Weekend Portfolio Analysis (October 15, 2017)

Market Analysis

The S&P 500 and Dow Jones Industrial Average have both closed higher the past five weeks in a row. The threat of tax reform and the start of earnings season continue driving markets into record territory. Financials kicked off the third quarter earnings season on a mostly higher note with JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) all reporting better-than-expected results. U.S. retail sales also bolstered investor sentiment with September retail sales rising strongly to 1.6%, up from 0.2% in August. Headlines from Washington, D.C. also remained in the spotlight as President Trump signed an executive order to cut off subsidy payments to insurance companies that provide Obamacare health plans, along with heightened concerns that the U.S. will leave NAFTA.

The S&P 500 (SPX) opened Monday at 2551.39 and closed Friday at 2553.17, up 1.78 points, or 0.07%.

Click Chart to Enlarge

The SPX chart is displaying a very strong uptrend with support at 2510, 2480 and 2400. Volatility remains historically low and has been for weeks.

U.S. crude oil inventories fell last week as refining rates rose, while gasoline posted an unexpected hefty build. According to the Energy Information Administration, crude oil inventories dropped 2.7 million barrels during the past week, slightly more than analysts’ expectations in a Reuters poll for a decrease of 2 million barrels. Inventories have been declining in recent weeks, after an interruption due to Hurricane Harvey that knocked out nearly half of the Gulf Coast’s refining capacity at the end of August.

The U.S. oil rig count fell for a second week in a row, extending a two-month drilling decline, even as crude prices rallied to over $50 per barrel. Drillers cut five oil rigs during the week, bringing the total count to 743, the lowest since early June, according to Baker Hughes.

Crude oil futures for November delivery opened Monday at $49.25 per barrel and closed Friday at $51.42, up $2.17 or 4.41%.

Click Chart to Enlarge

Trade Activity

As low volatility continues to persist, it has been difficult to find trades that meet our criteria. We have continued to add positions, but have kept the sizing small because of the low vol. This week we closed two positions and added two new positions.

/CL January 66/37 Strangle
On Monday, we closed this crude oil strangle buy purchasing the put and call back for a .09 ($90.00) debit. We had originally sold the strangle for a credit of 0.20 ($200.00). This net us a profit of $95.56 after commissions or a return on capital of 13.27% in 25 days.

/NG December 3.8/2.4 Strangle
On Thursday, I opened a new natural gas position. Natural gas can be a bit tricky to trade as it has a tendency to have big moves and whipsaw back and forth. However, implied volatility has increased significantly in /NG making it attractive.

Trade Details:
SELL 1 /NG Dec 3.8 Call @ 0.018
SELL 1 /NG Dec 2.4 Put @ 0.002
Credit: 0.02 ($200.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 2.38 / 3.82)
/NGZ7 Current Price : $3.108
Margin Required: $660.00
Days to Expiration: 46
Probability of Profit: 93.00%

/GC January 1480/1170 Strangle
Also on Thursday, I opened another gold position. Implied volatility expanded a bit giving us an opportunity to re-enter this product.

Trade Details:
SELL 1 /GC Jan 1480 Call @ 1.60
SELL 1 /GC Jan 1170 Put @ 1.20
Credit: 2.80 ($280.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1167.20 / 1482.80)
/GCG8 Current Price : $1296.90
Margin Required: $1285.00
Days to Expiration: 75
Probability of Profit: 96.27%

/CL January 68/40 Strangle
On Friday, we closed out our other crude oil strangle at our target profit level of 50% of maximum profit. We had originally sold the strangle on September 26 for 0.21 ($210 credit) and bought it back for 0.10 ($100). This net us a profit of $95.56 or a 13.27% return on capital in just 17 days.

Current Portfolio

/ZS December 1080/870 Strangle
$137.50 credit. 40 days to expiration. 1 delta on the puts and 9 deltas on the calls. Currently at 9% of maximum profit. Nothing to do on this trade right now.

Click Chart to Enlarge

/ZW December 480/490/425/415 Iron Condor
$412.50 Credit. 40 days to expiration. 26 deltas on the puts and 11 deltas on the calls. Currently at 4% of maximum profit. We continue to try to collect additional premium to offset earlier losses in the wheat trade. We are watching this carefully, and will make adjustments this week if the put side is breached.

Click Chart to Enlarge

Plan For Next Week

We continue to look for areas where volatility persists.

New Features for PRO members

Be sure to check out our two new features exclusively for PRO members. First, we have added a Trading Forums section to give PRO members the ability to interact with one another an various trading topics. Also, many readers have inquired about the Thinkscript code that is used to generate the IV indicator at the bottom of our ThinkOrSwim charts. We have now made this script available for PRO members here.

As always, comments are welcome below. If you have not signed up for your FREE membership yet, please be sure to do that so that you can access additional content on this site. Also, be sure to check out the PRO membership, our real-time trade alert service.

Happy Trading!