Weekend Portfolio Analysis (July 16, 2016)

Market Conditions

Up, up, and away! The bull is clearly back. Equities were up for the third week in a row, reaching a series of fresh record highs. The swift post-Brexit rebound has been driven by falling treasury yields (making bonds more expensive compared to stocks), better than expected economic data, and higher expectations for company earnings growth. The U.S. jobs report showed the strongest monthly hiring since last October, monthly retail sales rose sharply with three-month growth now the strongest in more than a year. Rate hike expectations did edge up a little, but concerns about a rate hike taking place before the end of 2016 are almost non-existent. The fed funds futures market estimates the likelihood of a hike in July at 2.4% while the implied probability of a hike in December sits at 47.8%.

The S&P 500 opened Monday at 2131.72 and closed on Friday at 2161.74, up 30.02 or 1.41% for the week.


The break above resistance at 2130 was of significant importance this week. A break above this level has been attempted several times prior but has always failed. The SPX is clearly above all of the moving averages and has moved back into the uptrending channel. Implied volatility is extremely low and the VIX closed the week at 12.67.


Trade Activity This Week

TradeHistory_071616There is very little opportunity right now for premium sellers. Volatility is at extreme low levels across all of the typical products that I trade (crude oil, gold, natural gas, corn, soybeans, and the S&P500). However, due to the collapse in implied volatility, I was able to exit some trades profitably. However, not everything came up roses. The  Trade History thumbnail on the left displays the trades for the past two weeks since I did not post last week.

On Tuesday this week, I exited both the /ZC Sep 510/335 strangle and the /ZC Sep 600/325 strangles for a small loss. These trades have been problematic since I put them on and at one point the loss was nearly $1,000. Corn had entered a short-term bear market after entering the trade and came very close to threatening the short puts. As corn started to rally this week, I took the opportunity to close the position for a $59.99 loss per contract. This resulted in a total loss of $239.96 for all four contracts. Of course, my timing was bad, as corn continued to rally throughout the week and had I held the trade a bit longer, I could have exited with a profit. But, that is trading.

I more than made up for the loss in corn, however, with the profits from the gold strangles. On Tuesday, I also closed out half of the /GC Oct 1650/1100 strangle position for a $231.52 profit (15.93% return on capital) on two contracts in 13 days. On Thursday, I closed out the other two contracts for a $331.52 profit (22.82% return on capital) also in just 13 days.

Finally, on Friday, the SkyWest Airlines ($SKYW) Jul 12.5 puts expired worthless for a profit of $37.00 (12.54% return on capital).

I placed two new trades this week, both in /ES. On Tuesday, I opened the first position.


upload_7_12_2016_at_2_08_51_PM/ES Sep 1800 Put
Trade Details:

SELL 2 /ES Sep 16 1800 Put @ 3.85

Credit: 3.85 ($192.50 per contract)
Max Risk: Unlimited (Breakeven Price: 1796.15)
/ES Current Price: 2146.75
Margin Required: $1609.00
Days to Expiration: 66
Probability of Profit: 94.07%

On Thursday, I added a second /ES position.


upload_7_14_2016_at_6_56_02_PM/ES Oct 1700 Put
Trade Details:

SELL 2 /ES Oct 16 1700 Put @ 4.75

Credit: 4.75 ($237.50 per contract)
Max Risk: Unlimited (Breakeven Price: 1695.25)
/ES Current Price: 2148.25
Margin Required: $1620.00
Days to Expiration: 99
Probability of Profit: 94.78%

Implied volatility is at rock bottom on /ES, so I realize that this becomes more of a directional play, however, as long as this market continues to trade sideways or up, I should be able to exit the trades at my target profit levels within 14-21 days.

Plan For Next Week

Gold has been a great trade for me this year. So far this year crude oil and gold have been the most consistent products that I have traded and provided the largest gains for the portfolio. In 2016, /CL futures options have provided $3,550.00 in profits (before commissions) and /GC options have brought in $3,190.00 in profits (before commissions). Looking further at this, I have made 12 trades in /GC this year with 100% success rate. In /CL, I made 27 trades this year, four of which were losses. This equates to an 85.19% success rate with crude oil options. Furthermore, all but one of the losses in /CL were very small (under $100). This all makes me re-think my strategy and where I should be concentrating my energy.

The portfolio is now up 5.33% for the year versus up 6.06% for the S&P 500 (see Trading Results).   The portfolio is currently 82% in cash.