Weekend Portfolio Analysis (November 11, 2017)

Market Analysis

Stocks got off to a good start this week, hitting new record highs on Monday and Wednesday, but retraced their gains in the latter half, breaking a streak of eight weekly gains for the large-cap indexes. Fading hopes for tax reform took an especially large toll on small-caps, which generally stand to gain more from faster U.S. growth and lower tax rates because of their domestic focus. Financials also underperformed as tax cut hopes diminished. As investors grew more defensive, they favored consumer staples stocks, which saw good gains for the week.

With 90% of the members of the S&P 500 Index having reported for the third quarter, blended earnings grew 6% versus the same quarter a year ago. Stripping out insurance companies, which were hit by hurricane claims, earnings rose 8.3%. Revenues rose 5.8% year over year.

The S&P 500 (SPX) opened Monday at 2587.47 and closed Friday at 2582.3, down 5.17 points, or 0.2%.

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The SPX saw selling right to the edge of its expected move on Thursday, but closed the week well within the expected move. Thursday’s action was the first time in quite a while that the market has reacted to negative news. The SPX sold off nearly 30 points on news that the Senate wants to delay corporate tax cuts until 2019.

Saudi Arabia’s crackdown on corruption, growing tensions between Iran and Saudi Arabia and the potential for a Venezuelan debt default all helped push oil prices higher this week. While short-term factors could push prices up in the near term, spare US production capacity could come back on line quite quickly, analysts say, limiting the market’s upside over the medium term.U.S. Crude oil prices spiked to their highest level in more than two years. However, data from the Energy Information Administration (EIA) on Wednesday put downward pressure on prices reporting that crude oil inventories rose by 2.2 million barrels last week versus analysts’ forecast for a 2.7 million barrel draw.

Baker Hughes reported on Friday that the number of active U.S. rigs drilling for oil increased to 738 this week.

Crude oil futures for December delivery opened Monday at $55.97 per barrel and closed Friday at $56.90, up $0.93 or 1.66%.

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Trade Activity

Over the past two weeks, I opened four new positions.

/GC February 1480/1130 Strangle
On Monday, October 30th, I opened a new gold position. Gold has been a consistent performer in our portfolio. With low volatility across the board, I have kept position sizes small and diversified across various asset classes. Additionally, I have positioned the strikes very far out of the money with lots of time until expiration to minimize gamma risk. This trade has not been on the books for quite two weeks yet and is already showing a nice profit.

Trade Details:
SELL 1 /GC Feb 1480 Call @ 1.10
SELL 1 /GC Feb 1130 Put @ 0.90
Credit: 2.00 ($200.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1128.00 / 1482.00)
/GCG8 Current Price : $1,278.10
Margin Required: $966.00
Days to Expiration: 87
Probability of Profit: 98.97%

/NG February 5 Call
Natural gas has always been a bit of a difficult trade for me. Although I have made money on it in the past, it does require a bit of a strong stomach to endure the trade due to its seeming volatility. /NG follows a seasonal pattern of peaking somewhere in late October or early November and then trending lower into January and February. Keeping this seasonal tendency in mind, I sold a short call this past Tuesday. Of course, nat gas has continued to rally since placing the trade, and I suspected it might. If the rally continues, I will add additional calls to the position. However, I am confident that the 5 strike is a very safe level. And again, we have plenty of time on our side for the trade to work out. Currently the position is showing a $60 loss.

Trade Details:
SELL 1 /NG Feb 5 Call @ .026
Credit: .026 ($260.00 per contract)
Max Risk: Unlimited (Breakeven Price: 5.026)
/NGG8 Current Price : $3.252
Margin Required: $330.00
Days to Expiration: 80
Probability of Profit: 98.08%

/ZS March 1200/920 Strangle
On Wednesday, I opened a new position in soybeans. Again, with low volatility, I went out nearly four months to expiration. The trade is already profitable at about 16% of maximum profit.

Trade Details:
SELL 1 /ZS Mar 1200 Call @ 2.00
SELL 1 /ZS Mar 920 Put @ 2.00
Credit: 4.00 ($200.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 916.00 / 1204.00)
/ZSH8 Current Price : $1,009.00
Margin Required: $503.00
Days to Expiration: 107
Probability of Profit: 97.25%

/ZW January 460/470/420/410 Iron Condor
On Wednesday, the put side of our /ZW December 480/490/425/415 Iron Condor was breached, so I added this adjustment trade to take in more credit. I have been working to offset losses in the wheat trade from earlier in July. Currently this trade is profitable at about 14% of maximum profit.

Trade Details:
SELL 3 /ZW Jan 460 Call @ 4.375
BUY 3 /ZW Jan 470 Call @ 2.75
SELL 3 /ZW Jan 420 Put @ 3.50
BUY 3 /ZW Jan 410 Put @ 1.75
Credit: 3.375 ($168.75 per contract / $506.25 total)
Max Risk: $993.75 (Breakeven Prices: 416.625 / 473.375)
/ZWH8 Current Price : $439.00
Margin Required: $342.00
Days to Expiration: 44
Probability of Profit: 59.46%

Current Portfolio

/CL February 68/40 Strangle
$210.00 Credit. 67 days to expiration. 1 deltas on the puts and 8 deltas on the calls. I was unable to close this trade out at the desired profit target (50% of max profit). In the meantime, geopolitical tensions in Saudi Arabia aided oil in its price recovery this past week. As a result, we are now showing a small $30 loss on this position. However, we still have a 94% probability of profit on this trade and the fundamentals favor stable prices going forward.

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/ZW December 480/490/425/415 Iron Condor
$412.50 Credit. 13 days to expiration. 32 deltas on the puts and 2 deltas on the calls. Wheat prices have been fluctuating between 420 and 430 for the past couple of weeks. The breach of our 425 put this week triggered the addition of another iron condor to this position. However, by the end of the week, this trade is back in the profitable range. Currently we are at 22% of maximum profit. We will be looking for an opportunity to exit the trade this coming week.

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Plan For Next Week

The portfolio is currently up 19.79% for the year versus up 14.7% for the S&P 500 (see Trading Results). The portfolio is currently 73% in cash.

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