Commentary

This week’s post encompasses three weeks of activity. During the first two weeks, I enjoyed a smooth Caribbean cruise to the Panama Canals and back. During these two weeks, I only had spotty Internet access. So, I was only able to work in three spread trades, primarily shooting from the hip. This week I will try to retrace those trades and see how my gun-slinging did.

This Week’s Market Sentiment

(As of 02/03/2020)

Broad Market Volatility:

VIX = 9-Day SMA 16.2, a jump from 13.3 two weeks ago.

A 9-day SMA VIX of 16.2 is nothing to be overly concerned about. It had popped up above 15 in the middle of last week when the Coronavirus was making big headlines in China. It has peaked at near 19 but has started to recover.

Put/Call Ratio:

9-day SMA (all OCC options): 0.84, a decent jump from 0.67 two weeks ago.

The P/C ratio’s 9-Day SMA is still below the 50-Day SMA. I updated the trend channel from last week to be a little flatter. Even though the P/C Ratio has peaked above 1, it has dropped back down within the channel.

Consumer Sentiment Index (CSI):
Popped up to 99.8 for January, which is up from 99.3 in December.

The CSI has remained above 99% for the past several 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 28,548, down 1.2% from 28,881 two weeks ago
S&P 3,258, down 0.6% from 3,278 two weeks ago

The majority of the downturn has been with in the last 3 trading days when the market seemed to react crazy the Coronavirus news.

Geopolitical tree-shakers are:

• Coronavirus is pushing the fear button pretty hard.
• Trump appears to be heading toward acquittal in his impeachment.
• 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:

In general, several geopolitical events are taking center stage this week.

Kneejerk reactions to an expanding Coronavirus spooked the markets late last week. But there is a general sentiment that the outbreak is being handled. If left unchecked, the fear of a pandemic will significantly affect airline travel or delay the exports China promised in the Phase I US/China trade deal.

Trump’s impeachment question appeared to not move the fear-needle much during the past two weeks. His acquittal will affirm that his policies will continue as is.

In the last few days, the market drop of nearly 1,000 points. The general reason given is the unknown effect of a Coronavirus pandemic in China, but may have also been exacerbated by basic profit-taking. The market has been on a tear for months, and a mini-correction was undoubtedly expected.

All these events seemed to pop the VIX and P/C Ratios, but not enough to suggest a direction change. Although this stuff is making us jittery, there’s nothing apparent that will translate into something longterm.

For this week,

• Focus on Vertical Bull Put Credit Spreads
  • Because the VIX is above 15, set the Prop-OTM > 83%
  • Max trade risk set to standard
• Vertical Bear Call Credit only if the VIX continues to rise and stay above 15
• No Vertical Bull Call Debit – market primed for a pull-back

Profit and Loss Statement

(As of 02/07/2020)

Realized Profit by Strategy

Schedule for this Week

Goals for this week: (02/02/20 – 02/06/20) (Week 6)

• 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 > 83%
• 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 or 9-day SMA within the trend channel
• 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: Mar 13 (6-weeks).
  • Bull Call Debit Spreads: Feb 28 (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 02/06/2020:)

Spread Count Summary:

Current Dollars at Risk:

New Trades Opened This Week (3 Weeks)

(01/20/2020 – 02/06/2020)

QQQ: 211p/208p – Open 02/04/20 – Expires 03/13/20 – Credit= $26.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.7%, ROR=9.2%, PC/Ratio=1.8, Max Loss=$273, IV%=32%

Entry Rules:

• Expiration date set at 6 weeks: Yes
• Probability of OTM > 83%: Yes
• Dollar risk set at or below $500: Yes
• Put/Call ratio below 1.0 or flat to falling over that last 2-3 weeks: Above 1 put falling
• VIX below 15 or 9-day SMA within the trend channel: No
• 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 within the bottom 3/4 of the trend channel: No
• 9-Day SMA above 50-Day SMA: Yes
• ROR > 7.5%: Yes

The P/C Ratio is 1.9, which is lower than the 2.3 as recorded on Jan 6. So it is falling back in line.

The VIX is technically out of range but just bearly.

The Short Strike is near the top of the Trend Channel, but the aggressiveness of the price movement of QQQ over the past 4 months really suggests it will continue to rise. The market price of QQQ will have to drop by 7.3% to read ITM.

DIA: 270p/267.5p – Open 02/04/20 – Expires 03/13/20 – Credit= $23.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.6%, ROR=8.8%, PC/Ratio=1.6, Max Loss=$228, IV%=36%

Entry Rules:

• Expiration date set at 6 weeks: Yes
• Probability of OTM > 83%: Yes
• Dollar risk set at or below $500: Yes
• Put/Call ratio below 1.0 or flat to falling over that last 2-3 weeks: Above 1 put falling
• VIX below 15 or 9-day SMA within the trend channel: No
• 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 within the bottom 3/4 of the trend channel: Yes
• 9-Day SMA above 50-Day SMA: Yes
• ROR > 7.5%: Yes

The VIX is above 15 and above any trend line. But there is not much history for this. The

DIA: 265p/262.5p – Open 02/03/20 – Expires 03/13/20 – Credit= $26.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.0%, ROR=11.2%, PC/Ratio=1.6, Max Loss=$223, IV%=36%

Entry Rules:

• Expiration date set at 6 weeks: Yes
• Probability of OTM > 83%: Yes
• Dollar risk set at or below $500: Yes
• Put/Call ratio below 1.0 or flat to falling over that last 2-3 weeks: Above 1 put falling
• VIX below 15 or 9-day SMA within the trend channel: No
• 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 within the bottom 3/4 of the trend channel: Yes
• 9-Day SMA above 50-Day SMA: Yes
• ROR > 7.5%: Yes

AAPL: 295p/292.5p – Open 01/29/20 – Expires 03/06/20 – Credit= $24.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.0%, ROR=10.2%, PC/Ratio=0.5, Max Loss=$225, IV%=57%

<No Chart or Entry Rules. Must have been seasick that day.>

DIA: 270p/267.5p – Open 01/29/20 – Expires 03/06/20 – Credit= $23.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.0%, ROR=9.7%, PC/Ratio=0.9, Max Loss=$225, IV%=57%

Entry Rules:

• Expiration date set at 6 weeks: Yes
• Probability of OTM > 83%: Yes
• Dollar risk set at or below $500: Yes
• Put/Call ratio below 1.0 or flat to falling over that last 2-3 weeks: Yes
• VIX below 15 or 9-day SMA within the trend channel: No
• 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 within the bottom 3/4 of the trend channel: Yes
• 9-Day SMA above 50-Day SMA: Yes
• ROR > 7.5%: Yes

SPY: 317p/314p – Open 01/22/20 – Expires 02/28/20 – Credit= $25.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.0%, ROR=8.8%, PC/Ratio=1.3, Max Loss=$274, IV%=57%

<No Chart or Entry Rules. Must have been seasick that day.>

Trades Currently Cooking

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%

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

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%

Current Trades Closed

SPY: 308p/303p – Open 01/02 – Expired 02/07 – Credit= $41.00
(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 = 99.9%. Expired worthless. Net profit = 41.00 – $1.00 fee = $40.00

QQQ: 221c/222c – Open 01/15/20 – closed 01/21/20 – Credit = $11.00
(Vertical Bull Call Debit Spread)
At Open: Prob. ITM=45.3%, ROR=66.7%, PC/Ratio=3.1, Max Gain=$40, IV%=13%

This position was closed after 3 trading days for a net profit of -$59.00 (to open) + $70 (to close) – $2.00 trading fees = $9.00 profit. I closed this early because I violated the Entry Rule to only open Vertical Bull Call Debit Spreads when the ETF price is at the bottom of the trend channel. This trade was open at the very top. I still might have worked great, but I do want to be more of a disciplined trader. A $9.00 profit is not bad.

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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