Options Trading Journal Entry 24 September 2022
Every went red again this week following the Fed’s recent raise and hawkish commentary. On Friday there was another sell-off.
September 23 will be remembered as another day investors got slaughtered. Analysts also cut the S&P year-end targets due to higher Fed rates.
My first two trades in EWZ also suffered but nothing dramatic (yet). I also opened an FCX iron condor in the middle of the week which also went down with the market.
I had selected EWX, GDX, IWM, TQQQ, LYFT, and GOLD and during the week added AMZN based on the IVR ranking I saw in Tastyworks.
We are still going down. Everything looks very bearish.
I again followed the stocks (and other underlyings) in TradingView (technical analysis) and StockInvest.us during the week. Every day I received Google Alerts which I diligently studied.
I created some ideas for the positions within the limitations I have set myself as entry rules (I will write about them in a future post or blog). And I tested them in Tastworks and backtested them in Tastytrading’s Lookback backtesting app and entered them during the week in the platform.
In the end, I only added one FCX iron condor.
Freeport-McMoRan Inc., a natural resource company, acquires, explores, and develops mineral assets, and oil and natural gas resources. The company explores copper, gold, molybdenum, cobalt hydroxide, silver, and other metals, as well as oil and gas. Freeport-McMoRan Inc. was founded in 1987 and is headquartered in Phoenix, Arizona.
In parallel, I worked on my playbook with options strategies and a blog post on how I use technical analysis (in progress still).
For my playbook I have used two excellent sources: Options with a Cherry on Top by Vicki Lee Dillard and Bible of Options Strategies, The: The Definitive Guide for Practical Trading Strategies 2nd Edition by Guy Cohen.
Technical Analysis
And of course, on the other days, when I had time I kept track of my positions in Tastyworks and any news related to my open positions. Although I am not (yet?) a day trader, I every day whenever I have time look at what’s happening in the market.
A special note on technical analysts I did this week. It looks like most of my underlyings are now in or close to the overbought area, below Keltner Channels and at the bottom of Bollinger Bands, while momentum (ADX) is decreasing or has already decreased. So it looks like it is going to be time again very soon to get into bull put or bull call spreads?
Table of Contents
- Options Trading Journal Entry 24 September 2022
- Market Sentiment 24 September 2022
- 1. Geopolitical Events and Economic Trends
- 2. VIX Index
- 3. Oil and Gas
- 4. Gold, Silver, and Copper (Metals & Mining)
- 5. Yield Curves
- 6. Producer Price Index
- 7. Consumer Price Index (CPI)
- 8. Consumer Sentiment Index
- 9. Put/Call Ratio
- 10. DJI, SPX, Russel 2000 Indices, and Main Market Sectors
- 11. USD and Other Currencies
- 12. Bitcoin
- Summary Market Sentiment 17 September 2022 (unchanged from last week)
- This Week’s Economic Calendar
- Earnings and Dividend Calendar
- Financials
- Last Week’s Options Trading
- This Week’s Guidelines
- Conclusion
Market Sentiment 24 September 2022
Every week I start with a review of the current market sentiment.
I mostly used eOption’s Closing Bell 23 September 2022 as the source.
This week was again not a good week for the markets.
The U.S. central bank on Wednesday hiked interest rates by 75 basis points and signaled more increases are to come.
Stocks fell further on Friday, closing out again one of the worst weeks of the year.
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.
- Stocks are being undercut by concern that the Fed’s resolve to fight inflation will push the economy into recession. The recession fears also hammered commodity prices, with crude plunging more than -5% Friday to an 8-month low, which fueled a sell-off in energy stocks
- The British Pound made a big fall to around 1.08 USD and is getting close to parity with the green back
- Russia is losing, so Putin is playing his last cards, threatening that the war will go nuclear and mobilizing 300.000 or more soldiers to fight his ugly war
- Recession fears continue to weigh on investor minds
2. VIX Index
- The CBOE Volatility Index (^VIX) — Wall Street’s “fear gauge” — teetered around 30 (higher volatility).
- A VIX below 15% is very low volatility. A VIX of 15% or below 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, it’ll 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 not adequate for short premium plays which require high volatility. This is where long calls and puts and debit spreads may be set up. Only when VIX gets closer to 30% selling options become viable.
- A VIX at 20% or higher is medium volatility
- A VIX at 30% or higher means high volatility. When selling options, you want to be selling 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 0f around 25, my maximum portfolio capital allocation is 35% of net liq.
VIX
< 15
15-19
20-29
30-40
>40
Volatility
Lowest volatility, all comfortable
Market in ‘lull’ mode
Volatility high
Volatility very high
Volatility and fear levels highest
Maximum portfolio capital allocation
25%
30%
35%
40%
50%
Volatility and the VIX play a very important role in how I size positions and portfolio allocation. Since my focus is on short premium trading, I must strike a balance between exposure to large losses and being able to reach sufficient occurrences.
In 2022 the VVIX Index (VIX Volatility Index) has also traded within a fairly reasonable range (roughly between 83 and 150). The long-term average is 97, and the VVIX is mean-reverting.
The VVIX is nicknamed the “VIX of VIX” because it is calculated using the implied volatility of ATM and OTM options in the VIX itself, using the same calculation method as VIX uses. The index measures the “volatility of volatility, or the “vol of vol.”
Today, the VVIX is trading at about 101.55 up from 92.4, which means it is moving up from the mean.
The VVIX/VIX Ratio
See more in this Tastyworks video.
3. Oil and Gas
The next sectors I look at – to understand market sentiment – are, due to their huge impact on the global economy, metal & mining.
- WTI crude oil slid $4.75/barrel, or -5.69%, to settle at $78.74/barrel. The move marked the lowest settlement since January and reflected a broad risk-off sentiment and ongoing global economic concerns following another round of aggressive Fed action and commentary earlier in the week.
4. Gold, Silver, and Copper (Metals & Mining)
The next sectors I look at – to understand market sentiment – are, due to their huge impact on the global economy, precious metals.
- Gold is trading lower amid a gain in the US dollar index. Recent Fed rate hikes this year have aimed to curb inflation, which could also drive a rotation out of inflationary hedge assets such as gold and silver. Gold settled at $1,655.60/oz, -1.5% (-$25.50/oz), to mark the lowest settlement since April 2020.
5. Yield Curves
- Fears of aggressive moves from the Fed have created a rapid climb in Treasury yields, keeping sustained pressure on gold.
Understanding yield curves also adds to better reading the market sentiment.
This week treasury yields drop along with gold prices.
A yield curve is a line that plots the yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.
There are three main shapes of yield curve shapes: normal (upward sloping curve), inverted (downward sloping curve), and flat. Upward sloping (also known as normal yield curves) is where longer-term bonds have higher yields than short-term ones.
Normal curves point to economic expansion, 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.
- The 10-year-3-month treasury spread nearly doubled in a week up to 0.45 so still close to but moving away from 0 .
- For some time now, the indicator has been predicting a recession.
ii. The 2-Year/10-Year Yield Curve
- The 2-year yield has now posted 12-consecutive high yield closes as per CNBC, rising above 4.25% earlier today (15-year highs).
- The benchmark 10-yr yield hit an 11-year high above 3.82% earlier (but pared gains to end lower on day)
From SeekingAlpha:
“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 when the yield curve is inverted, investors tend to be right about economic weakness on the horizon. 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.
6. Producer Price Index
The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services. Source: Bureau of Labor Statistics (BLS).
- Still going down which is a sign that inflation may be slowing
7. Consumer Price Index (CPI)
The measure that is most often used to measure inflation in terms of consumers is the consumer price index (CPI). Tens of thousands of items, in several categories, are tracked. The basket of products or services is considered each month, and economists and statisticians look for trends. If the CPI rises, it is an indication that prices could be trending higher, with inflation on the rise.
- However, consumer prices are still rising (although the steep slope is weakening slightly)
8. Consumer Sentiment Index
A low CSI index reflects the general (dis-)satisfaction with managing of U.S. economic policies. A high satisfaction rating suggests approval of the current policy management and implies market stability. Surveys of Consumers (umich.edu).
- Consumers sentiment prelim Sept 59.5 now 51.5, so down again
9. Put/Call Ratio
- A Put/call Ratio of below .5 could mean the market is very bullish. Maybe too bullish. It could be an excellent time to sell stocks high.
- Between 1.0 and 2.0 the Put/call Ratio indicates a bearish market.
- A Put/call Ratio above 2.0 could mean it is very bearish. It could be an excellent time to consider buying low.
- Moving sideways if the Put/call Ratio oscillates between 0.5 and 2.0.
- The put/call ratio went steeply up to 1.359 which indicates a bearish market
Warning: previous research conducted by tastytrade revealed that the Put/call Ratio is not a reliable trading indicator. To review that research in greater detail, readers can check out this installment
10. DJI, SPX, Russel 2000 Indices, and Main Market Sectors
In general, I look at the main indices DJIA, SPX, and Russell 2000 (IWM) and the level of volatility or ‘market thrashing’ (excessive volatility with significant rising then near proportionate falling in markets’ values within a trading period) : above 1% in any or all of them might indicate indecision in the market.
DJIA, SPX, IWM
- The Dow Jones Industrial [-1.6%]set a new YTD-low in today’s session after it closed at 29,590.
- The S&P 500 [-1.7%], Nasdaq [-1.8%]and Russell 2000 [-2.5%]also closed the trading week with steep losses.
Major Stock Market Sectors
I also follow the major market sectors in Barchart.
- All in the red
- Energy and Consumer Discretionary in the last two places.
- S&P 500 Index going down again, now with -1.72% compared to last week.
11. USD and Other Currencies
The DXY, the symbol for the US dollar index, tracks the price of the US dollar against a basket of six foreign currencies that have a significant trading relationship with the US and are also hard floating currencies. The index will rise if the dollar strengthens against these currencies and will fall if the dollar weakens against these currencies.
The DXY now stands at 108.973, slightly down from last week’s 109,609.
- The US dollar jumped to a new two-decade high against its rivals, with the dollar index (DXY) rising as much as 1.6%, essentially going vertical to highs above 113.20 as most major currencies were bludgeoned.
- The dollar rose +3.1% this week to 113.16, the highest level since at least 2002, driven by weakness in the euro which fell on weaker data (down 15% YTD).
- The dollar strengthened by 0.3% against the Japanese yen this week, largely thanks to the Bank of Japan’s decision to intervene.
- Meanwhile an absolute meltdown in the British Pound, falling 3.5% vs. the dollar to $1.085, lowest level in over 35-years after UK tax plan news.
12. Bitcoin
Bitcoin made a move further down to 19074 today.
Summary Market Sentiment 17 September 2022 (unchanged from last week)
Bull market
Bullish
Neutral/bearish
Bearish
Bear market/crash
1. Geopolitical events and economic trends
Positive trends, stable supply chains
Minor market issues, minor supply chain issues
National events, market issues, bad economic data, mini-corrections
Negative indicators, international events, serious market issues, broader market correction (-10%)
The total collapse of the global market, deep recession
2. VIX (VIX)
<15
Lowest volatility, all comfortable
15-19
Market in ‘lull’ mode
20-29
Volatility high
30-39
Volatility very high
>40
Volatility and fear levels highest
3. Oil & Gas (XOP)
Oil & gas
Minor market issues, minor supply chain issues
National events, market issues
International supply chain interruptions, high oil & gas prices
International conflicts involving US, Russia or China, and other main producing countries
4. Gold, Silver & Copper (GLD & SLV & Copper)
Gold, silver, and Copper stable
Minor market issues, minor supply chain issues
National events, market issues
International supply chain interruptions, high oil & gas prices
International conflicts involving US, Russia or China, and other main producing countries
5. US Yield Curve (T10Y3M and US10Y vs US02Y)
Considerably steep curve
Steep curve
Average but still positive curve
Flattening, inverting, and approaching zero
Inverted curve and negative
6. Producer Price Index (PPI)
Lowest price level
Price level higher than normal
Price levels rising fast
The price level is very high
Highest price level
7. Consumer Price Index (CPI)
Lowest price level
Price level higher than normal
Price levels rising fast
The price level is very high
Highest price level
8. Consumer Sentiment Index (CSI)
High consumer confidence
Consumer confidence is less high
Consumer confidence going down
Low consumer confidence
No consumer confidence
9. S&P 500 Put/call ratio (PCR)
Well below 0.5 (very bullish)
Close to 0.5 (bullish)
Between 0.5 and 1.0 (neutral)
Between 1.0 and 2.0 (bearish)
Above 2.0 (severely bearish)
10. Dow Jones (DJI)
S&P 500 (SPX)
Russel 2000 (RUT)
Major Market Sectors (XLE, XLF, etc)
Strong bull market
No real changes in an upward trend
Bullish market
Minor changes in an upward trend
Neutral bullish/bearish market
Increased (negative) changes and “thrashing”
Bearish market
Going down, many negative changes
Bear market
A deep recession or the market is collapsing, or already did so
11. US Dollar Currency Index (DXY)
Very weak dollar versus other currencies
Weak dollar
Neither weak/nor strong dollar
Strong dollar
Very strong dollar
12. Bitcoin (BTCUSD)
Bitcoin rising
Bitcoin rising slightly slower
Bitcoin “thrashing” at the same level
Crypto crashes, market corrections
Bitcoin collapses
No restrictions on trading (except for VIX rules)
Closer watch and reduce trades
More caution needed and reduce trades further
Extreme caution and reduce trades even further
Look to close any open positions and no new trades
This Week’s Economic Calendar
News from the ECB on Monday and Wednesday, from the Fed on Tuesday. And data on GDP US and CPI EU.
Earnings and Dividend Calendar
Next earnings season coming up for my selected underlyings.
The first dividends are in December for GDX.
Financials
Cash Balance 24 September
Portfolio allocation
Not started
Last Week’s Options Trading
Positions Closed Last Week
None
Positions Opened Last week
I will also explain which sources I used and how I researched the options ideas I created for each position I set up (BarChart, Lookback, etc).
Last week I (again) opened 1 new position: FCX 21 Oct Short Iron Condor 24/25/35/36 @ $26. I should be careful and try to exit before 13 October (Dividends).
Options Strategies Count Summary
Defined Risk
Week 10 -16 September
YTD
Bull Put Spread (credit)
1
1
Bear Call Spread (credit)
0
0
Bear Put Spread (debit)
0
0
Bull Call Spread (debit)
0
0
Short Iron Condor
2
2
Undefined Risk
Short Option
0
0
Short Straddle
0
0
Short Strangle
0
0
End-of-Week Active Positions Overview
This Week’s Guidelines
Open Positions Status at Beginning Week
I have now opened two positions in EWZ and one new position in FCX.
Goals and Schedule
At the end of September, it will be hard to reach maximum portfolio allocation.
Sunday: set up options strategy ideas and perform backtesting; select at least two options strategy ideas.
Tuesday: open a minimum of 2 vertical spreads or iron condors
Thursday: open a minimum of 2 vertical spreads or iron condors
For this, I need high IVR underlyings.
Options Buying Power and Portfolio Allocation This Week
Based on my current buying power and portfolio allocation rules I determine whether I can open new positions to maximize such portfolio allocation.
Allocation based on VIX
VIX
< 15
15-19
20-29
30-40
>40
Volatility
Lowest volatility, all comfortable
Market in ‘lull’ mode
Volatility high
Volatility very high
Volatility and fear levels highest
Maximum portfolio capital allocation
25%
30%
35%
40%
50%
Cash Balance
$4.600
Max Portfolio Capital Allocation (Cash Available for Trading)
35%
$1.610
Average Max Position Allocation (BP)
2%
$92
Portfolio allocation undefined vs defined risk
To be set up
Underlyings Selected for Trading This Week
Based on the criteria for stock selection (high liquidity, high volatility, technical, no earnings/dividends etc.), I have filtered the following ETFs and stocks for this week to focus on: EWX, GDX, IWM, TQQQ and in reserve LYFT, and GOLD since earning are coming up for both of them. And, as always, I will keep an eye on RIOT give the moves in Bitcoin to which RIOT is much correlated.
- EWZ (high IVR)
- GDX (high IVR)
- IWM (high IVR)
- TQQQ (high IVR)
- LYFT (high IVR and earnings coming up 1 Nov)
- GOLD (high IVR but earnings 3 Nov)
I need to revisit this as soon as the market opens again tomorrow.
And I will also check in my BarChart screeners to see whether there are results I can use to set up positions. In a future post, I will explain how I set up the screeners.
This Week’s Rules
This week I will start a post with my entry, adjustment, and exit rules per options strategy. I will describe how I am setting up a playbook with all the strategies I want to deploy.
Vertical Bull Put Credit Spread
14/09/22: Sold – EWZ 28 Oct BPS 27/28 @ 25.00
Vertical Bear Call Credit Spread
To be filled in
Vertical Bull Call Debit Spread
To be filled in
Vertical Bear Put Debit Spread
To be filled in
Short Iron Condors
14/09/22: Sold – EWZ 21 Oct Short IC 26/27/34/35 @ 32.00
Short Straddles
To be filled in
Other Strategies
To be filled in
Conclusion
I’m going slow and will not reach full portfolio allocation in September. But the idea of trading based on VIX level and holding back in rough and choppy times is all part of the game to reach my goals.
Let’s see whether the insights I described above based on technical analysis allow me soon to open new bull positions.
