Options Trading Journal Entry 22 October 2022
The call wings of my iron condors are coming under attack due to the surge of stock prices last Friday. This is a good opportunity to understand what happens to options positions when this happens.
After landing my first iron condors last week, I had, in addition to my RIOT short put, only four condors left, I opened two new short iron condors on Thursday (EWZ Dec 16 24/27/38/41 and QQQ Nov 24 238/242/298/302).
Volatility was high, the technicals all looked good, and I needed to maximize my portfolio allocation to 40% of net liq.
On Friday morning, all looked fine, and my P/L Day and P/L Open steadily grew. However, later in the day, stocks started to go up rapidly. For the RIOT short put, this was good news. This was not so good for the call legs in my iron condors. And most gains of the morning started evaporating.
Overall, I still ended with a positive day P/L, but it had been ten times higher earlier in the day.
I have to understand what happens when prices go up and why this affects P/L.
My QQQ iron condor call leg under attack
I will take my QQQ position (W) I opened on Thursday (see also below) at around 268.
The deltas for the put leg 238/242 strikes were at 14 (long) and 17 (short) with a 2-cent bid-ask spread of 2.56 – 2.58 for the long 238 strike and 3-cent wide spread for the short 242 strike: 3.15 – 3.18.
The open interest for the long strike is below what I have set as a rule (78). The short has an open interest of 496.
The call leg deltas of the call strikes 298/302 were 16 (short) and 12 (long).
Also, with 2 to 3 cents wide bid-ask spreads: short 298 strike: 1.99 – 2.20 and long 302 strike: 1.49 – 1.51.
Both open interests are below my rule (81 and 22, respectively) since this is weekly (25 Nov)!
At the opening, theta stood at 2.316, and the IVx (Tastywork’s ‘special’ VIX-based IV indicator) was at 36%.
IMPLIED VOLATILITY PER EXPIRATION (IVX)
The implied volatility (IVx) metric displayed in the option chain is calculated using a VIX-style calculation. The Cboe calculates the VIX Index using standard SPX options and weekly SPX options. These options are weighted to yield a measure of the expected volatility of the S&P 500 Index. A similar procedure applies to the calculation of IVx for each expiration cycle in the options chain. You can find more details on implied volatility and how to implement it in your trading in this link here. IVx per expiration can be found on the right side of the options chain for each expiration in the desktop platform. IVx on the positions/watchlist tab will default to a 30 days timeframe.
Source: Tastyworks
On the second day, at the end of Friday, QQQ stood nearly 7 points up at 275.42.
With the underlying going up, the deltas for the put leg went down to 10 (long) and 12 (short) now.
The bid-ask spreads are also much wider (9 cents): 1.67 – 1.76 for the 238 strike and 2.07 – 2.16 for the 242 strike.
Buying back the put leg would cost me now 2.16 – 1.67 = 0.39. Open interest went slightly up.
The call leg deltas are now at 23 and 19, also with wider bid-ask spreads: 3.17 – 3.28 for the short (9 cents) and 2.38 – 2.50 (12 cents!) for the long strike.
So buying back this leg based on mid prices would cost me 3.28 – 2.38 = 0.90 (worst case).
A total of 0.39 + 0.90 = 1. 29 (in Tastyworks bases credits and debits on mid prices, so therefore it shows 1.18 here below).
Also, here, open interest went slightly up.
My premium was 1.09, so that would be a loss of 0.20 ($20).
Theta is now at 2.401, and the IVx didn’t change much (35.2%).
But we’re only 2 days in and far away from expiry, but I need to keep a closer watch and monitor this and the other positions (all went up on Friday, except PYPL). There may be opportunities to rill up or down legs to gain more premium for this play.
It shows what happens when prices start to move and how the option greeks kick in to influence the option value.
Other news
I used the extra volatility on Thursday to place two new positions QQQ (25 Nov weekly)and EWZ (Dec monthly) again. VIX is now going under 30.
Earning season should be in full swing this week. 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 and stocks that have earnings behind them.
As for portfolio allocation ( came close to my maximum of 40% (based on the VIX level). which would mean I cannot open new positions were it not that I decided to deposit more money since I unexpectedly got some extra money coming in (so not immediately needed :)). This is mainly because a small account restricted me too much in the choice of underlyings for option plays.
So year-to-date, I deposited slightly more than $10,000 now, and from now on will use that as the basis for position and portfolio allocation and tracking P/L.
The RIOT short put still takes away a large chunk of my portfolio buying power but is in the green and will expire in one week.
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.
The book is over 1000 pages, and I am now at page 100 reading about long calls, a strategy I do not intend to use very much but need to understand for the plays I want to use.
Table of Contents
- Options Trading Journal Entry 22 October 2022
- Last Week’s Options Trading
- Market Sentiment 22 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 opened again two extra positions, and no positions were closed or managed.
Due to the market going up on Friday, my overall cash position didn’t change very much.
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 slightly in the red but no immediate threat of going ITM or even ATM. 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 call leg due to the market’s price surge on Friday.
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.
IWM Iron Condor 25 Nov (W) 150/152/190/192 Opened on Oct 14
The same for the weekly I opened last week: but slightly red P/L Open now due to challenged call leg.
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 and position in green at the end of the week.
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 (this week?) if possible with a profit or adjust before that date. I am still far away from >50% profit taking (one of my exit rules).
PayPal Holdings, Inc. operates a technology platform that enables digital payments on behalf of merchants and consumers worldwide. It provides payment solutions under the names of PayPal, Credit, Braintree, Venmo, Xoom, Zettle, Hyperwallet, Honey, and Paidy. The company’s payments platform allows consumers to send and receive payments in approximately 200 markets and in approximately 100 currencies, withdraw funds to their bank accounts in 56 currencies, and hold balances in their PayPal accounts in 25 currencies. PayPal Holdings, Inc. was founded in 1998 and is headquartered in San Jose, California.
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.
Riot Blockchain, Inc. and its subsidiaries focus on bitcoin mining operations in North America. It operates through Bitcoin Mining, Data Center Hosting, and Electrical Products and Engineering segments. As of December 31, 2021, it operated approximately 30,907 miners. Riot Blockchain, Inc. was incorporated in 2000 and is headquartered in Castle Rock, Colorado.
Positions Opened Last week
EWZ Iron Condor 16 Dec 24/27/38/41 Opened October 20
It’s becoming quickly one of my favourites. But I should be careful, since I within two days have another position here that I need to monitor due to the market surge on Friday and therefore still is in the red.
QQQ Iron Condor 25 Nov 238/242/298/302 Opened October 20
This position I described above in this blog post.
The investment seeks investment results that generally correspond to the price and yield performance of the index. To maintain the correspondence between the composition and weights of the securities in the trust (the “securities”) and the stocks in the Nasdaq-100 Index ® or NDX, which is heavy with technology stocks (50%) and is also concentrated with the top 15 stocks making up 60% of the ETF, the adviser adjusts the securities from time to time to conform to periodic changes in the identity and/or relative weights of index securities. The composition and weighting of the securities portion of a portfolio deposit are also adjusted to conform to changes in the index.
QQQ has US$149bn in assets and managed by Invesco.
Positions Rolled or Closed Last Week
This week no positions were closed, rolled, or otherwise managed.
Options Strategies Count Summary
Defined Risk
Week 15 October – 22 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
10
Undefined Risk
Short Option
0
1
Short Straddle
0
0
Short Strangle
0
0
End-of-Week Active Positions Overview
To be set up
Market Sentiment 22 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.
US equities markets rallied and finished near highs after the Fed’s Daly kicked off another round of Fed speakers with less hawkish comments on Friday morning.
Lastweek was a big week for corporate earnings and next week we hear from over 33% of the S&P 500, with nearly every sector well represented.
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.
- U.K. Prime Minister Liz Truss fired and Boris Johnson threatening to come back
2. VIX Index
- The CBOE Volatility Index (^VIX) — Wall Street’s “fear gauge” — now moves around 30 and under after surpassing 33 in the last weeks (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 87 from around 102, which means it is now under 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.
- Oil prices settled with a gain of $0.54, or +0.64%, to $85.05/bbl. The moved pushed oil to a weekly gain of 0.5%.
- U.S. Natural gas futures slid early hitting seven-month lows before settling at $4.9590/MMBtu, -$0.399 or -7.4% (lowest close since March 2022). The weekly slide hit -23% as concerns swirled around more mild winter whether expectations and a more balanced supply/demand position.
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.
- December gold settled at $1,656.30/oz, +1.3% (+$19.50/oz), pushing the active contract to a weekly gain of almost 0.5%. While the close was nicely positive, price action early in the session hit the lowest intraday level for the active contract since April 2020 before bouncing on speculation about future Fed moves.
5. Yield Curves
- The US Treasury 5-year yield tops 4.5% for first time since 2007
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 10-year yield hits new 14-yr highs of 4.34%
- The 2-yr 15-yr highs at 4.64% at highest of day before paring gains on WSJ article about Fed and Fed Daly comments.
- So the 2Y10Y Yield Curve is still inverted (and this is a sign of recession) but the 2Y is coming down faster than the 10Y is going down. I need to check whether that is a good sign (coming out 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.
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).
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 0.955, 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
Major Stock Market Sectors
I also follow the major market sectors in Barchart.
- Every sector was green. Materials (+3.46%) led, and communication services (+0.64%) lagged.
- S&P 500 Index up 1.29%
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 pound extended drop, fell to lows $1.1061 before rebounding back above $1.12
- Wild moves in Japanese yen as dollar hits fresh 32-yr highs 151.49 before massive reversal, down -2.5% to 146.20 (dollar up 28% YTD still) – the yen snapped its 12-session decline vs. the dollar following the notable reversal.
The DXY didn’t change much compared to last week and slightly down from last week (113) at 111.875.
12. Bitcoin
Bitcoin still remains in the 19000-20000 zone this week and is at 19179 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 22 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 (‘realized’) over $500 now, however extrinsic value of current positions went up to $427 and is still ‘unrealized’ so ‘at risk’.
So actually realized the gain from my ‘formal start’ in September (one month ago) is only around $75.
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 just started using max portfolio allocation (should be 40% based on VIX today, but on average, I only reach half of that); also when I do my financial calculations, I see now that 40% at risk should be minimum to reach goals, or I have to move faster to undefined risk set-ups.
- 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.
I added 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 seven positions in QQQ, PYPL, RIOT, EWZ (2x), and IWM (2x).
I was at 37.5% Buying power usage (NetLiq), but due to the deposit I am back at 17%.
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
$10,547.16
Buying Power/Net Liq
$10,120.16
Max Portfolio Capital Allocation (Cash Available for Trading)
40%
$4.048,06
Average Max Position Allocation (BP)
3%
$303,60
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.
IWM Nov18 IC 146-149-190-193 Opened on 30 September
See last week
EWZ Iron Condor 18 Nov 25/27/37/39 Opened October 3
See last week
EWZ Iron Condor 16 Dec 24/27/38/41 Opened October 21
See above
QQQ Iron Condor 25 Nov (W) 238/242/298/302 Opened October 21
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 continue optimizing portfolio allocation and positions size. I did add some more funds.
Let’s see whether, in the last week in October, things will become more bullish again and allows me to open more positions, using my extra funds .
Afterburner: Short Weekly options
After writing the conclusion I read an article on weekly options. I have also been testing a few out, and two are still running. Reading this, I think, for now, I better switch back to only doing monthly options.
New research conducted by tastytrade shows that the risk-reward paradigm for short weekly options doesn’t improve much, even in extremely volatile trading environments, like the one observed in 2022.
The average premium per day for weekly options is much higher than it is for monthly options. That indicates the potential return on capital (ROC) from a short weekly option is theoretically higher, as compared to a monthly option.
Despite the seemingly attractive figures outlined above, one can’t forget the broader context. Weekly options still have a narrower profit zone, and limited flexibility to deal with large losses in a short timeframe, as compared to monthly options.
Using backtests of 2022 trading data, tastytrade discovered that the overall performance of short weekly options has still been fairly weak—despite the richer premiums. Moreover, proactive management of short weekly options positions doesn’t help much, either.
The graphic below highlights how monthly options have far outperformed weekly options in 2022 when it comes to overall win ratio, daily P/L and limiting large losses.
The top row of the chart highlights the management strategy used in each backtest. For monthly options, each position was closed with 21-days left until expiration (DTE = days until expiration). While in the case of the two weekly option backtests, the first (middle column) left the positions open through expiration, while the second (right column) closed the short weekly options after three days (i.e. 3 DTE exit).
As highlighted below, the performance statistics of each respective backtest revealed that a short monthly approach appears to offer a more attractive risk-reward dynamic, as compared to the two short weekly approaches.
