Destiny is not the path given to us,
but the path we choose for ourselves.

– Megamind (Movie: Megamind)

Commentary

Back in April, airlines received $25 billion in bailouts from the government to pay their hundreds of thousands of employees. This support will expire at the end of September. Most airlines have already publically announce significant furloughs if the bailout is not renewed.

Roughly 25 million Americans will lose the $600 a week unemployment bonus soon. This proverbial camel’s nose under the “Univeral Income” tent program is a hot topic of negotiations for this next stimulus package.

With the COVID-Count climbing across the country, there is now a lot of pressure on Congress to take additional action. Everyone is on board with having a fourth round of a stimulus, but there seems to be little agreement amongst the parties regarding what should be include/excluded. Everyone has a great plan, but they are too busy shouting over each other to listen to anyone else. Luckily, the Treasury can borrow an enormous amount of money with near-zero interest rates.

The Senate Republicans are set to unveil their stimulus proposal this week, opening the door for formal negotiations. The House Democrats already past a massive three-trillion dollar plan last month. And the White House is not pleased with anything.

The Senate Republicans want liability protections for returning kids to school, businesses reopening, and medical workers battling a new virus. The House Democrats want a State bailout package and rejuvenated social programs. The White House wants a Payroll Tax Holiday and an extended (but targeted) PPP. All of these have been declared dead-on-arrival by the other groups.

A deeply divided Government has to agree on the stimulus details before the end of July – when Congress leaves town for a month. This is a mear two weeks from now. So I suspect the markets to remain a little “mel-uncl-lee”.

If negotiations go well (meaning more virus mediations and a stimulus that will keep the economy going until a vaccine is available), then a lot of money currently held on the sidelines will flood back. Wealth from today’s winners will then be redistributed back to the current losers. There is room for a significant market rally on positive stimulus news.

Tweaking my Entry Rules

This week, I’m going to fudge the Entry Rules a little by relaxing the 50% minimum Return on Risk (ROR) and introducing a 1.5% breathing room requirement. This change is due primarily because of the declining Implied Volatility (IV). As volatility falls, so does the size of the premiums available.

I still want to maximize ROR when I can, but I want to make sure I don’t Stop-Out too soon with the new Conditional-Trailing-Stop-Limit strategies. Now, as a priority, I want the Short-Strike price for any new position to be at least 1.5% below the underlining’s opening position price. This new requirement is intended to make sure new spreads can maneuver negatively (a little) before it triggers the Condition-Trailing-Stop-Limit order.

This Week’s Market Sentiment

(As of 07/20/2020)

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:

9-Day SMA stayed flat at 28.9 from 28.9 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 remained below the 50-Day, and the daily value bouncing was somewhat disturbing last week. The results are pretty much what we had the week before. Looking back at last week and comparing it with the past three months, the Marketeers seem to remain on edge.

This chart suggests that the immediate Market trajectory remains bullish.

Put/Call Ratio:

9-day SMA (all OCC options): dropped to 0.59 from 0.63 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 continues to slide a little over the last week. Although by not much, the 9-Day SMA remained just inside the trend-channel through the week. This indicator tells me that the Marketeers continue to expect the markets to remain bullish in the short term.

Consumer Sentiment Index (CSI):

The University of Michigan’s consumer sentiment fell to 73.2 in July from 78.1 in June, well below market forecasts of 79. This drop is assumed to be due to the coronavirus’s widespread resurgence and a fear of a lockdown 2.0.

This drop is supported by the current presidential polls suggesting Biden widening approval over Trump. We US voters are just not happy campers!

Market Indexes:

DOW = 26,672 – Up 2.2% from 26,075 last week.
S&P 500 = 3,225 – Up 1.3% from 3,185 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 rose nearly 1.3% last week in a somewhat self-supporting manner. There appears to be a positive and yet unexpected outcome from several of the Banks Earnings Report from last week.

This indicator continues to enforce the bull market perception.

Geopolitical tree-shakers are:

• Election year politics continue to exacerbate economy fears
• The next Stimulus Package in questions for the next few weeks
• Rising virus counts and news from the vaccine side
• Rising debts from states and cities suffering from a lack of tax income
• US and China poking at each other, stoking a new cold-war
• Oil prices still remain too low to continue production

By far, the largest tree-shaker at this point is the heading up to the November Presidential election. Faux-journalists are exacerbating the current issues into crises and creating sensations out of nothing. I expect the fever-level rhetoric to stay negative over the next four months.

Issues like, Black Lives Matter riots, Occupy movements, and violent unrest in Portland and Chicago are the manufactured punctuation to what some hope to be the collective sentiment of the rest of the country. The attempt is to demonstrate to all Americans just how bad a Trump/Conservative Government can spiral out of control.

This thinking reminds me of an interview with Osama Bin Ladin weeks after 9/11. He profoundly believed the US citizens felt oppressed and wanted to overthrow our system. He was confident that all we needed was a catalyst, like taking down the World Trade Center and attacking the Capital, which would be enough to inspire a government interaction. Boy, was he wrong – just as the Black Lives Matters organizers are wrong.

My sentiment for this coming week:

Of my four indicators above, the P/C Ratio and S&P 500 reinforce each other in a call for market growth. But the VIX and the CSI are vociferously signaling for caution.

I’m going to bet that by the end of July, the markets will have (or will about to) rally over the news of the next stimulus bill. So I plan to be a bit more aggressive in trade risks this week.

This week, I will focus on:

1. Limit the max risk per trade to < $500.00
2. Short Stike Price is 1.5% below the current underlining’s price
3. Limit the number of new trades and keep the week’s total dollar risk < $1,000.00
4. Keep the overall dollar risk to be below $1,500
5. Will focus on mid-term trades: 4-5 weeks
6. Credit spreads only (need positive cash flow for psychological reasons)
7. Will consider only Bull Spreads
8. Set Conditional-Trailing-Stop-Limits

Profit and Loss Statement

(As of 07/24/2020)

Realized Profit by Strategy

Schedule for this Week

Goals for this week: (07/20/20 – 07/24/20) (Week 30)

• 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%?:
• Short-Strike price (Head Room) >= -1.5% below the current price?
• 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?:
• 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: (see screenshot below)

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 14 (<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 07/24/2020)

Spread Count Summary:

Current Dollars at Risk:

New Trades Opened This Week

(07/20/2020 – 07/24/2020)

MSFT: 205p/195pp  – Open 07/22/20 – Expires 08/14/20 – Max Gain = $295.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=59.3%, ROR=41.8%, Head Room=2.7%, Max Loss=$704.00, IV%=24%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (23 days)
• Probability of OTM > 50%?: Yes (59.3%)
• Short-Strike price (Head Room) >= -1.5% below the current price? Yes (-3.2%)
• Dollar risk set at or below $500.00?: No ($704.00)
• Put/Call ratio below 1.5, or flat, or falling over that last 2-3 weeks?: Yes (0.5)
• The Trend-Channel is Bullish?: Yes (See chart)
• Short-Strike price below the trend channel at expiration?: Yes (See chart)
• 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%?: No (41.8%) (See comments below)
• Set a GTC Trailing Stop Limit: (see screenshots below)

Note: This Microsoft position is my first in a deep equity risk. The Short-Strike’s price width to the Long-Strike is 10, which makes my trade risk $10 * 100 shares = $1,000 minus the premium collected.

Technically, the actual dollar risk between this and a 1-Strike width (2.5) should be the same since I am now using the Conditional-Trailing-Stop-Limit exit strategy. But this has not yet been proven.

UNH: 297.5p/292.5p  – Open 07/21/20 – Expires 08/14/20 – Max Gain = $125.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=61.7%, ROR=34.2%, Head Room=2.7%, Max Loss=$379.00, IV%=14%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (24 days)
• Probability of OTM > 50%?: Yes (61.7%)
• Short-Strike price (Head Room) >= -1.5% below the current price? Yes (-2.7%)
• Dollar risk set at or below $500.00?: Yes ($374.00)
• Put/Call ratio below 1.5, or flat, or falling over that last 2-3 weeks?: Yes (0.7)
• The Trend-Channel is Bullish?: Yes (See chart)
• Short-Strike price below the trend channel at expiration?: Yes (See chart)
• 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%?: No (36.8%) (See comments below)
• Set a GTC Trailing Stop Limit: (see screenshots below)

Note: UNH has been moving mostly sideways for the past three months. I’m not sure how wise it was to open this position. If it remains moving sideways with a little lift here or there, it should still end positively. However, I do need to see how the new Conditional-Trailing-Stop-Limit Exit Strategy works…

Trades Currently Cooking

(As of 07/24/2020)

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%
Now: Prob. OTM=64.3%, ROR=12.3%, Head Room=2.3%, PC/Ratio=1.4, IV%=21%

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%
Now: Prob. OTM=65.1%, ROR=7.7%, Head Room=3.1%, PC/Ratio=1.7, IV%=31%

Trades Closed This Week

(As of 07/24/2020)

MSFT: 205p/195pp  – Open 07/22/20 – Expires 08/14/20 – Max Gain = $295.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=59.3%, ROR=41.8%, Head Room=2.7%, Max Loss=$704.00, IV%=24%
At Close: Prob. OTM=37.9%, PC/Ratio=0.5, Head Room=-1.2%, IV%=24%, ROR= -17.5%

Cost to open: $2.95 premium collected * 100 shares * 1 contracts = $295.00
Cost to close: -$4.18 premium paid * 100 shares * 1 contracts  = -$418.00
Net Loss = $295.00 to open – $418.00 to close = -$123.00 – fees
Actual ROR = -$123.00 / $704.00= -17.5%

This position lasted just one day. But the Conditional-Trailing-Stop-Limit appears to have performed as design. When open, the actual price of MSFT was 210.66 (2.7% above the Short-Strike price of 205). But immediately after Wednesday Closing-Bell and after Mircosoft’s blowout earnings report, MSFT began a decline of near 4%. Thursday afternoon, the Short-Strike went ITM with the current Mark price of $3.80. The Stop price as triggered to $4.24. And after a bit of fluctuation, got reset to $4.18 which an exit order was performed.

What I did learn that the original guestimate Stop-Price of $1.00 and a Limit-Price of $1.50 is too high for a failing position. During the back and forth of MSFT bouncing above then below the Short-Strike price, I was able to reset CTSL parameters to $.50 Stop-Price and $1.00 Limit-price.

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%
Now: Prob. OTM=59.1%, ROR=-4.3%, Head Room=3.7%, PC/Ratio=0.5, IV%=23%
At Close: Prob. OTM=21.8%, PC/Ratio=0.7, Head Room=-2.3%, IV%=26%, ROR= -61.7%

Cost to open: $1.67 premium collected * 100 shares * 1 contracts = $167.00
Cost to close: -$3.72 premium paid * 100 shares * 1 contracts  = -$372.00
Net Loss = $167.00 to open – $372.00 to close = -$205.00 – fees
Actual ROR = -$205.00 / $332.00= -61.7%

This AAPL position was going pretty good until the US announced the closure of the China consulate in Houston. China then retaliated with the closer of the Chengdu consulate (obviously in China). This is stoking a new Cold-War when Apple may be collateral damage.

By Thursday afternoon, both the Short and Long Strike prices of this position went ITM.

The Conditional-Trailing-Stop-Limit (CTSL) order maintain the original guesstimate of $1.00 Stop price and $1.50 Limit price. When the Short-Strike price went ITM, the Mark-price for this position was $2.525. This created a Stop-price of $3.525 but quickly improved to $3.13. AAPL then gapped down to $3.72 and was closed by the limit order.

The lesson learned here is the original CTSL confirmation was too much. Going forward, I will try Stop=$.50 and Limit=$1.00

Conclusion

This week’s markets were shaken by an escalation of the Cold-War between the US and China. The China Trade deal is now in question, and severe accusations of espionage are being flung about. In the collateral-crosshairs are the tech giants with a large customer base in both China and the US. Apple is one, and Microsft is another.

Also, this week, I started to throw some “Hail Mary” passes in configuring new Vertical Bull Put Credit Spreads. Opening one position that is 5-points wide and another that is 10-points wide. This “going-deep” yielded a premium income of $430 for this week – which is significantly more than any previous week. But at the same time, I am accepting significantly higher dollar risk. If these two spreads survive this week, then this will be the most successful week ever.

Going deep instead of multiple contracts was one of the lessons I learned last year (see Multi-Contracts for Credit Spreads). The Probability of OTM is still the same with any depth of contracts, but possible premiums are much higher. But unfortunately, the deeper I go, the lower the ROR.

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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