I am using ChatGPT and Sage to automate my trading journal, and I am more than impressed with how they can help me.
I am mainly doing this because updating the journal takes too much time.
So this is also why it was again already three weeks ago that I updated the journal.
I am ready now with the first set-up, which mainly is preparing the data in the tastytrade CSVs to extract what I need.
Due to the low volatile market, I am still not trading too much right now, so I have more time to look at Python.
I prefer delta-neutral trading and am using tastytrade’s beta-weighting deltas indicator to benchmark individual positions and sum them to understand the directional exposure of my whole portfolio.
I still have a neutral portfolio delta beta.
How am I Doing Overall?
I am now over a year into options trading. Although I am still far away from the goals I have set for myself, I have shown a consistently positive balance since September of last year. I had two dips, but I reached another record breaking the last $900 P/L YTD top in March .
I still make many mistakes, and my trading discipline has improved, but it needs further work.
I am now at a $ 791 realized gain and a $947 P/L YTD, so I have a $155 unrealized gain. Considering commissions and fees, I am only at $516 YTD. Still far away from the goals in my financial plan.
What am I Reading?
And I started re-reading another ‘must-read-for-options-traders’ book that is really helping me in learning options trading.
The book is over 400 pages, and I am still cherry-picking my way through the book.
I am also reading a lot about Python.
Table of Contents
- How am I Doing Overall?
- What am I Reading?
- Last Week’s Options Trading
- Options Strategy Risk Management Rules
- Alternatives for Short Premium Strategies
- Opened Positions
- Opened on 2 June: EWZ Jul 21 29/31 Bull Call for $105 debit
- Opened on 2 June: MRVL Jul 21 62.5/57.5 Bear Put for $255 debit
- Opened on 2 June: IWM Jul 21178/181 Bull Call for $180 debit
- Opened on 2 June: PLTR Jul 21 11/13/18/20 Iron Condor for $67 credit
- Opened on 26 May: AMD Jul 21 Iron Condor 100/105/140/145 for $180 debit
- Closed: Opened on 16 May: SPY Jun 30 413/410 Bear Put for $103 debit and closed on 2 June for $30 credit
- Running and Closed Positions
- Opened on 18 May: ORCL Jun 16 Iron Condor 90/95/105/110 for $186 credit on May 18, rolled put wing to Jul 21 for $72 credit on 26 May, rolled call wing for $25 to July 21 on 1 June for $25 credit, rolled up put wing to 100/102.5 on 2 June for $15 credit
- Closed: Opened on 18 May: AMZN Jun 16 short/Jul 21 long 125 Call Calendar for $170 debit and closed on 26 May for $210 credit
- Opened on 17 May: KRE Jul 21 Iron Condor 130/33/43/46 for $100 credit
- Opened on 17 May: MRK Jul 21 Iron Condor 100/105/120/125 for $167 credit
- Closed, Opened on 10 May: XLE Jun 23 81.5/83.5 Bear Call for $67 credit and closed on 31 May for $27 debit
- Closed: Opened on 10 May: XLF Jun 16 33/31 Bear Put for $81 debit and closed on 26 May for $80 credit
- Closed: Opened on 13 Apr: 2x MRVL May 12 (short) 50/Jun 16 (long) 51 Diagonal Call for $61 debit, rolled May 12 50 to Jun 9 (short) for $12 credit on 5 May, rolled Jun 9 to Jul 21 (short) on 19 May for $85 credit, and closed the position on 26 May for $60 debit.
- Closed: Opened on 4 May: KRE Jun 16 33/35 Bull Put for $66 credit and closed on 17 May for $28 debit
- Closed: Opened on 2 May: KRE Jun 16 36/38 Bull Put for $66 credit and closed on 26 May for $43 debit
- Closed: Opened on 2 May: GLD Jun 16 185/182 Short Put for $109 credit and closed on 18 May for $73 debit
- Closed: Opened on 1 May: SOFI Jun 16 4/7 Bull Call for $169 debit and closed on 26 May for $145 credit
- Running: Opened on 21 Apr: PTON Jun 16 Short Put 7 for $32 credit, rolled to Jul 21 for $25 credit
- Closed : Opened on 21 Apr: RIOT Jun 2 Bear Put Spread 10.5/8 for $94 debit and closed on 18 May for a $74 debit
- Closed: Opened on 20 Apr: KRE Jun 2 Bull Put Spread 41/43 for $67 credit and closed for $157 debit on 18 May
- Closed: Rolled: Opened on 29 Mar: GLD May 19 Iron Condor 171/174/191/194 for $101 credit and rolled the call wing to Jun 16 on 10 May for $36 credit and closed on 17 May for $45 debit
- End-of-Week Active Positions Overview
- Financials
- Market Sentiment 2 June 2023
- 1. Geopolitical Events and Economic Trends
- 2. VIX Index
- 3. Oil and Gas, Gold, Silver, and Copper (Metals & Mining)
- 4. USD and Other Currencies, Bitcoin and Crypto
- 5. Yield Curves
- 6. Producer Price Index (PPI), Consumer Price Index (CPI), Consumer Sentiment Index (CSI)
- 7. Put/Call Ratio
- 8. NASDAQ, DJI, SPX, Russel 2000 Indices, and Main Market Sectors
- Summary Market Sentiment
- This Week’s Economic Calendar
- Earnings and Dividend Calendar
- This Week’s Guidelines
- Conclusion
Last Week’s Options Trading
The VIX ended under 15 this week, so I need to continue adjusting my trading. It means less short premium strategies. I follow the tastytrade rules and will not put more than 25% of my money into short premium strategies.
I only have ten open positions end of the week, using around 29% of Buying Power. The issue is that it is very hard to find the right plays. Also, I need to expand my options playbook with more low-volatility strategies, as much as possible, delta-neutral, and only directional if all signals are on green. I still don’t feel well about where the market is going.
Options Strategy Risk Management Rules
- In high volatility (VIX >20), sell high vol (IVR>30) options to collect premium income while spreading the risk over various expiration dates (staggering dates to avoid expiration density); the higher the volatility, the more of your account you can allocate to short premium strategies.
- Sell options at high IVR (>30) to extract high (overpriced) premiums (‘overpriced’, since predicted volatility is nearly always overestimated, and stocks are less volatile than predicted, so implied volatility implosion or IV reversion to the mean allows for profits to be taken early when stocks fail to be as volatile as predicted).
- In low volatility (VIX < 20), buy low vol (IVR <30) debit options (you pay the premium) and lower the total allocation; the less volatility, the less money you should allocate to options trading. New rule: only sparingly enter into debit spreads (especially bear puts!), and only do this when more than three signals (technical indicators) confirm this.
- Sell and buy options on liquid underlyings in the options market (to open and close positions easily and ensure trades can be filled with narrow bid-to-ask spreads for optimal option pricing ).
- Sell and buy options across tickers with broad sector diversity across uncorrelated sectors to spread risk (too much concentration into any given sector runs the risk of stocks auto-correlating in the same direction and potentially jeopardizing all trades within the sector-specific bucket of trades).
- As much as possible (given a small account) stick to risk-defined trades (put spreads, call spreads, and iron condors) to mitigate risk and reduce the amount of capital required for any given trade.
- Probability of success (P50 in Tastyworks platform)> 70% to ensure a statistical edge
- Close the trade if 50% – 75% loss
- Close the trade and realize profits at 50% -75% premium early in the option lifecycle (21 DTE)
- Close-out trades (ideally 14-21 DTE) before expiration (before strike price gets challenged just before expiration (high volatility and higher loss probability!).
- Re-invest the capital made free towards additional trades.
- Maximize the number of trades to allow the expected probabilities to play out (trade small, trade often).
- Size position/portfolio allocation to manage risk exposure (worst-case scenarios always need to be considered therefore, I conservatively use small allocations to options trades, so only max 4% of my portfolio should only be used for any given trade).
- Keep an adequate amount of cash on hand (~40% in my case) to protect your portfolio against any major market downturns (i.e., Covid-19 and Q1 2022, 2023 recession(?). Cash also allows me to buy stocks/long equity at heavily discounted valuations.
Alternatives for Short Premium Strategies
I prefer short premium strategies so high volatility. But volatility is still relatively low. I need to be able to enter trades in all market conditions.
Historically, implied volatility has outperformed realized implied volatility in the markets. For this reason, we always sell implied volatility to give us a statistical edge in the markets. While I often search for a high IV rank at order entry, the market does not always accommodate me.
I, therefore, will start looking at adding these options strategies that benefit from increases in volatility, as well as more directional strategies to use during low-volatility markets to my playbook:
- Long bull call and (sparingly) bear put vertical spreads
- Ratio spreads
- Long put calendars and call calendars
- Long diagonal spreads
- Long volatility products
In bull(-ish) markets, implied volatility tends to be low in equities as the VIX drops. Just like I take advantage of reversion to the mean when IV is high, I stay engaged and do the same when it gets to an extreme on the low end. Therefore, in low IV, I will use strategies that benefit from this volatility extreme, expanding to a more normal value.
This doesn’t mean, however, that, in low IV markets, I stop looking for underlyings that have high IV. Premium selling is where the majority of the statistical edge lies.
Opened Positions
Opened on 2 June: EWZ Jul 21 29/31 Bull Call for $105 debit
Date
3/6/23
Underlying
30.56
PoP/P50
55%
DTE
47
IVR
-0.9
Δ Delta
36.65
Θ Theta
0.347
Other
3 June 23: $1 in the green
Opened on 2 June: MRVL Jul 21 62.5/57.5 Bear Put for $255 debit
Date
3/6/23
Underlying
60.18
PoP/P50
49%
DTE
47
IVR
4.9
Δ Delta
-21.83
Θ Theta
-0.034
Other
3 June 23 : at $6 negative; it needs to fill a gap after going straight up
Opened on 2 June: IWM Jul 21178/181 Bull Call for $180 debit
Date
19/5/23
Underlying
PoP/P50
DTE
IVR
Δ Delta
Θ Theta
Other
3 June 23 : $21 profit
Opened on 2 June: PLTR Jul 21 11/13/18/20 Iron Condor for $67 credit
Date
3/6/23
Underlying
14.51
PoP/P50
57%
DTE
47
IVR
35.9
Δ Delta
9.09
Θ Theta
0.631
Other
3 June 23 : $7 profit
Opened on 26 May: AMD Jul 21 Iron Condor 100/105/140/145 for $180 debit
Date
3/6/23
Underlying
117.86
PoP/P50
64%
DTE
47
IVR
26.9
Δ Delta
3.01
Θ Theta
1.921
Other
3 June 23 : $30 profit
Closed: Opened on 16 May: SPY Jun 30 413/410 Bear Put for $103 debit and closed on 2 June for $30 credit
3 June 23: Closed at a loss of $73
Running and Closed Positions
Opened on 18 May: ORCL Jun 16 Iron Condor 90/95/105/110 for $186 credit on May 18, rolled put wing to Jul 21 for $72 credit on 26 May, rolled call wing for $25 to July 21 on 1 June for $25 credit, rolled up put wing to 100/102.5 on 2 June for $15 credit
Date
3/6/23
Underlying
105.88
PoP/P50
35%
DTE
47
IVR
27.6
Δ Delta
-4.45
Θ Theta
1.228
Other
3 June 23 : -$17 in the red
Closed: Opened on 18 May: AMZN Jun 16 short/Jul 21 long 125 Call Calendar for $170 debit and closed on 26 May for $210 credit
3 June 23 : closed for $40 profit (around 24%)
Opened on 17 May: KRE Jul 21 Iron Condor 130/33/43/46 for $100 credit
Date
3/6/23
Underlying
42.16
PoP/P50
59%
DTE
47
IVR
23.2
Δ Delta
-17.11
Θ Theta
0.876
Other
3 June 23 : $2 in the red
Opened on 17 May: MRK Jul 21 Iron Condor 100/105/120/125 for $167 credit
Date
3/6/23
Underlying
112.52
PoP/P50
67%
DTE
47
IVR
27.0
Δ Delta
-1.82
Θ Theta
1.810
Other
Opened on 17 May: MRK Jul 21 Iron Condor 100/105/120/125 for $167 credit
Closed, Opened on 10 May: XLE Jun 23 81.5/83.5 Bear Call for $67 credit and closed on 31 May for $27 debit
Date
13/5/23
Underlying
78.55
PoP/P50
67%
DTE
41
IVR
18.4
Δ Delta
-10.26
Θ Theta
0.525
Other
31 May 23: closed at $40 (60%) profit.
13 May 23 : at $5 positive
Closed: Opened on 10 May: XLF Jun 16 33/31 Bear Put for $81 debit and closed on 26 May for $80 credit
Date
13/5/23
Underlying
31.90
PoP/P50
55%
DTE
34
IVR
20.1
Δ Delta
-43.92
Θ Theta
0.478
Other
26 May 23 : Closed at $1 loss
Closed: Opened on 13 Apr: 2x MRVL May 12 (short) 50/Jun 16 (long) 51 Diagonal Call for $61 debit, rolled May 12 50 to Jun 9 (short) for $12 credit on 5 May, rolled Jun 9 to Jul 21 (short) on 19 May for $85 credit, and closed the position on 26 May for $60 debit.
Date
19/5/23
Underlying
PoP/P50
DTE
IVR
Δ Delta
Θ Theta
Other
26 May 23 : Closed at $32 loss
Closed: Opened on 4 May: KRE Jun 16 33/35 Bull Put for $66 credit and closed on 17 May for $28 debit
Date
13/5/23
Underlying
36.36
PoP/P50
43%
DTE
34
IVR
43.9
Δ Delta
12.02
Θ Theta
0.255
Other
17 May 23: closed after 4 days for $38 profit (on target!)
13 May 23: I wagered another bet on KRE. Now at $11 profit and positive theta.
Closed: Opened on 2 May: KRE Jun 16 36/38 Bull Put for $66 credit and closed on 26 May for $43 debit
Date
13/5/23
Underlying
36.36
PoP/P50
43%
DTE
34
IVR
43.9
Δ Delta
15.61
Θ Theta
-0.286
Other
13 May 23: Due to high volatility, and below 30 RSI, I opened this position. KRE Jun 16 38/36 Bull Put for $66 credit
Closed: Opened on 2 May: GLD Jun 16 185/182 Short Put for $109 credit and closed on 18 May for $73 debit
Date
13/5/23
Underlying
186.82
PoP/P50
61%
DTE
34
IVR
29.6
Δ Delta
13.32
Θ Theta
0.616
Other
18 May 23: closed at a 40% profit
2 May 23: Due to high volatility, and below 30 RSI, I opened this positionGLD Jun 16 185/182 Short Put for $109 credit
Closed: Opened on 1 May: SOFI Jun 16 4/7 Bull Call for $169 debit and closed on 26 May for $145 credit
Date
13/5/23
Underlying
5.02
PoP/P50
26%
DTE
34
IVR
19.2
Δ Delta
78.18
Θ Theta
-0.145
Other
26 May 23: closed at $24 loss
1 May 23: SOFI Jun 16 4/7 Bear Call for $169 debit
Running: Opened on 21 Apr: PTON Jun 16 Short Put 7 for $32 credit, rolled to Jul 21 for $25 credit
Date
3/6/23
Underlying
68.37
PoP/P50
76%
DTE
47
IVR
-1.4
Δ Delta
22.33
Θ Theta
0.695
Other
Date
13/5/23
Underlying
6.94
PoP/P50
54%
DTE
34
IVR
10.2
Δ Delta
47.35
Θ Theta
0.885
Other
Date
22/4/23
Underlying
9.48
PoP/P50
81%
DTE
55
IVR
29.9
Δ Delta
15.34
Θ Theta
0.703
Other
13 May 23: -$35 in the red, which is over -100% so should have been closed ages ago.
22 Apr 23: opened based on technical indicators showing oversold and upward trend again. Now at $0
21 Apr 23: Another short put experiment with a low price (under 10) stock.
Peloton Interactive, Inc. provides interactive fitness products in North America and internationally. It offers connected fitness products with a touchscreen that streams live and on-demand classes under the Peloton Bike, Peloton Bike+, Peloton Tread, and Peloton Tread+ names. The company also provides connected fitness subscriptions for various household users, access to various live and on-demand classes, and Peloton Digital app for connected fitness subscribers to provide access to its classes. As of June 30, 2021, it had approximately 5.9 million members. The company markets and sells interactive fitness products directly through its retail showrooms and at onepeloton.com. Peloton Interactive, Inc. was founded in 2012 and is headquartered in New York, New York.
Closed : Opened on 21 Apr: RIOT Jun 2 Bear Put Spread 10.5/8 for $94 debit and closed on 18 May for a $74 debit
Date
13/5/23
Underlying
10.61
PoP/P50
31%
DTE
13
IVR
-0.4
Δ Delta
-35.89
Θ Theta
-1.453
Other
Date
22/4/23
Underlying
10.52
PoP/P50
40%
DTE
34
IVR
4.4
Δ Delta
-26.09
Θ Theta
-0.598
Other
18 May 23: waited much too long and closed at $20 loss
13 May 23: not my best RIOT play: -$27 in the red now (-28.7%) and negative theta
22 Apr 23: opened based on technical indicators showing overbought and downward trend again, mainly due to BTC going down. Now at $6
21 Apr 23: I can’t resist playing RIOT which until now has been one of my more profitable symbols
Closed: Opened on 20 Apr: KRE Jun 2 Bull Put Spread 41/43 for $67 credit and closed for $157 debit on 18 May
Date
13/5/23
Underlying
36.36
PoP/P50
11%
DTE
20
IVR
43.9
Δ Delta
5.37
Θ Theta
-0.496
Other
Date
22/4/23
Underlying
42.92
PoP/P50
54%
DTE
41
IVR
23.1
Δ Delta
15.32
Θ Theta
0.049
Other
18 May 23: waited much too long with closing this position so loss went considerably over 100%!
13 May 23: really very much in the red now : -$120 (-180%!). Not sure what I am waiting for, so I MUSt close it.
22 Apr 23: opened based on technical indicators showing oversold and upward trend again. Now at -$13 (-19.4%)
20 Apr 23: opened
Closed: Rolled: Opened on 29 Mar: GLD May 19 Iron Condor 171/174/191/194 for $101 credit and rolled the call wing to Jun 16 on 10 May for $36 credit and closed on 17 May for $45 debit
Date
13/5/23
Underlying
186.82
PoP/P50
66%
DTE
6/24
IVR
29.6
Δ Delta
-8.95
Θ Theta
0.591
Other
Date
22/4/23
Underlying
184.25
PoP/P50
75%
DTE
27
IVR
25
Δ Delta
-4.31
Θ Theta
1.616
Other
Date
29/3/23
Underlying
183.21
PoP/P50
59%
DTE
40
IVR
37.4
Δ Delta
-0.66
Θ Theta
1.08
Other
17 May 23: $92 in the green, so very successful play (close to 90% profit)
13 May 23: $62 in the green now (25.5%)
22 Apr 23: $42 in the green at 41.6% P/L and still has some room on the downside
01 Apr 23: $6 in the green
End-of-Week Active Positions Overview
Financials
Cash Balance 3 JUNE 2023
P/L YTD increased to $947 from $768 three weeks ago. Low volatility still doesn’t make me much money!
I am automating the P&L overviews so as soon as I am ready I will here show the results.
Status 13 May 23 (not updated)
Due to the low volatility and not being able to find enough plays, my trading is suboptimal, I am not making full use of my cash, optimizing my positions enough, etc . and I am still making mistakes in choosing the right directions and the right options strategies. Still looking for the edge!
The points I have to look at are:
- In general, my positions are placed on the safe side with low deltas, low risk, and low profit. I am already increasing risk by widening spreads and picking higher deltas.
- For a better-balanced portfolio allocation (based on VIX), I am adding non-short premium and passive income strategies to optimize my portfolio.
- Except for a small short put undefined risk play in RIOT, I have been only doing a limited number of defined risk strategies which are lower risk but also less profitable: I may need to start looking at adding other defined risk strategies, and once in a while short straddles and strangles based on low prices underlyings. But my account is, at this stage, really too small for this.
- I now select positions with higher premiums than the commissions and fees I have to pay and the target profit I have set as a rule (50%).
- I am now also monitoring the beat-weighted delta of my positions and total portfolio; in periods like this, I need to manage it in such a way that it remains close to 0. I am far away from achieving this.
- BUT MOST IMPORTANTLY: I SHALL ABIDE BY MY ENTRY, ADJUSTMENT, AND EXIT RULES !
Find out more about the platform I love to use for my options trading:
If you like it as much as I do, and want to open an account, click here:
Disclosure: for each referral I will get credits for items or cash to support this website! Thanks!
Market Sentiment 2 June 2023
Maintaining this journal part every weekend is taking too long, so I will start rationalizing it.
I mostly use eOption’s Closing Bell emails, StockTwits, BarChart, and Seeking Alpha I receive daily as a source.
1. Geopolitical Events and Economic Trends
During the week, I capture the most important news. Every weekend before the new trading week, I review the current markets, the general geopolitical events, and economic trends determining the sentiment in the world of options trading.
- The war between Russia and Ukraine is still raging.
2. VIX Index
- The CBOE Volatility index (VIX) is down to 14.6 (!). Crisis? Near-time recession? Not according to the markte.
- The VIX Index measures the level of the expected volatility of the S&P 500 Index over the next 30 days that is implied in the bid/ask quotations of SPX options. Thus, the VIX Index is a forward-looking measure, in contrast to realized (or actual) volatility, which measures the variability of historical (or known) prices.
- A VIX below 15% is very low volatility. A 15% or below VIX is assumed to be a market at rest. Since the intrinsic nature of the Stock Market is to move up, a VIX close to 15% or lower will tell us that the broader market is likely to head higher.
- Up to 19% VIX means the market is in ‘lull’ mode. 19% is seen as the ‘steady state’ VIX. This arena is inadequate for short premium plays, which require high volatility. This is where long calls, puts, and debit spreads may be set up. Only when VIX gets closer to 30%, selling options become viable.
- At 20% or higher means medium volatility.
- A VIX of 30% or higher means high volatility. When selling options, you want to sell out of stocks when the VIX is near 30. This is where credit spreads, short strangles, straddles, short iron condors, etc., can be played.
- Above a VIX of 40%, this is still the case, but given the extreme volatility, you should be very careful.
VIX for position sizing
So my maximum portfolio capital allocation for short premium strategies should remain at 30% of net liq. At the end of this week I only have 15% allocated.
See also on this subject this Tastytrade video.
VIX
< 15
15-19
20-29
30-40
>40
Volatility
Lowest volatility, all comfortable
Market in ‘lull’ mode
Volatility high
Volatility very high
Volatility and fear levels highest
Maximum portfolio capital allocation
25%
30%
35%
40%
50%
Volatility and the VIX are significant in how I size positions and portfolio allocation. Since my focus is on short premium trading, I must balance exposure to substantial losses and reaching sufficient occurrences.
In 2022 the VVIX Index (VIX Volatility Index) has also traded within a fairly reasonable range (roughly between 83 and 150). The long-term average is 86, and the VVIX is mean-reverting.
The VVIX is nicknamed the “VIX of VIX” because it is calculated using the implied volatility of ATM and OTM options in the VIX itself, using the same calculation method as VIX. The index measures the “volatility of volatility, or the “vol of vol.”
Today, the VVIX is down to 86.16 (average).
The VVIX/VIX Ratio
See more in this Tastyworks video.
3. Oil and Gas, Gold, Silver, and Copper (Metals & Mining)
The following sectors I look at – to understand the market sentiment – are, due to their massive impact on the global economy, commodities.
- Crude oil prices rebounded with risk assets this week, though many expect OPEC+ is unlikely to make further production cuts at its Sunday meeting.
- While US equities may not have appeared to care much about today’s payroll gains, gold traders looked to be a different story. August gold futures slid by $25.90/oz, or -1.29%, to $1,969.60, generally on concerns the Fed may not be done with rate hikes to manage inflation. Despite today’s slip, the active futures managed a 1.3% gain on the week to end a three-week losing streak. With the debt deal presumably behind us, the June CPI reading is the next big focus for gold, equities, the Fed, etc. At that point, we may get a better read on the Fed pause prospects and expectations through the remainder of the year.
4. USD and Other Currencies, Bitcoin and Crypto
The DXY, the symbol for the US dollar index, tracks the price of the US dollar against a basket of six foreign currencies that have a significant trading relationship with the US and are also hard floating currencies. The index will rise if the dollar strengthens against these currencies and will fall if the dollar weakens against these currencies. I also look at crypto trends, especially Bitcoin
- The US dollar ended the week higher
- Bitcoin hovering around 27200
- No slowing down stock markets today even with the dollar and yields moving higher following the better jobs data.
5. Yield Curves
- Treasury yields climbed all day with the 10-year at 3.69% and the 2-yr up over 15-bps to 4.50%.
Understanding yield curves also adds to better reading the market sentiment.
“A yield curve is a line that plots bonds’ yields (interest rates) having equal credit quality but differing maturity dates. The yield curve’s slope gives an idea of future interest rate changes and economic activity.
There are three main yield curve shapes: regular (upward-sloping curve), inverted (downward-sloping curve), and flat. Upward sloping (standard yield curves) is where longer-term bonds have higher yields than short-term ones.
Standard curves point to economic expansion, and downward-sloping (inverted) curves point to economic recession.
Yield curve rates are published on the Treasury’s website each trading day.”
Source: Investopedia
i. The 10-Year Treasury Constant Maturity minus 3-Month Treasury Constant Maturity Yield Curve
The yield curve (T10Y3M) compares the 10-year with the 3-month U.S. Treasury bond yield. It gives insight into bank profitability, which is correlated with economic activity. Historically, the yield curve has been a reliable predictor of economic recessions.
An inverted yield curve has been a good indicator of an economic slowdown ahead. A 10-year-3-month treasury spread approaching 0 signifies a “flattening” yield curve. Furthermore, a negative 10-year-3-month spread has historically been viewed as a precursor or predictor of a recessionary period.
- For some time now, the indicator has been predicting a recession.
ii. The 2-Year/10-Year Yield Curve
- The separation between the two instruments still predicts recession.
“An inverted yield curve can be an important economic indicator and a likely precursor to a recession.
When the curve inverts, the longer-dated bond (I am using the 10-year) will offer a lower annual yield than a short-dated bond (I am using the 2-year). This means that investors have bid up the prices on longer-dated bonds to the point where they yield less than short-dated bonds.
An inverted yield curve results from investor concerns about the economy and the stock market. History shows that investors tend to be right about economic weakness on the horizon when the yield curve is inverted. Since WWII, every recession has been preceded by a yield curve inversion.
Recessions don’t start immediately after the yield curve inverts, however. The inversion tends to precede the recession by 6 to 18 months.”
Source: SeekingAlpha
6. Producer Price Index (PPI), Consumer Price Index (CPI), Consumer Sentiment Index (CSI)
The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.
Source: Bureau of Labor Statistics (BLS).
- n/a
The measure that is most often used to measure inflation in terms of consumers is the consumer price index (CPI). Tens of thousands of items in several categories are tracked. The basket of products or services is considered each month, and economists and statisticians look for trends. If the CPI rises, prices could trend higher, with inflation on the rise.
- n/a
A low CSI index reflects the general (dis-)satisfaction with managing U.S. economic policies. A high satisfaction rating suggests approval of the current policy management and implies market stability.
Source: Surveys of Consumers (umich.edu).
- University of Michigan sentiment May’s preliminary Michigan Consumer Sentiment reading fell to a 6-month low, down 9.1% from April. A key measure of consumers’ thoughts on their current financial situation and the economy’s health tumbled, as did their expectations for the next six months.
7. Put/Call Ratio
- Moving sideways
- A Put/call Ratio of below .5 could mean the market is very bullish. Maybe too bullish. It could be an excellent time to sell stocks high.
- Moving sideways if the Put/call Ratio oscillates between 0.5 and 1.0.
- Between 1.0 and 2.0, the Put/call Ratio indicates a bearish market.
- A Put/call Ratio above 2.0 could mean it is very bearish. It could be an excellent time to consider buying low.
- The put/call ratio went below1.0, which indicates sideways movement.
Warning: previous research conducted by tastytrade revealed that the Put/Call Ratio is not a reliable trading indicator. Readers can check out this installment to review that research in greater detail this installment.
8. NASDAQ, DJI, SPX, Russel 2000 Indices, and Main Market Sectors
In general, I look at the leading indices DJIA, SPX, and Russell 2000 (IWM) and the level of volatility or ‘market thrashing’ (excessive volatility with significant rising then near proportionate falling in markets’ values within a trading period): above 1% in any or all of them might indicate indecision in the market.
NASDAQ, DJIA, SPX, IWM
- By far, the most talked about chart last week was the S&P 500, which broke out to a new year-to-date high.
- The index joins the Nasdaq 100, which has been leading the U.S. stock market higher, marking two of the four major indexes breaking out.
Major Stock Market Sectors
I also follow the major market sectors in Barchart.
- Every sector closed green.
- Materials (+3.35%) led, and communication services (+0.11%) lagged
Summary Market Sentiment
Bull market
Bullish
Neutral
Bearish
Bear market/crash
1. Geopolitical events and economic trends
Positive trends, stable supply chains
Minor market issues, minor supply chain issues
National events, market issues, bad economic data, mini-corrections
Negative indicators, international events, serious market issues, broader market correction (-10%)
The total collapse of the global market, deep recession
2. VIX (VIX)
<15
Lowest volatility, all comfortable
15-19
Market in ‘lull’ mode
20-29
Volatility high (down from above 30)
30-39
Volatility very high
>40
Volatility and fear levels highest
3. Commodities
Oil & gas (XOP), gold (GLD), silver SLV), and copper (COPX) stable
Minor market issues, minor supply chain issues
National events, market issues
International supply chain interruptions, high oil & gas prices
International conflicts involving US, Russia or China, and other main producing countries
4. Currencies & Crypto
Very weak dollar (DXY) versus other currencies, crypto (BTCUSD) crashing)
Weak dollar, Bitcoin
Neither weak/nor strong dollar, Bitcoin
Strong dollar, Bitcoin
Very strong dollar, Bitcoin
5. US Yield Curve s(T10Y3M and US10Y vs US02Y)
Considerably steep curve
Steep curve
Average but still positive curve
Flattening, inverting, and approaching zero
Inverted curve and negative
6. Producer Price Index (PPI), Consumer Price Index (CPI), Consumer Sentiment Index (CSI)
Lowest price level
High consumer confidence
Price level higher than normal
Consumer confidence is less high
Price levels rising fast
Consumer confidence going up and down from very high or up from very low
The price level is very high
Low consumer confidence
Highest price level
7. S&P 500 Put/call ratio (PCR)
Well below 0.5 (very bullish)
Close to 0.5 (bullish)
Between 0.5 and 1.0 (neutral)
Between 1.0 and 2.0 (bearish)
Above 2.0 (severely bearish)
8. Dow Jones (DJI)
S&P 500 (SPX)
Russel 2000 (RUT)
Major Market Sectors (XLE, XLF, etc)
Strong bull market
No real changes in an upward trend
Bullish market
Minor changes in an upward trend
Moving to neutral bullish/bearish market
Increased (positive/negative) changes and “thrashing”
Bearish market (with bear rallies)
In general, going down, many negative changes
Bear market
A deep recession or the market is collapsing, or already did so
Trading style
No restrictions on trading (except for VIX rules)
Closer watch and reduce trades
More caution needed and reduce trades further
Extreme caution and reduce trades even further
Look to close any open positions and no new trades
This Week’s Economic Calendar
- Purchasing Managers Indexes (PMIs) on Monday and Tuesday
- Oil on Wednesday
- Jobs on Thursday
Earnings and Dividend Calendar
In general, I tend to avoid earnings or dividends (and other major events within 30 days of opening a position). Earnings are somewhat out again (start next month).
Portfolio allocation
See above: I need to start working on a balance between defined and undefined risk strategies to be added to my playbook.
This Week’s Guidelines
Positions at Beginning Of the Coming Week
I now have 10 positions which is a below the average I need to have running to maximize my portfolio allocation at 2-3% position sizes and 50% overall allocations.
I am now at 20% buying power usage of which most is for short premium strategies. I have set the maximum allocation at 50%, so I need to add new positions quickly
I can exceptionally go up to 70% but I want to have at least a minimum of 30% in cash at all times, so can use 20% more in my account for emergencies or opportunities (so now 35% short premium and 15% debit/long strategies and 20% for emergencies).
Goals and Schedule for this week
Sunday: set up options strategy ideas and perform backtesting; select at least two options strategy ideas.
Until Tuesday: open one more vertical spread or iron condor and a long position.
Rest of the week: start looking at strategies involving buying bills or bonds for the remaining 10% of the 50%.
I need high IVR underlyings and underlyings trading in ranges with apparent resistance and support areas for short premium strategies.
Underlyings Selected for Trading This Week
And during the week I will monitor stocks going into earnings.
For this week, I will continue applying my underlying selection rules and focus on high volatility (IVR >40) and higher premium underlyings that have no significant events (like earnings < 30 days) coming up.
My expectation (or rather: hope) is that this week’s volatility will increase again.
Options Buying Power and Portfolio Allocation This Week
Based on my current buying power and portfolio allocation rules, I determine whether I can open new positions to maximize such portfolio allocation.
I use VIX to determine the allocation percentage for short premium strategies. Since I until now only opened short strategies, this still applies to my whole portfolio.
However, with VIX going down to under 15, I should consider using a higher % of my total NetLiq for other strategies.
Allocation based on VIX (for short premium strategies)
VIX
< 15
15-19
20-29
30-40
>40
Volatility
Lowest volatility, all comfortable
Market in ‘lull’ mode
Volatility high
Volatility very high
Volatility and fear levels highest
Maximum portfolio capital allocation
25%
30%
35%
40%
50%
I must use Buying Power (NetLiq) to allocate portfolio capital. I will use average, rounded numbers from now on.
Cash Balance
$11.183.59
(was $10,509.76 )
Buying Power/Net Liq
$11,144.59
(was $11,355.54 )
Max Portfolio Capital Allocation Short Premium (Cash Available for Trading)
30%
$3,400 (rounded)
Max Portfolio Capital Allocation Other (low risk, long positions)
20%
$2,300 (rounded)
Average Max Position Allocation (BP)
3%
$340 (rounded)
I am now under-allocated for short premium, so need to add new debit position (s).
Portfolio allocation undefined vs defined risk
All my plays are ‘defined risk.’ I need to add undefined risk positions at a later stage. I will explain why in my blog post on constructing trades.
Since my average maximum position allocation is up to 3% and close to $340, I need to look for higher priced underlyings or increase the number of contracts per position.
This Week’s Rules
This week, I will start a post with my entry, adjustment, and exit rules per the options strategy. I will describe how I set up a playbook with all the strategies I want to deploy.
Conclusion
To continue to work on: weekly reminder: I still need to get more mechanical and disciplined in entering and adjusting the positions and remembering why I (or the platform) close positions.
The same for exiting. The focus is now on learning Python and quant finance to further improve my options trading.
