Keep movin’, movin’, movin’,
though they’re disapproving,
Keep them dawwgies rollin’, Rawhide!

Don’t try to understand them,
Just rope and throw and brand ’em,
Soon we’ll be living high and wide!

– Frankie Laine (selected lyrics from “Rawhide”)

Commentary

Stampede

These lyrics can easily be applied to the Marketeers during the past three months. They certainly were disapproving, and they kept them dawwgies rolling!

A stampede is a wild headlong rush of frightened animals. And if I find myself in a stampede, the only thing I can do is duck and hope not to get trampled.

But trampled I did get.

At the start of the Covid-Crash (mid-February), most all Marketeers believed that the Markets’ devastation would be like a hand grenade thrown in a foxhole. Nothing would be safe, and nothing would be spared. So the frightened, crowd-crazed Marketeers ran like a startled herd for the nearest exit.

Many companies have been (and will be) directly damaged due to our country’s overreaction to the pandemic’s mitigation efforts. Cruise line companies like Carnival Corporation had to park all 104 of their ships. They continue to pay for ship’s maintenance, crew support, port fees, insurance, etc. even though there is NO revenue. Airlines are close to the same situation, as well as movie theaters, hotels, and some restaurants. Millions of Americans will take a significant financial blow during this time. And a targeted reconstruction is going to take a while.

But I predict that the destruction of the U.S. economy will be much less than we feared. As we start to look back on the initial explosion, the analogy will be more like a precision bombing rather than a hand grenade. Specific market sectors are going to be decimated, but a surprisingly large number of other industries will be spared. Why?

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If this happened twenty years ago,
we would be looking at the start of the Next Great Depression.

First, I need to understand the Stock Markets values are not directly hinged to any publicly traded companies. As described in my “Rebooting the U.S. Economy” journal post, the Markets are a discounting apparatus that reflects what the Marketeers “thinks” a stock will do rather than what it has done. So, the knee-jerked panic that the Marketeers “thought” the hand grenade would inflict on the whole of the economy will ultimately be much less.

Those Market segments that were not damaged by the Coronavirus grenade will see the “V-shape” recovery as was discussed by President Trump.

Annotation 2020-04-29 083352

As an example, MSFT was at its 52-weeks high when the Covid-Crash started the pandemic stampede. The Marketeers holding MSFT ran with the herd, and by the time it hit bottom one month later, MSFT lost nearly a third of its market value.

Once the stampede petered out, the Marketeers started to evaluate the individual companies for long-term damages. As it turns out, Microsoft’s services were in higher demand during the world-wide lockdown and therefore did not sustain any structural losses. As a result of the renew examination, MSFT started a V-Shape recovery.

Those segments that were severely damaged (leisure travel-related companies such as Carnival Corporation and related supply chain) may take years to rebuild.

Quite a lot of individual companies will fall in the same situation as Microsoft. When the Marketeers get around to carefully reevaluating different companies, many will quickly regain their market value as it was before the pandemic. Other companies will be in for a hard slog.

But fool me not! I’m expecting an onslaught of bankruptcies and revenue warnings over the next few months. Companies like Microsoft (that rebounded fast) will have plenty of opportunities to digest the broader damage that the pandemic will continue to have on their revenue stream and supply chain.

Collectively, I see a systematic reevaluation of the U.S. economy over the next three months. I will then expect the broader Markets to pull back from their April’s high, but counter-balanced by a reemployment boom as America returns to work.

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I am bullish on the Markets but bearish on the economy.

It is reasonable to project that after a postmortem evaluation of this time, we will see that this pandemic crisis did not inflict the magnitude of destruction on our economy as we initially feared. We will see that the majority of the damage was self-inflicted political fear-mongering. President Trump was correct when he feared there would be greater damage from the pandemic meditation efforts than from the pandemic itself.

As Rawhide’s lyrics suggest, I will not understand them, just rope and throw and brand them, and soon I’ll be living high and wide!

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This Week’s Market Sentiment

(As of 04/27/2020)

VIX – Broad Market Volatility:

VIX = 9-Day SMA stayed mostly flat at 40, from 46 last week.

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 of how fast it can get there.

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

Annotation 2020-04-26 073326
1-Year CBOE Market Volatility Index

The VIX started this week at 35%, dropping below the 9-Day SMA and a far drop from a peak of 83% back in March. The 9-Day SMA has also fallen below the 50-day SMA.

35% VIX is still historically high, but the falling value suggests a continued lessening of overall concern on the Markets’ mangling. But the high VIX continues to translate into higher thrashing. It also indicates that, generally, the premiums will continue to be higher this week than they were before the crash.

Put/Call Ratio:

9-day SMA (all OCC options): stayed flat at .82 from .87 last week.

Put Options are frequently used as protections against existing investments falling. When the ratio between Put Options bought vs. Call Options bought is 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.

Annotation 2020-04-26 073326PCR2
4-Months Put/Call Ratio for all OCC Options

The current Put/Call Ratio rose a little during the last half of last week, but the  9-day still finished the week lower than it began. This indicator is probably in the zone where it will not provide much insight one way or the other in then Markets direction.

Consumer Sentiment Index (CSI):

Annotation 2020-04-26 073326PCSI

Last week, the CSI eked up a smidgen from 71.0 to 71.8. But in the weeks ahead, with several states gradually opening back up, many of those who lost their jobs due to the kneejerk “shelter-in-place” overreaction will be able to reclaim them. The rate of rebound for the CSI will depend just on how fast we can get back on track.

Market Indexes:

DOW 23,775 – Down 1.9% from 24,242 last week.
S&P 2,837 – Down 1.3% from 2,875 last week.

The S&P 500 is a stock market index that tracks 500 of the largest companies in the U.S. This index represents about 80% of all the capitalization for the country. The S&P is widely considered the best indicator on how all the U.S. markets are doing.

Annotation 2020-04-26 073326PSPX
4-Months S&P 500 INDEX (ETF SPX)

The week’s Markets’ movement of 1-2% up then 1-2% down, is illustrating the internal thrashing that the VIX is suggesting. But just as the VIX is falling, the magnitude of the thrashing is also falling.

Geopolitical tree-shakers are:

  • Mounting political and economical pressure to restart our economic engines
  • Earnings seasons continues but is having marginal effects – yet
  • Over 26 million Americans lost their jobs due to the Shelter-in-Place orders
  • Election year politics continue to exacerbate COVID-19 fears
  • Hopeful news on Coronavirus vaccines and treatments
  • Oil gets a major bounce back but still way below sustainable production price.

My sentiment for this coming week:

Of the big-four indicators above, two of them (P/C Ratio and the Broader Markets) are  still demonstrating a bullish trend over the last five 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 bankruptcy, and the huge debt that will be amassed will but a weight on any recovery. I do not expect my 401K will be back to what it was by years end. 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.

For this week:

With the VIX in the mid-30s and the Put/Call ratio slightly rising, I will assume the thrashing will still be a dynamic for this week. Although the size of the thrashing is getting smaller, in a sideways or rising market there will be a good possibility that trades could fail at the last minute.

There is an indication that the Markets may start to trek sideways as the Marketeers start to evaluate individual companies. So low probability trades (high Return on Risk) may be more risky than desire. Tread lightly…

This week, I will focus on:

  1. Need to reclaim earlier losses, set minimum ROR for Credit spreads > 40%
  2. Limit the number of new trades and keep the week’s total dollar risk < $500
  3. If I start to gravitate back to Bull Credit spreads, keep the max trade risks < $300
  4. Focus on short to mid-term trades:  2-3 weeks.
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Profit and Loss Statement

(As of 05/1/2020)

YearMonthWeek #
2020Apr18
Beginning Account Balance$9,000.$5,417.30$3,940.51
Deposits (Div. & Int.)$38.41$0.03$0.03
Withdraws (paycheck)-$1,125.24-$250.00$0.00
Premiums on Open$1,022.00-$223.00$142.00
Premiums on Close-$4,786.00-$845.00$0.00
Fees Paid (total)-$68.75-$18.91-$2.12
Ending Account Balance $4,080.42$4,080.42$4,080.42
Total Gain/Loss-$4,919.58-$1,336.88$138.91
Return On RiskN/A -20.1%3.5%
Return On Capital -42.6%N/AN/A

Realized Profit by Strategy

Year Month Week #
2020 Apr 18
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 $0.
Icon Condors $0. $0. $0.
Cover Calls
Total -$3,756.46 -$757.88 $0.
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Schedule for this Week

Goals for this week: (04/27/20 – 05/01/20) (Week 18)

  • Max technical dollars at risk (new trades) = $500.
  • Max dollar risk per trade (new trades) = $500
  • 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 $200.00?:
  • 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?:
  • Current ETF price within the bottom 1/2 of Bull 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 >= 85%?:
  • Dollar risk set at or below $200?:
  • 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 <= 3 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 (<3-weeks)
    • Bear Debit Spreads: May 15 (<3-weeks)
    • Bull Credit Spreads: May 22 (<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 05/01/2020:)

Spread Count Summary:

Year Month Week #
2020 Apr 18
Vertical Bull Put Credit Spread 22 2 2
Vertical Bear Call Credit Spread 12 3 0
Vertical Bull Put Debit Spread 0 0 0
Vertical Bull Call Debit Spread 7 4 0
Iron Condor 0 0 0
Total 41 9 2

Current Dollars at Risk:

Year Month Week #
2020 Apr 18
Vertical Bull Put Credit Spread $258. $258. $258.
Vertical Bear Call Credit Spread $0. $0. $0.
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread $212. $212. $0.
Iron Condor $0 $0 $0
Total Dollar Risk $470. $470. $258.
Max Risk Allowed $4,500.00 $500.00
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New Trades Opened This Week

(04/27/2020 – 05/01/2020)

DIA: 242p/240p (1 contracts) – Open 04/30/20 – Expires 05/22/20 – Max Gain = $74.00
(Vertical Bull Put Creditt Spread)
At Open: Prob. OTM=52.3%, ROR=51.1%, PC/Ratio=1.4, Max Loss=$131.00, IV%=34%

Annotation 2020-04-30 090749

Entry Rules for Vertical Bull Put Credit Spreads:

  • Expiration date set at <= 4 weeks?: Yes (22 days)
  • Probability of OTM > 50%?: Yes (52.3%)
  • Dollar risk set at or below $200.00?: Yes ($131.00)
  • Put/Call ratio below 1.0 or flat to falling over that last 2-3 weeks?: Yes (flat)
  • The Trend-Channel is Bullish?: Yes (see chart)
  • Shortstrike price below the trend channel at expiration?: Yes (see chart)
  • Shortstrike price below 1 standard deviation from current price?:
  • Current ETF price within the bottom 1/2 of Bull Trend Channel?: No
  • 9-Day SMA above 50-Day SMA?: Yes (see chart)
  • ROR > 50%?: Yes (51.1%)

QQQ: 212p/210p (1 contracts) – Open 04/28/20 – Expires 05/22/20 – Max Gain = $74.00
(Vertical Bull Put Creditt Spread)
At Open: Prob. OTM=49.4%, ROR=58.4%, PC/Ratio=2.5, Max Loss=$125.00, IV%=34%

Annotation 2020-04-28 142743

Entry Rules for Vertical Bull Put Credit Spreads:

  • Expiration date set at <= 3 weeks?: Yes (24 days)
  • Probability of OTM > 50%?: No (49.4%)
  • Dollar risk set at or below $200.00?: Yes ($125.)
  • Put/Call ratio below 1.0 or flat to falling over that last 2-3 weeks?: No (2.4 and rising)
  • The Trend-Channel is Bullish?: Yes (see chart)
  • Shortstrike price below the trend channel at expiration?: Yes (see chart)
  • Shortstrike price below 1 standard deviation from current price?:
  • Current ETF price within the bottom 1/2 of Bull Trend Channel?: Yes (see chart)
  • 9-Day SMA above 50-Day SMA?: Yes (see chart)
  • ROR > 50%?: Yes (58.4%)

This is my first Vertical Bull Put Credit spread since Feburary. I’ve selected this strategy because 1) after a devastating Covid-Crash, the likelihood of the Markets rising is high, 2) I’ve been trading Bull Debit spreads with the same risk, but paying up front instead of collecting up front.

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Trades Currently Cooking

(As of 05/01/2020)

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%
Current: Prob. ITM=42.4%, PC/Ratio=0.3, IV%=24%

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%
Current: Prob. ITM=62.9%, PC/Ratio=1.5, IV%=30%

Current Trades Closed

(As of 05/01/2020)

No positions closed this week.

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Conclusion

As I am looking at this week’s new positions, I am considering a new, scaling exit strategy. I’m going to start submitting automatic trade triggers for all new working positions with a sliding scale of premiums.

I made a slight change to my Watch List. I added an “Exit Price” cell that will calculate what the exit price of that position should be based on the threshold percentage that I will set.

If the trade that I submitted has a 4-week expiration, then the first week’s exit price will be 50% of the max gain. If I can collect 50% in one week, then I have removed my dollar risk early and can make additional trades later.

In subsequent weeks, I need to analyze the performance of each position. If the probability of a successful trade is going up a pretty good clip, then in the second week, I could change the exit price to 60% of the max gain. And, by extension, 70% the 80% for the last two weeks.

On the flip side, if the position is not performing well, I will either leave the exit price at 50% or lower as I get closer to expiration.

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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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