Wisdom tends to grow in proportion
to one’s awareness of one’s ignorance.

– Anthony de Mello

Commentary

Awareness is a great change agent. This is true if you are walking to your car late at night, responding to kooky emails, or making financial decisions. This idiom is even more real when you are making short-term Options trades. Being aware of technical data, corporate fundamentals, and geopolitical goings-on will make or break my trading strategy.

This week’s post is to remind me that anything can send my options positions into a tailspin – a tweet, a Fed meeting, news. So I need to be hyper-aware of my surroundings, including Geopolitical ‘Buzz-Kills.’

One of Trump’s US/China tweets back in October sent all of my open positions negative within three days. And now, with the US and Iran’s increasing aggressive rhetoric over the killing of Iran’s General Soleimani, I need to remember to be mindful of possible market reactions due to non-market-related news.

I’m not too worried about the market effects over a few skirmishes with Iran. Iran’s economy is already wrecked from global sanctions, and they have even worse internal political turmoil than we do. Iran is to the region as the homeless street people are to San Franciso – causes a lot of problems and contributes mostly nothing to the world’s social economics.

However, high oil prices are the enemy of business. With all the threats between the US and Iran, the Strait of Hormuz is clearly in the crosshair. At least for the short term, this unknown target area is going to keep oil prices high as a hedging precaution. This precaution will also moderate our roaring market.

Iran can’t close the Strait, but they can create weeks or months-long bottleneck that can skyrocket the oil prices over the first quarter of 2020. Capital Economics said Friday; they estimated the closing of the Strait of Hormuz could raise oil prices to $150 a barrel. I doubt that will happen, or happen to that extent, but that kind of price explosion in oil could tank whatever positions I have open.

This Week’s Market Sentiment

As of 01/06/2020

General Volatility:
VIX = 15.1, a jump from 14.6 last week.

Annotation 2020-01-06 085404VIX

The VIX bumped above 15 this morning, and I am anticipating it will continue to hover around 13 until we find a dominant outcome from the Iran dust-up. This jump in volatility suggests the individual ETFs on my watch list will see a rise in premiums, which is a good thing. It also indicates a quick-dip in the market is more probable.

Put/Call Ratio:
9-day SMA (all OCC options): 0.67, Up from 0.66 last week

Annotation 2020-01-06 085404PC

The P/C ratio’s 9-Day SMA is still below the 50-Day SMA and is still within the Bull-trend channel for the last two months.

Consumer Sentiment Index (CSI):
Remains at 99.3, which is 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 28,512, dn .5% from 28,644 from last week
S&P 3,227, dn < .1% from last week’s 3,230

Annotation 2020-01-06 085404PDIA

The Markets ran reasonably flat last week. There were some impressive gains early last week, but the events in the Middle East late last week reclaimed those gains.

Geopolitical tree-shakers are:

  • Iran, Iraq, and Soleimani-the-fallen, all of which promises to raise oil prices
  • Trump’s Impeachment is getting hugely political, which is boring most of us
  • 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 Feds intends to remain on the sidelines through 2020

My sentiment for this coming week:
I am predicting that the Market will run marginally higher to flat over the next month or two, primarily due to the paranoia of higher oil price as that could trigger a mini-correction. If something does happen in the Strait and oil prices run amuck, I would expect most indexes to fall sharply

This week, even with the unknown time-bomb of Iran, I will support the Vertical Bull Put Credit Spread strategy. But with higher probability thresholds and lower dollar risk per trade. I want to take it slow and with smaller steps. I’m making these changes to the entry rules:

  • Prob OTM > 86%
  • Max trade risk < $300

Profit and Loss Statement

As of 01/10/2020

  YearMonthWeek #
  2020Jan2
Beginning 
Account Balance
 $9,000.$9,000.$9,039.96
 Deposits$0.$0.$0.
 Withdraws$0.$0.$0.
     
 Realized Profits 
(closed spreads)
$0.$0.$0.
 Unrealized profits 
(open spreads)
$114.$114.$73.
 Fees Paid (total)$4.16$4.16$2.12
     
Ending 
Account Balance
 $9,109.84$9,109.84$9,109.84
     
Total Gain/Loss $109.84$109.84$69.88
Return On Risk   8.9%9.0%
Return On Capital  1.2%  

 

Realized Profit by Strategy

(Note: No positions closed so far = no realized profits.

 YearMonthWeek #
 2020Jan2
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

Goals for this week: (01/06/20 – 01/10/20) (Week 2)

  • Max technical dollars at risk = $750
  • Max dollar risk per trade = $300
  • Update Trading Log as trades occurs

Entry Rules for Vertical Bull Put Credit Spreads:

  • Expiration date set at 6 weeks:
  • Probability of OTM 86%-90%:
  • Dollar risk set at or below $300:
  • Put/Call ratio flat over that last 2-3 weeks:
  • VIX% below 15%:
  • The Trend-Channel is Bullish:
  • Short strike price below the trend channel at expiration:
  • Short strike price below 1 standard deviation from current price:
  • Current ETF price within the bottom 3/4 of the trend channel:
  • 9-Day SMA above 50-Day SMA:
  • ROR > 7.5%:

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 14 (6-weeks).
    • Bull Call Debit Spreads: Jan 31 (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 per day).
    • 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

As of 01/10/2020:

Spread Count Summary:

 YearMonthWeek #
 2020Jan2
Vertical Bull Put Credit Spread443
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Iron Condor000
    
Total Spreads443

Current Dollars at Risk:

 YearMonthWeek #
 2020Jan2
Vertical Bull Put Credit Spread$1,236$1,236$777
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$1,236$1,236$777
Max Risk Allowed$4,500.00 $1,000.00

New Trades Opened This Week

QQQ: 199p/196p – Open 01/07 – Expires 02/14 – Credit= $22.00
(Vertical Bull Put Credit Spread)
Open: Prob. OTM= 86.2%, ROR = 8.0%, PC/Ratio = 1.5, Max Loss= $276, IV% = 16%

Entry Rules:

  • Expiration date set at 6 weeks: Yes
  • Probability of OTM 86%-90%: Yes
  • Dollar risk set at or below $300: Yes
  • Put/Call ratio flat or dropping over that last 2-3 weeks: meh
  • VIX% below 15%: Yes (14.0% at the time of trading)
  • The Trend-Channel is Bullish: yes
  • Short strike price below the trend channel at expiration: Yes
  • Short strike price below 1 standard deviation from current price: Yes (about -4SD)
  • Current ETF price at bottom 3/4 of the trend channel: no
  • 9-Day SMA above 50-Day SMA: Yes
  • ROR > 7.5%: Yes

Implied volatility (IV) is allowing me to make deeper OTM trades (+85% Prob:OTM) at a higher premium. I am not making a lot of premium profit (unrealized), but yet I do have some skin in the game.

AAPL: 270p/267.5p – Open 01/08 – Expires 02/14 – Credit= $22.00
(Vertical Bull Put Credit Spread)
Open: Prob. OTM= 87.5%, ROR = 9.7%, PC/Ratio = 0.5, Max Loss= $226, IV% = 53%

Entry Rules:

  • Expiration date set at 6 weeks: Yes
  • Probability of OTM 86%-90%: Yes
  • Dollar risk set at or below $300: Yes
  • Put/Call ratio flat or dropping over that last 2-3 weeks: Yes
  • VIX% below 15%: Yes (12.9% at the time of trading)
  • The Trend-Channel is Bullish: yes
  • Short strike price below the trend channel at expiration: Yes
  • Short strike price below 1 standard deviation from current price: Yes 
  • Current ETF price at bottom 3/4 of the trend channel: close
  • 9-Day SMA above 50-Day SMA: Yes
  • ROR > 7.5%: Yes

Implied volatility (IV) for Apple is 28.8%, which puts it above 50% in the 1-year ranking. This is high for Apple, which is giving me a nice premium for a lower risk.

QQQ: 206p/203p – Open 01/09 – Expires 02/14 – Credit= $27.00
(Vertical Bull Put Credit Spread)
Open: Prob. OTM= 82.1%, ROR = 10.0%, PC/Ratio = 2.0, Max Loss= $271, IV% = 13%

Entry Rules:

  • Expiration date set at 6 weeks: Yes
  • Probability of OTM 86%-90%: No, but qualifying below
  • Dollar risk set at or below $300: Yes
  • Put/Call ratio flat or dropping over that last 2-3 weeks: Yes
  • VIX% below 15%: Yes (13.1% at the time of trading)
  • The Trend-Channel is Bullish: yes
  • Short strike price below the trend channel at expiration: Yes
  • Short strike price below 1 standard deviation from current price: Yes 
  • Current ETF price at bottom 3/4 of the trend channel: No
  • 9-Day SMA above 50-Day SMA: Yes
  • ROR > 7.5%: Yes

The Iran retaliation was pretty much a dud, and there was a considerable de-escalation of hostility. The VIX dropped below 13 for a while. So I adjusted the Prob-OTM down to > 80% from > 86% due to the collective sigh of relief.

Trades Currently Cooking

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%
Current Prob. OTM = 90%

Current Trades Closed

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

Conclusion

During one week, geopolitical anxiety started high. First, with a base bombing in Iraq that killed one US contractor, to the killing of Soleimani, to 16 Iranian missiles retaliation, to the accidental shooting down of an airliner leaving Tehran, to a national conciliatory speech from Trump, culminating into a general Kumbaya moment. I’m exhausted just thinking about this week.

Also, China confirmed that Premier Liu is coming to the US next week to sign the US/China Phase 1 agreement. Even though most of us suspect that Phase 2 will never happen, this Phase 1 completion will boost the economy and market for a few more months.

Therefore, the high tension (and high market volatility) that started this week took a huge step back. I still kept the max risk per trade low but loosened on the minimal Prob-OTM to 80%, down from 86%).

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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