Entry 24 Dec 22: My First Christmas Rally?

By: nic

We are now in the Christmas long weekend, and 80% of the time, there is a Christmas rally. Not this year. Although on Friday, all sectors and many stocks ended in the green, Santa Claus’ rally got canceled.

History shows that the market typically rallies in the week leading up to Christmas through to the New Year, with the S&P 500 facing 62% odds of an uptrend over the period, versus a 53% chance on any given day. In 13 of the past 20 Christmas holiday periods, markets staged a positive return, with the winning days averaging a +1.58% gain.

There really is no one-size-fits-all explanation for this calendar effect. Many have attributed the phenomenon to a wide array of potential reasons spanning market optimism on improved holiday spending, institutional portfolio rebalancing, and “tax-loss harvesting” to switch out of losing investments into potential gainers.

Source: Seeking-Alpha

And I added a second long debit play this week. For me, this is a trial and part of my learning process. I need to understand at least all basic options strategies. Until now, I focused on short premiums, and I will continue to do that. But once in a while, if only to stay engaged, I will need to revert to long debit plays.

I added the bull call to my playbook (click and you will be navigated to the bull call page).

The set-up of a bull call and risk management are more complicated than for credit spreads:

  1. ‘ Buy to open’ (BTO) the call option ( in US 1 contract = 100 shares) ITM at 60 delta (so below the underlying price)
  2. ‘Sell to open’ (‘STO’) the call option at 40 delta.,so higher and above the underlying price. Since it is very difficult to find 40 delta set-ups fitting all criteria I often skew to 50 delta.
  • Sell the same number of strikes
  • Arrange both call strikes equidistant from the underlying price, or skew for a better breakeven, to create a debit that’s half the width of the spread.
  • 50% PoP
  • Intrinsic value long call >= Net debit (or: long call value – EXT >= Net Debit).

And these are the rules I have drafted for managing the play:

Halfway to/Near Expiration

  • If the underlying price increases to/slighly above the short call (higher strike) andprofit increases because the short call is now closer to the money and decreases in value faster than the long call: both calls are ITM and the profit = spread width – net debit (‘theoretical profit’) .
  • If the underlying decreases below your stop/loss, sell the long call or close the position.
  • If the underlying is between the call strikes and decreasing towards or below the long call (lower strike), the losses increase, because the long call is now closer to the money and decreases in value faster than the short call.
  • If the underlying decreases to/below the long call (OTM): both expire worthless. and the loss will be the net debit (theoretical risk).

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: I am reading 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 495.

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

Table of Contents

Last Week’s Options Trading

Last week, I started restructuring this part of my journal, because it has been taking too much work to update it each week. All the new, adjusted, and closed entries for each specific position are now added under each other in one chapter, including dates, adjustments, rolls, etc.

Positions Opened and Closed Last Week

Closed on 24 Dec: CLF Bear Call Spread Jan 20 17/18 for $31 Credit for $12 debit

24 Dec 22: closed one month later on 16 Dec for a $12 debit, so close to 60% profit.

17 Dec 22: this was an Iron Condor 16 Dec 11/12/17/18 Opened on Nov 16 for Additional $26 credit). It is in the green now, short strike at 28 delta, PoP at 77%, but still under 50% profit.

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.

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.

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).

Closed on 20 Dec: AAPL Bear Call Jan 20 145/150 Opened 15 Dec for $124 credit

20 Dec 22: five days later, closed at $50 debit, so again the profit target of around 60% has been reached.

15 Dec: based on the bullish indicators, a backtest in lookback, and high volatility, I opened another AAPL position.

Already at $31 profit now, short strikes is around 25 delta, PoP at 76%. So until now going in the direction I want it to go.

Opened on 19 Dec: XLE Iron Condor Feb 17 73/75/96/98 for a $59 credit

24 Dec 22: XLE didn’t move much since opening and is now $1 in the red

19 Dec 22: XLE is seeing higher volatility and slightly bullish, backtested positive.

Opened on 21 Dec 22: QQQ Bull Put 287/291 for $104 credit

24 Dec 22: QQQ is quickly becoming one of my favorite symbols. Looking at bullish charts, but first and foremost, acceptable high volatility. $8 in the green now.

Opened on 22 Dec 22: XLU Iron Condor for $76 credit

24 Dec 22: in addition to XLE, now also the next sector ETF added to my portfolio. Rationale: higher volatility. Looks like a good decision because already $14 in the green (due to the underlying price being closer to the short call).

Opened on 22 Dec 22: EEM Bull Call 37/39 for $110 debit

24 Dec 22: EEM looks bullish to me, but has very low volatility, so I am trying out a bull call debit play. At entry, I looked at the intrinsic value of the long call at 60 delta (should be equal to or higher than the net debit you pay, which itself should be in the middle of the spread, 50% PoP, short call at 40 delta, etc.). $21 in the red now. I already see that bull calls are not as easy as a bull put or bear call spread.

Opened on 23 Dec 22: TLT Iron Condor 92/95/111/114 for $77 credit

24 Dec 22: a last-minute play on Friday evening. $2 in the red now.

Status Active Positions

Running: QQQ Iron Condor Jan 20 254/258/306/310 Opened on Dec 12 for $132 credit

24 Dec 22: $30 in the green with PoP of 68% and short put still around 20 delta.

17 Dec 22: $38 in the green at 57% PoP, and short put strike at 23 delta.

15 Dec 22: open at 65% PoP and 73% P50 (chance to reach 50% profit) with short deltas around 18.

According to Tastylive’s lookback backtesting, the winning rate is around 56% which is low.

Running: SLV Bull Call Mar 17 20/22.5 for $123 debit

24 Dec 22: PoP 56% and $6 in the green.

15 Dec 22: opened this bull call based on the set-up described in my playbook. Strikes at 60% (long) and 40% (put). Intrinsic value long strike => net debit to be paid. Debit at around half of the spread width. ROI 1:1 etc.

SLV

The Trust seeks to reflect such performance before payment of the Trust’s expenses and liabilities. It is not actively managed. The Trust does not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the price of silver.

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

24 Dec 22: short put strike still ITM, but PoP is now at 52% and $44 in the red.

17 Dec 22: the price is still in between the short (at 75 delta) and long )at 45 delta) strikes with a PoP at 34% (1% above my stop loss target), and I am slightly above my second (100% stop loss) exit strategy target. I have to keep on monitoring and make a decision before the end of the year if it goes under the 33% PoP.

10 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

24 Dec 22: 80% PoP $27 in the green

17 Dec 22: more in the red ($36) at 47% PoP and short strike ITM at 58 delta. So also here I have to keep a close watch.

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

3 Dec 22: another short premium volatility play.

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 Dec 16 5 rolled out to Jan 20 for extra $22 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.

24 Dec 22: not much change to the positive. Also, due to bitcoin going nowhere.

17 Dec 22: I have been rolling this position several times now. This week was the third time:

  • RIOT Short Put 28 Oct (W) 5 Opened on Oct 14 for a $21 credit
  • Rolled up to 5.5 and out to Nov 18 for extra $30 credit
  • Rolled out to Dec 16 and down to 5 extra $20 credit
  • Rolled out to Jan 20 for an additional $22 credit

With the fall of crypto in general and bitcoin not being able to break through any resistance around 17.000, RIOT is now at a new low.

So the position is looking at a $23 loss, 46% PoP, and strike at 76 delta,

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

24 Dec 22: also not much change here with short put strike in ITM.

17 Dec 22: $9 in the red at 62% PoP with short put strike at 37 delta.

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

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.

My two RIOT positions as per 24 Dec 22 (with DTE, PoP, Cost, NetLiq and P/L

Running: AAPL Bull Put 20 Jan 120/125 Opened 23 Dec for $64 Credit

24 Dec 22: closed the 160/165 call leg of the AAPL Iron Condor 20 Jan 120/125/160/165 Opened 29 Nov for $123 Credit for $4 a debit, making a $55 profit.

17 Dec 22: at $23 profit now, both short strikes are still around 15 delta, PoP at 70%.

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

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

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

24 Dec 22: this was a rolled AMZN Iron Condor 20 Jan 81/83/108/109.75 Opened 28 Nov for $11 Credit and of which the 108/109/75 leg was first rolled to 100/102.5 for a $83 credit on 28 November and then closed on 22 Dec for 1 $13 debit. From the beginning, this has been a messy play and I am now looking at $31 in the red, which is coming close to my 100% loss exit rule.

17 Dec 22: at $40 profit now, both short strikes are still around 15-30 delta, PoP at 57%

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.

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.

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

24 Dec 22: $25 in the green now, which is close to my 50% profit target.

17 Dec 22: not much changed here: $7 profit, a PoP at 74%, and a short put strike not further out than 30 delta.

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

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

Rolled 24 Dec: MRVL Iron Condor 20 Jan 30/33/42/45 Rolled 20 Dec for $81+$33 = $114 Credit

24 Dec 22: with the put leg coming close to the underlying price (challenged), I rolled the 47/50 call leg of the MRVL Iron Condor 20 Jan 30/33/47/50 Opened 7 Dec for $81 Credit to 42/45 for an extra $33 credit.

17 Dec 22: in the green now at 75% PoP and short call strikes around 15 delta.

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

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

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.

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

24 Dec 22: with the underlying price so close to the short strike, this one is also in the red at $69.

17 Dec 22: $8 in the red at 59% PoP and short call strike at 30 delta.

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

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! :).

Rolled: SHOP Jan 20 Iron Condor 29.5/34/54/58 at a $166 Credit Opened on 20 Dec

24 Dec 22: rolled the 42/46.5 put leg of the SHOP Jan 20 Iron Condor 29.5/34/54/58 at a $113 Credit Opened on 9 Dec up to 42/46.5 for an additional $53 credit.

17 Dec 22: $17 in the red at 64% PoP and short put strike at 34 delta.

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

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.

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.

Running: QQQ Feb 17 Bear Call 280/284 on Nov 29 at a $2 Credit

24 Dec 22: this one turned green this week which is very good news after the adjustments I had to make on 3 Dec 2022! QQQ really recovered.

17 Dec 22: $25 in the red at 59 % PoP and short call strike at 45 delta.

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 is still ITM, but deltas respectively -54 and 50.

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.

QQQ

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.

QQQ stock breakdown

End-of-Week Active Positions Overview

Market Sentiment 24 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.

  • Nasdaq and the S&P 500 hit a losing streak of 3 weeks lower, and the DOW and Russell (barely) stay green for the week.

2. VIX Index

  • The CBOE Volatility Index (^VIX) — Wall Street’s “fear gauge” — down to around 21.
  • 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 21, so my maximum portfolio capital allocation for short premium strategies is still 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 considerably down this week from around 83 to 78.84. So still moving away from 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.

  • WTI crude oil gained $2.07, or 2.67%, to settle at $79.56/bbl, while Brent gained $2.94, or +3.63%, to settle at $83.92/bbl.  Comments out of Russia indicating it would favor production cuts over agreeing to price caps spurred the rally.  Specific comments mentioned potential daily production cuts of up to 700,000 barrels.

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 February gold settled +$8.90, or +0.5%, to $1,804.20/oz after another round of economic data failed to shift investor expectations for ongoing rate hikes from the Fed and fears of looming recession.  Today’s higher close marked the third weekly gain over the past four weeks.

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
  • The dollar index (DXY) went down to 104.325 (slightly lower so nearly unchanged to last week).

6. Bitcoin AND crypto

  • Bad times for everything crypto (and therefore also everything blockchain) continue
  • Bitcoin still struggling and at 16818 from 16741 last week.

7. Yield Curves

  • Ten-year Treasury yields rise 7.7 basis points to 3.746% as investors digested slumping durable goods orders and softening personal spending.

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).

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 Core CPI , excluding volatile food and energy, increased 0.2 percent for November versus 0.3 percent expected and 6.0 percent annually, also 0.1 percent lower than forecast. 

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 1.006, which indicates the same number of people are selling and buying and the market is moving towards being 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.

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

  • The S&P 500 on Friday slumped to its third straight weekly near loss.

Major Stock Market Sectors

I also follow the major market sectors in Barchart.

  • All sectors in the green!  Energy (XLE) paced the gainers with a late afternoon gain of 2.9% on the back of higher crude prices following comments on production cuts from Russia.  Utilities (XLU), Communications (XLC), Real Estate (XLRE), Consumer Discretionary (XLY) and Materials (XLB) all gained about +50-75bps.  Technology (XLK) and Healthcare (XLV) were the only sectors in the red by late afternoon, with modest declines in the -10-20bps range, but ended up green as well. 
  • S&P 500: 0.59% up from – 1.11% last week
17 December 2022 (source: Barchart)
24 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

  • Not much is happening in the last week of the year!

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.

Earning season is coming again!

Financials

Cash Balance 24 December

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.

I am more and more trading optimally, making full use of my cash, optimizing my positions etc .

The points I have to look at are:

  • 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 (based on VIX) and need to add non-short premium and passive income strategies to optimize my portfolio.
  • Except for a small short put undefined risk play in RIOT, I have been only doing a limited number of defined risk strategies which are lower risk but also less profitable: I may need to start looking at adding other defined risk strategies and once in a while short straddles and strangles based on low prices underlyings.
  • I now select positions with higher 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 18 (!) positions: in AAPL, AMZN, EEM, EWZ (2x), GDX, MRVL, QQQ (3x), RIOT (2x), SHOP (2x), SLV, TLT, XLE and XLU.

15 positions is the average I need to have running to maximize my portfolio allocation,

I am now at 32% buying power usage, which is slightly below the 35% I am allowed to use under my portfolio allocation rules based on VIX 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 28% must be filled with long options and passive income strategies. I want to help 40% in cash at all times.

Goals and Schedule for this week

Sunday: set up options strategy ideas and perform backtesting; select at least two options strategy ideas.

Until Tuesday: open one more vertical spread or iron condor and and a long position.

Rest of week: start looking at strategies involving buying bills or bonds for the remaining 25% of the 60% .

For short premium strategies, I need high IVR underlyings and underlyings trading in ranges with apparent resistance and support areas.

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.

High IVR
Low IVR

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

$11,832.18

Buying Power/Net Liq

$10,596.18

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

35%

$3,708,66

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

25%

$2.649.05

Average Max Position Allocation (BP)

4%

$423,85

If I look at Buying Power usage, I have reached my max for short premium positions.

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

Positions today.

Conclusion

This should be my first experience with the ‘Christmas rally’. Until now, I have not been really impressed with what the market is doing. On Friday, all sectors went green, and most of my options ended up green as well. Is this the beginning of a last-week boost before the end of the year?

The focus will remain on the exit play, which 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.

Leave a Comment