Weekend Portfolio Analysis (November 19, 2017)

Market Analysis

Stocks ended a rather busy week modestly lower for the second week in a row as investors turned their attention to the upcoming Thanksgiving holiday week. Investors continued to keep an eye on Capitol Hill, where Republican lawmakers are trying to implement the biggest tax overhaul in more than 30 years. The House passed its version of a tax reform bill on Thursday, while the Senate continued to make changes to its version, which will now includes a provision to repeal the Affordable Care Act’s individual mandate.

The week’s economic data were generally favorable. U.S. retail sales increased 0.2% in October, and housing starts and permits posted unexpected gains, rising 13.7% and 5.9%, respectively. The October producer price index rose 0.4% in October, more than anticipated. The consumer price index rose only 0.1% for October, but the core rate (excluding food and energy prices) rose 0.2%, a bit more than expected.

The S&P 500 (SPX) opened Monday at 2576.53 and closed Friday at 2578.85, up 2.32 points, or 0.09%.

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The Dow Jones Industrial Average has not experienced a 1% intraday drop over the past 66 trading days, a record streak.  It has been over 500 days since the last 5% sell-off, and the last 10% correction was almost two years ago. The VIX index, which measures market volatility, has been well below average for the past year, including recently reaching the lowest reading in the history of the index. However, Wednesday’s market decline and Thursday’s subsequent rally gave traders a taste of volatility not seen since mid-August.

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Despite record low levels of volatlity, the VVIX, which measure the volatility of the VIX, paints a slightly different story. Looking at the five-year chart below, we see that VVIX has been elevated in that it has remained above a very strong line of resistance since August.

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Also, the yield curve continues to flatten which typically is a precursor to a recession. The rising 2 and 5-year yields along with a downward trend in the 30-year has flatted the curve to 10-year lows. The benchmark 10-Year yield fell 5 bps to settle at 2.35% and remains below a key resistance point of 2.4%.

Crude oil prices jumped on Friday, but failed to offset their first weekly loss in six weeks as fears over rising U.S. output persisted, while falling expectations for an extension of OPEC-led output curbs weighed on sentiment.

On Wednesday, the U.S. Energy Information Administration (EIA) reported that commercial crude oil inventories rose again this week by 1.9 million barrels versus analysts’ expectations for a 2.2 million barrel draw. Also putting pressure on oil prices is the lowering of the International Energy Agency’s forecast for the growth of global oil demand by 100,000 barrels per day. At the same time, the U.S. continues to increase oil production,

Oilfield services firm Baker Hughes reported Friday that the number of active U.S. rigs drilling for oil remained unchanged from a week ago at 738. The weekly rig count is an important barometer for the drilling industry and serves as a proxy for domestic oil production.

Crude oil futures for January delivery opened Monday at $57.10 per barrel and closed Friday at $56.80, down $0.30 or 0.53%.

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Trade Activity

It was quiet week with only one closing trade.

/GC February 1480/1130 Strangle
On Wednesday, I decided to enter a limit order to close out my gold position as it was approaching 50% of maximum profit. Unfortunately, I made an error and submitted it as a market order as opposed to a limit order. It filled immediately and instantly I knew the error of my ways. I still made a profit on the position, but not quite what I had originally anticipated. The trade was opened on October 30th by selling the strangle for $2.00. I closed it out sixteen days later for $1.40 which net me a profit of $45.76 or a 4.74% return on capital.

Current Portfolio

/CL February 68/40 Strangle
$210.00 Credit. 59 days to expiration. 1 deltas on the puts and 5 deltas on the calls. Last week geopolitical tensions resulted in our profits vanishing. This past week, we are back to a profitable scenario again, currently at 38% of maximum profit. We will look for an opportunity to exit this trade and enter a new crude oil position for the March expiration cycle.

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/NG February 5 Call
$260.00 Credit. 68 days to expiration. 6 deltas on the calls. Currently at 15% of maximum profit. This trade is looking good so far.

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/ZS March 1200/920 Strangle
$200.00 Credit. 96 days to expiration. 7 deltas on the puts and 5 deltas on the calls. Currently at breakeven. Nothing to do here right now.

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/ZW December 480/490/425/415 Iron Condor
$412.50 Credit. 5 days to expiration. 39 deltas on the puts and 2 deltas on the calls. Wheat prices continue to fluctuate between 420 and 430. I do not like to hold options this close to expiration, as the gamma risk is very high. We will try to exit early in the week, even if it results in a small loss.

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/ZW January 460/470/420/410 Iron Condor
$506.25 Credit. 33 days to expiration. 15 deltas on the puts and 27 deltas on the calls. Currently at 11% of maximum profit. So far this trade looks healthy.

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Plan For Next Week

The portfolio is currently up 20.25% for the year versus up 14.54% for the S&P 500 (see Trading Results). The portfolio is currently 75% in cash.

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Happy Thanksgiving!

Happy Trading!