He who is not courageous enough to take risks
will accomplish nothing in life.

– Muhammad Ali

Commentary

Choppy aftershocks are going to be the status quo after the epic 37% collapse of the DOW in less than six weeks. And like the Master of Disaster, these Markets thrashing is beating the hell out of my Options Trading activity.

“Market thrashing” is caused by ongoing high-volume of trading activity that fails to move the Markets’ needle in any direction. When Markets direction is unclear (or highly disputed by the Marketeers), we will see excessive volatility with significant rising then near proportionate falling in Markets’ values within a trading period – aka “thrashing.”

The thrashing of a couple of weeks ago saw the DOW rise then fall 1,000+ points within a day. Lately, those daily thrashings have mostly subsided to plus/minus hundreds of points. As the Markets’s anxiety begins to wane and volatility falls, the thrashing will be measured in trading weeks instead of trading days. And as the VIX continues to fall, the magnitude of the thrashing should taper significantly.

Is it a Problem?

The main problem with Markets thrashing is I will never know if the tail end signals a new trajectory or just a reaction to further indecision. My making Bears or Bulls Options Trading Strategy decisions will continue to be near impossible for the next few weeks. The fact that I put a thousand dollars betting on the bears last week may come back to maul me this week.

Eventually, the Broader Market thrashing will contract. The Marketeers will return to having disagreements over individual companies instead of the US economy as a whole. As the US businesses begin to get back their footing, there will be a new start to a new Bull Market and new predictable Market trends. Then it’s back to the good times.

We still need to wait to see just how much corporate revenues have disappeared during the last two months to formulate a meaningful trajectory. Many small businesses will never come back, but many new ventures will take its place. There are going to be many eco-stutter-starts, so I’m expecting the thrashing to continue for some time.

Ultimately, we’ll see the US economy once again “float like a butterfly and sting like a bee.”

This Week’s Market Sentiment

(As of 04/06/2020)

VIX – Broad Market Volatility:

9-Day SMA fell to 44 from 65.7 last week.

From a peak of about 83 a few weeks ago to 45 today, suggest that the Marketeers are starting to see the pandemic generated economic crises through less hysterical glasses. This drop is not at all a signal that we are over the hump, but the frantic nature of a collapsing marking appears to be giving away to the resignation of the sucky times ahead.

Put/Call Ratio:

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

Put Options are frequently used as protections against existing investments falling. But apparently, the Marketeers went bargain-buying at the end of March, and now they don’t need to purchase Puts to hedge their investments.

The 9-Day SMA for the P/C ratio has dropped below the upward trend channel of last week, so I revised the trend direction for this week to point down. The initial knee-jerk reaction we saw eight weeks ago seems to be relaxing.

Consumer Sentiment Index (CSI):

This week-old 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 21,053 – down 2.7% from 21,637 last week.
S&P 2,489 – down 2.1% from 2,543 last week.

Last week the Markets only loss 584 from the week before. Even though this is still a loss, it is not the thrashing loss that was expected.

My new trend chart is a slight adjustment from last week as I slid it over by a couple of weeks. But I am looking at this adjustment with a lot of skepticism. It is more likely that there will not be a trend to trade with until a couple more weeks.

Geopolitical tree-shakers are:

• 6 million people filed for unemployment – unemployment projected at 13%
• US deaths from COVID-19 tops 10,000
• Hopeful talks of promising vaccines and therapeutics are raising spirits
• New 1.5 trillion dollar stimulus bill being debated in congress
• Oil prices make a slight comeback on high-hopes of a Saudi-Russia production cut
• Election year politics continue to exacerbate COVID-19 fears

My sentiment for this coming week:

We are in the process of defining new trend-channels, but their directions are still mostly unknown. It’s going to take 6-weeks to 2-months to confirm any new trend’s trajectory. Until then, I believe it is going to be too much in flux to know which way.

Each trade needs to look at the mini-trend to get a hint on what strategy to use.

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 bottom, then the Markets should close higher at the end of the week.

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 (keep a close watch on existing Bear Credit Spreads)
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.

Profit and Loss Statement

(As of 04/06/2020)

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

Schedule for this Week

Goals for this week: (04/06/20 – 04/09/20) (Week 15)

• 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?:
• Shortstrike 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.

This Week’s Trade Activity

(As of 04/09/2020:)

Spread Count Summary:

Current Dollars at Risk:

New Trades Opened This Week

(04/06/2020 – 04/09/2020)

MSFT: 165c/167.5c – Open 04/08/20 – Expires 04/17/20 – Max Gain = $122.00
(Vertical Bull Call Debit Spread)
At Open: Prob. ITM=37.5%, ROR=95.3%, PC/Ratio=0.6, Max Loss=$128., IV%=37%

Entry Rules: Vertical Bull Call Debit Strategies:

• Expiration date set at 5-6 weeks?: No
• Probability of ITM > 43%?: No
• 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

There are several NOs on the Entry Rules for the following reasons:

• The 5-6 Weeks expiration range is being “rethunk” as a general practice. I’m in the process of deciding that having trades active for this long is putting too much at risk. Besides, if the Markets are in a moderate recovery, then I need to take advantage of short term gains to recoup my earlier losses.
• ITM of >43% presumed a 1-strike width trade. MSFT only has a strike-width of 2.5.
• A recovering VIX seems more relevant to a Bull Debit strategy than a low VIX.  
• 9-Day SMA above 50-Day SMA again seems less appropriate to a Market bounce.

This trade will be my one trade for this week. Because the Markets are in flux, I am putting only $128 at risk instead of $1,000. This decision to minimize risks seems prudent.

The MSFT trend-channel I’m looking at is a short 3-weeks. But this is the single consistent price movement during this time. I’m making a bet that Microsoft will continue to rise at least by 1.5% ($2.89) over the next 9 days.

Trades Currently Cooking

(As of 04/09/2020)

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%

Current Trades Closed

(As of 04/09/2020)

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%
At Close: Net profit = $48 at open – $333.00 at close  – $2.08 fee = -$287.08

I closed this position a day early as the Markets rallied this week towards max loss on these Bear Spreads. Any kind of rise on the final trading day (tomorrow) would have resulted in an exercise/assign of both sides of the spread for a max loss of $451.

My loss mitigation effort saved (guffaw) $451 potential max loss – $287.08 actual loss = $163.92 saved from being lost.

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%
At Close: Net profit = $25 at open – $216.00 at close  – $2.12 fee = -$193.12

I closed this position early as the Markets rallied this week towards max loss on these Bear Spreads. Any kind of rise on the final trading day (today) would have resulted in an exercise/assign of both sides of the spread for a max loss of $275.

My loss mitigation effort saved (guffaw) $275 potential max loss – $193.12 loss = $81.88 saved from being lost.

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%
At Close: Net profit = $26 at open – $200.00 at close  – $2.13 fee = -$176.13

I closed this position early as the Markets rallied this week towards max loss on these Bear Spreads. Any kind of rise on the final trading day (tomorrow) would have resulted in an exercise/assign of both sides of the spread for a max loss of $223.

My loss mitigation effort saved (guffaw) $223 potential max loss – $176.13 actual loss = $46.87 saved from being lost.

Conclusion

All three of my Vertical Bear Call Credit Spreads that I opened last week have failed spectacularly. These three positions carried a max loss risk of -$952. Applying some too-late loss mitigation, my actual loss for these three was -$681 (“sting like a bee!”)

Trade the Trend was the first and is the primary Options strategy that I have been hanging my hat on. But times like now, there are no trends to trade on.

This week I only engaged in one Vertical Bull Debit Call Spread. This spread has a max-loss risk of $128 (the price I paid) and a max-gain of $122 (which is pretty much the typical premium collected in a week). Technically, the only thing I’m betting on is that Microsoft will close $3 higher on Apr 17th that it was when I open the trade.

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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