Options Trading Journal Entry 17 September 2022
The first two trades I opened my journey with were both EWZ. This was done in the middle of a bad week for the markets. My philosophy is if you trade bad situations like this you can trade any market. On verra.
September 13 will be remembered as a day investors got slaughtered. All the major indexes were down more than 3.5% that day.
We are still going down. Everything looks very bearish.
It was also the day I decided to put on my first formal trade.
I had selected EWX, GDX, LYFT, and SNAP and during the week added IWM and C (again) based on IVR ranking I saw in Tastyworks.
I again followed the stocks (and other underlyings) in TradingView (technical analysis) and StockInvest.us during the week. Every day I received Google Alerts which I diligently studied.
I created some ideas for EWZ, IWM, GDX, and C within the limitations I have set myself as for entry rules (I will write about them in a future post). And I tested them in Tastworks and backtested them in Tastytrading’s Lookback backtesting app and entered them during the week in the platform.
In the end, only one EWZ iron condor and one EWZ vertical bull put spread position were opened.
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.
In parallel, I worked on my trading journal spreadsheet where I track all data related to each position. This will remain a work in progress and will be further finetuned. I now have to fill in more than 50 lines per trade, so I need to start culling not really needed information.
And of course, on the other days, when I had time and kept track of my positions in Tastyworks and any news related to my open positions. Although I am not (yet?) a day trader, I every day whenever I have time look at what’s happening in the market.
Table of Contents
- Options Trading Journal Entry 17 September 2022
- Market Sentiment 17 September 2022
- 1. Geopolitical Events and Economic Trends
- 2. VIX Index
- 3. Oil and Gas
- 4. Gold, Silver, and Copper (Metals & Mining)
- 5. Yield Curves
- 6. Producer Price Index
- 7. Consumer Price Index (CPI)
- 8. Consumer Sentiment Index
- 9. Put/Call Ratio
- 10. DJI, SPX, Russel 2000 Indices, and Main Market Sectors
- 11. USD
- 12. Bitcoin
- Summary Market Sentiment 17 September 2022 (unchanged from last week)
- This Week’s Economic Calendar
- Earnings and Dividend Calendar
- Financials
- Last Week’s Options Trading
- This Week’s Guidelines
- Conclusion
Market Sentiment 17 September 2022
Every week I start with a review of the current market sentiment.
I mostly used eOption’s Closing Bell 16 September 2022 as the source.
This week was not a good week for the markets. September 13 will be remembered as a day investors got slaughtered. All the major indexes were down more than 3.5% that day.
Stocks fall further on Friday, closing out one of the worst weeks of the year as a profit warning in the transportation sector (Fedex) renew fears about a recession/slowing economy, while investors position themselves ahead of next week’s two-day FOMC policy meeting where another 75-bps rate is widely expected.
Later this week, key inflation reports due with June CPI and PPI reports likely market catalysts.
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 death of Queen Elizabeth II is still deflecting the country from UK’s real and deep economic woes
- The British Pound fell below the $1.14 level vs. the US dollar today after weak UK retail sales, the lowest levels since 1985
- Ukraine is still on a winning spree pushing back Russia into a humiliating retreat, but this does not mean the war will be over soon
- Recession fears in Europe continue to weigh on investor minds; however, the EU – unlike the UK – seems to be dealing better and better with the soaring natural gas and consumer prices
- Recession fears in the U.S continue to worry investors
- In Europe, the CAC 40 index ends the week 2.17% lower at 6077.30, falling a 4th straight day, The FTSE 100 Index is down 114.39 points or 1.56% this week to 7236.6.8 and the German DAX down 346.95 points or 2.65% this week to 12741.26, snaps 2-week winning streak. (source: eOption News)
2. VIX Index
The CBOE Volatility index (VIX), or fear index, hit its highest level in two months of 28.45 before paring gains. Today it is down to 26.30 again.
- A VIX below 15% is very low volatility. A VIX of 15% or below 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, it’ll 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 not adequate for short premium plays which require high volatility. This is where long calls and puts and debit spreads may be set up. Only when VIX gets closer to 30% selling options become viable.
- A VIX at 30% or higher means higher volatility. When selling options, you want to be selling 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 0f around 25, my maximum portfolio capital allocation is 35% of net liq.
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 play a very important role in how I size positions and portfolio allocation. Since my focus is on short premium trading, I must strike a balance between exposure to large losses and being able to reach 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 97 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 uses. The index measures the “volatility of volatility, or the “vol of vol.”
Today, the VVIX is trading at about 92.4 up from 85, which measn it is reverting back to the mean.
The VVIX/VIX Ratio
See more in this Tastyworks video.
3. Oil and Gas
The next sectors I look at – to understand market sentiment – are, due to their huge impact on the global economy, metal & mining.
- Oil prices finished flat on Friday, with WTI crude up 1c to $85.11 per barrel, posting its 3rd consecutive weekly decline amid a resurgent dollar, demand concerns given signs the economy is slowing (FDX warning), and rising interest rate fears ahead of the Fed next week.
- Gas pump prices in the US move down to $3.69/gallon (national average), 26% below their all-time high in mid-June and at their lowest levels in over 6 months.
4. Gold, Silver, and Copper (Metals & Mining)
The next sectors I look at – to understand market sentiment – are, due to their huge impact on the global economy, precious metals.
- Gold prices rose $6.20 or 0.4% to settle at $1,683.50 an ounce after falling -1.9% the day prior and settling at its lowest since April 2020.
- A surge in the dollar and yields have pushed gold lower but bounced today as they eased.
5. Yield Curves
Understanding yield curves also adds to better reading the market sentiment.
This week treasury yields drop along with gold prices.
A yield curve is a line that plots the yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.
There are three main shapes of yield curve shapes: normal (upward sloping curve), inverted (downward sloping curve), and flat. Upward sloping (also known as normal yield curves) is where longer-term bonds have higher yields than short-term ones.
Normal curves point to economic expansion, 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.
- The 10-year-3-month treasury spread is at 0.25 so still close to 0 .
- So for some time now, the indicator has been predicting a recession.
ii. The 2-Year/10-Year Yield Curve
- In bond markets, the yield on the benchmark 10-year Treasury note ticked up above 3.49% from 3.458% Thursday.
- The two-year Treasury yield, more sensitive to near-term Fed interest-rate expectations, climbed further above 3.901%, after settling at 3.871% on Thursday, the highest since October 2007.
- The move over the last month has been astounding, with the 10-yr off lows around 2.6% early August to 3.5% today (and off levels of 1.3% y/y).
- The 2-yr yield is also up about 100-bps over the last month or so and off levels around 0.2% y/y).
- The yield curve inversion between the 2s and 10s widened to 45 bps.
- The overall U.S. and global macroeconomic story is getting worse while the dollar is getting stronger.
- The 2-year/10-year yield curve spread inverted on April 1, 2022, for the first time since 2019. It is still inverted today.
From SeekingAlpha:
“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 when the yield curve is inverted, investors tend to be right about economic weakness on the horizon. 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.
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, it is an indication that prices could be trending higher, with inflation on the rise.
- However, consumer prices are still rising (although the steep slope is weakening slightly)
8. Consumer Sentiment Index
A low CSI index reflects the general (dis-)satisfaction with managing of U.S. economic policies. A high satisfaction rating suggests approval of the current policy management and implies market stability. Surveys of Consumers (umich.edu).
- Consumers sentiment prelim Sept 59.5 vs. consensus 60.0 and vs final aug 58.2, so up again
- Current conditions index prelim sept 58.9 (consensus 60.8) vs final aug 58.6; consumers expectations index prelim sept 59.9 (consensus 59.7) vs final aug 58.0.
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 2.0.
- The put/call ratio went steeply up to 1.2 which indicates a bearish market
Warning: previous research conducted by tastytrade revealed that the Put/call Ratio is not a reliable trading indicator. To review that research in greater detail, readers can check out this installment
10. DJI, SPX, Russel 2000 Indices, and Main Market Sectors
In general, I look at the main 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
- The Nasdaq posts its worst weekly return since January, down around 6%.
- The S&P 500 (SP500) posted its worst weekly performance since mid-June, slumping 4.78% for the five-day session. The losses came on the back of a solid 3.65% gain last week.
- Dow (DJI) is off 3.7% after is advanced 0.8% last week
· The Russell 2000 Index was little changed down -0.24 points or 0.01% to 1,769.36
Major Stock Market Sectors
I also follow the major market sectors in Barchart.
- Only Consumer Staples and Real Estate slightly in the plus
- Energy and Industrial in the last two places.
- S&P 500 Index going down from 1.53% last week to -0.725 TODAY.
11. USD
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 now stands at 108.973, slightly down from last week’s 109,609.
- The U.S. dollar eased off best levels coming off 24-year highs vs. the Japanese yen, the euro battling to stay above parity vs. the dollar, and the British Pound fell below the $1.14 level vs. the US dollar today after weak UK retail sales, lowest levels since 1985.
12. Bitcoin
Bitcoin made a move down from high 22781 on 12 September to 19887 today with a high volume down on 13 September 2022.
Summary Market Sentiment 17 September 2022 (unchanged from last week)
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
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
The Federal Reserve’s battle to combat inflation will dominate the conversation next week with the Federal Reserve holding a two-day meeting to set policy. Expectations are high that the FOMC will fire off a full point rate hike at the meeting after the consumer price report for August came in hotter than anticipated. Nomura now expects a terminal rate of 4.50% to 4.75% by February of 2023 before inflation is expected to cool rapidly, especially as the year-over-year comparisons to the war in Ukraine start to come into play. (Source: SeekingAlpha)
On Monday and Tuesday a lot of GB numbers coming in. On Tuesday also the US CPI and on Wednesday the PPI. The EU PPI follows on Friday.
The CPI inflation report for August will be one of the most important ones in the week ahead. The report is expected to show that prices rose 8.1% in August which would mean a second straight month of deceleration.
Earnings and Dividend Calendar
Next earnings within 45 days for my selected underlyings.
The first dividends are in December for GDX.
Financials
Cash Balance 18 September
| Week 10-16 September | Month September | Year 2022 | |
| Beginning Account Cash Balance | $4,527.73 | $4,527.73 | $6,019.87 |
| Deposits (Div. & Int.) | $0.00 | $0.00 | $0.00 |
| Withdraws (paycheck1) | $0.00 | $0.00 | $0.00 |
| Premiums on Open | $57.00 | $57.00 | $57.00 |
| Premiums on Close | $0.00 | $0.00 | -$1,353.08 |
| Commissions Paid | -$6.00 | -$6.00 | -$116.00 |
| Fees Paid (total) | -$0.82 | -$0.82 | -$30.10 |
| Dividends/Interest Received | $0.00 | $0.00 | $0.22 |
| Ending Account Cash Balance | $4,577.91 | $4,577.91 | 4,577.91 |
| Total Gain/Loss | $50.18 | $50.18 | -$1,492.14 |
| At risk | -$86 | ||
| ROR | n/a | ||
| ROC | n/a |
Portfolio allocation
Not started
Last Week’s Options Trading
Positions Closed Last Week
None
Positions Opened Last week
I will also explain which sources I used and how I researched the options ideas I created for each position I set up (BarChart, Lookback, etc).
Last week I (again) opened 2 new positions.
Options Strategies Count Summary
Defined Risk
Week 10 -16 September
YTD
Bull Put Spread (credit)
1
1
Bear Call Spread (credit)
0
0
Bear Put Spread (debit)
0
0
Bull Call Spread (debit)
0
0
Short Iron Condor
1
1
Undefined Risk
Short Option
0
0
Short Straddle
0
0
Short Strangle
0
0
End-of-Week Active Positions Overview
This Week’s Guidelines
Open Positions Status at Beginning Week
Last week I Opened two new positions in EWZ.
Goals and Schedule
At the end of September, I want to have reached maximum portfolio allocation.
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
For this, I need high IVR underlyings.
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.
Allocation based on VIX
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%
Cash Balance
$4.577
Max Portfolio Capital Allocation (Cash Available for Trading)
35%
$1,602
Portfolio allocation undefined vs defined risk
To be set up
Underlyings Selected for Trading This Week
Based on the criteria for stock selection (high liquidity, high volatility, technical, no earnings/dividends etc.), I have filtered the following ETFs and stocks for this week to focus on: EWX, GDX, IWM, TQQQ and in reserve LYFT, and GOLD since earning are coming up for both of them. And, as always, I will keep an eye on RIOT give the moves in Bitcoin to which RIOT is much correlated.
- EWZ (high IVR)
- GDX (high IVR)
- IWM (high IVR)
- TQQQ (high IVR)
- LYFT (high IVR and earnings coming up 1 Nov)
- GOLD (high IVR but earnings 3 Nov)
I need to revisit this as soon as the market opens again tomorrow.
And I will also check in my BarChart screeners to see whether there are results I can use to set up positions. In a future post, I will explain how I set up the screeners.
This Week’s Rules
This week I will start a post with my entry, adjustment, and exit rules per options strategy.
Vertical Bull Put Credit Spread
14/09/22: Sold – EWZ 28 Oct BPS 27/28 @ 25.00
Vertical Bear Call Credit Spread
To be filled in
Vertical Bull Call Debit Spread
To be filled in
Vertical Bear Put Debit Spread
To be filled in
Short Iron Condors
14/09/22: Sold – EWZ 21 Oct Short IC 26/27/34/35 @ 32.00
Short Straddles
To be filled in
Other Strategies
To be filled in
Conclusion
So, I have taken off. After three days I am slightly in the red with the bull put spread due to the slump on Friday.
I also am now tracking everything. This is taking much of my time, so I will try to find ways to do this faster.
