Distracted by pleasure,
Directed by pain.
 

Commentary

Annotation 2020-06-28 075843whoa

This week’s commentary is the start of a multi-part series on learning Stop Losses with Ameritrade’s Think or Swim trading platform. Because this is a new topic for me to explore, I figure it will take me a couple of weeks of trial and errors to figure things out.

Last year I learned how to manage losses in a Bull Market. This year I am learning how to handle losses in a Bear Market. And the one thing I have learned – these are two different strategies.

One of my more notable problems is not knowing how to identify losers or winners. I tend to hold on to a loser too long or claim a victory too soon. I realize that my emotions are circumventing what my job should be – cut losers early and let winners ride.

Stop Loss orders are used to systematically limit the downside of my open positions or protect whatever limited profit I have already accrued. Using Stop Losses are one of the fundamentals of Options Trading for Income and something that I should have learned early on. A Stop Loss is configured to follows my Exit Strategy and let the Trading Platform make the execution when required – my emotions are damn.

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Typically, setting up a Trailing Stop Limit is a two-step Trade-Trigger. It is functionally an OTO (One-Triggers-the-Other) conditional order. The first order (called the Stop) watches for a specific value of the position. Once that value is reached, it will automatically submit the linked second order to close the position at a Limit price.

I have found that setting up Stop Loss orders in Think or Swim is super confusing. There are many inter-linked options involved, and the ability to dial in the right combinations takes some special knowledge. Over the next couple of Commentaries, I hope to breakdown some of the mystery.

Early this week, I submitted my first two Trailing-Stop-Limit orders using what I thought was an intuitive approach. But I had two very unexpected results.

The first time, the stop was triggered within hours of entering the order. It was a Trailing Stop Limit with the set at +25% of Mark for a position that was steadily moving positive. Fortunately, this early out resulted as a positive $5.00.

The second unexpected exit happened (again the same day that I submitted). At a suspicious 10 minutes before Market closing, the Stop Order was executed but the linked Limit order was rejected. Below is the screenshot.

MSFT rejected

This screenshot is showing the Stop Value and Limit Value to be negative. At this point, it became clear that I did not know enough.

Next week, I’m going to walk my way through creating a new Trailing Stop Limit order and hopefully document each of the setting’s options.

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This Week’s Market Sentiment

(As of 06/22/2020)

VIX – Broad Market Volatility:

VIX = 9-Day SMA stayed flat at 33.2 from 33.6 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 2020-06-28 075843VIX
CBOE Market Volatility Index

The VIX’s 9-Day SMA started a new elevated sideways trend over the last two weeks. This appears to undoubtedly been caused by the increased COVID cases and a few states halting or rolling back reopening phases. The fact that it has not jumped up much higher shows greater confidence that a March-April style level lockdown could be avoided.

If I look back on the three-year history, the only sideways trends have been when the VIX is hovering around 15. So this hovering in the mid-to-low thirties suggests that the Marketeers are getting ready for a possible mini-bear market.

Going into this week, I should be very cautious about the Markets’ direction.

Put/Call Ratio:

9-day SMA (all OCC options): stayed flat at .71 from .71 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 more than selling.

Annotation 2020-06-28 075843PCR
Put/Call Ratio for all OCC Options

The past two-week mini-trend is showing the Put/Call Ratio at a steady rise. The daily value at the end of last week is well above the 50-Day SMA, suggesting more and more investors are increasing their Puts purchases.

But the end of the week’s value of .88 (below 1.0) still implies that more Marketeers are buying more Calls than Puts – betting more on rising Markets than not.

This week’s P/C Ratio suggests I should proceed with extreme caution.

Consumer Sentiment Index (CSI):

Annotation 2020-06-28 075843CSI

June’s CSI was revised down to 78.1, from 78.9. This is still a substantial gain over last month and April’s low. However, the very-preliminary estimates from the UM are suggesting that July’s CSI may slip further down.

The possible flattening of the CSI spells uncertainty going into the last mile of the recovery.

Market Indexes:

DOW = 25,016 – down 3.3% from 25,871 last week.
S&P 500 = 3,009 – down 2.9% from 3,098 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.

Annotation 2020-06-28 075843SP500
S&P 500 Index

Looking back over the past month, the S&P 500 was down 3.3% last week (6/22-6/26), up 1.9% the week before, down 4.8%, and up 4.9% continuing back. The oscillation between ups and downs is notable, plus the magnitude of the thrashing is also telling.

I cannot say that we are strongly bullish in the short term, but I believe that there will be pressure the coming week to bounce up, off that lower trend-channel barrier.

Geopolitical tree-shakers are:

  • Election year politics continue to exacerbate economy fears
  • Bad news in containing the Coronavirus is dampening the reopening
  • Defund the Police movement and Monument toppling
  • 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. Faux-journalists are exacerbating the current social unrest to punctuate how out of control is President Trump’s leadership.

So I expect the fever-level rhetoric from the Never-Trumpers to heat up and stay negative over the next five months. The media needs to sustain the negativity long enough to bum all out and brainwash us into voting how 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 continue to signal caution. The S&P continues to move in an overall bullish trajectory, but that can change.

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

If history is any indication for the future, the oscillation in the past few weeks suggests that this week would be positive. The fact the S&P 500 daily values are at the bottom of the trend-channel also suggests some pressure to bounce up. The Put/Call Ratio is still below 1.0. so there is no rush towards protection.

As of today (Sunday, June 28, 2020), I will predict that this coming week to be positive. But any Monthly Options Spreads open this week will have to out-last any prediction.

For the next four weeks, I will consider the market to move either sideways or Bullish. I want to keep the total dollars at risk low (< $500), but I will raise the risk per trade (<$175 is still considered low).

This week, I will focus on:

  1. Limit the max risk per trade to < $175.00
  2. Limit the number of new trades and keep the week’s total dollar risk < $500.00
  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. Credit spreads only (need positive cash flow for psychological reasons)
  6. Will consider Bull Spreads, Bear Spreads or even Iron Condors
  7. Set trade triggers and exit positions as soon as possible
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Profit and Loss Statement

(As of 07/03/2020)

 YearMonthWeek #
 2020July27
Beginning Account Balance$9,000.$4,047.79$3,953.93
Deposits (Div. & Int.)$38.44$0.00$0.03
Withdraws (paycheck)-$1,625.24-$0.00$0.00
Premiums on Open$3,118.00$84.00$258.00
Premiums on Close-$6,275.00-$0.00-$77.00
    
Fees Paid (total)-$125.50-$1.06-$4.23
Ending Account Balance $4,130.73$4,130.73$4,130.73
Total Gain/Loss-$4,869.27$82.94$176.80
ROR 2.0%4.5%
ROC-36.5%  

 

Realized Profit by Strategy

  Year Month Week #
  2020 July 27
Vertical Bull Put Credit Spread -$3,204.77 $0. $4.88
Vertical Bear Call Credit Spread -$182.79 $0. $0.
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread -$66.83 $0. $0.
Icon Condors $0. $0. $0.
Cover Calls
Total -$3,454.39 $0. $4.88
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Schedule for this Week

Goals for this week: (06/29/20 – 07/03/20) (Week 27)

  • Max dollars at risk (for the week) < $5000.00
  • Max dollar risk per trade (new trades) = $175.00
  • 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 $175.00?:
  • 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 25%:

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 24 (<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.
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This Week’s Trade Activity

(As of 07/03/2020)

Spread Count Summary:

  Year Month Week #
  2020 July 27
Vertical Bull Put Credit Spread 47 1 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 66 1 3

Current Dollars at Risk:

  Year Month Week #
  2020 July 27
Vertical Bull Put Credit Spread $326. $166. $326.
Vertical Bear Call Credit Spread $0. $0. $0.
Vertical Bull Put Debit Spread $0. $0. $0.
Vertical Bull Call Debit Spread $0. $0. $0.
Iron Condor $0 $0 $0
 
Total Dollar Risk $326. $166. $326.
Max Risk Allowed $1,500.00   $500.00
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New Trades Opened This Week

(06/29/2020 – 07/03/2020)

AAPL: 362.5p/360p (1 contract) – Open 07/02/20 – Expires 07/24/20 – Max Gain = $84.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=59.7%, ROR=50.3%, PC/Ratio=0.4, Max Loss=$165.00, IV%=19%

Annotation 2020-07-02 084822

Entry Rules for Vertical Bull Put Credit Spreads:

  • Expiration date set at <= 4 weeks?: Yes (22 days)
  • Probability of OTM > 50%?: Yes (59.7%)
  • Dollar risk set at or below $175.00?: Yes ($165.00)
  • 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)
  • 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?: Yes (See chart)
  • 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 (50.3)
  • Set a GTC Trailing Stop Limit to 25%: Yes

MSFT: 197.5p/195p (1 contract) – Open 06/30/20 – Expires 07/24/20 – Max Gain = $90.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=56.0%, ROR=56.0%, PC/Ratio=0.4, Max Loss=$159.00, IV%=22%

Annotation 2020-06-30 101337

Entry Rules for Vertical Bull Put Credit Spreads:

  • Expiration date set at <= 4 weeks?: Yes (24 days)
  • Probability of OTM > 50%?: Yes (56%)
  • Dollar risk set at or below $175.00?: Yes ($159.00)
  • 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)
  • 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?: No (See chart)
  • 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 (56.0)
  • Set a GTC Trailing Stop Limit to 25%: Yes

AAPL: 347.5p/345p (1 contract) – Open 06/29/20 – Expires 07/24/20 – Max Gain = $84.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=59.9%, ROR=50.3%, PC/Ratio=0.6, Max Loss=$165.00, IV%=24%

20200629AAPL

Entry Rules for Vertical Bull Put Credit Spreads:

  • Expiration date set at <= 4 weeks?: Yes (25 days)
  • Probability of OTM > 50%?: Yes
  • Dollar risk set at or below $175.00?: 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)
  • 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?: Yes (See chart)
  • 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 (50.3)
  • Set a GTC Trailing Stop Limit to 25%: Yes

Trades Currently Cooking

(As of 07/03/2020)

The only positions open as of this Friday are the two that were opened this week.

Trades Closed This Week

(As of 07/03/2020)

AAPL: 347.5p/345p (1 contract) – Open 06/29/20 – Expires 07/24/20 – Max Gain = $84.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=59.9%, ROR=50.3%, PC/Ratio=0.6, Max Loss=$165.00, IV%=24%
At Close: Prob. OTM=63.6%, PC/Ratio=0.6 IV%=24%, ROR=4.2%

Cost to open: $0.84 premium collected * 100 shares * 1 contracts = $84.00
Cost to close: -$0.77 premium paid * 100 shares * 1 contracts  = -$77.00
Net profit= $84.00 to open – $77.00 to close = $7.00 – fees
Actual ROR = $7.00 / $165.00= 4.2%

This position was closed about one hour after opening via a trailing stop limit set 25% on 6/29/20. This was totally unexpected.

The Trail Stop was set at Mark +25% and the Limit at Mark +25%. The Mark was at $.84 when the order was submitted and the “Stop Wait” status was displaying. But about 1 hour after entering the order, this position closed at $0.77.

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.

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Conclusion

This past week, I wanted to get a good handle on setting up Trailing Stop Limit orders. A task that I should have learned last year.

But as I looked through the Think and Swim docs and the Internet’s vast intellect, I also found that there is not too much info on the subject.

So for this week, I carved out everything in the Commentary except the preamble and left it at that. Next week, I will continue with what I started this week – a screenshot by screenshot look at Think or Swim’s order wizard.

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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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