Weekend Portfolio Analysis (July 22, 2017)

Market Analysis

Stock prices continued to advance this week setting new records both in the U.S. and abroad. The gains are being fueled in part by a solid start to earnings season and steady interest rates. Investors have largely ignored the political headlines regarding Russia as well as the ongoing debates on health care and tax reform, and instead have taken stocks higher as prospects for accelerating global growth proved to be the dominant market driver. Among the indices setting records this week were the bellwether S&P 500, the Russell 2000 and the Nasdaq Composite.

The fed funds futures market still points to the December FOMC meeting as the most likely time for the next rate-hike announcement with an implied probability of 52.0%, up slightly from last week’s 50.6%. The Fed will release its latest policy statement on Wednesday afternoon at 14:00 ET.

The S&P 500 (SPX) opened Monday at 2,459.5 and closed Friday at 2,472.54 up 13.04 points, or 0.53%.

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The SPX tagged the upper edge of the expected move on Thursday, but then reversed lower. This leg of the rally might be starting to show signs of stalling out. The Dow Jones Transport Index, typically a leading indicator, is off of its highs. Only time will tell if this trend will continue.

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Furthermore, the CBOE Volatility Index (VIX) made another historic low this week, closing at just 9.36. It is questionable as to whether or not these ultra-low levels of volatility can continue in the short term.

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Crude oil prices were unable to hold gains seen earlier in the week. This is a divergence in that many analysts believe Saudi Arabia will come to the rescue and reduce exports. The Department of Energy reported on Wednesday that U.S. crude oil imports averaged 7.8 million barrels per day during the past month which is down 1.7% month over month. The overall decline in imports has not been offset by increases in production which rose by 30,000 barrels in the United States during the past week. The Energy Information Administration reported that crude oil inventories decreased by 4.7 million barrels from the previous week. Baker Hughes released weekly figures showing that the number of active U.S. rigs drilling for oil edged down by 1 to 764 this week. The count, which is often seen as proxy for the outlook on domestic production, had climbed in each of the last two weeks.

Crude oil futures for September delivery opened Monday at $46.85 per barrel and closed Friday at $45.60, down $1.25 or 2.67%.

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Corn, soybean and wheat futures had a stormy week as producers, traders, and end users tried to track the weather and growing conditions across the country. These crops are at a critical point in the growing season when high temperatures or dry weather can threaten yields. Uncertainty about forecasts is causing the futures to shift into a so-called “weather market” that vacillates with every update. Of the three, corn prices were the most volatile this past week.

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Trade Activity

It was a very quiet trading week with only a couple of partial closing trades.

/ZC September 410 Call
I had added this call as a hedge against a drop in corn prices. As it appeared that corn prices might turn around and start heading back up, I decided to exit the call. As it ended up, corn prices did rally fairly strongly early in the week, but reversed direction again on Friday. This trade was essentially a scratch with barely a profit of $16.88 after commissions.

/ZW September 620/640/460/440 Iron Condor
On Wednesday, we bought back the nearly worthless short call in the wheat iron condor. I decided not to sell the entire call vertical because the long call had also lost most of its value. Depending on weather conditions that occur over the next few days, it is possible that wheat may start to rally again, in which case we would be able to sell the long call for more than its current value. The remainder of the trade remains in place.

Current Portfolio

/ZC September 390 Straddle
$1,937.50 Credit. 34 days to expiration. 59 deltas on the puts and 41 deltas on the calls. Currently at 24% of maximum profit. I am still waiting for the contraction in volatility which would make this trade even more profitable.

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/ZS September 1100/1120/900/880 Iron Condor
$200.00 Credit. 34 days to expiration. 4 deltas on the puts and 20 deltas on the calls. Currently at 28% of maximum profit. Our profit is not quite as much as it was last week due movements in the underlying price of soybeans, but the trade still looks good from a probabilistic perspective.

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/ZS September 1100/860 Strangle
$450.00 Credit. 34 days to expiration. 1 deltas on the puts and 20 deltas on the calls. Currently at breakeven. As with the iron condor, the increase in soybean prices along with a further expansion in volatility has not permitted us to exit this trade yet.

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/ZW September 620/640/460/440 Iron Condor
$400.00 Credit. 34 days to expiration. 14 deltas on the puts and 2 deltas on the calls. Currently at 40% of maximum profit for the original iron condor. Our gain on the upside is unlimited, should wheat prices take off again.

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/ZW December 570 Straddle
$4,150.00 Credit. 125 days to expiration. 67 deltas on the puts and 32 deltas on the calls. Currently at 4% of maximum profit. I will be watching this closely. If wheat prices continue to show weakness, I will likely add a second at-the-money straddle. However, the fundamentals do not favor prices dropping further at this point.

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Plan For Next Week

I am waiting for volatility to expand a bit further before re-entering the crude oil market. In the mean time, I will be watching the grain markets very closely.

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