Weekend Portfolio Analysis (May 6, 2017)

Market Analysis

The stock market extended its gains this week due to improved economic growth. Friday’s non-farm payrolls report was fairly upbeat, with 211,000 added to payrolls in April, higher than the 190,000 expected. This was a huge improvement over March’s weak report (job gains of only 79,000). The unemployment rate fell to 4.4%, the lowest it has been in ten years. Also making the news this week was the announcement by the Federal Reserve that interest rates would remain unchanged for now. However, their report paved the way for a likely rate hike at the June FOMC meeting. Fed futures now point to an 83% probability of a rate hike in June. The S&P 500 opened Monday at 2388.5 and closed Friday at 2399.29, its highest close ever. This resulted in a weekly gain of 10.79 points, or 0.45%.

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Volatility remains at very low levels. In fact, on Monday, the VIX traded below 10 for the first time in over ten years. Investors remain complacent and the SPX appears poised for another breakout to the upside. However, there are still a lot of potential pitfalls in this market and extreme caution should be exercised when we see these kinds of extreme levels (extreme low in the VIX and extreme high in the S&P 500 and Nasdaq). Note also that the expected move in the SPX for next week is back to a more “normal” range of +/- 31.71 points which indicates that it will remain between 2367 and 2431.

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Crude Oil

The headline this week was falling oil prices. Oil prices crashed on Thursday, erasing all the gains made since the OPEC deal was announced, before bouncing back in trading on Friday, suggesting that the crash was due more to a technical selloff rather than disappointing fundamentals. Crude oil hit a five-month low of 43.76 during the Thursday overnight session before reversing. In lieu of recent price action, OPEC is likely to extend its cuts for another six months when it meets later this month.

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On Tuesday, the American Petroleum Institute (API) reported a large drawdown of 4.2 million barrels in U.S. crude oil inventories, compared to analyst expectations for only a 2.2 million barrel draw. However, this was quickly countered by the Energy Information Administration report on Wednesday which indicated that the crude inventories only fell by 930,000 barrels, much less than the analysts had expected. This combined with the news that Libyan oil fields had come back on line rekindled the oversupply fears creating an incredibly volatile week for crude oil as seen below in the 5-day chart.

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Baker Hughes reported yet another week of increases in the number of oil rigs operating in the U.S. This week the number rigs increased by 6 to 694. Crude oil futures for June delivery opened the week on Monday at $49.17 per barrel and closed Friday at 46.47, down 2.70 or 5.5%.

Trade Activity

It was busy trading week as we closed out a lot of our positions as May expiration approaches.

XRT May 41/46/41/36 Iron Butterfly
On Monday, we closed out this trade by purchasing back the iron butterfly for $2.17. We had originally sold the position for $2.25. After commissions, we had a total loss of $1.28.

XRT May 43/47/43/37 Iron Butterfly
This was the adjustment trade that we had sold when the breakeven point on the 41 butterfly were breached. We sold the position for $1.94 and bought back just the short put and call on Monday for $1.40, generating a profit of $46.80 after commissions, or a 7.8% return on capital. This gain more than offsets the $1.28 loss from the original XRT position. The long put and call were virtually worthless, so there was no point wasting commissions to close them out. This trade is an example of how making an adjustment to the position can take a loss and turn it into a profit. Of course this does not always work out this way.

SPY May 5 (Weekly) 238.5 Straddle
In anticipation that the Apple earnings results and FOMC meeting might move the markets, we did something that is very out of character for our style of trading. We bought a straddle. With volatility at near all-time lows, the straddle was VERY cheap. We paid $1.40 for it on Tuesday. Unfortunately, the markets did not move much and we closed the position out on Wednesday by selling it for $1.30. This net us a loss of $14.12 after commissions. As I indicated in the Trade Alert that was sent out, this was simply a very cheap lottery ticket. It didn’t pan out, so we exited quickly and with very minimal damage.

IWM May 141/144/125/122 Iron Condor
On Tuesday, we also closed out the May IWM Iron Condor. With the drop in the Russell 2000, I saw an opportunity to exit this trade for a minimal profit. We had sold the position originally for $0.84 and bought it back for $0.62, which net us a profit of $12.72 or 4.24% after commissions.

FXE May 103/109/103/97 Iron Butterfly
We exited one of our two FXE iron butterflies on Wednesday for a small loss. It looked as if we would be able to exit both this trade and our hedge and come out overall with a small profit. We bought back this position first, locking in a $27.28 loss, but were never able to get filled on our second position as the price started moving against us.

/CL Aug 70/40 Strangle
With the huge drop in oil, we decided to roll down our calls on the two strangles. We had sold the 70 calls last week for .05 and .04. We bought them back for .02 and sold the 59 calls for .11 each. This locked in a profit of $35.56 on the call side. We are now left with three contracts of the Aug 59/40 strangles.

IWM Jun 144/147/128/125 Iron Condor
On Thursday, we also closed out the June IWM iron condor for a nice profit. We had sold this originally for $0.97 and bought it back for $0.55, generating a profit of $32.72 or 10.91% after commissions.

EFA May 65/67/65/61.5 Iron Butterfly
Our EFA position continues to be tested as it has moved higher. On Friday, we opened another adjustment trade to help offset some the losses on the previous iron butterflies. This time the position is centered around the 65 strike.
Trade Details:
SELL 1 EFA May 17 65 Call @ 0.62
BUY 1 EFA May 17 67 Call @ 0.03
SELL 1 EFA May 17 65 Put @ 0.47
BUY 1 EFA May 17 61.5 Put @ 0.08
Credit: 0.98 ($98.00 per contract)
Max Risk: $350.00 (Breakeven Prices: 64.02 / 65.98)
EFA Current Price: $65.12
Margin Required: $350.00
Days to Expiration: 14
Probability of Profit: 48.40%

Current Portfolio

ZC July 395/405/340/330 Iron Condor
$250.00 Credit. 48 days to expiration. 7 deltas on the puts and 26 deltas on the calls. Currently at 15% of maximum profit. This trade looks good at this point.

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EFA May 62/66/62/57 Iron Butterfly
$205.00 Credit. 13 days to expiration. 9 deltas on the puts and 89 deltas on the calls. Currently has a loss of $136.50. Volatility has expanded and the price has moved well outside of the butterfly in this trade. Normally I would have exited this trade by now, but because of the French elections tomorrow (Sunday), I am going to wait until Monday to close it. We will likely take a loss on the position, but I plan to open another iron condor on Monday for the June expiration if the volatility does not completely collapse.

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EFA May 64/66/64/60 Iron Butterfly
$108.00 Credit. 13 days to expiration. 20 deltas on the puts and 78 deltas on the calls. Currently has a loss of $50.50. This was an earlier adjustment to the trade above. However, with the strong upward move in EFA, we are playing defense on this trade as well.

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The combined position in EFA now looks like this:

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FXE May 105/109/105/101 Iron Butterfly
$177.00 Credit. 13 days to expiration. 24 deltas on the puts and 78 deltas on the calls. Currently has a loss of $19.50. The Euro has recovered strongly since the first round of French elections. Sunday’s final round outcome will likely result in a significant decrease in the volatility of FXE. I plan to also exit this trade on Monday.

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SPY May 241/244/221/218 Iron Condor
$76.00 Credit. 13 days to expiration. 3 deltas on the puts and 37 deltas on the calls. Currently at breakeven. This position has flipped between being profitable and being at a loss. Any slight pullback at this point would be a cue to exit.

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Plan For Next Week

We are in defensive mode right now due to the move up in the markets and the strengthening of the Euro. Also, the crash in crude oil this week was significant and is dragging down our account. With regards to our /CL positions, I am still comfortable with the position. EFA, FXE and SPY expire in two weeks and we need to exit the positions this week and cut our losses. I will be looking at opportunities in EFA for the June expiration which might allow us to recoup some of the losses.

The portfolio is currently up 10.62% year-to-date versus 6.56% for the S&P 500 and is 51% in cash.

Happy Trading!