Weekend Portfolio Analysis (July 29, 2017)

Market Analysis

For the week, the S&P 500 Index finished flat, but not before hitting another all-time high on Thursday. The Dow Jones Industrial Average and Nasdaq Composite also scored new record highs during this past week. Stocks continue to be propelled higher by upbeat earnings announcements. Boeing (BA) on Wednesday reported second-quarter earnings that beat Wall Street estimates and hiked its forecast for 2017, sending shares of the stock soaring to levels not seen since at least 1948! The company has been reorganizing, cutting costs, and aggressively renegotiating new contracts with its suppliers. The stock is up 54% year-to-date.

Also on Wednesday afternoon, the Federal Reserve released its latest policy directive. However, the release largely turned out to be a nonevent. The FOMC decided to keep the fed funds target range at 1.00%-1.25%, as expected, and noted that it expects to begin paring its balance sheet “relatively soon”, which was interpreted by many to mean September.

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 Federal Reserve will release its latest policy statement on Wednesday afternoon at 14:00 ET.

The S&P 500 (SPX) opened Monday at 2,472.04 and closed Friday at 2,472.10 up 0.06 points, or 0.002%.

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The expected move for this coming week is just slightly more than last week at +/- 21.66 points based on the option pricing.

Despite the midweek volatility in the SPX, the upward trend, when looking at the longer time frames below, shows no sign of slowing down.

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The CBOE Volatility Index (VIX) made yet another historic low this week, dropping to 8.84 on Wednesday. Unsurprisingly, the volatility then jumped above 11 on Thursday and Friday, but ended up closing the week back down at 10.29. Considering earnings season is winding down next week and continued dysfunction accompanied with disappointing headlines out of Washington, the markets are likely to meander for the next couple weeks.

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Crude oil prices climbed to their highest level in nearly two months Wednesday after data from the U.S. Energy Information Administration (EIA) showed that domestic crude supplies fell by 7.2 million barrels for the week ended July 21. That was a far deeper draw than the 2.5 million barrels which analysts forecast. Prices also prices were bolstered by renewed production-curb commitments from OPEC members as well as uncertainty in Venezuela. Baker Hughes on Friday reported that the number of active U.S. rigs drilling for oil climbed by 2 to 766 rigs this week.

Crude oil futures for September delivery opened Monday at $45.62 per barrel and closed Friday at $49.79, up $4.17 or 9.14%, the largest weekly rise since early December.

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Trade Activity

It was another quiet trading week. I closed one trade and opened a new trade in crude oil.

/ZW December 570 Straddle
Volatility in wheat options collapsed somewhat this week, but so did the price wiping out the small profit that we had in this trade. I had two choices, either add a second straddle at the lower at-the-money price point, or, just close the position for basically a scratch. I had planned to sell the second straddle position if prices continued to fall, but I did not anticipate the contraction of volatility to a point where the premium was not worthwhile. So, I just closed the trade. I had sold the straddle on July 12 for 83.00 and bought it back this past Monday for 82.38. The net profit after commissions was $23.13.

/CL November 64/37.5 Strangle
I have wanted to open another crude oil position, but with volatility so low, the premiums were very low. This week, volatility expanded a bit and I was filled on a new high probability strangle. The strikes are located out at two standard deviations. If volatility continues to increase, I may look at adding a second position.

Trade Details:
SELL 1 /CL Nov 64 Call @ 0.07
SELL 1 /CL Nov 37.5 Put @ 0.09
Credit: 0.16 ($160.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 37.34 / 64.16)
/CLX7 Current Price : $49.49
Margin Required: $720.00
Days to Expiration: 81
Probability of Profit: 95.06%

Current Portfolio

/ZC September 390 Straddle
$1,937.50 Credit. 27 days to expiration. 69 deltas on the puts and 30 deltas on the calls. Currently at 37% of maximum profit. IV Percentile is still up at 72%, which is fairly elevated. Since price has not moved much, I am holding the position a bit longer than I normally would to capture a bit more theta decay.

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/ZS September 1100/1120/900/880 Iron Condor
$200.00 Credit. 27 days to expiration. 3 deltas on the puts and 12 deltas on the calls. Currently at 62% of maximum profit. I have a lot of room for price to move around with an 85% probability of profit. I will close the trade at 75% of maximum profit.

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/ZS September 1100/860 Strangle
$450.00 Credit. 27 days to expiration. 1 delta on the puts and 12 deltas on the calls. Currently at 51% of maximum profit.  I have even more room for price excursions on this strangle than with the iron condor above. I will hold the trade to 75% of maximum profit.

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/ZW September 620/640/460/440 Iron Condor
$400.00 Credit. 27 days to expiration. 22 deltas on the puts and 1 delta on the call. Currently at 3% 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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Plan For Next Week

I continue to look for opportunities where volatility is elevated, but at the moment, there are not a lot of options (no pun intended).

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