If you always put limits on everything you do,
physical or anything else,
it will spread into your work and into your life.
There are no limits.

-Bruce Lee

Commentary

Bruce Lee2

Bruce Lee’s life was defined as much by his philosophy as by his brand of fighting skills. He was in a constant state of self revaluation and reassessment.

“To change with change is the changeless state.”

This week’s commentary is a brief six-month self-assessment of my Options Trading sagacity. Now is time to make those last philosophical adjustments for the final leg of my 2-year mission.

My Options Trading savvy has netted me a 43% loss from my start of year $9,000 cash balance. On top of that, I have paid myself a whopping $1,500 ($250/month * 6 months) as a monthly paycheck. So my available trading cash going into the final six-months is thin.

But, as a defense to my dismal performance thus far, the COVID-Crash (Feb-Mar) took nearly 40% of my available cash, leaving me in a deep hole early. Plus, the huge market thrashing since then has made short-term Spread positions a high risk. This year, being an election year, pandemic hysteria, and manufactured social unrest is not the typical winning year.

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Still an entry-level newb!

After the market pounding early this year, I found that I still do not have a coherent strategy in market awareness or exit-rules to help protect me from such a COVID-event. And it took a tsunami-like COVID-Crash to get me to look into it closer. The past six months were a costly learning experience.

Like Bruce Lee, I need to keep reassessing my Options-Fighting sense by continually rearticulating a trading philosophy to help guide my efforts.

  • Be more market aware. Know the trend – trade the trend. Don’t trade emotion, don’t trade opportunity.
  • High volatility and high market thrashing are going to be a challenge for any Options Spreads. If the underlying is experiencing high volatility, then I need more breathing room to maneuver.
  • In highly volatile markets, avoid those underlying instruments that are prone to big price gaps. It might be best to focus more on Index-ETFs than individual stocks.
  • Redefine my maximum dollar risk for a single spread to be higher. Rely more on the Conditional-Trailing-Stop-Limit to limit losses. 

Going back to an earlier rule, I will start to target a higher Prob-OTM and lower ROR over the opposite. But instead of limiting the Long-Strike to minimize the max-loss, I will maximize the max-loss to maximize the premium. In other words, enter positions with the Long-Strike 10 points away instead of 2 or 3.

Entering into the final six months of my two-year mission, I need to step up my game. I seem to lack the mo-jo to out-think the markets. If I want to be one of the Marketeers, I need to reassess my limits and step up and be a winner!

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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 tipped down a little to 26.2 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.

Annotation 2020-07-26 072801VIX
CBOE Market Volatility Index

The rate the VIX is dropping to 15 has slowed. I adjust the Trend-Channel a little to follow the past six-weeks a bit more closer.

The 9-Day SMA is still below the 50-Day SMA, and the current VIX is below the 9-Day SMA. The general trend remains in a falling state, suggesting that the Marketeers are getting more in agreement with the general market’s direction.

This chart suggests that the thrashing size of the market’s movement is lessening, which tells me two things: 1) trends of the market indexes ETFs will continue in the general direction as they have been over the past six weeks, and 2) the premiums offered for spreads are falling.

Put/Call Ratio:

9-day SMA (all OCC options): rose to 0.61 from 0.59 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.

Annotation 2020-07-26 072801PCR
Daily Put/Call Ratio for all OCC Options

I also lessen the rate of descent in the Trend-Channel for the Put/Call Ratio. I’m still showing the ratio falling, but it remains in the range of a happy market.

Fridays (7/24/20) value of .76 is a significant bump from the middle of last week. This bump is contributed to Trump ordering the closure of the Houston Chinese consulate and Beijing’s response.

Although it is evident that the Marketeers are squeamish and will jump on any little bit of news, they are not running for cover. A 9-Day SMA of .61 signals that most of our investment buddies are buying Calls.

This chart is suggesting a continuation of a Bull direction in the markets.

Consumer Sentiment Index (CSI):

Annotation 2020-07-19 083130CSI

This chart is unchanged from last week.

From the declines starting at the COVID-Crash, a record number of workers remain unemployed. Plus, those states that were boldly reopening have hit the brakes, and reemployment is slowing. Many people are reassessing there current their financial future with the continuing Coronavirus.

Market Indexes:

DOW = 26,470 – Down 0.8% from 26,672 last week.
S&P 500 = 3,216 – Down 0.3% from 3,225 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 2020-07-26 072801SPX
Daily S&P 500 Index – Four-Months

The S&P 500 was arguably flat last week. On its way to a moderate point rise, it turned flat on Thursday as the Tech Sector got a fright from the China consulate closer. Since much of our tech-toys have a significant supply chain in China, a flare-up in US/China relations will be a cause of concern.

The 9-Day SMA continues to rise, and the current S&P 500 index is still on the trend channel’s upside.

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
  • US and China poking at each other, stoking a new cold-war
  • Stoking up local unrest in various cities
  • Rising virus counts and news from the vaccine side
  • Rising debts from states and cities suffering from a lack of tax income
  • Oil prices still remain too low to continue production
  • GDP numbers comes out this week – should be a doozy

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.

My sentiment for this coming week:

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

This week will be big for the markets:

  • Many of the sectors bellwether companies (Apple, Amazon and Google) are reporting earnings this week. The earnings will cover the second quarter of this year – over the biggest economic lockdown periods in America’s history.
  • Apple, being one of these bellwether stocks for the tech sector, will report earnings after market closing on Thursday. With the pandemic and US/China dust-up, they have to demonstrate why their stocks’ valuation is high, confirm the iPhone 12 is on target for this Fall’s release, and provide positive growth guidance for the rest of the year. If they can’t, I will expect a huge selloff of AAPL and a substantial drop in the tech markets.
  • The second-quarter GDP number will be published Thursday before the markets open. We all expect a +30% drop for the second-quarter GDP (that should already be baked in the current market valuation). But just the sheer reporting of the most significant GDP drop ever is going to roil some segments.
  • The weekend news surrounding the next phase Stimulus Bill suggests that there are few agreements. Some of the more contentious points may need to wait for a Phase 5 bill (kick the can down the road). So don’t look for any market-bump help from this.
  • Several of the big tech companies are testifying in Congress over antitrust violations. Google is delaying its Earnings Report until after their testimony.

With all these “wait and see” points, I may wait until the end of the week before opening any new positions.

This week, I will focus on:

  1. Trade only Index ETFs
  2. Limit the max risk per trade to < $1,000.00
  3. Short Stike Price to be 4.0% below the current underlining’s price
  4. Keep the week’s total dollar risk < $1,500.00
  5. Keep the overall dollar risk to be below $3,000
  6. Will focus on mid-term trades: 4-5 weeks
  7. Credit spreads only (need positive cash flow for psychological reasons)
  8. Will consider only Bull Spreads
  9. Set Conditional-Trailing-Stop-Limits
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Profit and Loss Statement

(As of 07/31/2020)

 YearMonthWeek #
 2020July31
Beginning Account Balance$9,000.$4,047.79$4,136.93
Deposits (Div. & Int.)$38.50$0.03$0.03
Withdraws (paycheck)-$1,875.24-$250.00-$250.00
Premiums on Open$4,323.00$1,289.00$0.00
Premiums on Close-$8,024.00-$1,749.00-$1.05
    
Fees Paid (total)-$146.59-$22.15-$1.05
Ending Account Balance $3,316.64$3,316.64$3,316.64
Total Gain/Loss-$5,683.36-$731.15-$456.00
ROR -11.9%-5.5%
ROC-42.7%  

Realized Profit by Strategy

  Year Month Week #
  2020 July 31
Vertical Bull Put Credit Spread -$3,662.86 -$132.00 -$72.10
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 -$3,912.48 -$132.00 -$72.10
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Schedule for this Week

Goals for this week: (07/27/20 – 07/31/20) (Week 31)

  • Max dollars at risk (for the week) < $1,500.00
  • Max dollar risk per trade (new trades) = $1,000.00
  • Update Trading Log as trades occurs

Entry Rules for Vertical Bull Put Credit Spreads:

  • Expiration date set at <= 4 weeks?:
  • Is this an Index ETF?:
  • Probability of OTM > 50%?:
  • Short-Strike price (Head Room) >= 4.0% below the current price?:
  • Dollar risk set at or below $900.00?:
  • 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 21 (<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 07/31/2020)

Spread Count Summary:

  Year Month Week #
  2020 July 31
Vertical Bull Put Credit Spread 57 11 0
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 76 11 0

Current Dollars at Risk:

  Year Month Week #
  2020 July 31
Vertical Bull Put Credit Spread $132.00 $132.00 $0.00
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 $132.00 $132.00 $0.00
Max Risk Allowed $3.000.00   $1,500.00

 

New Trades Opened This Week

(07/27/2020 – 07/31/2020)

Trades Currently Cooking

(As of 07/31/2020)

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 07/31/2020)

UNH: 297.5p/292.5p  – Open 07/21/20 – Expires 08/14/20 – Max Gain = $135.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=61.7%, ROR=34.2%, SSO=2.7%, Max Loss=$379.00, IV%=14%
Now: Prob. OTM=54.0%, Head Room=-1.1%, PC/Ratio=0.9, IV%=18%
At Close: Prob. OTM=49.6%, PC/Ratio=0.9, Head Room=??%, IV%=16%, ROR= -18.5%

Cost to open: $1.35 premium collected * 100 shares * 1 contracts = $135.00
Cost to close: -$2.05 premium paid * 100 shares * 1 contracts  = -$205.00
Net Loss = $135.00 to open – $205.00 to close = -$70.00 – fees
Actual ROR = -$70.00 / $379.00= -18.5%

This position lasted less than one week. It never really move up but started inching down. The exit was expected and I need to move on.

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Conclusion

There was too much happening this week to support a trend within anything in my watchlist of funds. The two-week trajectories went sideways or down for all of them. Thursday GDP numbers and the nail bitter for Apple’s earnings kept the market mostly lethargic until Thursday – which the DOW dropped over 500 points.

As of now (Thursday afternoon – about 2-hours before market closing), I will put off all new positions prospects until Friday. It will be a last-minute decision, depending on what AAPL does.

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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.”

 

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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