Weekend Portfolio Analysis (December 3, 2017)

Market Analysis

The S&P 500, Russell 2000 and Dow Jones Industrial Average all moved higher this past week with the Dow passing through 24,000 for the first time, just 32 days after crossing 23,000. In fact, the Dow has achieved the 20k, 21k, 22k, 23k and 24k milestones in 2017. Markets rallied early in the week due to increased optimism that the tax-reform bill will pass soon. Also adding fuel to the rally was encouraging economic data. The third-quarter GDP was revised upwards to 3.3%, the strongest period of growth for the U.S. economy in the past three years. However, the market’s gains were tempered on Friday by news that Mike Flynn, the former national security advisor, may testify regarding interference in the 2016 election.

The S&P 500 (SPX) opened Monday at 2602.66 and closed Friday at 2642.22, up 39.56 points, or 1.52%.

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Volatility remains low, but there are some interesting signals coming from the CBOE Volatility Index (VIX) that haven’t occurred for a while. For example, the VIX rose on each of the last four trading days, even though S&P 500 has been making new highs each day. If this is really a reversal in trend for the VIX, it could indicate a short-term correction is imminent.

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OPEC members, Russian and nine other crude oil producers agreed on Thursday to replace the current production cut deal that expires in March with an agreement that will extend the production cuts through December 2018.

The U.S. Energy Information Administration (EIA) announced on Wednesday that U.S. crude oil inventories fell by 3.4 million barrels last week versus analysts’ estimates of a 2.3 million barrel draw. The drop is partially due to the Keystone oil pipeline shutting down which has led to a decrease in Cushing crude oil inventories.

The U.S. oil rig count increased again this past week. The boost to the number of oil rigs in the U.S. is likely to grow if oil prices continue to climb as a result of OPEC’s prolonging of the deal that is designed to ease the glut. Baker Hughes reported Friday that the number of active U.S. rigs drilling for oil increased by 2 from a week ago to 749.

Crude oil futures for January delivery opened Monday at $58.95 per barrel and closed Friday at $58.29, down $0.66 or 1.12%.

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Trade Activity

This week we had the opportunity to close two trades and open two new trades.

/NG March 5.25 Call
On Tuesday, I sold another tranche of natural gas calls. Nat gas spiked up again and I am still bearish on /NG at this point. I may have entered the position a day early, but I think it will be a good trade in the long run.

Trade Details:
SELL 2 /NG Mar 5.25 Call @ .021
Credit: .021 ($210.00 per contract)
Max Risk: Unlimited (Breakeven Price: 5.271)
/NGH8 Current Price: 3.077
Margin Required: $660.00
Days to Expiration: 87
Probability of Profit: 99.23%

/ZW January 460/470/420/410 Iron Condor
On Thursday I exited the last of the wheat iron condors currently in the portfolio for just shy of 40% of maximum profit. After commissions, I net a profit of $90.06 or a 26% return on capital in just 22 days. Overall for the year, I am still down nearly $2,500 on the wheat trades. This has been the only commodity in which I lost money during 2017.

/CL March 70/44 Strangle
On Thursday, OPEC announced that they would extend the production cuts which crushed the option premiums. In fact, by Friday, the IV Percentile had dropped to 0%! I exited the strangle at our target profit level just ten days after opening the trade. After commissions, I net a profit of $115.56 or a 16.05% return on capital.

/GC March 1450/1150 Strangle
On Friday, I opened another strangle in gold for the March expiration cycle. I am comfortable with the range that gold has been trading in and believe that it is currently fairly priced.

Trade Details:
SELL 1 /GC Mar 1450 Call @ 1.40
SELL 1 /GC Mar 1150 Put @ 1.00
Credit: 2.40 ($240.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1147.60 / 1452.40)
/GCH8 Current Price : $1289.00
Margin Required: $1079.00
Days to Expiration: 83
Probability of Profit: 97.15%

Current Portfolio

/ZS March 1200/920 Strangle
$200.00 Credit. 82 days to expiration. 5 deltas on the puts and 4 deltas on the calls. Currently at 43% of maximum profit. This trade is still looking very good.

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Plan For Next Week

The portfolio is currently up 23.4% for the year versus up 17.35% for the S&P 500 (see Trading Results). The portfolio is currently 80% in cash.

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