“People of Earth, your attention, please.
As you will no doubt be aware, the plans for the
development of the outlying regions of the Galaxy require
the building of a hyperspatial express route through your star system,
and regrettably, your planet is one of those scheduled for demolition.
The process will take slightly less than two of your Earth minutes.
Thank you.”

– Prostetnic Vogon Jeltz (Movie: The Hitchhiker’s Guide to the Galaxy)

Commentary

The Hitchhiker's Guide to Options Trading

Being stuck at home these days, I am watching a lot more crazy movies. Just the other day, I had the pleasure to rewatch one of my old classic favorites: “The Hitchhiker Guide to the Galaxy.” It later dawned on me of the similarities between the Vogons from the movie and the US’ efforts to manage the Coronavirus pandemic.

“Vogons are one of the most unpleasant races in the Galaxy. Not evil, but bad-tempered, bureaucratic, officious, and callous.” – Narrator from the movie.

Whenever I watch Dr. Fauci, Dr. Redfield, or other doctors talk to the TV audience, they remind me of Prostetnic Vogon Jeltz’s announcement to the people of earth. I always hear a very officious: “We really don’t know…” “it is unclear…” “we need first to do controlled clinical trials…” “we need to check the models…” “in the absents of facts, let’s give 12-18 months…” I keep expecting to hear, “Apathetic bloody planet. I’ve no sympathy at all.”

Annotation 2020-04-14 103126a

After watching several Coronavirus task force updates, I would get the impression that our efforts to mitigate the pandemic would NEVER end. I found a new sympathetic appreciation for Marvin – the manic-depressive robot from the movie.

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So what if the Vogons were also in charge of restarting the economy?

A typical Vogonian response to reopening any local business could be: we need to submit the plan, “signed in triplicate, sent in, sent back, queried, lost, found, subjected to public inquiry, lost again, and finally buried in soft peat for three months and recycled as firefighters.”

It appears to me that because we mostly followed the advice of the Vogons on the President’s Task Force, we overreacted in the breath of the COVID-19 mitigation efforts. Sadly but true, many major metropolitans were incompetently unprepared for such an event, resulting in significantly disproportionate results. But the big government’s broad-brush approach to bureaucratically controlling the spread of the virus did a lot of unnecessary damage to many communities’ local economies.

Annotation 2020-04-16 075818

Another eerie similarity to “The Hitchhiker Guide to the Galaxy” is the astonishing number of State Governors whose names should have the aka of Zaphod Beeblebrox – a political figure that has “no power whatsoever and merely requires the incumbent to attract attention, so no one wonders who’s really in charge.” A role that several of our state Governors have demonstrated that they are ideally suited.

This week’s commentary is not so much on my Options Trading performance but the tenuous state of our economy due to the disarray in managing the Coronavirus pandemic. A Vogonian approach to rebooting the economy can be equally destructive as we attempted to control the pandemic. I do not doubt that when the postmortem analysis is done on this period, it will infer that we gave the scientist too much rope.

Until then… I’ll continue to Trade-Trudge with my towel in hand.

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This Week’s Market Sentiment

(As of 04/13/2020)

VIX – Broad Market Volatility:

VIX = 9-Day SMA stayed mostly flat at 43, from 44 last week.

Annotation 2020-04-12 092139VIX
3-Year CBOE Market Volatility Index

Last week the VIX ended at 41.5. This still remains historically high and still continues to show that the Marketeers are very unsure as to the Markets’ direction for this week. But the notable psychological point is is that the actual VIX has fallen below the 9-Day SMA, confirming that we are moving in the right direction.

Put/Call Ratio:

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

Annotation 2020-04-12 092139PCR
Put/Call Ratio for all OCC Options

Put Options are frequently used as protections against existing investments falling. But a declining Put/Call Ratio continues to signal that the Marketeers are not that fearful of their exiting portfolio. Either they have transferred most of their assets into cash (therefore having nothing to lose), or they are confident that the purchases they made over the past couple of weeks are safe from another meltdown.

The 9-Day SMA for the P/C ratio has dropped below the top edge of the downward trend channel, and the actual P/C ratio has dropped below the 50-Day SMA. Both of these are suggesting that there is not too much worry over their existing investments.

Consumer Sentiment Index

Annotation 2020-04-12 092139CSI

This week’s University of Michigan’s Consumer Sentiment Index continues to nosedive, 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.”

This CSI chart suggests that we, the people, will be less inclined to make purchases in the near term. If I have lost my job due to Coronavirus related layoffs or my business has lost all my growth momentum after being shut down for months, I will be much less likely to buy that new TV, car, or home. Even if we reopen stores, restaurants, or theaters, there will be a huge reluctance for people to venture back into large crowds for a very long time. Personal spending in the near term will be stifled. And it is the massive consumer spending that fuels our economic engine.

Market Indexes:

DOW 23,719 – up 12.6% from 21,053 last week.
S&P 2,790 – up 12.1% from 2,489 last week.

Annotation 2020-04-12 092139DIA

Over the last 4 trading weeks, the DOW’s activity looked like this: Down 4,000, up 2,500, down 582 then up 2,400. This is the definition of thrashing, and the amplitude of the thrashing far exceeds the risk factors I set for my self.

Geopolitical tree-shakers are:

  • Earnings seasons starts this week with banks and industrials
  • Hopeful news on Coronavirus vaccines and treatments
  • A finalized OPEC+ oil production cut deal
  • Election year politics continue to exacerbate COVID-19 fears

My sentiment for this coming week:

Last week, the Broader Markets bounced back up over 13%. However, my confidence that the Markets will continue to find a new bottom still holds. I fully expect the Markets to continue to thrash in the high-hundreds.

Earnings seasons begin this week with reports from banks and industrials as starters. These first peek at just how much corporate revenue has vaporized will give us a hint into how long the slog will take for the Market’s restoration.

At Markets’ open on Monday morning, the Put/Call Ratio for IWM and QQQ jumped. The other ETFs on my watch list remained flat. This signals to me that most of the early trading Marketeers are signaling tech-related Markets will take a hit with the earnings reporting starting this week.

For this week:

I believe that this week the markets will continue to thrash, but the severity will be in the mid to high hundreds rather than thousands. If they are genuinely testing a bottom, then the Markets should close higher at the end of the week – but I’m pretty pessimistic on this projection.

If we have hit bottom, the possibility of Vertical Bull Put Credit Spreads may creep back into the mix. But I will still reframe for partaking.

The VIX has fallen some, and the Implied Volatility for most of my watchlist has dropped. This drop in the IV 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 Spreads)
  2. Limit the number of new trades and keep the week’s dollar risk below $300
  3. Keep to short-term trades – < 2 weeks. With the high VIX and thrashing still occurring, there’s no telling which way the market will end.
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Profit and Loss Statement

(As of 04/017/2020)

 YearMonthWeek #
 2020Apr16
Beginning Account Balance$9,000.$5,607.39$4,236.90
Deposits (Div. & Int.)$38.36$0.$0.
Withdraws (paycheck)-$875.24$0.$0.
Realized Profits (closed spreads)-$3,584.95-$607.00$0.
Unrealized Profits (Open spreads)$126.00$126.00$126.00
Debit Positions (Open spreads) 1-$255.07-$250.20-$248.95
Fees Paid (total)-$58.23-$6.14-$1.05
Ending Account Balance 2$4,609.11$4,871.10$4,112.90
 
Total Gain/Loss-$4,609.11-$736.29-$124.00
Return On RiskN/A -13.1%-2.9%
Return On Capital -41.9%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.

Realized Profit by Strategy

  Year Month Week #
  2020 Apr 16
Vertical Bull Put Credit Spread -$3,435.30. $0. $0.
Vertical Bear Call Credit Spread -$182.86 -$681.34 $0.
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread -$25.02 $69.25 $0.
Icon Condors $0. $0. $0.
Cover Calls
Total -$3,643.18 -$612.09 $0.
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Schedule for this Week

Goals for this week: (04/13/20 – 04/17/20) (Week 16)

  • Max technical dollars at risk (new trades) = $300.
  • Max dollar risk per trade (new trades) = $300
  • Update Trading Log as trades occurs

Entry Rules for Vertical Bull Put Credit Spreads:

  • Expiration date set at <= 2 weeks?:
  • Probability of OTM > 80%?:
  • Dollar risk set at or below $0?: (no trades this week)
  • 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 85%?:
  • Dollar risk set at or below $300?:
  • Put/Call ratio above 1.0 or rising?:
  • VIX% above 45?:
  • The short-term Trend-Channel Bearish?:
  • Current ETF price near the top or above the trend channel?:
  • Short-strike price near 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 <= 2 weeks?:
  • Probability of ITM > 40%?:
  • Dollar risk set at or below $300?:
  • 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%?:
  • Exit threshold = 50% of max gain:
  • 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 24 (<2-weeks)
    • Bear Debit Spreads: Apr 24 (<2-weeks)
    • Bull Credit Spreads: Apr 24 (<2-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 is accepted, 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 04/17/2020:)

Spread Count Summary:

  Year Month Week #
  2020 Apr 16
Vertical Bull Put Credit Spread 20 0 0
Vertical Bear Call Credit Spread 12 3 0
Vertical Bull Put Debit Spread 0 0 0
Vertical Bull Call Debit Spread 5 2 1
Iron Condor 0 0 0
 
Total 37 5 1

Current Dollars at Risk:

  Year Month Week #
  2020 Apr 16
Vertical Bull Put Credit Spread $0. $0. $0.
Vertical Bear Call Credit Spread $0. $0. $0.
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread $124. $124. $124.
Iron Condor $0 $0 $0
 
Total Dollar Risk $124. $0. $124.
Max Risk Allowed $4,500.00   $300.00
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New Trades Opened This Week

(04/13/2020 – 04/17/2020)

AAPL: 285c/287.5c – Open 04/15/20 – Expires 04/24/20 – Max Gain = $124.00
(Vertical Bull Call Debit Spread)
At Open: Prob. ITM=41.4%, ROR=99.2%, PC/Ratio=0.7, Max Loss=$125., IV%=35%

Annotation 2020-04-15 144634

Entry Rules:

  • Expiration date set at <= 2 weeks?: Yes
  • Probability of ITM > 40%?: Yes
  • Dollar risk set at or below $300?: Yes
  • Put/Call ratio flat or dropping over the last 2-3 weeks?: Yes
  • VIX% below 15% over the last 2-3 weeks?:
  • The Trend-Channel is Bullish?: Yes
  • Short-Strike price below the trend channel at expiration?: No
  • 9-Day SMA above 50-Day SMA?: No
  • Current ETF price above 9-Day SMA?: Yes
  • ROR > 40%?: Yes
  • Exit threshold = 50% of max gain: Yes
  • Ex-Dividend Date beyond the contract’s expiration date.?: No

Apple has been trading well over the past three weeks. It took a severe beating in March and appeared to be rebounding from an unjust low. The “no’s” from the Entry Rules above are mainly because of the thrashing but rebounding stock prices.

I made this trade today primarily because the broader markets took a beating this morning when the US Retail Sales numbers were released to be the largest drop in history (-8.7% in March). The DOW tumbled 455, and AAPL pulled back .9%. So I’m hoping I’m buying this spread at a low.

Since I have a long way to make up the losses so far, I need to take a little extra risk. At this point, all I’m betting is that Apple will close higher in 9 days than it is right now.

Trades Currently Cooking

(As of 04/17/2020)

Trades that were opened last week were closed this week. At this time, I do not have active trades that are “cooking”.

Current Trades Closed

(As of 04/17/2020)

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%
At Close: Net profit = -$127.00 at open + $195.00 at close  – $2.10 fee = $65.90

This position was closed 3 days early when the ROR hit 55%. With the Markets still thrashing +/- multiple hundreds per day, I did not want to take the chance of a downturn within the last 1 or 2 days before expiration.

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%
At Close: Net profit = -$58.00 at open + $87.00 at close  – $2.11 fee = $26.89

This position was closed 10 days early when the ROR hit 65%. With the Markets still thrashing +/- multiple hundreds per day, I changed my sell-signal threshold to 65%.

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Conclusion

Because of all Markets’ continuing thrashing, I set an exit rule for Vertical Bull Call Debit Spreads to sell when I reached between 50% to 65% of max-gain. This allows me to claim a profit without worrying if a significant Market downturn will take the profit away.

This week I only entered one trade.

(As a note, all three of the Vertical Bull Call Debit Spreads that I opened during the first week of April had > 50% profit during the second week. But from then to expiration, the Markets fell, and they all became steep losses by the time I sold them.)

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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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