There’s something out there hunting us,
and it ain’t no man…

Billy (Movie: Predator)

 Commentary

Am I being stalked by Predator Investors? We all are!

How hard is it to manipulate the stock markets? What would it take for me to significantly influence a stock price, either up or down, enough to gain personally? And is market manipulation even legal?

Actually, manipulating a stock price is not that hard. Marketeers do it all the time. Whenever I buy or sell stocks or options, I am driving the prices of those funds. Whenever I enter a limit order to sell a Options Spread for a few pennies more, I am baiting an unknown Options buyer. Playing in the Stock Market is a bartering game.

I can manipulate the markets in a micro fraction scale. Me buying or selling 100 shares of MSFT in a day will slightly (and briefly) change MSFT’s price trajectory. But if I can buy/sell 1,000 shares or 100,000 shares of MSFT within a short time, I can drive MSFT’s price considerably.

Large-volume traders can manipulate the markets enough to force me out of options positions or stock holdings. These volume traders are Predator Investors, and they prey on small investors like me all the time. It’s about time to start recognizing this hunter and try to mitigate their ill effects.

This commentary explores how these Predators Investors hunt their prey and how I can try to avoid being one of their tasty treats.

Predator Investors

A Predator Investor is a person who will deliberately “gun the market” to manipulate the small investor out of (or into) positions for a loss. They are mega high-volume traders that can slaughter their smaller prey then gobble up the carnage for a profit. Some of their dastardly tactics are called “Pump and Dump” or “Poop and Scoop.”

Gunning the Market

One of the lethal weapons a Predator Investor will use is called “Gunning the Market.” Gunning a stock price in one direction or the other only requires three stages.

Stage 1: Gunning is a technique where a high-volume trader creates the illusion of a significant stock movement. By Aggressively buying or selling a large number of shares of a stock over a short period, the Investor Predator can momentarily and artificially drive that stock’s price either up or down.

Stage 2: The prey (thousands of small investors like me) are hoodwinked into continuing the illusion. Depending on our level of greed of fear, the prey will pile onto the movement by following suit. This causes the price movement to escalate further.

Stage 3: Finally, once the movement has reached a significant enough percent change, thousands of stop-loss orders are triggered. Millions of additional transactions are added to the fray – driving the price movement even further. 

To start a stampede, all I have to do is to spook a few bulls.

Pump and Dump

Predator Investors can “gun a stock” by buying a large number of shares over a couple of days, artificially juicing the price. After the greedy prey is lured into the buying frenzy (still bumping the price), Predator Investors then abruptly sells back the massive number of shares they bought, gobbling up a sizable profit. Afterward, a bunch of us chagrined investors are left holding stocks now underwater.

Poop and Scoop

This tactic is identical to the Pump and Dump but in the other direction. Gunning a stock by selling an enormous number of shares can generate a percentage drop in a stock price. These mass-sellings causes fear, prodding the prey to sell their shares to avoid a loss. After the stock’s loss momentum weighs the prices down enough, the Predator Investor can add to his position by buying back shares at a much lower price.

Recently SoftBank was one such predator when they “gunned the market” with billions of Call Options. Cranking the value higher required the sellers to buy stocks to fulfill their obligation, which then cranked the value even higher. It creates a feedback loop that artificially stokes the stocks – juicing the short-term return.

Stop Hunting

Stop Hunting is a Predator Investor strategy for trapping the most prey at one time. It is used to find the best time to gun a stock – ensuring the maximum number of individual investors’ stop-loss orders will be triggered. It is relatively simple to do.

The first step in Stop Hunting is to find the best fishing spot where I can catch the most stop-loss orders. Although stop-loss order can be set anywhere, the Predator Investors knows that they are usually clumped together just above the “Resistance” line or below the “Support” line.

Predator Investors eats Marketeers for lunch.

How to avoid getting Stop Hunted?

As dumb as this sounds, the best way to avoid being caught in the Stop-Hunt is to avoid placing a stop-loss. Although this decision is counterproductive to the past journal entries, I hope to find other ways to avoid being suckered. Here are a few:

• Employ stop-losses only for those funds whose daily volume is so high that gunning tactics would be hard to be successful. If the daily market volume is in the 10s of millions, it will take a lot to gun the price.
• Keep watch on the stock price as it creeps close to a Resistance/Support line, especially if my stop-loss triggers are only a few percentages away. I may want to cancel my stop-loss if I feel like I’m being watched.

Is my Conditional Trailing Stop Limit
working against me?

When mega-traders add to or exit a position, they can shift that stock’s price with its volume trades. These temporary shifts are often manifested as price gaps that only last a few seconds to a couple of days.

Within the last four weeks, I had three Conditional Trailing Stop Limits triggered during a price gap (or a possible Stop-Hunt trap). These gaps exited my positions with a sizable loss to my account. However, all three of these positions recovered hours later and would have expired worthless if left alone.

The two working positions that I have this week (SPY and DIA) would have also stopped out last week, but I canceled the CTSL early. The SPY position closed at a loss as the price of SPY fell well below the short-strike price on the final day. It would have closed Sept 1 when the price gapped down below 332 (see above chart)

I need to develop a way to finesse these stop-loss orders to avoid being caught in a Predator’s trap.

This Week’s Market Sentiment

(As of 09/07/2020)

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:

VIX = 9-Day SMA Jumped to 28.9 from 26.2 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.

Over the last two weeks, the broader market went through some choppy waters. After the stock split from Apple and Tesla, the technology sector went through a major adjustment. Microsoft fell 12.5%, and AAPL sank 16.5%, all within nine trading days. Many analysts were prediction at Tech-bubble bursting, which exacerbated an acceleration of the selloff.

I have not changed the trend channel because I believe that the selloff was more of profit-taking from the unrealistic runup before Aug 31. I want to leave what I had as a reference for this week.

A shock to the market caused the VIX to shoot above the 200-Day SMA. This market jolt was enough to drag the 50-Day SMA up above 200-Day as well. From this viewpoint, we are still in the midst of high volatility.

This high VIX suggests that I should proceed with supper caution if I enter a new position this week. I recommend to myself that any new Option position should have more than 5% breathing room.

Put/Call Ratio:

9-day SMA (all OCC options): continued mostly flat at 0.57 from 0.60 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.

A lot more Marketeers bought insurance over the last two weeks, but not so many that there appears to be a stampede for the exit. The 9-Day SMA jumped above the 50-Day but remained well below 1.0. This chart suggests that the Marketeers ended this past week pretty much at the same fear level as the beginning of last week.

From time to time, I need to remind myself that the current Put/Call Ratio is currently well below the average over the past three years. And over the past three years, the S&P 500 has gained over 1,000 points or about 30%.

But for my 4-week Vertical Bull Put Credit Spreads, I need to only look at the trend for the past 4-months. And the short-term trend is suggesting that the Marketeers are skittish.

Consumer Sentiment Index (CSI):

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.

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.

The U-M’s Consumer Sentiment Index remains unchanged as of this writing.

I remain bullish on the future changes to this index as we realize that the economy is not as bad off as the political-economist wants us to believe. But with the elections less than two months away, the uncertainty of what a post-election economy will look like is bound to keep a lid on any future optimism.

Market Indexes:

DOW = 27,666 – Down 1.7% from 28,133 last week.
S&P 500 = 3,341 – Down 2.5% from 3,427 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.

I still believe this chart shows the selloff over the last two weeks to be a reaction to the general market exuberance that preceded it. There appears to be a similar pattern back in June.

This chart also shows an artificial ratcheting up of prices before a profit-taking selloff (Predator Investors at work). But what it doesn’t show is a national economy on the verge of collapse.

The telling story will be this coming week if the selloff continues or resumes its 4-month trend. The S&P 500 bouncing off the bottom of the trend channel may suggest a short-term rebound this week.

Geopolitical Tree-Shakers (GTS):

• Election year politics exacerbating the economy and COVID fears
• Abraham Accord (Middle East peace pack)
• East cost wildfires, sham unrests, delegitimizing police
• Stimulus Package failed again
• Narrowing polls for the presidential election makes future uncertain
• COVID vaccine optimism from the US and China
• This week’s Fed reports

The Democrats are not going to allow another meaningful stimulus package prior to the election. They need the markets to be as depressed as possible and cannot afford to give Trump a win.

The Federal Reserve is pretty much at their limit on what they can do to stimulate the economy. So I expect some kind of punt when they report this week (which will not please the Marketeers).

My sentiment for this coming week:

Of my five indicators above, the current two-week trend for the S&P, VIX, and P/C Ratio strongly suggests that we still have a choppy market ahead. But a two-weeks movement does not make a trend.

The CSI and GTS are also signaling distrust and disgust in our Government to handle any financial issues before the election.

But the S&P 500 is signaling a possible positive bump very soon.

GTS is mainly old news, but the national debt projection for the next fiscal year may be what threw the Marketeers into a defensive tizzy.

These five indicators continue to show no consensus over the short-term market projection. A continuing selloff is highly likely, but I’m betting on a sideways trend to dominate most of the next several weeks.

This week, I will focus on:

1. Limit the max risk per trade to < $1,000.00
2. Short Stike Price to be > 5% 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 09/18/2020)

	Year	Month	Week #
	2020	Sept	38
Beginning Account Balance	$9,000.00	$3,283.24	$3,181.10
Deposits (Div. & Int.)	$38.52	$0.02	$0.00
Withdraws (paycheck)	-$2,125.24	$0.00	$0.00
Premiums on Open	$5,456.00	$427.00	$179.00
Premiums on Close	-$8,850.00	-$577.00	-$230.00
Fees Paid (total)	-$160.23	-$5.26	-$2.10
Ending Account Balance	$3,128.00	$3,128.00	$3,128.00
Total Gain/Loss	-$5,872.00	$-155.24	-$53.10
ROR		-4.7%	-1.7%
ROC	-42.1%

Realized Profit by Strategy

	Year	Month	Week #
	2020	Sept	38
Vertical Bull Put Credit Spread	-$3,840.56	-$299.26	-$127.10
Vertical Bear Call Credit Spread	-$182.79	$0.00	$0.00
Vertical Bull Put Debit Spread	$0.	$0.00	$0.00
Vertical Bull Call Debit Spread	-$66.83	$0.00	$0.00
Icon Condors	$0.	$0.00	$0.00
Cover Calls	–	–	–
Total	-$4,090.18	-$299.26	-$127.10

Schedule for this Week

Goals for this week: (09/14/20 – 09/18/20) (Week 38)

• Max dollars at risk (for the week) < $1,000.00
• 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?:
• Probability of OTM > 60%?:
• Short-Strike price (Head Room) >= 5.0% below the current price?:
• Dollar risk per trade <= $1,000.00?:
• Total dollar risk <= $3,000:
• 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?:
• The current price above 9-Day SMA?:
• 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: Oct 09 (<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 09/18/2020)

Spread Count Summary:

	Year	Month	Week #
	2020	Sept	38
Vertical Bull Put Credit Spread	66	2	1
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	85	2	1

Current Dollars at Risk:

	Year	Month	Week #
	2020	Sept	38
Vertical Bull Put Credit Spread	$1,693	$1,693	$821
Vertical Bear Call Credit Spread	$0.00	$0.00	$0.00
Vertical Bull Put Debit Spread	$0.00	$0.00	$0.00
Vertical Bull Call Debit Spread	$0.00	$0.00	$0.00
Iron Condor	$0.00	$0.00	$0.00
Total Dollar Risk	$1,693	$1,693	$821
Max Risk Allowed	$3.000.00		$1,000.00

New Trades Opened This Week

(09/14/2020 – 09/18/2020)

QQQ: 260p/250p  – Open 09/14/20 – Expires 10/09/20 – Max Gain = $179.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=73.3%, Head Room=-6.0%, Max Loss=$820.00, IV%=21.7%

Entry Rules for Vertical Bull Put Credit Spreads:

• Expiration date set at <= 4 weeks?: Yes (25 days)
• Probability of OTM > 60%?: Yes (73.3%)
• Short-Strike price (Head Room) >= 4.0% below current price?: Yes (-6.0)
• Dollar risk per trade <= $1,000.00?: Yes ($820.00)
• Total dollar risk <= $3,000: Yes ($2,588)
• Put/Call ratio below 1.5, or flat, or falling over that last 2-3 weeks?: No
• 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?: No (See chart)
• 9-Day SMA above 50-Day SMA?: Yes (See chart)
• The current price above 9-Day SMA?: No (See chart)
• Set a GTC Conditional Trailing Stop Limit (CTSL): (No)

Explaination:

The markets are bouncing back from a two-week mini-correction. The SPY is bouncing off the support-line (bottom line of trend-channel). Some positive news on the COVID vaccine, Oracle buying TikTok, and various mergers are rising the markets.

I did not enter a CTSL order because of various revelations explained in the Commentary of this journal entry. I did enter an alarm to warn me if the short-strike breaches ITM.

Trades Currently Cooking

(As of 09/18/2020)

See Conclusion for Exit Strategy tweak.

DIA: 273p/263p  – Open 09/01/20 – Expires 09/25/20 – Max Gain = $128.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=72.1%, Head Room=-4.3%, Max Loss=$871.00, IV%=21%
Now: Prob. OTM=75.9%, Head Room=-2.7%, IV%=17%

Trades Closed This Week

(As of 09/18/2020)

SPY: 333p/323p  – Open 08/26/20 – Expires 09/18/20 – Max Gain = $105.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=75.5%, Head Room=-4.1%, Max Loss=$894.00, IV%=19%
At Close: Prob. OTM=0.0%, PC/Ratio=1.3, Head Room=+0.7%, IV%=22%,

Cost to open: $1.05 premium collected * 100 shares * 1 contracts = $105.00
Cost to close: -$2.30, premium paid * 100 shares = -$230.00
Net Profit= $105.00 to open – $230.00 to close = -$125.00 – fees
Actual ROR = -$126.00 / $894.00= -14%

A review of this position’s opening explanation shows that I agreed to these entry parameters even though I knew they were too tight. SPY had breached the top of the trend channel, and I cautioned myself that it was wound too tight, and a snapback was possible. I should not have opened this position with these parameters. – First mistake.

Shortly after this position was opened, the markets fell, primarily because of the over-exuberance early on. So this SPY position when in and out if ITM early in its holdings. I canceled the CTSL order after the second week because it teased at triggering when I thought it could recover. – Second mistake.

On the final day (today) this position started OTM and about 2% above the short-strike price. It slowly fell below the short-strike but at a slow and undetermined spread. I could have exited out around 9:00 this morning and secured a $50 profit from this exercise but chose not to proceed. – Third mistake.

End results, instead of walking away with $50 I instead gave up $125.

Conclusion

Walking the wire between OTM and ITM should not be acceptable. If an opened position is so close to ITM, I should exit at first opportunity instead of taking the chance.

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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