Weekend Portfolio Analysis (July 2, 2016)

Market Analysis

Equities recorded their strongest weekly gains of the year following last week’s Brexit debacle. Markets were spurred higher by a vow to further ease monetary policy by the Bank of England during the summer. In the wake of those comments, markets have priced in an 85% chance of a rate cut in England by August. This all puts further pressure on central banks in the United States to keep interest rates low indefinitely. It appears that the zero-percent interest rate policy (ZIRP) is now the “new normal”. The S&P opened Monday at 2031.45 and closed on Friday at 2102.95, up 71.5 points, or 3.52%.


Volatility remained high early in the week, but by the close on Friday, the VIX was once again trading below 15. However, premiums on S&P 500 put options remained quite elevated nearly all week. This is reflected in the SKEW index.


On Tuesday, the SKEW was at its all-time high of 153.66. This simply indicates that puts were trading significantly more rich than calls and that tail risk was highly elevated.

Crude oil prices are back on the rise again due to falling inventories, concerns over the Brexit uncertainty, political crisis in Venezuela and the strike of oil workers in Norway. The U.S. Energy Information Administration (EIA) reported on Wednesday that crude inventories fell by 4.05 million barrels for the week ending June 24. Overall, crude inventories are down by 16.82 million barrels since the last week of April, indicating that the refineries are processing more crude and the incremental demand is chipping in. The strength in oil prices persisted despite the increase in oil rigs. Baker Hughes reported Friday that the rig count increased for the fourth time in the past five weeks, reaching 341 active rigs after the addition of 11 new rigs this week. This is the highest weekly increase in oil rig count since December 2015. Crude oil for August 2016 delivery opened Monday at 47.81 and closed Friday at 49.28, up 1.47 or 3.08%.


Trade Activity This Week

TradeHistory_070216_2_weeksDue to my traveling last week, I did not publish an end-of-week post. Although I am not going to review all of the trades from two weeks ago, I have included all of those trades in the Trade History screenshot from my trade platform. Clicking the thumbnail will open up all of the trades over the past two weeks.

On Monday, I closed the two /ZC Sep 630/330 strangles that I had originally sold on June 8. The strangles were sold for $3.00 each and bought back at 50% of maximum profit ($1.50/each). After commissions, the profit was $117.52, or a 33.87% return on capital in 19 days.

Also on Monday, I took advantage of the high premiums in /ES options by selling some deep out-of-the-money puts. I published details of this trade in the post, Selling Puts After Brexit. On Tuesday, volatility had contracted enough to exit this trade at nearly 50% of maximum profit – $84.36 after commissions, or 16.61% return on a capital in just one day.

On Tuesday, I noticed that volatility had spiked just momentarily in crude oil. IV Percentile had been hovering around the low teens, but spiked to over 29 with very little movement in the price. I decided to sell a /CL straddle and have listed the trade details below.


upload_6_28_2016_at_10_33_05_AM/CL Oct 16 48.5 Straddle
Trade Details:

SELL 1 /CL Oct 16 48.5 Call @ 3.63
SELL 1 /CL Oct 16 48.5 Put @ 3.37

Credit: 7.00 ($7000.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 41.5 / 55.5)
/CL Current Price: 48.75
Margin Required: $1972.00
Days to Expiration: 79
Probability of Profit: 55.35%
IV Percentile: 29.36%

The next day, the IV Percentile dropped from 29.36% down to 9.52% and I closed the straddle out by buying it back for 6.77. This net a profit of $215.76 or 10.94% return on capital in just one day. Anytime I can get at least $7.00 in premium for a /CL straddle with less than 80 days to expiration, it gets my attention. A gambling man could have stayed in the trade longer and perhaps collected a lot more theta over the long weekend. However, I was not looking for a home run, but simply a quick profit on what I thought was a bit of a pricing anomaly.

On Wednesday, I closed out three /ES Aug 1375 puts that I had sold the previous Friday. This trade net me a profit of $51.54 or 7.28% return on capital in 5 days.

I also started opening trades in gold for the October expiration cycle. The /GC positions that I had for September expiration were nearly at 50% maximum profit, and with gold still having fairly high volatility, I chose to begin opening positions in the new cycle.


upload_6_29_2016_at_4_12_45_PM/GC Oct 16 1650/1100 Strangle
Trade Details:

SELL 2 /GC Oct 16 1650 Call @ 2.30
SELL 2 /GC Oct 16 1100 Put @ 0.70

Credit: 3.00 ($300.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1097.00 / 1653.00)
/GC Current Price: 1324.80
Margin Required: $1453.00
Days to Expiration: 90
Probability of Profit: 97.29%
IV Percentile: 76.19%

On Thursday, I put on a defined-risk trade to hedge against another drop in the markets. This is not a high-probability trade at this point, but I did not put much at risk.


upload_6_30_2016_at_8_16_09_AM/ES Aug 16 2070/2060 Debit Put Spread
Trade Details:

BUY 1 /ES Aug 16 2070 Put @ 46.75
SELL 1 /ES Aug 16 2060 Put @ 42.75

Debit: 4.00 ($200.00 per contract)
Max Risk: $200.00 (Breakeven Prices: 2066)
/ES Current Price: 2063.75
Margin Required: $200.00
Days to Expiration: 50
Probability of Profit: 52.05%

I have not had great luck with debit spreads due to my inability to accurately predict direction in the markets. In fact, placing this trade almost guarantees that the S&P 500 will be trading a historically high levels in the very near future. However, it is cheap insurance and as a defined-risk trade, I will not have sleepless nights if this trade does not work out.

On Thursday, I also closed out all four of the four /GC Sep 1600/1065 strangles that I sold back on June 10th and June 24th. I initially sold 2 strangles for $2.80 on June 10. On June 24th, the volatility had expanded again and I was able to add two more strangles also at $2.80. They were closed for $1.50 and $1.40 respectively. This net a profit of $483.04 on all four contracts, or 19.94% return on capital in 20 days.

Finally, on Friday I closed the /ZS Sep 1540/840 strangle that I sold back on May 25. I had opened the trade by selling the strangle for $4.00 and closed it at 50% of maximum profit ($2.00) which net a profit of $83.76 after commissions, or 20.53% return on capital in 37 days.

Plan For Next Week

I am still looking for opportunities to exit the remaining /ZC and /ZS positions. These products seem to take a bit longer to produce profits than some of the other commodities that I trade.

The portfolio is finally showing a profit with a gain of 2.03% for the year versus 3.18% for the S&P 500 (see Trading Results).   The portfolio is currently 74% in cash.

  • The Lazy Trader

    “In fact, placing this trade almost guarantees that the S&P 500 will be trading a historically high levels in the very near future” –> LOL

    Great wrap up Aram.

  • Great job Aram.