Unbeknownst to all,
we have been preparing for the Coronavirus pandemic
for over 10 years…

– Damocles

Commentary

With the universal adoption of the Internet, we have unknowingly been evolving our economic infrastructure into an asocial, work-at-home online model. We no longer need to live face-to-face. This almost sounds like the basic premise of the book “Ready Player One.”

We are more easily self-isolated today than at any time in the past.

Amazon blazed online retail shopping and ship to home business models that many box-store retailers have adopted. Social Media like Facebook have successfully (debatable) muted our need for constant in-person socialization. Cloud technologies allow us to access our critical information from anywhere in the world. Cheap mobile devices (like my iPhone) and fast unlimited nation-wide data services are in the hands of almost everyone in the country.

We can litigate, meet with our doctors, buy groceries, talk with social services, pay our bills, renew our prescription drugs, convene corporate meetings, attend school, check in with Grandma, send money to anyone, perform any banking transactions, have face to face video chat, update computer systems, exchange documents, buy, sell (all with contactless transactions), work, study, and get our fill of news and entertainment from anywhere in the world – all while we sit on our comfy couch at home. We can do almost everything we need to sustain our way of life – online.

– Ready Player One?

The bulk of us will always need to travel to our place of work to… work. Hospitals require nurses, grocery stores require stockers, and car service centers require mechanics. But a significant percentage of us can easily continue our work from home. And nearly all of us are using some form of online service for a variety of personal support.

The Internet has profoundly changed the way we live, work, and play. If this pandemic happened in the 1990s, we would be the midst of the Great Depression 2.0.

This week’s commentary is less on my Options Trading prowess and more on just a thought I had. I’ll get my trading-mojo back on next week.

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.

The VIX started this week at 37%, rising slightly above the 35% start of last week. It also slightly breached the 9-day SMA but only by a smidgen.

37% 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 .83 from .82 last week.

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.

The current Put/Call Ratio shot up during the last half of last week, breaching the trend channel and rising past the mystical “fear line.”

This jump in Market Fear occurred just after President Trump suggested renewed tariffs against China plus some ominous messaging going in the Berkshire Hathaway’s annual meeting.

Consumer Sentiment Index (CSI):

The CSI remained at 71.8 from the week before. 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 = 23,724 – Down 0.2% from 23,775 last week.
S&P 500 = 2,831 – Down 0.2% from 2,837 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 of how all the U.S. markets are doing.

The past week’s Markets’ movement is a good illustration of internal thrashing. Up over 4% my mid-week, the S&P then tanked over 4% by the close of Friday.

Geopolitical tree-shakers are:

• Threats of new tariffs on China’s imports
• Over 30 million Americans lost their jobs due to the Shelter-in-Place orders
• Election year politics continue to exacerbate COVID-19 fears
• Never Trumper’s news reporting also continue to exacerbate COVID-19 fears
• Hopeful news on Coronavirus vaccines and treatments
• Oil remains below sustainable production price

My sentiment for this coming week:

Of the big-four indicators above, the VIX, P/C Ratio, and the S&P were moving in positive territory until late Wednesday when Trump mentioned the possibility of a new round of tariffs against China. The last tariff war we had with China took a big bite out of our Markets value.

The tariff messaging is currently a trial-balloon from the administration, but it could also be a warning for all us Marketeers.

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:

When the big four indicators above start to move in concert, then I can reasonably predict a direction. If all are moving in a positive direction then that is a good signal that a bull may now be leading the herd. If the four indicators are not all in a positive agreement, then the internal thrashing is going to but any trades I have cooking at risk.

With the VIX still in record-high territory, the likelihood of losing a low-probability trade (needed to reclaim earlier losses) is going to high. So I should place trade triggers on all trades and take a win as soon as possible.

I have no doubt that I will see a choppy and wild Markets ride for the next couple of months, but I’m going to assume that it will inch higher over time than lower. So my attitude is Bullish.

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. Bull Credit spreads only (need to positive cash flow for psychological reasons)
4. Focus on mid to long-term trades:  3-4 weeks
5. Do not consider Bear trades
6. Set trade triggers at 50% of the max gain for the first half of any position.

Profit and Loss Statement

(As of 05/08/2020)

Realized Profit by Strategy

Schedule for this Week

Goals for this week: (05/04/20 – 05/08/20) (Week 19)

• Max technical dollars at risk (new trades) = $500.
• Max dollar risk per trade (new trades) = $200
• 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%?:
• Set a GTC trade trigger to close at 50% max gain?:

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 29 (<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.

This Week’s Trade Activity

(As of 05/08/2020:)

Spread Count Summary:

Current Dollars at Risk:

New Trades Opened This Week

(05/04/2020 – 05/08/2020)

MA: 277.5p/275p (1 contract) – Open 05/08/20 – Expires 05/29/20 – Max Gain = $90.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=55.5%, ROR=56.0%, PC/Ratio=0.8, Max Loss=$159.00, IV%=24%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (21 days)
• Probability of OTM > 50%?: Yes (55.5%)
• Dollar risk set at or below $200.00?: Yes ($159.00)
• Put/Call ratio below 1.0 or flat to falling over that last 2-3 weeks?: Yes (0.9 / 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?: Sort of (middle)
• 9-Day SMA above 50-Day SMA?: Yes (see chart)
• ROR > 50%?: Yes (56%)
• Set a GTC trade trigger to close at 35% max gain?: Yes

MSFT: 180p/177.5p (1 contract) – Open 05/05/20 – Expires 05/29/20 – Max Gain = $84.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=51.6%, ROR=50.3%, PC/Ratio=0.4, Max Loss=$165.00, IV%=24%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (24 days)
• Probability of OTM > 50%?: Yes (52.5%)
• Dollar risk set at or below $200.00?: Yes ($165.00)
• Put/Call ratio below 1.0 or flat to falling over that last 2-3 weeks?: Yes (0.4 / falling)
• 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
• ROR > 50%?: Yes
• Set a GTC trade trigger to close at 35% max gain?: Yes

IWM: 125p/123p (1 contracts) – Open 05/07/20 – Expires 05/29/20 – Max Gain = $70.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=53.7%, ROR=53.5%, PC/Ratio=0.8, Max Loss=$129.00, IV%=44%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (22 days)
• Probability of OTM > 50%?: Yes (53.7%)
• Dollar risk set at or below $200.00?: Yes ($129.00)
• Put/Call ratio below 1.0 or flat to falling over that last 2-3 weeks?: Yes (0.8 / falling)
• 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
• 9-Day SMA above 50-Day SMA?: Yes
• ROR > 50%?: Yes (53.5%)
• Set a GTC trade trigger to close at 35% max gain?: Yes

Trades Currently Cooking

(As of 05/08/2020)

DIA: 242p/240p (1 contracts) – Open 04/30/20 – Expires 05/22/20 – Max Gain = $74.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=52.3%, ROR=51.1%, PC/Ratio=1.4, Max Loss=$131.00, IV%=34%
Current: Prob. OTM=34.2%, PC/Ratio=2.0, IV%=40%

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 05/08/2020)

QQQ: 212p/210p (1 contracts) – Open 04/28/20 – Expires 05/22/20 – Max Gain = $74.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=49.4%, ROR=58.4%, PC/Ratio=2.5, Max Loss=$125.00, IV%=34%
At Close: Prob. OTM=71.8%, ROR=28.0%, PC/Ratio=0.5, IV%=31%, Profit=$37.00

Gross Profit = $74.00 premiums collected at open – $37.00 premiums paid at close – 2.12 trading fees = $34.88

This prosition was closed via a preset trade trigger set at 50% max-profit. This is the first of a new exit strategy to close all positions as early as possible and thus reduce the max dollar risk.

Conclusion

This week’s journal entry includes fairly lame commentary. It was just a thought I had while we were in the World-Wide-Lockdown.

But the majority of think-time used was on how to define better exit strategies that do not include “leave it all out there.” So my commentary for next week will be redefining a lot of parameters.

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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