Money may not buy happiness,
but I’d rather cry in a Jaguar than on a bus.

– Françoise Sagan.

Commentary

The economy is projected to be severely crippled for the next several years, but the Stock Markets are surging at record recovery. So, what do the Marketeers (like Mouseketeers) know that the prominent economists don’t?

Many notable economists that I read on Bloomberg or Yahoo Finance spins the Coronavirus world-wide shut down in the same depressing vein as when the 1950’s Interstate Highway expansion crushed the economies of small communities with bypasses. Or those once-prosperous cow-towns turned ghost-towns when the railroads past them by.

I have heard projections that our sheltering at home orders may last for two years. Oil, which went negative in April, would take over ten years to recover. High probability that a vaccine for the COVID-19 will take two or more years (if ever) to be developed. And, we cannot consider any normality until billions of doses of a COVID-19 vaccine have been manufactured, and every person on earth has been vaccinated.

But yet the Marketeers are flying back into the Markets at a remarkable rate. The S&P 500 has already roared back over 30% from its COVID-Crash low of just six weeks ago.

The Marketeers appear to see the Corona-shutdown tantamount to an epic snowstorm burying many large sections of the country. There are also shelter at home orders, schools and businesses are also closed, and the local economies also crashes to a standstill. But the Marketeers seem to be aware that the snow will melt and the market demands that was there before the storm will come back quickly.

So I need to ignore the Mob-Media’s journalism (journalists who troll Twitter for some mislaid injustice to champion). Because I know as the Coronavirus storm wanes, there will be as many people needing haircuts as before the pandemic. The base energy that fuelled the demands before the epidemic is still there and will demand return very quickly.

I can’t help from feeling that all the adverse reporting against our current economic situation’s resiliency is more of a political spin to influence the November elections. Before the pandemic, President Trump used economic growth and strength as a campaign cudgel against his political foes – now his foes are looking to use a failed economy as Trump’s policy results.

This Week’s Market Sentiment

(As of 05/18/2020)

Broad Market Volatility:
VIX = 9-Day SMA flat at 32 from 33 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.

Probably one thing to notice with this week’s chart is the VIX’s rate of decline appears to be slowing. The leveling of the Marketeers’ general anxiety seems appropriate as we are still in a general economic uncertainty. I suspect that until the November elections are over (or until there are no questions who will be president), the VIX will hover somewhere near this level.

A VIX above 15% is going to help generate higher premiums for spread positions, but at the same time, there will be a little sphincter-clinching as to what trades will succeed.

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

Put/Call Ratio:
9-day SMA (all OCC options): dropped slightly to .79 from .83 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 last two peaks, as shown in the above chart at 5/1 and 5/13, suggest the Marketeers continue to be skittish and most any off-putting news.

Like the VIX, the trajectory for the Put/Call Ratio also appears to be leveling off. But this is reasonably expected since the level is very similar to other times during a bull run.

The current Put/Call indicator is well below 1.0 and suggests we are in a Bullish direction.

Consumer Sentiment Index (CSI):

The CSI ticked up slightly to 73.7 from April’s eight-year low of 71.8. But this is better news than it looks. The University of Michigan’s Technical Analysts expectation for the start of May was for the CSI to continue to fall to 68, so the unexpected bounce suggests a better than expected sentiment.

The past two months saw over 39 million new unemployment applications and many States continuing a draconian lockdown. But with many other States opening back up and small businesses are starting to return, we should be entering the period of the Great Re-Employment. I would expect the indicator to bound back up reasonably fast once a significant number of these newly unemployed return to work.

This turnaround for the CSI indicator suggests bullish Markets.

Market Indexes:
DOW = 23,685 – Down 2.7% from 24,331 last week.
S&P 500 = 2,864 – Down 2.3% from 2,930 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 Markets gave up this week about what they took in last week. This dynamic corresponds with the flattening of VIX as it appears most Marketeers are entering a neurotic wait-and-see period.

Six weeks does not make a compelling trend, but I adjusted the S&P 500’s trend channel to be a little flatter to make it more relatable to the other indicators.

One observation I can point out is that the current SPY price and the 9-Day SMA is close to the bottom of the trend-channel. In the Technical Analysis world, that would suggest that there will be more of an inclination to bounce towards the top side of the channel.

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

Geopolitical tree-shakers are:

• Rising tension with China
• 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.

States are opening, and re-employment is soaring. New unemployment claims are continuing to uptick, primarily for work missed in the past six weeks and by those workers who have now return to their old jobs. 95% of all current claims are only for a short time and not for years.

For this week:

All four of the indicators above support the bullish perception, but it may be more of a slow-going slog. I am expecting more up days than down days, but it’s going to be hard to feel too confident in any new trades.

Coming off a Bear week last week, and the SPX is hovering towards the bottom of the new trend-channel, I’m going to be a bit more bullish for trades this week. I will still limit my maximum dollar-risk to less than $500 for the week.

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 05/22/2020)

Realized Profit by Strategy

Schedule for this Week

Goals for this week: (05/18/20 – 05/22/20) (Week 21)

• 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:
  • Bull Credit Spreads: June 12 (<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 $500, 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 05/22/2020:)

Spread Count Summary:

Current Dollars at Risk:

New Trades Opened This Week

(05/18/2020 – 05/22/2020)

MA: 290p/287.5p (1 contract) – Open 05/22/20 – Expires 06/12/20 – Max Gain = $84.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=54.5%, ROR=55.0%, PC/Ratio=0.2, Max Loss=$160.00, IV%=21%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (21 days)
• Probability of OTM > 50%?: Yes (54.5%)
• Dollar risk set at or below $200.00?: Yes ($160.00)
• Put/Call ratio below 1.0, or flat, or falling over that last 2-3 weeks?: Yes (0.2)
• 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 (See chart)
• 9-Day SMA above 50-Day SMA?: Yes (See chart)
• ROR > 50%?: Yes (55.0%)
• Set a GTC trade trigger to close at 35% max gain?: Yes (0.58)

I was drawn to this spread primarily because the Put/Call Ratio was .2. MA has been trending up for over 6 weeks, and apparently the current holders of MA stocks are not too concern about the price falling (thus such a low P/C Ratio).

AAPL: 315p/312.5p (1 contract) – Open 05/21/20 – Expires 06/12/20 – Max Gain = $83.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=56.5%, ROR=50.3%, PC/Ratio=0.6, Max Loss=$165.00, IV%=17%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (22 days)
• Probability of OTM > 50%?: Yes (56.5%)
• Dollar risk set at or below $200.00?: Yes ($165.00)
• Put/Call ratio below 1.0, or flat, or falling over that last 2-3 weeks?: Yes (0.6)
• 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 (See chart)
• 9-Day SMA above 50-Day SMA?: Yes (See chart)
• ROR > 50%?: Yes (50.3%)
• Set a GTC trade trigger to close at 35% max gain?: Yes (0.55)

AAPL is quickly catching up to its pre-pandemic levels, so I need to be careful not to rely too much on its growth. But I do believe that as we approach fall, the 5G mobile data technologies and new first-ever 5G iPhone will keep the stock on a bullish path.

Right now, I’m just banking that AAPL will close just a little higher in 22 days than it is now.

MSFT: 185p/182.5p (1 contract) – Open 05/19/20 – Expires 06/12/20 – Max Gain = $95.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=50.2%, ROR=61.0%, PC/Ratio=0.4, Max Loss=$154.00, IV%=17%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (24 days)
• Probability of OTM > 50%?: Yes (50.2%)
• Dollar risk set at or below $200.00?: Yes ($154.00)
• Put/Call ratio below 1.0, or flat, or falling over that last 2-3 weeks?: Yes (0.4)
• 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 (61.0%)
• Set a GTC trade trigger to close at 35% max gain?: Yes (0.62)

Of those in my watchlist, this MSFT spread appeared the most reasonable. Primarily, the Put/Call Ratio is low (0.4) and falling from last week (0.6). With the volatility low and the P/C Ratio low, the Marketeers are channeling to me that MSFT has plenty of upsides left.

The only reservation I have is taking this position a day after the Markets’ >3% rise. After such a lift, the Marketeers typically pull back.

Trades Currently Cooking

(As of 05/22/2020)

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

Current Trades Closed

(As of 05/22/2020)

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%
At Close: Prob. OTM=77%, PC/Ratio=1.2, IV%=44%, ROR=27.1%

Cost to open: $.70 premium collected * 100 shares * 1 contracts = 70.00
Cost to close: -$.35 premium paid * 100 shares * 1 contracts  = -$35.00
Net Profit = $70.00 to open – $35.00 to close = $35.00
Actual ROR = $35.00 / $129.00= 27.1%

This position was closed via a trade-trigger set at 50% of max gain on 5/20/20. I was able to close this position (removing the dollar risk) 9 days early.

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%
At Close: Prob. OTM=64.7%, PC/Ratio=1.6, IV%=17%, ROR=7.6%

Cost to open: $.68 premium collected * 100 shares * 1 contracts = 68.00
Cost to close: -$.58 premium paid * 100 shares * 1 contracts  = -$58.00
Net Profit = $68.00 to open – $58.00 to close = $10.00
Actual ROR = $10.00 / $131.00= 7.6%

This position was closed via a trade-trigger set at 15% of max gain on 5/18/20. This position was underwater from the first week and the trade-trigger was reset to 0% after the first week because it quickly dropped to a Prob-OTM of < 8%. At that time I thought it best if I could just get out of it.

However, on Monday 5/18, the Markets had a major jump. I elected to exit this at 15% just to get a win. (I am expecting a pullback later this week.)

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%
At Close: Prob. OTM=68.2%, PC/Ratio=0.5, IV%=17%, ROR=19.3%

Cost to open: $.88 premium collected * 100 shares * 1 contracts = 88.00
Cost to close: -$.57 premium paid * 100 shares * 1 contracts  = -$57.00
Net Profit = $88.00 to open – $57.00 to close = $31.00
Actual ROR = $31.00 / $161.00= 19.3%

This position was closed via a trade-trigger set at 35% of max gain on 5/18/20. This position closes for $31 after just 2 trading days. That’s not bad…

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%
At Close: Prob. OTM=78.4%, PC/Ratio=0.5, IV%=19%, ROR=24.3%

Cost to open: $.96 premium collected * 100 shares * 1 contracts = 96.00
Cost to close: -$.59 premium paid * 100 shares * 1 contracts  = -$59.00
Net Profit = $96.00 to open – $59.00 to close = $37.00
Actual ROR = $37.00 / $152.00= 24.3%

This position was closed via a trade-trigger set at 35%, three trading days after it was open. This position was closed after a huge Markets jump this morning.

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%=28.3%
At Close: Prob. OTM=75.8%, PC/Ratio=0.5, IV%=24%, ROR=24.4%

Cost to open: $.90 premium collected * 100 shares * 1 contracts = 90.00
Cost to close: -$.45 premium paid * 100 shares * 1 contracts  = -$45.00
Net Profit = $90.00 to open – $45.00 to close = $45.00
Actual ROR = $45.00 / $159.00= 28.3%

This position was closed via a trade-trigger set at 50%, six trading days after it was open. This position was closed after a huge Markets jump this morning.

Conclusion

This week was more Trade Trudging than general position management.

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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