Entry 28 Jan 23: Beta-Weighted Delta

By: nic

I need to start monitoring beta-weighted delta! Because my strategies are too dependent on the directional move of the market.

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

The reason for my week’s loss is also that my active positions are more skewed to a bearish market, whereas, in the past weeks, we have seen several rallies upward. I didn’t manage them because the expiry dates were still far out and I expected the market to go down again. This happened, but immediately thereafter there were new rallies that took me by surprise.

So I have some iron condors where the call wings are deep ITM (QQQ, SQ). And since for the other iron condors the P/L has gone down for the same reason that the underlying price is getting closer to the shore call strike.

Gauging the moves of one underlying is already difficult but how can I monitor the directional exposure of a complete portfolio? How do I make sure that my strategies are not too dependent on the directional move of the market? This is even more difficult, because not all underlyings move the same amount, in the same direction, at the same time.

Beta-weighting deltas

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

Tastyworks uses SPY (Index price), but you can change this to any other index or other underlying.

“Beta weighting is a means for investors to put all of their positions into one standard unit. It is a way to look at an entire portfolio and understand how it will change with a move in the market. It tells us about the size, diversity, and general risk of our positions.

Beta weighting is calculated using the past five years of data because a realm of different market environments are needed to give accurate values. At tastylive, we will often beta weight to the SPY because we mostly trade liquid mid to big cap stocks that are correlated with the S&P 500. On the other hand, if most of our positions were in stocks that correlate with a specific sector, such as technology, we might want to beta weight our portfolio to a more appropriate underlying such as QQQ instead.

At tastylive we beta weight to make sure that our strategies are not too dependent on the directional move of the market. Sometimes, we will have to take certain positions out of our beta weighted portfolio because they throw off the accuracy of the overall value. Beta weighting is not a concrete number that we use to make calculations, but rather a tool that helps us put context around our overall market position.

Source: Tastyworks

Every time the SPY moves, my portfolio will move by a comparable amount. If our beta-weighted delta is -20 then for every +$1 up move in SPY I will see a loss of $20.00 in the portfolio. Or, the portfolio shorts the equivalent of 20 shares of SPY.

We can use beta-weighted delta to:

  • Compare relative risks between stocks (the higher the beta-weighted delta compared to another stock, the higher the directional exposure/risk)
  • Assess the total risk of the portfolio to the market (if I want to remain delta-neutral, and I am exposed too much in one direction, I must open positions in the opposite direction as our exposure)*
  • Calculate the expected move of the portfolio

* short call (short delta) versus short put (long delta), long put spread (short delta) versus long call spread (long delta), etc.

The beta-weighing delta formula makes use of the Beta of an underlying. Beta (β) is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole (usually the S&P 500). Stocks with betas higher than 1.0 can be interpreted as more volatile than the S&P 500 (source: Investopedia).

The formula = Delta x Underlying price x 1/(Index price x Beta)

Earnings Season

Does an earning trades season as such have an influence on the market? Or what was what happened yesterday due to the fact that 20 January was the expiry date? By the way, it was the largest non-quarterly index OpEx on record.

I also now see why you should be careful with selling options when volatility is low: the impact of delta (and gamma) increases, the more IV goes down. I have to study this.

Stocks clawed back some of this week’s losses in a broad-based rally Friday that ended the week on an upbeat note. Tech-related stocks led the way, But this actually impacted my P/L since the underlyings were coming close to the short call strikes of my iron condors.

Finding new set-ups is quite difficult with VIX, and therefore IVR is so low now and earnings coming up. After that, it should be easier again.

I also in the end had a good week and added $100 profit to my P/L YTD.

This week again ended up from the week before, and I am now at around $482 P/L YTD ex fees ( = $384 YTD in fees) in 3 weeks. So at this pace, the goal for this year (around $5.000 profit) is still within reach within 40 weeks. But of course, it doesn’t work like that as I will soon experience.

Low volatility

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

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

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

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

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

And as a last note again: I am still reading what is considered the bible for options traders: Options as Strategic Investment, 5th ed. by Lawrence G. McMillan.

Options as a Strategic Investment

The book is over 1000 pages, and I am now at page 720 still reading about volatility trading.

Beta-weighing
Beta-weighing short and long deltas

Table of Contents

Last Week’s Options Trading

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

  1. Many of them are now close to 21 DTE, which is the moment I either should adjust or close.
  2. Some of my positions have gone deep in the money, and I rolled them out since I still believe the market is more bearish than bullish.

Options Strategy Risk Management Rules​

  1. Sell options to collect premium income while spreading the risk over various expiration dates (staggering dates to avoid expiration density).
  2. Sell options on underlyings that are liquid in the options market (to open and close positions easily and ensure trades can be filled with narrow bid-to-ask spreads for optimal option pricing ​).
  3. Sell 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 ).
  4. 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). ​
  5. 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.
  6. Probability of success (P50 in Tastyworks platform)> 70% to ensure a statistical edge
  7. Closing the trade and realizing profits at >50% premium early in the option lifecycle (21 DTE) and re-invest the capital made free towards additional trades.
  8. Closeout trades prior to expiration (before strike price gets challenged just before expiration (high volatility and higher loss probability!).
  9. Maximize the number of trades to allow the expected probabilities to play out (trade small, trade often).
  10. Size position/portfolio allocation to manage risk exposure (worst-case scenarios always need to be considered therefore I conservatively use small allocations to options trades, so only 4% of my portfolio should only be used for any given trade). 
  11. Keep an adequate amount of cash on hand (~40% in my case) to protect your portfolio against any major market downturns (i.e., Covid-19 and Q1 2022, 2023 recession(?). Cash also gives me the possibility of buying stocks/long equity at heavily discounted valuations. ​

Alternatives for Short Premium Strategies

I prefer short premium strategies so high volatility. But volatility is still relatively low. I need to be able to enter trades in all market conditions.

Historically, implied volatility has outperformed realized implied volatility in the markets. For this reason, we always sell implied volatility to give us a statistical edge in the markets. While I often search for a high IV rank at order entry, the market does not always accommodate me.

I, therefore, will start looking at adding these options strategies that benefit from increases in volatility, as well as more directional strategies to use during low-volatility markets to my playbook:

  1. Long bull call and bear put vertical spreads
  2. Ratio spreads
  3. Long put calendars and call calendars
  4. Long diagonal spreads
  5. Long volatility products

In bull(-ish) markets, as the VIX drops, implied volatility tends to be low in equities. Just like I take advantage of reversion to the mean when IV is high, I continue to stay engaged and do the same when it gets to an extreme on the low end. Therefore, in low IV, I will use strategies that benefit from this volatility extreme, expanding to a more normal value.

This doesn’t mean, however, that, in low IV markets, I stop looking for underlyings in the market that have high IV. Premium selling is where the majority of the statistical edge lies.

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

Opened POSITIONS

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

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

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

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

Here my set-up for bull calls:

  1. ‘ Buy to open’ (BTO) the call option ( in US 1 contract = 100 shares) ITM at 0.60 delta (up to ATM so below the underlying price)
  2. ‘Sell to open’ (‘STO’) the call option at 0.40 delta, so higher and above the underlying price. Since it is very difficult to find 0.40 delta set-ups fitting all criteria, I often skew towards 0.50 delta, but this further reduces my profit potential.
  • Sell the same number of strikes
  • Arrange both call strikes equidistant from the underlying price, or skew for a better breakeven, to create a debit that’s half the width of the spread.
  • 50% PoP
  • Intrinsic value long call >= Net debit (or: long call value – EXT long call (mid) >= Net Debit).

Opened on Jan 27: BAC Mar 17 Bull Call 35/37 for $105 debit

Date

27/1/23

Underlying

36.67

PoP

44%

DTE

50

IVR

0.0

Δ Delta

18.83

Θ Theta

-0.101

Other

–

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

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

Date

27/1/23

Underlying

45.26

PoP

48%

DTE

50

IVR

-0.9

Δ Delta

22.90

Θ Theta

0.003

Other

–

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

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

Date

27/1/23

Underlying

188.82

PoP

50%

DTE

50

IVR

0.7

Δ Delta

10.12

Θ Theta

-0.243

Other

V = -0.68

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

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

Date

27/1/23

Underlying

32.28

PoP

49%

DTE

50

IVR

7.3

Δ Delta

18.25

Θ Theta

0.017

Other

V = -0.29

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

Opened on Jan 27: FXI Mar 17 Bull Call 32/35 for $150 debit

Date

27/1/23

Underlying

33.23

PoP

45%

DTE

50

IVR

1.2

Δ Delta

32.79

Θ Theta

-0.178

Other

V = 0.14

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

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

Date

27/1/23

Underlying

36.26

PoP

49%

DTE

50

IVR

1.0

Δ Delta

28.72

Θ Theta

-0.143

Other

V = -0.37

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

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

Date

27/1/23

Underlying

$6.33

PoP

60%

DTE

42

IVR

28.4

Δ Delta

33.73

Θ Theta

0.967

Other

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

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

Date

27/1/23

Underlying

$38.73

PoP

50%

DTE

49

IVR

0.8

Δ Delta

33.73

Θ Theta

-0.278

Other

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

Opened on Jan 27: GLD Mar 17 Bull Call 177/181 for $219 debit

Date

27/1/23

Underlying

$179.34

PoP

52%

DTE

49

IVR

30.2

Δ Delta

14.85

Θ Theta

-0.120

Other

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

Running and Closed Positions

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

Date

21/1//23

Underlying

$29.18

PoP

59%

DTE

55

IVR

30.2

Δ Delta

1.023

Θ Theta

n/a

Other

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

Date

28/1//23

Underlying

$29.82

PoP

64%

DTE

48

IVR

25

Δ Delta

-5.32

Θ Theta

1.173

Other

Negative delta for the position now, v at -3.61

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

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

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

Underlying

$29.29

PoP

57%

DTE

56

IVR

31.6

Δ Delta

-0.05

Θ Theta

n/a

Other

67% P50 (probability of reaching 50% profit)

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

Delta neutral

Running: Opened on Jan 20: SPY Mar 17 Iron Condor 364/368/413/417 for $157 credit

Date

21/1/23

Underlying

$395.88

PoP

54%

DTE

55

IVR

9.7

Δ Delta

-2.75

Θ Theta

0.016

Other

-0.28 delta now for OTM short call leg

Date

28/1/23

Underlying

$405.68

PoP

54%

DTE

48

IVR

2.7

Δ Delta

-4.58

Θ Theta

1.457

Other

v = -6.43

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

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

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

Underlying

$391.85

PoP

51%

DTE

56

IVR

8.5

Δ Delta

-1.81

Θ Theta

n/a

Other

72% P50 (probability of reaching 50% profit)

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

Delta neutral

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

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

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

Underlying

$35.35

PoP

54%

DTE

69

IVR

9.1

Δ Delta

-43.48

Θ Theta

0.003

Other

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

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

Underlying

$35.42

PoP

54%

DTE

72

IVR

10.5

Δ Delta

-40.58

Θ Theta

0.204

Other

66% P50 (probability of reaching 50% profit)

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

Here my set-up for bear puts:

  1. ‘ Buy to open’ (BTO) the put option ( in US 1 contract = 100 shares) ITM at 0.60 delta (up to ATM so above the underlying price)
  2. ‘Sell to open’ (‘STO’) the put option at 0.40 delta, so lower than the long put and below the underlying price. Since it is very difficult to find 0.40 delta set-ups fitting all criteria, I often skew towards 0.50 delta, but this further reduces my profit potential.
  • Sell the same number of strikes
  • Arrange both call strikes equidistant from the underlying price, or skew for a better breakeven, to create a debit that’s half the width of the spread.
  • 50% PoP
  • Intrinsic value long call >= Net debit (or: long call value – EXT long call (mid) >= Net Debit).

Running: opened on Jan 10: DAL Jun 16 Bull Call 36/43 for $330 debit

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

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

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

Here my set-up for bull calls:

  1. ‘ Buy to open’ (BTO) the call option ( in US 1 contract = 100 shares) ITM at 0.60 delta (up to ATM so below the underlying price)
  2. ‘Sell to open’ (‘STO’) the call option at 0.40 delta, so higher and above the underlying price. Since it is very difficult to find 0.40 delta set-ups fitting all criteria, I often skew towards 0.50 delta, but this further reduces my profit potential.
  • Sell the same number of strikes
  • Arrange both call strikes equidistant from the underlying price, or skew for a better breakeven, to create a debit that’s half the width of the spread.
  • 50% PoP
  • Intrinsic value long call >= Net debit (or: long call value – EXT long call (mid) >= Net Debit).

Running: ARKK Mar 17 Bull Call 33/38 Opened on Jan 10 for $255 debit

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

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

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

Opened on Jan 13: RIOT Feb 24 Iron Condor 3.5/5.5/8/10 for $70 credit

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

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

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

Closed: RIOT Feb 24 Short Put 5 opened on Jan 10 for $59 credit and closed on Jan 26 for a $24 debit

26 Jan 23: This was a quicky again of only 16 days in play while reaching the 60% profit target and just after closing my second RIOT short put.

21 Jan 23: $22 in the green with RIOT still going up mainly. PoP 78%.

14 Jan 13: Another play with one of my favorite stocks! Since a few weeks ago the stock price has nearly doubled. IVR remains high enough (31.5%). Delta at 0.21. PoP at 74%

Closed: Opened on Jan 10: RIOT Feb 17 Short Put 5 for $60 credit and closed on Jan 13 for $24 debit

23 Jan 23: only open for 13 days and profit target achieved.

21 Jan 23: $29 in the green with RIOT still going up mainly. PoP 80%. 21 DTE action date (manage/close) next week.

14 Jan 13: Another play with one of my favorite stocks! Since a few weeks ago the stock price has nearly doubled. IVR remains high enough (31.5%). Delta at 0.20. PoP at 74%

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

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

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

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

Here are the possibilities:

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

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

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

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

Running: Opened on 30 Dec: SPY Iron Condor Feb 17 343/348/411/416 for $128 credit and rolled the 343/348 puts on Jan 24 to 381/386 for a $70 credit and on Jan 27 to Mar 17 for $30 credit

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

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

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

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

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

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

Running: Opened on 29 Dec: QQQ Iron Condor Feb 17 235/240/294/299 for $138 credit and rolled there 235/240 puts on Jan 24 to 270/275 put wing for a $77 credit and on Jan 27 rolled the 294/299 call wing to Mar 17 for $20 credit

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

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

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

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

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

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

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

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

QQQ

The investment seeks investment results that generally correspond to the price and yield performance of the index. To maintain the correspondence between the composition and weights of the securities in the trust (the “securities”) and the stocks in the Nasdaq-100 Index ® or NDX, which is heavy with technology stocks (50%) and is also concentrated with the top 15 stocks making up 60% of the ETF, the adviser adjusts the securities from time to time to conform to periodic changes in the identity and/or relative weights of index securities. The composition and weighting of the securities portion of a portfolio deposit are also adjusted to conform to changes in the index.

QQQ has US$149bn in assets and managed by Invesco.

QQQ stock breakdown

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

AAPL

Apple Inc. designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide. It also sells various related services. In addition, the company offers iPhone, a line of smartphones; Mac, a line of personal computers; iPad, a line of multi-purpose tablets; AirPods Max, an over-ear wireless headphone; and wearables, home, and accessories comprising AirPods, Apple TV, Apple Watch, Beats products, HomePod, and iPod touch. Further, it provides AppleCare support services; cloud services store services; and operates various platforms, including the App Store that allow customers to discover and download applications and digital content, such as books, music, video, games, and podcasts. Additionally, the company offers various services, such as Apple Arcade, a game subscription service; Apple Music, which offers users a curated listening experience with on-demand radio stations; Apple News+, a subscription news and magazine service; Apple TV+, which offers exclusive original content; Apple Card, a co-branded credit card; and Apple Pay, a cashless payment service, as well as licenses its intellectual property. The company serves consumers, and small and mid-sized businesses; and the education, enterprise, and government markets. It distributes third-party applications for its products through the App Store. The company also sells its products through its retail and online stores, and direct sales force; and third-party cellular network carriers, wholesalers, retailers, and resellers. Apple Inc. was incorporated in 1977 and is headquartered in Cupertino, California.

Closed: Feb 17 TLT Iron Condor 92/95/111/114 Opened on 23 Dec 22 for $77 credit and closed on Jan 27 for $33 credit

27 Jan 23: Closed this position for somewhat less than my profit target since rolling up or out didn’t work.

21 Jan 23: $31 in the green, PoP went up to 80%, short call delta down to -0.23. 21 DTE action date (manage/close) next week.

14 Jan 23: 22 days since opening and TLT improved and is $17 in the green now, PoP is at 75%, and the short call leg is highest at -0.22 delta.

7 Jan 23: 16 days since opening and TLT improved and is $15 in the green now, PoP is at 74%, and the short call leg is highest at -0.23 delta.

31 Dec 22: P/L $2 in the red and PoP at 65% now and short put leg highest at 27 delta

Bond prices fell last week as yields edged higher again. This pulled down the price of the
iShares 20+ Year Bond ETF (TLT). TLT now stands out as one of the higher implied volatility ETFs,
with an IV Rank over 55. Source: Cherry Picks by Tastylive.

24 Dec 22: a last-minute play on Friday evening. $2 in the red now.

TLT

The fund generally invests at least 90% of its assets in the bonds of the underlying index and at least 95% of its assets in U.S. government bonds. The underlying index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity greater than or equal to twenty years.

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

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

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

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

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

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

24 Dec 22: XLE didn’t move much since opening and is now $1 in the red

19 Dec 22: XLE is seeing higher volatility and is slightly bullish, backtested positive.

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

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

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

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

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

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

24 Dec 22: PoP 56% and $6 in the green.

15 Dec 22: opened this bull call based on the set-up described in my playbook. Strikes at 60% (long) and 40% (put). Intrinsic value long strike => net debit to be paid. Debit at around half of the spread width. ROI 1:1 etc.

SLV

The Trust seeks to reflect such performance before payment of the Trust’s expenses and liabilities. It is not actively managed. The Trust does not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the price of silver.

Closed: Opened on 7 November: EWZ Bull Put 16 Dec 26/30 for $102 Credit, Rolled to Mar 17 for Additional $22 Credit, and closed on Jan 24 for $132 debit

24 Jan 23: The position has been a struggle, and given that I don’t see EWZ going away from this range Still just under $30 the last time I looked), I decided to close it at a tiny loss ($8 ex fees).

21 Jan 23: This is also one of the positions which continue misbehaving. Went to OTM, then ITM again. I am not sure anymore why I am hanging on to this. -$24 in the red now, even if PoP is not so far down compared to last week (now 57%) and short put delta is at -0.56.

14 Jan 23: 38 days since opening and greatly improved with EWZ underlying going up again (29.51 now): $23 in the green now and PoP at 59%, short put leg still ITM at -0.53 delta.

7 Jan 23: 31 days since opening and $21 in the red now and PoP at 48%, short put leg still ITM at 0.62 delta. This is a big change compared to last week, and my only explanation is that volatility (increase) is playing a role here.

31 Dec 22: short put strike still ITM, and PoP is now down to 46% and $34 in the red. The Brazil ETF is still shaky but looking and overall trending down.

Over the past two weeks, EWZ has rallied over 7% off lows as the politics in Brazil have settled down a bit and commodity prices have strengthened.  Despite the rally, EWZ’s OTM calls are trading over equidistant OTM puts, indicating that the market sees risk to the upside.  EWZ has been underperforming the SPY, so it may have less downside than the US market does, and that might be enough for a trader to consider a bullish strategy in it.  EWZ’s IV has stayed relatively strong as the stock bounced, and with a 38% overall IV and a 35% IV rank, EWZ’s options make attractive candidates for short premium trades.  If you think EWZ might continue to rally or at least not make new lows in the next few weeks, the short 25.5 put in the Feb weekly expiration with 42 DTE is a bullish strategy that has an 88% prob of making 50% of its max potential profit before expiry, and that generates $1.30 of positive daily theta.

Cherry Bomb Newsletter 30 Dec 22 – Tom Preston – Chief Quantative Strategist TastyLive

24 Dec 22: short put strike still ITM, but PoP is now at 52% and $44 in the red.

17 Dec 22: the price is still in between the short (at 75 delta) and long )at 45 delta) strikes with a PoP at 34% (1% above my stop loss target), and I am slightly above my second (100% stop loss) exit strategy target. I have to keep on monitoring and make a decision before the end of the year if it goes under the 33% PoP.

10 Dec 22: Due to the market surge this week, the stock price went above the put short strike. My strategy to do nothing in the last weeks when it went ITM has until now proven to be the right decision. But it is getting closer to 16 December, and still is in the red ($15). I need to manage this position next week.

7 Dec 22: Getting closer to the expiry date, I had to take action, so I rolled the continuously challenged 26/30 put leg out to Mar 17 for an additional $22 credit. This is not best practice (the DTE 45 entry – 21 close/manage rule): I should have managed/closed the position sooner, and the spread is rolled too far out). I am taking a risk here, but it should give me enough time to close the position at a profit when the price goes up again.

10 Dec 22: Today, the stock price is at 29.94, slightly below the 30 short strike (44 delta), PoP at 59%, and loss is $72 euros. So I will do nothing for now but need to monitor EWZ if it goes further down.

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.

End-of-Week Active Positions Overview

Financials

Cash Balance 28 January 2023

This week my P/L YTD shot up to close to $600 two weeks ago. But in the past two weeks, I saw it melting away like snow. And I ended up below $200. Mainly due to QQQs hitting new highs.

As explained above this was due to market rallies (bullish) and low volatility enforcing my (bearish) directional exposure.

I am more and more trading optimally, making full use of my cash, optimizing my positions etc .

The points I have to look at are:

  • In general, my positions are placed on the safe side with low deltas, so less risk, and low profit. I am already increasing risk by widening spreads and picking higher deltas.
  • For a better-balanced portfolio allocation (based on VIX) and I am adding non-short premium and passive income strategies to optimize my portfolio.
  • Except for a small short put undefined risk play in RIOT, I have been only doing a limited number of defined risk strategies which are lower risk but also less profitable: I may need to start looking at adding other defined risk strategies, and once in a while short straddles and strangles based on low prices underlyings.
  • I now select positions with higher premiums compared to the commissions and fees I have to pay and the target profit I have set as a rule (50%).
  • I am now also monitoring the beat-weighted delta of my positions and total portfolio; in periods like this, I need to manage it in such a way that it remains close to 0.

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:

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Market Sentiment 28 January 2023

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

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

1. Geopolitical Events and Economic Trends

During the week, I capture the most important news. Every weekend before the new trading week, I review the current markets, the general geopolitical events, and economic trends determining the sentiment in the world of options trading.

  • The war between Russia and Ukraine is still raging on; nobody except Putin is happy with Germany.
  • This Friday marks the latest of a string of market closes on the highs, showing zero concern into next week’s FOMC meeting.
  • Markets scored their 4th straight strong Friday as stocks trade like its 2020 again, with short squeezes, Bitcoin popping, and risk assets leading while defensive sectors falling, buying now, and asking questions later. 

2. VIX Index

  • Zero fear again this week (and month) as the CBOE Volatility index (VIX) is down for 6th straight day, hitting lows of 17.97 earlier, the lowest levels since January 2022. Now at 18.51.
  • The VIX Index measures the level of the expected volatility of the S&P 500 Index over the next 30 days that is implied in the bid/ask quotations of SPX options. Thus, the VIX Index is a forward-looking measure, in contrast to realized (or actual) volatility, which measures the variability of historical (or known) prices.
  • A VIX below 15% is very low volatility. A 15% or below VIX is assumed to be a market at rest. Since the intrinsic nature of the Stock Market is to move up, a VIX close to 15% or lower will tell us that the broader market is likely to head higher. 
  • Up to 19% VIX means the market is in ‘lull’ mode. 19% is seen as the ‘steady state’ VIX. This arena is inadequate for short premium plays, which require high volatility. This is where long calls, puts, and debit spreads may be set up. Only when VIX gets closer to 30%, selling options become viable.
  • At 20% or higher means medium volatility.
  • A VIX of 30% or higher means high volatility. When selling options, you want to sell out of stocks when the VIX is near 30. This is where credit spreads, short strangles, straddles, short iron condors, etc., can be played.
  • Above a VIX of 40%, this is still the case, but given the extreme volatility, you should be very careful.

VIX for position sizing

So my maximum portfolio capital allocation for short premium strategies should remain at 30% of net liq.

See also on this subject this Tastytrade video.

VIX

< 15

15-19

20-29

30-40

>40

Volatility

Lowest volatility, all comfortable

Market in ‘lull’ mode

Volatility high

Volatility very high

Volatility and fear levels highest

Maximum portfolio capital allocation

25%

30%

35%

40%

50%

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

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

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

Today, the VVIX went up to 83.31. So moving back to the mean.

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.

  • Nymex WTI crude March futures settle at $79.68 a barrel, down $1.33, 1.64%
  • Natural gas February futures settle at $3.1090/MMBtu. Natural gas prices rebounded after hitting fresh 20-month lows earlier Friday ahead of the expiration of the front-month and a growing belief that there is more than enough gas in storage for the rest of the winter..

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 slipped 60 cents, or less than 0.1%, to settle at $1,929.40 an ounce – up fractionally on the week (+0.1%) with no big bets ahead of the FOMC Policy meeting next week.

5. USD and Other Currencies

The DXY, the symbol for the US dollar index, tracks the price of the US dollar against a basket of six foreign currencies that have a significant trading relationship with the US and are also hard floating currencies. The index will rise if the dollar strengthens against these currencies and will fall if the dollar weakens against these currencies.

  • A weaker US dollar and sliding Treasury yields have kept precious metals higher this month
  • The US dollar index (DXY) no rally again, holding down at the 102 level
  • The euro stays up around 1.09 ahead of next week’s central bank meetings (FOMC expected +25-bps and ECB +50bps).
  • Year-to-date Bitcoin’s price has expanded by a remarkable 39% to ~$23,000, while these levels are still far below November 10, 2021, all-time high of $68,789, is lows around $16,500 to start the year in what has been a massive run higher for risk assets.

6. Bitcoin AND crypto

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

7. Yield Curves

  • Treasury yields edge higher, with the 10-year holding just above the 3.5% level, but bonds on track for best start to a new year in more than three decades, powered by a wave of money from investors fearful of missing out.

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

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

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

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

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

Source: Investopedia

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

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

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

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

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

  • The 2s10s curve is still at its deepest level of inversion in forty years. For only the fourth time on record and for the first time since 2009, bearish sentiment has fallen double digits in back-to-back weeks
  • Ten-Year Bond Yield -0.2 bps to 3.507.

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

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

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

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

Source: SeekingAlpha

8. Producer Price Index

The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.

Source: Bureau of Labor Statistics (BLS).

9. Consumer Price Index (CPI)

The measure that is most often used to measure inflation in terms of consumers is the consumer price index (CPI). Tens of thousands of items in several categories are tracked. The basket of products or services is considered each month, and economists and statisticians look for trends. If the CPI rises, prices could trend higher, with inflation on the rise.

  • The Core CPI , excluding volatile food and energy, increased 0.2 percent for November versus 0.3 percent expected and 6.0 percent annually, also 0.1 percent lower than forecast. 

10. Consumer Sentiment Index

A low CSI index reflects the general (dis-)satisfaction with managing U.S. economic policies. A high satisfaction rating suggests approval of the current policy management and implies market stability. 

Source: Surveys of Consumers (umich.edu).

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

11. Put/Call Ratio

  • A Put/call Ratio of below .5 could mean the market is very bullish. Maybe too bullish. It could be an excellent time to sell stocks high.
  • Between 1.0 and 2.0, the Put/call Ratio indicates a bearish market.
  • A Put/call Ratio above 2.0 could mean it is very bearish. It could be an excellent time to consider buying low.
  • Moving sideways if the Put/call Ratio oscillates between 0.5 and 1.0.
  • The put/call ratio went down to 1.195, which indicates the same number of people are selling and buying and the market is moving towards being 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.

12. NASDAQ, DJI, SPX, Russel 2000 Indices, and Main Market Sectors

In general, I look at the leading indices DJIA, SPX, and Russell 2000 (IWM) and the level of volatility or ‘market thrashing’ (excessive volatility with significant rising then near proportionate falling in markets’ values within a trading period): above 1% in any or all of them might indicate indecision in the market.

NASDAQ, DJIA, SPX, IWM

  • All green AGAIN at the end of the week.

Major Stock Market Sectors

I also follow the major market sectors in Barchart.

  • 5 of 11 sectors closed green. Consumer discretionary (+2.28%) led, and energy (-2.01%) lagged.
  • S&P 500: up 0.67% from 1.89% up last week
21 January 2023
28 January 2023

Summary Market Sentiment

Bull market

Bullish

Neutral

Bearish

Bear market/crash

1. Geopolitical events and economic trends

Positive trends, stable supply chains

Minor market issues, minor supply chain issues

National events, market issues, bad economic data, mini-corrections

Negative indicators, international events, serious market issues, broader market correction (-10%)

The total collapse of the global market, deep recession

2. VIX (VIX)

<15

Lowest volatility, all comfortable

15-19

Market in ‘lull’ mode

20-29

Volatility high (down from above 30)

30-39

Volatility very high

>40

Volatility and fear levels highest

3. Oil & Gas (XOP)

Oil & gas

Minor market issues, minor supply chain issues

National events, market issues

International supply chain interruptions, high oil & gas prices

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

4. Gold, Silver & Copper (GLD & SLV & Copper)

Gold, silver, and Copper stable

Minor market issues, minor supply chain issues

National events, market issues

International supply chain interruptions

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

5. US Dollar Currency Index (DXY)

Very weak dollar versus other currencies

Weak dollar

Neither weak/nor strong dollar

Strong dollar

Very strong dollar

6. Bitcoin (BTCUSD)

Bitcoin rising

Bitcoin rising slightly slower

Bitcoin “thrashing” at the same level

Crypto crashes, market corrections

Bitcoin or other cryptos or companies collapse

7. US Yield Curve (T10Y3M and US10Y vs US02Y)

Considerably steep curve

Steep curve

Average but still positive curve

Flattening, inverting, and approaching zero

Inverted curve and negative

8. Producer Price Index (PPI)

Lowest price level

Price level higher than normal

Price levels rising fast

The price level is very high

Highest price level

9. Consumer Price Index (CPI)

Lowest price level

Price level higher than normal

Price levels rising fast

The price level is very high

Highest price level

10. Consumer Sentiment Index (CSI)

High consumer confidence

Consumer confidence is less high

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

Low consumer confidence

No consumer confidence

11. S&P 500 Put/call ratio (PCR)

Well below 0.5 (very bullish)

Close to 0.5 (bullish)

Between 0.5 and 1.0 (neutral)

Between 1.0 and 2.0 (bearish)

Above 2.0 (severely bearish)

12. Dow Jones (DJI)

S&P 500 (SPX)

Russel 2000 (RUT)

Major Market Sectors (XLE, XLF, etc)

Strong bull market
No real changes in an upward trend

Bullish market
Minor changes in an upward trend

Moving to neutral bullish/bearish market

Increased (positive/negative) changes and “thrashing”

Bearish market (with bear rallies)

In general, going down, many negative changes

Bear market

A deep recession or the market is collapsing, or already did so

Trading style

No restrictions on trading (except for VIX rules)

Closer watch and reduce trades

More caution needed and reduce trades further

Extreme caution and reduce trades even further

Look to close any open positions and no new trades

This Week’s Economic Calendar

  • The FOMC meeting, a key OPEC gathering, and heavyweight earnings reports
  • Disinflation continues, but core inflation remains well above the Fed’s 2% long-term target. As a result, many expect another 25 bp hike at next week’s meeting and potentially another in March before the Fed pauses to allow observe how higher rates impact the economy.
  • Catalysts next week are the Feb 1st FOMC meeting (25-bps hike expected) and ECB policy meeting (50-bps hike expected), as well as nonfarm payrolls data on Friday.
  • Also there will be key earnings results from AAPL, AMZN, CAT, PFE, GOOGL .
Source: investing.com

Earnings and Dividend Calendar

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

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

Some major stocks will report earnings next week, amongst which AAPL, AMZN and GOOG.

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 24 positions which (if they are at around $133 profit and 80% wins) is considerably above the average I need to have running to maximize my portfolio allocation (around 18).

I am now at above 50% buying power usage, which is above the 30% I am ‘allowed’ to use under my portfolio allocation rules based on VIX for short premium strategies. However, today over 20 % of my positions are long debit spreads. So 50% is active now. My goals, for now, is to grow to 70% (short max 50% depending on VIX and the remainder long positions).

I want to have 30% in cash at all times.

Goals and Schedule for this week

Sunday: set up options strategy ideas and perform backtesting; select at least two options strategy ideas.

Until Tuesday: open one more vertical spread or iron condor and a long position.

Rest of week: start looking at strategies involving buying bills or bonds for the remaining 10% of the 60% .

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

Underlyings Selected for Trading This Week

This is my selection for this week. I am still avoiding the earnings as much as possible, looking for high IVRs.

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

For this week, I will continue applying my underlying selection rules and focus on high volatility (IVR >40) and higher premium underlyings that have no significant events (like earnings < 30 days) coming up.

The expectation is that this week’s volatility will increase.

Options Buying Power and Portfolio Allocation This Week

Based on my current buying power and portfolio allocation rules, I determine whether I can open new positions to maximize such portfolio allocation.

I use VIX to determine the allocation percentage for short premium strategies. Since I until now only opened short strategies, this is still applicable to my whole portfolio.

However, with VIX going down to 20, I should be looking at using 5% of my total NetLiq for other strategies.

Allocation based on VIX (for short premium strategies)

VIX

< 15

15-19

20-29

30-40

>40

Volatility

Lowest volatility, all comfortable

Market in ‘lull’ mode

Volatility high

Volatility very high

Volatility and fear levels highest

Maximum portfolio capital allocation

25%

30%

35%

40%

50%

In allocating portfolio capital, I need to use Buying Power (NetLiq)

Cash Balance

$10,902.36
(was $11,819.96)

Buying Power/Net Liq

$10,722.36
(was $11,068.96)

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

30%

$3,216.71

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

30%

$3,216.71

Average Max Position Allocation (BP)

4%

$428,89

I also brought my beat-weighted delta back to a more neutral level (0!). Let’s see of this improves things.

Portfolio allocation undefined vs defined risk

All my plays are ‘defined risk.’ I need to add undefined risk positions at a later stage. I will explain why in my blog post on constructing trades.

Since my average maximum position allocation is up to 4% and close to $440, I need to be looking for higher priced underlyings or increasing the number of contracts per position.

This Week’s Rules

This week I will start a post with my entry, adjustment, and exit rules per the options strategy. I will describe how I set up a playbook with all the strategies I want to deploy.

Conclusion

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

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

The same for exiting.

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