Entry 4 November 23: Iron Condors and Too-Well-Performing Underlyings

By: nic

I opened four iron condors with too-well-performing, high IVR underlyings (XLE, TLT, SPY, and QQQ), after closing my loss-making shorts in NIO and RIOT.

The XLE, QQQ, and SPY condors did so well that the call wings were quickly threatened. A bracket order closed the QQQ at 50%, and the SPY came close to my stop loss target of 100% loss and briefly went ITM.

So why do I allow 100% losses whereas my target is to stop losses at 50%? I seem to be using another rule that if the strategy is still close to 45 DTE, still showing more than 50% profit probability, and there are enough signals the underlying will move into the opposite direction, that I accept to double my stop loss target to 100%. I need to integrate this in my playbook.

Here my greeks as of last week:

Closing all shorts and opening condors that then started moving their call wings close to ITM, positions me as follows:


See below: I need to open new positions up to 20-25% of buying power.

Deltas are now negative and could be neutralized for instance by adding more long positions.

Negative vega means that the value of my options portfolio decreases when volatility increases and increases when volatility decreases.

How am I Doing Overall?

Still not too fine. I again lots some money this week. Up to August I was trading in what I called my ‘twilight zone’ of round $11.000, in which I had been stuck some time.

I still make many mistakes, and my trading discipline has improved, but it needs much more work.

What am I Reading?

And started reading another ‘must-read-for-options-traders’ book that will further help me in learning options trading: Options, Futures, and Other Derivatives, Global Edition by John Hull.  I have to pick it up again.

I am also now programming my trades in Python and still looking at automating my trading journal.

Condor flying

Table of Contents

Last 2 Weeks’ Options Trading

As from 5 August the VIX went from around 15 up to 21 in October and is now back at around 15 again.

I will follow again as much as possible the tastytrade rules (at 15% VIX, not more than 25% of my money into short premium strategies. Also, since it is the earnings period again, I limit as much as possible entering new trades unless they promise to be profitable earning trades.

I still have 3 open positions end of the week, all defined risk iron condors, and using around only 5% (!) of buying power. Unfortunately, finding short premium plays with low VIX is hard, so I will need again to look at long strategies.

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. New rule: only sparingly enter into debit spreads (especially bear puts!), and only do this when more than three signals (technical indicators) confirm this.
  4. Sell and buy options on liquid underlyings 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. Close the trade if 50% – 75% (max 100%) loss.
  9. Close the trade and realize profits at 50% -75% premium early in the option lifecycle (21-14 DTE)
  10. Close-out trades (ideally 14-21 DTE) before expiration (before strike price gets challenged just before expiration (high volatility and higher loss probability!).
  11. Re-invest the capital made free towards additional trades.
  12. Maximize the number of trades to allow the expected probabilities to play out (trade small, trade often).
  13. 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 max 4% of my portfolio should only be used for any given trade). 
  14. Keep an adequate amount of cash on hand (~40% in my case) to protect your portfolio against any major market downturns (i.e., pandemics, wars, recessions, etc). Cash also lets me buy stocks/long equity at heavily discounted valuations. ​

ENTRy Rules

  1. Iron condors: 8/8/16/16 – 10/10/20/20 delta
  2. Credit spreads: 10/30 delta
  3. Debit spreads: 40/60 – 50/55 delta
  4. Short puts: 30 delta
  5. Technical indicators:
    • RSI: oversold/overbought
    • Clear regression trend (bullish, bearish, neutral) with high r-factor (>90%)
    • Clear ADX, MACD, volume signals

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 (sparingly) 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, implied volatility tends to be low in equities as the VIX drops. Just like I take advantage of reversion to the mean when IV is high, I 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 that have high IV. Premium selling is where the majority of the statistical edge lies.

Opened Positions

Opened TLT Dec 15 Iron Condor 77/80/89/92 on 27 Oct for $105 credit

4 November 2023: the idea is to open short premium iron condor strategies at high IVR levels (and ideally >20 VIX) at around 70% PoP, 1/3 – 2/3 profit loss at least at three strikes wide so profit is >$100. Today the underlying price is coming dangerously close to the short call of the condor. P/L Open is negative, PoP is at 57%, P/L Open% at -4.8%, but still 41 days to go.

Opened XLE Dec 15 Iron Condor 75/78/90/93 on 27 Oct for $109 credit

4 November 2023: same principles as above, Today, the underlying price is still in the middle of the close to the short call leg and short put leg of the condor. P/L Open is positive, PoP is at 67%, P/L Open% at 10.1%, andstill 41 days to go.

Closed: Opened QQQ Dec 15 Iron Condor 318/321/371/374 on 27 Oct for $110 credit and closed on 3 Nov for $160 debit

4 November 2023: actually, this one went wrong when I was trying out bracket orders for iron condors. I forgot to change the stop loss trigger. But it was anyway going in the wrong direction and coming close to the 50% stop loss target. -$50 loss.

Opened SPY Dec 15 Iron Condor 380/383/435/438 on27 Oct for $101 credit

4 November 2023: same principles as above, Today, the underlying price is coming dangerously close to the short call of the condor (even for a brief period went ITM yesterday). P/L Open is negative (P/L Open %: -85.1%), PoP is at 51%, but still 41 days to go.

Running and Closed Positions

Closed: Opened SBUX Nov 17 Iron Condor 180/85/100/105 on 6 Oct for $133 credit and closed on 24 Oct for $125 debit

24 October 2023: closed play for $8 profit. Which is zero dues to costs for paying fees for options

21 October 2023: at $3 profit now with price still nicely in the middle, but earnings coming up in 2 weeks on 2 nov (and week later dividend), so needs to be watched!

Closed: Opened NIO Sep 15 Short Put 13 on 4 Aug for $65 credit, rolled on 21 Aug for $27 credit and again on 10 Oct for $2 credit and closed on 23 October for -$545 debit.

23 October 2023: closed for $451 loss. The main reason: didn’t monitor this play due to my move to another house. Lesson learned: close all positions before an event that disallows you to focus on your trades.

21 October 2023: at $-446 loss now

8 August 2023: at -$7 loss now

Closed: Opened RIOT Aug 18 Short Put 14 on 14 Jul for $62 credit and rolled on 25 Jul to Sep 15 and up to 15 for $77 credit, got assigned and sold the shares on 24 October for $1130 credit

23 October 2023: sold my RIOT shares. Total loss of this play: -$370. Same issue as above: no monitoring during my move.

21 October 2023: It says expired but actually it was assigned to me one week before expiry. I now hold 100 shares RIOT.

8 August 2023: at $7 loss now

Closed: Opened RIOT Aug 4 Short Put 15 on 14 Jul for $51 credit, rolled to Sep 1 on 17 Jul for $73 credit, to Sep 29 on 16 Aug down to 14.5 for $25 credit, and on 19 Sep down to 14 and to Nov 17 and closed on 24 Oct for -$345 debit

24 October 2023: closed at a -$386 loss. Same issue as above: no monitoring during my move.

21 October 2023: at $-366 loss now

8 August 2023: at $42 profit

End-of-Week Active Positions Overview

Financials

Cash Balance November 2023

I have to restart my work on automating the P&L overviews, so as soon as I am ready, I will here show the results.

Due to the low volatility and not being able to find enough plays, my trading is suboptimal; I am not making full use of my cash, optimizing my positions enough, etc . and I am still making mistakes in choosing the right directions and the right options strategies. Still looking for the edge!

The points I have to look at are:

  • My positions are generally placed on the safe side with low deltas, risk, and profit. I am already increasing risk by widening spreads and picking higher deltas.
  • For a better-balanced portfolio allocation (based on VIX), 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. But my account is, at this stage, really too small for this.
  • I now select positions with higher premiums than the commissions and fees I have to pay and the target profit I have set as a rule (50%).
  • I am also monitoring the beat-weighted delta of my positions and total portfolio; in periods like this, I need to manage it to remain close to 0. I am far away from achieving this.
  • BUT MOST IMPORTANTLY: I SHALL ABIDE BY MY ENTRY, ADJUSTMENT, AND EXIT RULES!

Find out more about the platform I love to use for my options trading:

If you like it as much as I do and want to open an account, click here:

Disclosure: for each referral I will get credits for items or cash to support this website! Thanks!

Market Sentiment 4 November 2023

1. Geopolitical Events and Economic Trends

A lot has happened in the past two months:

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.

  • Ukraine war still raging
  • War in Gaza/Israel continuing
  • GOP in US continuing to cause chaos

Stocks closed sharply higher Friday to extend a monster rally that saw the big three indexes sweep to their biggest weekly gains of the year, as investors grew more hopeful that the Federal Reserve’s interest rate hikes might have ended (Seeking Alpha)

Among the top stock market benchmarks, the Dow Jones index rallied 5% for its best weekly showing since October 2022, the S&P 500 jumped 5.8% and the Nasdaq Composite surged 6.6%, the strongest week for those indexes since November last year. 

I mostly use eOption’s Closing Bell emails, StockTwits, BarChart, and Seeking Alpha I receive daily as a source.

2. VIX Index

  • The CBOE Volatility index (VIX) is at 15 again.
  • 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.

If the market drops and the VIX goes up, the futures and options in the front month typically rise the most and more quickly than those in the back month.  And vice versa.

VIX for position sizing

So my maximum portfolio capital allocation for short premium strategies scan go to 25% of net liq again. At the end of this week, I have only 5% allocated.

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.

The VVIX/VIX Ratio

The higher the VVIX is, the higher the premiums are on the VIX options, everything else being equal.  If the VVIX spikes higher, it indicates traders are buying VIX options either as a hedge against or as a speculation for, a market sell-off.  The VVIX is telling us in such a case that the market is girding itself for some downside. And vice versa.

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.”

See more in this Tastyworks video.

It stands no at 82.83.

SKEW

Also, watch this tastylive video on how to use SKEW as an extra indicator in low volatility environments. The SKEW index measures the tail risk by using out-of-the-money SPX options.

Low volatility/high SKEW (>130) : danger, further reduce your trades! Since volatility is still relatively low, SKEW shouldn’t go up too much (negative P&L!).

It is now at 140.09.

3. Oil and Gas, Gold, Silver, and Copper (Metals & Mining)

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

  • Oil prices lagged with WTI crude down near 2-month lows, falling -$1.95 or 2.36% to settle at $80.51 per barrel (down about -6% on the week), while Brent crude futures settle at $84.89/bbl, down $1.96, 2.26% (also down about 6% on week), one of the few assets not rallying this week.
  • Gold prices benefitted from the roll in the US dollar and Treasury yields after struggling the first half of the week amid a flight out of “haven” assets and into riskier ones – but today was risk on across the board. Gold finished higher $5.70 to settle at $1,999.20 an ounce (off earlier highs $2,011.90 an ounce) and posted a modest beat the last 5-days.

4. USD and Other Currencies, Bitcoin and Crypto

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. I also look at crypto trends, especially Bitcoin

  • The U.S. dollar index (DXY) tumbled this week, falling another 1% today to move below 1.05 (off weekly highs above 107 on Wednesday). 
  • Bitcoin outperformed, topping $30K earlier.

5. Yield Curves

  • Treasury prices soar as yields tumble as the 10-year fell -11.1 bps on day to 4.557% and dropped 28.9 bps on the week (after hitting mid-week highs above 4.93%); yields have fallen 4 straight days.
  • Bond yields tumbled this week, with the 10-year Treasury yield sliding to 4.57% after touching 5% in recent weeks.
  • The shorter-end more rate-sensitive 2-year yield was down 11 basis points to 4.86%.

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. This is now becoming weaker.

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

  • The separation between the two instruments less and less predicting recession (inverse 10Y lower than 2Y, but see the gap closing again and both going down!).

“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 (PPI), Consumer Price Index (CPI), Consumer Sentiment Index (CSI)

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).

  • PPI
  • 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.

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).

  • CSI University of Michigan sentiment 

7. Put/Call Ratio

  • Moving sideways
  • 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.
  • Moving sideways if the Put/call Ratio oscillates between 0.5 and 1.0.
  • 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.
  • The put/call ratio went under 1.0, which indicates bullish movement.

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.

8. 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

  • Stock markets surged again on Friday, making it a 5th straight day of gains in what has been an amazing week for major averages.
  • The S&P 500 advanced about 6% this week, the Nasdaq +6.6%, the Dow +5% and the Russell 2000 (which underperformed in October), rose 7.8%.
  • It was their best week of the year, pushing the S&P 500 (SPX) back above its 200-day MA resistance midweek (4,245) and its 50-day MA today (4,347) after hitting lows of 4,132 on Monday morning.
3 November 2023 closing prices
21 October closing prices

Major Stock Market Sectors

I also follow the major market sectors in Barchart.

  • All red
21 October 2023
4 November 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. Commodities

Oil & gas (XOP), gold (GLD), silver SLV), and copper (COPX) stable

Minor market issues, minor supply chain issues

National events, market issues

International supply chain interruptions, high oil & gas prices

International conflicts involving US, Russia or China, and other main producing countries

4. Currencies & Crypto

Very weak dollar (DXY) versus other currencies, crypto (BTCUSD) crashing)

Weak dollar, Bitcoin

Neither weak/nor strong dollar, Bitcoin

Strong dollar, Bitcoin

Very strong dollar, Bitcoin

5. US Yield Curve s(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), Consumer Price Index (CPI), Consumer Sentiment Index (CSI)

Lowest price level

High consumer confidence

Price level higher than normal

Consumer confidence is less high

Price levels rising fast

Consumer confidence going up and down from very high or up from very low

The price level is very high

Low consumer confidence

Highest price level

7. 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)

8. 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

  • More Powell, oil, jobs, and GDPs UK.

Earnings and Dividend Calendar

In general, I tend to avoid trading around earnings or dividends (and other major events within 30 days of opening a position), although I once in a while trade earnings of highly volatile tech stocks.

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 two undefined risk positions and 100 shares I want to get rid of.

I am now at 26% buying power usage of which most is for short premium strategies. I cn go to 35% for undefined positions. I have set the maximum overall allocation at 50% (so can add 15% defined risk long strategies).

I have told myself I can exceptionally go up to 70% but I want to have at least a minimum of 30% in cash at all times, so can use 20% more in my account for emergencies or opportunities (so now 35% short premium and 15% debit/long strategies and 20% for emergencies). Until now I never went above 40%.

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 the week: start looking at strategies involving buying bills or bonds for the remaining 10% of the 50%.

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

Underlyings Selected for Trading This Week

And during the week, I will monitor stocks going into 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 again.

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 still applies to my whole portfolio.

However, with VIX going down to under 15, I should consider using a higher % 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%

I must use Buying Power (NetLiq) to allocate portfolio capital. I will use average, rounded numbers from now on.

Cash Balance

$10.799.33
(was $10.438.79 )

Buying Power/Net Liq

$10,406.32
(was $10,130.79 )

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

35%

$3,500 (rounded)

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

15%

$2,300 (rounded)

Average Max Position Allocation (BP)

3%

$350 (rounded)

I am now under-allocated for defined short premium, so I must add new defined credit and some long debit position (s).

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 3% and close to $340, I need to look for higher priced underlyings or increase 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 am happy with Tastutrade’s bracket order for iron condors etc. This may help me be more disciplined in closing losing positions.

With each trade, I need to detail the time, make a screenshot of the market on the relevant timeframes, detail my reasoning for entering, the reason for stop placement, the reason for taking profit level, etc. So when, in a few months, I look over my trades, I begin to notice patterns in my losing trades and winning trades. Over time I can fine-tune your edge.

The same for exiting. The focus is now on learning Python and quant finance to further improve my options trading.

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