Weekend Portfolio Analysis (November 26, 2017)

Market Analysis

Stocks rose in the holiday-shortened week of light trading, breaking a two-week stretch of lower markets and setting new record highs for the S&P 500 and Nasdaq Composite. There was only a slight retracement on Wednesday when the S&P 500 dropped a couple of points as the minutes from the recent Federal Open Market Committee (FOMC) meeting revealed that “…several participants expressed concerns about a potential buildup of financial imbalances” given elevated asset valuations and low financial market volatility.

The flattening of the yield curve persisted in the Treasury market this week with the spread between the 2-yr note yield and the 10-yr note yield narrowing to 60 basis points from 63 basis points a week ago. The spread was 125 basis points at the beginning of 2017. A narrowing spread is often a precursor to slowdown in economic growth.

The S&P 500 (SPX) opened Monday at 2579.49 and closed Friday at 2602.42, up 22.93 points, or 0.89%.

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The CBOE Volatility Index (VIX) touched an all-time low amid a flurry of trading at the close of Friday’s shortened session, briefly falling to 8.56 before bouncing back to 9.67. Although this is a new low for the VIX index, it was brushed off by exchange officials as a “blip” that occured when the bid and ask prices of SPX options widened during holiday trading due to very low volume. However, it is still important to note that VIX has hit all-time lows several other times this year.

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U.S. crude oil prices reached a two-year high following the shutdown of imports from the TransCanada Keystone XL pipeline. The closure of the pipeline following a leak in South Dakota is expected to reduce deliveries to the U.S. by around 85% through the end of the month. After the announcement, oil prices shot up on Wednesday on expectations of tighter supply in the United States. Meanwhile, WTI futures flipped into a state of backwardation, the first time the futures curve has been downward sloping in years. Backwardation could help accelerate inventory drawdowns. Traders also are expecting a possible announcement of new production cuts by Saudi Arabia at the next OPEC meeting.

The U.S. Energy Information Administration (EIA) released its weekly petroleum status report Wednesday morning, showing that U.S. commercial crude inventories decreased by 1.9 million barrels last week, maintaining a total U.S. commercial crude inventory of 457.1 million barrels. The commercial crude inventory remains in the upper half of the average range for this time of year.

After several consecutive months of sharp declines in the rig count, the U.S. oil industry added more rigs back into operation for the third week in a row. Oilfield services firm Baker Hughes reported Friday that the number of active U.S. rigs drilling for oil increased by 9 from a week ago to 747.

Crude oil futures for January delivery opened Monday at $56.80 per barrel and closed Friday at $58.97, up $2.17 or 3.82%.

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Trade Activity

In advance of the Thanksgiving holiday, I closed out three positions, opened one new trade, and had some options expire after the holiday.

/NG February 5 Call
On Monday, I closed out the Natural Gas call position for a great profit. We had originally sold the calls on November 7th for $0.026, collecting $260 in premium per contract. We bought back the calls for $0.015, or $150 which net a profit of $102.78 after commissions or a return on capital of 31.15% in jsut 13 days. Natural Gas prices have continued to plummet, but should we see another spike in prices over the next few weeks, we will look to re-enter the position.

/CL February 68/40 Strangle
Also on Monday, we closed out our February crude oil strangle nearly at the target profit level of 50% of maximum profit. The strangle was originally sold on October 16th for $0.21 ($210 in credit). We closed it out for $0.11 (or $110). This net a profit after commissions of $85.56 or 11.88% return on capital in 35 days. I had to hold this trade a bit longer than I like due to the low implied volatility.

/ZW December 480/490/425/415 Iron Condor
This trade has really taken me for a ride. Wheat prices continued to bounce above and below our breakeven point on this trade forcing me to wait until expiration week to close out of it, which is not something I normally like to do. I got lucky and on Tuesday, the price of wheat rallied significantly. I saw an opportunity to exit the trade for a scratch (less the cost of commissions) and I jumped on the opportunity. I closed out just the put vertical side of the trade since the calls were already worthless and in no danger of going in-the-money. Of course, had I waited about 30 minutes longer, the price rallied even further. However, it eventually pulled back and then plummeted over the next couple of trading days, so I feel this was about as close to a win as I could hope for. On Friday, the calls expired and we are now completely out of the December cycle for wheat. After commissions, we lost $73.08, marking our first losing position in over two months.

/CL March 70/44 Strangle
On Tuesday, we opened another strangle in crude oil for the March expiration cycle. Crude oil is one of my core go-to products and is responsible for over 60% of this year’s trading profits. However, as low volatility continues to persist and instability in the Middle East continues to escalate, I am aware of the potential risk continuing to trade this product right now. This is one of the reasons that I am trading the furthest out options in time that are offered by TD Ameritrade.

Trade Details:
SELL 1 /CL Mar Call @ 0.12
SELL 1 /CL Mar Put @ 0.14
Credit: 0.26 ($260.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 43.74 / 70.26)
/CLH8 Current Price : $56.85
Margin Required: $720.00
Days to Expiration: 85
Probability of Profit: 94.49%

Current Portfolio

/ZS March 1200/920 Strangle
$200.00 Credit. 89 days to expiration. 6 deltas on the puts and 3 deltas on the calls. Currently at 34% of maximum profit. This trade looks fine right now.

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/ZW January 460/470/420/410 Iron Condor
$506.25 Credit. 26 days to expiration. 25 deltas on the puts and 15 deltas on the calls. Currently at 14% of maximum profit. I will be watching wheat prices carefully. In the event that they continue to collapse, we may need to exit this trade early, but I think that they are in the process of bottoming.

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Plan For Next Week

The portfolio is currently up 21.4% for the year versus up 15.58% for the S&P 500 (see Trading Results). The portfolio is currently 84% in cash.

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