Weekend Portfolio Analysis (October 29, 2017)

Market Analysis

The U.S. stock market ended the week higher and moved further into record territory thanks to an impressive batch of technology earnings. The S&P 500 Index recorded a seventh consecutive weekly gain, its best stretch in nearly three years. The technology-heavy Nasdaq Composite Index performed best, helped by a surge in Microsoft, Amazon, Google, and Intel at the open of trading on Friday following the release of better-than-expected earnings reports the previous evening. The small-cap Russell 2000 lagged and recorded a small loss for the week. Technology stocks led the week’s gains. With 45% of the companies making up the S&P 500 Index having reported third quarter earnings, the blended estimate for aggregate year-over-year earnings growth is 5.3%. Excluding the energy sector, the earnings growth estimate is 3.0%.

On the data front, the advance GDP report showed that the U.S. economy increased at annual rate of 3.0% in the third quarter, marking the second straight quarter the annualized rate has been 3.0% or higher.

The S&P 500 (SPX) opened Monday at 2578.08 and closed Friday at 2581.07, up 2.99 points, or 0.12%.

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Price trends remain strong, but the surge in momentum that emerged off of the August lows has tempered a bit as October has progressed. This could set up the S&P 500 for some near-term consolidation. Initial support is near 2540, although a pullback towards 2500 could help unwind investor optimism and leave the index well positioned to rally into year-end. In addition to deteriorating momentum, the percentage of stocks trading above their 50-day (red line) and 200-day (blue line) averages has contracted somewhat.

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U.S. Crude oil prices spiked to a nearly 7-month high with WTI crude trading just over $54 per barrel breaking through key technical levels. Geopolitical tension and expectations that OPEC and other oil exporters will extend a deal to limit their oil output helped fuel the rally on Friday, sending Brent crude to over $60 for the first time in more than two years. This was despite data from the Energy Information Administration (EIA) on Wednesday that crude oil inventories rose by 856,000 barrels last week versus analysts’ forecast for a 2.6 million barrel draw.

Baker Hughes reported on Friday that the number of active U.S. rigs drilling for oil increased by 1 to 737 this week.

Crude oil futures for December delivery opened Monday at $52.07 per barrel and closed Friday at $54.19, up $2.12 or 4.07%.

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Trade Activity

This week we had two closing trades and no new opening trades.

/GC January 1480/1170 Strangle
On Thursday we closed out our gold strangle for a very quick profit. We originally sold the strangle for $2.80 on October 12. We bought it back for $1.20 which net us a profit after commissions of $145.76. This was an 11.34% return on capital in just 14 days.

/NG December 3.8/2.4 Strangle
On Friday we closed out the natural gas strangle. Again, we had opened this position back on October 12 for 0.020 (or $200.00 credit). We bought back the strangle for .009 (or $90.00). This resulted in a net profit of $95.56 or a 14.48% return on capital in just 15 days.

Current Portfolio

/CL February 68/40 Strangle
$210.00 Credit. 80 days to expiration. 2 deltas on the puts and 2 deltas on the calls. Currently at 47% of maximum profit. This trade is looking great, despite the run up in crude oil prices on Friday. We will likely be closing this trade out this coming week.

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/ZW December 480/490/425/415 Iron Condor
$412.50 Credit. 26 days to expiration. 45 deltas on the puts and 4 deltas on the calls. Currently has a loss of $206.25. The P&L on this trade continues to fluctuate as wheat prices jump around. Earlier this week, wheat prices rallied and the trade was at about 25% of maximum profit. Prices are now close to the bottom of the trading range and as long they don’t drop too much further, we should be okay.

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Plan For Next Week

The portfolio is currently up 19.79% for the year versus up 14.6% for the S&P 500 (see Trading Results). The portfolio is currently 86% in cash. With so much cash on the sidelines, we are ready to add positions anywhere we can find some volatility.

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Happy Trading!

  • Mike

    Hi Aram, looks good, I am currently in a losing .5 wide iron condor as well, my short 54.5 calls on CL are at a delta of 45. My puts are at 49.5 and 49.

    When should I look to adjust or close this position? It will expire on Nov 17th.

    • Aram Basmadjian

      Hi Mike! So you have a /CL Dec 54.5/55/49.5/49 iron condor that expires in 17 days… What was the original credit that you collected for this trade?

      • Mike

        Collected 15 cents, on a .5 spread.

        • Aram Basmadjian

          $150 credit collected, $350 max loss. Currently you are showing a $70 loss. The breakeven on the call side is $54.65 and /CL is trading right at $54. Considering that this is a very small defined-risk trade and the call side has not yet been breached, I would just hold the trade. In the future, I would not put trades on that are so close to the at-the-money price levels. You need to allow yourself to have a higher probability of profit.