All that is gold does not glitter,-J.R.R. Tolkien (Book: The Fellowship of the Ring)
Not all those who wander are lost;
The old that is strong does not wither,
Deep roots are not reached by the frost.
Samwise Gamgee was the intrepid companion to Frodo in Tolkien’s Lord of the Rings epic novel. He was not the Ring Bearer, nor was he even the story’s protagonist. But he was unquestionably the hero who saved Middle-Earth from the Dark Lord Sauron.
Some people (and some things) are often relegated as the background character to the bigger story. But their contributions to a successful venture are unquestionable. For my Options Trading venture, the strategy of “Trading the Trend” is my Samwise Strategy.
I’ve wandered the Options Chain’s cornfields for the past two years, and I still feel that I’m learning new things. I am far from feeling lost, but as Samwise said, “if I take one more step, then I will have gone farther than I ever have.”
“Not all those who wander are lost.”
The topic of this week’s commentary is to review charting the Trend Channels that I rely on to select my Vertical Bull Put Credit Spreads. Charting Trend Channels is my desired method of comparing prospective positions. I use them to wander through the different options in hopes of finding a direction.
Art of Charting
Charting is primarily Technical Analysis of an underlying. It is all about trying to predict a future movement from the subtle trends found in history. It is a complement to Fundamental Analysis – but much more colorful.
There are dozens of different charting patterns to choose from, but the parallel channel is all that matters from my perspective.
The other charting patterns are best used for Day Trading where I am not looking for long term results but how the underlying might move within the next hour or so.
I only consider those high-volume ETFs where it has moved up consistently over the past year. And within that, I will only look at the last four months. Today, those ETF have been Index ETFs such as DIA, SPY, and QQQ.
When I create a trend channel, I will first set the chart’s parameters to one year with each tick mark set to one day. I will then create a “support” trend line by drawing a straight line along the bottom-most points spanning the last four-month. I will make sure to extend the line beyond the expected expiration date of the prospective underlying.
Next, I would create a duplicate of the Support line and move it up to go through the topmost points. This line becomes the Resistance line.
The Resistance line suggests that there might be increasing pressure on the underlying to pullback as it approaches. It does not mean that a retreat is inevitable, but knowing that the pressure is building may influence my choice to a position that is not in such a situation.
The trend channel’s support line is the most important. It is a visual confirmation that my selected short-strike is well below the channel at expiration. Thus, assuming that the underlying will continue within the trend channel for the next few weeks, then my spread should expire worthlessly.
Finally, I need to draw a short-term trajectory line through the last two weeks. If I’m interested in opening a new Vertical Bull Put Credit spread, then it makes sense to open one while the underlying is tracking up, not down. If the underlying is tracking down, I will watch it daily to see when it turns the corner and resumes a bullish direction. At that point, I will open a new position.
Staging Perspective Positions
For each of my funds on my watch list, I will guess a short-strike by following the “Entry Rules for Vertical Bull Put Credit Spreads.” I then continue to markup the trend channel as follows.
- I draw a vertical line that shows the expiration date.
- I draw a horizontal line that shows the short-strike I chose.
The intersection of these two lines should be well below the support line of the trend channel.
This week’s Trend Charts
For illustration, below are the four ETFs on my watchlist and the chart markups I made on Monday (10/19/20). I may tweak the parameters a little, but I will select this week’s spread based upon these parameters.
Current Value: 286.42
Short Strike = $365 Put
Headroom = -7.4%
Prob-OTM = 81.9%
IV% = 21%
Premium = $0.93
Current Value: 348:21
Short Strike = $320 Put
Headroom = -7.9%
Prob-OTM = 81.4%
IV% = 25%
Premium = $0.97
Current Value: $163.16
Short Strike: $145 Put
Current Value: $287.30
Short Strike: $260 Put
This Week’s Market Sentiment
(As of 10/19/2020)
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 9-Day SMA remained mainly flat at 27.4 from 27.1 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.
After a quick dip to near 25%, the VIX remains steady sideways as we head toward Election Day.
The VIX continues to scream “THRASHING” for the next several weeks as the Marketeers remains high strung.
9-day SMA (all OCC options): ended most flat 0.58 from 0.61 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 Put/Call Ratio continues to be out of sync with the other four indicators. Although the S&P 500 continues to thrash and the VIX is shouting uncertainty. Marketeers seem to have a curious lack of interest in protecting their current portfolio.
I will assume that the majority of the Market’s activity is with realigning assets.
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 (CSI) posted Oct readings. The slight bump up to 81.2 versus last month’s 80.4 reading can be explained by the slowness with the US Economy’s rebound.
As a long term trajectory, I would believe that the market rebound will continue.
DOW = 28,606 – Up < 0.1% from 28,587 last week.
S&P 500 = 3,484 – Up 0.2 % from 3,477 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 DOW felt the effects of a near 800 point sing last week. But its end-of-week reading barely budged from the week’s start.
The S&P 500 current value is above the 9-Day SMA, and the 9-Day SMA is now above the 50-Day SMA. All are falling within the current Trend-Channel.
The S&P 500 appears to have taken a foothold back into the bullish trend. With a little more than two weeks left until the election, it seems the Marketeers may be more convinced of an election outcome.
- Upcoming Supreme Court confirmation battle
- Threats of revenge if Democrats win the election
- Stimulus bill remains uncertain
- Election year politics exacerbating the economy, and COVID fears
- How mass-flooding of election ballots affects election integrity
- New accusations against the Bidens may shake some voters
My sentiment for this coming week:
The S&P 500, VIX, and Put/Call Ratio indicators suggest that the Marketeers are continuing to realign their portfolios – moving from small Cap to Large Cap. This move may be more of a slowing economy as investors believe small businesses will probably bear the brunt of additional closures.
Additionally, the CSI, VIX, and GTS indicators are screaming uncertainty for at least the next week or two – especially if the election is NOT decided on Election Day. I would expect intraday thrashing to continue as bombshell reports after bombshell reports come out on the national news and other social media.
Consensus suggests the Bulls will plow through the election results but expect some wild market thrashing as they trample through. If I were smart, I would not open a new Option Spread that spans Election Day – but I haven’t been smart all year, so why change now.
This week, I will focus on:
- Limit the max risk per trade to < $1,000.00
- Short Stike Price to be > 6% below the current underlining’s price
- Keep the week’s total dollar risk < $1,000.00
- Keep the overall dollar risk to be below $3,000
- Will focus on mid-term trades: 4-5 weeks
- Credit spreads only (need positive cash flow for psychological reasons)
- Will consider only Bull Spreads
- Set alarms
Profit and Loss Statement
(As of 10/23/2020)
|Beginning Account Balance||$9,000.00||$2,418.99||$2596.92|
|Deposits (Div. & Int.)||$38.52||$0.00||$0.00|
|Premiums on Open||$5,655.00||$308.00||$109.00|
|Premiums on Close||-$9,570.00||-$32.00||-$14.00|
|Fees Paid (total)||-$167.87||-$5.12||-$2.05|
|Ending Account Balance||$2,689.87||$2,689.87||$2,689.87|
Realized Profit by Strategy
|Vertical Bull Put Credit Spread||-$3,931.75||$240.89||$81.96|
|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|
Schedule for this Week
Goals for this week: (10/19/20 – 10/23/20) (Week 43)
- Document lessons learned or new thoughts
- Open new positions
- Update Trading Log as trades occurs
- Current maximum dollars at risk < $3,000? Yes/No ( )
- Max dollar at risk this position < $1,000? Yes/No ( )
- Max time to have any dollars at risk < 4 weeks? Yes/No ( )
- Is the long-term trend (four months) bullish? Yes/No (see chart)
- Is the short-term trajectory of the underlying bullish? Yes/No (see chart)
- Is the Put/Call Ratio < 1, (or falling if it is > 1)? Yes/No ( )
- The current price above 9-Day SMA?: Yes/No (see chart)
- 9-Day SMA above 50-Day SMA?: Yes/No (see chart)
- Is the Short-strike > 1 SD below the current price? Yes/No ( )
- Is the short-strikes Prob-OTM > 70%? Yes/No ( )
- Short-Strike price below trend channel at expiration?: Yes/No (see chart)
- Current price within bottom 1/2 of Trend Channel?: Yes/No (see chart)
- Is the long-strike at maximum width? Yes/No (?? strike width)
- 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: Nov 13 (<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.
- 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 10/23/2020)
Spread Count Summary:
|Vertical Bull Put Credit Spread||69||3||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|
Current Dollars at Risk:
|Vertical Bull Put Credit Spread||$1,790.00||$1,790.00||$891.00|
|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|
|Total Dollar Risk||$1,790.00||$1,790.00||$891.00|
|Max Risk Allowed||$3.000.00||$1,000.00|
New Trades Opened This Week
(10/19/2020 – 10/23/2020)
DIA: 262.5p/252.5p – Open 10/21/20 – Expires 11/13/20 – Max Gain = $109.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=80.4%, Head Room=-7.1%, Max Loss=$890.00, IV%=22%
- Current maximum dollars at risk < $3,000? Yes ($1,790.00)
- Max dollar at risk this position < $1,000? Yes ($890.00)
- Max time to have any dollars at risk < 4 weeks? Yes (23 days)
- Is the long-term trend (four months) bullish? Yes (see chart)
- Is the short-term trajectory of the underlying bullish? No (see chart)
- Is the Put/Call Ratio < 1, (or falling if it is > 1)? Yes (0.8)
- The current price above 9-Day SMA?: No (see chart)
- 9-Day SMA above 50-Day SMA?: Yes (see chart)
- Is the Short-strike > 1 SD below the current price? Yes (1SD=263.61)
- Is the short-strikes Prob-OTM > 70%? Yes (80.4%)
- Short-Strike price below the trend channel at expiration?: Yes (see chart)
- The current price within bottom 1/2 of Trend Channel?: Yes (see chart)
- Is the long-strike at maximum width? Yes (10 strike width)
Trades Currently Cooking
(As of 10/23/2020)
QQQ: 267p/257p – Open 10/14/20 – Expires 11/06/20 – Max Gain = $101.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.2%, Head Room=-9.8%, Max Loss=$898.00, IV%=32%
Now: Prob. OTM=77.6%, Head Room=-7.5%, IV%=34%
Trades Closed This Week
(As of 10/23/2020)
QQQ: 253p/243p – Open 10/06/20 – Expires 10/30/20 – Max Gain = $97.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.7%, Head Room=-9.5%, Max Loss=$901.00, IV%=33%
At Close: Prob. OTM< 95.6%, Head Room=-11.2%, IV%=31.8%, ROR= 9.3%
Cost to open: $0.98 premium collected * 100 shares = $98.00
Cost to close: -$0.14 paid * 100 shares = -$14.00
Net Profit= $98.00 to open – $14.00 to close = $84.00 – fees
Actual ROR = $84.00 / $901.00= 9.3%
This position was closed 10 days early when the percent to profit reached 85%.
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.”
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