–Matt Farrell: The first time I heard the concept of a Fire-Sell,
I actually thought it would be cool if anyone ever really did it.
Just hit the reset button – melt the system just for fun.
–John McClane: Hey, it’s not a system. It’s a country!
(Movie: Live Free or Die Hard)

Commentary

Several market dynamics are fueling the current fear in this week’s Market Sentiment. The Coronavirus is dominating the headlines, with about a third of all national news items reporting about the virus. But also dominating the headlines is the Democratic race for the party’s nomination and the soul of the future Democratic Party. This week’s commentary looks into candidates that are being a little – economical with the truth.

Wealth Inequality

When discussing the “Wealth Inequality” within the US, the left’s popular mantra will cite statistics such as “20% of all Americans possess 80% of all wealth,” or “the top 1% owns over 43% of all wealth.” Unqualified, these dry statistics paint a picture of feudalistic times with nobles and peasants. The problem is, if you see today’s US society as if we are still stuck in the Medieval Age, then you will most likely always (and forever) see inequality – regardless of any changes.

Democratic candidates such as Bernie Sanders and Elizabeth Warren are floating a new “Wealth Tax.” This tax is advertised to transform us from that feudalistic time into something that looks like, well, today’s US economic prosperity.  But the Wealth Tax they propose (as described in their manifestos) will not transfer any of the 20 percenters’ wealth to the other 80 percenters. Instead, the tax will only transfer the wealth to the Federal Government – forming a new Nobel class. This Noble class is assumed to grant a more equitable distribution of services to those who bend the knee. But the bigger question to ask is – “can politicians do a better job of wealth distribution than what the US’ wealthy are already doing?”

Can You Spare a Dime?

A favorite question I have asked the equal-distribution folks – “where do billionaires or multi-millionaires keep their money?”

I am willing to bet you something reasonable that if I walked up to billionaire Bill Gates and ask if I can borrow $100, he’ll probably thumb through the bills in his wallet and say something like, “Sorry, I’m only carrying $62” – What! Bill Gates doesn’t keep his billions in his wallet!

If Bill were a reasonable investor, I would guess he has a sizable checking and savings account at his local bank (write those big checks). His bank would certainly appreciate Bill’s sizable account because while they would pay him a poultry .5% interest on his balance, the bank will be leveraging his money (and the accounts of others) to provide loans to the local community. These loans are made to buy new cars, set up mortgages for new homes, invest in inventory or payroll for local businesses.

If Bill has to withdraw most of his savings every year to pay the new Wealth Tax, then the local community would undoubtedly feel the pain. With less money in the local banks to leverage, the fewer loans to be made. The fewer loans, the higher the interest.

Where did all that money go?

I would also imagine that Bill does not have his billions buried in a shoebox in the backyard. Most likely, he has the bulk of his fortune invested in a diverse portfolio of stocks, bonds, and real estate. A portfolio like Bill’s may include millions of shares of Microsoft, Walmart, Boeing, and hundreds of other companies. Investing billions in these funds will raise stock prices that will bolster a lot of people’s 401Ks, stabilize state pensions, and support a large number of small businesses that are desperately in need of working capital. They may even own factories, hotels, communication companies, and much more, employing thousands if not millions of people.

If Bill has to sell a high percentage of his portfolio yearly to pay this Wealth Tax bill, then the price of those stocks will fall, and many people’s retirement accounts will shrink. Companies may have to downsize to operate within a lower funding limit. State pensions will have to lower their premiums.

Add to Bill’s influence are many other billionaires and millionaires such as Bloomberg, Trump, and Soros. None of these 20 percenters are hoarding their fortunes in closets and mattresses. All of them are widely diversified in the US economic system that feeds millions of people like me.

This commentary’s whole point is to suggest that the 20 percenters have already diversified and have already spread their wealth throughout the population. They make our US economic system the most productive in the world. The US government has mechanisms to target areas for economic growth and wealth distribution by manipulating tax codes and incentivizing Bill’s buds to build factories in blighted areas. This is using carrots to Sanders’ stick. 

I think the point of this week’s commentary is to suggest the Market’s Pronasticators may have it wrong over the last week or two. The hysteria over the Coronavirus may not be the primary driving force behind last week’s market madness, but rather a gut fear over the Sanders’ vision of a Socialist America. 

To Sander’s supporters – Do we really have to burn down the US economic system to rebuild it as an anemic socialist state? “Hey, it’s not a system. It’s a country!”

This Week’s Market Sentiment

(As of 03/02/2020)

Broad Market Volatility:

VIX = 9-Day SMA shot up to 20.8 from 15.7 last week.

Monday morning’s VIX value skyrocketed up to 43. This is the single biggest jump when looking over this 3-year chart. More of an issue is the 9-Day SMA rise above the 50-Day and now peaking at 21. The abruptness of the increase punctuates the hysteria of the general Marketeers.

Put/Call Ratio:

9-day SMA (all OCC options): jumped to 1.2, from 0.69 a week ago.

The P/C ratio’s 9-Day SMA leaped to .93, primed to move above the 1.0 line. This is beginning to signal that the Marketeers may be starting to hunker down for a prolog sellout.

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

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%.

It will be interesting to see how the current market hysteria will affect the CSI when it updates for March.

Market Indexes:
DOW 25,409 down 12.4% from 28,992 last week.
S&P 2,954, down 11.5% from 3,337 last week.

The epic plunge for the DOW has been reported the largest since the 2008 Financial crisis. But this plunge has nothing to do with the underpinnings of our economy. The fear comes from the unknown – whether the Coronavirus or what a Socialist America looks like.

Geopolitical tree-shakers are:

• Coronavirus is the dominant headline this past week
• Coronavirus fear-baiting for political purposes
• Dems presents diversely different messages for the 2020 elections 
• North Korea fires another missile
• The Feds stands ready to drop interest rates

My sentiment for this coming week:

They say that the Market hates the unknown. And apparently, the Market is pissed! The VIX and Put/Call Ratios are signaling that the downward slide is far from over. However, because of the magnitude of the market drop, there may be a V-shape bounce when the bottom is reached.

The Market Prognosticators may be wrong. Although the virus news is all over the media, so is the scary notion that Sanders may be the Democratic nominee. Lots of polls have Sanders beating Trump, and there is a fear that our entire economic system could be uprooted. If Biden does well this week, and the fear mongering over the virus lowers, then the upheaval in our financial system may subside and then the Market may be staged for a big comeback.

Many of the stocks now are defined as “over-sold” and have reached “dirt-cheap” status. If someone and put new money into the Market at the bounce, then they are set for a fantastic return. But for short-term options trading, anything new is going to be high-risk.

For this week:

This week, I’m going to focus solely on loss mitigation.  I have many positions set to expire this week and next that are well beyond max loss. My task this week is to either roll or close these losing trades.

Profit and Loss Statement

(As of 03/06/2020)

¹ Debit Spreads removes cash from the account when active.

Realized Profit by Strategy

Schedule for this Week

Goals for this week: (03/02/20 – 03/06/20) (Week 9)

• Max technical dollars at risk (new trades) = $1,000.
• Max dollar risk per trade (new trades) = $500
• No new trades this week unless conditions changes
• 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:
• Shortstrike price below the trend channel at expiration:
• Shortstrike 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 Credit spreads: Apr 09 (6-weeks) (Apr 10 is Good Friday).
  • Bear Credit 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.

This Week’s Trade Activity

(As of 03/06/2020:)

Spread Count Summary:

Current Dollars at Risk:

New Trades Opened This Week

(03/02/2020 – 03/06/2020)

SPY: 265p/260p – Open 03/5/20 – Expires 04/9/20 – Max Gain = $47.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.6%, ROR=10.2%, PC/Ratio=1.5, Max Loss=$452, IV%=84%

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: No
• VIX below 15 or 9-day SMA within the trend channel: No
• The Trend-Channel is Bullish: No
• 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: No
• ROR > 7.5%: Yes

This trade goes against the beginning of the week guidelines.  The reason for the change is as follows:

• The IV is very high, and that gives me a higher premium at a strike further OTM.
• The P/C ratio has been constant for the past 6 weeks. This suggests that a steady line for those who are optimistic.
• SPY will have to fall 13.7% (a 420 points drop in the S&P500) by 4/9 to get ITM. Although we had already had a more considerable drop two weeks ago, the past week trend seems to suggest we are testing the bottom of this correction.
• I’m already negative in my account balance for the year. I need to take a higher risk to recover.

QQQ: 180p/175p – Open 03/4/20 – Expires 04/9/20 – Max Gain = $43.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=86.4%, ROR=9.0%, PC/Ratio=2.0, Max Loss=$457., IV%=72%

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: No
• VIX below 15 or 9-day SMA within the trend channel: No
• The Trend-Channel is Bullish: No
• 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: No
• ROR > 7.5%: Yes

This trade is violating most of my entry rules.

The VIX is not below 15 but at 34. The 9-Day SMA is within a Bull Trend channel, but the channel is only a week old. The Put/Call Ratio is 2.0, which is .7 higher than the start of the week. The trend channel is bullish, but I redrew the channel last week after the massive selloff. And the ETF’s 9-Day SMA is most definitely NOT above the 50-Day.

So why am I making this trade?

Super Tuesday solidified around Joe Biden. Bloomberg just dropped out of the presidential race, and the momentum has definitely turned from Bernie Sanders. This seems to provide a collective forehead-wipe from nervous Marketeers.

The IV is enormous, which is generating an attractive premium. The Short-Strike is 15.5% below the current QQQ ETF price – which suggests another 1,350+ point drop of the NASDAQ.

We had two up-days within the past three trading days. Although the bottom may not have been hit, I don’t think it will retreat another 13% and stay there long.

Trades Currently Cooking

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%
Current Prob. OTM = 58%

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%
Current Prob. OTM = 98%

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 = 22%

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 = 9%

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 = 26%

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 = 13%

AAPL: 295p/292.5p – Rolled 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%
Current Prob. OTM = 34%

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 = 10%

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 = 35%

DIA: 265p/262.5p – Open 02/03/20 – Expires 03/13/20 – Credit= $26.00
(Vertical Bull Put Credit Spread) (Rolled)
At Open: Prob. OTM=83.0%, ROR=11.2%, PC/Ratio=1.6, Max Loss=$223, IV%=36%
Current Prob. OTM = 26%

Current Trades Closed

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%
Closed 03/02/20 – Debit = $201.00

As of premarket-open on Monday (3/02), DIA is currently 254 and will need to unrealistically rise nearly 6.3% in 4 days (DOW rising 1,600 points) to clear the short-strike of 270 by 03/06. It is also doubtful that it will recover 6.3% in 3-weeks should I consider rolling. (Note that there is an ex-Dividend date on 3/20, and a deep ITM short would certainly be assigned.)

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%
Closed 03/02/20 – Debit = $175.00

As of premarket-open on Monday (3/02), DIA is currently 254 and will need to unrealistically rise nearly 6.3% in 11 days (DOW rising 1,600 points) to clear the short-strike of 270 by 03/13. It is also doubtful that it will recover 6.3% in 3-weeks should I consider rolling. (Note that there is an ex-Dividend date on 3/20, and a deep ITM short would certainly be assigned.)

Conclusion

This week, the Market has whipsawed significantly but seems to have developed a new bull trend. We have record volatility, and that volatility is translating into higher premiums. It may be time to go bottom fishing.

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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