But choose wisely,
for while the true Grail will bring you life,
the false Grail will take it from you.

Grail knight (Movie: Indiana Jones and the Last Crusade)

 Commentary

Geopolitical effects on #OptionsSpreads

Have I chosen – poorly?

Monday’s 800 point drop in the DOW stopped-out my DIA position that was expiring this Friday. This early exit cost my account a whopping $332. So, I primarily spent this week on the reexamination of strategies.

This week’s commentary focuses on buttressing the importance of the geopolitical influence on short-term Options Spreads. It’s not always about technical analysis or the fundamentals of the underlying. Some of the times, it can be what is happening outside my window.

The whipsaw action of the markets is certainly not a suitable environment for my young Options Strategy studies. Even though I am learning the cause and effects of managing options spreads during a crazy year, it is not playing nice with my trading account.

Advertisements

Lesson Not Learned – Knowing When Not to Play.

The rules that I set for my two-year study assumed that I would open a new position weekly. But this year of the COVID-Crash, economy-killing lockdowns, hyped social-injustice riots, and a very divisive Presidential election is not what I would call an ideal Income from Options Trading setting.

Justice Ginsberg’s death six weeks before the election has triggered a firestorm of threats and promises of Armageddon. If I thought our democracy’s future was at risk in the past, just listen to Speaker Pelosi and Senate Minority Leader Schumer’s speeches over the past few days. The past couple of weeks is when the Geopolitical Tree-Shakers are driving the markets.

When I plan my Vertical Bull Put Credit Spreads strategy for the week, I have five indicators that I look at closely. These indicators are discussed in the “This Week’s Market Sentiment” section below. The VIX, Put/Call Ratios, the Consumer Sentiment Index (CSI), the S&P 500 4-month trends, and the Geopolitical Tree-Shaker (GTS). To date, the GTS has played more of an informative roll than one that may yield a veto.

Advertisements

This Week’s Market Sentiment

(As of 09/21/2020)

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 dipped to 27.4 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% or below will have an innate tendency to rise.

Geopolitical effects on #OptionsSpreads
CBOE Market Volatility Index

The trend-channel for the VIX was broken over the last few weeks as the markets reassess many of it’s inflated position. Not wanting to be the one holding an empty purse, many of the Marketeers lightened their load and took profit.

I had a hard time assessing a trend from the volatility jump, so I ended up just moving the existing over the last three weeks. Regardless of where the market goes this week, I see the VIX, in general, continue to calm – but not too fast.

The week-ending VIX was 25.8%, considerably below the 9-Day SMA.

This high VIX suggests that the premiums that I can collect from Vertical Spreads continue to be offered at a… premium. But fast direction changes are still going to be possible. 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): rose slightly to 0.67 from 0.57 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.

Geopolitical effects on #OptionsSpreads
Daily Put/Call Ratio for all OCC Options

Even with the negative markets over the past few weeks, Marketeers are still not running for Insurance. Not only is the Put/Call Ratio well below the 1.0 line, but it is also below the average over the past three years (green line).

For the past four months, this chart has been stating that the bulls are still in control.

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.

As expected, the CSI for September jumped to 78.9 from August’s 74.1. This increase continues to show growing optimism in the economy as we approach the November elections.

I will note here that the U-M team survey revealed that it was mostly the Democrats who showed the most optimism about the U.S. economy’s future. But like most surveys, there probably is a huge imbalance with the participants.

I continue to be 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 = 27,657 – Down but mostly flat from 27,666 last week.
S&P 500 = 3,310 – Down 0.9% from 3,341 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.

Geopolitical effects on #OptionsSpreads
Daily S&P 500 Index – Four-Months

I still believe this chart shows the selloff over the last three weeks to be a reaction to the general market exuberance that preceded it. Once profit-taking started on Sept 1, the mass movement triggered other funds stop-losses, and the stampede began.

As of last week (Sept 18), the S&P erased the previous six weeks gain, putting the current evaluation close to the previous steady trend. (Both entities are shown in yellow in the above graph.

Last week’s relatively flat market may signal that a bottom to the pullback may have been reached. But this may be hopeful thinking. Many of the star players in the S&P 500 are still showing overvaluation.

A whipsaw market maybe what we will see until the election has been decided. The tenner of the upcoming elections may be rubbing off on the Marketeers. I foresee either a continued selloff or a mostly sideways trajectory.

Geopolitical Tree-Shakers (GTS):

  • RBG death – filling the vacancy will cause turmoil
  • The UK is considering another lockdown
  • The U.S. debt is piling up
  • Democrats are promising armageddon if they take power
  • Election year politics exacerbating the economy and COVID fears
  • Narrowing polls for the presidential election makes future uncertain
  • Stoking hysteria

The Democrats have got to be exhausted with all the sky-falling rhetoric.

My sentiment for this coming week:

Of my five indicators above, the VIX and S&P 500 signify the probability of a continued selloff. The CSI suggests that the current economy is precarious, and the Put/Call Ratio still implies the market as bullish.
Finally, the GTS intimates market turmoil for the short term.

There is no consensus on an Options Strategy. I recommend sitting this week out.

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
Advertisements

Profit and Loss Statement

(As of 09/25/2020)

YearMonthWeek #
2020Sept39
Beginning Account Balance$9,000.00$3,283.24$3,128.01
Deposits (Div. & Int.)$38.52$0.02$0.00
Withdraws (paycheck)-$2,375.24$-250.00$-250.00
Premiums on Open$5,456.00$427.00$0.00
Premiums on Close-$9,538.00-$1,035.00-$458.00
Fees Paid (total)-$162.33-$6.31-$1.06
Ending Account Balance$2,418.95$2,418.95$2,418.95
Total Gain/Loss-$6,581.05$-864.29-$459.06
ROR-18.7%-14.7%
ROC-47.2%

Realized Profit by Strategy

YearMonthWeek #
2020Sept39
Vertical Bull Put Credit Spread-$4,172.66-$631.36$0.00
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-$4,422.28-$631.36$0.00

Schedule for this Week

Goals for this week: (09/21/20 – 09/25/20) (Week 39)

  • 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 16 (<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.
Advertisements

This Week’s Trade Activity

(As of 09/25/2020)

Spread Count Summary:

YearMonthWeek #
2020Sept39
Vertical Bull Put Credit Spread6630
Vertical Bear Call Credit Spread1200
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread700
Iron Condor000
Total8530

Current Dollars at Risk:

YearMonthWeek #
2020Sept39
Vertical Bull Put Credit Spread$821.00$821.00$0.00
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$821.00$821.00$0.00
Max Risk Allowed$3.000.00$1,000.00

New Trades Opened This Week

(09/21/2020 – 09/25/2020)

No new positions this week.

Trades Currently Cooking

(As of 09/25/2020)

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%

Trades Closed This Week

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%
At Close: Prob. OTM=>29%, PC/Ratio=.06, Head Room=+0.4%%, IV%=21%, ROR= -37.9%

Cost to open: $1.28 premium collected * 100 shares = $128.00
Cost to close: -$4.58 paid * 100 shares = -$458
Net Loss = $128.00 to open – $458 to close = -$330.00 – fees
Actual ROR = -$330.00 / $871.00= -37.9%

Monday of this week, the DOW fell over 800 points. DIA fell below 268 before recovering a bit. Volatility between now and the election is going to be a real challenge!

This position was closed with a CTSL order that was conditioned on a drop below DIA $279.

(As of 09/25/2020)

Advertisements

Conclusion

With the Presidential election only five weeks away, I will therefore expect to see at least one bombshell news-event every day until then. The Twitter-mob feeding the national news is causing a gigantic feedback loop that sends those of us who pay attention to an insensible state.

With most trend-channels broken, I do not have high hopes that there will be any predictable market direction between now and Nov 3.

I’m thinking that a fun topic for next week’s commentary could be looking into who influences the influencers.

Advertisements

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.”

Advertisements

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

#OptionsTrades by Damocles
Options Trades by Damocles
0