Every champion was once a contender
who refused to give up.

-Rocky Balboa (Movie: Rocky)

Commentary

Every successful Options Trader started as a rookie-newb. If we are smart, we would train hard (study), enter Amateur Play (trade with paper money), then enter the ring as a Journeyman for a couple of years (trading with a small budget we are willing to lose).

As a Journeyman, I currently trade with a low-end budget, mainly because I know that many lessons can’t be learned unless they really hurt. When trading with paper money, I can be greedy and unintimidated. But when trading with real money, losing smarts. So as a Journeyman, I much rather lose a couple of hundreds than a couple of thousands.

When I become a contender, the stakes will go up.

Avoid Getting Broken Thumbs

For this week’s commentary, I want to review my thinking on selecting the Short-Strike for a new Vertical Bull Put Credit Spread. One aspect of picking the Short-Strike is to keep an eye on market volatility.

A high VIX for the general markets (or a high Implied Volatility for a single underling) implies a high degree of value-thrashing for the underlying. Thrashing further suggests significant price jumps – one way or the other. When the volatility is above 15%, either with the VIX or the IV Percentile, I should expect a higher sensitivity to significant price movements with any news being reported.

So as a rule-of-thumb, if VIX or IV% is higher than 15%, then consider a Short-Strike that is 3% or more under the current underlying’s value. If the volatility is less than 15%, then find a strike at 2% or less.

Using Volatility to Set a Short-Strike

If a newly opened position satisfies all my entry rules, but the underlying is thrashing wildly, I know it can easily be thrown underwater fast and probably never recover.

Consider if the IV% is >= 50% and I open a new position with the Short-Strike close to At-The-Money (ATM), any market-jarring news could easily cause a drop in the underlying price by 5% or more.  This gap down can knock the wind out of any spread position and it may never get back up. Don’t want that.

However, if the volatility is significantly below 15% (meaning that there is little to no thrashing), then considering a new spread with the Short-Strike closer to ATM might be better. It will be less likely to have a large gap down movement. Besides, the narrower headroom – the higher premiums collected.

Consider the following as a headroom Rule-of-Thumb:

• VIX/IV% greater than 15%, pick a Short-Strike 3% or more below the ATM price
• VIX/IV% less than 15%, find a Short-Strike less than 3%

For example, assume IWM’s IV% is > 25%, and VIX is near 22%. With this high volatility, I will pick a Short-Strike that has a 4% headroom. Thus with the current price of IWM at $159.41, a proposed Short-Strike price could = $159.41 – ($159.41 * .04) = $153.03, or $153. This formula gives this position an estimated 4.02% headroom.

For those who refuse to give up – remember this:

Rocky couldn’t sing or dance, and he didn’t even win the fight –
but he did get the girl!

This Week’s Market Sentiment

(As of 08/10/2020)

This Market Sentiment is as of the start of my trading week. This analysis 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 down to 23.9 from 25.0 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% or below will have an innate tendency to rise.

The 9-Day SMA has slightly breached the top of the Trend-Channel but is still declining. Additionally, the current VIX of 22.2% is following the trend downward and is getting closer to 15.

This level of the VIX suggests that the Marketeers remain primed and pumped for something to happen. But don’t appear to be too concerned as to what degree that “something” is.

The decline will have a narrowing effect on the current degrees of market thrashing, which will minimize the probability of larger gap-downs. It will also have a muting effect on the size of available premiums for my credit spreads.

The dynamics of the market can erupt in any given news cycle. Short of any erupting news, this VIX implies that the markets will continue in its current direction (semi-aggressive bullish)

Put/Call Ratio:

9-day SMA (all OCC options): dipped to 0.59 from 0.64 last week.

Put Options are frequently used as protections against existing investments falling. When the ratio between Put Options bought versus 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.

The 9-Day SMA inched down from 0.64 to 0.59. The 9-Day SMA remained below the 50-Day SMA, signaling a continuation for bullish activities in the markets.

Being nearly one-half a point below that scared/safe line suggests most Marketeers are confident of continue market growth.

The consumer Sentiment index hopes to take a broad snapshot of what we all feel to be the direction of the U.S. economy. It measures how consumers feel about their personal financial situation and compares that to what they believe is happening to others throughout the country. The survey contains 50 questions and is conducted to more than 500 people each month.

Consumer Sentiment Index (CSI):

A low rating is a general dissatisfaction with our current management of U.S. economic policies. This dissatisfaction will imply that something has to change.

A high satisfaction rating suggests approval of the current policy management and implies market stability.

This chart has not changed over the past two weeks. Pre-pandemic, the general consumer showed sustainable approval for the Federal Economic policies. Most everyone in the country was satisfied with their prospects and believed that others were doing well.

The Federal Economic policies at the start of the pandemic pulled the rug out of a lot of consumers. Plus, the continued policy dispute in Washington over, 1) should we limit Federal effort to COVID mitigation, or 2) to step up to socialism, has raddled many of us.

The CSI trend suggests a lethargic consumer base until either a vaccine is thoroughly dispersed throughout the world, or until after the November elections.

Market Indexes:

DOW = 27,433 – Down 3.8% from 26,428 last week.
S&P 500 = 3,351 – Up 2.4% from 3,271 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 markets continue to rise, even with the political deadlock on the Federal Stimulus Bill. Any positive news out of Washington this week should keep the tide rising.

The current value of the SPX is above the 9-Day SMA, and that is above the 50-Day SMA. Both SMA has been rising for nearly three months. This chart is showing a sustained growth in the S&P 500 since the COVID-Crash bottomed out in March.

A Warning Sign!

The current S&P 500 value is about to breach the top end of the Trend-Channel. This action may be an indicator of a possible breakout or, like a rubber band wound too tight, a signal to expect a little slippage fairly soon.

Geopolitical tree-shakers are:

• Election year politics continue to exacerbate economy fears
• Ongoing limited national lockdown of many small businesses
• Ongoing negotiations over a Stimulus Package
• Trump weekend executive orders to extend unemployment benefits
• Tariffs tit-for-tat with Canada and China
• China tension escalates
• COVID infection/death numbers

Soundly amid the election season, I fully expect all kinds of outrageous news accusations and ridiculous political stunts from both parties. Unless a believable event occurs, I feel that the markets have already baked in political machinations into its value.

Currently, the over-exaggeration of the pandemic as causing a high level of social anxiety, and that is cat-nip for political campaigns. This time next year (or two), I predict that we will have an analysis of the COVID medical effect on the U.S. people to look something like this:

• I believe it will reveal that the high number of infections recorded will be because we actively searched for those infected – instead of just counting those who were feeling the effects. I’m sure that if we actively sought out those who have the seasonal flu virus, the flu count would be astronomically high.
• I also believe the death rate will be revised considerably down. Currently, we are counting everyone who died and had COVID. So if someone died in a car accident and the autopsy showed both high levels of alcohol and COVID, he is counted as a COVID related death.

My sentiment for this coming week:

Of my four indicators above, the VIX, P/C Ratio, and S&P 500 are reinforcing each other in confirming a continued Bull trajectory for the general market. But the CSI is vociferously signaling for caution, and the S&P 500 may be wound a little too tight.

After several months of scandalmongering to sway voters in November, I feel most Marketeers are getting numb to all the dire threats that are being thrown out there. So I’m starting to see most Geopolitcal Tree-Shakers getting compartmentalized and put in the back seat.

With VIX still hovering above 20%, any unexpected news event could throw a Vertical Bull Put Credit Spread ITM (In-the-Money). So I will keep my minimum headroom between the current underlying price to the Short-Strike price 4% or better.

This week, I will focus on:

1. Limit the max risk per trade to < $500.00
2. Short Stike Price to be 4.0% below the current underlining’s price
3. Keep the week’s total dollar risk < $1,000.00
4. Keep the overall dollar risk to be below $3,000
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 08/14/2020)

	Year	Month	Week #
	2020	Aug	33
Beginning Account Balance	$9,000.	$3,316.67	$3,559.57
Deposits (Div. & Int.)	$38.44	$0.00	$0.00
Withdraws (paycheck)	-$1,875.24	-$0.00	-$0.00
Premiums on Open	$4,739.00	$415.00	$170.00
Premiums on Close	-$8,024.00	-$0.00	-$0.00
Fees Paid (total)	-$150.75	-$4.16	-$2.06
Ending Account Balance	$3,727.51	$3,727.51	$3,727.51
Total Gain/Loss	-$5,272.49	$410.84	$167.94
ROR		12.4%	4.7%
ROC	-38.2%

Realized Profit by Strategy

		Year	Month	Week #
		2020	Aug	33
Vertical Bull Put Credit Spread		-$3,596.97	$65.89	$0.00
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		-$3,846.59	$65.89	$0.00

Schedule for this Week

Goals for this week: (08/10/20 – 08/14/20) (Week 33)

• 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

• Expiration date set at <= 4 weeks?:
• Probability of OTM > 50%?:
• Short-Strike price (Head Room) >= 4.0% 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?:
• The current price within the bottom 1/2 of Bull Trend Channel?:
• The current 1-week or 2-week trajectory bullish?:
• 9-Day SMA above 50-Day SMA?:
• Current price above 9-Day SMA?:
• ROR >= 50%?:
• Set a GTC Conditional Trailing Stop Limit (CTSL): (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: Sept 4 (<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 08/14/2020)

Current Dollars at Risk:

		Year	Month	Week #
		2020	Aug	33
Vertical Bull Put Credit Spread		61	4	2
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		80	4	2

Spread Count Summary:

		Year	Month	Week #
		2020	Aug	33
Vertical Bull Put Credit Spread		$2,285.00	$2,285.00	$830.00
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		$2,285.00	$2,285.00	$830.00
Max Risk Allowed		$3.000.00		$1,000.00

 

New Trades Opened This Week

(08/07/2020 – 08/14/2020)

SPY: 324p/315p  – Open 08/13/20 – Expires 09/04/20 – Max Gain = $58.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=77.1%, ROR=12.9%, Head Room=-4.3%, Max Loss=$441.00, IV%=15%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (22 days)
• Probability of OTM > 50%?: Yes (77.1%)
• Short-Strike price (Head Room) >= 4.0% below the current price?: Yes (-4.3%)
• Dollar risk set at or below $500.00?: Yes ($441.00)
• 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)
• The current price within the bottom 1/2 of Bull Trend Channel?: Yes (See chart)
• The current 1-week or 2-week trajectory bullish?: Yes (See chart)
• 9-Day SMA above 50-Day SMA?: Yes (See chart)
• Current price above 9-Day SMA?: Yes (See chart)
• ROR >= 50%?: 12.9%
• Set a GTC Conditional Trailing Stop Limit (CTSL): (see screenshot below)

This position falls flat to my new Entry Rules in two ways. First, the ROR is below 15%. I did not take note of this until after the position was open. I’m not sure how much this would make a difference in my decision making, but it would have been a factor.

Second, the IV% = 15%. The selection of a -4% headroom for the Short-Strike was primarily decided because the VIX is > 20%. This position may have been a good candidate for a -3% pick. If it were so, then the ROR would have been 16.4%

These are the nuances that I need to get better at.

MA: 315p/310p  – Open 08/11/20 – Expires 09/04/20 – Max Gain = $112.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=72.0%, ROR=28.7%, Head Room=-4.2%, Max Loss=$387.00, IV%=12%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (24 days)
• Probability of OTM > 50%?: Yes (72%)
• Short-Strike price (Head Room) >= 4.0% below the current price?: Yes (-4.3%)
• Dollar risk set at or below $500.00?: Yes ($387.00)
• Put/Call ratio below 1.5, or flat, or falling over that last 2-3 weeks?: Yes (0.2)
• The Trend-Channel is Bullish?: Yes (See chart)
• Short-Strike price below the trend channel at expiration?: Yes (See chart)
• The current price within the bottom 1/2 of Bull Trend Channel?: No (See chart)
• The current 1-week or 2-week trajectory bullish?: Yes (See chart)
• 9-Day SMA above 50-Day SMA?: Yes (See chart)
• Current price above 9-Day SMA?: Yes (See chart)
• ROR >= 50%?: 28.7%
• Set a GTC Conditional Trailing Stop Limit (CTSL): (see screenshot below)

The two Entry Rules that drew me to this trade was the Put/Call Ratio and the current IV%. The Put/Call ratio of 0.2 was the lowest of all in my watchlist. Additionally, the Implied Volatility Percentage (IV%) of 12% was also the quietest. These two values suggest that Mastercard (M.A.) has the least concern with investors since there is a real lack of Put Options being purchased. Additionally, being below 15%, IV% suggests that thrashing is minium, and the current trajectory is strongly supported. (The two-week path is strongly Bullish).

Trades Currently Cooking

(As of 08/14/2020)

SPY: 315p/306p  – Open 08/03/20 – Expires 08/28/20 – Max Gain = $121.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=73.1%, ROR=15.4%, Head Room=-4.2%, Max Loss=$778.00, IV%=19%
Now: Prob. OTM=83.9%, ROR=7.4%, Head Room=-5.8%, PC/Ratio=1.4, IV%=17%

QQQ: 258p/250pp  – Open 08/05/20 – Expires 08/28/20 – Max Gain = $124.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=72.9%, ROR=18.2%, Head Room=-4.7%, Max Loss=$675.00, IV%=23%
Now: Prob. OTM=75.0%, ROR=1.9%, Head Room=-5.0%, PC/Ratio=2.2, IV%=26%

 

Trades Closed This Week

(As of 08/14/2020)

Now positions were closed this week…

Conclusion

This week’s efforts was to give some thought on generating a “suggested” Short-Strike pick for a considered new spread position. I added a new formula in my Watch-List:

As mentioned, Short-Strikes are a suggestion. They are based upon the volatility of the markets in general and the underlying specifically.

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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