Commentary

Annotation 2020-03-09 100152

We need to CHILLAX!

As of this Monday morning (3/9/20), every Vertical Bull Put Credit Spread in my Options portfolio is insanely deep ITM. This equates to a possible max loss of $2,713 if all positions fail. My job now is to try and minimize this max loss by selling early or rolling positions.

What I initially thought to be a rather short-term correction due to an irrational response to the Coronavirus turned into an insane stock-shock that may last months. This morning the DOW was down 7% – enough to trigger a market-wide halt. By the end of this week, there would be three such halts as we are thrown deep into the jaws of a Bear Market.

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There’s going to be widespread damage to our economy due to travel restrictions, loss of tourism, and reduced shipping/transportation. Many tourism/events related businesses will likely be forced to layoff employees, Cruise/Airlines companies will lose half their business, and many corporations will downward revise their earnings projections.

What’s being damage is discretionary spending because people are fearful of going out and corporate supply chains are unwinding because people are afraid to go to work. It will take months to restart our eco-engine.

But on the bright side, this market punch is not nearly as scary as the 2008 crash.  In 2008, we had a systemic problem with the financial system due to the sub-prime loan poison. The banking backstops that we now rely on to addresses these types of issues did not exist then. But today, the economy has strong legs. I will predict that when the bounce back begins it will be quick. We should be celebrating new highs well before the end of the year.

As far as my Options Trading test for this year, the losses I am accruing now will set the stage for a predictable bull rally that I can recoup my losses during the second half of the year.

Crossing my fingers.

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This Week’s Market Sentiment

(As of 03/09/2020)

Broad Market Volatility:

VIX = 9-Day SMA shot up to 25.45 from 20.8 last week.

Annotation 2020-03-09 100152VIX

Monday morning’s VIX value again skyrocketed up to 54. This is (once again) the single biggest jump when looking over this 3-year chart. More of an issue is the 9-Day SMA is far above the 50-Day and now peaking at 25. The abruptness of the increase punctuates the hysteria of the general Marketeers.

Put/Call Ratio:

9-day SMA (all OCC options): held flat at 1.1, from 1.2 a week ago.

Annotation 2020-03-09 103719PC

The P/C ratio’s 9-Day SMA remained at 1.1, but only after a collective breath last week.  However, Freaky-Friday this weekend and today (03/09/20), the Put/Call Ratio shot up to the second-highest in three years. The 3-year highest was recorded in early Dec 2018 (middle of the 2018 correction). This is signaling that the Marketeers may hunker down for a prolog sellout.

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

Annotation 2020-02-17 085052CSI

The University of Michigan’s Consumer Sentiment Index remains high through the beginnings of this market craziness. The February Jobs Report was a blowout – vastly beating expectations by a wide marge.

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

Market Indexes:
DOW 24,652 down 3.0% from 25,409 last week.
S&P 2,836, down 4.0% from 2,954 last week.

Annotation 2020-03-09 100152DIA

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, the new oil price war or what a Socialist America looks like.

Geopolitical tree-shakers are:

  • Trump declares National Emergency over Coronavirus
  • Socialism is posing a threat to the Democratic party.
  • Russia starts an oil price-war to battle the US Shale industry
  • North Korea fires yet another missile
  • Unpresidently, the Feds cut the interest rate to no effect
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My sentiment for this coming week:

Markets have been in turmoil for the last several weeks. Last week, it appeared to show some relief. But this past weekend, the storm was exacerbated with Russia, bucking OPEC’s decisions, decided to unilaterally start an oil price war with the US. Russia’s decision to flood the market with surplus oil shocked the hell out of the other oil marketeers to the point the price of oil fell 30% overnight. Oil falling 30% piled on to an already fearing market was pouring gas on a fire.

The travel industry is taking the 1-2 punch over every little national news report with who got contracted the virus today. Tourism and the local communities will definitely feel the effects of canceled conferences and work-ordered travel restrictions. Bruised and beaten by over-hyped Coronavirus reporting, the market did what it could only do – bucked its knees and collapsed.

Over the next several weeks, I will expect a slew of downward-revised Earnings Reports from companies that are directly affected by a collapsing supply chain. I anticipate the VIX to continue to trickle up with every Coronavirus news item.

The US economy has taken severe damage over the past month. For it to tick up, corporate CEOs will have to feel good about the legal ramifications on approving travel, container vessels will have to be back in full operations for several weeks, and major conventions and events will have to ramp up.

In short: It’s going to take a long while to restart the US Economy.

For this week:

This week, I’m going to focus mainly 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.

NO bull spreads of any kind. But I need to look into higher risk Bear Spreads to start repairing the losses so far.

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Profit and Loss Statement

(As of 03/13/2020)

At the end of this week, I have lost a total of $1,003.73 from the opening balance of my Options Trading account. That that loss includes the $500 I’ve paid myself so far. Thus my actual trading loss is really just $503.73. (But still have a long way to go in closing existing losing trades.)

 YearMonthWeek #
 2020Mar11
Beginning Account Balance$9,000.$8,649.55$8,736.47
Deposits (Div. & Int.)$25.36$0.$0.
Withdraws (paycheck)-$500.$0.$0.
Realized Profits (closed spreads)-$1,897.$0.$0.
Unrealized Profits (Open spreads)$659.$363.$274.
Debit Positions (Open spreads) 1$129.$0.$0.
Fees Paid (total)-$38.21-$5.20-$3.12
Ending Account Balance 2$7,368.14$9,007.35$9,007.35
 
Total Gain/Loss-$1,631.85$357.80$270.88
Return On RiskN/A 19.0%27.8%
Return On Capital -12.9%N/AN/A

1 Debit Spreads removes cash from the account when active.
2 Any position closed with a loss is recorded on the date the position was opened. So the YTD column reflects that actual performance for all positions, the MTD only reflects performance for those that were opened in the month, and WTD for performance for positions open in the week.

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Realized Profit by Strategy

  Year Month Week #
  2020 Mar 11
Vertical Bull Put Credit Spread -$1,908. $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 -$1,897. $0. $0.
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Schedule for this Week

Goals for this week: (03/09/20 – 03/13/20) (Week 11)

  • Max technical dollars at risk (new trades) = $1,000.
  • Max dollar risk per trade (new trades) = $500
  • No new Bull 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 $0:
  • 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 75%
  • 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:
    • Bear Credit Spreads: Apr 17 (6-weeks) (Apr 10 is Good Friday).
    • Bear Debit Spreads: Apr 3 (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 03/13/2020:)

Spread Count Summary:

  Year Month Week #
  2020 Mar 11
Vertical Bull Put Credit Spread 20 2 0
Vertical Bear Call Credit Spread 4 3 3
Vertical Bull Put Debit Spread 0 0 0
Vertical Bull Call Debit Spread 2 0 0
Iron Condor 0 0 0
 
Total 26 5 3

Current Dollars at Risk:

  Year Month Week #
  2020 Mar 11
Vertical Bull Put Credit Spread $2,086. $911. $0.
Vertical Bear Call Credit Spread $1,436. $976. $976.
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread $129. $0. $0.
Iron Condor $0 $0 $0
 
Total Dollar Risk $3,651. $1,887. $976.
Max Risk Allowed $4,500.00   $1,000.00
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New Trades Opened This Week

(03/09/2020 – 03/13/2020)

DIA: 242.5c/245c – Open 03/13/20 – Expires 03/27/20 – Max Gain = $60.00
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM=81.4%, ROR=31.2%, PC/Ratio=1.2, Max Loss=$189, IV%=96%

Annotation 2020-03-13 090942

Entry Rules for Vertical Bear Call Credit Spreads:

  • Expiration date set at <= 4 weeks: Yes
  • Prob-OTM near or greater than 75%: Yes
  • Dollar risk set at or below $500: Yes
  • Put/Call ratio above 1.2 and rising: Yes
  • VIX% above 17: Yes
  • The short-term Trend-Channel Bearish: Yes
  • Current ETF price near or below 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: Yes
  • ROR > 7.5%: Yes

This is a very short term (2-weeks) position with a minimum max risk. For this trade to fail, the DOW must move up 10% within the 2-weeks timeframe. But from the past 2-weeks of market behavior, I am expecting the whipsaw effect to continue and hopefully go up but not by 10%.

DIA: 265c/270c – Open 03/10/20 – Expires 04/3/20 – Max Gain = $100.00
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM=83.8%, ROR=24.8%, PC/Ratio=1.0, Max Loss=$399, IV%=98%

Annotation 2020-03-10 104944

Entry Rules for Vertical Bear Call Credit Spreads:

  • Expiration date set at <= 4 weeks: Yes
  • Prob-OTM near or greater than 75%: Yes
  • Dollar risk set at or below $500: Yes
  • Put/Call ratio above 1.2 and rising: No
  • VIX% above 17: Yes
  • The short-term Trend-Channel Bearish: Yes
  • Current ETF price near or below 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: Yes
  • ROR > 7.5%: Yes

SPY: 301c/306c – Open 03/9/20 – Expires 04/3/20 – Max Gain = $114.00
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM=82.2%, ROR=29.4%, PC/Ratio=2.1, Max Loss=$385, IV%=84%

Annotation 2020-03-09 100152SPY

Entry Rules for Vertical Bear Call Credit Spreads:

  • Expiration date set at <= 4 weeks: Yes
  • Prob-OTM near or greater than 75%: Yes
  • Dollar risk set at or below $500: Yes
  • Put/Call ratio above 1.2 and rising: Yes
  • VIX% above 17: Yes
  • The short-term Trend-Channel Bearish: Yes
  • Current ETF price near or below 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: Yes
  • ROR > 7.5%: Yes
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Trades Currently Cooking

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%
Current Prob. OTM = 37%

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%
Current Prob. OTM = 48%

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 = 25%

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 = 99.7%

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 = 6.1%

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 = 1.7%

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 = 4.9%

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Current Trades Closed

All of these closures are positions that remain +10% beyond ITM. It is my estimation that there is no way to get to ATM in 7 or 14 days. Rolling these during a Bear Market trend will just exacerbate the losses. This week’s losses = -$1,478.40 out of a possible -$1,630 as max loss. So closing early saved $152.00 (9.3% savings).

Next week, I expect another 2 or 3 deep losses closures.

It’s going to take quite a bit of winning to recuperate. Luckily I have 9 months to do so.

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%
Closed 3/13/20 – Debit -$4.85
Gross Loss = -$485.00 to close + $47.00 to open – $2.08 fees = -$440.08

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%
Closed 3/13/20 – Debit -$2.00
Gross Loss = -$200.00 to close + $25.00 to open – $2.08 fees = -$177.08

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%
Closed 3/9/20 – Debit -$2.53
Gross Loss = -$253.00 to close + $26.00 to open – $2.08 fees = -$229.08

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%
Closed 3/9/20 – Debit -$2.24
Gross Loss = -$224.00 to close + $26.00 to open – $2.08 fees = -$200.08

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%
Closed 3/9/20 – Debit -$4.72
Gross Loss = -$472 to close + $42 to open – $2.08 fees = -432.08

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Conclusion

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

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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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