A person is smart.
People are dumb, panicky, dangerous animals.
— Agent K (Movie: Men in Black)

Commentary

Annotation 2020-04-19 071459P

Now that we are seeing the mortality models for the COVID-19 pandemic revised significantly downward, now that our eco-politicians are no longer predicting the new Great Depression, now that many States are aggressively scheduling the reopening of businesses and, now that the Markets are starting to pick up – fear is now being replaced with frustration. We are all itchy to get back to normal!

The one sign that I have been on the lookout (to let me know we have turned the pandemic corner) is when the prime news organizations start to change their headlines from the “big-one” hysterics to “who can we blame.” This shift appears to have started, so I feel much better.

Now that we are no longer wringing our hands over our pending doom, what will the yellow journalists from our national news organization do now? They know that they need to keep the Fret-Level at DEFCON 1 through election day. And since it appears that they are changing talking points to the blame game, I see this as a sure sign we turned that COVID-Crash corner.

I do agree with Agent K. “What would go good with this – would be silence.

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Did we hit the Markets’ COVID-Crash bottom last month?

In one month (Feb 20 to Mar 20), the DOW Jones went from 29,299 to 19,377. That is a drop of nearly 10,000 points or a third of the market’s value in just 30 days. But during the following 30 days, the DOW bounced back to 24,023, regaining almost half of what was lost. This is a particle “V-shape” rebound from the Marketeers’ initial overreaction. But for the longer-term economic damage the pandemic’s overreaction caused, no way will our economy realize a full V-shape rebound.

I have no doubt that we will reclaim all that we lost and then more, but how long it will take and what does it look like from here is unknowable. I believe that once the hysteria from the pandemic is put aside, the Marketeer’s will start evaluating the individual damage to the broad base sectors and then start a slow slog positive. Once the November election is behind us, then the slog should turn into a jog.

What would go good with this – would be silence.

One commodity to watch as a measure of recovery.

When the world’s governments decided to force “shelter in place” for most of their population, economic activity came to a screeching halt. Planes are not flying, boats are not sailing, factories are not churning. And without the massive consumption of energy to make life happen, the global demand of oil collapsed, and now the glut of oversupply has driven the price of oil to $0.

But as we start driving, flying, and buying, the energy required to satisfy renewed demands will require oil, and that will start pushing the price of oil higher. So as I watch the WTI (stock ticker “CL=F”) move up, then I know that we are getting our engines started.

What would go good with this – would be a lot more noise.

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This Week’s Market Sentiment

(As of 04/20/2020)

Broad Market Volatility:

VIX = 9-Day SMA stayed mostly flat at 46, from 43 last week.

Annotation 2020-04-19 071459VIX
3-Year CBOE Market Volatility Index

The VIX is an emotion-gauge for the general investing population. It is thought to be driven by the Marketeers’ current level of greed or fear. As a one-month forward-looking volatility matrix, it is not designed to tell us which direction the market will be going, but more on how fast it can get there.

A VIX of 15% is assumed to be a market at rest. And since the intrinsic nature of the Stock Market is to move up, a VIX closer to 15% will have an innate tendency to rise.

This week is beginning with the 9-Day SMA still rising (because it is averaging the past 9-days). But as of the close of last Friday, the VIX is making a beeline back down to something more reasonable. A current VIX of 38% is still too high to say we have reached a market bottom. But it does suggest the Marketeers are not nearly as fearful as when the crash started.

Put/Call Ratio:

9-day SMA (all OCC options): dropped to .87 from .97 last week.

Annotation 2020-04-19 071459PCR4
4-Month Put/Call Ratio for all OCC Options

Put Options are frequently used as protections against existing investments falling. When the ratio between Put Options bought vs. Call Options bought are above 1, then this is an indicator that the Marketeers are buying insurance to what they may see as declining Markets. Conversely, when the Put/Call Ratio falls below 1, then there is a general sense that the broader Markets will increase, and more investors are buying than selling.

Friday’s P/C Ratio is below the 9-Day P/C Ratio’s SMA, which is below the 50-Day. This pattern is now holding in a six-week trend that suggests that we may be back in a Bull Market.

Annotation 2020-04-19 071459PCR12
12-Month Put/Call Ratio for all OCC Options

The one year P/C Ratio chart is showing the current ratio to be not far above a consistent Bull Market level. It still needs to drop more before we can feel confident that we are back in a positive trend.

Consumer Sentiment Index (CSI):
Annotation 2020-04-12 092139CSI

Last week, we showed that the consumer sentiment tanked to 71 in April. This reading is the lowest since 2011, and the monthly decline is the biggest in history. This fall suggests that there is no expectation of increased spending soon.

This dramatic drop in confidence was recorded during a time when the news was suggesting a summer-long or a year-long lockdown. But with the recent moves to reopen most of the economy by the end of April, I’ll expect this to rise almost as fast as it fell.

Market Indexes:

DOW 24,242 – up 2% from 23,719 last week.
S&P 2,875 – up 3% from 2,790 last week.

Annotation 2020-04-19 071459PDIA

The DOW has been up two weeks in a row. As as we see in the above chart’s trend channel, the last month has been bullish. The current day DOW closing has been above the 9-Day SMA for the past two weeks and is about to break through the trend channel’s upper barrier.

Geopolitical tree-shakers are:

  • Activity on “reopening” providing economic hope
  • Earnings seasons continues but is having marginal effects
  • Over 21 million filed for unemployment during the past 4 weeks
  • Election year politics continue to exacerbate COVID-19 fears
  • Hopeful news on Coronavirus vaccines and treatments
  • Oil gets hammered to the lowest price ever recorded
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My sentiment for this coming week:

Of the big-four indicators above, two of them (P/C Ratio and the Broader Markets) are demonstrating a Bullish trend for nearly six weeks. But the VIX is still suggesting that we are still thrashing in large jumps. So even though the Markets are making small positive gains, it is doing so in big jolts.

The CSI is more telling on how fast we can expect to return to normal. The self-inflicted loss of jobs, expected jumps in small businesses that bankrupt, and the huge debt that was amassed will but a weight on any recovery. I do not expect my 401K will be back to what it was before this year is over. But I do expect a steady rebound from here, and I should be able to recover my Options Trading losses before the end of the year.

One observation: The weekly explosion for unemployment fundamentally supports the CSI’s nosedive over the last month. I have several close friends and relatives that have been furloughed during the lockdown and are counted in the unemployment numbers. But as of this week, almost all of them have been recalled. Some started back working this week, and others are scheduled to begin within a week or two. So the exponential grown in the unemployment count needs to be offset by what is NOT being reported – those who have gone back to work.

For this week:

Any talks about a new Bull Market should be taken with a grain of salt. One month hardly a trend makes. The self-inflicted damage we did to small businesses and those low to mid skilled workers will take a long time to repair. So, for this week, I’m not too keen on making large risk trades, even with high probabilities.

Also, the continued high thrashing of the market can easily make a short term gain, negative at the last minute. So I’m thinking about extending my “cooking time” to another week or two longer.

My strategy for this week is to keep my total dollar risk low by entering just Call Debit spreads that expire 3 to 4 weeks out. I will set my exit strategy to 50%-65% of maximum gain. I will also consider a low-risk ATM Vertical Bull Put Credit Spread.

This week, I will focus on:

  1. Limit the number of new trades and keep the week’s dollar risk below $500
  2. Focus on short to mid-term trades –  3 – 4 weeks.
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Profit and Loss Statement

(As of 04/24/2020)

 YearMonthWeek #
 2020Apr17
Beginning Account Balance$9,000.$5,417.30$4,391.72
Deposits (Div. & Int.)$38.36$0.$0.
Withdraws (paycheck)-$1,125.34-$250.00-$250.00
Premiums on Open$880.00-$365.00-$212.00
Premiums on Close-$4,786.00-$845.00$16.00
    
Fees Paid (total)-$66.59-$16.75-$5.17
Ending Account Balance $3,940.55$3,940.55$3,940.55
 
Total Gain/Loss-$5,059.45-$1,476.75-$451.17
Return On RiskN/A -22.6%-4.6%
Return On Capital -44.1%N/AN/A

Realized Profit by Strategy

  Year Month Week #
  2020 Apr 17
Vertical Bull Put Credit Spread -$3,435.18 -$325.13 $0.
Vertical Bear Call Credit Spread -$182.79 -$415.42 $0.
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread -$138.49 -$17.33 -$110.09
Icon Condors $0. $0. $0.
Cover Calls
Total -$3,756.46 -$757.88 -$110.09
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Schedule for this Week

Goals for this week: (04/20/20 – 04/24/20) (Week 17)

  • Max technical dollars at risk (new trades) = $500.
  • Max dollar risk per trade (new trades) = $150
  • Update Trading Log as trades occurs

Entry Rules for Vertical Bull Put Credit Spreads:

  • Expiration date set at <= 4 weeks?:
  • Probability of OTM > 50%?:
  • Dollar risk set at or below $150?:
  • Put/Call ratio below 1.0 or flat to falling over that last 2-3 weeks?:
  • The Trend-Channel is Bullish?:
  • Shortstrike price below the trend channel at expiration?:
  • Shortstrike price below 1 standard deviation from current price?: Not applicable
  • Current ETF price within the bottom 3/4 of the trend channel?:
  • 9-Day SMA above 50-Day SMA?:
  • ROR > 50%?:

Entry Rules for Vertical Bear Call Credit Spreads:

  • Expiration date set at <= 4 weeks?:
  • Prob-OTM near or greater than 85%?:
  • Dollar risk set at or below $300?:
  • Put/Call ratio above 1.0 or rising?:
  • 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 <= 4 weeks?:
  • Probability of ITM > 40%?:
  • Dollar risk set at or below $150?:
  • Put/Call ratio flat or dropping 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 > 60%?:
  • Exit threshold = between 50% to 65% of max gain:
  • Ex-Dividend Date beyond the contract’s expiration date.?:

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: May 15 (<4-weeks)
    • Bear Debit Spreads: May 15 (<4-weeks)
    • Bull Credit Spreads: May 15 (<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 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 04/24/2020:)

Spread Count Summary:

  Year Month Week #
  2020 Apr 17
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 7 4 2
Iron Condor 0 0 0
 
Total 39 7 2

Current Dollars at Risk:

  Year Month Week #
  2020 Apr 17
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 $212. $212. $212.
Iron Condor $0 $0 $0
 
Total Dollar Risk $212. $212. $212.
Max Risk Allowed $4,500.00   $500.00

New Trades Opened This Week

(04/20/2020 – 04/24/2020)

TWTR: 29c/30c (2 contracts) – Open 04/23/20 – Expires 05/15/20 – Max Gain = $114.00
(Vertical Bull Call Debit Spread)
At Open: Prob. ITM=38.0%, ROR=112.8%, PC/Ratio=0.5, Max Loss=$94.00, IV%=41%

Annotation 2020-04-23 084104

For Vertical Bull Call Debit Strategies:

  • Expiration date set at <= 4 weeks?: Yes – 22 days
  • Probability of ITM > 40%?: No – 38%
  • Dollar risk set at or below $150?: Yes – $94.00
  • Put/Call ratio flat or dropping over the last 2-3 weeks?: Unknown
  • The Trend-Channel is Bullish?: Yes – see chart
  • Short-Strike price below the trend channel at expiration?: No but close – see chart
  • 9-Day SMA above 50-Day SMA?: No – coming off a market crash
  • Current ETF price above 9-Day SMA?: Yes – see chart
  • ROR > 60%?: Yes – 112.8%
  • Exit threshold = between 50% to 65% of max gain: Yes
  • Ex-Dividend Date beyond the contract’s expiration date.?: TWTR carries no dividends

Twitter was a last-minute review for a possible trade for this week.

I was looking for a stock/ETF that was caught up in the initial Markets panic (which nearly every stock was) but had a good chance at a consistent recovery. I figured that TWTR, like NFLX and MSFT, would have benefitted from increasing use during our stay-at-home state.

NFLX has a minimum Options Strike Width of 5, meaning that a spread position would carry a $500 max-loss risk. This risk was WAY more than I wanted at this time. MSFT likewise has a minimum OSW of 2.5 ($250 max-loss risk), and that was more than I wanted.

TWTR has a OSW of only 1, plus the prob-ITM was lower than my minimum threshold, I bought this position for .46 x 2 contracts = $92.00 debit – (.50 per leg trading fee X 4 legs = -$2.00) = $94.00 as my max-loss risk.

SPY: 284c/285c – Open 04/20/20 – Expires 05/15/20 – Max Gain = $78.00
(Vertical Bull Call Debit Spread)
At Open: Prob. ITM=43.9%, ROR=63.9%, PC/Ratio=1.9, Max Loss=$122., IV%=40%

Annotation 2020-04-20 140835

For Vertical Bull Call Debit Strategies:

  • Expiration date set at <= 4 weeks?: Yes – 25 days
  • Probability of ITM > 40%?: Yes – 44%
  • Dollar risk set at or below $150?: Yes – $122.00
  • Put/Call ratio flat or dropping over the last 2-3 weeks?: Yes – Flat
  • The Trend-Channel is Bullish?: Yes – see chart
  • Short-Strike price below the trend channel at expiration?: Yes – see chart
  • 9-Day SMA above 50-Day SMA?: No – coming off a market crash
  • Current ETF price above 9-Day SMA?: Yes – see chart
  • ROR > 60%?: Yes – 64%
  • Exit threshold = between 50% to 65% of max gain: Yes
  • Ex-Dividend Date beyond the contract’s expiration date.?: Yes

This is my first position for the week with a 4-week expiration. When I submitted this trade request in the morning, the long-strike price was 2-strikes ITM. When this trade was accepted, the long-strike price was 2 strikes OTM. From the time I submitted the trade request and the time it was accepted, oil collapsed to negative price territory, and the Broader Market followed suit. – Timing is everything!

Trades Currently Cooking

(As of 04/24/2020)

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 04/24/2020)

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%
At Close: Net Loss = -$124.00 at open + $16.00 at close  – $2.09 fee = -$110.09

Apple was enjoying two weeks of solid gains when I entered this position. During the two days following the entry, AAPL dipped steadily until the weekend, when the total collapse in oil prices the broader Markets tumbling. Today, three days to expiration, the probability of ITM is 8.1%. No way can any leg of this position be ITM by then. I closed this trade at the end of the day Tuesday, hoping to claw back some time value.

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Conclusion

March and April were catastrophic months for my Options Trading efforts. The Markets’ tailspin sent all my pre-crash positions into max-loss. Now, after the first four months of the year, I pretty much cleared my position board. And, I am now near $5,000 in the hole. I now have eight months to make back the $5,000.

Making my P&L numbers look even worse, I’ve entered in four debit spreads this month. Debit spreads begin with max-loss, so I am adding these negatives to my current balance with the expectation of max-gain when they close next month.

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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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