Entry 4 Feb 23: Options Trading Exit Rules?

By: nic

When trading options, exit rules are there for a reason, as I again found out in January when the market went against most of my positions.

Well, it wasn’t the market to blame, it was myself who had to be held accountable for not following rules.

I started off with a nice $350 P/L YTD and saw it growing to close to $600 in the middle of the month, which is close to the $700 per month I need to earn on average during the year to reach my financial targets.

So, all looked very promising until the market decided to completely ‘lose fear’ for recessions, wars, and other nasty things happening today (VIX down to under 20) and have several upward ‘meltdowns’ which caught me by surprise. Looking at the market outlook and most of the indicators there are no strong reasons for this.

However, the call wings in my condors QQQ, and SQ went deeper and deeper ITM, and also other condors like SPY started o being hit.

Having solid exit rules in place I of course in a very disciplined way started adjusting and closing down positions. Well, not. That is exactly what I didn’t do, ending up very much more in the red at the end of the week.

So I took some drastic measures. I closed all positions showing more than 50% loss, or below 33% PoP on Friday to clean up my act. This of course impacted my P/Ls, cash, and net liq.

So I am down to $92,50 P/L YTD ex fees, from close to $600 two weeks ago. There is close to $2,000 in positive NetLiq which I now need to manage much more rigorously. Especially when it comes to mechanically applying exit rules.

Exit Rules

As the fundamental component of my risk management, I have described my exit rules in my playbook and I use them for my trading plan.

In general, they boil down to some important main principles.

I should close a position (or part of an iron condor/butterfly: the put or call wing of a credit spread) if:

  • either the position/wing is at 21 DTE, if the position cannot be adjusted (rolled);
  • or, if the loss percentage of the play goes above 50% (of the original premium);
  • or, if PoP goes below 33% and we are close to 21 DTE and 50% loss target.

whichever occurs first.

For vertical debit spreads (price direction!): if none of the above but after 15 days still flip-flopping: and signal deep red: retrofit with the opposite debit spread.

And How did my Beta-weighting Exercise Go?

I told myself last week I needed to start monitoring beta-weighted delta! Because my strategies are too dependent on the directional move of the market.

I can use Tastyworks’ beta-weighting deltas indicator to benchmark individual positions and sum them to understand the directional exposure of my whole portfolio.

This is where I was last week when I started buying more positive delta:

And this is where I ended up this week:

The market’s rally caused me to overshoot to the other side. So, this game of keeping my portfolio neutrally beta-weighted is also not so easy, it seems.

This week my options lost much of their value again. And it is not due to me placing bad bets on earnings which I wrote about in my journal entry of last week. It was again the QQQ and SQ that caused most of the damage by shooting up like rockets.

The reason for this week’s loss is not so much due to an unbalanced portfolio, but simply to not following exit rules, and allowing short positions to go deep ITM, accumulating loss.

Low volatility

Another issue adding to my worries is that IVR is continuing to be very low for most of my positions. And still going lower! Since the end of last year, the overall IV in assets went down to around 20%. This translates to ‘fear’ going down 40% (!). Whereas we still have a war raging in Europe, inflation hasn’t subsided, a recession seems unavoidable, etc. markets are behaving as if we’re back to bullish times again. It shows me that the market is irrational. Therefore, my focus should be on trading as delta-neutral as possible.

The volatility decrease has had an effect on implied volatility which is working against the positions I have. Especially when there are big moves, in a low volatility environment, the IV can spike much higher and lower than when volatility is high (IVR > 50).

This is more pronounced in low volatile underlyings like indexes or ETFs, but the same principle also applies to higher volatility stocks.

The exception is certain commodities (gold, gas, etc.) where it is the opposite (in part due to greater fear for upside moves: ‘reverse skew’).

So actually what I am seeing now proves the point that short premium strategies in a low-volatility environment are much riskier. That’s also the reason why I base my portfolio allocation also on how high or low the VIX is (see below).

And as a last note again: I am still 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 750.

Exit rules are there for a reason

Table of Contents

Last Week’s Options Trading

This week I had to manage some of my positions for two reasons:

  1. I have completely reshaped my positions, so most of them are open one week or short now..
  2. I got rid of all loss-making and deep ITM positions, although a few of my short strikes are still close to ITM.

Options Strategy Risk Management Rules​

  1. In high volatility (VIX >20) sell high vol (IVR>30) options to collect premium income while spreading the risk over various expiration dates (staggering dates to avoid expiration density); the higher the volatility, the more of your account you can allocate to short premium strategies.
  2. Sell options at high IVR (>30)  to extract high (overpriced) premiums (‘overpriced’, since predicted volatility is nearly always overestimated, and stocks are less volatile than predicted, so implied volatility implosion or IV reversion to the mean allows for profits to be taken early when stocks fail to be as volatile as predicted). ​
  3. In low volatility (VIX < 20) buy low vol (IVR <30) debit options (you pay the premium) and lower the total allocation; the less volatility, the less money you should allocate to options trading.
  4. Sell and buy options on underlyings that are liquid in the options market (to open and close positions easily and ensure trades can be filled with narrow bid-to-ask spreads for optimal option pricing ​).
  5. Sell and buy options across tickers with broad sector diversity across uncorrelated sectors to spread risk (too much concentration into any given sector runs the risk of stocks auto-correlating in the same direction and potentially jeopardizing all trades within the sector-specific bucket of trades).
  6. As much as possible (given a small account) stick to risk-defined trades (put spreads, call spreads, and iron condors) to mitigate risk and reduce the amount of capital required for any given trade.
  7. Probability of success (P50 in Tastyworks platform)> 70% to ensure a statistical edge
  8. Closing the trade and realizing profits at >50% premium early in the option lifecycle (21 DTE) and re-invest the capital made free towards additional trades.
  9. Closeout trades prior to expiration (before strike price gets challenged just before expiration (high volatility and higher loss probability!).
  10. Maximize the number of trades to allow the expected probabilities to play out (trade small, trade often).
  11. Size position/portfolio allocation to manage risk exposure (worst-case scenarios always need to be considered therefore I conservatively use small allocations to options trades, so only 4% of my portfolio should only be used for any given trade). 
  12. Keep an adequate amount of cash on hand (~40% in my case) to protect your portfolio against any major market downturns (i.e., Covid-19 and Q1 2022, 2023 recession(?). Cash also gives me the possibility of buying stocks/long equity at heavily discounted valuations. ​

Alternatives for Short Premium Strategies

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.

In addition, I am in the middle of studying earnings plays, but not yet confident, given the market, to start now with earnings trading.

Opened POSITIONS

From now on I will use the integers (10, 20, 30) for contract deltas and fractals (0.10, 0.20, 0.30) for the individual legs.

I am now also introducing blocks with key position data to get a better overview of how a position is behaving over time. As for all new positions opened, I will start adding such data.

To balance my portfolio based on beta-weighted delta I added a considerable number of positive delta positions this week. Since I am not convinced at all that we are again back in a bullish market, I carefully selected the underlyings and selected as many as possible non-tech, and non-US ETFs or stocks I believe may be less impacted by earnings or market movements (or where I don’t mind getting assigned, like RIOT).

I need to check their correlation with SPY to see whether I did this correctly.

Here my set-up for bull calls:

  1. ‘ Buy to open’ (BTO) the call option ( in US 1 contract = 100 shares) ITM at 0.60 delta (up to ATM so below the underlying price)
  2. ‘Sell to open’ (‘STO’) the call option at 0.40 delta, so higher and above the underlying price. Since it is very difficult to find 0.40 delta set-ups fitting all criteria, I often skew towards 0.50 delta, but this further reduces my profit potential.
  • 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 long call (mid) >= Net Debit).

Opened: TLT Mar 17 105/108 Bull Call Opened on Feb 3 for $166 debit

Date

3/2/23

Underlying

106.87

PoP

51%

DTE

42

IVR

-3.8

Δ Delta

18.51

Θ Theta

0.010

Other

4 Feb 23: 50% PoP now, -$4 in red.

Opened: FXI Mar 17 33/30 Bear Put Opened on Feb 3 for $160 debit

Date

3/2/23

Underlying

31.08

PoP

56%

DTE

42

IVR

11.3

Δ Delta

-39.47

Θ Theta

0.292

Other

4 Feb 23: 54% PoP now, no change in P/L.

Opened: UAL Mar 17 55/49 Bear Put Opened on Feb 3 for $316 debit

Date

3/2/23

Underlying

51.20

PoP

56%

DTE

42

IVR

2.1

Δ Delta

-38.76

Θ Theta

0.544

Other

4 Feb 23: 54% PoP now, no change in P/L.

Opened: NIO Mar 17 12.5/10 Bear Put Opened on Feb 3 for $129 debit

Date

3/2/23

Underlying

11.28

PoP

55%

DTE

42

IVR

10.3

Δ Delta

-32.83

Θ Theta

-0096

Other

4 Feb 23: 50% PoP now, P/L $4 in the green

Opened: GLD Mar 17 176/171 Bear Put Opened on Feb 3 for $240 debit

Date

2/2/23

Underlying

173.47

PoP

49%

DTE

42

IVR

1.6

Δ Delta

-26.89

Θ Theta

0.172

Other

4 Feb 23: 51% PoP now, -$2 P/L in the red.

Opened: SLV Mar 17 21.5/19.5 Bear Put Opened on Feb 3 for $100 debit

Date

2/2/23

Underlying

20.57

PoP

—

DTE

42

IVR

7.9

Δ Delta

-40.98

Θ Theta

-0.037

Other

4 Feb 23: 54% PoP now, no change in P/L.

Opened and Closed: XLU Mar 17 Bear Put 71/68 Opened on Feb 2 for $125 debit and closed on 3 Feb for a $200 credit

2 Feb 23: Opened and closed in the same week for a $75 profit in 1 day(!).

Opened and Closed: AMZN Feb 17 Iron Condor 96/99/123/126 Opened on Feb 2 for $106 credit and closed on 3 Feb for a $55 debit

2 Feb 23: Earnings play opened just before the earnings announcement and closed the next day for a $55 profit in 1 day(!).

Opened: AAL Mar 17 Bear Put 17/15 Opened (2x) on Feb 2 for $187 debit

Date

4/2/23

Underlying

17.02

PoP

35%

DTE

41

IVR

1.0

Δ Delta

-58.65

Θ Theta

-0.510

Other

–

4 Feb 23: 35% (!) PoP now, so close to 33% PoP close rule, -$65 in the red which is 35% loss.

Running and Closed Positions

Running: BAC Apr 21 Bull Call 35/37 Opened on Jan 27 for $105 debit

Date

27/1/23

Underlying

36.67

PoP

44%

DTE

84

IVR

0.0

Δ Delta

18.83

Θ Theta

-0.101

Other

–

Date

4/2/23

Underlying

36.43

PoP

53%

DTE

76

IVR

5.2

Δ Delta

18.16

Θ Theta

-0.020

Other

–

4 Feb 23: not much change in the underlying price, 53% PoP now, P/L now positive $12.

27 Jan 23: To bring more delta-neutrality into my portfolio I added a BAC bull call.

Running: FCX Mar 17 Bull Call 43/47 Opened on Jan 27 for $213 debit

Date

27/1/23

Underlying

45.26

PoP

48%

DTE

50

IVR

-0.9

Δ Delta

22.90

Θ Theta

0.003

Other

–

Date

4/2/23

Underlying

43.16

PoP

37%

DTE

41

IVR

6.9

Δ Delta

25.22

Θ Theta

-0.590

Other

–

4 Feb 23: 37% PoP now, so getting close to the danger area, P/L at -$39 (26% loss).

27 Jan 23: To bring more delta-neutrality into my portfolio I added an FCX bull call.

Running: IWM Mar 17 Bull Call 186/190 Opened on Jan 27 for $243 debit

Date

27/1/23

Underlying

188.82

PoP

50%

DTE

50

IVR

0.7

Δ Delta

10.12

Θ Theta

-0.243

Other

V = -0.68

Date

4/2/23

Underlying

196.99

PoP

71%

DTE

41

IVR

5.6

Δ Delta

6.89

Θ Theta

0.271

Other

V = -2.54

4 Feb 23: the underlying price went up, 71% PoP now, P/L now positive $72.

27 Jan 23: To bring more delta-neutrality into my portfolio I added an IWM bull call.

Running: GDX Mar 17 Bull Call 31/33 Opened on Jan 27 for $110 debit

Date

27/1/23

Underlying

32.28

PoP

49%

DTE

50

IVR

7.3

Δ Delta

18.25

Θ Theta

0.017

Other

V = -0.29

Date

4/2/23

Underlying

30.32

PoP

32%

DTE

41

IVR

5.2

Δ Delta

19.27

Θ Theta

0.316

Other

V = 0.76

4 Feb 23: The underlying went down, 32% PoP now, P/L $48 in the red which is close to the 50% loss target. So very near to closing this position.

27 Jan 23: To bring more delta-neutrality into my portfolio I added a GDX bull call.

Closed: FXI Mar 17 Bull Call 32/35 Opened on Jan 27 for $150 debit and closed on 3 Feb for $75 credit.

Date

27/1/23

Underlying

33.23

PoP

45%

DTE

50

IVR

1.2

Δ Delta

32.79

Θ Theta

-0.178

Other

V = 0.14

Date

3/2/23

Underlying

31.09

PoP

closed

DTE

closed

IVR

closed

Δ Delta

closed

Θ Theta

closed

Other

closed

3 Feb 23: The position after opening immediately started going in the wrong direction (down) at quickly arrived at a 50% loss, so given my exit rules, had to be closed at a $75 loss.

27 Jan 23: To bring more delta-neutrality into my portfolio I added an FXI bull call.

Running: XLF Mar 17 Bull Call 35/37 5.5 Opened on Jan 27 for $127 debit

Date

27/1/23

Underlying

36.26

PoP

49%

DTE

50

IVR

1.0

Δ Delta

28.72

Θ Theta

-0.143

Other

V = -0.37

Date

4/2/23

Underlying

36.59

PoP

55%

DTE

41

IVR

3.4

Δ Delta

27.73

Θ Theta

-0.085

Other

V = -0.74

4 Feb 23: 54% PoP now, P/L $11 in the green.

27 Jan 23: To bring more delta-neutrality into my portfolio I added an XLF bull call opposite to the Mar 31 bear put spread I already have.

Running: RIOT Mar 10 Short Put 5.5 Opened on Jan 27 for $60 debit

Date

27/1/23

Underlying

$6.33

PoP

60%

DTE

27

IVR

28.4

Δ Delta

33.73

Θ Theta

0.967

Other

Date

4/2/23

Underlying

$6.84

PoP

80%

DTE

34

IVR

22.6

Δ Delta

21.10

Θ Theta

0.999

Other

4 Feb 23: 80% PoP now, P/L $23 in the green.

27 Jan 23: To bring more delta-neutrality into my portfolio I here also add a short put in my favorite, and until now very successful, play, RIOT.

Running: DAL Mar 17 Bull Call 37/41 Opened on Jan 27 for $215 debit

Date

27/1/23

Underlying

$38.73

PoP

50%

DTE

49

IVR

0.8

Δ Delta

33.73

Θ Theta

-0.278

Other

Date

4/2/23

Underlying

$39.58

PoP

53%

DTE

41

IVR

0.4

Δ Delta

34.07

Θ Theta

0.34

Other

4 Feb 23: 53% PoP now, P/L at $25.

27 Jan 23: To bring more delta-neutrality into my portfolio I am adding some more long debit positions, based on the entry rules I have set for such strategies. This is my second DAL debit position. Airlines are doing fine, so I bet on DAL remaining bullish.

Closed: GLD Mar 17 Bull Call 177/181 Opened on Jan 27 for $219 debit and closed on 3 Feb for $102 credit

Date

27/1/23

Underlying

$179.34

PoP

52%

DTE

49

IVR

30.2

Δ Delta

14.85

Θ Theta

-0.120

Other

Date

2/2/23

Underlying

$173.46

PoP

Closed

DTE

Closed

IVR

Closed

Δ Delta

Closed

Θ Theta

Closed

Other

Closed

3 Feb 23: Gold after opening immediately started going in the wrong direction (down) at quickly arrived at a 50% loss, so given my exit rules, had to be closed at a $117 loss.

27 Jan 23: To bring more delta-neutrality into my portfolio I am adding some more long debit positions, based on the entry rules I have set for such strategies.

Running: Opened on Jan 20: EWZ Mar 17 Iron Condor 24/27/32/35 for $98 credit

Date

21/1//23

Underlying

$29.18

PoP

59%

DTE

55

IVR

30.2

Δ Delta

1.023

Θ Theta

n/a

Other

Short put and call delta still around (-)0.28 and delta now going ‘long’, but still close to neutral

Date

28/1/23

Underlying

$29.82

PoP

64%

DTE

48

IVR

25

Δ Delta

-5.32

Θ Theta

1.173

Other

Negative delta for the position now, v at -3.61

Date

4/2/23

Underlying

$28.63

PoP

66%

DTE

41

IVR

24.1

Δ Delta

7.95

Θ Theta

1.213

Other

4 Feb 23: 66% PoP now, P/L $24 in the green.

28 Jan 23: Also EWZ moved somewhat up and now $14 in the green at 64% PoP and deltas at 0.20/-0.31

21 Jan 23: Not much change and $3.00 in the green.

20 Jan 23: Opened a second position just below the 1/3 ($98) width of the spread ($300) and the short strikes around 20 delta, seeing not much direction (rangebound/neutral) in the future.

Underlying

$29.29

PoP

57%

DTE

56

IVR

31.6

Δ Delta

-0.05

Θ Theta

n/a

Other

67% P50 (probability of reaching 50% profit)

0.26/0.09 delta OTM put legs and 0.29/0.12 delta OTM call legs

Delta neutral

Closed: on Jan 20: SPY Mar 17 Iron Condor 364/368/413/417 for $157 credit and rolled the put wing 364/368 to 391/395 for $40 credit on 2 Feb and closed the put wing and call 417 strike with the 411 call strike of my other SPY iron condor for $ 4.35 debit

Date

21/1/23

Underlying

$395.88

PoP

54%

DTE

55

IVR

9.7

Δ Delta

-2.75

Θ Theta

0.016

Other

-0.28 delta now for OTM short call leg

Date

28/1/23

Underlying

$405.68

PoP

54%

DTE

48

IVR

2.7

Δ Delta

-4.58

Θ Theta

1.457

Other

v = -6.43

Date

4/2/23

Underlying

$412.35

PoP

Closed

DTE

Closed

IVR

Closed

Δ Delta

Closed

Θ Theta

Closed

Other

Closed

2 Feb 23: Taking a loss on my SPY position here. I made use of the fact that I had two iron condors expiring on the same date by combining strikes of both to close down most of this iron condor. I ‘borrowed’ the 411 call strike of the other iron condor since it was ITM and needed adjusting. The 416 call strike I closed one day later together with the 416 call strike of the other SPY iron condor (see below).

28 Jan 23: SPY went up even further, the negative delta doubled, and the position is now -$48 in the red.

21 Jan 23: The underlying price went up, IVR increased, delta moved shorter. I am now -$2 in the red.

20 Jan 23: Opened an iron condor at over 1/3 width (40%) betting on SPY price staying rangebound (neutral) between $368 and $413.

Underlying

$391.85

PoP

51%

DTE

56

IVR

8.5

Δ Delta

-1.81

Θ Theta

n/a

Other

72% P50 (probability of reaching 50% profit)

0.21/0.18 delta OTM put legs and 0.22/0.18 delta OTM call legs

Delta neutral

Rolled: XLF Mar 31 Bear Put 37/34 opened on Jan 18 for $132 debit and rolled the 37 strike to 35 on Jan 27 for $21 credit

4 Feb 23: 36% PoP now, P/L -$45 in the red, so needs close monitoring or be closed.

27 Jan 23: This has been going in the wrong direction with the whole market going up. So the only defense I have now is to roll up the 37 strike with two points to get some extra credit in. But if XLF continues going up I will have to close it for a loss,

21 Jan 23: Three days later my P/L Open is at $0. The underlying went slightly down, same with IVR (for a bear put you’d rather have it going up). Delta shorter, theta down to nearly nothing.

Underlying

$35.35

PoP

54%

DTE

69

IVR

9.1

Δ Delta

-43.48

Θ Theta

0.003

Other

-0.31 delta OTM short put leg, and -0.72 delta OTM call leg

18 Jan 23: Given the first earnings reports coming in and general sentiment, I decided to put in a bear put for XLF. It is therefore a bearish position.

Underlying

$35.42

PoP

54%

DTE

72

IVR

10.5

Δ Delta

-40.58

Θ Theta

0.204

Other

66% P50 (probability of reaching 50% profit)

-0.32 delta OTM short put leg, and -0.75 delta OTM call leg

Here my set-up for bear puts:

  1. ‘ Buy to open’ (BTO) the put option ( in US 1 contract = 100 shares) ITM at 0.60 delta (up to ATM so above the underlying price)
  2. ‘Sell to open’ (‘STO’) the put option at 0.40 delta, so lower than the long put and below the underlying price. Since it is very difficult to find 0.40 delta set-ups fitting all criteria, I often skew towards 0.50 delta, but this further reduces my profit potential.
  • 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 long call (mid) >= Net Debit).

Closed: opened on Jan 10: DAL Jun 16 Bull Call 36/43 for $330 debit and closed on 3 Feb for $384 debit

3 Feb 23: In my major clean-up this week I also closed this position, since I believe airlines will be going down. So I took out a $54 profit.

27 Jan 23: Down to $21 in the green, PoP at 46%, deltas didn’t move much (0.67/-0.34)

21 Jan 23: Now $30 in the green, IVR down to 0.7%, and deltas still in the same range as before (0.67/-0.38). PoP at 48%, so up.

14 Jan 23: Mainly due to the fact that volatility for most underlyings is very low, and the fact that my portfolio allocation rules forbid me to add more short premium positions to those already opened, I am opening debit spreads. Slightly in the green ($4), IVR (0.4%), and deltas (0.64/-0.35) close to when opened. PoP at 44%.

Here my set-up for bull calls:

  1. ‘ Buy to open’ (BTO) the call option ( in US 1 contract = 100 shares) ITM at 0.60 delta (up to ATM so below the underlying price)
  2. ‘Sell to open’ (‘STO’) the call option at 0.40 delta, so higher and above the underlying price. Since it is very difficult to find 0.40 delta set-ups fitting all criteria, I often skew towards 0.50 delta, but this further reduces my profit potential.
  • 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 long call (mid) >= Net Debit).

Closed: ARKK Mar 17 Bull Call 33/38 Opened on Jan 10 for $255 debit and closed on Feb 1 for $407 credit

3 Feb 23: I decided to close this position at 21DTE (my other exit rule) and take a lower percentage of profit, but still nice.

28 Jan 23: Still a winner, coming closer to the 60% profit target now. $118 in the green, 75% PoP, deltas at 0.86/-0.66 now.

21 Jan 23: Still going strong: $29 in the green now at 59% PoP, and deltas at 0.72/-0.45.

14 Jan 23: Made a good start and is now in the green ($12), IVR 0.8%, deltas at 0.70/-0.43, PoP at 51%.

Opened on Jan 13: RIOT Feb 24 Iron Condor 3.5/5.5/8/10 for $70 credit and closed on 3 Feb the 3.5/5.5 put wing for $18 debit

4 Feb 23: 74% PoP now, P/L $30 in the green.

27 Jan 23: 64% PoP, $28 in the green, and deltas at 0.29 put / -0.26 call. IVR at 28.4

21 Jan 23: IVR went higher to 38.1 now. I would prefer it to g down of course with a short iron condor. So profitwise not much change ($2) and deltas around 0.30)

14 Jan 23: Another play with one of my favorite stocks! Since a few weeks ago the stock price has nearly doubled. IVR remains high enough (31.5%). Highest delta at short call strike (-0.33). P50 at 50%

Closed: QQQ Bear Call Feb 10 (W) 278/284 opened on 4 Jan for $153 credit, rolled on Jan 20 to 280/286 Mar 17 for $9 credit, and closed on 3 Feb for $520 debit

3 Feb 23: I should have closed this one a long time ago and with all rallies of this week and QQQ reaching nearly 314, this position went even further ITM. So I took the bold decision to not wait any longer (even if expiration is in 6 weeks: rule = rule) and closed it for a $520 debit. A loss of $358, thank you very much.

28 Jan 23: All signals are on red for this one, and according to nearly all my exit rules I should have closed it. $293 in the red, 31% PoP. So here I am really in default, only because I still think the market will go down and I can slightly mitigate the loss I am looking at right now. So here I am really gambling. Maybe not good, but it will be another lesson learned.

21 Jan 23:This position is continuously flirting with going ITM. This week it went OTM again, and I was getting close to 21 DTE (the date on which I must manage/close positions), so I took the opportunity to roll the position out and up, but rallied back ITM at the end of the week. Now also my rolled out and up is back again in the danger zone with the short leg again ITM, showing a loss of $27.

14 Jan 23: This position is doing its best to go against me, and the underlying price is hovering around or going above the short call strike (now at close to 281!). Although the PoP is still above 33% (it is at 47%), I need to actively start managing this one before the underlying price increases much more!

Here are the possibilities:

  • If the underlying price increases, there are different ways to manage the position:
    • Convert it to an Iron Condor by selling a Bull Put, if you feel the underlying will rebound but want to give it a bit more time. Note: I am not sure it will rebound.
    • Roll the tested or breached short call up for extra credit (same expiration), but never above breakeven (‘defensive roll’ and always check with your rules – like IVR >30 – and backtest to decide whether you would also have done this as a new set-up. Note: this seems possible when the short strike is ATM/slightly ITM, but this station seems to have already been passed,.
    • Convert the call credit spread into a Butterfly by adding a debit spread, if you don’t really feel that the underlying will rebound and move to the downside, but still want to stay “in the game” (however, it usually requires staying in very close to expiration to reap the benefits, and therefore is also called a “Time Bomb Butterfly”). Note: if I look at the entry rule of the iron butterfly, it requires an IVR over 30 (now under 1!), so not sure this is the solution.
    • Roll the position out in time when the short strike is ATM or slightly ITM (‘vertical roll’), and the long strike is OTM, to extend the duration and the breakeven, and to continue the original strategy. Note: see above (passed station).
    • Or invert the spreads for a credit greater than the width of the conversion, as long as the underlying price remains within the short strikes (spread). Note: the width is already quite wide ($600), and I never tried this out before.
    • If this is not workable: allow the limited risk probabilities to play out, or close the position. Note: I will see what happens next week and may have to grab the best opportunity (e.g. price relatively down) to just close for a loss.

Anyway, I need to know better how to hedge against quickly falling or increasing prices in the case of bull put or respectively bear call spreads. As stocks fall or rise, volatility typically increases, increasing margin requirements and also swelling your credit spread’s premium.

It is this volatility, or Vega, that I really want to hedge against. With a credit spread, I want the position to expire worthless, and thus I am effectively taking a short position in volatility. Thus, decreasing Vega will be profitable.

7 Jan 23: 4 days since opening and this one immediately went in the wrong direction after opening: P/L Open at -$36, PoP now up to 68%, and highest leg is the short call at -0.35 delta.

Running: Opened on 30 Dec: SPY Iron Condor Feb 17 343/348/411/416 for $128 credit and rolled the 343/348 puts on Jan 24 to 381/386 for a $70 credit and on Jan 27 to Mar 17 for $30 credit and closed the 411 with my other iron condor and the 416 of his condor with the 413 strike of the other condor on 2 Feb for $185 debit

3 Feb 23: See also above my other Iron Condor. Also, this one came under attack due to SPY rallying upwards this week. Now only the Mar 17 381 /386 bull put is left at an 84% PoP, $23 in the green, and strikes at -0.14 (long)/0.17 (short) delta respectively.

27 Jan 23: since we are now at 21 DTE of the Feb 17 expiration date, I am adjusting the position by rolling the wings out. I cannot roll complete condors, so I have to do that wing-by-wing. In this case, I am rolling out the put side as a bull put spread.

24 Jan 23: same story here as with iron condors: rallies up threatening call wings, so rolling up unchallenged put legs to capture credit.

21 Jan 23: 76% PoP and $15 in the green. The short call still highest delta but only at -0.23. 21 DTE action date (manage/close) next week.

14 Jan 23: 15 days since opening and PoP at 72%, profit to -$2, and the short call is the highest delta still at -0.29.

7 Jan 23: 9 days since opening and PoP went up to 74%, profit to -$8, and the short call is the highest delta now at -0.19.

31 Dec 22: lost $7 euros on Friday when everything went red again. But PoP is still at 70%, and deltas are under 20 (or better: .20).

Running: Opened on 29 Dec: QQQ Iron Condor Feb 17 235/240/294/299 for $138 credit and rolled there 235/240 puts on Jan 24 to 270/275 put wing for a $77 credit and on Jan 27 rolled the 294/299 call wing to Mar 17 for $20 credit and closed this call wing on 30 Jan for a $240 debit, moved the put wing out on 1 Feb to Mar 17 for $30 credit and up to $286/291 on 2 Feb for $45 credit

3 Feb 23: The Qs also went up again, and given the fact that I really need to start trading more disciplined and actually apply my exit rules, and I was far above the 50% loss target I have set myself, I closed the ITM call wing; by rolling the put wing I can win some money back. What is left from this iron condor play is a Mar 17 bull put 286/291 at 72% PoP, $14 in the red, and put strikes at -21/27 delta.

27 Jan 23: rolled the challenged call wing to March 17 since I still believe this is a bubble and the market will come down very soon. Also here PoP is close to my 35% threshold, and I am $99 in the red.

24 Jan 23: same story here as with iron condors: rallies up threatening call wings, so rolling up unchallenged put legs to capture credit.

21 Jan 23: 73% PoP, $7 in the green, and the highest leg is the short call at -28.37 delta. 21 DTE action date (manage/close) next week.

14 Jan 23: 16 days since opening and P/L Open down to $7, PoP is now at 71%, and the highest leg is the short call at -0.26 delta.

7 Jan 23: 10 days since opening and P/L Open at $28, PoP is now down to 75%, and the highest leg is the short call at -0.15 delta.

31 Dec 22: I added a Feb 17 iron condor and closed all my other positions (21 DTE rule). As with all my iron condors a high volatility play. My general rules for iron condors are that the deltas of the individual legs should be around 20, IVR above 30, and ideally IV (implied volatility) higher than average HV (historical volatility). I do look at some technical indicators mainly to determine where to position the short strikes. So if I see an upward trend, I will move the put legs up towards the price of the underlying, and I will do the same with the call legs at the same time giving them more ‘cushion.’

Overall condor delta today at 1. Deltas of the legs today are still at or around 16. PoP at 69%.

Note: the Nasdaq-100 is the worst-hit U.S. stock index for 2022, down over 34% on the year.
QQQ also has the highest current implied volatility rank of the 4 index ETFs, around 35%.

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

Opened on 29 Dec: SQ Iron Condor Feb 17 42.5/47.5/75/80 for $150 credit and the 42.45 put leg rolled on 18 Jan to 57.5/62.5 for a $63 credit and rolled again to 70/75 on 24 Jan for another $99 credit and to Mar 17 for a $56 credit and closed the call wing 75/80 on 3 Feb for $405 debit

3 Feb 23: Another position I partially closed this week, after having taken the decision to now actually stick to my exit rules (see above). So I closed the deep Feb 17 ITM call wing for $405. The Mar 17 70/75 bull put should help me to recover some of the loss and is at 70% PoP, $5 in the green, and put strikes at -0.19/0.27 deltas.

27 Jan 23: Since we are now at 21 DTE of the Feb 17 expiration date, I am adjusting the position by rolling the wings out. I cannot roll complete condors, so I have to do that wing-by-wing. In this case, I am breaking up the iron butterfly I had created and rolling out the put side as a bull put spread to Mar 17. The call side is deep ITM, but I am still betting on the market going down soon. If not, I will have to take the loss.

24 Jan 23: SQ is rocketing upwards with each rally and making it harder and harder for me to adjust the ITM call wing. I therefore can only roll up the put wing to get some extra credit in to possibly cover for the loss I will have to accept on the ITM call wing.

21 Jan 23: This position is not happy with me and decided to further deteriorate. Even after I rolled the 42.5/47.5 put wing to 57.5/62.5 for a $63 credit. Especially on Friday things went wrong when – with the underlying price quickly going up, the call leg went ITM (short call closed to -0.59), and my P/L Open ended at -66 $. PoP is now at 42% which is getting very low (33% is my ‘abort position’ level). I may need to manage this position again next week. 21 DTE action date (manage/close) next week anyway.

14 Jan 23: 16 days since opening and $26 in the red and PoP slightly down to 63% now and short call leg highest at -0.44 delta. The underlying is now &71.65 edging closer to the call wing.

7 Jan 23: 10 days since opening and still $1 in the red and PoP slightly down to 64% now and short call leg highest at -0.39 delta.

31 Dec 22: $1 in the red and PoP at 66% now and short call leg highest at 27 deltas.

Closed: Opened on 28 Dec: AAPL Iron Condor Feb 17 105/110/145/150 for $136 credit and rolled the 105/110 put legs to 120/125 for a $61 credit, and rolled again on 24 Jan to 127/132 for another $42 credit; rolled the 145/150 call wing to Mar 17 for $15 credit; on Jan 27 rolled the 127/132 put wing out and up to 130/135 Mar 17 for $48 credit; on Jan 30 closed the 145/150 for $222 debit and the 130/135 for $34 debit.

3 Feb 23: the whole position is now closed after also AAPL went up to around $155 after earnings and calls were ITM, 50% target loss percentage broken, etc. In the end, I still made a profit of $46 with this play

27 Jan 23: since we are now at 21 DTE of the Feb 17 expiration date, I am adjusting the position by rolling the wings out. I cannot roll complete condors, so I have to do that wing-by-wing. In this case, I am rolling out the challenged call side as a bear call spread to March 17 in the hope AAPL will go down again before then.

24 Jan 23: With all the upward rallies this week I have been rolling up the unchallenged put legs as high as possible to capture extra credit to mitigate any possible loss I will have to suffer with the call wing.

21 Jan 23: $25 in the green at 59% PoP. Short call leag close to -0.30 delta. I am taking some risk here by narrowing the iron condor wings. But I only have 6 days to 21 DTE (so effectively 26 Jan) and hope I will be able to get out with a small profit before AAPL earnings one week later (2 Feb) waves hit the market (and my position). 21 DTE action date (manage/close) next week anyway.

14 Jan 23: 16 days since opening and P/L still $34 in the green and PoP at 74% now and short call leg highest at -0.22 delta. The underlying is now $134.76.

7 Jan 23: 11 days since opening and P/L $34 in the green and PoP at 72% now and short call leg highest at -0.16 delta.

31 Dec 22: I added a Feb 17 iron condor to the bull put I already opened. As with all my iron condors a high volatility play. My general rules for iron condors are that the deltas of the individual legs should be around 20, IVR above 30, and ideally IV (implied volatility) higher than average HV (historical volatility). I do look at some technical indicators mainly to determine where to position the short strikes. So if I see an upward trend, I will move the put legs up towards the price of the underlying, and I will do the same with the call legs at the same time giving them more ‘cushion.’

Overall condor delta today at 4. Deltas of the legs today are still at or under 20. PoP at 66%.

Watch it! Earnings later in January! If I keep to my 21 DTE manage/exit rule, this should be no problem if by then I have reached my 60% profit goal.

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.

Rolled: Opened on 19 Dec: XLE Iron Condor Feb 17 73/75/96/98 for a $59 credit and rolled the 73/75 puts to 84/86 on Jan 24 for a $34 credit and rolled out and widened the 96/98 call wing to 95/100 Mar 17 for $107 credit and rolled and widened the 84/86 put wing to 78/83 for a $32 credit.

4 Feb 23: As long as I can get extra credits along the way to expiration I will do so. The Mar 17 iron condor 78/83/95/100 now shows a 61% PoP and is $66 in the green with now the short put at 0.34 delta since XLE went down in price to 85.96.

24 Jan 23: same story here as with iron condors: rallies up threatening call wings, so rolling up unchallenged put legs to capture credit.

21 Jan 23: 33 days since opening and $21 in the green now with PoP at 79%. The short call is still -0.22 delta.

14 Jan 23: 27 days since opening and $16 in the green now and PoP at 78% now, short call leg highest at -0.22 delta.

7 Jan 23: 20 days since opening and $12 in the green now and PoP at 74% now, short call leg highest at -0.20 delta.

31 Dec 22: $1 in the green and PoP at 68% now and short call leg highest at 23 delta

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 is slightly bullish, backtested positive.

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

28 Jan 23: 43 days open, IVR 6,7, PoP 57%, and down to $19 in the green.

21 Jan 23: 36 days open and 61% PoP, $32 in the green.

14 Jan 23: 29 days since opening and $40 in the green now and PoP at 64% now, short call leg at -0.50 delta. No dividend risk here, so I don’t have to worry too much if this leg goes ITM.

7 Jan 23: 23 days since opening and $24 in the green now and PoP at 58% now, short call leg at -0.45 delta. No dividend risk here, so I don’t have to worry too much if this leg goes ITM.

31 Dec 22: PoP up to 59% and $26 in the green.

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.

End-of-Week Active Positions Overview

Financials

Cash Balance 4 February 2023

Two weeks ago my P/L YTD shot up to close to $600 two weeks ago. But in the past two weeks, I saw it melting away like snow. And I ended up below $100. Mainly due to QQQ, SPY and SQ hitting new highs and causing call wings of iron condors to go deep ITM.

As explained above this was due to my not managing my positions correctly and in accordance with my exit rules.

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 am already increasing risk by widening spreads and picking higher deltas.
  • For a better-balanced portfolio allocation (based on VIX) and I am adding 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 am now also monitoring the beat-weighted delta of my positions and total portfolio; in periods like this, I need to manage it in such a way that it remains close to 0.
  • BUT MOST IMPORTANTLY: I SHALL ABIDE TO MY EXIT RULES FROM NOW ON!

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Market Sentiment 4 February 2023

Again, the market first went up this week. One of the reasons the stocks and bonds reversed course on Friday was because U.S. consumer inflation data showed prices softening in December.

Stocks fell Friday as a much stronger-than-expected jobs report worried some investors that the Federal Reserve would keep hiking interest rates. But still finish with weekly gains.

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.

  • The war between Russia and Ukraine is still raging on; nobody except Putin is happy with Germany.

2. VIX Index

  • Zero fear again this week (and month) as the CBOE Volatility index (VIX) is now at 18.33.
  • The VIX Index measures the level of the expected volatility of the S&P 500 Index over the next 30 days that is implied in the bid/ask quotations of SPX options. Thus, the VIX Index is a forward-looking measure, in contrast to realized (or actual) volatility, which measures the variability of historical (or known) prices.
  • 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

So my maximum portfolio capital allocation for short premium strategies should remain at 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 up to 83.49. Slightly up from next week.

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 reverses to finish the day lower, as WTI crude -$2.49 or 3.28% to settle $73.39 per barrel (off earlier highs $78)
  • Natural gas at lowest levels since December 2020, down -2.2% to $2.402 mln Btus.

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.

  • April gold tumbles -$54.20 or 2.8% to settle at $1,876.60 an ounce, falling a 3rd day in a row, dropping to more than a three-week low after stronger-than-expected U.S. jobs data raised fears that the Federal Reserve could keep hiking interest rates. 

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 gained over 1%, hitting a three-week high
  • Year-to-date Bitcoin’s price has expanded to ~$23,500, while these levels are still far below November 10, 2021, all-time high of $68,789, is lows around $16,500 to start the year in what has been a massive run higher for risk assets.

6. Bitcoin AND crypto

  • Better times for most crypto (and therefore also everything blockchain).
  • Bitcoin rises for the 16th time in the last 17 trading days, up roughly 29% YTD after a dismal 2022 campaign, still at 22950 from 22950 last week.

7. Yield Curves

  • Treasurys sold off on the blowout jobs report, with the two-year yield soaring 21 basis points to 4.29% and the benchmark 10-year note rising 14 basis points to 3.53% (the level it was at Wednesday ahead of the FOMC meeting).
  • The news, while positive in the sense that it means more people were working, raised concern among investors that the Federal Reserve may have to do more in terms of raising interest rates as it fights rapidly rising prices.

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 still 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).

  • University of Michigan Confidence Jan-Final sentiment at 64.9 from a preliminary reading of 64.6; index at 59.7 in prior month as the expectations index rose to 62.7 vs. 59.9 prior and current economic conditions index rose to 68.4 vs. 59.4 prior month.
  • Consumer sentiment (as per the UoM data) going up again after hitting its lowest level on lower gasoline prices and inflation expectations.
  • However, consumer sentiment still remains historically low, since concerns over the economy remain, with many consumers stepping up their savings to prepare for a potential recession.

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 0.90, which indicates less people are selling than buying and the market is moving towards being bearish again (?).

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. NASDAQ, 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.

NASDAQ, DJIA, SPX, IWM

  • The S&P 500 booked its fourth weekly gain in five weeks, up 1.6%, as investors bet inflation is headed lower.
  • The Nasdaq surged 3.3% for a fifth straight weekly advance thanks to strong earnings from some major tech companies
  • The Dow Jones average was the week’s outlier, falling 0.3%.

Major Stock Market Sectors

I also follow the major market sectors in Barchart.

  • Utility stocks (NYSEARCA:XLU) are Friday’s worst performing S&P sector, -2.8%, as investors sell fixed-income vehicles with yields rising after much stronger than expected U.S. non-farm payrolls data raised fears that the Federal Reserve could keep hiking interest rates.
  • S&P 500: down -1.04% from 0.67% up last week
28 January 2023
4 February 2023

Summary Market Sentiment

Bull market

Bullish

Neutral

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

Moving to neutral bullish/bearish market

Increased (positive/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

Earnings and Dividend Calendar

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

Major U.S. banks have kicked off the earnings season with investors set to focus sharply on credit card delinquencies, the level of bad loan provision, and the read on the mortgage industry.

Some more major stocks will report earnings next week.

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

Positions at Beginning Of the Coming Week

I now have 22 positions which I now consider to be around the average I need to have running to maximize my portfolio allocation at 2-3% positions sizes and 50% overall allocations.

My financial trading plan

I am now at below 50% buying power usage of which half is for iron condors and bull puts and which is below the 30% I am ‘allowed’ to use under my portfolio allocation rules based on VIX for such short premium strategies.

I want to have at least 30% in cash at all times, so can use 10% more in my account for emergencies or opportunities (so now 30% short premium and 30% debit/long 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 one more vertical spread or iron condor and a long position.

Rest of week: start looking at strategies involving buying bills or bonds for the remaining 10% 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.

And during the week I will monitor stocks coming out of earnings.

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.

My expectation (or rather: hope) is that this week’s volatility will increase.

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

$8,746.19
(was $10,902.36)

Buying Power/Net Liq

$10,587.19
(was $110,722.36)

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

30%

$3,176.16

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

30%

$3,176.16

Average Max Position Allocation (BP)

3% (changed from 4%)

$317.62

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 $440, 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.

Conclusion

I considered the first two weeks to be a good start to the year. Until last week, seeing that in one week about 60% of my P/L had been wiped out. It is still there somewhere in the form of unearned gains. But it is sobering to see how fast things can turn against you if you’re not paying attention to better balancing your portfolio.

To work on: I still need to get more mechanical and disciplined in entering and adjusting the positions and remembering why I (or the platform) close positions.

The same for exiting.

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