Commentary

In this week’s very short commentary, I want to review the two most significant impediments to Options Trading; ignorance and greed.

Yes, there are professional gamblers. Through training, research, experience, and determination, they can marginally slide the improbable odds of wining towards their side of the table. And as Kenny Rogers said, “you have to know when to hold them, and know when to fold them.”

One of my two biggest impediments to having better success in Options Trading for income is my continued ignorance towards developing a complete game plan. I still feel like part of the Junior Varsity team and still need a lot of coaching. The COVID-Crash in March and the continued bludgeoning of the economy for political sake has exposed a severe ignorance of my understanding of proper position management.

Another significant impediment is my impatience to do better. I want to bet more to make more. Even though I am out of control of loss management, greed is a temptation that I need to apply more discipline.

This week, I’ve been taking a more in-depth look at how I manage my exit strategies, and I discovered I really don’t have one.

This Week’s Market Sentiment

(As of 06/22/2020)

Broad Market Volatility:
VIX = 9-Day SMA jumped to 33.6 from 29 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.

VIX’s 9-day SMA has moved above the 50-day SMA, signaling that there is now the beginnings of a new fear trend. The current VIX of 35 is also above both SMAs.

This near two-week change in direction suggests that the Marketeers are beginning to get concerned about a possible second round of lockdown, more specifically the start of a sustained pullback of the Markets.

This bounce in the VIX is concerning for the short term trades.

Put/Call Ratio:
9-day SMA (all OCC options): popped up to .71 from .65 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 more than selling.

The Put/Call Ratio’s 9-Day SMA appears to be on an upward trajectory. The current value of .76 is now above both the trend-channel, the 9-Day SMA, and the 50-Day SMA. These values suggest that the Marketeers are starting to move towards buying Puts for insurance to a rising Market.

The current Put/Call indicator is still well below 1.0, and the general trend is still down, but this can change fairly quickly. I think that after this week (ending 6/26), we will have a better idea of the herd is getting spooked.

Consumer Sentiment Index (CSI):

In general, there is an improved perception in our economy as States start their reopening. With more small businesses reopening, there is an expectation of lower unemployment. We are engaging in more economic activity, which is what the Marketeers are looking for.

This minor rebound for the CSI indicator continues to suggest a longer-term bullish Markets.

Market Indexes:
DOW = 25,871 – Up 1.0% from 25,606 last week.
S&P 500 = 3,098 – Up 1.9% from 3,041 last week.

The S&P 500 is a stock market index that tracks the 500 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 performing.

Even though the Markets ended on a sour note last week, it still eked a slight gain. But the gyration over the past three weeks might be explained like this:

The June Jobs Report released the first week of the month was an extraordinary upset to the eco-naysayers. Where the faux-journalist predicted (maybe hoping) that the unemployment number would jump by millions and thrust the unemployment to above 20%, instead there was a high re-employment and the unemployment rate fell to 14% (yes, still high but WAY different from 20%). This report was such unexpected and great news that the Markets soared.

This kind of overreaction is called “Market Exuberance.” It is almost always followed by some of the quick-reactors taking a profit. And when profit taking is happening, the VIX will rise due to the volatility it creates.

After the profit-taking in the second week of June, there was a move to return to the pre-report trend.

The S&P 500 indicator still strongly suggests that we are in an overall bullish trajectory.

Geopolitical tree-shakers are:

• Election year politics continue to exacerbate economy fears
• Increase number of COVID-19 following States reopening
• The economy’s recovery predictions are being re-evaluated
• Beijing’s media assault on Hong Kong and the U.S.
• Social unrest stoked by agenda-driven news reporting

By far, the largest tree-shaker at this point is the heading up to the November Presidential election. Between now and then, there is a lot of pressure on Democrats to convince the majority of voters that Trump has been a lousy president. They have to convince us that the economic growth was an illusion, the national management of the pandemic was botched, President Trump’s personal interests trump his commitment to the country, and we are on the verge of a national social crisis so severe that our national souls are in jeopardy.

So I expect the rhetoric from the never-Trumper to heat up and stay negative for the next five months. The media needs to sustain the negativity long enough to bum all out so that we are brainwashed into doing what they say. And all of this is just right down the Twitter-Mobs’ alley.

My sentiment for this coming week:

Of the big-four indicators above, the VIX, P/C Ratio, and CSI are all signaling caution. The S&P continues to move in Bull Market territory, but that can change. I think this week, in particular, will be telling if a general trend change is happening.

The high VIX and the move to buy Puts suggests that the Marketeers are still mostly on edge. Any marginally disturbing news can shift directions fast. We are continuing in a period of high-volume thrashing that will but any short-term trade position at high risk.

I think that this week will tell us if we are on a new trend. So, it would be ok if I don’t make any trades this week. If it turns out that we are returning to the three-month trend, then I will re-evaluate.

This week, I will focus on:

1. Limit the max risk per trade to <$125.00
2. Limit the number of new trades and keep the week’s total dollar risk < $250.00
3. Keep the overall dollar risk to be below $1,500 (with an effort at <$1,000)
4. Will focus on mid-term trades: 4-5 weeks.
5. Close exiting position as soon as the minimum exit price threshold is hit
6. Bull Credit spreads only (need positive cash flow for psychological reasons)
7. Set trade triggers and exit positions as soon as possible

Profit and Loss Statement

(As of 06/26/2020)

Realized Profit by Strategy

Schedule for this Week

Goals for this week: (06/22/20 – 06/26/20) (Week 26)

• Max technical dollars at risk (for the week) < $250.00
• Max dollar risk per trade (new trades) = $125.00
• 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 $125.00?:
• Put/Call ratio below 1.0, or flat, or falling over that last 2-3 weeks?:
• The Trend-Channel is Bullish?:
• Short-Strike 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?:
• Current ETF 1-week or 2-week trajectory bullish?:
• 9-Day SMA above 50-Day SMA?:
• ROR > 50%?:
• Set a GTC Trailing Stop Limit to 20%:

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: July 10 (<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 06/26/2020)

Spread Count Summary:

Current Dollars at Risk:

All positions have been closed this week.

New Trades Opened This Week

(06/22/2020 – 06/26/2020)

AAPL: 352.5p/350p (1 contract) – Open 06/25/20 – Expires 07/17/20 – Max Gain = $87.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=57.9%, ROR=53.1%, PC/Ratio=0.5, Max Loss=$162.00, IV%=24%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (22 days)
• Probability of OTM > 50%?: Yes (57.9%)
• Dollar risk set at or below $125.00?: No ($162.00)
• Put/Call ratio below 1.0, or flat, or falling over that 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)
• Shortstrike price below 1 standard deviation from current price?:
• Current ETF price within the bottom 1/2 of Bull Trend Channel?: Close
• Current ETF 1-week or 2-week trajectory bullish?: Yes (see chart)
• 9-Day SMA above 50-Day SMA?: Yes (see chart)
• ROR > 50%?: Yes (53.1%)
• Set a GTC Trailing Stop Limit to 20%:

QQQ: 248p/246p (1 contract) – Open 06/23/20 – Expires 07/17/20 – Max Gain = $70.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=52.5%, ROR=53.5%, PC/Ratio=1.9, Max Loss=$129.00, IV%=27%

• Expiration date set at <= 4 weeks?: yes (24 days)
• Probability of OTM > 50%?: Yes (52.5%)
• Dollar risk set at or below $125.00?: No ($129)
• Put/Call ratio below 1.0, or flat, or falling over that last 2-3 weeks?: No (Rising)
• The Trend-Channel is Bullish?: Yes (See chart)
• Short-Strike 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?:
• Current ETF 1-week or 2-week trajectory bullish?: Yes (See chart)
• 9-Day SMA above 50-Day SMA?: Yes (See chart)
• ROR > 50%?: Yes (53.5%)
• Set a GTC trade trigger to close at 35% max gain?: Yes ($0.46)

Trades Currently Cooking

(As of 06/26/2020)

Note: Last week’s volatility, this week’s downward spiral, plus the mini-correction on Wed 6/24 for a near 700 point drop sent the price of position beyond the stop-loss set. With the Markets making a mini-correction, all open trades (whether open this week or before) have been closed by Friday (6/26)

Current Trades Closed

(As of 06/26/2020)

AAPL: 352.5p/350p (1 contract) – Open 06/25/20 – Expires 07/17/20 – Max Gain = $87.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=57.9%, ROR=53.1%, PC/Ratio=0.5, Max Loss=$162.00, IV%=24%
At Close: Prob. OTM=059.4%, PC/Ratio=0.6 IV%=24%, ROR=1.2%

Cost to open: $0.87 premium collected * 100 shares * 1 contracts = $87.00
Cost to close: -$0.85 premium paid * 100 shares * 1 contracts  = -$85.00
Net profit= $87.00 to open – $85.00 to close = $2.00 – fees
Actual ROR = $2.00 / $162.00= 1.2%%

This position was closed one day after opening via a trailing stop limit set 20% 6/26/20.

The Trail Stop was set at Mark +20% and the Limit at Mark +20%. The Mark was at $.85 when the order was submitted and the “Stop Wait” status was displaying. But about 3 minutes after entering the order, this position closed at $0.85.

This unexpected execution was really a good thing since AAPL was quickly moving in the wrong direction. But I need to understand the cause and effects better. This will be my task for next week.

QQQ: 248p/246p (1 contract) – Open 06/23/20 – Expires 07/17/20 – Max Gain = $70.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=52.5%, ROR=53.5%, PC/Ratio=1.9, Max Loss=$129.00, IV%=27%
At Close: Prob. OTM=039.4%, PC/Ratio=1.7 IV%=30%, ROR=-24.0%

Cost to open: $0.70 premium collected * 100 shares * 1 contracts = $70.00
Cost to close: -$1.01 premium paid * 100 shares * 1 contracts  = -$101.00
Net loss = $70.00 to open – $101.00 to close = -$31.00 – fees
Actual ROR = -$31.00 / $129.00= -24.0%

This position was closed one day after opening via a trailing stop set at 35% current price on 6/24/20.

This behavior from the Trailing-Stops is what I hope to see in the future. If the position is not moving in the right direction, then exit early for a few dollar loss.

SPY: 317p/314p (1 contract) – Open 06/10/20 – Expires 07/02/20 – Max Gain = $101.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=53.3%, ROR=50.5%, PC/Ratio=1.1, Max Loss=$198.00, IV%=26%
At Close: Prob. OTM=0.0%, PC/Ratio=1.7 IV%=33%, ROR=-99.0%

Cost to open: $1.01 premium collected * 100 shares * 1 contracts = $101.00
Cost to close: -$2.95 premium paid * 100 shares * 1 contracts  = -$297.00
Net loss = $101.00 to open – $297.00 to close = -$196.00 – fees
Actual ROR = -$196.00 / $198.00= -99.0%

This position was closed via a trailing stop set at 35% current price on 6/24/20.

First, this position was ITM from its beginning. When reviewing the entry rules, the only thing that looked out of place was the then value of SPY was at the top of the Trend-Channel – which suggests a slight downturn could be expected.

Second, I did not have a Trailing-Stop set on this position at open. If I did, it would be set at 35%. If I did, this position would be closed not too long after open for a net loss of @$35.00 instead of $196.00. But when experimenting with Trailing-Stops this week, I set it when the position was way underwater.

Third, I now have to find out why my Trailing-Stop worked the way it did. When I last saw the sell order queued in Think or Swim, the activation amount was set at $2.70. But when the closing sell was made, it unexpectedly executed at $2.97.

DIA: 257p/255p (1 contract) – Open 06/19/20 – Expires 07/10/20 – Max Gain = $68.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=50.4%, ROR=51.1%, PC/Ratio=1.8, Max Loss=$131.00, IV%=35%
At Close: Prob. OTM=40.0%, PC/Ratio=0.5 IV%=37%, ROR=-23.1%

Cost to open: $.68 premium collected * 100 shares * 1 contracts = $68.00
Cost to close: -$0.97 premium paid * 100 shares * 1 contracts  = -$97.00
Net loss = $68.00 to open – $97.00 to close = -$29.00 – fees
Actual ROR = -$29.00 / $131.00= -22.1%%

This position was closed via a trailing stop set at 35% current price on 6/24/20.

MA: 302.5p/300p (1 contract) – Open 06/09/20 – Expires 07/02/20 – Max Gain = $86.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=57.1%, ROR=58.2%, PC/Ratio=1.0, Max Loss=$163.00, IV%=15%
At Close: Prob. OTM=37.0%, PC/Ratio=0.7 IV%=23%, ROR=-28.2%

Cost to open: $.86 premium collected * 100 shares * 1 contracts = $86.00
Cost to close: -$1.42 premium paid * 100 shares * 1 contracts  = -$142.00
Net profit = $86.00 to open – $142.00 to close = -$56.00 – fees
Actual ROR = -$46.00 / $163.00= -28.2%%

This position was closed via a trailing stop set at 35% current price on 6/24/20.

QQQ: 240p/238p (1 contract) – Open 06/17/20 – Expires 07/10/20 – Max Gain = $67.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=56.2%, ROR=50.0%, PC/Ratio=1.5, Max Loss=$132.00, IV%=29%
At Close: Prob. OTM=70.0%, PC/Ratio=1.8, IV%=26%, ROR=17.4%

Cost to open: $.67 premium collected * 100 shares * 1 contracts = $67.00
Cost to close: -$.44 premium paid * 100 shares * 1 contracts  = -$44.00
Net profit = $67.00 to open – $44.00 to close = $23.00 – fees
Actual ROR = $23.00 / $132.00= 17.4%%

This position was closed via a trade-trigger set at 35% of max gain on 6/23/20. This position was opened less than one week from today, securing 35% of maximum gain.

Last week saw a jump in volatility and a question as to the Market trajectory. The beginning of this week sees a continuation with a miss-communication from the China Trade front that caused a mini-crash during the premarket Futures. A quick in-an-out for this trade sets a profit plus gets a $135 risk off the table.

But I need to find a way to let winning position rise without risking a greed induced loss.

Conclusion

This week’s performance highlighted my lack of an exit strategy, especially when the Markets drops precipitously into a mini-correction (as it did on Wednesday and Friday). The realized loss of -$297.57 for this week was the from the total kill of all my currently-cooking positions. I need to come up with an exit strategy that will act as a firewall for Market corrections.

This week I started to investigate Stop-Loss strategies in Think or Swim.  Who said you couldn’t teach old dogs new tricks?

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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