Weekend Portfolio Analysis (August 5, 2017)

Market Analysis

Equities edged higher this week amid strong earnings and employment news. While the S&P 500 failed to reach new highs for the week, the Dow Jones Industrial Average passed a new milestone, rising above 22,000 for the first time on Wednesday and closing at a record high on Friday.

The U.S. economy added 209,000 jobs in July, surpassing Wall Street expectations of 183,000 new jobs. The unemployment rate also ticked down to 4.3%, the lowest in 16 years, suggesting that there is no slowing of momentum in the labor market.

Second-quarter results are now in for about 75% of the companies in the S&P 500. Earnings are up on average about 10.1% year-over-year, beating estimates of 6.4%.

Rate-hike expectations did shift up a tad following the July jobs report with the fed funds futures market assigning an implied probability of 50.4% to a December rate hike.

The S&P 500 (SPX) opened Monday at 2,475.94 and closed Friday at 2,476.83 up 0.89 points, or 0.04%.

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According to the Dow Jones Industrial Average, the stock market had yet another bullish week, however, the S&P 500 and the Nasdaq are telling a less conclusive story, while the Russell 2000’s performance is downright worrisome! Small caps are a historical leader for the overall market and it may be signaling some upcoming weakness for equities.

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Regardless of this week’s mixed performance, there’s no question that investors are still bullish as stocks hover near all-time highs and the CBOE Volatility Index (VIX) hovers near an all-time low.

After a month-long rally, crude oil prices appear to have lost some of their momentum this week. The U.S. Energy Information Administration (EIA) reported that domestic crude supplies fell by 1.53 million barrels for the week ended July 28. Consensus forecasts were for a much larger decline of 2.8 million barrels, which put pressure on prices. However, on Friday Baker Hughes reported that the number of active U.S. rigs drilling for oil dropped by 1 to 765 rigs this week, helping to buoy prices a bit higher. Crude oil futures for September delivery opened Monday at $49.85 per barrel and closed Friday at $49.52, down $0.33 or 0.66%.

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Trade Activity

It was a fairly busy trading week closing several trades and opening new ones.

/ZS September 1100/860 Strangle
On Monday, I bought back the September soybean strangle to close it out. Originally the strangle was sold for $9.00. I bought it back for $2.25. This net a nice profit of $321.26 after commissions, or nearly 44% return on capital in 43 days.

/ZS September 1100/1120/900/880 Iron Condor
In addition to the soybean strangle, I also closed out the iron condor position. This iron condor was originally sold for $4.00 and I bought it back on Monday for $1.00. The net profit was $117.52 after commissions, or a 63% return on capital in 26 days.

/ZS January 1200/860 Strangle
Although the implied volatility is not as high as it was three to four weeks ago, it is still fairly elevated. I decided to open another soybean strangle, but this time for the January cycle. Since placing the trade, soybean prices have continued to drop, but the strikes are fairly far out-of-the-money.

Trade Details:
SELL 1 /ZS Jan 1200 Call @ 5.75
SELL 1 /ZS Jan 860 Put @ 2.75
Credit: 8.50 ($425.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 851.50 / 1208.50)
/ZSF8 Current Price : $1008.25
Margin Required: $505.00
Days to Expiration: 144
Probability of Profit: 86.83%

/ZC September 360 Straddle
Corn prices continued to drop this week so on Tuesday I added a second corn straddle for the imminent September expiration. This position is not a stand-alone position, but rather is a hedge to mitigate potential losses on the initial straddle (which is currently profitable).

Trade Details:
SELL 1 /ZC Sep 360 Call @ 10.00
SELL 1 /ZC Sep 360 Put @ 7.00
Credit: 17.00 ($850.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 343.00 / 377.00)
/ZCU7 Current Price : $363.00
Margin Required: $679.00
Days to Expiration: 24
Probability of Profit: 52.07%

/ZW October 550/560/470/460 Iron Condor
I have been getting beaten up pretty badly over the past month by wheat. As you may recall, on July 3 and 5 wheat prices rallied strongly on reports of crop damage due to the drought conditions in the Dakotas. I took a significant loss exiting the trade at that point. And of course, of few days later, wheat prices started their spiral back down. Having been whipsawed on both sides of the trade, I placed this defined-risk trade on Tuesday.

Trade Details:
SELL 3 /ZW Oct 550 Call @ 3.125
BUY 3 /ZW Oct 560 Call @ 2.375
SELL 3 /ZW Oct 470 Put @ 6.625
BUY 3 /ZW Oct 460 Put @ 3.875
Credit: 3.50 ($175.00 per contract)
Max Risk: $975.00 (Breakeven Prices: 466.50 / 553.50)
/ZWZ7 Current Price : $491.50
Margin Required: $399.00
Days to Expiration: 52
Probability of Profit: 60.35%


/ZW September 620/640/460/440 Iron Condor
I have been gradually exiting this position. On July 19th, I bought back the short 620 call for a $696.26 profit. On Wednesday, I closed out the 460/440 put vertical by purchasing it back for $9.25. The put vertical portion of the iron condor was originally sold for $1.50, so this resulted in a loss of $807.48 after commissions. I still have the long 640 call, which at this point is worthless (barring a miracle). Assuming that it will expire worthless in 20 days, the total loss on this trade will be $661.22. Although it is possible that wheat could have a huge rally again within the next three weeks, I am a realist, and at this point, am writing it off as a loss.

Current Portfolio

/CL November 64/37.5 Strangle

$160.00 Credit. 72 days to expiration. 2 deltas on the puts and 2 deltas on the calls. Currently at 25% of maximum profit. This high-probability trade allows for a lot of movement in crude oil prices.

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/ZC September 390 Straddle
$1,937.50 Credit. 20 days to expiration. 84 deltas on the puts and 15 deltas on the calls. Currently at 29% of maximum profit. IV Percentile is starting to drop. We will probably look at closing this trade within the next week to ten days.

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When adding the /ZC September 360 straddle to the position, I am at 50% of maximum profit of the combined position. The risk profile for the combined position is shown below.

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Plan For Next Week

There is very little volatility right now, but I continue to search for opportunities.

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