The only way to get rid of your past,

is to make a future out of it. 

– Phillips Brooks

Commentary

Week one of 2020 has only two trading days – Thursday and Friday. Monday and Tuesday were the last trading days for 2019, and Wednesday was a happy New Year. This short week gives me three days to work through and write down some of my new year’s resolutions on becoming a better Discipline Option Trader.

As a quick look back at 2019, I considered myself a Padawan Learner within the Options Trading Order. I was schooled in forehead-slapping and creative ways of exclaiming, “D’oh!”.  But I also learn some great lessons that I documented in my last post, “Let 2019 Go!

As of January 1, 2020, I am now embarking on the second goal of my 2-year mission. Having completed my first goal, I now have twelve months to demonstrate that I can generate not only a paycheck but also a profit from trading Options Spreads.

I now consider myself a full-fledged Options Traders – albeit a junior one at that. I still need close watching and hand slapping, but I will do my best to be mindful of the Options Force in making trading decisions.

Goals for 2020

  1. Start a new trading budget and schedule and work within
  2. Be aware of current market trends and external trades’ buzz-kills
  3. Explain why I opened new trades BEFORE I open them
  4. Explain why losing trades lost
  5. Leave emotions at the door.
Starting a New Budget

I have created an isolated brokers account with Ameritrade for the sole purpose of monitoring my Options Trading process. Following my post on how to create a Trading Budget, on Dec 31, I will transfer enough cash into this account to have a total beginning balance of $9,000 on Jan 1.

 

I will make daily, or weekly options Options Spread trades that will total no more than $500 per trade, no more than $1,000 per week, and no less than 7.5% return-on-risk (ROR). Each Monday, I will state the week’s Entry Rules in the Schedule section below and will explain each trade BEFORE I submit the orders.


Each Friday, I will update my trading log, compile all the trading stats and publish this blog as my weekly activity journal.
 

On the last Friday of each month, I will transfer a “paycheck” of $250 from this trading account to my bank account. I will make this same transfer each month regardless of my position’s success or failure.

 

Finally, I expect that on December 31, 2020, after my last paycheck, I will have at least $9,000 in my trading account (hopefully more). All the while, paying myself $3,000 as steady income over the year.

This Week’s Market Sentiment

As of 12/30/2019

General Volatility:
VIX = 14.6, a jump from 12.8 last week.

The VIX is below 15 but took a good jump up from last weeks’ 12.8. Being Dec 30th and short of any other Geopolitical news, I’m taking this minor leap into indecision as part of the long-expected end-of-year stock adjustments that most Marketeers require. Selling losing stocks to claim Capital Gains’ tax credits, or selling winning stock to insure the Capital Gains taxes paid in 2019 is a Marketeer’s accounting requirement.

Put/Call Ratio
9-day SMA (all OCC options): 0.75, Up from 0.66 last week

The P/C ratio’s 9-Day SMA is still below the 50-Day SMA and is still within the trend channel for the last two months. Even though this Put/Call ratio and the VIX are moving slightly higher towards the bear direction, a one-day, or two-day or three-day slight direction change does not make a trend change.

Consumer Sentiment Index (CSI):
99.3, up from 96.8 in November, and holding flat from 99.2 last week.

The CSI has remained above 99% for the past three weeks and that supports the notion that a market direction change is not in the making. This ratio has been on a steady rising clip since Aug. 

Market Indexes
DOW 28,644, up <.3% from 28,566 from last week
S&P 3,239, up <5.0% from last week’s 3,226

The Markets last week made some significant gains pre-Christmas and then went mostly flat for the two trading days after. And the narrowing frequency of the DOW over the past three months makes this an attractive time for some high(er) risk bull plays.

Geopolitical tree-shakers are:
There is a noticeable lack of geopolitical news this past week, probably due to the Christmas season cheer.

  • The US executed an air-strike in Western Iraq riling the local folks
  • The stalemate with Trump’s Impeached seems to not have a market effect
  • US/China Trade Phase 1 deal will be signed Jan 15
  • The 2020 elections are expected to rattle some nerves as we get closer  
  • The Fed are intending to remain on the sidelines through 2020 
  • North Korea promised Christmas present was a dud
  • Surprising lack of the usual end-of-year profit-taking until today

My sentiment for this coming week
There still remains very little conflict in the market direction, even with the one-day jump in VIX and Put/Call Ratio. But the steady CSI and the bullish trend of the broader markets suggests that the VIX and P/C Ratio is more about an end of year profit-taking.

With the VIX barely below 15, the P/C ratio below 1.0 (and remaining in the bull trend-channel), the CSI maxing out, a broader market that is rising and no buzz-kill news – this week should continue to be bullish. But with the slight bump in the VIX and the new year transition, I suggest keeping on eye on this sentiment over this week.

I would support Vertical Bull Put Credit Spreads, or if the VIX and P/C ratio drop dramatically towards the end of this week, Vertical Bull Call Debit Spreads.

End of the week (01/03/20) note:

At the start of the week, there were little outside issues that I would call a buzz-kill. But after the killing of the Iranian general Soleimani, and the promised Iranian retaliation on late Thursday, the market went into heighten alert. I would call that a significant buzz-kill. 

I’m not changing my above (original) assessment after the fact. The one traded I made this week was assuming this early assessment. But because of the significant change of the geopolitical landscape, I will not make any additional trades this week.  

Profit and Loss Statement

As of 01/03/2020

  YearMonthWeek #
  2020Jan1
Beginning
Account Balance
 $9,000.$9,000.$9,000.
 Deposits$0.$0.$0.
 Withdraws$0.$0.$0.
     
 Realized Profits 
(closed spreads)
$0.$0.$0.
 Unrealized profits 
(open spreads)
$41.$41.$41.
 Fees Paid (total)$1.$1.$1.
     
Ending
Account Balance
 $9,040.$9,040.$9,040.
     
Total Gain/Loss $40.00$40.004$0.00
Return On Risk   8.7%8.7%
Return On Capital  0.4%  

Realized Profit by Strategy

 YearMonthWeek #
 2020Jan

1

Vertical Bull Put Credit Spread$0.$0.$0.
Vertical Bear Call Credit Spread$0$0.$0.
Vertical Bull Put Debit Spread$0.$0.$0.
Vertical Bull Call Debit Spread$0.$0.$0.
Icon Condors$0.$0.$0.
Cover Calls
Total$0.$0.$0.

Schedule for this Week

Entry Rules for Vertical Bull Put Credit Spreads:

  • Expiration date set at 6 weeks:
  • Probability of OTM 80%-85%:
  • Dollar risk set at or below individual trade max:
  • Put/Call ratio dropping over that last 2-3 weeks:
  • VIX% below 15%:
  • The Trend-Channel is Bullish:
  • Short strike price below trend channel at expiration:
  • Short strike price below 1 standard deviation from current price:
  • Current ETF price at bottom 3/4 of trend channel:
  • 9-Day SMA above 50-Day SMA:
  • ROR > 7.5%:

Goals for this week: (12/30/19 – 01/03/20) (Week 1)

  • Make no trades until 01/02/20
  • Max technical dollars at risk = $1,000 
  • Max dollar risk per trade = $500
  • Update Trading Log as trades occurs

Monday:

  • Determine/update this week’s market sentiment section
  • Calculate/record Put/Call Ratios for all stocks on the watch list
  • Review/tweak Trend-Channels for all stocks in the watch list
  • Set target expiration dates for all options as follows:
    • Bull Put Credit Spreads: Feb 7 (6-weeks).
    • Bull Call Debit Spreads: Jan 24 (4-weeks).
  • Look up Ex-Dividend dates for positions in/approaching ITM (MarketWatch/Calendar)
  • Stage possible trades for all watch list stocks by 10:00 AM
  • NO TRADING BEFORE 10 AM. (Let the market find its direction after the weekend.)
  • Watch one Webcast or take one online mini-course to be completed by Friday.  

Tuesday – Thursday:

  • Review how yesterday’s staged trades moved. Adjust premiums to take advantage of movements. 
  • Submit a couple of Spreads, but keep a close watch. If one takes, cancel the others (we want one new active trade).
    • Be mindful of Entry Rules.
    • Balance the spread strategy (Call/Put) to minimize actual risk for that expiration date.
  • Update trading log file and journal (this blog).

Friday:

  • Review the total technical dollars at risk for this week. If significantly below $1,000, then submit additional spreads if prudent.
  • Update and post weekly journal (this blog) with any lessons learned or strategy changes.

This Week’s Trade Activity

I need to note that I did not open any additional positions after the US/Iran dust-up. The one position that I did open I did so before the bombing news.

As of 01/03/2020:

Spread Count Summary:

 YearMonthWeek #
 2020Jan1
Vertical Bull Put Credit Spread111
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Iron Condor000
    
Total Spreads111

Current Dollars at Risk:

 YearMonthWeek #
 2020Jan1
Vertical Bull Put Credit Spread$459$459$459
Vertical Bear Call Credit Spread$0$0$0
Vertical Bull Put Debit Spread$0$0$0
Vertical Bull Call Debit Spread$0$0$0
Iron Condor$0$0$0
    
    
Total Dollar Risk$459$450$459
Max Risk Allowed$4,500.00 $1,000.00

New Trades Opened This Week

SPY: 308p/303p – Open 01/02 – Expires 02/07 – Credit= $43.00
(Vertical Bull Put Credit Spread)
Open: Prob. OTM= 81.6%, ROR = 9.7%, PC/Ratio = 1.2, Max Loss= $455, IV% = 0%

Think and Swim

Entry Rules:

  • Expiration date set at 6 weeks. – Yes
  • Probability of OTM 80%-85% – Yes
  • Dollar risk set at or below individual trade max – Yes
  • Put/Call ratio dropping over that last 2-3 weeks – Yes (mostly flat)
  • VIX% below 15% – Yes (13.5%)
  • The Trend-Channel is Bullish – Yes
  • Short strike price below trend channel at expiration – Yes
  • Short strike price below 1 standard deviation from current price – Yes (-3SD)
  • Current ETF price at bottom 3/4 of trend channel – No (but close)
  • 9-Day SMA above 50-Day SMA – Yes
  • ROR > 7.5% – Yes (9.7%)

The first trading day after New Year began strong. The general market/economy outlook is positive. No real geopolitical threats and Congress is still in recess. All appears well.

Trades Currently Cooking

No open trades prior to this week.

Current Trades Closed

No trades to closed. The first opportunity to close any trades will be Feb 7.

Conclusion

From one perspective, 2019 was an extraordinary year for anyone who was in the markets. 401Ks, IRAs, and buy-and-hold brokerage accounts made out like bandits. From what I saw, 2019 was a 30% plus growth year in investments and will be one for the record books. 

But… 2019 began from a deep market hole. The very end of Dec 2018 was the bottom side of a painful market correction that started that previous Sept. A correction that a lot of us saw 15% to 20% of our investments vanish. 

So while 2019 was great, it is only great because it began in a deep hole that we had to climb out first. But if we measure from the 2018 high to 2019 end-of-year, the growth was about 10%. 

2020 is not going to be another 2019. For 2020, we are not starting from a deep hole but a mountain top. Also, in 2020, we are going to have a dynamic from the November Elections, which will push the market flat from indecision, then can run in many different directions. If Trump or a seasoned/moderate Democrat is (re)elected, then most policies are expected to stay the same. In this case, I would expect an 8% – 12% market return for the year. 

But if a progressive executive takes the White House, then I would assume significant policy changes in Banking, Energy, Big-Tech, and Healthcare. These policy changes will certainly spook the Marketeers in these sectors during the second have of this year, and it may take most of 2021 to recalibrate.

Cheers…

Disclaimer

Even though I have tried to make it clear that this blog is my journal documenting my trek into Options Trading, it has been suggested by others that I, nevertheless, include a general disclaimer. So here goes..

“This blog and the information contained herein is not intended to be a source of advice or analysis with respect to the material presented. The information and/or documents contained in the blog do not constitute investment advice.”

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