This week I will conclude my review of using ThinkorSwim to set up a Conditional Trailing Stop Limit for my Vertical Spreads.

Conditional Trailing-Stop Limits

Stop Loss strategies are still a mystery in many ways. I’ve spent nearly three weeks reading and trying various Stop-Loss configurations, and most of the attempts ended in costly early stops.  

I still feel I’m missing the bigger picture.

Although I understand the mechanics’ cause/effects, it would have been a lot easier (and cheaper) to grasp the specifics during relatively calm markets, not through the craziness that we are going through now.

I will not go through all the explanations or revelations as I did in Trading Spreads with Stop Loss Part 1 and Trading Spreads with Stop Loss Part 2. In this week’s commentary, I’m going to pick up where I left off.

Two New Perspectives

First, the larger the dollars at risk for a position, the more working space for market fluctuation. We are in a generally good Bull Market, but with high volatility. The markets will oscillate all over the place, but should still end as winners.

Second, just because the closing Mark-price for my open positions is negative, does not mean these positions are losing. An open position is not losing money until the Short-Strike is ITM (In-The-Money). Therefore, I should not even consider closing until it falls within ITM.

This week I will look at how I can use ThinkorSwim to set up a Conditional Trailing Stop Limit for my Vertical Spreads. The conditional part is to not consider a closing order for any position until that position breaches ITM. And to make sure I have some market-thrashing wiggle-room, the Short-Strike should be at least 1.5% below the current trading price.

Setting “Conditional” Trailing-Stop-Limits

Referencing AAPL position: 

AAPL: 380p/375p (1 contract) – Open 07/14/20 – Expires 08/07/20 – Max Gain = $167.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=61.0%, ROR=50.0%, PC/Ratio=0.3, Max Loss=$332.00, IV%=33%

In ThinkorSwim, I have the option to add a condition to submitting a Trailing-Stop-Limit order. To set a “condition,” I need to open the “Order Rules” dialog box by clicking the little cog symbol located on the right edge of the order ticket.

The narrative to dial in the closing settings is as follows:

If the price of the underlining AAPL drops to or below the Short-Strike price of $380 (placing the position ITM), then submit a Trailing-Stop-Limit order. The Trailing-Stop-Limit order will have the Stop-price set to the current Mark price + $1.00. Set the Limit-price to Mark + $1.50.

I will fill the Order-Rules dialog box, as shown below:

The order confirmation dialog:

The order in the Monitor pane awaiting the time to submit (WAIT TGR)

The order in the Monitor pane awaiting for AAPL to drop to $380 (WAIT COND)

I am aware of the oscillation dynamics of volatile markets. Just because the underlining had reached the ITM for the Short-Strike, does not mean it can’t bounce back. So this is the scenario, I hope to achieve the following.

If the AAPL stock price falls to ITM, then set the stage to exit this position by submitting the Trailing-Stop-Limit order. The Stop-price for the order will now be Mark + $1.00 with a Limit-price of Mark + $1.50.

This Trailing-Stop-Limit order will allow the price of AAPL to fall a little more. But if the Mark price never hits the Stop-price, but starts a bounce-back, then this Wait-Stop should ride it back up to positive territory. If it continues to fall, then just bail (hopefully less than max-loss).

I’m thinking that having this pre-condition to my Stop-Loss attempts should give me additional control over my Exit-Strategy. Then again…

“Let go of the illusion of control.”

– Master Oogway (Move: Kung Fu Panda)

This Week’s Market Sentiment

(As of 07/13/2020)

This Market Sentiment is as of the start of my trading week. This is typically completed by midday Monday morning and I will use it to help guide my trading decisions for this week. By the time this journal is published, it will be a week old.

VIX – Broad Market Volatility:

VIX = 9-Day SMA fell to 28.9 from 31.4 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’s 9-Day SMA dropped below the 50-Day SMA in a showing of renewed confidence. A new trend channel was drawn that closely matched the previous. Last Friday’s closing value of the VIX was 27.9 and showing a continued relaxation of market tension.

This chart suggests that the immediate Market trajectory has returned to bullish.

Put/Call Ratio:

9-day SMA (all OCC options): dropped to 0.63 from 0.7 last week.

Put Options are frequently used as protection 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.

This past week’s Put/Call Ratio 9-Day SMA recovered from the knee-jerk reaction of the month before. The 9-Day SMA remains continues to stay below the 50-Day SMA, and the current ratio value is just below the 9-Day SMA.

The ratio has reentered the existing trend-channel and is continually signaling a bullish trajectory. To provide a little perspective of the current Put/Call Ratio value, the chart above shows the 3-year. Since we are below that green line, the Marketeers appear to be betting on the re-growth of a lot of stocks damaged by the pandemic.

This chart is suggesting general support for a continued bullish trend.

Consumer Sentiment Index (CSI):

We are still waiting for the July CSI chart from UM.

The workforce’s improvement, which will inject millions back into a restarting economy, should certainly confirm improved sentiment. We’ll find out this time next week.

Adding more fuel to the fire should keep the Marketeers happy for this week.

Market Indexes:

DOW = 26,075 – Up 1.0% from 25,827 last week.
S&P 500 = 3,185 – Up 1.8% from 3,130 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.

The S&P 500 being up nearly 2% last week continues to follow the general market thrashing pattern for the last six weeks. But the magnitude of the movement is a good sign that the Thrashing Amplitude may start to relax. What I’m looking for is not an up by big percent then down by big percent… But an up by little percent followed by another up by little percent. The slower/steady movement is where we can make some money.

If recent history is any kind of guide, then next week should follow with a 2%-4% downturn. But the lethargic up by 1%/1.8% last week may be a sign that the thrashing my be subsiding.

Geopolitical tree-shakers are:

• Election year politics continue to exacerbate economy fears
• Black Lives Matter (and other mixed messages from the mob)
• A systematic shift from small business to corporations
• Rising unemployment and record budget deficits
• Public discussions on the merits of sending kids back to school this Fall

By far, the largest tree-shaker at this point is heading up to the November Presidential election. Faux-journalists are exacerbating the current issues into crises to test President Trump’s leadership. I expect the fever-level rhetoric to stay negative over the next four months.

• The suppression of small/private businesses over the fear of a broader Coronavirus outbreak pushes much of the once small-business resources and newly available workforces towards large corporations. Small businesses do not have a representation in the Stock Marker. The markets are made up almost entirely of large corporations. This is why I see a market rebound even though the economy as a whole is suffering.
• A little over a month ago was the George Floyd murder plus the hype over a COVID resurgence (and possibly returning to a social lockdown) from the Fourth of July activities. For a good month, there was a lot of manufactured crisis-stoking from the media with statue-topplings and the “occupy” movements.
• Crisis fatigue seems to be setting in with the general public. Those hot-buttons that issues of the past several weeks are starting to become old news. I see an increasing number of eye-rolling.
• Keeping social unrest at a fever pitch is necessary for a Democrat’s victory in November.

My sentiment for this coming week:

Of the four major indicators above, the VIX, P/C Ratio, and S&P are still suggesting a generalized bull market. The cycle of ups/downs in the S&P indicates that this coming week will be a down week, but the magnitude of the thrashing is suggesting a calming.

The CSI is remaining silent (as of Sunday 7/12) on the issue but suggests that we are all starting to feel a bit better on our economy as a whole.

For this week, I will up my trade risk to $500 in hopes I will “stop” out early if things go out of control. I need to up my game a bit if I want to recoup some of this year’s losses. But if the markets go sideways or down, then this week may be death by a thousand cuts.

I will continue to limit the number of trades (maximum trade risk) to $750.

This week, I will focus on:

1. Limit the max risk per trade to < $500.00
2. Limit the number of new trades and keep the week’s total dollar risk < $750.00
3. Keep the overall dollar risk to be below $1,500
4. Will focus on mid-term trades: 4-5 weeks.
5. Credit spreads only (need positive cash flow for psychological reasons)
6. Will consider only Bull Spreads
7. Set trade triggers and exit positions as soon as possible

Profit and Loss Statement

(As of 07/17/2020)

Realized Profit by Strategy

Schedule for this Week

Goals for this week: (07/13/20 – 07/17/20) (Week 29)

• Max dollars at risk (for the week) < $1,000.00
• Max dollar risk per trade (new trades) = $500.00
• 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 $500.00?:
• Put/Call ratio below 1.5, 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 1% below 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: Aug 7 (<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 07/17/2020)

Spread Count Summary:

Current Dollars at Risk:

New Trades Opened This Week

(07/13/2020 – 07/17/2020)

This week, I submitted five Vertical Bull Put Credit Spreads, but only three survive a premature Stop-out. Additionally, I had an open spread from last week that was also early stopped. All three of these positions had a Trailing-Stop-Limit that was not conditional on ITM.

For these three early-stops, two (if they were open today) would be well on their way to winning. The third early-stop was for MSFT, which is currently undergoing a mini-correction would be a total loss.

The two positions that did survive the week included the conditional ITM clause to the closing order.

IWM: 143.5p/142.5p – Open 07/17/20 – Expires 08/07/20 – Max Gain = $34.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=57.6%, ROR=50.8%, PC/Ratio=1.5, Max Loss=$65.00, IV%=33%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (21 days)
• Probability of OTM > 50%?: Yes (57.6)
• Dollar risk set at or below $500.00?: Yes ($65.00)
• Put/Call ratio below 1.5, or flat, or falling over that last 2-3 weeks?: Yes (Falling)
• The Trend-Channel is Bullish?: Yes (See chart)
• Short-Strike price below the trend channel at expiration?: Yes (See chart)
• Shortstrike price 1% below current price?: Yes (2.1%)
• 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 (50.8%)
• Set a Conditional-Trailing-Stop-Limit: Yes

AAPL: 380p/375p (1 contract) – Open 07/14/20 – Expires 08/07/20 – Max Gain = $167.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=61.0%, ROR=50.0%, PC/Ratio=0.3, Max Loss=$332.00, IV%=33%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (23 days)
• Probability of OTM > 50%?: Yes (61.0%)
• Dollar risk set at or below $500.00?: Yes ($332.00)
• Put/Call ratio below 1.0, or flat, or falling over that last 2-3 weeks?: Yes (0.3)
• 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 (50.0%)
• Set a GTC Trailing Stop Limit to 25%: No (I will set trailing stop tomorrow to avoid a 4th day trade violation.

I set this new Conditional-Trailing-Stop-Limit on 7/16:

AAPL: 370p/365p (1 contract) – Open 07/14/20 – Expires 08/07/20 – Max Gain = $163.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=61.7%, ROR=48.2%, PC/Ratio=0.4, Max Loss=$336.00, IV%=32%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (24 days)
• Probability of OTM > 50%?: Yes (61.7%)
• Dollar risk set at or below $500.00?: Yes ($336.00)
• 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?: Mid (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%?: No (48.2%)
• Set a GTC Trailing Stop Limit to 25%: Yes (See below)

The current Mark price for this position is $1.80. Calculating a 25% offset = $1.80 * .25 = $0.45. I rounded this up to $0.50.

I set my Limit-price to Mark + .50 and my Stop-price to Mark + .40. This should set my stop-price to $1.80 + $0.40 = $2.20 and my Limit-price to $1.80 + $0.50 = $2.30.

(Note: this order Stop-Out 15 minutes later.)

MSFT: 207.5p/205p (1 contract) – Open 07/13/20 – Expires 08/07/20 – Max Gain = $92.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=57.8%, ROR=58.0%, PC/Ratio=0.3, Max Loss=$157.00, IV%=33%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (24 days)
• Probability of OTM > 50%?: Yes (57.8%)
• Dollar risk set at or below $500.00?: Yes ($157.00)
• Put/Call ratio below 1.0, or flat, or falling over that last 2-3 weeks?: Yes (0.3)
• 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 (58.0%)
• Set a GTC Trailing Stop Limit to 25%: Yes (See below)

I did not get a screenshot of my Trailing Stop Limit order. But I submitted it with a $0.25 Stop-price then a $0.35 Limit-price.

SPY: 319p/318p (1 contract) – Open 07/13/20 – Expires 08/07/20 – Max Gain = $34.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=51.4%, ROR=50.8%, PC/Ratio=1.3, Max Loss=$65.00, IV%=28%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (24 days)
• Probability of OTM > 50%?: Yes (51.4%)
• Dollar risk set at or below $500.00?: Yes ($65.00)
• Put/Call ratio below 1.0, or flat, or falling over that last 2-3 weeks?: Yes (1.3 – flat for +6 weeks)
• 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 (50.8%)
• Set a GTC Trailing Stop Limit to 25%:

Trades Currently Cooking

(As of 07/17/2020)

Trades Closed This Week

(As of 07/17/2020)

AAPL: 370p/365p (1 contract) – Open 07/14/20 – Expires 08/07/20 – Max Gain = $163.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=61.7%, ROR=48.2.0%, PC/Ratio=0.4, Max Loss=$336.00, IV%=32%
At Close: Prob. OTM=54.2%, PC/Ratio=0.5 IV%=33%, ROR=–6.25%

Cost to open: $1.63 premium collected * 100 shares * 1 contracts = $163.00
Cost to close: -$1.84 premium paid * 100 shares * 1 contracts  = -$184.00
Net Loss = $163.00 to open – $184.00 to close = -$21.00 – fees
Actual ROR = -$21.00 / $336.00= -6.25%

This position closed 15 minutes after I entered the Stop-Loss order.

IWM: 142p/139p (1 contract) – Open 07/06/20 – Expires 07/31/20 – Max Gain = $100.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=54.2%, ROR=50.3%, PC/Ratio=1.4, Max Loss=$199.00, IV%=35%
At Close: Prob. OTM=39.3%, PC/Ratio=0.8 IV%=43%, ROR=-29.1%

Cost to open: $1.00 premium collected * 100 shares * 1 contracts = $100.00
Cost to close: -$1.40 premium paid * 100 shares * 1 contracts  = -$140.00
Net Loss = $100.00 to open – $140.00 to close = -$40.00 – fees
Actual ROR = -$40.00 / $199.00= -29.1%

This position took a couple of shots with the Trailing-Stop-Limit. The last is the screenshot below

Although I get peeved that I haven’t had a positive performance from my trails with Stop-Losses, but the end results are pretty much what I’ve asked for – “Cut losing positions easy” and “Protect earnings

The trajectory of IWM went south almost immediately after I opened. I should have closed it quicker for a smaller loss than $40, but I was busy trying to figure out how to do that…

MSFT: 207.5p/205p (1 contract) – Open 07/13/20 – Expires 08/07/20 – Max Gain = $92.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=57.8%, ROR=58.0%, PC/Ratio=0.3, Max Loss=$157.00, IV%=33%
At Close: Prob. OTM=45.1%, PC/Ratio=0.8 IV%=43%, ROR=-20,1%

Cost to open: $1.00 premium collected * 100 shares * 1 contracts = $100.00
Cost to close: -$1.40 premium paid * 100 shares * 1 contracts  = -$140.00
Net Loss = $100.00 to open – $140.00 to close = -$40.00 – fees
Actual ROR = -$40.00 / $199.00= -29.1%

Conclusion

Can I be incidentally flagged as a Pattern Day Trader?

A caveat about submitting Stop-Loss:

Most brokers have to follow the FINRA regulation about Day Trading. FINRA Regs define a pattern Day-Trader as making four or more round-trip trades during a rolling 5-day period. A round-trip trade is when I open then close the same position within the same day.

If I were to open a new Spread position in the morning, submit a Trailing-Stop-Limit soon after, and before the close of the day’s market, that position gets Stopped-Out, then that is considered a Day-Trade. If this occurs more than three times in five days, my broker can restrict my account from opening any new positions for up to 90 days.

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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