Rule number three,
you will not cry, or whine, or laugh, or giggle,
or sneeze, or burp, or fart.
So, no, no annoying sounds.

– Gru (Movie: Despicable Me)

 Commentary

Rules for creating Regression Channels

In a recent post, Trend Trading Options – the Samwise Strategy, I gave myself sound advice – follow the trend when opening new Vertical Bull Put Credit Spreads. But getting somewhat despicable myself, I decided to regress a little and enhance that advice by using the Thinkorswim’s Regression Channel instead of a simple trend-channel.

Creating a Trend-Channel using thinkorswim’s active tools was my way of visually comparing multiple Options Spreads possibilities. The trend-channel sets the boundaries of my prospective positions and helps me confirm my Entry Rules. Before adopting the “Regression Channel” tool, I would create a trend-channel by using the trend-line tool and manually draw a channel that “looked good.” The problem was the lack of consistency between each of the channels I created. Using the Regression Channel tool will help me be more consistent across time.

Regression Line

Before thinking about a TOS Regression Channel, I need to understand the Regression Line.

Using the last 120 days of AMD’s trading data as an example, I can draw a Regression Line by first clicking the “Active Tools” icon at the bottom right of thinkorswim’s chart tab. The popup menu will show many tools to use. The one I want is the “Regression Line.”

Test chart using 120 days of AMD data

A Regression Line is a straight line that best fits through a series of points on a chart. It is a simple way of displaying the general behavior of these points.

To draw a Regression line in thinkorswim, simply click the mouse anywhere in the future of the data points and drag the line to how many days I want to include. In this graph, I drew a 120-day Regression Line.

Regression Line example
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Regression Channel

But for my needs, I want a Regression Channel.

Again, clicking the Active Tool icon at the bottom right, select the “Regression Channel” option. I can then easily create the channel by clicking the mouse anywhere in the future of the data points and then dragging left for 120 days.

Regression Channel example

By default, the channel’s top and bottom lines are 1/2 Standard Deviation above and 1/2 Standard Deviation below the center Regression Line (the Regression Channel is 1-Standard Deviation wide). Therefore, for the past 120 trading days for AMD, 68.27% of all strike-points fell within this channel.

TOS Regression Channel Deviation

Hovering my mouse over the Regression Channel will display a popup dialog box with all kinds of information. One nugget of data is the “Deviation.”

In the image above, Deviation = 5.95. This means that the top line (1/2 Standard Deviation) is $5.95 above any point along the center Regression Line. The bottom line (1/2 Standard Deviation) is $5.95 below the centerline. This knowledge helps me verify that the Short-Strike I need to choose needs to be at least $5.95 below the current price.

Does this count as annoying???

– Agnes (Movie: Despicable Me)
It this getting annoying?

Previous Post from OptionsTradesByDamocles

Entry Rules for Vertical Bull Put Credit Spreads
The "limiting loss by limiting risk" blunder. One 10-Strike-width Vertical Bull Put Credit Spread has a …
Using Excel with ThinkorSwim
Walking through steps of installing thinkorswim on a new laptop and how to get Excel to …
Exit Rules: Vertical Credit Spreads – Pt 1
Having an Escape Plan (Exit Rules) for my open Vertical Bull Put Credit Spreads is just …
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This Week’s Market Sentiment

(As of 01/24/2021)

This Market Sentiment Section is typically completed by midday Monday morning. By the time this journal is published, it will be a week old.

In this section, I review five indicators: VIX, S&P 500 Put/Call Ratio, S&P Market movement, Consumer Sentiment Index, and Geopolitical events that could affect the market’s direction. I will use these indicators to help guide my trading decisions for this week.

VIX: Broad Market Volatility

VIX 9-Day SMA dipped a little last week to 22.8% from 23.5% last week. The one-week deviation saw a little bump to 1.4 from last week’s 1.0.

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.

Regression Channel for VIX
CBOE Market Volatility Index – 01/24/2021

The 4-month regression channel for the VIX continues its slow and steady decline from the uncertainty of the approaching Nov ’20 elections. But from the election day retreat (about 80 days ago) it has been functional flat as the Marketeers try to get a read on the new Biden Administration.

The 9-Day SMA and the 50-Day SMA have been closely tracking each other for the past 10 days and the uncertainty level appears to be leveling out. And the current value of 21.9% is near the lowest its been since the COVID-Crash began back in Feb.

The short term trashing of the VIX is also mostly muted at 1.4 deviation from the center-line. This signals that most of the Marketeers are agreeing to the lowering of uncertainty.

The VIX is still relatively high, so premiums for credit spreads should remain high.

Based solely on the VIX, I would initially set this week’s DEFCON (Options Trading Readiness Signal) level to 4

DEFCON = 4

Put/Call Ratio:

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.

Regression Channel for Put/Call Ratio
Daily Put/Call Ratio for all S&P 500 Constituents Options – 01/24/2021

The current Put/Call Ratio of 1.62 is down from 1.92 from a year ago (just prior to the COVID-Crash). This makes the current ration near 18% down from a year ago.

Looking at this indicator alone, I would set the DEFCON to level 2. But since the ratio is dropping AND the VIX is over 15%, I will adjust this week’s DEFCON level to 3. But that is the readiness signal only after looking at two indicators. This will change and I move down.

DEFCON = 3

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Consumer Sentiment Index (CSI):

The CSI’s current level of 79.2 is down from 80.7 from last month and down from 99.8 1 year ago.

The new chart below comes from ycharts.com.

This Consumer Sentiment Index (CSI), as provided by University of Michigan. This indicator tracks US consumer sentiment based on surveys on random samples of US households.

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.

Consumer Sentiment Index
Updated: Jan 20, 2020

The US Consumer Confidence continues to inch down over the past few weeks. But the rate of change does not affect the general sentiment that the economy remains stagnant as the pandemic rages on.

The CSI has been hovering around the 80 level since October. This level still signals a disatisfication of the current economy. Apparetnly most are waiting to see how well the new Congress and Administation will play together.

There is not a suggestion that the CSI should change the DEFCON rating.

DEFCON = 3

Market Indexes:

DOW (DJX) = 30,997 – Up 0.6% from 30,814 last week. (4 week deviation: 3.4, flat from 3.3 last week)
S&P 500 (SPX) = 3,841 – Up 1.9% from 3,768 last week. (4 week deviation: 47.5 – flat from 39.7 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.

Four months S&P 500 market trend Regression Channel
Daily S&P 500 Index – Four-Months (Updated 01/24/2021)

The S&P 500 continues a lazy bull run for over four months.

The current price above the 9-Day SMA and is well above the 50-Day SMA. This signals that the recent Bull Run is still… running.

For the S&P 500, measuring the price thrashing (deviation) for the past four weeks (currently 47.5) remains relatively flat. The narrowing of the trend will undoubtedly continue as the tail end of the four-month trend channel moves beyond the Nov election.

The lazy bull trajectory added to the falling VIX is a good signal that the Marketeers are pretty much focused on a sustainable trend. The positive long-term Market Index should improve the DEFCON.

DEFCON = 4

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Geopolitical Tree-Shakers (GTS):

One way to look at the GTSs is like a lit fuse to a bomb. The fuse can be fast or slow, and the bomb can easily be a dud. But I need to watch this closely as an indicator. The GTS can significantly disrupt all the other indicators at a drop of a hat.

  • Trumps pending Senate trial
  • Continue fallout from the Captial insurgency
  • Biden’s moratorium on new oil permits on Federal land + Keystone Pipeline
  • The US re-entering the Paris Climate treaty
  • Biden giving pessimistic COVID info compared to Trump’s optimistic info
  • Congress seems to be functioning (honeymoon period)
  • Court-packing and Senate filibuster rules still being negotiated
  • Stimulus bills and Billions to Gualamola

Geopolitical hysteria seems a lot muted from the past year. Those jingliest journalists who made their name by scaring the hell out of the country has to now change their tune.

The Trump trial will not have much effect on the general markets since he is no longer defining policies and the Senate is no longer throttling spending. So no matter how the trial turns out, it should not affect my Market Sentiment. And the fact that Justice Roberts will not preside over the trial is giving ammo to the remaining Trump loyalist in the senate to not convict.

A Stimulus bill will brighten the broader market as it will help in feeding the businesses. A promised Infrastructure bill will also simulate stocks. So I am seeing most GTS issues to be positive instead of negative. Therefore none of these GTS should change the DEFCON level.

DEFCON = 4

My sentiment for this coming week:

Trading Readiness

DEFCON 4

This week, I will focus on:

  • two 10-Strike-Width spreads to maximize net premiums
  • Spread term of 8-weeks or less.
  • Probability of OTM > 70%
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Cash Flow Statement

(As of 01/29/2021)

Year
2021
Month
Jan
Week
#4
Beginning Account Balance$16,000.00$16.000.00$16,422.89
Deposits (Div. & Int.)$0.00$0.00$0.00
Withdraws (paycheck)-$300.00-$300.00-$300.00
Premiums on Open$528.00$528.00$101.00
Premiums on Close-$0.00-$0.00-$0.00
Fees Paid (total)-$5.14-$5.14-$1.03
Ending Account Balance$16,222.86$16,222.86$16,222.86
Total Gain/Loss$222.86$222.86-$200.03
ROR3.3%0.6%
ROC3.3%

Realized Profit by Strategy

Year
2021
Month
Jan
Week
#4
Vertical Bull Put Credit Spread$0.00$0.00$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
Icon Condors$0.00$0.00$0.00
Cover Calls
Total$0.00$0.00$0.00

At the close of the first month of the year, none of my open positions had the opportunity to close. Although I do have a GTC trade trigger set on all open positions to buy-to-close if any of them hit 80% of max gain.

I’m investigating a new “Exit Rule”. I will set a GTC trade trigger to buy-to-close any open positions following this schedule:

  1. If expiration date is > 20 days, then close if doing so will generate 80% of max gain
  2. If expiration date is between 20-10 days, then close if doing so will generate 85% of max gain
  3. If expiration date is between 10-5 days, then close if doing so will generate 90% of max gain
  4. If expiration date is < 6 days then allow position to expire worthless
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Schedule for this Week

Goals for this week: (01/25/2021 – 01/29/2021) (Week #4)

  • Document lessons learned or new thoughts
  • Open one or two wide-strike spread
  • Update Trading Log as trades occurs

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: Mar 19 (6-8 weeks)
      Note: If there are no Options Chains published for the 8-week expiration, then use the next Options Chain down from 8-weeks (7-weeks, 6-weeks). Beyond 4-weeks expirations, only the monthly chains are available to trade.
  • 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 01/029/2021)

Spread Count Summary:

Year
2021
Month
Jan
Week
#4
Vertical Bull Put Credit Spread440
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Iron Condor000
Total440

Current Dollars at Risk:

Year
2021
Month
Jan
Week
#4
Vertical Bull Put Credit Spread$4,573.$4,573.$0.
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$4,573.$4,573.$0.
Max Risk Allowed$16,000.00$8,000$2,000.

New Trades Opened This Week

(01/25/2021 – 01/29/2021)

QQQ: 290p/280p  – Open 01/26/21 – Expires 03/19/21 – Max Gain = $101.00 – Open Price = $329.04
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.3%, Head Room=-11.9%, Max Loss=$898.00, ROC 11.1%, 52d Dev = 7.0

Regression Channel for my new Options Spread position opened this week

Entry Rules for Vertical Bull Put Credit Spreads:

  • New maximum dollars at risk < $8,000? Yes ($5,472.00)
  • Max dollar at risk this position < $2,000? Yes ($898.00)
  • Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (52 days)
  • Is the long-term trend (four months) bullish? Yes (see chart)
  • Is the short-term trajectory of the underlying bullish? Yes (see chart)
  • Is the Put/Call Ratio < 1, (or falling if it is > 1)? No (1.9 – slightly rising)
  • The current price above 9-Day SMA?: Yes (see chart)
  • 9-Day SMA above 50-Day SMA?: Yes (see chart)
  • Is the Short-strike > 1 SD below the current price? Yes (1SD=292.50)
  • Is the short-strikes Prob-OTM > 70%? Yes (81.3%)
  • Short-Strike price below the trend channel at expiration?: Yes (see chart)
  • The current price within the bottom 1/2 of Trend Channel?: No (see chart)
  • Is the long-strike at maximum width (>= 15)? Yes (10 strike width)
  • Set a GTC Conditional Trailing Stop Limit (CTSL): (Not Set)

This week’s DEFCON level is set to 4. So I am looking to maximize my collected premiums by selling two 10-strike-width spreads instead of one 15-strike-width. The above position is the first for this week.

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Trades Currently Cooking

(As of 01/29/2021)

QQQ: 290p/275p  – Open 01/20/21 – Expires 02/26/21 – Max Gain = $122.00 – Open Price = $322.05
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.3%, Head Room=-10.1%, Max Loss=$1,377.00, ROC 8.8%, 37d Dev = 4.1

SPY: 350p/340p  – Open 01/14/21 – Expires 02/26/21 – Max Gain = $86.00 – Open Price = $380.48
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.3%, Head Room=-8.0%, Max Loss=$912.00, ROC 9.4%, 43d Dev = 4.7

QQQ: 280p/270p  – Open 01/12/21 – Expires 02/26/21 – Max Gain = $102.00 – Open Price = $314.52
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.5%, Head Room=-11.0%, Max Loss=$897.00, ROC 11.3%, 44d Dev = 4.8

IWM: 180p/165p  – Open 01/06/21 – Expires 02/019/21 – Max Gain = $116.00 – Open Price = $202.92
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.2%, Head Room=-11.7%, Max Loss=$1,383.00, ROC 8.3%, 44d Dev = 6.4
Now: Prob. OTM=54.4%, Head Room=-1.0%, IV%=36%

Trades Closed This Week

(As of 01/29/2021)

Nothing to close

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Conclusion

Market jitters rose quite a bit during the middle of the week, as news about Reddit’s WallStreekBets group successfully Gunned the Market for GameStop and AMC. This caused a significant pullback and the VIX shot up to over 37%. Brokers like Robinhood restricted the trading of GameStop stocks in a brazen show of force.

I’m not sure of the internal dynamics of just what happen and why there is a heighten concern. But the situation has made it to the White House and there is a lot of concern amongst the pundits.

The position that I entered on Tuesday was supposed to be the first of two. But with most indexes in a moderate decline, I decided to stop there.

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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.”

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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