“Never let a serious crisis go to waste.”

– Rahm Emanuel

Commentary

Annotation 2020-03-22 091242c

Our economic system is a vital function in our way of life. A free-market economy is one of the major requirements for a free society. But by the very nature of its freedom, from time to time, it Blue-Screens!

Many actors would like to challenge our way of life – or at least test the status quo. Some of these actors are found by looking in the mirror. Some of these only come out during a US election year.

Markets are a Discounting Apparatus

In general, the Markets are a discounting apparatus. It reflects more of what the Marketeers “think” it will do rather than what it has done. As uncertainty increases, that uncertainty is considered already baked in the current Market value. In other words, if news comes out that the virus could be more devastating to our economy than otherwise thought, then the Markets immediately drop severely, even though that level of devastation has not (or may never) occur. Or, if there is a piece of news that leaks the possibility of an interest rate cut, even though the reduction has not happened, the Markets may jump significantly. When the interest rate drop does occur, the Markets shrugs it off because the change was already acted on earlier. So it is the trickling of news that drives Markets’ direction – not so much what is happening.

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Considering the above paragraph, the profound market reaction we have seen over the past five weeks appears to be what the Marketeers fears could be the worst-case scenario amongst several colliding news-driving fronts. As long as we continue to focus on the worst possible cases, the Markets will set its value “as if” it has already happened.

The Coronavirus (COVID-19) outbreak has undoubtedly been the most significant Market-sensitive news item for the past six weeks. The prognostication of our doomsday prophets and attention-starved neo-economists has found lead-story spaces with various media. Fear seems to sell. For example, I can go to the Drudge Report website if I want to get depressed. – “not letting a serious crisis go to waste.”

Exacerbating part of this fear are foreign adversaries. The pandemic will have a profound effect on oil demand around the world as fewer people travel. To address that, OPEC has agreed to reduce production to help prop the price of oil and manage what will be a gross oversupply. But countries like Russia have picked this time to buck OPEC’s directives and significantly increase their oil production. The stated purpose is to start an aggressive oil price war against the US Shale industries. The bottom falling out of the oil market over the past three weeks has compounded the market fears. – “not letting a serious crisis go to waste.”

Countries like North Korea and Iran desperately want the US economy to collapse, so US sanctions’ threats will have no teeth. Over the past several weeks, these counties have stepped up their cyberattacks on US institutions to generate news and stoke fear. – “not letting a serious crisis go to waste.”

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Countries like China and Russia desperately want a rival economic engine like the US. These countries are flooding the US Social Media with false news stories and disinformation. These fake-news stories are re-reported by our national media and have a lot to do with interfering with the 2020 election or placing the CIVID-19 blame on the US military. – “not letting a serious crisis go to waste.”

But thankfully, going into this Market crash, the US economy is the strongest it has ever been. The 2008 crash has taught us many lessons, and the US has implemented many backstops mechanisms to deal with significant issues like this. But it will still take many months to ramp back up.

With the Two-Trillion Dollar Stimulus Bill on the Senate’s table this week, the DOW on Tuesday had its highest single-day increase in history – exploding over 2,000 points. Even though the package had not passed (just news reporting), the Marketeers bought back into the Markets as if it already had. 

As a personal note, I believe that this stimulus bill will help define the bottom of the 2020 crash. I’m sure we will see new lows as the number of COVID-19 infections peek, and as we digest the carnage that record unemployment will have on our economy. 

But it may be time to consider rebalancing investments into the more risky, harder-hit funds as the US Economy starts a reboot.

Press CTRL-ALT-DEL.

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This Week’s Market Sentiment

(As of 03/23/2020)

Broad Market Volatility:

VIX = 9-Day SMA shot up to 59.67 from 48.81 last week.

Annotation 2020-03-23 070931VIX
Three-Year look at the VIX

The VIX is also known as the fear indicator. The higher it gets, the more uncertain the Marketeers are about the direction of our economy. Looking at the 3-year VIX chart, the Marketeers seem to be scared witless.

It is also an indicator of anticipated premiums offered/expected for Options trading. Implied Volatility (IV) for each ETF is used in calculating the current premiums. The higher the IV, the higher the premiums. For this week, I should expect high premiums being offered for the spreads I will sell.

Put/Call Ratio:

9-day SMA (all OCC options): stayed level at 1.2 for the week.

Annotation 2020-03-23 070931PCR

Put Options are frequently used as protections against existing investments falling. Likewise, the Call Options are used to take advantage of rising new investments. Therefore, Put/Call Ratio is a decent indicator of what the Marketeers think what the Markets’ movement could be in the future. The more Put Options sold than Call Options, then the more protectionist they are. So a P/C Ratio above 1 could mean that Marketeers are protecting their investments and below 1 could mean they are accumulating.

The P/C ratio’s 9-Day SMA fluctuated a little last week but ended where it started at 1.2. For the past 4 weeks, this has been well above the magical 1.0 line. This is signaling that the Marketeers may hunker down for a prolog sellout.

(As an observation, the P/C Ratio for all of my watchlist funds dropped significantly from this time last Monday. This could be an early indication for a little less fear.

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 19,174 down 17% from 23,186 last week.
S&P 2,305, down 15% from 2,711 last week.

Annotation 2020-03-23 070931DIA

The market fell a butt-clenching 15% just last week. But the Markets’ thrashing of +/- 1,000 points each day is sort of telling me that we may be testing a Market bottom.

Geopolitical tree-shakers are:

  • Coronavirus: Global efforts to shutdown social activity
  • Russia starts an oil price-war to battle the US Shale industry
  • Virus: Trump declares “War Time Powers”
  • Virus: Trump acknowledges that the cure could be worse than the disease
  • Virus: Increase in foreign cyberattacks and disinformation campaigns

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 Marketeers are looking for bigtime interventions from the Feds and they may get it this week.

For this week:

It seems to me that the Markets will continue to thrash over the next 4-6 weeks. 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.
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Profit and Loss Statement

(As of 03/27/2020)

 YearMonthWeek #
 2020Mar13
Beginning Account Balance$9,000.$8,649.55$6055.66
Deposits (Div. & Int.)$25.36$0.$0.
Withdraws (paycheck)-$750.00-$250.-$250.
Realized Profits (closed spreads)-$2,864.00$137.00$0.
Unrealized Profits (Open spreads)$366.00$366.00$105.
Debit Positions (Open spreads) 1$0.$0.$0.
Fees Paid (total)-$47.83-$11.55-$2.10
Ending Account Balance 2$5,729.53$8,891.00$5,908.56
 
Total Gain/Loss-$3,270.47$241.45-$147.10.
Return On RiskN/A 5.7%1.7%
Return On Capital -28.3%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 13
Vertical Bull Put Credit Spread -$3,067. -$146. $0.
Vertical Bear Call Credit Spread $321. $283. $0.
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread -$118. $0. $0.
Icon Condors $0. $0. $0.
Cover Calls
Total -$2,864. $137. $0.
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Schedule for this Week

Goals for this week: (03/23/20 – 03/27/20) (Week 13)

  • 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 <= 2 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 3 (2-weeks)
    • Bear Debit Spreads: Apr 17 (4-weeks)
    • Bull Credit Spreads: May 1 (6-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 03/27/2020:)

Spread Count Summary:

  Year Month Week #
  2020 Mar 13
Vertical Bull Put Credit Spread 20 2 0
Vertical Bear Call Credit Spread 9 8 2
Vertical Bull Put Debit Spread 0 0 0
Vertical Bull Call Debit Spread 2 0 0
Iron Condor 0 0 0
 
Total 31 10 2

Current Dollars at Risk:

  Year Month Week #
  2020 Mar 13
Vertical Bull Put Credit Spread $453. $453. $0.
Vertical Bear Call Credit Spread $1,231. $1,231. $445.
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread $0. $0. $0.
Iron Condor $0 $0 $0
 
Total Dollar Risk $1,684. $1,684. $445.
Max Risk Allowed $4,500.00   $1,000.00
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New Trades Opened This Week

(03/23/2020 – 03/27/2020)

SPY: 267c/270c – Open 03/25/20 – Expires 04/3/20 – Max Gain = $55.00
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM=82.8%, ROR=22.1%, PC/Ratio=1.6, Max Loss=$244, IV%=71%

Annotation 2020-03-25 095122

Entry Rules for Vertical Bear Call Credit Spreads:

  • Expiration date set at <= 2 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?: Yes
  • Short strike price above the trend channel at expiration?: Yes
  • 9-Day SMA below 50-Day SMA?: Yes
  • ROR > 7.5%?: Yes

Yesterday (3/24) was a historical rise in the Market due to the assumed agreement to the Phase 3 Stimulus package in the Senate. I’m figuring there will be some pull back for a little profit (or less-loss) taking, and this position will be truly safe.

The Short-Strike price of 267 is near 23 (about 9.5%) points higher than the current price of 244. Therefore, for this position goes In-The-Money (ITM), the S&P500 will have to rise 123 points within the next seven trading days.

DIA: 220c/222.5c – Open 03/24/20 – Expires 04/3/20 – Max Gain = $50.00
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM=78.6%, ROR=24.6%, PC/Ratio=0.9, Max Loss=$199, IV%=69%

Annotation 2020-03-24 112023

Entry Rules for Vertical Bear Call Credit Spreads:

  • Expiration date set at <= 2 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?: Yes
  • Short strike price above the trend channel at expiration?: Yes
  • 9-Day SMA below 50-Day SMA?: Yes
  • ROR > 7.5%?: Yes

Today is the expected agreement to the Senate’s Trillion-Dollar stimulus bill. The Market popped about 2,000 points. But I’m betting that pop will deflate over the next few days.

Trades Currently Cooking

(As of 3/27/2020)

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%
Current Prob. OTM = 23%

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%

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Current Trades Closed

Many of these positions never made it to the “Trades Currently Cooking” section of this journal. They are short term (< 2 weeks) trades that were open last week and closed this week.

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%
At Close: Net profit = $43 at open -$188 at close – $2.08 fee = -147.08

I closed this position 16 days early. The Prob-OTM = 50.0%, but only when the Market jumped due to the presumption of passing a stimulus bill. This sale was an attempt to mitigate a $457 loss.

It was not until after I closed this position that I carefully looked at the metrics and saw that both long and short strikes were OTM. With 16 days to go and a rising market, this trade might have been saved, or at the least closed with a lower than a $147 loss. I need to learn to look before I leap.

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%
At Close: worthless. Net profit = $55 premium collected – $1.04 fee = $53.96

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%
At Close: worthless. Net profit = $60 premium collected – $1.04 fee = $58.96

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%
At Close: worthless. Net profit = $108 premium collected – $1.04 fee = $106.96

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%
At Close: worthless. Net profit = $60 premium collected – $1.04 fee = $58.96

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%
Expired worthless 3/27/20

This AAPL spread was a roll from a 1/29/20 Vertical Bull Put Credit Spread that went terribly wrong (just like all my other Bull Put spreads).

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Conclusion

All this week and most of last, the Market thrashed most every trading day. I’ve seen the DOW go up 1,000 points then down 2,000 points then up. It appears it is searching for a bottom but still unsure about all the negative news that is coming out.

The first two trades I made this week were at the then Market’s values, only to be in the thrashed up, and by the end of that day, they were at high-risk of ITM. Knowing that thrashing is now part of the Market’s characteristic, going forward, I need to add 2% or 3% to the Short-Strike and place a premium limit based on the current value. Let the Market thrash up and take the trade instead of taking the trade and then have the Market thrash up.

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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