Looks like I picked the wrong week to quit smoking.
Looks like I picked the wrong week to quit drinking.
Looks like I picked the wrong week to quit amphetamines.
 Looks like I picked the wrong week to quit sniffing glue.

– Air Traffic Controller, Steve McCroskey (Movie: Airplane!)

Commentary

Annotation 2020-03-30 081619a
Searching for the Markets’ bottom.

Over the past six weeks, most equities have been walloped by what the Marketeers can imagine being a perfect-storm crisis.  The worst-case scenario for a deadly pandemic, plus a costly Saudi-Russia oil war (targeting the US Shale Oil Industry).

At first panic, the marketeers predicted irreparable destruction to nearly all businesses. We then assumed our Bio-Scientists would fail us. Then we thought that our government would be unable to react. As a result, we thoroughly pulled the rug out from our 401Ks.

But after six-weeks of knee-knocking, panic-fatigue looked to be setting in. Last week we had consecutive up days, and the Markets ended the week higher than it began. We were all talking, “Markets bottom.” But could this momentary deep-breath be just a sugar reaction to the spending bill?

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The 2-trillion dollar spending bill “Coronavirus Aid, Relief, and Economic Security (CARES) Act” provided a confidence builder to individuals and a 4-trillion dollar leveraged loan system to keep small businesses afloat. Passing this bill was a huge physiological win for everyone. Question – “who thinks up these bill names and acronyms anyway?”

But even with the Feds estimating staggering job losses, the DOW thrashing 1,000 points up, then 1,000 down started to subside to hundreds up/down. A lot of the uncertainties that defined the beginning of this pandemic are beginning to coalesce into clearer thoughts, ideas, and hope. Slowly the Marketeers were starting to see a plan come together from various quarters of government. But those same quarters are also preparing Marketeers for more reasons to panic.

The Fed’s quickly came through with a multi-trillion-dollar spending bill (the CARES Act) – one of the likes we thought we would never see. They used the same hocus-pocus econ-math to pay for the bill that was excoriated when we were debating Medicare for All or the other high-dollar Socialist projects this past Fall. Remarkably, what was utter nonsince then – is “perfect” now.

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But more importantly, the spending bill came with a plan –

– Instead of laying off knowledge workers and risking not being able to restart your business when the pandemic has passed, we (the citizens of the US) will pay your knowledge workers full salaries for the duration of the imposed isolation period. Thus, when the pandemic ends, you can easily restart your shop with the same talent you always had.

Regardless of what I think of the machinations purportedly used to fund the spending bill, the inferred plan that it is pitching is brilliant. Simply put – instead of rebuilding the economy from a deep hole, we can wait it out and restart it not too far from where we left off.

Passing the spending bill allowed the Marketeers to take a deep breath for a week. But the actual reality of the COVID-19 pandemic and too-low oil prices has yet to be imagined. I’m pretty sure we still have a ways to go until we bottom-out.

Surely I can’t be serious! I am serious and don’t call me Shirley…

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This Week’s Market Sentiment

(As of 03/30/2020)

Broad Market Volatility:

VIX = 9-Day SMA shot up to 65.7 from 59.7 last week.

Annotation 2020-03-30 081619VIX
3-Year CBOE Market Volatility Index

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 knee-knocking Marketeers appear to be just a little less anxious at the end of last week than they were at the beginning.

Starting about 02/13/20 the VIX exploded to a 3-year high topping 66 (remembering that 15 is my threshold for strategy review). But sometime about 03/16, there seemed to be a bit of relaxing. Not to suggest that we are over the hump, but rather the Markets have given up so much that it may be exhausted.

Put/Call Ratio:

9-day SMA (all OCC options): dropped to .97 from 1.2 last week.

Annotation 2020-03-30 081619PCR

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 one could mean that Marketeers are protecting their investments. Below one could say they are accumulating.

The 9-Day SMA for the P/C ratio has dropped below the upward trend channel I have been tracking since the crash began. It has also just barely dropped below 1. This drop suggests to me that the Marketeers are starting to set up for a rebound.

Consumer Sentiment Index (CSI):
Annotation 2020-03-30 081619CSI

The just-released University of Michigan’s Consumer Sentiment Index continues to drop in March, 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 decrease dramatically while the US goes into a “social shutdown.”

The Consumer Sentiment is understandably at the bottom of the tank. With many of our small businesses shut down for what may be another month, it will be a long time before we start hitting the gas again. But large companies that are providing critical services are enabling those small businesses considered crucial to the supply chain to stay open. Therefore, stocks that have taken a profound beating on what was feared could happen, have now started to come back.

Market Indexes:

DOW 21,637 up 12% from 19,174 last week.
S&P 2,543 up 10% from 2,305 last week.

Annotation 2020-03-30 081619DIA

Last week the Markets recovered a significant amount of its losses from the week before. And as of this Monday morning, it seems to be resistance to giving up those gains.

The 9-Day SMA broke through the bear trend-channel. Again, this may be signaling that we are testing if we have reached the bottom.

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Geopolitical tree-shakers are:

  • Defense Production Act used to require GM to make ventilators
  • Historic 3.3 million Americans file for unemployment.
  • $2.2 Trillion dollar stimulus passed – more to come
  • Oil continues to fall from a record plunge – thanks to a Saudi-Russia’s price war
  • Election year politics continue to exacerbate COVID-19 fears

My sentiment for this coming week:

I’m suggesting that we are still far from until we hit bottom, but a bottom appears now to be within sight. The wide-spread devastation that was initially feared is starting to reforming as conceivably manageable. In last week’s post “Rebooting the US Economy,” I explained how the Markets would fall on uncertainty. Now The country, in general, appears to be coalescing around a plan which is starting to convince most Marketeers that we are now less “uncertain”.

For this week:

I believe that this week the markets will continue to thrash, but the severity will be in the low hundreds rather than thousands. If they are genuinely testing a crash bottom, then the Markets should close higher at the end of the week.

It is most likely, last week’s Markets bounce was a reaction based upon the confidence the Marketeers had on the implied economic plan presented by Congress.

The VIX has fallen some, and the IV for most of my watchlist has dropped. This drop in the volatility means that the available premiums will also be correspondingly lower.

This week, I will focus on:

  1. Loss mitigation
  2. Be cautious with Vertical Bear Call Credit Spreads
  3. Be cautious with low-risk Bull Call Debit Spreads
  4. No Bull Put Credit spreads.
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Profit and Loss Statement

(As of 04/03/2020)

 YearMonthWeek #
 2020Apr14
Beginning Account Balance$9,000.$5,607.39$5,607.39
Deposits (Div. & Int.)$38.36$0.$0.
Withdraws (paycheck)-$750.00$0.$0.
Realized Profits (closed spreads)-$2,953.81$3.15$4.20
Unrealized Profits (Open spreads)$116.00$74.00$116.00
Debit Positions (Open spreads) 1$58.00$0.-100.00
Fees Paid (total)-$54.19-$3.15.-$4.20
Ending Account Balance 2$5,454.36$5,681.39$5,549.39
 
Total Gain/Loss-$3,545.64$74.00-$58.00
Return On RiskN/A 1.3%-1.0%
Return On Capital -31.5%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 Apr 14
Vertical Bull Put Credit Spread -$3,400. $0. $0.
Vertical Bear Call Credit Spread $510. $0. $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 -$3,008. $0. $0.
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Schedule for this Week

Goals for this week: (03/30/20 – 04/03/20) (Week 14)

  • 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 above 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%?:

For Vertical Bull Call Debit Strategies:

  • Expiration date set at 5-6 weeks?:
  • Probability of ITM > 43%?:
  • Max dollar risk no more than 1/4 trade max?:
  • Put/Call ratio flat or dropping over the last 2-3 weeks?:
  • VIX% below 15% over the last 2-3 weeks?:
  • The Trend-Channel is Bullish?:
  • Short Strike price below the trend channel at expiration?:
  • 9-Day SMA above 50-Day SMA?:
  • Current ETF price above 9-Day SMA?:
  • ROR > 40%?:
  • Ex-Dividend Date beyond the contract’s expiration date.?:

(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 9 (2-weeks)
    • Bear Debit Spreads: Apr 24 (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 04/03/2020:)

Spread Count Summary:

  Year Month Week #
  2020 Apr 14
Vertical Bull Put Credit Spread 20 0 0
Vertical Bear Call Credit Spread 12 3 3
Vertical Bull Put Debit Spread 0 0 0
Vertical Bull Call Debit Spread 3 0 1
Iron Condor 0 0 0
 
Total 35 3 4

Current Dollars at Risk:

  Year Month Week #
  2020 Apr 14
Vertical Bull Put Credit Spread $0. $0. $0.
Vertical Bear Call Credit Spread $976. $0. $976.
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread $58. $0. $58.
Iron Condor $0 $0 $0
 
Total Dollar Risk $1,034. $0. $1,034.00
Max Risk Allowed $4,500.00   $1,000.00

Not keeping my eye on the ball resulted in putting $34 more at risk this week than my rules allowed. Bad Juju!

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New Trades Opened This Week

(03/30/2020 – 04/03/2020)

SPY: 269c/274c – Open 04/2/20 – Expires 04/9/20 – Max Gain = $48.00
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM=86.3%, ROR=10.4%, PC/Ratio=1.8, Max Loss=$451., IV%=58%

Annotation 2020-04-02 085645SPY

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?: Yes
  • 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 above 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

QQQ: 198c/201c – Open 04/2/20 – Expires 04/9/20 – Max Gain = $25.00
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM=90.5%, ROR=8.4%, PC/Ratio=1.0, Max Loss=$275., IV%=60%

Annotation 2020-04-02 085645QQQ

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 above 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

I redrew the trend-channel to be a mirror of the last bear channel.

AAPL: 262.5c/265c – Open 04/2/20 – Expires 04/9/20 – Max Gain = $26.00
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM=89.9%, ROR=11.2%, PC/Ratio=0.8, Max Loss=$223., IV%=61%

Annotation 2020-04-02 085645

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?: Yes
  • Short strike price at or just above 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

QQQ: 195c/196c – Open 03/31/20 – Expires 04/24/20 – Max Gain = $40.00
(Vertical Bull Call Debit Spread)
At Open: Prob. ITM=43.7%, ROR=69.5%, PC/Ratio=1.3, Max Loss=$59., IV%=57%

Annotation 2020-03-31 101957a

Entry Rules for Vertical Bull Call Debit Strategies:

  • Expiration date set at 5-6 weeks?: No
  • Probability of ITM > 43%?: Yes
  • Max dollar risk no more than 1/4 trade max?: Yes
  • Put/Call ratio flat or dropping over the last 2-3 weeks?: Yes
  • VIX% below 15% over the last 2-3 weeks?: No
  • The Trend-Channel is Bullish?: Yes
  • Short Strike price below the trend channel at expiration?: Yes
  • 9-Day SMA above 50-Day SMA?: No
  • Current ETF price above 9-Day SMA?: Yes
  • ROR > 40%?: Yes
  • Ex-Dividend Date beyond the contract’s expiration date.?: Yes

This trade is my first test for the Vertical Bull Call Debit Spread. I’m making this trade because I am “believing” that QQQ will close at least slightly by the end of the month than it is now.

The primary reason for the NO answers in the above checklist is because I am testing a bottom to the Markets’ crash. I’m anticipating a slow recovery for a short while, but I’m betting the Markets’ will close on Fridays slightly higher than the opens on the previous Mondays.

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Trades Currently Cooking

(As of 04/03/2020)

All long-term Bull Put positions were closed out at near Max-Loss (sad).

Short-term positions went from the “New Trades” section in one week then directly into the “Current Trades Closed” section (below) the next. So for this week, there are not positions that are currently cooking except for those that were open this week.

Current Trades Closed

(As of 04/03/2020)

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%
At Close: Net profit = $47 at open – $370 at close – $2.10 fee = -$325.10

Looking back on the open statement for the above position (beginning of March), I recorded that opening this trade was against the guidelines I set for that week. But I was pretty sure at that time that the Markets were just in a correction. This proves to me that emotion has no place in Options Trading – forehead slap!

This position is the last of the Vertical Bull Put Credit Spreads that I had cooking. The long-strike (260) is still over 5% above the current price of SPY, with eight trading days remaining. The Markets are steadily moving down, so I feel I have no hope of coming closet to the long-strike. Closing out at a $325 loss is better than the $452 max loss I will most likely have if I waited to expiration.

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%
At Close: Net profit = $100 at open (expired worthless)  – $1.05 fee = $98.95

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%
At Close: Net profit = $114 at open (expired worthless)  – $1.05 fee = $112.95

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%
At Close: Net profit = $55 at open (expired worthless)  – $1.05 fee = $53.95

DIA: 220c/222.5c – Open 03/24/20 – Closed 03/30/20 – 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%
At Close: Net profit = $50 at open -$130 at close – $2.08 fee = -82.08

The above position is the first Bear Call Credit Spread to fail. I’m taking this as a sign that the Markets’ drop may be turning around.

Updated 4/2/20: DIA was well below 220 (209) as of this morning. This position would have succeeded and I would have made $50 – instead of losing $82. My thinking that we may have reached Markets bottom appears to be mistaken.

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Conclusion

At the beginning of this week, I was starting to believe that the Markets have mostly found a bottom. I knew there would be other bad days to come, but the degree of thrashing had lessened, and last week there were more up days than down.

I tested one low-risk Bull Debit Call spreads this week because I was confident that once the VIX drops dramatically and the Put/Call Ratio gets below one, then we would begin the methodically slog up. I am now pretty sure that will fail.

My belief in the Markets bottom was emotional (wishful thinking) and did not keep my eye on the empirical data. Unemployment will continue to skyrocket, the majority of public companies will not make their dividends, and general fear of a catastrophic pandemic is just starting.

Clearly, I need to keep looking for the Markets’ bottom.

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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

Options Trades by Damocles
Options Trades by Damocles
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