Commentary

Annotation 2020-02-26 091236

This week’s commentary was preempted by the market meltdown. Much of my time was focused on determining which strategy to use and the possibility of managing any losing trades.

So for this week, we are doing nothing but Trade Trudging. I will continue a look into my watchlist in a later post.

The Market Sentiment below was defined on Monday. I don’t want to change it during this week so I can have a record of what I consider the situation in the beginning (gaffa!). But see my Conclusion (at the end) for a post week wrapup.

Advertisements

This Week’s Market Sentiment

(As of 02/24/2020)

Broad Market Volatility:

VIX = 9-Day SMA 15.7, up a little from 14.8 last week.

Annotation 2020-02-24 074240VIX2

The 9-day SMA for the VIX bounced back up to above 15 as of this Monday morning (2/24/20) due to a sudden spike up to 23 for the current VIX. This overnight spike appears to be caused by the reports of increase Coronavirus outside of China.

More disconcerting is the redrawn 4-month trend channel showing a steady increased VIX. I’m interpreting this as the Marketeers increasing anxiety that the virus will affect more companies than originally thought.

Put/Call Ratio:

9-day SMA (all OCC options): 0.69, functionally flat from 0.71 a week ago.

Annotation 2020-02-24 074240PCR

The P/C ratio’s 9-Day SMA drop below the 50-Day SMA, signaling a trend towards a less protectionist position. However, this chart and numbers was prior to the market open on Monday where the futures have dropped over 800 points.

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%.

Market Indexes:
DOW 28,992 down 1.4% from 29,398 last week.
S&P 3,337, down 1.3 % from 3,380 last week.

Annotation 2020-02-24 074240DIA

This DOW Jones chart and stats were taken prior to this Monday morning market open. Futures has the market cratering 800 point down due to new reports of the Coronavirus in Iran and Italy.

Geopolitical tree-shakers are:

  • Coronavirus is the dominant headline this past week
  • Sanders’ dominating win in Nevada is rattling the Dems for the 2020 elections 
  • The Feds feel rates are likely to remain where they are for 2020
Advertisements

My sentiment for this coming week:

There has been a definite shift in the fear meter concerning the Coronavirus. New reports from Iran and South Korea of an increasing number of infections plus Italy quarantining large sections of the country are letting the Marketeers know that the virus is going to affect more companies’ supply-chain than originally thought.

Bernie Sanders’ dominant win in Nevada is spooking a lot of “down-water Dems” for the 2020 Election. Sanders’ US Economy strategy of “burn it down and restart as Socialism” will not play well with the general electorate, but the fact that we are even having the national debate on replacing US Capitalism with Cuba style Socialism is in itself a market scarring notion.

For this week:

The VIX is above 15 and its trend-channel is now increasing.  The P/C Ratios are starting to rise. The large drop in the DOW set for this Monday morning is suggesting that a mini correction can take place.

I’m thinking that the down market will trigger other computer trades and will be depressed until we begin to see Coronavirus containment. I’m believing that there will be several days (a week maybe two) were the broader market will tick further down before it makes rebound.

Sanders will exacerbate fears of economic havoc if he continues to dominate the nomination process.

  • Vertical Bull Put Credit Spreads – Avoid
    • Prop-OTM > 85%
    • Max trade risk set to half standard
    • But wait until mid-week to see if the market is stabilizing
  • Vertical Bull Call Debit – Avoid
    • None
  • Vertical Bear Call Credit Spread –
    Even though there is no bear trend to channel, look at past corrections trend-channels and transpose. A down market for the next week or two should put these Bear Spreads well OTM.
  • Prop-OTM > 83%
  • Max trade risk set to standard
Advertisements

Profit and Loss Statement

(As of 02/28/2020)

 YearMonthWeek #
 2020Feb9
Beginning Account Balance$9,000.$9,027.37$9,134.03
Deposits (Div. & Int.)$25.36$12.53.$12.53
Withdraws (paycheck)-$500.-$250.-$250.
Realized Profits (closed spreads)-$280.$0.$0.
Unrealized Profits (Open spreads)$679.$656.$291.
Debit Positions (Open spreads) 1-$250.-$250.$0.
Fees Paid (total)-$24.03-$11.46-$3.12
Ending Account Balance$8,650.33$9,184.44$9,184.44
 
Total Gain/Loss-$349.67-$157.07$50.41
Return On RiskN/A 11.5%33.5%
Return On Capital 1.4%N/AN/A

1 Debit Spreads removes cash from the account when active.

Realized Profit by Strategy

  Year Month Week #
  2020 Feb 9
Vertical Bull Put Credit Spread -$291. $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 -$280. $0. $0.
Advertisements

Schedule for this Week

Goals for this week: (02/24/20 – 02/28/20) (Week 9)

  • 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 Bear Call Credit Spreads:

  • Expiration date set at <= 4 weeks
  • Prob-OTM near or greater than 83%
  • Dollar risk set at or below $500
  • Put/Call ratio above 1.2 and rising
  • VIX% above 17
  • The short-term Trend-Channel Bearish
  • Current ETF price near or above the trend channel
  • Short strike price at or just below 1 standard deviation from the current price
  • Short strike price above the trend channel at expiration
  • 9-Day SMA below 50-Day SMA
  • ROR > 7.5%

(Note, in a Bear trending market the IV will typically be high. A high IV will generate a high Standard Deviation. Projecting the short strike of a Bear Call Credit Spread using the inflated SD my set a bar too high for profit.)

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: Apr 3 (6-weeks).
    • Bull Call Debit Spreads: Mar 20 (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.
Advertisements

This Week’s Trade Activity

(As of 02/28/2020:)

Spread Count Summary:

  Year Month Week #
  2020 Feb 9
Vertical Bull Put Credit Spread 18 9 2
Vertical Bear Call Credit Spread 1 1 1
Vertical Bull Put Debit Spread 0 0 0
Vertical Bull Call Debit Spread 2 1 0
Iron Condor 0 0 0
 
Total 21 11 3

Current Dollars at Risk:

  Year Month Week #
  2020 Feb 9
Vertical Bull Put Credit Spread $3,082. $2,855. $399.
Vertical Bear Call Credit Spread $460. $460. $460.
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread $129. $129. $0.
Iron Condor $0 $0 $0
 
Total Dollar Risk $3,671. $3,444. $859.
Max Risk Allowed $4,500.00   $1,000.00
Advertisements

New Trades Opened This Week

(02/24/2020 – 02/28/2020)

AAPL: 295p/292.5p – Open 02/28/20 – Expires 03/20/20 – Credit= $25
(Vertical Bull Put Credit Spread, Rolled)
At Open: Prob. OTM=83.0%, ROR=10.2%, PC/Ratio=0.5, Max Loss=$225, IV%=57%

This new position was created via a rolling order.

DIA: 270p/267.5p – Open 02/28/20 – Expires 03/27/20 – Credit =
(Vertical Bull Put Credit Spread, Rolled)
At Open: Prob. OTM=81.8%, ROR=11.8%, PC/Ratio=1.4, Max Loss=$356., IV%=84%

This new position was created via a rolling order.

QQQ: 198p/194p – Open 02/26/20 – Expires 04/3/20 – Max Gain = $44.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.8%, ROR=11.8%, PC/Ratio=1.4, Max Loss=$356., IV%=84%

Annotation 2020-02-26 091236QQQ

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: No
  • The Trend-Channel is Bullish: Qualifying 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

From the end of last week through yesterday (02/25) QQQ has taken quite a tumble. Today’s market open is showing a substantial rebound. But I do know that sometimes these rebounds are only priming the pumps for another drop.

The VIX is at 26, definitely over 15, but is slowing falling. However, the most telling metric for QQQ is the P/C Ratio. The current ratio is 1.4, which is now at a 6-week low. It was as high as 2.5 at the beginning of this week and it was as high as 2.8 on 2/12. The implication that I’m reading in this drop is that those stocks in the QQQ ETF are now considered significantly oversold and prime for a rebound.

With IV% at 84%, premiums for a deep OTM position as high. High premiums and a significantly falling P/C ratio signaled a good bottom indicator to this market correction. I still feel it will fall more before the week is out, but not to the Short-Strike.

QQQ: 238c/243c – Open 02/25/20 – Expires 04/3/20 – Max Gain = $40.00
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM=90.1%, ROR=8.5%, PC/Ratio=2.4, Max Loss=$459., IV%=98%

Annotation 2020-02-25 100513

Entry Rules:

  • Expiration date set at <= 4 weeks: No (6-weeks)
  • Prob-OTM near or greater than 83%: Yes (90.1%)
  • Dollar risk set at or below $500: Yes ($459.)
  • Put/Call ratio above 1.2 and rising: Yes (2.4)
  • VIX% above 17: Yes (26)
  • The short-term Trend-Channel Bearish: Yes (needs qualifying)
  • Current ETF price near or above the trend channel: Yes
  • Short strike price at or just below 1 standard deviation from the current price: Yes
  • Short strike price above the trend channel at expiration: Yes
  • 9-Day SMA below 50-Day SMA: No
  • ROR > 7.5%: Yes (8.5%)

All market craziness broke through staring Monday 2/25. New news from the Coronavirus front that Italy and Iran are reporting new cases. The likelihood of the virus spreading through Europe is stoking a fear that additional supply-chains will be affected and that would hit stock prices.

On Monday, the DOW closed over 1,000 points down. Tuesday’s open saw a little bounceback but quickly reversed for additional losses. No doubt that auto-trading and triggering a continuous route.

This trade is my first Bear trade of the year. I don’t have any trend-channels to validate my choice except to go back when QQQ dropped a near amount, which was in July of 2019. I mapped that mini-correct trend-channel and then copy the trend on today’s chart. The assumption is this mini-correction will be similar.

My error for this QQQ Bear Call Credit trade is the 6-weeks term. I initially set the staging section of my watchlist to look ad Bull Put strategies and did not reset the take to 4 weeks for Bear Call strategies.

Advertisements

Trades Currently Cooking

This week’s market chaos has placed the majority of the still cooling position in peril.

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%
Current Prob. OTM = 49%

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%
Current Prob. ITM = 12%

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%
Current Prob. OTM = 53%

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%
Current Prob. OTM = 50%

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%
Current Prob. OTM = 47%

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%
Current Prob. OTM = 71%

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%
Current Prob. OTM = 64%

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%
Current Prob. OTM = 73%

Advertisements

Current Trades Closed

AAPL: 295p/292.5p – Open 01/29/20 – Rolled 02/28/20 – Debit= $209
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.0%, ROR=10.2%, PC/Ratio=0.5, Max Loss=$225, IV%=57%
Current Prob. OTM = 1.0%

As of premarket-open on Friday (2/28), AAPL is trading at 273 and will need to unrealistically rise nearly 8% in 7 days to clear the short-strike of 295. But I would not totally discount an 8% recovery in 3-weeks. So I selected to roll this position to a new trade (same strikes) but expire 3/20.

Rolling this position required me to close the current trade for a debit of $234.00, then reopen the same spread for a 3/20 expiration for a credit of $209.00. The total cost of this multi-trade was $25.00, minus the $24.00 premium already collected. IF this position expires worthless in 3 weeks, then my gross profit will be -$1.00 minus a pot load of fees.

DIA: 270p/267.5p – Open 01/29/20 – Rolled 02/28/20 – Debit = 
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.0%, ROR=9.7%, PC/Ratio=0.9, Max Loss=$225, IV%=57%
Current Prob. OTM = 10.8%

As of premarket-open on Friday (2/18), DIA is currently 257 and will need to unrealistically rise nearly 5% in 7 days to clear the short-strike of 270 by 03/06. But I would not totally discount a 5% recovery in 3-weeks. So I selected to roll this position to a new trade (same strikes) but expire 3/20.

To roll this position, I have to first sell the current position at the current market price then repurchase the 270p/267.5p spread at the new asking price.

One thing to keep in mind is 03/20 is an Ex-Dividend date for DIA. If DIA is still ITM by 03/20 I will need to close it on Friday to avoid an assignment.

SPY: 317p/314p – Open 01/22/20 – Assigned 2/28/20 – Debit= $300.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.0%, ROR=8.8%, PC/Ratio=1.3, Max Loss=$274, IV%=57%
At Close: Prob. OTM=0.0%, ROR=-99.5%, PC/Ratio=1.6, Debit=2.96, IV%=100%

As of premarket Friday (2/28), SPY is currently 297 will need to rise nearly 7% to clear the short-strike of 317. Considering the thunderous market collapse this week (plus pre-open futures is still down nearly 400 points) I do not see a scenario of any kind of bounce back soon.

I was considering a rolling order to push this back a week or two, but that does not seem likely either. Selling this position Friday morning for any price under $3.00 (3 strikes ITM * 100 shares per strike = $3.00 max loss if I just let it assign) will be some price less than max-loss.

One thing to keep in mind is 03/20 is an Ex-Dividend date for SPY. If SPY is still ITM by 03/20 I will need to close it on Friday to avoid an assignment.

Advertisements

Conclusion

In the course of about 1-week time (6 trading days), the broad market tumbled over 12% into “Market Correction” territory. Coronavirus fear is gripping the world’s market and causing significant selloffs.

Below is my watchlist as of this Thursday morning (2/27). In just a few days, all my position went from safe to max-loss status. Looking at column “F,” the red-flashing ITM is telling me that I am now in-the-money for all trades showing.

Annotation 2020-02-27 084700

The first position listed above is (SPY Vertical Bull Put Credit Spread for 317p/314p expiring tomorrow) and is already at a max loss, as shown in cell AC20 compared to AD22.

Annotation 2020-02-27 084700VIX
VIX as of 2/27

The Market Metrics that I use at the beginning of the week have continued to accelerate. But I must remember to see them as reactionary and not a prognosticator.

The 9-day VIX on Monday was 15.7, and now (3 trading days later) is 21.0. The 9-day Put/Call Ratio was .69 and now .88 – with the actual value = 1.2.

The Broader Market has taken a significant shellacking. At the beginning of the week, the DOW was 28,992, but now 25,766 (a 2,691 point drop in 4 days or <11% correction). The S&P began at 3,337 but tanked to 2,979 (losing 358 points or > 10%).

It is undoubtedly evident that I need to send the next few weeks in damage control.

Advertisements

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.”

Advertisements

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

0