Weekend Portfolio Analysis (May 20, 2017)

Market Analysis

Volatility returned to the stock market this week, but only briefly. On Wednesday, markets plunged as political chaos intensified in Washington. Investors worried that the latest Donald Trump controversy – this time over former Federal Bureau of Investigation director James Comey – would distract from his administration’s policy plans. While the Dow and S&P 500 Index suffered their biggest one-day losses since November 9th, the Nasdaq Composite had its worst session since Brexit. But by Thursday those fears subsided and stocks were back on an advancing path, which continued to build during Friday’s session as oil prices lifted energy shares and the ‘buy the dip’ mentality set in.

The fed funds futures market still points to the June FOMC meeting as the most likely time for the next rate-hike announcement with an implied probability of 78.5%, unchanged from last week.

The S&P 500 opened Monday at 2398.98 and closed Friday at 2381.76, down 17.22 points, or 0.72%.

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As fear rose, so did the CBOE Volatility Index (VIX), which spiked more than 46% on Wednesday, its biggest single-day percentage gain since the post-Brexit backlash last June. The VIX jumped as high as 16.30 midweek before closing at 12.04 on Friday. The VIX began the week at a very low 10.54.

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It is interesting to note that despite the big moves in the market this week, the SPX closed the week within the expected move. The implied volatility of the SPX options are now indicating that the index should remain within a range of +/- 28.25 points for next week, which suggests that traders expect the index to close next Friday between 2353 and 2410.

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Crude oil continued its rally this week as the Energy Information Administration (EIA) reported earlier in the week a decrease in both crude oil and gasoline inventories. Data from the EIA on Wednesday showed that domestic crude supplies fell by 1.8 million barrels for the week ended May 12. That was the sixth weekly drop in a row reported by the EIA. Reports that OPEC may consider not only extending production cuts into 2018, but that it may also consider deepening them as well helped boost oil prices further. With the extension into 2018 likely already priced in, a deepening of the production cut is the only tool OPEC has left in its arsenal to combat the effects of U.S. shale to lift prices, even if only temporary. Oil traded above the ever-important $50 mark on Friday for the first time in three weeks. The number of rigs drilling for oil in the U.S. rose by eight in the past week to 720, according to oil-field services company Baker Hughes Inc. This is the eighteenth straight week that the rig count has increased. Crude oil futures for June delivery opened the week on Monday at $48.14 per barrel and closed Friday at $50.90, up 2.76 or 5.73%.

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Trade Activity

We opened several new trades this week.

/ZS September 1160/840 Strangle
We saw a momentary increase in volatility in soybeans and sold a strangle utilizing deep out-of-the-money options. This is a high probability trade and we expect to be in the trade for 3-4 weeks. Currently the position is already at 15% of maximum profit.

Trade Details:
SELL 1 /ZS Sep 1160 Call @ 6.375
SELL 1 /ZS Sep 840 Put @ 2.625
Credit: 9.00 ($450.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 831.00 / 1169.00)
/ZS Current Price: $966.00
Margin Required: $503.00
Days to Expiration: 102
Probability of Profit: 86.15%

/ZW July 445/455/400/390 Iron Condor
As I indicated in last week’s blog post, I had incorrectly placed an iron condor in wheat. On Monday, the put strike was tested on this trade, so I opened a second iron condor as an adjustment trade to lower my breakeven point. Wheat prices have recovered slightly, but only time will tell on this trade.

Trade Details:
SELL 2 /ZW Jul 445 Call @ 5.875
BUY 2 /ZW Jul 455 Call @ 4.125
SELL 2 /ZW Jul 400 Put @ 1.375
BUY 2 /ZW Jul 390 Put @ 0.50
Credit: 2.625 ($131.25 per contract)
Max Risk: $737.50 (Breakeven Prices: 397.375 / 447.625)
/ZW Current Price: $425.50
Margin Required: $279.00
Days to Expiration: 39
Probability of Profit: 58.49%

Here is what the combined wheat position now looks like on the risk graph. We currently have a very small loss of $25.00 combined between both iron condors. Right now the price of /ZW is positioned right in the zone where we would like it to stay, but it has been a bit volatile lately and has traded anywhere between 420 and 460.

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FXE June 107/112/107/102 Iron Butterfly
With implied volatility picking up again on Tuesday in FXE and the spike up in the Euro, I decided to put on a small iron butterfly position. Since placing the trade, FXE has moved up about $1.00 If our upper breakeven point is breached, we will plan to add a second iron butterfly centered around the current price.

Trade Details:
SELL 1 FXE Jun 107 Call @ 1.18
BUY 1 FXE Jun 112 Call @ 0.09
SELL 1 FXE Jun 107 Put @ 0.85
BUY 1 FXE Jun 102 Put @ 0.04
Credit: 1.90 ($190.00 per contract)
Max Risk: $310.00 (Breakeven Prices: 105.10 / 108.90)
FXE Current Price: $107.27
Margin Required: $500.00
Days to Expiration: 31
Probability of Profit: 50.62%

/CL September 65/39 Strangle
With the increase in volatility on crude oil as a result of the upcoming OPEC meeting next week, we opened a new strangle for the September expiration cycle.

Trade Details:
SELL 1 /CL Sep 65 Call @ 0.22
SELL 1 /CL Sep39 Put @ 0.10
Credit: 0.32 ($320.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 38.68 / 65.32)
/CL Current Price: $51.01
Margin Required: $660.00
Days to Expiration: 90
Probability of Profit: 90.92%

Current Portfolio

/ZC July 395/405/340/330 Iron Condor
$250.00 Credit. 34 days to expiration. 5 deltas on the puts and 24 deltas on the calls. Currently at 35% of maximum profit. This trade looks good. At this point there is nothing to do.

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/CL August 40/59 Strangle
$1,040.00 Credit. 58 days to expiration. 4 deltas on the puts and 11 deltas on the calls. Currently has a loss of $220.00. Volatility has expanded, which is hurting our P&L, but at this point the price is remaining well within our expected area.

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Plan For Next Week

The portfolio is well diversified between energy, agricultural and currency markets. However, we are a bit overweighted in the oil sector. Therefore, we need to watch this part of the portfolio very carefully in case oil prices start really moving around again. The portfolio is currently up 10.26% year-to-date versus 5.8% for the S&P 500 and is 59% in cash.

Happy Trading!