Entry 13 Nov 22: Good News and Bad News

By: nic

Options Trading Journal Entry 13 November 2022

This week there was good news and bad news. Both impacted my positions considerably.

Better than expected CPI figures and softening of inflation in the US moved the markets upwards, resulting in challenged call legs in my iron condors. The US mid-term elections didn’t have a big influence it seems.

Bad news coming from Brazil tanked EWZ and my bear call is being challenged.

VIX is under 23, so I need to adjust my portfolio allocation for short premium strategies.

I, therefore, still need to look also at adding long positions ( including debit spreads) if I want to maximize my portfolio allocation up to 40% (based on the portfolio rule I imposed on myself).

Due to the fact that I doubled the cash in my account two weeks ago, I still have some work to do to find the right plays.

This time, I am again looking at a negative week P/L.

I am now actively using all the rules and tools I have to select underlyings, construct trades, and use technical analysis to determine entry points for my options trades.

During the week, I follow the stocks (and other underlyings) in TradingView (technical analysis) and StockInvest.us, TradingView (technical analysis), and StockInvest.us. Every day I receive Google Alerts.

And I test all positions in Tastyworks, backtested them in Tastytrading’s Lookback backtesting app, and entered them during the week in the platform.

I am still working on my blog on entry rules in which the options greek delta plays a very important role.

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 174, reading about bear call strategies.

Brasil
Brasil

Table of Contents

Last Week’s Options Trading

It was a busy week, monitoring and managing my positions. After the mid-term election there as a (bearish?) rally which impacted some of my positions. Sometimes positively but in one case (QQQ) really negatively.

Bad news from Brasil pushed my EWZ position into ITM for some hours. Now again OTM but still very close

Status running Active Positions

EWZ Iron Condor 16 Dec 24/27/38/41 Opened October 20 for $82 credit

The third EWZ position I opened with a wider spread and, therefore, higher credit, was pushed back to below 10% profit, after having been close to 50% profit last week.

It is coming closer to the put leg short strike (27), So I have set alerts if the stock price goes below 30.

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.

IWM Iron Condor 18 Nov 146/149/190/193 Opened on Sep 30 for $76 credit (rolled to 162/165/190/193 on Oct 27 for extra $30 credit)

My second higher volatility, higher premium IWM play is still green, but the position is still far from the 50% profit target.

Also, this position is getting close to the call leg of the iron condor and needs monitoring.

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

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 is going to create.

Lately, RIOT had been relatively stable with low IVRs compared to early this year. But this week, with Bitcoin going down fast, news about FTX going into liquidation and other crypto companies going bad, RIOT tanked to $4.90 on Wednesday. So this position is ITM and – as I said before – may next week be assigned to me. At the close of the week RIOT was at $5.34.

Anyway, I already have a stock position in another account, and I don’t also mind having a stock position in my Tastyworks to do some wheel, secured put, and covered call experiments.

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 Short Put Credit Spread 16 Dec 19/21 Opened on Oct 27 for credit of $51

The FXI position I opened was initially going completely in the wrong direction and last week was in red territory (P/L open of -$19). So much even that it came close to the close at 50% loss target I set myself.

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.

FXI totally recovered, and this position is now above my 55% profit target (at 66%), so I should not wait too long until the end of next week to take profit.

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

In addition to the bull put I already opened, mainly due to the high volatility of FXI, I decided to open an iron condor which is faring less well and shows a small -$3 P/L Open loss today. This is mainly due to he fact that the FXI stock price (up to over 25) is coming closer to the short strike of the call leg (27).

So to be monitored!

I read an interesting Seeking Alpha article on FXI and the emerging market thesis. Here a summary

The emerging market thesis

The investment in iShares China Large-Cap ETF has been under the emerging market thesis. Specifically, since the earlier 1980s, the developed markets, led by the US, started to outsource some production to “emerging markets”.

Scared by the high inflation of the 1970s, the developed markets realized the potential to tap into an abundant cheap labor force and other resources to 1) lower inflation and 2) boost the exports to these countries. This started the most recent wave of globalization.

The emerging markets investment thesis was based on the expectations that these emerging markets would grow the domestic middle class over time and expand the domestic consumption, which would benefit the domestic companies. Further, the expectations were that the global manufacturers from these emerging markets would also grow in size as the globalization unfolds.

China

China has been the major beneficiary of globalization, reaping the most benefits from outsourcing and significantly grew the domestic economy.

All economic expectations with respect to China came true. As an illustration, this is China Urban Households Disposable Income per Capita, since 1980. The Chinese consumer significantly expanded the purchasing power since 1980s.

However, China did not evolve politically. China is still a 1-party system, with the Communist Party in total control.

Further, China got too successful and too strong. In 1980s, China was producing and exporting a low-quality Shanghai sports shoes to PE classes in some developed countries. Now, China is getting competitive in producing the highest-level technology products. China became technologically advanced enough to become the real threat to the United States.

Thus, the peak in globalization was reached possibly in 2008, and since the globalization has been reversing, with the accelerated de-globalization (and the China-US decoupling) since the Trump administration imposed the trade tariffs on China in 2017, and especially after the COVID-19 pandemic, which in fact started in China.

The ultimate act of de-globalization has been unfolding in 2022 with the Russian invasion of Ukraine, and the China’s apparent support for Russia.

As the real-time evidence, the Biden administration is continuing with the Trump administration trade tariffs, even escalating the technology war with the further semiconductors export bans, and even starting the process of delisting the Chinese stocks from the US exchanges.

In short, the US and China are in the economic war, which is only escalating, and there is no clear end to it with the 2024 elections approaching and the possible return of the Trump administration. Also, the US and China are on the opposing sides of the real war, with the issue of Taiwan heating up as well. There is no clear end to the geopolitical issue between the US and China, or even a hint of minor de-escalation.

The Chinese stocks, as represented by the iShares China Large-Cap ETF, are correctly reflecting this reality. The turnaround, if the ever happens, must be supported with the major policy change from both sides, and the probability of that is really 0%.

China will eventually relax the COVID-19 restrictions, but this is not the policy change needed to fundamentally justify the investment in iShares China Large-Cap ETF.

The US Dollar

The emerging market thesis is based on the prediction that emerging markets would grow at a much higher rate compared to the US growth, which would cause the US Dollar (UUP) to weaken. In fact, at the height of FXI bubble in 2008, the Euro (FXE) was trading at 1.60. Now, the Euro is below 1, and this also reflects de-globalization, which at this stage implies a relatively stronger US economy and a stronger US dollar.

FXI

The market positing and sentiment in FXI reflects the gloomy outlook. In fact, the short interest in FXI is very high, with 25% of shares outstanding is sold short. Chinese stocks also have heavy weight in the iShares MSCI Emerging Markets ETF (EEM), which also has 23% of the shares sold short.

FXI jumped almost 8% on Nov 4th, due to the rumors of the China’s COVID-19 reopening. The same rumor appeared few days earlier. At this point, this is likely only a short-covering rally.

Short-term traders could attempt to time the short squeeze in FXI, but investors should stay away.

The iShares China Large-Cap ETF is cheap, but at this point this is a value trap. The turnaround in FXI must be supported with the policy turn favoring re-globalization, which has a 0% probability right now. The rumor of COVID-19 reopening in China is a short-squeeze trigger. Even when China confirms the reopening plans, it could extend the bear market rally, until the unfavorable fundamentals overweight.

QQQ Iron Condor 16 Dec 244/248/306/310 Opened November 1 for $117 credit

Slightly in the green and I really need to start looking at rolling up the 244/248 put strikes to get more credit. I will review this later this month when we get close to expiry.

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

This one was open last week, three days later. This is a weekly, so I told myself to monitor it closely.

Tastytrade some time ago released a video on weeklies versus monthlies, which actually shows weeklies have a lower chance to be profitable, compared to standard monthly options. See also the article below.

Well, I probably should have taken Tasty’s advise, because this postion is now killing me:

  • The call leg is going further and further ITM,
  • I am at a negative P/L of around $133 (so 100% of credit which is twice what I set myself as rule),
  • the QQQ price seems to be breaking through the resistance (which is around 285) and
  • the PoP (probabbility of profit is now at 38% which is getting cose to the 33% I have set myself.

So I really need to start acting soon!

How did this happen?

Firstly, I believe that was much too optimistic when I selected this weekly position in how QQQ would move. I didn’t expect big moves. Moreover, based on my own analysis and market sentiment, I expected it to go down, rather than up!

But then we got the mid-term election results, the CPI figures, and more positive news, and we ended up with a rally!

A massive green day on Thursday touching the old ceiling/resistance before on QQQ.

However, inflation just came in at 7.7% which, although better than 8.2%, which is still not good, and corporate earnings are still going to feel the hurt. Things are going to get worse before they get better economically, is the opinion of many marketeers.

So is what happened with QQQ only a bounce in a downtrend. We still not observe any serious widespread accumulation patterns to make it really  bullish ?

FCX Iron Condor 16 Dec 28/30/43/45 Opened November 4 for $53 credit

And FCX is also back again since it also had a high volatility score which makes opening iron condors attractive. Slightly in the green, but also here a stock price moving up to the short strike of the call.

FCX

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.

Positions Opened Last week

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

I opened this on Monday when all things still looked good for EWZ. On Thursday, the new president of Brazil, Lula, however, caused EWZ to tank and go slightly ITM, after he announced that the macro-economic sitiation in Brasil doesn’t look good. On Friday, it recovered, but I need to closely monitor this.

I can do a few things:

  • Nothing and see where the stock goes
  • Roll the bear call to a later expiration date (and get more credit which will improve break-even)
  • Consider adding a bear call spread to create an iron condor or iron butterfly
  • Close it, even if for no or a small profit.

AMZN Bull Put Spread 81/84 Opened on Nov 8 for $77 Credit

After the earnings AMZN went down. This week it started to recover and therefore my bull put spread is showing a 70% profit now, which is 15% above my target. I need to take this profit next week.

AMZN Iron Condor 83/85/112/114 Opened on Nov 11 for $54 Credit

I opened this on Friday based on the increased volatility of AMZN , no P/L Open ye to report (so $0).

SPY Iron Condor 365/367/422/424 Opened on Nov 11 for $60 Credit

Same here for the SPY

Positions Rolled or Closed Last Week

IWM Iron Condor 25 Nov (W) 150/152/190/192 Opened on Oct 14 for $53 credit

Closed the position on Wednesday for a profit (ex-commissions) of $34 (so 64%, which is well above my (new) 55% profit target.

IWM Iron Condor 18 Nov (W) 162/165/190/193 call leg 190/193 Rolled to 16 Dec on Nov 11 for $35 credit

Rolled the call leg of the iron condor for a profit (ex-commissions) of $34 .

Options Strategies Count Summary

I will, from now on, also add rolled positions, since it actually means closing one and opening another one.

Defined Risk

Week 22 October – 29 October

YTD

Bull Put Spread (credit)

1

2

Bear Call Spread (credit)

1

2

Bear Put Spread (debit)

0

0

Bull Call Spread (debit)

0

1

Short Iron Condor (incl rolled positions)

1

17

Undefined Risk

Short Option (including rolled RIOT)

0

2

Short Straddle

0

0

Short Strangle

0

0

End-of-Week Active Positions Overview

Market Sentiment 12 November 2022

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

I mostly use eOption’s Closing Bell emails I receive daily as a source.

It’s been a roller coaster few days. After a big sell-off on Wednesday, there was a HUGE reversal in all markets on Thursday. 

The US Tech 100 was up nearly 7%, the US 500 nearly 5% and the Germany 40 index by nearly 4%. The Wallstreet 30 index was up 1,000 points – the biggest one-day gain since the pandemic.

This was all because of the US inflation report came in lower than expected, with the lowest annual increase since January. There is an expectation that this may cause the Fed to slow the pace of interest rate hikes but time will tell.

The US dollar tanked on the announcement helping currencies such as the euro and the British pound to surge higher. The US dollar has been one of the best-performing markets this year but has now started to unwind causing reversals in many other asset classes too.

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.

  • President Lula of Brasil didn’t make investors happy with bad macro-economic news and higher inflation reports (so EWZ tanked)
  • China eased pandemic controls, as the country’s leaders seek to lessen the pain of a stringent zero-Covid policy that has exacted a heavy economic toll and stoked rising public resentment – WSJ
  • U.S. stocks scored their strongest week since June, as a report on Thursday that showed slowing inflation raised hopes that the Federal Reserve might pull back its policy of aggressive interest rate hikes.

2. VIX Index

  • The CBOE Volatility Index (^VIX) — Wall Street’s “fear gauge” — now moves further down to around 23 (22.52 today) after surpassing 33 in the last weeks (the highest volatility since June of this year).
  • 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 23, so my maximum portfolio capital allocation for short premium strategies is 35% of net liq.

See also on this subject this Tastytrade video.

VIX

< 15

15-19

20-29

30-40

>40

Volatility

Lowest volatility, all comfortable

Market in ‘lull’ mode

Volatility high

Volatility very high

Volatility and fear levels highest

Maximum portfolio capital allocation

25%

30%

35%

40%

50%

Volatility and the VIX are significant in how I size positions and portfolio allocation. Since my focus is on short premium trading, I must balance exposure to substantial losses and reaching sufficient occurrences.

In 2022 the VVIX Index (VIX Volatility Index) has also traded within a fairly reasonable range (roughly between 83 and 150). The long-term average is 86, and the VVIX is mean-reverting.

The VVIX is nicknamed the “VIX of VIX” because it is calculated using the implied volatility of ATM and OTM options in the VIX itself, using the same calculation method as VIX. The index measures the “volatility of volatility, or the “vol of vol.”

Today, the VVIX went up to 85 from around 79, which is close tothe long-term average of 86 and the 83-150 range it has been trading at in the past period.

The VVIX/VIX Ratio

See more in this Tastyworks video.

3. Oil and Gas

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

  • Oil prices jump with other commodity prices, as WTI crude gains $2.49 or 2.9% to settle at $88.96 per barrel but finished the week lows -3.9%. Crude futures and base metals extended the gains seen overnight which were sparked by China’s COVID update, after health authorities eased some of the country’s heavy COVID curbs.
  • Natural gas prices erase earlier gains and end the session 5.8% lower at $5.879/MMBtu – for the week, gas falls by 8.1%.

4. Gold, Silver, and Copper (Metals & Mining)

To understand the market sentiment, I look at the following sectors: precious metals and mining due to their massive impact on the global economy.

  •  Gold prices rise for the 5th time in last 6-session, gaining $15.70 or 0.9% to settle at $1,769.40 an ounce, a big beneficiary of the lower dollar today/this week (rises around 5.5% on the week, and silver over 4%). Prices for the precious metal got a boost as the U.S. dollar fell to a more than two-month low on the back of the October consumer price index data released Thursday, which fed expectations that the Federal Reserve may slow the pace of interest-rate hikes.

5. Yield Curves

  • U.S. Treasury yields tumbled, with the benchmark 10-year yield plunging to 3.82% after finishing last week at 4.16%.
  • October’s Treasury yield-curve inversion is warning darker days are coming to Wall Street and the Dow Industrials.
  • Durable stock market bottoms take place at the tail end of recessions and/or when interest rates are falling quickly. So this is not one of them.

Understanding yield curves also adds to better reading the market sentiment.

“A yield curve is a line that plots bonds’ yields (interest rates) having equal credit quality but differing maturity dates. The yield curve’s slope gives an idea of future interest rate changes and economic activity.

There are three main yield curve shapes: regular (upward-sloping curve), inverted (downward-sloping curve), and flat. Upward sloping (standard yield curves) is where longer-term bonds have higher yields than short-term ones. 

Standard curves point to economic expansion, and downward-sloping (inverted) curves point to economic recession.

Yield curve rates are published on the Treasury’s website each trading day.”

Source: Investopedia

i. The 10-Year Treasury Constant Maturity minus 3-Month Treasury Constant Maturity Yield Curve

The yield curve (T10Y3M) compares the 10-year with the 3-month U.S. Treasury bond yield. It gives insight into bank profitability, which is correlated with economic activity. Historically, the yield curve has been a reliable predictor of economic recessions.

An inverted yield curve has been a good indicator of an economic slowdown ahead. A 10-year-3-month treasury spread approaching 0 signifies a “flattening” yield curve. Furthermore, a negative 10-year-3-month spread has historically been viewed as a precursor or predictor of a recessionary period.

  • For some time now, the indicator has been predicting a recession.

ii. The 2-Year/10-Year Yield Curve

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

“An inverted yield curve can be an important economic indicator and a likely precursor to a recession. 

When the curve inverts, the longer-dated bond (I am using the 10-year) will offer a lower annual yield than a short-dated bond (I am using the 2-year). This means that investors have bid up the prices on longer-dated bonds to the point where they yield less than short-dated bonds.

An inverted yield curve results from investor concerns about the economy and the stock market. History shows that investors tend to be right about economic weakness on the horizon when the yield curve is inverted. Since WWII, every recession has been preceded by a yield curve inversion.

Recessions don’t start immediately after the yield curve inverts, however. The inversion tends to precede the recession by 6 to 18 months.”

Source: SeekingAlpha

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, prices could trend higher, with inflation on the rise.

  • The U.S. Labor Department published new Consumer Price Index (CPI) data on Thursday, and lower-than-anticipated inflation in October has helped spur a dramatic uptick in bullish momentum for the market at large.
  • The CPI rose 0.4% on a sequential basis and 7.7% year over year, while economists were expecting a 0.6% sequential increase and a 7.9% increase compared to October 2021. The better-than-expected data has investors pouring back into stocks.

8. 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) hits lowest level since June as fear of recession looms.
  • University of Michigan surveys of consumers 1-year inflation outlook prelim November 5.1% vs final October 5.0% and the 5-year inflation outlook prelim November 3.0% vs final October 2.9.
  • The headline University of Michigan surveys of consumers sentiment prelim Nov 54.7 vs. consensus 59.5 and final Oct 59.9; current conditions index prelim Nov 57.8 vs final Oct 65.6 and expectations index prelim Nov 52.7 vs final Oct 56.2.

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 1.0.
  • The put/call ratio went down to 0.76, which indicates a much higher number of people are selling and 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.

10. 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 S&P 500 surged 5.9%, while the Nasdaq Composite soared 8.1% for the week as investors shook off a drop in cryptocurrencies to snap up oversold tech shares, and the Dow Jones average added 4.1%

Major Stock Market Sectors

  • Consumer Discretionary (XLY), Healthcare (XLV) and Utilities (XLU) led the laggards lower for much of Friday. 
  • Materials (XLB) paced the gainers with more than a 3% move higher
  • Financials (XLF), Energy (XLE) and Industrials (XLI) enjoyed more modest gains. 
  • Friday’s results continue the recent trend of mixed results with money mostly just moving back and forth across sector groups, especially with earnings having been more a tale of extremes this quarter than other recent periods.

I also follow the major market sectors in Barchart.

  • Every sector was green again.
  • S&P 500 Index up 1.36%
Major Sectors 6 November 2022
Major Sectors 13 Nov 2022

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 went further down from 110.788 to 106.416 today.
  • Not since December 2002 has the value of the euro dipped below the US dollar, but that’s exactly what it did over summer and into autumn 2022. For the first time in 20 years, economists can now talk about parity, the situation where the euro is equal in value to the US dollar. However, the Euro is up about 1% above 1.03 today.
  • The dollar falls 1.6% vs. yen to 138.65;
  • Sterling back above 1.18 – down 5.5% in 6-days. 

12. Bitcoin AND crypto

  • Bad times for everything crypto (and therefore also everything blockchain)
  • Bitcoin went considerably down to 16818 today.
  • One of the biggest stories of the week was the collapse of FTX International.

Summary Market Sentiment 1 October 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 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 or other cryptos or companies collapse

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

  • We will hopefully get to know who won the senate. The consensus expectation is that a divided government between the White House and Congress will lead to more political gridlock and a potential slowdown for some of President Biden’s agenda. Historians note the stock market has outperformed with a divided government over the returns generated in the years following the same party controlling the Senate, the House, and the Presidency. Analysts warn that a scenario that could rattle the market would be any lack of clarity with regard to Senate control if results are contested. (Source: SeekingAlpha)

Earnings and Dividend Calendar

Earnings season is over. In addition, and there are some dividend pay-outs upcoming. I tend to stay away from underlying having earnings or dividends within 30 days.

The first dividends are in December for GDX.

Financials

Cash Balance 13 November

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 again didn’t really help. I added to my cash balance, but my unrealized gain/loss also went up considerably due to what happened on Thursday (stock rally).

Cash Balance 13/11/2022

But 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 40% based on VIX today, but on average, I only reach half of that); also, when I do my financial calculations, I see now that 40% at risk should be minimum to reach goals, or I have to move faster to undefined risk set-ups.
  • 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 need to start looking at adding short straddles and strangles 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.

I added extra funds to my account so that I can trade with higher premiums while still following my rules. Or a combination thereof.

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 10 positions: in SPY, FCX, FXI (2x), QQQ (2x), RIOT, EWZ (2x), and IWM (1x).

I am now at 28.8% buying power, closer to my target of 40%.

With a VIX of around 23, my maximum portfolio capital allocation for short premium strategies is 35% of net liq. All my strategies up to date are short premium.

This means I can add up to a max 7.2% this week with other short premium strategies ($727). The remaining 5% must be filled with a long options strategy.

Goals and Schedule for this week

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

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.

I added 5 stocks with lower (<40) IVR/volatility since I want to true out some long positions and debit spreads: Uber, PINS, T, PYPL and C.

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 25, 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

$11,142.76

Buying Power/Net Liq

$10,095.76

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

35%

$3.533,52

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

5%

$504,79

Average Max Position Allocation (BP)

3%

$302,87

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.

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.

Option Positions in Play

Vertical Bull Put Credit Spread

FXI Bull Put Credit Spread 16 Dec 19/21 Opened on Oct 27 at $51 credit

Delta’s (short/long): 32/16 and backtested

AMZN Bull Put Credit Spread 16 Dec 81/84 Opened on 8 Nov

EWZ Bull Put Credit Spread 26/30 Opened on 7 Nov

Delta’s (short long: 17/8 and backtested

Vertical Bear Call Credit Spread

None

Vertical Bull Call Debit Spread

None

Vertical Bear Put Debit Spread

None

Short Iron Condors

IWM Iron Condor 18 Nov 162-165-190-193 Opened on 30 September and rolled on 27 October

See above

EWZ Iron Condor 16 Dec 24/27/38/41 Opened October 21

See above

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

QQQ Iron Condor 16 Dec 244/248/306/310 Opened November 1

See above

QQQ Iron Condor 2 Dec (W) 238/242/280/284 Opened November 4

See above

FCX Iron Condor 16 Dec 28/30/43/45 Opened November 4

See above

SPY Iron Condor 16 Dec 365/367/422/424 Opened 11 Nov

See above

AMZN Iron Condor 16 Dec 83/85/112/114 Opened 11 Nov

Delta’s: Put (short/long) 17/16 and Call (short/long) 22/12. Tested in Tastytrade’s lookback.

Naked Put

RIOT Short Put 28 Oct (W) 5 Opened on Oct 14 and rolled to 5.5

See above

Short Straddles

None

Other Strategies

None

Conclusion

Opening positions is going better now, but I need to continue optimizing portfolio allocation and position size. Moreover, I shouldn’t too much revert to weeklies to achieve my portfolio allocation goals is what I learnt this week with my QQQ 2 December position.

Leave a Comment