Entry 10 Dec 22: Crashing Condor

By: nic

Options Trading Journal Entry 10 December 2022

Quite a busy week watching my FXI iron condor crashing, opening positions, and managing losing positions. I am starting to understand that options trading and passive income may be different concepts.

Newsflash: While writing this post, I actually got assigned to the short call strike of my FXI iron condor.

I now have actually two positions in FXI:

  • -100 (so short) shares
  • a bull put spread with nearly 0 time value left.

In the entire below, I will describe how I am going to solve this. There is no need to worry.

I am learning more about long debit strategies but didn’t find yet a play.

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:

  1. Long bull call and bear put vertical spreads
  2. Ratio spreads
  3. Long put calendars and call calendars
  4. Long diagonal spreads
  5. Long volatility products

In bull(-ish) markets, as the VIX drops, implied volatility tends to be low in equities. Just like I take advantage of reversion to the mean when IV is high, I continue to 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 in the market that have high IV. Premium selling is where the majority of the statistical edge lies.

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.

Options as a Strategic Investment

The book is over 1000 pages, and I am now at page 335, still reading about dual calendar spreads.

Crashing condor
Condor trying to land (it didn’t as you will see below)

Table of Contents

Last Week’s Options Trading

Today I will start restructuring this part of my journal. It is taking too much work to update it. I will start adding all the new, adjusted, and closed entries for each specific position under each other with dates, adjustments, rolls, etc., in them.

Status Active Positions

Adjusted: CLF Bear Call Spread Jan 20 17/18 for $31 Credit (was: Iron Condor 16 Dec 11/12/17/18 Opened on Nov 16 for Additional $26 credit)

3 Dec 22: another high volatile short premiums strategy play I opened in November as an Iron Condor 16 Dec 11/12/17/18 Opened on Nov 16 for $26 credit and which is slightly in the red ($2).

7 Dec 22: closed the 11/12 put leg at a $2 debit. It was getting close to zero bid/ask, which means I cannot manage it anymore (roll up/out). I am not sure whether this is bad, but to be sure, I closed it. The same day I rolled the 17/18 call leg out to Jan 20 for a $13 credit.

10 Dec 22: at $7 profit (excl. fees) now, PoP (possibility of profit) is still at 70% and short strike at -36. According to me the premium should now be at $37. I have to check why the Tastyworks platform now says in the total line that ‘Cost’ is only $31? in the option chain etc.; all is okay. A glitch? I contacted tech support.

CLF

Cleveland-Cliffs Inc. operates as a flat-rolled steel producer in North America. The company offers carbon steel products, such as hot-rolled, cold-rolled, electrogalvanized, hot-dip galvanized, hot-dip galvannealed, aluminized, enameling, and advanced high-strength steel products; stainless steel products; plates; and grain oriented and non-oriented electrical steel products. It also provides tubular components, including carbon steel, stainless steel, and electric resistance welded tubing. In addition, the company offers tinplate products, such as electrolytic tin coated and chrome coated sheet, and tin mill products; tooling and sampling; raw materials; ingots, rolled blooms, and cast blooms; and hot-briquetted iron products. Further, it owns five iron ore mines in Minnesota and Michigan. The company serves automotive, infrastructure and manufacturing, distributors and converters, and steel producers. Cleveland-Cliffs Inc. was formerly known as Cliffs Natural Resources Inc. and changed its name to Cleveland-Cliffs Inc. in August 2017. The company was founded in 1847 and is headquartered in Cleveland, Ohio.

Adjusted: EWZ Bull Put 16 Dec 26/30 opened 7 November for $102 Credit, Rolled to Mar 17 for Additional $22 Credit

3 Dec 22: Due to the market surge this week, the stock price went above the put short strike. My strategy to do nothing in the last weeks when it went ITM has until now proven to be the right decision. But it is getting closer to 16 December, and still is in the red ($15). I need to manage this position next week.

7 Dec 22: Getting closer to the expiry date, I had to take action, so I rolled the continuously challenged 26/30 put leg out to Mar 17 for an additional $22 credit. This is not best practice (the DTE 45 entry – 21 close/manage rule): I should have managed/closed the position sooner, and the spread is rolled too far out). I am taking a risk here, but it should give me enough time to close the position at a profit when the price goes up again.

10 Dec 22: Today, the stock price is at 29.94, slightly below the 30 short strike (44 delta), PoP at 59% and loss is $72 euros. So I will do nothing for now but need to monitor EWZ if it goes further down.

Running: EWZ Iron Condor 20 Jan 25/27/36/38 Opened 29 November for $59 credit

3 Dec 22: another short premium volatility play.

10 Dec 22: $1 in the red, with the short put strike at 26 delta, PoP72%

EWZ

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.

Running: RIOT Short Put 28 Oct (W) 5 Opened on Oct 14 for a $21 credit and rolled up to 5.5 and out to Nov 18 for extra $30 credit and rolled out to Dec 16 and down to 5 extra $20 credit

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 will react.

10 Dec 22: RIOT keeps on going up and down with Bitcoin and ended deeper below $5 at $4.19. So this position is deeper ITM at an 81 delta and 39% PoP. I need to make a decision this week to roll it out again since the Total P/L is now $24 negative.

Anyway, I already have a stock position in another account, and I don’t also mind having 100 shares as a position in my Tastyworks.

RIOT

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.

Running: RIOT Bull Put 20 Jan 2/4 Opened 29 November for $51 credit

3 Dec 22: Opened a RIOT bull, put in the belief that it can only go up from here, and (see above) I don’t mind getting assigned and would then get the shares at a discount.

10 Dec 22: $2 in the red at 62% PoP with short put strike at 37 delta.

RIOT

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.

Running: FXI Iron Condor 16 Dec 18/20/27/29 Opened November 4 for $53 credit

3 Dec 22: FXI went above the short strike of the call leg (27) and is now at 28.53 and in between the call strikes.

10 Dec 22: this iron condor is killing me; I can’t manage the 18/20 call leg anymore (bids at $0.00), and the short strikes of the put leg are ITM, and the long strike is close to ITM. So: high alert, and I need to close it this week at a considerable loss! I poorly managed this position, probably because I didn’t want to occur my first loss since September, I trespassed all my exit rules. I even got several opportunities to roll the leg out and didn’t use them.

I have to look at my selection rules again and be careful with stocks or ETFs with bids/asks of $0.Let this be a lesson!

Now I am looking at a $136 loss (initial premium was $51) which is nearly three times my self-imposed loss cap of 100%. The short strike of the call leg is at 93 delta and the long strike is at 48 delta. I also cannot just let it go since the price may remain in between the strikes, and you don’t want to get assigned then.

So, this condor is crashing and needs to be closed as soon as possible!

[Later the same day:] I was too late. The market made the decision for me. On Saturday afternoon, I got assigned on my 27 short strike call. This results in -100 shares short.

Assignments occur when you are ‘short option’; you have an obligation to sell. In case of a long option you have a right to exercise (buy).

I now can choose between exercising the long leg or setting up a covered stock order to close out of the long option AND the assigned shares. Exercising may lead to me leaving money on the table (extrinsic/time value). Also, a covered stock order means I don’t have to pay the $5 from the exercise request.

So the set-up for the covered stock order will be (must be done at the same time):

  1. buy-to-close (‘BTC’) the -100 short shares
  2. sell-to-close (‘STC’) the 29 long call.

This will free up my buyer power again. I will not lose much more than what I would have lost if I would have closed the position myself on Monday.

But this is the first serious warning that I must follow my exit rules much more stringently!

FXI

FXI was created on 10/05/04 by Blackrock. The ETF tracks an index of the 50 largest and most liquid Chinese stocks traded on the Hong Kong Stock Exchange.

The iShares China Large-Cap ETF seeks to track the investment results of the FTSE China 50 Index composed of large-capitalization Chinese equities that trade on the Hong Kong Stock Exchange. Currently, almost 80% of the index is in consumer cyclical stocks (33%), financial services (27%), and communication services (19%).

Top 10 stocks represent almost 58% of the index, with the three large tech stocks Alibaba (BABA), Tencent (OTCPK:TCEHY) and JD.com (JD) representing almost 25% of the index.

Running: AAPL Iron Condor 20 Jan 120/125/160/165 Opened 29 Nov for $123 Credit

3 Dec 22: $1 in the green. Mainly a volatility play.

10 Dec 22: at $24 profit now, both short strikes are still around 13-15 delta, PoP at 72%

AAPL

Apple Inc. designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide. It also sells various related services. In addition, the company offers iPhone, a line of smartphones; Mac, a line of personal computers; iPad, a line of multi-purpose tablets; AirPods Max, an over-ear wireless headphone; and wearables, home, and accessories comprising AirPods, Apple TV, Apple Watch, Beats products, HomePod, and iPod touch. Further, it provides AppleCare support services; cloud services store services; and operates various platforms, including the App Store that allow customers to discover and download applications and digital content, such as books, music, video, games, and podcasts. Additionally, the company offers various services, such as Apple Arcade, a game subscription service; Apple Music, which offers users a curated listening experience with on-demand radio stations; Apple News+, a subscription news and magazine service; Apple TV+, which offers exclusive original content; Apple Card, a co-branded credit card; and Apple Pay, a cashless payment service, as well as licenses its intellectual property. The company serves consumers, and small and mid-sized businesses; and the education, enterprise, and government markets. It distributes third-party applications for its products through the App Store. The company also sells its products through its retail and online stores, and direct sales force; and third-party cellular network carriers, wholesalers, retailers, and resellers. Apple Inc. was incorporated in 1977 and is headquartered in Cupertino, California.

Running: AMZN Iron Condor 20 Jan 81/83/108/109.75 Opened 28 Nov for $11 Credit

3 Dec 22: This went messy. Before sending the offer, I probably, and by accident, ‘thick-fingered’ the short call strike above the long call strike ending up with a broken iron condor (one side short, the other side long). I have to be more careful when reviewing and sending an order actually closely check.

So I made a beginner panic-football mistake and sold/bought back the long call leg strikes (I could have just rolled the short call strike down). I then sold a new 100/102.5 bear call to complete the iron condor again.

Until now, this has only cost me commissions and fees, and the position is in the green but far away from the profit target.

10 Dec 22: despite the messy set-up when I opened this position, I clearly recovered in the right way and am now looking at a $31 profit, a PoP at 51%, and a short put strike not further out than 30 delta.

AMZN

Amazon.com, Inc. engages in the retail sale of consumer products and subscriptions in North America and internationally. The company operates through three segments: North America, International, and Amazon Web Services (AWS). It sells merchandise and content purchased for resale from third-party sellers through physical and online stores. The company also manufactures and sells electronic devices, including Kindle, Fire tablets, Fire TVs, Rings, and Echo and other devices; provides Kindle Direct Publishing, an online service that allows independent authors and publishers to make their books available in the Kindle Store; and develops and produces media content. In addition, it offers programs that enable sellers to sell their products on its websites, as well as its stores; and programs that allow authors, musicians, filmmakers, Twitch streamers, skill and app developers, and others to publish and sell content. Further, the company provides compute, storage, database, analytics, machine learning, and other services, as well as fulfillment, advertising, publishing, and digital content subscriptions. Additionally, it offers Amazon Prime, a membership program, which provides free shipping of various items; access to streaming of movies and series; and other services. The company serves consumers, sellers, developers, enterprises, and content creators. Amazon.com, Inc. was incorporated in 1994 and is headquartered in Seattle, Washington.

Running: GDX Bull Put 20 Jan 25/27 Opened 30 Nov for $52 Credit

3 Dec 22: already $16 in the green. Jumping on the bullish trend for this underlying.

10 Dec 22: $7 profit, a PoP at 74%, and a short put strike not further out than 28 delta.

Opened: MRVL Iron Condor 20 Jan 30/22/47/50 Opened 7 Dec for $81 Credit

7 Dec 22: another short premium – high volatility play.

10 Dec 22: slightly in the red at 67% PoP and short call strike at 27 delta.

MRVL

Marvell Technology, Inc., together with its subsidiaries, designs, develops, and sells analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. It offers a portfolio of Ethernet solutions, including controllers, network adapters, physical transceivers, and switches; single or multiple core processors; ASIC; and printer System-on-a-Chip products and application processors. The company also provides a range of storage products comprising storage controllers for hard disk drives (HDD) and solid-state drives that support various host system interfaces consisting of serial attached SCSI (SAS), serial advanced technology attachment (SATA), peripheral component interconnect express, non-volatile memory express (NVMe), and NVMe over fabrics; and fiber channel products, including host bus adapters, and controllers for server and storage system connectivity. It has operations in the United States, China, Malaysia, the Philippines, Thailand, Singapore, India, Israel, Japan, South Korea, Taiwan, and Vietnam. Marvell Technology, Inc. was incorporated in 1995 and is headquartered in Wilmington, Delaware.

Opened: SHOP Jan 20 Bull Put 31/33 at a $50 Credit Opened on 8 Dec

8 Dec 22: opened this one based on high IVR and Tom Preston’s Cherry Bomb Newsletter of 8 December (so I know who to blame if things go wrong! :).

10 Dec 22: lightly in the green at 73% PoP and short put strike at 25 delta.

Opened: SHOP Jan 20 Iron Condor 29.5/24/54/58 at a $113 Credit Opened on 9 Dec

9 Dec 22: since I didn’t use the full position allocation size for the 8 Dec SHOP position, and indicators like IVR were still positive, I decided to add this iron condor.

10 Dec 22: $8 in the red at 65% PoP and short put strike at 29 delta.

SHOP

Shopify Inc., a commerce company, provides a commerce platform and services in Canada, the United States, Europe, the Middle East, Africa, the Asia Pacific, and Latin America. The company’s platform enables merchants to displays, manages, markets, and sells its products through various sales channels, including web and mobile storefronts, physical retail locations, pop-up shops, social media storefronts, native mobile apps, buy buttons, and marketplaces; and enables to manage products and inventory, process orders and payments, fulfill and ship orders, new buyers and build customer relationships, source products, leverage analytics and reporting, manage cash, payments and transactions, and access financing. It also sells custom themes and apps, and registration of domain names; and merchant solutions, which include accepting payments, shipping and fulfillment, and securing working capital. The company was formerly known as Jaded Pixel Technologies Inc. and changed its name to Shopify Inc. in November 2011. Shopify Inc. was incorporated in 2004 and is headquartered in Ottawa, Canada.

Closed: SPY Iron Condor Put Leg 365/367 > 374/376 on Nov 28 at a $16 Credit: SPY 374/376/422/424 Opened on Nov 11 for $60 Credit and Closed at $30 Debit

3 Dec 22: No real change, and in the green and still close to 50% profit.

10 Dec 22: this was a SPY iron condor SPY 365/367/422/424 0pened on Nov 11 for $60 credit with a put Leg 365/367 > 374/376 rolled on Nov 28 at a $16 credit, and now closed for $30 debit, which means a nice profit of $46 (close to 40%).

Closed: QQQ Iron Condor 16 Dec 244/248/306/310 Opened November 1 for $117 credit; rolled up the 244/248 Put Leg to 262/266 on Nov 28 for a $40 Credit and Closed at $63 debit

3 Dec 22: In the green and steadily going up and around 50% profit target.

10 Dec 22: closed at $94 profit.

Positions Rolled or Closed Last Week

Running: QQQ Feb Bear Call 280/284 on Nov 29 at a $2 Credit

3 Dec 22: this was a weekly iron condor 2 Dec (W) 238/242/280/284 opened on November 4 for $133 credit and needed a complete rescue plan this week since it was getting deeper ITM.

So I rolled the put leg 238/242 to 269/273 for a $24 credit on Nov 18 and out to Dec 30 for a $62 Credit on Nov 29 and closed the 269/273 leg on Nov 30 for a $102 Debit;

I rolled the 280/284 to Feb 17 on the same day for a $2 Credit

So until now, I have a $133 + $24 + $2 – $102 = $57 profit on this play.

But I am still in the ITM danger zone with QQQ at 292.55. Closing it now would cost me $42.

10 Dec 22: QQQ went down to 282.04, so my P/L open is in the green at $4, PoP at 67%, the short strike still ITM, but deltas respectively -54 and 50.

End-of-Week Active Positions Overview

Market Sentiment 10 December 2022

Every week I start with a review of the market sentiment.

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.

  • U.K. tries to spur growth by revamping its financial sector.
  •  Data today showed a further deceleration of inflation, but still coming in above estimates,
  • Confidence improved for consumers.

2. VIX Index

  • The CBOE Volatility Index (^VIX) — Wall Street’s “fear gauge” — tumbled to lows last week (sub-$19), lowest in several months, but went up again to end at 22.83 today.
  • 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 around 22, so my maximum portfolio capital allocation for short premium strategies is 35% of net liq.

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 went up to around 87 from 81.57 last week. So again, around 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 fell, with WTI crude down -$0.44 or 0.62% to settle at $71.02 per barrel, adding to the biggest weekly decline for crude since early August on growing recession fears following weak economic data from China, Europe, and the United States. The contracts hit 2022 lows earlier this week and fell over 11% on the week.
  • Brent crude futures settle at $76.10/bbl, down 5 cents, 0.07%. 

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.

  • Gold prices rise $9.20 or 0.5% to settle at $1,810.70 an ounce to conclude a strong week for the precious metal, rising by about +0.7% ahead of the FOMC meeting next week.

5. 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 jumped initially PPI data came in higher than expected on both a m/m and y/y basis for November – but still showed further confirmation that inflation in the U.S. is slowing compared to prior month data. The dollar leveled off to finish flat on the day ahead of the November CPI data Tuesday and FOMC meeting on Wednesday
  • The dollar index (DXY) went down to 104.93.

6. Bitcoin AND crypto

  • Bad times for everything crypto (and therefore also everything blockchain) continue
  • Bitcoin at 17204 today so going above 17000 again.

7. Yield Curves

  • The PPI news sent bond yields, which had been trending lower for a few weeks, higher. The Fed says they’re staying aggressive until inflation comes down meaningfully, and today’s reading was anything but that.
  • Treasury yields rose following the monthly PPI and Michigan sentiment and inflation expectations data.
  • The yield on the 10-year Treasury note, which reflects expectations about the economy and inflation, was at 3.55%, rising from 3.47% prior.

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 2s10s curve is at its deepest level of inversion in forty years. For only the fourth time on record and for the first time since 2009, bearish sentiment has fallen double digits in back-to-back weeks

“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

8. 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).

  • November’s producer price index (PPI) came in higher than expected, rising by 0.3% MoM and 7.4% YoY. 
  • The reason is wholesale vegetables…which saw a 38% surge. This caused the overall food index to rise 3.3%, which offset the 3.3% decline in energy costs.
  • Core PPI doubled the 0.2% MoM estimate at 0.4%, excluding food and energy. While the YoY rise of 6.2% is less than October’s 6.6% reading, inflation remains far too high for the Fed’s liking.
  • Meanwhile, China’s producer prices fell overseas in November as inflation cooled consumer demand. Weak activity and soft demand in the world’s second-largest economy remain a concern for investors.

9. 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.

  • The USA CPI peaked in June 2022 and has declined already for over four months from 9.1% in June 2022 to 7.7% in October 2022

10. 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).

  • Consumer sentiment (as per the UoM data) going up again after hitting its lowest level.

11. 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 down to 1.186, which indicates a much higher number of people are selling and that the market is more bearish.

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.

12. 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

  • For the week, the major stock market indexes all went lower, with the Nasdaq down 0.70%, the S&P 500 0.73%, the Russell 2000 going down 1.15% and the Dow Jones 0.9%

Major Stock Market Sectors

I also follow the major market sectors in Barchart.

  • All sectors except Communication Services in the red
  • S&P 500: – 0,73%
3 December (source: Barchart)
10 December 2022 (source: Barchart)

Summary Market Sentiment 10 December 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 (down from above 30)

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

International conflicts involving US, Russia or China, and other main producing countries

5. US Dollar Currency Index (DXY)

Very weak dollar versus other currencies

Weak dollar

Neither weak/nor strong dollar

Strong dollar

Very strong dollar

6. Bitcoin (BTCUSD)

Bitcoin rising

Bitcoin rising slightly slower

Bitcoin “thrashing” at the same level

Crypto crashes, market corrections

Bitcoin or other cryptos or companies collapse

7. 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

8. 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

9. 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

10. Consumer Sentiment Index (CSI)

High consumer confidence

Consumer confidence is less high

Consumer confidence going down from very high or up from very low

Low consumer confidence

No consumer confidence

11. 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)

12. 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 (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

  • Next Wednesday, CPI numbers.
  • Brace for a potentially huge (and volatile!) week coming up. We get updated consumer price index inflation (CPI) data on Tuesday, then the Federal Reserve sets interest rates Wednesday along with a press conference from Powell, and then the European Central Bank follows Thursday. 
This week’s calendar

Earnings and Dividend Calendar

Earnings season is over. In addition, there are not many dividend payouts upcoming. I tend to avoid earnings or dividends (and other major events within 30 days of opening a position.

The first dividends are in December for GDX (20 Dec; not on the list below), in which I have a position.

Financials

Cash Balance 10 December (before assignment FXI short call strike)

I am progressively recovering the around $1,350 loss I made earlier this year (this excludes commission and fees) 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 this week, not much happened. I will not reach my year target, but I am each month increasing my cash position. However, I may have to accept a considerable loss next week, which will wipe out a big part of my profits since my formal start of options trading in August of this year.

Cash Balance 10 Dec 2022

I still am not trading optimally, making full use of my cash, optimizing my positions etc .

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 35% based on VIX today, but on average, I only reach half of that) and need to add non-short premium strategies to optimize my portfolio.
  • 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 may need to start looking at adding once in a while short straddles and strangles based on low prices underlyings 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 by widening spreads, taking more risk, adding higher priced underlyings without overexposing myself to too much risk.

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 now have 13 positions: in FXI, CLF, QQQ, RIOT (2x), EWZ (2x), AMZN, MRVL, GDX, SHOP (2x), and AAPL.

I am now at 41% buying power usage, which is above the 35% I am allowed to use under my portfolio allocation rules for short premium strategies.

With a VIX of around 22, my maximum portfolio capital allocation for short premium strategies is 35% of net liq. All my strategies up to date are short premium.

The remaining 35% must be filled with long options strategies.

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 a minimum of 2 vertical spreads or iron condors and 2 debit spreads or long positions.

Thursday and Friday are Thanksgiving.

For short premium strategies, 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.

The expectation is that this week’s volatility will increase.

I added stocks with lower (<40) IVR/volatility since I want to true out some long positions and debit spreads.

Hi to lo vol

Lo to hi vol

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 is still applicable to my whole portfolio.

However, with VIX going down to 20, I should be looking at using 5% 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%

In allocating portfolio capital, I need to use Buying Power (NetLiq)

Cash Balance

$11,629.84

Buying Power/Net Liq

$10,352.84

Max Portfolio Capital Allocation Short Premium (Cash Available for Trading)

35%

$3,623,49

Max Portfolio Capital Allocation Other (low risk, long positions)

25%

$2.588.21

Average Max Position Allocation (BP)

4%

$414,11

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 4% and close to $448, I need to be looking for higher priced underlyings or increasing 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.

Overview Option Positions AS PER Today

Conclusion

This is the first time I go assigned. But nothing to worry about. With a simple covered stock order, I can get back into the game without losing too much money. Anyway, not much more than if I had closed the position myself.

But it shows me that my exit play is still very weak. I should not allow it to happen that I:

  • don’t manage close to ITM short strikes of vertical credit spreads around 14-21 DTE
  • allow a position to go below 33% PoP
  • allow strikes legs to go down to (close to) zero extrinsic value

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