Weekend Portfolio Analysis (October 1, 2017)

Market Analysis

Talk of tax reform drove stocks higher with the markets trading at new all-time highs again this week, led by the small cap stocks. All four major indices ended the week in the green. The gains this week in the small cap stocks are due to the disproportional benefit that a reduction in corporate taxes would have on smaller and medium sized companies.

Investors turned their attention to Fed Chair Janet Yellen on Tuesday as she gave a speech entitled “Inflation, Uncertainty, and Monetary Policy”. Ms. Yellen defended a gradual course of rate hikes despite continued uncertainty in the area of inflation, but her comments didn’t move the financial markets. Still, the fed funds futures market projects that the next rate hike will occur at the December FOMC meeting with an implied probability of 77.9%, up from 72.8% last week.


The S&P 500 (SPX) opened Monday at 2499.39 and closed Friday at 2519.36, up 19.97 points, or 0.8%.

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Stocks have broken out to new highs, which is bullish from a macro trend perspective. The S&P 500 (SPX) has been higher each of the past six months as well as ten of the past eleven months. The persistence of the SPX to maintain the uptrend has kept volatility in the cage.

The chart below shows the performance of the Russell 2000 versus the S&P 500 for the past week. Although the small-cap index has lagged behind the large-caps all year, the tax reform announcements this week had a meteoric effect on the small-cap stocks.

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After vastly underperforming the S&P 500 earlier in the year, energy stocks have generally outperformed since mid-August. This is due largely to the rise in oil prices since June and market sentiment becoming more bullish that oil prices will rise in coming months. Part of this is an improved global demand outlook (led by the U.S. and developing economies) as well as supply stabilizing, led by ongoing OPEC and Russian cuts and expectations for oil shale growth in the U.S. to slow.

The Energy Information Administration (EIA) released data showing that U.S. crude supplies fell unexpectedly last week. Data from the EIA indicated that domestic crude supplies fell by 1.8 million barrels for the week ended Sept. 22. That was contrary to the forecast for a rise of 1.3 million barrels by analysts.

The number of rigs drilling for oil in the U.S. increased by 6 this week to 750, according to oil-field services company Baker Hughes Inc.

Crude oil futures for November delivery opened Monday at $50.68 per barrel and closed Friday at $51.64, up $0.96 or 1.89%.

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Trade Activity

This week we started adding some new positions to the portfolio. All of the new trades added are high probability trades. Because of the persistent low volatility, however, we are keeping our position sizing very small (one contract). We opened three new positions and closed one existing position.

/CL January 68/40 Strangle
On Tuesday, we opened another position in crude oil. Oil prices appear to have stabilized around the $50 price range. This strangle gives us a $28 price range with a 95% probability of profit.We are already at 14% of a maximum profit on this trade.

Trade Details:
SELL 1 /CL Jan 68 Call @ 0.07
SELL 1 /CL Jan 40 Put @ 0.14
Credit: 0.21 ($210.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 39.79 / 68.21)
/CLF8 Current Price : $52.31
Margin Required: $720.00
Days to Expiration: 79
Probability of Profit: 95.00%

/GC January 1500/1130 Strangle
Also on Tuesday, we opened a strangle in gold. In full disclosure, this trade was suggested by one of our subscribers and I liked it and added it to our portfolio. IV Percentile was at nearly 29% when we placed the trade and has dropped rapidly since adding the position and is now at only 2%. As a result, we are already at 33% of maximum profit on this trade.

Trade Details:
SELL 1 /GC Jan 1500 Call @ 2.00
SELL 1 /GC Jan 1130 Put @ 0.70
Credit: 2.70 ($270.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1127.30 / 1502.70)
/GCG8 Current Price : $1306.20
Margin Required: $881.00
Days to Expiration: 91
Probability of Profit: 97.72%

/CL December 63/38 Strangle
We sold this strangle on September 5th for $0.18 ($180.00 Credit). On Thursday, we bought it back for $0.08. This net us a profit of $85.56 after commissions or 11.88% return on capital is just 23 days.

/ZS December 1080/870 Strangle
On Friday we opened a new position in soybeans. Implied volatility is not nearly as high as we would like to see, so we have positioned our strikes out at 2 standard deviations.

Trade Details:
SELL 1 /ZS Dec 1080 Call @ 1.75
SELL 1 /ZS Dec 870 Put @ 1.00
Credit: 2.75 ($137.50 per contract)
Max Risk: Unlimited (Breakeven Prices: 867.25 / 1082.75)
/ZSZ7 Current Price : $968.50
Margin Required: $497.00
Days to Expiration: 56
Probability of Profit: 94.26%

Current Portfolio

/CL January 66/37 Strangle
$200 Credit. 74 days to expiration. 2 deltas on the puts and 3 deltas on the calls. Currently at 40% of maximum profit. We will be looking at closing this trade at 50% of maximum profit.

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/ZW November 460/470/405/395 Iron Condor
$506.25 Credit. 26 days to expiration. 3 deltas on the puts and 33 deltas on the calls. Currently at 29% of maximum profit. We continue to watch these wheat positions very carefully. If we see a bit of a move down this week, we will close this trade out.

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/ZW November 475/485/425/415 Iron Condor

$600.00 Credit. 26 days to expiration. 12 deltas on the puts and 15 deltas on the calls. Currently at 45% of maximum profit.

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Plan For Next Week

We will be watching our wheat positions closely and looking for opportunities to exit the trades that are approaching our profit target levels.

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