Options Trading Journal Entry 15 October 2022
I managed to get all my iron condors landed this week safely.
With option plays, closing positions before earnings (one week from now) is important. This week I closed all my October 21 positions in AMZN (iron condor), EEM (bear call spread), EWZ (iron condor), IWM (iron condor), and FCX (iron condor again) with a profit as targeted.
This was in a week which was very bumpy again. On Thursday, after the CPI numbers came out the market started low but then went up with high volumes. On Friday, stocks started to tank again and went down to the levels earlier this week.
None of my positions came into a danger zone this week, so there was no need to adjust.
I used the extra volatility on Friday to place three new positions IWM, PYPL (iron condors), and RIOT ( short put short play) since I have no problem owning 100 shares or more in RIOT). VIX is still above 30.
Also, next week the earning season really kicks off. Since I have not added earning plays to my playbook yet, I will avoid opening positions for underlyings with earnings within 30 days of opening. So I am now still mainly looking at ETFs.
I am still far from optimal portfolio allocation. Still, I will not force myself to open positions that do not conform to the rules I have imposed upon me. I should normally have around 18 positions open based on the options strategies I now deploy and the risk I am willing to take (position size).
The RIOT short put takes away a large chunk of my portfolio buying power but will expire in two weeks.
I am now actively using all the rules and tools I have to select underlyings, construct trades, and use technical analysis to determine entry points for my options trades.
During the week, I follow the stocks (and other underlyings) in TradingView (technical analysis) and StockInvest.usTradingView (technical analysis), and StockInvest.us during the week. Every day I receive Google Alerts.
And I test all positions in Tastyworks, backtested them in Tastytrading’s Lookback backtesting app, and entered them during the week in the platform.
I am still working on my blog on entry rules in which the options greek delta plays a very important role.
And as a last note: two weeks ago, I received what is considered the bible for options traders: Options as Strategic Investment, 5th ed. by Lawrence G. McMillan.
Over 1000 pages, and I am now at page 40 reading about covered calls, a strategy I do not intend to use very much.
Table of Contents
- Options Trading Journal Entry 15 October 2022
- Last Week’s Options Trading
- Market Sentiment 15 October 2022
- 1. Geopolitical Events and Economic Trends
- 2. VIX Index
- 3. Oil and Gas
- 4. Gold, Silver, and Copper (Metals & Mining)
- 5. Yield Curves
- 6. Producer Price Index
- 7. Consumer Price Index (CPI)
- 8. Consumer Sentiment Index
- 9. Put/Call Ratio
- 10. DJI, SPX, Russel 2000 Indices, and Main Market Sectors
- 11. USD and Other Currencies
- 12. Bitcoin
- Summary Market Sentiment 1 October 2022
- This Week’s Economic Calendar
- Earnings and Dividend Calendar
- Financials
- This Week’s Guidelines
- Open Positions Status at Beginning Of the Coming Week
- Goals and Schedule for this week
- Underlyings Selected for Trading This Week
- Options Buying Power and Portfolio Allocation This Week
- This Week’s Rules
- Option Positions in Play
- Conclusion
Last Week’s Options Trading
This week I closed most of my positions, all with a profit of 50% of the premium received or higher.
I again used the high volatility on Friday to open three new positions. So let’s see where we are.
Status already Active Positions
EWZ Iron Condor 18 Nov 25/27/37/39 Opened October 3
The second higher volatility, higher premium EWZ play is still in the green. This one expires on 18 November, there is some more need to monitor it since volatility has pushed the expected move closer to the break-evens of the lower short leg.
EWZ seeks to track the investment results of the MSCI Brazil 25/50 Index. The fund generally invests at least 80% of its assets in the securities of its underlying index and depositary receipts representing securities in its underlying index. The index is a free float-adjusted market capitalization-weighted index with a capping methodology applied to issuer weights so that no single issuer exceeds 25% of the underlying index weight, and all issuers with a weight above 5% do not cumulatively exceed 50% of the underlying index weight. The fund is non-diversified.
IWM Iron Condor 18 Nov 146/149/190/193 Opened on Sep 30
My second higher volatility, higher premium IWM play is also still in the green. This position also expires on 18 November, there is some more need to monitor it since volatility has now moved the expected move close to the legs’ break-even levels.
I plot the expected move and change it on a regular basis in TradingView to get a visual on whether legs are challenged.
The investment seeks to track the investment results of the Russell 2000 Index, which measures the performance of the small-capitalization sector of the U.S. equity market. The fund generally invests at least 80% of its assets in the component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the component securities of its underlying index (i.e., depositary receipts representing securities of the underlying index) and may invest up to 20% of its assets in certain futures, options and swap contracts, cash and cash equivalents.
Positions Opened Last week
At the end of the week, after having closed most of my Oct 21 expiring positions, I opened three new positions on Friday:
PYPL Iron Condor 18 Nov 62.5/65/97.5/100 Opened on Oct 14
Another volatility play giving me a nice credit and positive backtesting results.
However, I oversaw that there is earnings coming on 3 November, which is against my entry rules (earnings > 30 days) so I should either get out on time if possible with a profit or adjust before that date.
IWM Iron Condor 25 Nov (W) 150/152/190/192 Opened on Oct 14
This week I couldn’t find many new ideas, so I decided to look at ‘weekly’ options.
- Weekly options are similar to monthly options, except they expire every Friday instead of the third Friday of each month.
- Weeklys are introduced on Thursdays and expire eight days later on Fridays.
- They have become extremely popular for trading, allowing traders to capitalize on short-term news.
To be honest, there was not much news or other reasons than that volatility is high and IWM positions until now are giving me regular short premium income.
RIOT Short Put 28 Oct (W) 5 Opened on Oct 14
Once in a while, I place trades in one of my favorite companies: RIOT. I follow blockchain, crypto, and NFTs. RIOT is very much correlated to Bitcoin, so as soon as I see Bitcoin going up or down, I know that RIOT is going to create.
Lately, RIOT has been quite stable with low IVRs compared to early this year. Whether this says something about Bitcoin I need to check.
Anyway, I already have a stock position in another account, and I don’t also mind having a stock position in my Tastyworks to do some wheel, secured put, and covered call experiments.
A 28 Oct short put at 5 would give me a nice discount of 21 cents (4%) on the stock price if and when exercised.
Positions Rolled or Closed Last Week
I closed all of the following positions in the green with a profit of around 50% of the premium received:
- AMZN Iron Condor 21 Oct 21 97/99/128/130 Opened Sep 26
- EEM Bear Call Spread 21 Oct 36.6/38 Opened on Sep 27
- EWZ Iron Condor 21 Oct 26/27/34/35 Opened Sep 15
- FCX Iron Condor 24/25/35/36 Oct 21 Opened Sep 21
- IWM Iron Condor 21 Oct Opened Sep 26, Put Leg 147 149 Rolled to 157 159 on Oct 7
One week ago, I rolled the put spread of this iron condor ten points up from 147/149 to 157/159, giving me an extra premium and pushing the break-evens further out.
I based the roll-up on the ‘Expected Move’ as indicated in the Tastyworks platform, the (extra) premium I would receive, and my expectation of the direction and trend of the underlying (which is slightly bearish).
Options Strategies Count Summary
Defined Risk
Week 8 October – 15 October
YTD
Bull Put Spread (credit)
0
0
Bear Call Spread (credit)
0
1
Bear Put Spread (debit)
0
0
Bull Call Spread (debit)
0
1
Short Iron Condor
2
8
Undefined Risk
Short Option
1
1
Short Straddle
0
0
Short Strangle
0
0
End-of-Week Active Positions Overview
To be set up
Market Sentiment 15 October 2022
Every week I start with a review of the market sentiment.
I mostly use eOption’s Closing Bell emails I receive daily as a source.
On Thursday morning, in the span of three hours, S&P 500 futures had a -3.9% decline and a 3.9% rally. U.S. equity futures completely reversed an early gain after CPI data became hotter than expected (core CPI hit a 40-yr high). S&P and Nasdaq futures tumbled, falling between 2-3% on the open as Treasuries gapped, with the 10-year yield rising above 4% and the dollar surged.
After Thursday’s massive rally and market recovery, this didn’t continue on Friday, and another negative inflation reading was met with aggressive selling (markets giving back a chunk of Thursday’s gains).
In Europe, U.K. Prime Minister Liz Truss fired her Treasury chief Kwasi Kwarteng to salvage her tenure following pressure from her Conservative Party and the international market. She most probably will be the next one out.
“The Fed is trying to bring down inflation, and a tight labor market makes doing that extremely hard. Many jobs and few available workers create an environment where labor has the upper hand. As a result, workers can bargain for higher pay and more incentives.
While this is great in theory, especially given the current wealth gap in society, it creates upward inflation pressure. Companies’ input costs go up, so they raise the prices of the goods/services they sell. And on the demand side, higher wages for workers mean more demand, pushing up prices.
That is the opposite of what the Fed is trying to do. Its policies are attempting to crush demand enough that unemployment increases and the prices of homes and other significant goods decrease.
So while the White House is happy about September nonfarm payrolls rising 263k and the unemployment rate falling to 3.5%, the Fed and the stock market are not.
How does this all tie back to the stock market and today’s decline? Upward inflationary pressure means the Fed will have to keep tightening financial conditions aggressively until it sees meaningful progress. Higher interest rates put pressure on the stock market because the risk-free rate of return (or discount rate) used in every financial model goes up, reducing the value of most other assets.”
Source: Stocktwits Daily Rip 7 Oct 22
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 Russia-Ukraine war continues to escalate as missile strikes damage critical infrastructure in the Kyiv region.
- Russian leader Vladimir Putin said there were no plans for a further military mobilization in Russia and says no need for massive strikes on Ukraine now. In Europe
- U.K. Prime Minister Liz Truss fired her Treasury chief Kwasi Kwarteng to salvage her tenure following pressure from her Conservative Party and the international market
- China’s CPI inflation rose to 2.8% y/y in September (vs. +2.5% y/y in August), primarily on elevated food prices.
- The U.S. and Saudi Arabia continue to argue over the OPEC+ oil cut reasoning. Meanwhile, the International Energy Agency (IEA) says those oil supply cuts could tip the world into a recession
2. VIX Index
- The CBOE Volatility Index (^VIX) — Wall Street’s “fear gauge” — still moves around 32 after surpassing 33 earlier in the week (the highest volatility since June of this year).
- 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
With a VIX of above 29, my maximum portfolio capital allocation is 40% of net liq.
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 97, 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 went further down at the end of the week to 102 from around 106, which means it is still reverting back to the mean.
The VVIX/VIX Ratio
See more in this Tastyworks video.
3. Oil and Gas
The following sectors I look at – to understand the market sentiment – are, due to their massive impact on the global economy, metal & mining.
- Nov WTI crude oil (CLX22) on Friday closed down -3.48 (-3.91%), and Nov RBOB gasoline (RBX22) closed down -7.25 (-2.68%).
- Slack energy demand in China, the world’s largest crude importer, weighed on crude prices.
- Nov nat-gas on Friday closed sharply lower. Prices were under pressure on negative carry-over from a slump in European nat-gas prices, which tumbled to a 3-1/2 month low Friday
4. Gold, Silver, and Copper (Metals & Mining)
To understand the market sentiment, I look at the following sectors: precious metals and mining due to their massive impact on the global economy.
- On Thursday, December gold futures were last trading at $1,666 per ounce, down 0.69 percent.
- According to experts, the US dollar’s 20-year high and rising interest rates will continue to be major obstacles for gold (and other precious metal) prices
5. Yield Curves
- The yield on the benchmark U.S. 10-year Treasury note advanced after a solid report on the labor market was likely to keep the Federal Reserve on its path of aggressive interest rate hikes to combat inflation. Before paring gains, the 10-yr yield rose as much as 8 basis points above 3.9%.
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.
- This week treasury yields drop along with gold prices.
- Benchmark U.S. 10-year Treasury yields firmed, further weighing on zero-yield gold.
- For some time now, the indicator has been predicting a recession.
ii. The 2-Year/10-Year Yield Curve
- The 2-year yield has now posted another 12-consecutive high yield close, as per CNBC, rising above 4.4% (15-year highs).
- The benchmark 10-yr yield hit another high above 4%.
- So the 2Y10Y Yield Curve is still inverted (and this is a sign of 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
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).
- Still going down, which is a sign that inflation may be slowing
7. Consumer Price Index (CPI)
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.
- Another disappointing inflation report as core CPI data rose to a fresh all-time 40-year high
8. Consumer Sentiment Index
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: reported at 59.8 vs. est. 59.0 and vs final Sept 58.6; current conditions index prelim Oct 65.3 vs. Sept-F 59.7 and expectations index prelim Oct 56.2 vs. Sept-F 58.0.
9. Put/Call Ratio
- 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.
- 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.
- Moving sideways if the Put/call Ratio oscillates between 0.5 and 1.0.
- The put/call ratio went steeply up to 0.924, which indicates slightly fewer people are selling than buying and that the market is neutral/bullish.
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.
10. 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.
DJIA, SPX, IWM
- The Dow Jones Industrial [-1.34%] set another new YTD-low
- The S&P 500 [-2.37%], Nasdaq [-3.08%], and Russell 2000 [-2.66%] closed last trading week with more losses.
Major Stock Market Sectors
I also follow the major market sectors in Barchart.
- Every sector was red, with energy (-3.73%) and consumer discretionary (-3.71%) leading lower.
- S&P 500 Index at -2.37% down from -2.80%
11. USD and Other Currencies
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.
- The U.S. dollar rose over 0.5% against its rivals.
- Sterling fell sharply against the U.S. dollar after British Prime Minister Liz Truss fired her finance minister and scrapped parts of their economic package that has caused so much turmoil in the UK’s currency and bond markets.
The DXY didn’t change much compared to last week (although it went down to 110 mid-week for a short period) and now stands around 1 point up at 113.29.
12. Bitcoin
Bitcoin remaining in the 19000-20000 zone this week and is at 19124 today.
Summary Market Sentiment 1 October 2022
Bull market
Bullish
Neutral/bearish
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
30-39
Volatility very high
>40
Volatility and fear levels highest
3. Oil & Gas (XOP)
Oil & gas
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. Gold, Silver & Copper (GLD & SLV & Copper)
Gold, silver, and Copper 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
5. US Yield Curve (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)
Lowest price level
Price level higher than normal
Price levels rising fast
The price level is very high
Highest price level
7. Consumer Price Index (CPI)
Lowest price level
Price level higher than normal
Price levels rising fast
The price level is very high
Highest price level
8. Consumer Sentiment Index (CSI)
High consumer confidence
Consumer confidence is less high
Consumer confidence going down
Low consumer confidence
No consumer confidence
9. 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)
10. 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
Neutral bullish/bearish market
Increased (negative) changes and “thrashing”
Bearish market
Going down, many negative changes
Bear market
A deep recession or the market is collapsing, or already did so
11. US Dollar Currency Index (DXY)
Very weak dollar versus other currencies
Weak dollar
Neither weak/nor strong dollar
Strong dollar
Very strong dollar
12. Bitcoin (BTCUSD)
Bitcoin rising
Bitcoin rising slightly slower
Bitcoin “thrashing” at the same level
Crypto crashes, market corrections
Bitcoin collapses
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
Earnings and Dividend Calendar
The next earnings season is coming up for my selected underlyings.
The first dividends are in December for GDX.
Financials
Cash Balance 15 October
I am still recovering the nearly $1.500 loss I made while learning how to options trade (yes, yes, first paper trade and then migrate to the real stuff, I know, but I learn more from being burnt).
And even without including the ‘ramp-up loss’ of $1.500, as from the formal start of my trading (September), I have gained around $360, of which $245 is still ‘unrealized’ so ‘at risk.’
So actually realized the gain from my ‘formal start’ in September (one month ago) is $115, and at the end of the year, at this rate will be no more than $1.380, which is only 30% of what I planned.
This is far away from where I should be based on my plan. The root causes are the following:
- In general, my positions are placed on the safe side with low deltas, so less risk, and low profit
- I am not using max portfolio allocation (should be 40% based on VIX today, but on average, I only reach half of that): however, given present choppiness, it is better to err on the safe side and not cost what cost try to reach the 40%
- Except for a small short put undefined risk play in RIOT, I have been only doing defined risk strategies which are lower risk but also less profitable: I need to start looking at adding short straddles and strangles to my strategies
- The positions I select have too low premiums compared to the commissions and fees I have to pay and the target profit I have set as a rule (50%): I need to go for higher premiums/max loss.
Commissions and Fees Destroy Profits
For the last point, I will give an example. The commission and fees for opening one iron condor contract are around $4.55. Since, in most instances, I close the position, I will have to pay a fee of $0.55 extra (no commission), which totals $5.10 per position.
In general, I close positions at 50% profit (50% of premium). However, this does not take into account commissions, fees, and other costs. So if I want a net profit of 50% over the premium, in the case of an iron condor, I will have to add twice the total costs of commissions, fees, and other costs to recoup such costs.
Say I selected a position where the max loss is $75, and the profit (at least 33%) was $25. I close at 50% profit = $12.50. Net profit will be $12.50 -/- $5.10 = $7.40. So less than 30%.
In this case, to reach a net profit of 50%, I should add twice the amount of commissions and fees (= 2x $5.10= $10.20) to the $12.50, which amounts to $22.70 so I will have to put the target to close profit at 22.7/25 = 90% (!). Net profit of 50% then is $37.20/2= $17.60 – $5.10 -=$12.50.
Today, I have set as a rule that my max position size should be 2% of the total portfolio amount of $9.000, so $180. Let’s look now at what the calculation is:
- Max loss = $180, and 33% profit = $60
- Net profit to be 50% = $30
- Adding $10.20 brings us to $40.20
- Target profit should be 40.2/60 = 67%
Today, I can raise the 2% to 5% of the total portfolio amount of $9.000, so $450. Let’s look now at what the calculation is:
- Max loss = $450, and 33% profit = $150
- Net profit to be 50% = $75
- Adding $10.20 brings us to $85.20
- Target profit should be 85.2/150 = 55%
A target profit of 55% is not so far out from the 50% options traders like in Tastytrade consider being the sweet spot.
IMPROVED WIN PERCENTAGE
We have found that managing our winning trades prior to expiration can improve our probability of success. If we consistently enter trades with a probability of profit of 70%, but we close them when we reach a certain percentage of profit, we can increase our overall percentage of winning trades higher than 70%. This is because we’re taking risk off the table and we’re also decreasing the time that we’re in the trade.
RISK VS. REWARD
Another reason we prefer to manage our winning trades is because of the risk/reward shift that occurs when we start to see profits. Let’s take an example of selling a call for $1.00. The maximum profit is $1.00, and the losses are undefined. Ten days go by and implied volatility contracts, which results in the option being worth $0.50. Since our maximum profit is the credit received for this trade, we have to reevaluate the risk/reward. In the current position, we can only make $0.50 more, while still holding all the risk of the position. Not to mention the fact that we can also lose the unrealized gains we’re seeing in the open position!
As we get closer and closer to maximum profit, our risk starts to outweigh the potential reward of holding the position. We’ve found that the target of managing our winning trades at 50% can be the sweet spot over the long run for most trades.
Source: Tastytrade
Now, if I don’t want to increase the max position size so much (trade often, trade small principle) I can decide to increase my total portfolio amount to $15.000 and increase the max position to 3%, which also is $450. The calculation is exactly the same as that above.
So I either accept that my profits are actually lower than 50% of the premium received, or I up my target profit percentage to include the commissions and fees. Or I add extra funds to my account so that I can trade with higher premiums while still following my rules. Or a combination thereof.
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
Open Positions Status at Beginning Of the Coming Week
I have now five positions in PYPL, RIOT, EWZ, and IWM (2x).
My maximum portfolio allocation (max 40% of total portfolio buying power based on today’s VIX) is still far out. Whereas I now should be profiting with my short premium strategies from the opportunities presented by the high volatility in the market.
I am at 25.9% Buying power usage (NetLiq).
Goals and Schedule for this week
Sunday: set up options strategy ideas and perform backtesting; select at least two options strategy ideas.
Tuesday: open a minimum of 2 vertical spreads or iron condors
Thursday: open a minimum of 2 vertical spreads or iron condors
I need high IVR underlyings and underlyings trading in ranges with apparent resistance and support areas.
Start looking at how short straddles and strangles work.
Underlyings Selected for Trading This Week
This is my selection for this week. I am still avoiding the earnings as much as possible, looking for high IVRs.
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.
I dropped NVDA and EEM and added C, BAC, and UNG to the list.
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.
Allocation based on VIX
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%
In allocating portfolio capital I need to use Buying Power
Cash Balance
$4,889.21
Buying Power
$4,644.21
Max Portfolio Capital Allocation (Cash Available for Trading)
40%
$1.857,68
Average Max Position Allocation (BP)
3%
$140
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.
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.
Option Positions in Play
Vertical Bull Put Credit Spread
None
Vertical Bear Call Credit Spread
None
Vertical Bull Call Debit Spread
None
Vertical Bear Put Debit Spread
None
Short Iron Condors
PYPL Iron Condor 18 Nov 62.5/65/97.5/100 Opened on Oct 14
RSI close to bottom, but not quite there. High IVR, so legs outside expected moves. Low deltas (<20)
IWM Iron Condor 25 Nov (W) 150/152/190/192 Opened on Oct 14
High IVR, so legs outside expected moves. It is a weekly and open interest was very low. Again an experiment.
EWZ Iron Condor 18 Nov 25/27/37/39 Opened October 3
See above
IWM Nov18 IC 146-149-190-193 Opened on 30 September
See above
Naked Put
RIOT Short Put 28 Oct (W) 5 Opened on Oct 14
The first undefined trade is a short-term short put for RIOT. It is not the ideal set-up to get a high premium since IVR is low, but once in a while, I will allow myself an experiment.
Short Straddles
None
Other Strategies
None
Conclusion
I’m going much too slow and need to start optimizing positions size, and probably add some funds. I am only halfway. But the idea of trading based on high VIX levels only when all entry indicators are on green and holding back in rough and choppy times is part of the game to reach my goals.
Let’s see whether October will become more bullish again and allows me to open more positions.
