Entry 3 Dec 22: Narrow Escape

By: nic

Options Trading Journal Entry 3 December 2022

This week I had a narrow escape with one of my QQQ positions that were to expire on December 2. It teaches me again that I really must stick to closing or managing my positions around the 21-14 DTE.

On Wednesday, the Fed news and a more dovish position on rate increases caused an upside surge in most of the stocks in which I have positions.

Also, the VIX moved down to 20 (close to the long-term average of 19), so we’re moving toward low volatility.

I prefer short premium strategies so high volatility. But volatility is going down. 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 310, still reading about put strategies.

Narrow escape
Narrow escape

Table of Contents

Last Week’s Options Trading

A very busy week with closing, rolling, and opening positions! This was also caused by the Fed’s news on Wednesday, which resulted in a massive surge of the SPX and other stocks. My ITM shorts went deeper ITM, and some of my OTMs came close to the short call strike.

I also need to look at how to restructure this part of my journal. It is taking too much work to update it. I am thinking of just adding all entries for each specific active position ( so not closed) under each other with dates, adjustments, rolls, etc., in them. I will start doing that next week.

Status ALREADY RUNNING Active Positions

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.

CLF Iron Condor 16 Dec 11/12/17/18 Opened on Nov 16 for $26 credit

Another high volatile short premiums strategy play I just opened and which is slightly in the red ($2).

I have to watch this since it is expiring within two weeks.

EWZ Bull Put 16 Dec 26/30 opened 7 November for $102 credit

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.

IWM

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.

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.

Bitcoin went up, and RIOT’s IVRs also went higher, RIOT ended just below $5 again. So this position is still ITM.

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.

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

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

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.

So to be managed!

Positions Opened Last week

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

$1 in the green. Mainly a volatility play.

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

Already $16 in the green. Jumping on the bullish trend for this underlying.

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

Opened a RIOT bull put in the believe 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.

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

Another short premium volatility play.

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

This went messy. Just 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.

Positions Rolled or Closed Last Week

FCX Iron Condor 16 Dec 28/30/43/45 Opened November 4 Closed xx Nov for $21 debit

Far in the green (over 40% profit), and the stock price moved to the middle of the short strikes again.

EWZ Iron Condor 16 Dec 24/27/38/41 Opened October 20 for $82 Credit closed for $37 debit

Again a nice on-target win.

SPY Iron Condor Put Leg 365/367 > 374/376 on Nov 28 at a $16 Credit so now SPY 374/375/422/424 Opened on Nov 11 for $60 Credit

No real change, and in the green and still close to 50% profit.

QQQ Ex-Iron Condor 17 Feb Bear Call on Nov 29 at a $2 Credit

This was a weekly iron condor and needed a complete rescue plan this week since it was getting deeper ITM.

QQQ Iron Condor 2 Dec (W) 238/242/280/284 Opened November 4 for $133 credit.

Rolled 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,

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 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

In the green and steadily going up and around 50% profit target.

IWM Iron Condor 18 Nov (W) 162/165/190/193 call leg 190/193 Rolled to 16 Dec on Nov 11 (bear call now) closed for $48 debit

This one I need to evaluate since it shows up as a loss, while overall I made a profit. I need to understand better how to account for rolls etc.

AMZN Iron Condor 83/85/112/114 Opened on Nov 11 Closed on Dec 1 for $22 Debit

Another win!

End-of-Week Active Positions Overview

Market Sentiment 3 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.

Two moves were important this week: Fed Chairman Jerome Powell’s mid-week remarks that suggested a slower pace of rate hikes, and caused a huge surge in stock prices, and the U.S. jobs report on Friday. The latter showed the Federal Reserve’s aggressive interest rate increases have not yet cooled the strong labor market.

Stocks fell sharply after the data revealed non-farm payrolls rose by a greater than expected 263,000 and the unemployment rate held steady at 3.7% in November, but investors were able to shake off the report, leaning on the Fed’s Wednesday report..

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.

  • At a two-day summit in the Romanian capital of Bucharest, the North Atlantic Treaty Organization doubled down on a vow to make Ukraine a member of the military alliance.
  • EU pushes for Russia oil cap
  • More easing of COVID controls expected in China

2. VIX Index

  • The CBOE Volatility Index (^VIX) — Wall Street’s “fear gauge” — tumbled to lows late day (sub-$19), lowest in several months, so stock price momentum swung back to the upside in the final hour on Friday.
  • 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 19, so my maximum portfolio capital allocation for short premium strategies is 30% 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 down again to around 81.57 from 82 last week. So still moving back to the mean.

The VVIX/VIX Ratio

See more in this Tastyworks video.

3. Oil and Gas

The following sectors I look at – to understand the market sentiment – are, due to their massive impact on the global economy, metal & mining.

  • Oil slipped, with WTI crude around $76.75 per barrel, down over 2% for a 3rd straight week of declines heading into December 4th OPEC meeting. Note markets remain focused on the price cap that the U.S., the European Union, and their allies plan to impose on Russian crude on Dec. 5.
  • WTI Crude January futures settle at $79.98 a barrel, down -$1.24, 1.53%
  • Natural Gas January futures settle at $6.2810/MMBtu, down 7% on delayed Freeport LNG restart, less cold forecasts.

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 slide back went below $1,800 after strong U.S. jobs report to settle at $1,809.60 an ounce, rebounding late day following a roll in the dollar off highs and as treasury yields also turned lower.

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 dollar reversed from initial gains to finish lower.
  • The dollar index (DXY) after spiking to highs 105.59 on the data, ended lower by days end around 104.70, continuing its recent meltdown (fell 1% yesterday and over 4% in November on easing rate hike expectations

6. Bitcoin AND crypto

  • Bad times for everything crypto (and therefore also everything blockchain) continue
  • Bitcoin at 16947 today after going above 17000 this week

7. Yield Curves

  • The U.S. Treasury yields also reversed from initial gains to finish lower.
  • After spiking to 3.63% on the 10-yr following the stronger nonfarm payrolls data and spike in weekly average wages, the 10-year yield “melted” higher around 3.51% late day

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
Going down again?

“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).

  • Still going down, which is a sign that inflation may be slowing

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 0.844, which indicates a much higher number of people are buying and that the market is more 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

  • For the week, the three major stock market indexes went higher and then ended mixed, with the Nasdaq down 0.18%, the S&P 500 0.12%, the Russell 2000 going up 0.59% and the Dow Jones edging up by 0.1%

Major Stock Market Sectors

I also follow the major market sectors in Barchart.

  •  Sector moves were paced by Materials (XLB), Industrials (XLI) and Consumer Staples (XLP) as gainers, while Technology (XLK), Energy (XLE) and Financials were the largest laggards.
  • Communications (XLC) and Healthcare (XLV) were flattish. 
  • Value and growth both eased on the day, with the Russell 1000 Value giving up about 0.35%, while its Growth counterpart experienced a decline closer to 0.70%.
  • S&P 500: – 0,12%
26 November (source: Barchart)
2 December (source: Barchart

Summary Market Sentiment 3 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

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

  • ECB, and PMI, PPI coming up this week.
  • The November inflation report is due on Dec. 13. 
  • The last meeting of the Federal Reserve in 2022 is also set to kick-off on Dec. 13, with the group’s final decision on interest rates scheduled to be announced on Dec. 14

Earnings and Dividend Calendar

Earnings season is over. In addition, there are not many dividend pay-outs 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) in which I have a position.

Financials

Cash Balance 3 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, all went quite well. I will not reach my year target but I am each month increasing my cash position.

Cash Balance 2 December 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 12 positions: in SPY, FXI, QQQ (2x), RIOT (2x), EWZ , CLF, AMZN, and AAPL.

I am now at 24% buying power usage, closer to the 30% I am allowed to use under my portfolio allocation rules for short premium strategies but still far away from the 60% I have allowed myself to use.

With a VIX of around 20, my maximum portfolio capital allocation for short premium strategies is 30% of net liq. All my strategies up to date are short premium.

This means I can add up to a max 6% this week with other short premium strategies. The remaining 30% 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.

There are only two relatively high: EWZ and FXI.

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

I added underlyings that just came out of earnings.

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

$11,463.55

Buying Power/Net Liq

$10,434.55

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

30%

$3,130,37

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

30%

$3.130.37

Average Max Position Allocation (BP)

4%

$417,38

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

I loved managing all the positions this week. I am getting the feel of it. But I also see that if the workload goes up, I make mistakes.

So I need to focus better and reduce activities that do not immediately add value to my options trading. This also means I need to revisit this trading journal and see whether I can spend less time on filling it in (now three hours per week).

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