“You have taught us there is nothing beyond our reach.
Not even the stars…”
Nuria- (Star Trek TNG: “Who Watches the Watchers”)

Commentary

Watching the Watchers

This week’s commentary will begin a series of overviews on my watchlist and how I use it to help select Options trades for the week.

My watchlist is nothing more than a shortlist of highly-liquid underlying stocks and ETFs options. The key is to have a manageable list of core underlings that I can easily keep track of trends and market effects.

My watchlist has two functions. First, I will use it to construct possible trades for the week. Using live market data, I will configure several Options Spreads based on the entry rules outline on my PIM page. The boundaries of my entry rules will be defined via “This Week’s Market Sentiment” below.

As a second function, I will use my watchlist to monitor active trades. Once I select a prospective trade from my staged positions, I will enter the order on Ameritrade’s Think or Swim trading platform and wait for execution. Once the order is executed, I will copy that 6-rows section of the spreadsheet that describes my new trade from my “Staged” section of my watchlist and paste it at the bottom of the “Active Trades” section of the same watchlist.

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Annotation 2020-02-18 095455a
This image shows 5 separate active trades that I’m monitoring this week

Technically, my watchlist is an Excel spreadsheet with a live-data connection to TD Ameritrade’s Think or Swim trading platform. By manipulating just a few cells in my watchlist spreadsheet, I can easily see which trade configuration will generate the most premiums with the highest probability of success.

Connecting ThinkOrSwim to Excel

Annotation 2020-02-18 095455b

As an example of how my watchlist is constructed, I can select a spread strategy from a drop-down menu, as seen in cells B20 or B27 in this image. If I’m not sure as to what the best options-strategy to use, the cells B23 or B30 will suggest a strategy based upon the current market conditions.

In cells E20 or E27, I can enter the underlining ETF for the suggested strategy. With this entry, the spreadsheet can pull the current ETF’s price and the Implied Volatility (IV) from the Think or Swim platform and calculate a suggested short-strike. This suggested short-strike will be plus/minus one standard deviation from the current price and will appear in the cells D20 and D27. For this example, the suggested short-strike price for this “Vertical Bull Put Credit Spread” is 229.85 for QQQ and 288.33 for DIA.

Finally, from the above image, the position’s open date and the expiring date was set to a static value once these six rows are pasted in the Active Section. This image is showing that I have three days left until expiration, and the “Sell” flag is set because I have reached > 95% of profit, as shown in cell H24.

To be continued next week…

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This Week’s Market Sentiment

(As of 02/17/2020)

Broad MarInvestigating VIX Amplitude to Select Option Spreads Expiration Datesket Volatility:

VIX = 9-Day SMA 14.8, a drop from 16.2 last week.

Annotation 2020-02-17 085052

The 9-day SMA for the VIX retreated below 15 for the first time in February. This drop suggests that any angst from the Marketeers are abating.

Put/Call Ratio:

9-day SMA (all OCC options): 0.71, functionally flat from 0.79 a week ago.

Annotation 2020-02-17 085052PC

The P/C ratio’s 9-Day SMA drop below the 50-Day SMA, signaling a trend towards a less protectionist position.

Consumer Sentiment Index (CSI):
It peeks at 100.9 in February.

Annotation 2020-02-17 085052CSI

The University of Michigan’s Consumer Sentiment Index was revised higher to 100.9 in February. This is the highest reading since March 2018. This year’s inflation expectations remained steady at 2.5% while the 5-year outlook dropped to 2.3%.

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Market Indexes:
DOW 29,398, up 0.7% from 29,195 last week.
S&P 3,380, up 1.3 % from 3,338 last week

Annotation 2020-02-17 085052dia

Following a slight price adjustment at the end of January where impeachment was front and center and the Coronavirus was more uncertain, the DOW had quickly recovered and appears to be continuing on the same Bullish trend.

Geopolitical tree-shakers are:

  • Coronavirus continues to dominate headline news
  • China announced a stimulus package to counter the Coronavirus fears
  • China announced all factories will return to operation after a mandatory shutdown
  • The 2020 elections are expected to rattle some nerves as we get closer
  • The Feds feel rates are likely to remain where they are for 2020
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My sentiment for this coming week:

The 2020 election has the potential to significantly shift the US economy in diversely opposing directions. As we get closer, the various directions will be winnowed down and choices will become clear. But from this 60,000-foot view, it seems the consensus amongst the Marketeers is that Trump will win and continue the existing economic strategy.

A couple of US drugmakers have announced that they have a vaccine and could be ready for mass distribution within a month or two. But there is an anticipation that several companies with China-based factories may start lowering reported guidance expectations.

For this week:

The VIX is below 15, CSI at 2-year high and P/C Ratios are low:

  • Vertical Bull Put Credit Spreads
    •  Prop-OTM > 80%
    • Max trade risk set to standard
  • Vertical Bull Call Debit
    • Prob-ITM > 45%
    • Max trade risk set to $150.
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Profit and Loss Statement

(As of 02/07/2020)

 YearMonthWeek #
 2020Feb8
Beginning Account Balance$9,000.$9,027.37$9,179.17
Deposits (Div. & Int.)$12.83$0.$0.
Withdraws (paycheck)-$250.$0.$0.
Realized Profits (closed spreads)$204.$0.$0.
Unrealized Profits (Open spreads)$437.$365.$208.
Fees Paid (total)-$19.79-$8.33-$3.13
Ending Account Balance$9,384.04$9,384.04$9,384.04
 
Total Gain/Loss$345.09$317.72$165.92
Return On RiskN/A 13.8%21.7%
Return On Capital 6.9%N/AN/A

 

Realized Profit by Strategy

  Year Month Week #
  2020 Feb 8
Vertical Bull Put Credit Spread $193. $0. $0.
Vertical Bear Call Credit Spread $0 $0. $0.
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread $11. $0. $0.
Icon Condors $0. $0. $0.
Cover Calls
Total $204. $0. $0.
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Schedule for this Week

Goals for this week: (02/17/20 – 02/21/20) (Week 8)

  • 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 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%:

Entry Rules for Vertical Bull Call Debit Spreads:

  • Expiration date set at 4-6 weeks:
  • Probability of ITM > 45%
  • Probability of Touch > 90%
  • Dollar risk set at or below $150:
  • 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 one strike below the current ATM:
  • Current ETF price within the bottom 3/4 of the trend channel:
  • 9-Day SMA above 50-Day SMA:
  • Ex-Dividend date beyond expiration date:
  • ROR > 50%:

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 27 (6-weeks).
    • Bull Call Debit Spreads: Mar 13 (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.
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This Week’s Trade Activity

(As of 02/21/2020:)

Spread Count Summary:

  Year Month Week #
  2020 Feb 8
Vertical Bull Put Credit Spread 16 7 2
Vertical Bear Call Credit Spread 0 0 0
Vertical Bull Put Debit Spread 0 0 0
Vertical Bull Call Debit Spread 2 1 1
Iron Condor 0 0 0
 
Total 18 8 3

Current Dollars at Risk:

  Year Month Week #
  2020 Feb 8
Vertical Bull Put Credit Spread $3,184. $2,456. $813.
Vertical Bear Call Credit Spread $0 $0 $0
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread $129 $129 $129
Iron Condor $0 $0 $0
 
Total Dollar Risk $3,313. $2,585. $942.
Max Risk Allowed $4,500.00   $1,000.00
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New Trades Opened This Week

(02/17/2020 – 02/21/2020)

QQQ: 220p/216p – Open 02/20/20 – Expires 03/27/20 – Max Gain = $40.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.4%, ROR=10.9%, PC/Ratio=1.7, Max Loss=$359.00, IV%=41%

Annotation 2020-02-20 094727a

Entry Rules for Vertical Bull Put Credit Spreads:

  • Expiration date set at 6 weeks: Yes
  • Probability of OTM > 80%: 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: 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
  • 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

A jump in Implied Volatility prompted this final trade of the week. At the beginning of the week, IV Percentile was at 27%. By today, it jumped to 41%. The increase in IV will produce a higher premium rate, while all the other matrix remains strongly bearish.

Additionally, the P/C ratio for QQQ started this week at 2.3. A drop to 1.7 tells me that there is less concern about a drop in QQQ now than there was at the beginning of the week.

AAPL: 325c/322.5c – Open 02/19/20 – Expires 03/27/20 – Max Gain = $120.00
(Vertical Bull Call Debit Spread)
At Open: Prob. ITM=45.5%, ROR=92.3%, PC/Ratio=0.5, Max Loss=$130.00, IV%=39%

Annotation 2020-02-19 092821

Entry Rules for Vertical Bull Call Debit Spreads:

  • Expiration date set at 4-6 weeks: Yes
  • Probability of ITM > 45%: Yes
  • Probability of Touch > 90%: Yes
  • Dollar risk set at or below $150: 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: Yes
  • The Trend-Channel is Bullish: Yes
  • Short strike price one strike below the current ATM: No
  • Current ETF price within the bottom 3/4 of the trend channel: Yes
  • 9-Day SMA above 50-Day SMA: Yes
  • Ex-Dividend date beyond expiration date: Yes
  • ROR > 50%: Yes

This position will require me to keep a careful watch on the price of AAPL. Because of it being 6 weeks out, the time value will be high for quite a while. Should have stayed with my original instinct of 4-weeks.

Because the strike-width of this AAPL option chart is 2.5, I executed this trade knowing that the long-strike value was already slightly ITM.

AAPL has been dealing with the Coronavirus for that past month, but that has not badly damage the stock value. The price of AAPL is now at the bottom of the trend channel after trading flat for a while. I’m thinking the worst is done and AAPL will resume its past track.

QQQ: 218p/213p – Open 02/18/20 – Expires 03/27/20 – Max Gain = $47.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.7%, ROR=10.2%, PC/Ratio=1.6, Max Loss=$452.00, IV%=41%

Annotation 2020-02-18 111647QQQ

Entry Rules:

  • Expiration date set at 6 weeks: Yes
  • Probability of OTM > 80%: 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: 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
  • 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

On the morning this trade was made, the VIX rose nearly 10% to just over 15. In and of itself, this move is not a red flag. But the VIX will need a close eye on it for the rest of the week.

QQQ’s P/C ratio dropped from 2.3 last week and 2.8 the week before to 1.6. Even though QQQ has dropped in price since the close of the past Friday, there does not seem to be a concern.

Note: QQQ and the broader markets are taking a hit today due to Apple’s announcement that it will miss this quarter’s guidance due to their China factories being shut down for the Coronavirus.

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Trades Currently Cooking

SPY: 319p/314p – Open 02/13/20 – Expires 03/20/20 – Max Gain = $44.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.1%, ROR=9.5%, PC/Ratio=0.8, Max Loss=$454.00, IV%=40%

DIA: 277p/272p – Open 02/11/20 – Expires 03/20/20 – Max Gain = $42.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.5%, ROR=9.0%, PC/Ratio=1.2, Max Loss=$457.00, IV%=30%

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%

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%

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%

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%

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%

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%

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Current Trades Closed

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=99.8%

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=97.6%

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Conclusion

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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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Contact Me

To contact me or ask me a non-post related question, please use this form. If you want to comment on this post’s topic, please use the “Leave a Reply” box below so it can be attached to the post for future reference. – Thanks

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