Entry 6 Nov 22: Moving up!

By: nic

Options Trading Journal Entry 6 November 2022

This week, the value of my options trades continued moving up and I added over $200 to my P/L YTD.

On Friday, I added some positions in FCX, FXI, QQQ at the last minute before closing. Given their high volatility, here were some good opportunities to enter into iron condors (again) for underlyings in my ‘this week’s focus’ list.

On Monday, I opened another EWZ iron condor and I closed PYPL right on time before earnings (went down considerably).

VIX went further down to 25, so I need to adjust my portfolio allocation for short premium strategies.

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

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

Overall, I am again looking at a positive week P/L.

Earning season is going to an end. Since I have not added earning plays to my playbook yet, I will avoid opening positions for underlyings with earnings within 30 days of opening. So I am now still mainly looking at ETFs and stocks that have earnings behind them.

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

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

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

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

And as a last note: two weeks ago, I received what is considered the bible for options traders: Options as Strategic Investment, 5th ed. by Lawrence G. McMillan.

Options as a Strategic Investment

The book is over 1000 pages, and I am now at page 140, reading about ratio spreads, a strategy I do not intend to use very much but need to understand for the plays I want to use.

Moving up!
Rolling wings

Table of Contents

Last Week’s Options Trading

This week I started with closing two iron condors, in EWZ (at targeted profit) and PYPL (at a small profit since it was just before earnings and I didn’t want to take any risk).

Then I opened additional QQQ iron condors on Tuesday and Friday, and (automatically) closed one QQQ iron condor on Friday at target profit. I also added FCX and FXI iron condors.

Status running Active Positions

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

The third EWZ position I opened last week with a wider spread and, therefore, higher credit, is now close to 50% profit. The price of the stock jas positioned itself nicely in the middle of the iron condor strikes.

EWZ

EWZ seeks to track the investment results of the MSCI Brazil 25/50 Index. The fund generally invests at least 80% of its assets in the securities of its underlying index and depositary receipts representing securities in its underlying index. The index is a free float-adjusted market capitalization-weighted index with a capping methodology applied to issuer weights so that no single issuer exceeds 25% of the underlying index weight, and all issuers with a weight above 5% do not cumulatively exceed 50% of the underlying index weight. The fund is non-diversified.

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

My second higher volatility, higher premium IWM play went red last week (-$4), but this week more than recovered. After getting close to the upper leg of the iron condor on Monday, it dropped to under 180 on Thursday and Friday.

The price of the underlying continued going up all week, but, fortunately, went down again on Thursday and therefore didn’t reach the call legs’ break-even level.

The position is getting close to the 50% profit target.

I plot the expected move and change it on a regular basis in TradingView to get a visual on whether legs are challenged.

IWM up to 4 November 22

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

The same for the weekly I opened: last week red but P/L Open now in green ($18).

IWM

The investment seeks to track the investment results of the Russell 2000 Index, which measures the performance of the small-capitalization sector of the U.S. equity market. The fund generally invests at least 80% of its assets in the component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the component securities of its underlying index (i.e., depositary receipts representing securities of the underlying index) and may invest up to 20% of its assets in certain futures, options and swap contracts, cash and cash equivalents.

RIOT Short Put 28 Oct (W) 5 Opened on Oct 14 for a $21 credit and rolled up to 5.5 and out to Nov 18 for extra $30 credit

Once in a while, I place trades in one of my favorite companies: RIOT. I follow blockchain, crypto, and NFTs. RIOT is very much correlated to Bitcoin, so as soon as I see Bitcoin going up or down, I know that RIOT is going to create.

Lately, RIOT has been quite stable with low IVRs compared to early this year. Whether this says something about Bitcoin I need to check.

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

RIOT

Riot Blockchain, Inc. and its subsidiaries focus on bitcoin mining operations in North America. It operates through Bitcoin Mining, Data Center Hosting, and Electrical Products and Engineering segments. As of December 31, 2021, it operated approximately 30,907 miners. Riot Blockchain, Inc. was incorporated in 2000 and is headquartered in Castle Rock, Colorado.

RIOT has been going down this week and came very close to the strike price at 5.5.

It is still 3 weeks to expiry, it has $37 extrininsic value, I don’t care if it is assigned, so I did nothing. Actually the stock price boiunced up to $5.79 again. P/L Open is now negative (-$11).

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

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

Last week I was afraid I had to manage the position this week. But FXI’s price bounced up again on Friday. Mainly due to news that China would relax its Covid policies (see later: quod non).

The position is getting close to the 50% profit target I have set myself.

However, the news over the weekend that China is doubling down on its Cov-zero policy may impact my FXI positions negatively (higher volatility).

FXI 4 Nov 22

Positions Opened Last week

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

Making use of my selection rules, and looking at my ‘in play’ list (stocks selected from my ‘faves’ list and which I will focus on during the week) for most volatile underlyings, and after looking at the chart and doing backtesting, I again selected a QQQ position.

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

And another one three days later. This is a weekly, so I will monitor it closely. Tastytrade some time ago released a video on weeklies versus monthlies, which actually shows weeklies have a lower chance to be profitable, compared to standard monthly options. See also the article below.

Certain underlyings offer weekly expiration cycles, which allow traders to take their chance in short-term directional plays. At tastytrade, we avoid weekly expiration cycles unless they are part of an earnings play.

Weekly options are generally less liquid because they are a non-standard expiration cycle. This means that it is harder for us to maneuver in and out of trades and we may not get the best price fills for our positions. Additionally, we have found that we profit less from using four weekly trades instead of one monthly trade. This is due to the fact that weekly options hold far less theta, which is paramount to profitability when selling options. Also, distribution curves are much more narrow in weekly options so we would have to move much closer to the current stock price when putting on a one standard deviation position (not to mention the additional commission fees that we would incur)!

The one time we elect to use weekly options is for earnings plays. We want to select the closest expiration to the announcement, so IV is as sensitive as it can be. Our preferred strategy is to sell premium before earnings announcements since IV is crushed afterwards. If the position goes our way, we can realize a large portion of our potential profit in seconds.

Source: Tastytrade

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

And FCX is also back again since it also had a high volatility score which makes opening iron condors attractive.

FCX

Freeport-McMoRan Inc., a natural resource company, acquires, explores, and develops mineral assets, and oil and natural gas resources. The company explores copper, gold, molybdenum, cobalt hydroxide, silver, and other metals, as well as oil and gas. Freeport-McMoRan Inc. was founded in 1987 and is headquartered in Phoenix, Arizona.

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

In addition to the bull put I already opened, mainly due to the high volatility of FXI, I decided to open an iron condor.

Positions Rolled or Closed Last Week

EWZ Iron Condor 18 Nov 25/27/37/39 Opened October 3 for $52 credit

Closed for $21 debit, so over 60% of max profit (target was 50%) before commissions and fees.

QQQ Iron Condor 25 Nov 238/242/298/302 Opened October 20 for $109 credit

Closed for $49 debit, so over 55% of max profit (target was 50%) before commissions and fees.

PYPL Iron Condor 18 Nov 62.5/65/97.5/100 Opened on Oct 14 for $72 credit

Closed for $60 debit, so over only 16% of max profit (target was 50%) before commissions and fees. I closed it just before earnings, which in the end was (and always is) a wise decision since earnings (like dividends) can really hurt one’s position due to higher volatility and price moving fast up or down. In this case, PYPL made a considerable drop.

Options Strategies Count Summary

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

Defined Risk

Week 22 October – 29 October

YTD

Bull Put Spread (credit)

0

1

Bear Call Spread (credit)

0

1

Bear Put Spread (debit)

0

0

Bull Call Spread (debit)

0

1

Short Iron Condor (incl rolled positions)

4

16

Undefined Risk

Short Option (including rolled RIOT)

0

2

Short Straddle

0

0

Short Strangle

0

0

End-of-Week Active Positions Overview

Still to be set up

Market Sentiment 29 October 2022

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

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

Friday’s jobs data were above expectation and sent the markets higher to start but may not have been enough to change overall sentiment. 

While last week’s Federal Reserve interest rate decision was the main event, October’s labor market data were the encore. And unfortunately, neither was good news for investors. 

The Federal Reserve wants to crush demand enough to cool the labor market and housing so that record-high inflation decreases. 

So far, housing has softened, and prices have begun to come down marginally. However, the labor market remains resilient. Source: StockTwits.

From a data perspective, there is still reason to be more bullish than bearish, at least in the near term.  But many ‘gurus’ (often politically driven) out there are still predicting a total collapse.

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.

  • Speculation over China’s reopening pushed international stocks and commodities higher. However, over the weekend China doubled down on its Covid-zero policy (so higher volatility expected).
  • The Bank of England raised rates by 75 bps and warned that the country would face a two-year slump. 
  • The tone was set when Federal Reserve Chair Jerome Powell warned that the ultimate level of interest rates will be higher than expected and China reopening hopes faded. The 10-year Treasury yield (US10Y) ended the week at 4.18% and the 2-year yield (US2Y) stood at 4.67%.

2. VIX Index

  • The CBOE Volatility Index (^VIX) — Wall Street’s “fear gauge” — now moves around 25 after surpassing 33 in the last weeks (the highest volatility since June of this year).
  • A VIX below 15% is very low volatility. A 15% or below VIX is assumed to be a market at rest. Since the intrinsic nature of the Stock Market is to move up, a VIX close to 15% or lower will tell us that the broader market is likely to head higher. 
  • Up to 19% VIX means the market is in ‘lull’ mode. 19% is seen as the ‘steady state’ VIX. This arena is inadequate for short premium plays, which require high volatility. This is where long calls, puts, and debit spreads may be set up. Only when VIX gets closer to 30%, selling options become viable.
  • At 20% or higher means medium volatility.
  • A VIX of 30% or higher means high volatility. When selling options, you want to sell out of stocks when the VIX is near 30. This is where credit spreads, short strangles, straddles, short iron condors, etc., can be played.
  • Above a VIX of 40%, this is still the case, but given the extreme volatility, you should be very careful.

VIX for position sizing

With a VIX of around 25, so my maximum portfolio capital allocation for short premium stratgies is 35% of net liq.

See also on this subject this Tastytrade video.

VIX

< 15

15-19

20-29

30-40

>40

Volatility

Lowest volatility, all comfortable

Market in ‘lull’ mode

Volatility high

Volatility very high

Volatility and fear levels highest

Maximum portfolio capital allocation

25%

30%

35%

40%

50%

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

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

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

Today, the VVIX went slightly up to 79 from around 78, which means it is still under the long-term average of 86 and the 83-150 range it has been trading at in the past period.

The VVIX/VIX Ratio

See more in this Tastyworks video.

3. Oil and Gas

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

  • WTI crude rose $4.44 to settle at $92.67 per barrel, up over 5% on the day and pushing to 4-week highs as the dollar eased, with an EU ban on Russian oil looming large and investors weighing the prospects for an easing of China’s COVID curbs. Though fears of global recession capped gains, prices still ended the week higher by more than 5.4% for WTI.

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 jumped $45.70 or 2.8% to settle at $1,676.60 an ounce, helped by a sharp retreat in the US dollar, which fell 1.5% for the dollar index (DXY) to 111.22, off overnight highs around 113.

5. Yield Curves

  • Treasury yields bounced all over the place, with the 2-year hitting a 15-year high above 4.75% while posting its largest inversion (as much as 70-bps) against the 10-yr before narrowing. More concerns of longer and higher rate hikes by the Fed pushed the short-end of the curve higher than the long-end this week. 

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

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

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

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

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

Source: Investopedia

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

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

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

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

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

  • The 2s10s curve is at its deepest level of inversion in forty years (around 70-bps on Friday morning). For only the fourth time on record and for the first time since 2009, bearish sentiment has fallen double digits in back-to-back weeks

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

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

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

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

Source: SeekingAlpha

6. Producer Price Index

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

Source: Bureau of Labor Statistics (BLS).

  • Still going down, which is a sign that inflation may be slowing

7. Consumer Price Index (CPI)

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

  • The October inflation report release will be one of the headline events of the week.
  • Headline inflation is expected to fall to +8.0% in October from +7.8% in September and core CPI is seen moderating to +0.4% month-over-month from +0.6%.

8. Consumer Sentiment Index

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

Source: Surveys of Consumers (umich.edu).

9. Put/Call Ratio

  • A Put/call Ratio of below .5 could mean the market is very bullish. Maybe too bullish. It could be an excellent time to sell stocks high.
  • Between 1.0 and 2.0, the Put/call Ratio indicates a bearish market.
  • A Put/call Ratio above 2.0 could mean it is very bearish. It could be an excellent time to consider buying low.
  • Moving sideways if the Put/call Ratio oscillates between 0.5 and 1.0.
  • The put/call ratio went steeply up to 1.021, which indicates an equal number of people are selling and buying and that the market is neutral.

Warning: previous research conducted by tastytrade revealed that the Put/call Ratio is not a reliable trading indicator. Readers can check out this installment to review that research in greater detail this installment.

10. DJI, SPX, Russel 2000 Indices, and Main Market Sectors

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

DJIA, SPX, IWM

  • For the full week the major averages finished lower, with the Dow shed down 1.4%, the S&P off 3.4% and the Nasdaq clipping 5.7%.
Closing prices 4 Nov 2022

Major Stock Market Sectors

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

I also follow the major market sectors in Barchart.

  • Every sector was green again.
  • S&P 500 Index up 1.36%
Major Sectors 29 Oct 2022
Major Sectors 6 November 2022

11. USD and Other Currencies

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

  • The DXY didn’t change much compared to last week and was slightly down from last week (111.875) at 110.788.

12. Bitcoin

Bitcoin went a few percentages up from 19179 last week to 21268 today.

Summary Market Sentiment 1 October 2022

Bull market

Bullish

Neutral/bearish

Bearish

Bear market/crash

1. Geopolitical events and economic trends

Positive trends, stable supply chains

Minor market issues, minor supply chain issues

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

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

The total collapse of the global market, deep recession

2. VIX (VIX)

<15

Lowest volatility, all comfortable

15-19

Market in ‘lull’ mode

20-29

Volatility high (down from above 30)

30-39

Volatility very high

>40

Volatility and fear levels highest

3. Oil & Gas (XOP)

Oil & gas

Minor market issues, minor supply chain issues

National events, market issues

International supply chain interruptions, high oil & gas prices

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

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

Gold, silver, and Copper stable

Minor market issues, minor supply chain issues

National events, market issues

International supply chain interruptions, high oil & gas prices

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

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

Considerably steep curve

Steep curve

Average but still positive curve

Flattening, inverting, and approaching zero

Inverted curve and negative

6. Producer Price Index (PPI)

Lowest price level

Price level higher than normal

Price levels rising fast

The price level is very high

Highest price level

7. Consumer Price Index (CPI)

Lowest price level

Price level higher than normal

Price levels rising fast

The price level is very high

Highest price level

8. Consumer Sentiment Index (CSI)

High consumer confidence

Consumer confidence is less high

Consumer confidence going down

Low consumer confidence

No consumer confidence

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

Well below 0.5 (very bullish)

Close to 0.5 (bullish)

Between 0.5 and 1.0 (neutral)

Between 1.0 and 2.0 (bearish)

Above 2.0 (severely bearish)

10. Dow Jones (DJI)

S&P 500 (SPX)

Russel 2000 (RUT)

Major Market Sectors (XLE, XLF, etc)

Strong bull market
No real changes in an upward trend

Bullish market
Minor changes in an upward trend

Neutral bullish/bearish market

Increased (negative) changes and “thrashing”

Bearish market

Going down, many negative changes

Bear market

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

11. US Dollar Currency Index (DXY)

Very weak dollar versus other currencies

Weak dollar

Neither weak/nor strong dollar

Strong dollar

Very strong dollar

12. Bitcoin (BTCUSD)

Bitcoin rising

Bitcoin rising slightly slower

Bitcoin “thrashing” at the same level

Crypto crashes, market corrections

Bitcoin collapses

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

  • Looking ahead, the CPI report and U.S. election loom next week as big events. 
  • The consensus expectation is that a divided government between the White House and Congress will lead to more political gridlock and a potential slowdown for some of President Biden’s agenda. Historians note the stock market has outperformed with a divided government over the returns generated in the years following the same party controlling the Senate, the House and the Presidency. Analysts warn that a scenario that could rattle the market would be any lack of clarity with regard to Senate control if results are contested. (Source: SeekingAlpha)

Earnings and Dividend Calendar

We’re in the middle of the earnings season. In addition, there are some dividend pay-outs upcoming. I tend to stay away from underlying having earnings or dividends within 30 days.

The first dividends are in December for GDX.

Financials

Cash Balance 6 November

I am progressively recovering the around $1,350 loss I made earlier this year (this excludes commission and fees) while learning how to options trade (yes, yes, first paper trade and then migrate to the real stuff, I know, but I learn more from being burnt).

And this week didn’t really help. I added to my cash balance, but my unrealized gain/loss also went up considerably due to what happened at the end of the week.

Cash Balance 6 Nov 2022

And even without including the ‘ramp-up loss’ of $1,350, as from the formal start of my trading (September), I have gained (‘realized’) close to $ 350 now since September of this year ($1,350 -/- $996.26).

But I still am not trading optimally, making full use of my cash, optimizing my positions etc .

At this rate, I will only be breaking even in 6 months, and then only have a $700 profit at the end of the year in lieu of the over $4,200 I have targeted. I need to up my game.

The root causes are the following:

  • In general, my positions are placed on the safe side with low deltas, so less risk, and low profit
  • I just started using max portfolio allocation (should be 40% based on VIX today, but on average, I only reach half of that); also when I do my financial calculations, I see now that 40% at risk should be minimum to reach goals, or I have to move faster to undefined risk set-ups.
  • Except for a small short put undefined risk play in RIOT, I have been only doing defined risk strategies which are lower risk but also less profitable: I need to start looking at adding short straddles and strangles to my strategies
  • The positions I select have too low premiums compared to the commissions and fees I have to pay and the target profit I have set as a rule (50%): I need to go for higher premiums/max loss.

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

Portfolio allocation

See above: I need to start working on a balance between defined and undefined risk strategies to be added to my playbook.

This Week’s Guidelines

Open Positions Status at Beginning Of the Coming Week

I now have nine positions in FCX, FXI (2x), QQQ (2x), RIOT, EWZ, and IWM (2x).

I am still at 19% buying power, well below my target of 40%.

Goals and Schedule for this week

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

Tuesday: open a minimum of 2 vertical spreads or iron condors

Thursday: open a minimum of 2 vertical spreads or iron condors

I need high IVR underlyings and underlyings trading in ranges with apparent resistance and support areas.

Start looking at how short straddles and strangles work.

Underlyings Selected for Trading This Week

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

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

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

I added underlyings that just came out of earnings.

Options Buying Power and Portfolio Allocation This Week

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

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

However, with VIX going down to 25, I should be looking at using 5% of my total NetLiq for other strategies.

Allocation based on VIX (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

$10,852.41

Buying Power/Net Liq

$10,278.41

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

35%

$3.597,44

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

5%

$513,92

Average Max Position Allocation (BP)

3%

$308,35

Portfolio allocation undefined vs defined risk

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

This Week’s Rules

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

Option Positions in Play

Vertical Bull Put Credit Spread

FXI Short Put Credit Spread 16 Dec 19/21 Opened on Oct 27

Vertical Bear Call Credit Spread

None

Vertical Bull Call Debit Spread

None

Vertical Bear Put Debit Spread

None

Short Iron Condors

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

High IVR, so legs outside expected moves. It is a weekly and open interest was very low. Again an experiment.

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

See last week

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

See above

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

Watch Monday news on impact China’s Covid-zero decision.

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

See above

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

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

Naked Put

RIOT Short Put 28 Oct (W) 5 Opened on Oct 14

The first undefined trade is a short-term short put for RIOT. It is not the ideal set-up to get a high premium since IVR is low, but once in a while, I will allow myself an experiment.

Short Straddles

None

Other Strategies

None

Conclusion

I’m still going much too slow in opening positions and need to continue optimizing portfolio allocation and position size.

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