Weekend Portfolio Analysis (September 3, 2017)

Market Analysis

Stocks finished higher for the second week in a row despite some midweek volatility surrounding North Korea’s missile launch over northern Japan. U.S. nonfarm payrolls rose less than expected, adding only 156,000 new jobs versus estimate for a 180,000 rise. History shows that August is traditionally one of the slowest months of the year for new hires, so this was not entirely a surprise. Other tailwinds for the market included reports that the U.S. economy grew at a 3% annual pace in the second quarter, an upward revision from the 2.6% pace reported in July. Spending was robust by both consumers and businesses in Q2, with capital expenditures expanding at an 8.8% rate, the fastest in nearly two years. Corporate profits also rose 8.1% year over year.

The S&P 500 (SPX) opened Monday at 2,447.35 and closed Friday at 2,476.55 up 29.2 points, or 1.19%.

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Volatility remains low. The CBOE Volatility Index (VIX) spiked up above 14 on the day of the missile launch, but closed way below its highs that day. As long as the VIX continues to close below 13, stocks will likely continue to rise.

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The devastation wrought by Hurricane Harvey also captured investors’ attention, but apparently with mixed effects. The impact on energy stocks was immediate, with gasoline futures reaching a two-year high in response to a massive shutdown in refinery production, while reduced refinery demand weighed on oil prices. It is estimated that 23% of U.S. refinery capacity is now offline due to flooding in the Houston area.

In a largely bullish Wednesday report, the U.S. Energy Information Administration (EIA) said that crude oil inventories decreased by 5.4 million barrels during the week ended August 25. At 457.8 million barrels, U.S. crude oil inventories are now in the middle of the average range for this time of year. Consensus estimates had called for a draw of only 1.9 million barrels of crude. The number of active oil rigs operating in U.S. oil fields remained unchanged at 759 rigs, according to Baker Hughes.

Crude oil futures for October delivery opened Monday at $47.89 per barrel and closed Friday at $47.35, down $0.54 or 1.13%.

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Trade Activity

We had three trades this week, two closing trades and one new adjustment trade to our wheat position.

/ZS January 1260/800 Strangle
On Monday we closed out one of our two soybean positions. The January 1260/800 strangle was sold on August 8th for 4.375. We bought back both contracts this week for 2.125 which net us a profit of $192.52 after commissions and fees. This worked out to a net return on capital of 32.85% in just 20 days!

/CL November 64/37.5 Strangle

On Thursday we bought back the crude oil strangle for $0.07. We had originally sold this trade for $0.16. After commissions and fees, we net a profit of $75.56 or 10.49% return on capital in 34 days.

/ZW November 460/470/405/395 Iron Condor
Wheat prices appear to have found some support and are stabilizing. We are still in the process of recovering from losses in our earlier /ZW positions. This iron condor has the same strikes as the one for the October expiration that we placed last week, however it is for the November expiration. This allows us to collect more premium.

Trade Details:
SELL 3 /ZW Nov 460 Call @ 7.25
BUY 3 /ZW Nov 470 Call @ 5.25
SELL 3 /ZW Nov 405 Put @ 3.25
BUY 3 /ZW Nov 395 Put @ 1.875
Credit: 3.375 ($168.75 per contract)
Max Risk: $993.75 (Breakeven Prices: 401.625 / 463.375)
/ZWZ7 Current Price : $436.00
Margin Required: $307.00
Days to Expiration: 57
Probability of Profit: 76.54%

Current Portfolio

/6E November 1.27/1.1 Strangle
$275.00 Credit. 61 days to expiration. 2 deltas on the puts and 5 deltas on the calls. Currently at 40% of maximum profit. The U.S. dollar appears to have found support, reducing concerns that the Euro currency might continue to rally. IV Percentile is still somewhat elevated, but we are close to our target profit level of 50% of maximum profit.

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/ZS January 1200/860 Strangle
$425.00 Credit. 110 days to expiration. 9 deltas on the puts and 3 deltas on the calls. Currently at 45% of maximum profit. This trade is looking good. I hope to exit this trade during the coming week if soybean prices continue to trend up a bit.

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/ZW October 460/470/405/395 Iron Condor
$575.00 Credit. 19 days to expiration. 7 deltas on the puts and 23 deltas on the calls. Currently at 34% of maximum profit. Right now, this trade is looking pretty good. Ultimately, we are looking for wheat prices to remain in the 440 to 460 range for the next couple of weeks to minimize our losses.

Our remaining put verticals from the earlier wheat trades result in the combined risk graph that is shown below.

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Plan For Next Week

Crude oil continues to be one of our best performers year over year. We will be looking for another opportunity to enter additional trades in /CL as soon as possible. In the meantime, we continue to work on repairing the damage to the portfolio from the crash in wheat prices in last month.

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