Falling down is how we grow. Staying down is how we die.

– Maximus Decimus Meridius (Movie: Gladiator)

Commentary

Annotation 2020-03-15 082711

I wish I knew what I don’t know.

The Coronavirus “crisis” is a bit confusing to me. But from the Market’s tantrum to the Fed’s draconian reaction, one might think that this is an election year.

There does appear to be a silver lining to the current Market-Madness for Options Traders like me. The Implied Volatility (IV) for all funds is at historical highs. With high IV comes high premiums available for Options trading. And the Markets seem to have a predictable direction – down. So now is the time to look into short-term, higher-risk Bear Spreads to make back some of the losses I have to date.

“Vertical Bear Call Credit Spreads” has the same construction as the Vertical Bull Put Credit Spreads, except I am now working with Call Options instead of Put Options. Using the Bear Call Spread configuration, I am betting that the Markets will continue to decline. This tactic is called “Shorting the Markets.”

Advertisements

High hopes for a speedy recovery.

I should keep reminding myself that the Stock Markets are an amalgamation of a lot of people’s monies. People who very much want to make money – not lose it. The US Markets are valuable income resources for the US Treasury. The Government needs robust Markets to feed its needs. Companies large and small need the Markets for necessary capitalization. State and Federal pensions are funded by healthy Markets. Wall Street is made up of powerful Hedge Fund companies and personal brokers/IRAs/401Ks managers. Their livelihoods are dependant on rising Markets.

There is a LOT of energy, resources, and human will-power to keep the Markets high. Thus, there is a powerful intrinsic nature for the Markets to rise. Sooner than later, the Marketeers will see that stocks are dirt cheap, and the insatiable urge to not miss the bargains will kick in – like moths to a flame or my wife to the clearance racks. All the cash that has been but aside will flood back in.

Advertisements

This Market crash will be short-lived

This Market crash (like all other crashes) will be short-lived. It will be followed by a fast, explosive growth when Marketeers become fearful that they will miss the chance to buy funds at bargain-basement prices. The DOW will quickly skyrocket to an equilibrium (somewhere well below the last highs), then start a competitive march back to new highs. The paper-loss of value in the funds that I hold is gut-wrenching. But I do know that I have not lost anything – unless I sell.

Personally, I do not have the resources to predict when that bounce-back will occur. I know that I will never see the explosive bounce coming until after it happens. My only option is to watch my savings dwindle, then ride the tide back up.

For the intermediate-term, the only reasonable thing for me to do is to but all my funds in a lock-box and wait until October. And pucker-up and take it like a 7-year old.

Advertisements

This Week’s Market Sentiment

(As of 03/16/2020)

Broad Market Volatility:

VIX = 9-Day SMA shot up to 48.81 from 25.45 last week.

Annotation 2020-03-16 082028VIX

Monday morning’s VIX value again accelerated up to over 75 until dipped to 57. I have no dought that within this week, we will see staggering new highs for the VIX. This signals to me a real (more like unrealistic) panic from the intrepid Marketeers.

Put/Call Ratio:

9-day SMA (all OCC options): rose to 1.2, from 1.1 a week ago.

Annotation 2020-03-16 082028PCR

The P/C ratio’s 9-Day SMA continued up to 1.2. For the past 2 weeks, this has been well above the magical 1.0 line. This is signaling that the Marketeers may hunker down for a prolog sellout.

Consumer Sentiment Index (CSI):
Annotation 2020-03-16 082028CI

The University of Michigan’s Consumer Sentiment Index took a major drop in February, signaling that consumer’s confidence had (past tense) fallen significantly since the Markets’ meltdown started. It is reasonable to believe that this indicator will continue to fall dramatically while the US goes into a social shutdown.

Market Indexes:

DOW 23,186 down 6% from 24,652 last week.
S&P 2,711, down 4.4% from 2,836 last week.

Annotation 2020-03-16 082028DIA

The most common adjective now being used to describe the current market reactions is “historic.” We are currently witnessing a new chapter in the US economy story. Twenty years in the future, we will be reading about the great 2020 Market Crash, and this will be the new benchmark for history.

Geopolitical tree-shakers are:

  • Coronavirus: Global efforts to shutdown social activity
  • Coronavirus: Trump declares National Emergency – restricts travels
  • Acknowledgments that the current market implosion will result in a recession
  • Socialism is posing a threat to the Democratic party
  • Russia starts an oil price-war to battle the US Shale industry

My sentiment for this coming week:

For this week and the many weeks to come, I see the Markets continue to thrash in history scales as news from the Coronavirus front continues to trickly out. The more extreme the Feds are to stem the sell-off, the more terrorized the Marketeers will get.

The number of virus cases is going to grow exponentially, and that increase will be enough to continue spooking the Market to new lows.

For this week:

It seems to me that the Markets will continue to drop over the next 2-4 months. The magnitude of the drops may subside as time goes on, but I will predict they will continue to be lower each week.

This week, I will focus on:

  1. Loss mitigation
  2. Vertical Bear Call Credit Spreads
  3. No Bull spreads of any kind.
Advertisements

Profit and Loss Statement

(As of 03/20/2020)

 YearMonthWeek #
 2020Mar12
Beginning Account Balance$9,000.$8,649.55$9,001.02
Deposits (Div. & Int.)$25.36$0.$0.
Withdraws (paycheck)-$500.00$0.$0.
Realized Profits (closed spreads)-$2,872.00$0.$0.
Unrealized Profits (Open spreads)$707.00$586.00$223.
Debit Positions (Open spreads) 1$129.00$0.$0.
Fees Paid (total)-$44.67-$8.39-$3.15
Ending Account Balance 2$6,444.69$9,227.16$9,220.87
 
Total Gain/Loss-$2,555.31$577.61$219.85
Return On RiskN/A 21.3%26.6%
Return On Capital -23.1%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.

Realized Profit by Strategy

  Year Month Week #
  2020 Mar 12
Vertical Bull Put Credit Spread -$2,921. $0. $0.
Vertical Bear Call Credit Spread $38. $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 -$2,872. $0. $0.
Advertisements

Schedule for this Week

Goals for this week: (03/16/20 – 03/20/20) (Week 12)

  • 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:

(No Bull Spreads this week)

  • 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 below 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 24 (6-weeks)
    • Bear Debit Spreads: Apr 10 (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 03/20/2020:)

Spread Count Summary:

  Year Month Week #
  2020 Mar 12
Vertical Bull Put Credit Spread 20 2 0
Vertical Bear Call Credit Spread 7 6 3
Vertical Bull Put Debit Spread 0 0 0
Vertical Bull Call Debit Spread 2 0 0
Iron Condor 0 0 0
 
Total 29 8 3

Current Dollars at Risk:

  Year Month Week #
  2020 Mar 12
Vertical Bull Put Credit Spread $911. $911. $0.
Vertical Bear Call Credit Spread $1,803. $1,803. $827.
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread $129. $0. $0.
Iron Condor $0 $0 $0
 
Total Dollar Risk $2,843. $2,714. $827.
Max Risk Allowed $4,500.00   $1,000.00
Advertisements

New Trades Opened This Week

(03/16/2020 – 03/20/2020)

QQQ: 200c/203c – Open 03/19/20 – Expires 03/27/20 – Max Gain = $55.00
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM=87/3%, ROR=22.1%, PC/Ratio=0.9, Max Loss=$244, IV%=82%

Annotation 2020-03-19 143956

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: No
  • Short strike price at or just below 1 standard deviation from the current price: No
  • Short strike price above the trend channel at expiration: Yes
  • 9-Day SMA below 50-Day SMA: Yes
  • ROR > 7.5%: Yes

When this trade was entered, I have one week and one day of trading left until expiration. The Short-Strike price of 200 is 17 points above the cost-basis, which is 10% above the current ETF price. Even though QQQ is not a pure NASDAQ index fund (close enough), the NASDAQ will have to raise 715 points in just one trading week to reach ITM. From my current viewpoint, that rise seems unlikely.

DIA: 230c/232.5c – Open 03/17/20 – Expires 03/27/20 – Max Gain = $60.00
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM=79.5%, ROR=31.2%, PC/Ratio=1.3, Max Loss=$189, IV%=95%

Annotation 2020-03-17 120557

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 trade is only risking 1/2 of the max risk for a trade this week. I selected half the risk to allow me to make other trades later this week.

Also, this trade expires in ten days. The Short-Strike price of $230 is $21.00 higher than the ETF cost basis. That $21.00 represents a 2,100 point rise in the DOW in 10 days (or about a 10% increase in the Market).

SPY: 278c/283c – Open 03/16/20 – Expires 03/27/20 – Max Gain = $108.00
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM=85.3%, ROR=27.4%, PC/Ratio=1.7, Max Loss=$391, IV%=99%

Annotation 2020-03-16 082028SPY

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

With the IV at near 100%, the premiums offered are at its best. This trade took in over $100 in premiums while still remaining above 85% Prob-OTM.

Advertisements

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 = 23%

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 = 44%

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%
Current Prob. OTM = 99%

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%
Current Prob. OTM = 99%

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%
Current Prob. OTM = 97%

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 = 0%

Current Trades Closed

All of these closures are positions that remain 10% or less 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.

SPY: 319p/314p – Open 02/13/20 – Expires 03/20/20 – Max Gain = $42.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.1%, ROR=9.5%, PC/Ratio=0.8, Max Loss=$454.00, IV%=40%
Assigned 3/20/20 – Debit -$5.00
Gross Profit= $42.00 to Open – $500.00 to assigned – $1.74 fees = -$459.74

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%
Closed 3/17/20 – Debit -$2.50
Gross Profit= $44.00 to Open – $250.00 to close – $2.08 fees = $208.08

This position was closed 17 days early. The Prob-OTM was down to 24.5%. QQQ would have to rise by 6.5% in the 17 days to get above the long-strike price. Since the trajectory of QQQ is negative, I don’t hold much hope of profit. Closing now should save me $148.

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%
Closed 3/16/20 – Debit -$0.02
Gross Profit= $40.00 to Open – $2.00 to close – $2.08 fees = $35.92

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%
Closed 3/16/20 – Debit -$3.98
Gross Profit= $40.00 to Open -$398.00 to close – $2.08 fees = -$360.08

Advertisements

Conclusion

This week, I opened three new positions, all of which were short term (less than 2-weeks to expiration) and mostly 10% between cost-basis and Short-Strike. With the IV as high as it is, this allowed premiums collected to be much higher than the Bull Put Spreads that I’ve been leaning on before the crash with a whole lot less probability of failure.

Lessons that I’ve might have learned:

  1. Having $4,500 worth of risk hanging out there may not be too wise. Maybe I should lower that by half-ish.
  2. A less than 10-days to expiration will keep the trades fluid. If I can trade more than $2,000 over 2-weeks, then I can’t lose as much if the Markets make an unexpected turn.
  3. Along with Prob-OTM, add Head-Room as a required matrix for trading. This week, I’ve been focused on short term trades that have a head-room of near 10%.
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