Market volatility can tell me a lot about the broader market, and one of the most useful volatility indicators is the CBOE VIX Market Sentiment. But sometimes, it just flys over my head.

Guardian of the VIX

The VIX can also be called the “Fear Index.” It is designed to be an up-to-the-minute estimate of the future volatility of the S&P 500. Using the ever-changing Implied Volatility (IV) of options being bought at the current moment, it will calculate the market sentiment as the Marketeers see it for the next 30 days. (Swish – caught…)

The VIX is designed to project future market sentiment by analyzing the current purchase of all SPX Options with an expiration date of 30 days from now. As the Implied Volatility of Options purchased rise or fall due to the increase or decrease of purchasing activity, this data is compiled into a forward-thinking assumption of future fear. (Swish – missed…)

The VIX will inversely track the current market levels. When there are uncertainty and anxiety in the marketplace, it will move up, and typically the broader market moves down. Likewise, with more certainty in the market, the VIX will move down, and the broader market typically moves up. (Swish – caught…)

Not an Indication of Market Direction

One thing to realize is that the VIX can momentarily spike based upon any now-happenings (sunspots, UFO sighting, Trump tweet) event. It will then plunge as if nothing happened. Or it can spike based upon a longer-term event (elections, terrorism, significant economic policy changes), starting a new trend upward. The VIX will not tell me which direction the markets will move, but just that it will move faster or slower.

So any decisions made on a snapshot of the VIX value are not too helpful. But I can see that a VIX spike can be a mercurial early warning alarm, requiring me to start looking at the geopolitical surroundings. (Swish – caught…)

How Do I Use the VIX

The blogosphere seems to go all over the map when it comes to interpreting the VIX for trading. But there is a consensus that a VIX that hovers below 15 is considered an optimistic or unconcerned market sentiment. Even short-lived spikes up above 15 is not too much of a fear indicator.

Additionally, the VIX is driven by Implied Volatility (IV). And IV is one component used in calculating the current premium price of an Options position. So the higher the VIX, then it is likely the premium price is higher.

So, as a shot in the dark, I will state these parameters for now. I’m sure I will revisit this topic in the future.

• VIX < 20: Trade Bull Spreads
• VIX 15 – 25: Look both ways
• VIX > 25: Trade Bear Spreads

This Week’s Market Sentiment

(As of 01/13/2020)

Broad Market Volatility:

VIX = 9-Day SMA 13.3, a drop from 15.1 last week.

The VIX fell to 13.5 from last week’s scary moments. It seems the underpinnings of the economy’s strength outweighed the fear of higher oil prices.

Being below 15 suggests there is not much concern for a market change.

Put/Call Ratio:

9-day SMA (all OCC options): 0.67, flat from 0.67 last week

The P/C ratio’s 9-Day SMA is still below the 50-Day SMA and is still within the Bull Trend channel over the previous two months. This continues to show continuing optimism (or non-pessimism) in the general market direction.

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 28,881, up 1.3% from 28,512 from last week
S&P 3,278, up < 1.6% from last week’s 3,227

Even with the international craziness of the last two weeks, the Markets enjoyed a good return.

Geopolitical tree-shakers are:

• Trump’s Impeachment is set to begin this week
• US/China Trade Phase 1 deal will be signed this week
• USMCA to be approved by the Senate this week
• 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:

There will be a sigh of relief when the US/China Phase I trade deal is signed, but I believe that most of the economic benefits have already been baked in the current Market Pie. Same with the USMCA being passed in the Senate this week.

Most everyone already knows how the impeachment proceeding will turn out, so as a market-moving agent, I would think it will remain a yawner. The only caveat is if something new is uncovered from the trial that will touch the president.

The VIX is below 15, and the P/C ratio remains in the optimistic territory. So, there are not too many tree-shakers that is going the change the market direction as yet.

I am concern about what appears to be a long-term market exuberance. The broader market has been on fire, breaking new highs for over a month. But, I am predicting that the Market will remain within its current bullish trajectory – moving higher to flat over the next month or two.

For this week,

• focus on Vertical Bull Put Credit Spreads
• No Vertical Bear Call Credit – market moving up
• No Vertical Bull Call Debit – market primed for a pull-back

Profit and Loss Statement

(As of 01/17/2020)

Realized Profit by Strategy

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

Schedule for this Week

Goals for this week: (01/13/20 – 01/17/20) (Week 3)

• Max technical dollars at risk = $1,000
• Max dollar risk per trade = $500
• Update Trading Log as trades occurs

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at 6 weeks:
• Probability of OTM > 80%
• Dollar risk set at or below $500:
• Put/Call ratio below 1.0 or flat to falling 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 21 (6-weeks).
  • Bull Call Debit Spreads: Feb 7 (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 only one new active trade per day).
• Be mindful of Entry Rules.

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 01/17/2020:)

Spread Count Summary:

Current Dollars at Risk:

New Trades Opened This Week

(01/13/2020 – 01/17/2020)

QQQ: 206p/201p – Open 01/14/20 – Expires 02/21/20 – Credit= $41.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.2%, ROR=8.5%, PC/Ratio= .5, Max Loss=$459, IV%=14%
Now: Prob. OTM=88.4%

Entry Rules:

• Expiration date set at 6 weeks: Yes
• Probability of OTM 80%-85%: Yes
• Dollar risk set at or below $500: Yes
• Put/Call ratio flat over that last 2-3 weeks: Yes
• VIX% below 15%: Yes
• 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 (3SD)
• Current ETF price within the bottom 3/4 of the trend channel: No
• 9-Day SMA above 50-Day SMA: Yes
• ROR > 7.5%:

The ETF current price is at the top of the trend channel. Not sure if this is bad juju, but I compensated for this by selecting a short strike that is more than 3 Standard deviations from the current price.

QQQ: 221c/222c – Open 01/15/20 – Expires 02/21/20 – Debit = $60.00
(Vertical Bull Call Debit Spread)
At Open: Prob. ITM=45.3%, ROR=66.7%, PC/Ratio=3.1, Max Gain=$40, IV%=13%
Now: Prob. ITM=51.4%

Entry Rules:

• Expiration date set at 5-6 weeks: yes
• Probability of ITM > 43%: yes
• Max dollar risk no more than 1/4 trade max: yes
• Put/Call ratio flat or dropping over the last 2-3 weeks: yes
• VIX% below 15% over the last 2-3 weeks: yes
• The Trend-Channel is Bullish: yes
• Short Strike price below the trend channel at expiration: No
• 9-Day SMA above 50-Day SMA: yes
• Current ETF price above 9-Day SMA: yes
• ROR > 40%: yes
• Ex-Dividend Date beyond the contract’s expiration date: yes

One reason I need to make these trade journal entries BEFORE I make the trades is to assure that I am following my own Entry Rules. But for this trade, I violated a biggy. The ETF price is towards the top of the trend channel, and not below the trend channel. This could be a costly blunder if the market does not continue with its past exuberance. It still may pay off, but I will most likely close it early once I can do so without losing money.

DIA: 281p/276p – Open 01/17/20 – Expires 02/21/20 – Credit= $38.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.3%, ROR=8.3%, PC/Ratio=0.7, Max Loss=$460, IV%=5%
Now: Prob. OTM=82.5

Entry Rules:

• Expiration date set at 6 weeks: Yes (barely)
• Probability of OTM > 80%: Yes (83.3%)
• Dollar risk set at or below $500: Yes ($460)
• Put/Call ratio flat or falling over that last 2-3 weeks: Yes (0.7)
• VIX% below 15%: Yes (12.1)
• 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 (1SD)
• Current ETF price within the bottom 3/4 of the trend channel: No
• 9-Day SMA above 50-Day SMA: Yes
• ROR > 7.5%: (8.3%)

The ETF current price is near the top at the top of the trend channel, not quite in the bottom 3/4. But the IV percentile (IV%) is 6% which is relatively low. Status on the economic front continues to be good and the likelihood of DIA to continue to climb is high.

Trades Currently Cooking

QQQ: 199p/196p – Open 01/07 – Expires 02/14 – Credit= $22.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=86.2%, ROR=8.0%, PC/Ratio=1.5, Max Loss=$276, IV%=16%
Now: Prob. OTM=95.1%

AAPL: 270p/267.5p – Open 01/08 – Expires 02/14 – Credit= $22.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=87.5%, ROR=9.7%, PC/Ratio=0.5, Max Loss=$226, IV%=53%
Now: Prob. OTM=92.9%

QQQ: 206p/203p – Open 01/09 – Expires 02/14 – Credit= $27.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.1%, ROR=10.0%, PC/Ratio=2.0, Max Loss=$271, IV%=13%
Now: Prob. OTM=89.7%

SPY: 308p/303p – Open 01/02 – Expires 02/07 – Credit= $43.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 81.6%, ROR = 9.7%, PC/Ratio = 1.2, Max Loss= $455, IV% = 0%
Now: Prob. OTM = 94.4%

Current Trades Closed

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

Conclusion

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 concerning the material presented. The information and/or documents contained in the blog do not constitute investment advice.”

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