David: What is the primary goal?
Joshua: You should know, Professor. You programmed me.
David: Oh, c’mon. What is the primary goal?
Joshua: To win the game.
(Movie: WarGames)

Commentary

The COVID-Crash this past February stung pretty badly!

I had 14 trades that all suffered near max loss. The damage done during February was the Thermal Nuclear destruction of $3,757.79 from my trading account, which represents a -42% of my original $9,000 investment. And this was only after two months into my fiscal year.

Adding a little lemon juice to my injury was the indecisions of the Marketeers in seeking a bottom to the crash. My fishing between a Bear Spread strategy and a Bull strategy netted me another slight loss over the following two months.

So now, seeing four months in the rearview mirror, my trading account currently has $3,687 in trade losses, minus $1,000 for my salary ($250/m salary X 4 months) = -$4,687 in accounting losses. That is over half of my starting balance. Not a good start!

Two significant strategic errors

First strategic error:
Not aggressive enough in the trading matrix

At the start of this year, I wanted to trade what I thought to be the surest thing for minimal risk. So I decided to focus primarily on those trades that had an 80%-85% probability of success (Prob-OTM). This risk-strategy was relatively easy pre-pandemic when the 4-month trend channels were consistently bullish, and the overall volatility (VIX) was below 15%.

But a 1-month Vertical Bull Put Credit spread with the Prob-OTM > than 80% during a time of low volatility does not yield much premium. So to make the trade worthwhile (between $20 and $40 premiums collected), I had to place $400 to $500 at risk for each position opened. This makes the targeted return-on-risk (ROR) about 7.5%.

Collecting premiums between $20 – $40 does not make a monthly $250 paycheck unless I am winning 9+ trades each month. To achieve a paycheckable profit, I had to keep at least $4,000 on the risk-block at all times. Again, this strategy was mostly sound during the latter half of 2019, where I was able to inch my way to a small profit each month.

But as I have painfully learned, one problem with just making low-risk trades, is that there are very few opportunities to close any of these positions early should the Markets turn sour.

Second strategic error:
Not closing on the first opportunity of profit

While monitoring my spreads portfolio, I can frequently observe various positions moving in and out of profit at varying percentages. But because my high probability positions have a low ROR rate, closing early for $5 or $10 does not accumulate enough profit to make a paycheck – especially if I’m only making two or three trades a week. I am therefore mathematically required to keep all positions open until their expiration.

The results are that I am required to keep $4,000 at risk to earn the minimal $250 each month. This amount of dollar risk is acceptable as long as a “Market-Event” does not happen. And by any definition, the COVID-Crash is a “Market-Event.” My trading axiom, therefore, was: “take one step forward, then two steps back.”

Revised Entry Strategy

1. I need to increase my minimum ROR from 7.5% per trade to an average of 25%
2. I need to lower my maximum dollar at risk from $4,500 to below $2,000
3. I need to close winning positions early and keep my on-going dollars at risk low

Going forward, I will change my entry rules for new Vertical Bull Put Credit spreads to focus a Short-Strike just under ATM. This will increase the premiums collected, and by extension, raise the ROR and lower the dollar risk for the trade. But it cannot stop here!

Going forward, I will change my entry rules to limit the maximum dollar risk for any spread trade to < $200. As the open positions count increases, this restriction will lower the maximum total dollar risk. The total risk will change to < $2,000. But it cannot stop here!

Going forward, I will immediately enter a closing trade trigger order to close all open trades based upon a sliding percent of the max-gain schedule. I am willing to claim a much smaller profit more often if it allows me to take more risk off the table sooner.

This change in the Entry Rule strategy assumes a Bull Market trend. As long as the underlining stock/ETF is higher one month later, then I should be ok (famous last words!)

Proper position management: let no position expire

I need to adapt to a new Exit Strategy on managing my open positions. I need to seek to close all open positions before expiration. I can help facilitate this strategy by immediately setting closing trade triggers for every new position I have open.

1. If the 1-month open position remains below 50% Prob-OTM after the end of the third week, then seek for an aggressive exit
2. Set a trade-trigger to exit any new trade at 35% of max-gain within the first two weeks of a one-month spread contract
3. Reset a trade-trigger to exit any open trade at 50% of max-gain during the final two weeks of the one-month spread contract

Programming to win the game
(Setting closing trade-triggers)

Consider the Microsoft spread below:

MSFT: 185p/182.5p (1 contract) – Open 05/12/20 – Expires 06/05/20 – Max Gain = $104.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=50.2%, ROR=72.0%, PC/Ratio=0.5, Max Loss=$144.00, IV%=17%

With the current MSFT price at 186.50, this spread configuration is opening a new position with the Short-Strike just below ATM. This trade has a near 50/50 chance of closing OTM on June 5. But I fully intend to close this position before expiration – at the first sign of profit.

Upon opening this position, I will immediately submit a closing trade trigger with the buy-back price of $104.00 / 100 * 35% = $0.36, with the Time-In-Force (TIF) = GTC. If anytime during the first two weeks this trigger gets pulled, then I’ll claim the $36 and remove the $144 at-risk dollars off the table.

On Monday of the third trading week, if the position is moving positive, (current Prob-OTM > 50%) but just have not hit the $0.36 price, I will reset the trade-trigger to $104.00 / 100 * 50% = $0.52.

And likewise, if the position is not moving fast enough, then I could keep the exit price at 35% or lower if I want to bail.

The primary goal is to “Win the Game!”

This Week’s Market Sentiment

(As of 05/11/2020)

VIX: Broad Market Volatility

VIX = 9-Day SMA dropped to 33 from 40 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 28%, a significant drop from last week’s start of 37%. Continuing its collective exhaling, the nervous Marketeers appear to be relaxing more on what they consider unknown territory.

There still is a lot of unknowns as to how fast the general economy can restart and recover. So the VIX will probably remain high until more details are available. But the trend suggests between bullish and flat.

The trajectory of the current VIX trend channel continues to suggest a bullish direction.

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 Put/Call Ratio looks to be falling well within the safe side. But when the current trend is compared with the P/C Ratios from before the COVID-Crash, it seems to be well within the range when the Markets were all strong bulls.

The current Put/Call indicator suggests we are in a Bullish direction.

Consumer Sentiment Index (CSI):

The CSI has not been updated since the start of April, but with many States still in lock-down, I can’t imagine a revision to be too much better. When the Great-Reemployment starts, then consumer’s sentiment should improve dramatically.

Market Indexes:

DOW = 24,331 – Up 2.6% from 23,724 last week.
S&P 500 = 2,930 – Up 3.5% from 2,831 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.

For the 500 largest U.S. corporations, the current value is higher than the 9-Day SMA (Simple Moving Average), which is higher than the 50-Day SMA, which is inside the Bull Trend Channel.

The technical indicator suggests that we are in a Bullish trajectory.

Geopolitical tree-shakers are:

• Phase 4 stimulus bill being discussed
• Historic high 36 million unemployed – but waiting for reemployment numbers
• Election year politics continue to exacerbate COVID-19 and economy fears
• Hopeful news on Coronavirus vaccines and treatments
• Oil continues to rise but 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 are moving in positive territory for a couple of weeks. But the high VIX suggests that the Marketeers are still mostly on edge, and any marginally disturbing news can shift directions fast.

The lack of a revised CSI should be interpreted as neutral. But I’m projecting this indicator to be bullish simply because of the reopening efforts.

For this week:

Three of the big four indicators above suggest that the next 30 days should be bullish. But the VIX is still considered high (above 15% but a long way from 82%). So I need to be wary of bad news on the pandemic or the economy. It seems a little spark could set a direction change fast.

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. Reclaiming earlier losses, set minimum ROR for Credit spreads > 25%
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. Set trade triggers and exit positions as soon as possible

Profit and Loss Statement

(As of 05/15/2020)

	Year	Month	Week #
	2020	May	20
Beginning Account Balance	$9,000.	$4,080.41	$4,283.21
Deposits (Div. & Int.)	$38.40	$0.00	$0.00
Withdraws (paycheck)	-$1,125.24	$0.00	$0.00
Premiums on Open	$1,535.00	$513.00	$269.00
Premiums on Close	-$4,586.00	$200.00	237.00
Fees Paid (total)	-$81.32	-$12.57	-$8.37
Ending Account Balance	$4,780.84	$4,780.84	$4,780.84
Total Gain/Loss	-$4,219.16	$700.43	$497.63
Return On Risk	N/A	17.2%	11.6%
Return On Capital	-34.8%	N/A	N/A

Realized Profit by Strategy

		Year	Month	Week #
		2020	May	20
Vertical Bull Put Credit Spread		-$3,373.37	$61.81	$26.91
Vertical Bear Call Credit Spread		-$182.79	$0.	$0.
Vertical Bull Put Debit Spread		$0.	$0.	$0.
Vertical Bull Call Debit Spread		-$66.83	$71.66	$71.66
Icon Condors		$0.	$0.	$0.
Cover Calls		–	–	–
Total		-$3,622.99	$133.47	$98.57

Schedule for this Week

Goals for this week: (05/11/20 – 05/15/20) (Week 20)

• Max technical dollars at risk (for the week) = $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, or 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 35% 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: June 5 (<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 05/15/2020:)

Spread Count Summary:

		Year	Month	Week #
		2020	May	20
Vertical Bull Put Credit Spread		28	6	3
Vertical Bear Call Credit Spread		12	0	0
Vertical Bull Put Debit Spread		0	0	0
Vertical Bull Call Debit Spread		7	0	0
Iron Condor		0	0	0
Total		47	6	3

Current Dollars at Risk:

		Year	Month	Week #
		2020	May	20
Vertical Bull Put Credit Spread		$903.	$771.	$481.
Vertical Bear Call Credit Spread		$0.	$0.	$0.
Vertical Bull Put Debit Spread		$0.	$0.	$0.
Vertical Bull Call Debit Spread		$212.	$0.	$0.
Iron Condor		$0	$0	$0
Total Dollar Risk		$903.	$771.	$481.
Max Risk Allowed		$2,000.00		$500.00

New Trades Opened This Week

(05/11/2020 – 05/15/2020)

AAPL: 302.5p/300p (1 contract) – Open 05/14/20 – Expires 06/05/20 – Max Gain = $88.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=53.4%, ROR=54.0%, PC/Ratio=0.8, Max Loss=$161.00, IV%=24%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (22 days)
• Probability of OTM > 50%?: Yes (53.4%)
• Dollar risk set at or below $200.00?: Yes ($161.00)
• Put/Call ratio below 1.0, or flat, or falling over that last 2-3 weeks?: Yes (0.8)
• 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 (54.0%)
• Set a GTC trade trigger to close at 35% max gain?: Yes ($0.57)

MA: 270p/267.5p (1 contract) – Open 05/13/20 – Expires 06/05/20 – Max Gain = $96.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=56.9%, ROR=62.1%, PC/Ratio=1.0, Max Loss=$152.00, IV%=27%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (23 days)
• Probability of OTM > 50%?: Yes (51.9%)
• Dollar risk set at or below $200.00?: Yes ($153.00)
• Put/Call ratio below 1.0, or flat, or falling over that last 2-3 weeks?: Yes (mostly 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?: Yes (see chart)
• 9-Day SMA above 50-Day SMA?: Yes (see chart)
• ROR > 50%?: Yes (62.1%)
• Set a GTC trade trigger to close at 35% max gain?: Yes ($0.62)

MSFT: 182.5p/180p (1 contract) – Open 05/12/20 – Expires 06/05/20 – Max Gain = $85.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=56.1%, ROR=51.2%, PC/Ratio=0.6, Max Loss=$164.00, IV%=17%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (24 days)
• Probability of OTM > 50%?: Yes (56.1%)
• Dollar risk set at or below $200.00?: Yes ($164.00)
• Put/Call ratio below 1.0, or flat, or falling over that last 2-3 weeks?: Yes (mostly 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?: Yes (maybe?)
• 9-Day SMA above 50-Day SMA?: Yes (see chart)
• ROR > 50%?: Yes (51.2%)
• Set a GTC trade trigger to close at 35% max gain?: Yes ($0.55)

Trades Currently Cooking

(As of 05/15/2020)

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%
Current: Prob. OTM=45.2%, PC/Ratio=0.7, IV%=27%

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%
Current: Prob. OTM=44.1%, PC/Ratio=1.8, IV%=54%

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=22.1%, PC/Ratio=2.0, IV%=33%

Current Trades Closed

(As of 05/15/2020)

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%
At Close: Prob. OTM=69.3%, PC/Ratio=0.5, IV%=17%, ROR=16.2%

Cost to open: $.84 premium collected * 100 shares * 1 contracts – $1.05 fee = 82.95
Cost to close: -$.55 premium paid * 100 shares * 1 contracts – $1.05 fee = -$56.05
Net Profit = $82.95 to open – $56.05 to close = $26.90
Actual ROR = $26.90 / $165.00= 16.3%

This position was closed via a trade-trigger set at 35% of max gain on 5/11/20. This position reached 35% of max gain only after four trading days after open. 16.3% return on risk is great on four days and I do not have the $165 dollar risk for this trade.

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%
At Close: Prob. ITM=77.0%, PC/Ratio=1.4, IV%=25%, ROR=39.2%

Cost to open: -$.60 premium paid * 100 shares * 2 contracts – $2.10 fee = -$122.10
Cost to close: $.86 premium collected * 100 shares * 2 contracts – $2.10 fee = $169.90
Net Profit = -$122.10 to open + $169.90 to close = $47.80
Actual ROR = $47.80 / $122.00 = 39.2%

This position was closed via a trade-trigger set at 65% of max gain on 5/11/20. With only 4 days left in this position, I decided to leave the the 65% trade-trigger and felt lucky to get out with a profit.

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%
At Close: Prob. ITM=42.4%, PC/Ratio=0.3, IV%=20%, ROR=25.3%

Cost to open: -$.46 premium paid * 100 shares * 2 contracts – $2.07 fee = -$94.07
Cost to close: $.60 premium collected * 100 shares * 2 contracts – $2.07 fee = $117.93
Net Profit = -$94.07 to open + $117.93 to close = $23.86
Actual ROR = $23.86 / $94.00 = 25.3%

This position was closed via a trade-trigger set at 25% of max gain on 5/11/20. This position have been underwater for the first three weeks. The long-leg became ITM towards the end of last week. With only 4 days left in this position, I decided to leave the the 25% trade-trigger and felt lucky to get out with a profit.

Conclusion

There is a lot of econ-talk about an economy in shambles. But yet the Markets’ indexes are continuing to move bullish. There are a couple of explanations that I will like to explore in the next week’s commentary.

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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