Weekend Portfolio Analysis (September 16, 2017)

Market Analysis

As tensions continued to escalate this past week between North Korea and the rest of the world, U.S. stocks had another banner week. The S&P 500 conquered 2,500 while recording its largest weekly gain since January and the Dow Jones Industrial Average also recorded a new all-time high. News that an outline of the tax reform plan is going to be released later this month helped propel stocks higher.

The U.S. Federal Reserve will be in focus next week with the Federal Open Market Committee (FOMC) hosting its September meeting. While the central bank is not expected to raise interest rates at next week’s meeting, the odds of a December rate hike are now at 57.8% following the latest inflation data, up from last week’s 31% probability.

The S&P 500 (SPX) opened Monday at 2,474.52 and closed Friday at 2,500.23, up 25.71 points, or 1.04%.

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Crude oil prices rallied this week after the Energy Information Administration (EIA) reported a smaller than expected build of 5.9 million barrels for the week ended September 8th. It was the second straight build in inventories after Hurricane Harvey shut down production in some of the Gulf of Mexico fields and refineries in Texas. Also, the Organization of Petroleum Exporting Countries (OPEC) has forecast higher demand for its oil in 2018 and pointed to signs of a tighter global market, indicating that its deal with non-OPEC states to cut output is drawing down supply. The number of rigs drilling for oil in the U.S. fell for the second week in a row, dropping by 7 to 749, according to oil-field services company Baker Hughes Inc.

Crude oil futures for October delivery opened Monday at $47.58 per barrel and closed Friday at $49.83, up $2.25 or 4.73%.

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Trade Activity

We had a busy trading week as we exited several positions and opened a few new ones as well.

DIS October 97.5/92.5 Put Credit Spread
On Monday, Hurricane Irma was battering Florida which resulted in the temporary closure of the Disney theme parks in Orlando. This put significant downward pressure on the stock and inflated volatility. I decided to sell a put credit spread just below the current trading price figuring that the price would move back up and volatility would contract after the storm passage.

Trade Details:
SELL 1 DIS Oct 97.5 Put @ 2.09
BUY 1 DIS Oct 92.5 Put @ 0.63
Credit: 1.46 ($146.00 per contract)
Max Risk: $354.00 (Breakeven Price: $96.04)
DIS Current Price : $97.59
Margin Required: $500.00
Days to Expiration: 39
Probability of Profit: 59.01%

By Friday, volatility had contracted and the price of DIS shares had increased by $1.20. We exited the trade for a nice quick profit by buying back the credit spread for $0.90. This net a profit of $51.90 or 10.49% return on capital after commissions in just five days.

/6E November 1.27/1.1 Strangle
On Wednesday we closed our euro strangle at our target of 50% of maximum profit. After commissions, we net a profit of $122.66 or 23.19% return on capital after commissions in just 35 days. This ended up being a great trade.

/ZW October 470/460 Put Credit Spread
Also on Wednesday with the rally in wheat prices, we took the opportunity to exit this losing credit spread. This trade had originally been part of the October 550/560/470/460 iron condor that was sold back on August 1st. We had exited the call side last month when the put side was breached. We ended up not taking a full loss on this trade, and were able to exit with a $892 loss after commissions. However, if our remaining wheat positions are exited profitably, which at this point looks probable, it should offset this loss significantly.

/CL January 66/37 Strangle
On Thursday, we opened a new position in crude oil utilizing the January options. We continue to be plagued by very low volatility in crude oil right now, so we kept the trade size small by only opening one contract. Also, our strikes are way out 2 standard deviations.

Trade Details:
SELL 1 /CL Jan 66 Call @ 0.09
SELL 1 /CL Jan 37 Put @ 0.11
Credit: 0.20 ($200.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 36.80 / 66.20)
/CLZ7 Current Price : $50.91
Margin Required: $720.00
Days to Expiration: 91
Probability of Profit: 94.30%

Current Portfolio

/CL December 63/38 Strangle
$180.00 Credit. 60 days to expiration. 2 deltas on the puts and 3 deltas on the calls. Currently at 27% of maximum profit. We entered this trade with very low implied volatility, so volatility is the real risk here. However, our breakeven points are established well out-of-the-money. Our target is 50% of maximum profit, so we are more than half way there.

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/ZW October 460/470/405/395 Iron Condor
$575.00 Credit. 6 days to expiration. 2 deltas on the puts and 22 deltas on the calls. Currently at 56% of maximum profit. This trade still looks real good. We are planning on closing this trade early next week.

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/ZW October 440/430 Put Vertical
$325.00 Credit. 6 days to expiration. 28 deltas on the put side. Currently has a $50 loss. Things have improved dramatically this week with the stabilization and small rally of wheat prices. This put vertical looks like it may just pay out for us next week, helping to offset earlier losses.

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The combined risk graph for the entire November wheat position that expires next week is shown below. Ultimately, we are looking for wheat prices to remain between 440 and 460 next week.

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/ZW November 460/470/405/395 Iron Condor
$506.25 Credit. 41 days to expiration. 8 deltas on the puts and 38 deltas on the calls. Currently at 3% of maximum profit. The recent rally in wheat prices has hurt this position, but depending on what happens with the October options next week, we might just decide to take a scratch on this trade.

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Plan For Next Week

I intend to watch the wheat prices carefully this week as our October positions expire at the end of the week. My plan is to exit the trades early in the week, assuming that price cooperated.

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