Entry 5 August 23: Limiting the Number of Plays

By: nic

In the past four weeks, I have been limiting the number of plays and again have been winning; I have recovered my losses since I started trading options last year.

Two months ago, I started to apply the rules I set up for myself more strictly. With tastylive’s lookback engine, I backtested at different time periods (all-time, six years, YTD) my list of highly liquid, narrow bid-ask underlyings from different sectors (now over 20): AAPL, AMZN, BABA, BAC, C, CSCO, DIA, DIS, EEM, EWZ, GLD, GOOGL, IWM, KRE, MRK, MRVL, MSFT, QQQ, SBUX, SLV, SPY, TLT, TSLA, UBER.

In the past four weeks, I traded with only around ten underlyings; in the past two weeks, this went down to no more than 5. I now have three positions in two underlyings open (NIO and RIOT) at 32.7% buying power usage. In addition, I added more undefined risk plays and extended my BPR risk to 30% of my portfolio.

In the pst month, I mainly stuck to short premium strategies: short puts, credit spreads, and iron condors, and I did some earnings plays with iron condors again. The next play I need to check out is the ratio spread.

Since they are all short puts, the delta beta and theta are positive.

I now have a positive portfolio delta beta, earning me $6 per day (theta) if nothing changes.

Negative vega means that the value of my options portfolio decreases when volatility increases and increases when volatility decreases. So I have to closely watch the VIX (still very low).

How am I Doing Overall?

I seem to have found a way to start leaving the ‘twilight zone’ around $11.000, in which I have been stuck sometime now. However, I should by now have been comfortably going towards $13.000, which is still far away.

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

I am now at a $ 1,359.33 realized gain (up over $200 since four weeks ago) and a $1387.33 P/L YTD, and I have a $28 unrealized gain.

Considering commissions and fees, I am now at $832.25 YTD. So , I am still far from my financial plan’s goals, which I may need to revisit. I am more and more realizing that to reach my goal of adding $7000 this year, I would need $100.000 to trade with (9 times more than what I have now put into the game)!

What am I Reading?

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

Struggling to the top
Still a long way to go

Table of Contents

Last Week’s Options Trading

The VIX is finally up again, after hovering a long time around 13/14, and went up to 17 at the end of the week. So I should be able to find more short premium strategies. I follow as much as possible the tastytrade rules (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 only have 3 (!) open positions end of the week, all undefined risk short puts, therefore using around 32.7% (!) of buying power. I still don’t feel comfortable about where the market is going.

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 NIO Sep 15 Short Put 13 on 4 Aug for $65 credit

8 August 2023: at $7 loss now

Closed: Opened TSLA Iron Condor Earnings Play 270/275/320/325 on 19 July for $172 credit and closed on 20 July for $160 debit

20 July 2023: didn’t do exactly what I wanted it to do, but still squeezed net $10 bucks out of it

Closed: Opened DIS Aug 18 Bull Put 85/50 on 17 July for $175 credit and closed on 28 July for $160 debit

26 July 2023: closed for $15 profit

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

8 August 2023: at $7 loss now

Opened RIOT Aug 4 Short Put 15 on 14 Jul for $51 credit, rolled to Sep 1 for $72 credit

8 August 2023: at $42 profit

Closed: Opened PLTR Aug 25 Short Put 14.5 on 12 July for $55 credit and closed on 19 July for $22 debit

17 July 2023: closed for $22 profit

Closed: Opened KRE Aug 25 Bull Call 43.5/45 on 14 July for $70 debit and closed on 19 July for $40 debit

19 July: closed for $33 profit (60%)

Running and Closed Positions

Closed: Opened SOFI Aug 18 Short Put on 7 July for $30 credit and closed on 17 July for $12 debit

17 July 2023: closed for $18 profit

8 July 2023: slightly in the red.

Closed: Opened GLD Aug 18 Bull Call 178/182 for $190 debit and closed on 18 Jul for $285

18 July 2023: nice winner (50%)

8 July 2023: Aug 18 Bull Call; now slightly in the red.

Closed: Opened MRK Aug 18 Bull Put 110/105 on 7 Jul for $185 credit and closed on 17 Jul for $280

17 July 2023: loser, absolutely didn’t do what I wanted to do (go up).

8 July 2023: in the green with $5

Expired: Opened: RIOT Jul 21 12 Long Put on 7 Jul for $20 debit, and expired

7 July 2023: expired so $20 loss

8 July 2023: This really is a bet that RIOT will come down after its massive rise in gthe past days. Friday already looked promising. $ 7 in the red now.

Closed: Opened MSFT Jul 21 317.5/322.5/350/355 Iron Condor on 27 Jun for $172 credit , rolled calls out to Jul 28 on 3 Jul and puts out to Jul 26 and up to 320/325, rolled calls out to Aug 18 on 7 Jul and closed on 18 July for $157 loss

8 August 2023: Finally, I closed this down after recouping the loss I had accumulated over time due to MSFT going down and breaking through my call wings. This one proves for me that you can continue to manage and roll, but in the end, the conclusion is you had to follow the rules and close at a similar loss much earlier (which would have freed money for other opportunities).

8 July 2023: Due to all rolling, and despite attempts to roll alos the put wing to Aug 18, I now have two spreads at different dates. Overall still in the green ($6)

End-of-Week Active Positions Overview

Financials

Cash Balance AUGUST 2023

I am 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 8 August 2023

This is what I said on June 24: stocks fell on Friday to wrap up their worst week since the collapse of the Silicon Valley Bank in March, indicating the market’s three-month rally may have ended. Well, that didn’t happen, did it? Or is it still to happen? The last days don’t look really good and tech stocks like MSFT have started to go down. So, time to look at Market Sentiment again!

Major averages slumped late day on Froday following a further deterioration in shares of Apple (AAPL) after earnings last night left shares weak, dragging broader averages down. Stock prices ended the week lower, capped by news that the United States had its top rating cut by Fitch mid-week to AA+ from AAA which weighed on market sentiment.

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; grain supply again under attack by Russians
  • Trump indicted.
  • United States had its top rating cut by Fitch mid-week to AA+ from AAA,

2. VIX Index

  • The CBOE Volatility index (VIX) is up to 17 again. Is the market now finally giving up on the 2023 rally and realizing the dire straits we are still in?.
  • 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 30% of net liq again. At the end of this week, I have over 30% allocated. with one NIO and two RIOT short puts,

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 close to 100, so up.

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.”

The VVIX/VIX Ratio

See more in this Tastyworks video.

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

It is now at 153.35.

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 extended their winning streak to 6-week, with WTI crude rising $1.27 or 1.56% to settle at $82.82 per barrel, helped by Saudi Arabia’s decision to continue curtailing its production into the fall, and by signs that oil demand is finally outpacing supply. This week, Saudi Arabia announced that it will continue to hold back an additional one million barrels per day of oil production through September and possibly longer. Russia will reduce its production cut to 300,000 barrels in September from 500,000 barrels in August.
  • Natural gas prices gained +0.5% Friday to settle at $2.577/MMBtu, but end with a -2.3% weekly decline, the fourth weekly drop in the past five weeks amid uncertainty over weather patterns for the remainder of this month. Today’s weekly rig-count report from Baker Hughes showed no change in the number of active, natural gas-targeted rigs in the US. YTD gas is 43% lower.
  • Gold prices reversed higher, rising $7.30 to settle at $1,976.10 an ounce, snapping the 3-day losing streak as the dollar slumped and Treasury yields eased off YTD highs following lower than expected headline job readings.

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 US dollar fell (DXY -0.7%) after trading flat prior overnight and erasing nearly all the week’s gains, after slowing U.S. jobs growth in July encouraged hopes of a soft economic landing but higher wages suggested the Federal Reserve may need to keep interest rates higher for longer.
  • Bitcoin in the past two weeks went down to 29021 from a high at around 31818 in July.

5. Yield Curves

  • Treasury yields and the dollar advanced mid-week (dollar to 3-week highs and yields to YTD highs), while stocks were sold.

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 separation between the two instruments still predicts recession.

“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 around 1.0, which indicates sideways 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

  • All went up in the past month.
  • This week we saw the first decline of more than 1% in the S&P in roughly 47 days before rallying the tail-end of the week to pare weekly losses, but it has been nearly 6-months since the S&P posted a daily decline of over 2% (Feb 21st) as the S&P 500 remains higher by 17% YTD, the Russell 2000 +11%, the Dow a modest 6% but the Nasdaq outperforms +33% YTD led by a 46% jump in the SOX index.
7 August closing prices
24 June closing prices

Major Stock Market Sectors

I also follow the major market sectors in Barchart.

  • 5 of 11 sectors closed green.
  • Technology (+0.51%) led, and materials (-0.82%) lagged
24 June 2023
8 August 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

  • Oil, GDP, and CPIs

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 three undefined risk positions at more than 30$ buying power usage. I need to balance that with some more define risk short premium strategies

I am now at 30% buying power usage of which most is for short premium strategies. I have set the maximum allocation at 50% (20% defined risk long strategies) , so I can still add new positions quickly (this is NOT what tastytrade advises).

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

$11.722.42
(was $10.885.04 )

Buying Power/Net Liq

$11,722.42
(was $11,013.04 )

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

30%

$3,500 (rounded)

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

20%

$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

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