Entry 1 Oct 22: Navigating Choppy Waves

By: nic

Options Trading Journal Entry 1 October 2022

Again a week of choppy waves and rising volatility to the highest range we’ve seen this year. This allows me to pursue my short premium strategies, using short iron condors, bull put and bear call spreads.

The stock prices of my positions EWZ and FCX did go up this week, but VIX reached its highest point and SPY went down, so overall everything is still looking very bearish.

Navigating choppy waves in a high volatility environment also implies being on the watch-out for adjustments, like rolling to recenter positions and other opportunities to improve positions.

Also this month the next earning season starts. Since I have not added earning plays to my playbook yet, I will avoid opening positions for underlyings with earnings within 30 days from opening. So I am now mainly looking at ETFs.

My trades of the past few weeks survived the tempests this week. The prices of EWZ and FCX were too much for my liking approaching the put spreads of the iron condors and getting to close to the short strike of the EWZ vertical , but they both bumped up again. I am already looking at how I can adjust if next week things go int the wrong direction.

Last week I selected EWZ , GDX , IWM, TQQQ, LYFT, and GOLD and during the week added AMZN and EEM based on the IVR ranking I saw in Tastyworks.

I opened four new trades: three iron condors (AMZN, IWM (2x)), and one EEM bear call spread.

I now have seven positions open. This is far below the 18 I aim to have open at any time.

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

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.

And I tested them in Tastyworks and 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 (I will write about them in a future post or blog).

It looks like most of my underlyings are still in or close to the overbought area, below Keltner Channels and at the bottom of Bollinger Bands, but some are changing again. So it looks like it is going to be time again very soon to get into more bull put or bull call spreads in addition to short iron condors.

Choppy Waves
Now really taking off!

Table of Contents

Market Sentiment 1 October 2022

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

I mostly use eOption’s Closing Bell 30 September 2022 as the source.

This week was one of the roughest stretches in many years as an aggressive policy outlook from the Fed, in an effort to slow inflation, has shown signs of drastically slowing the economy.

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.

  • Euro zone inflation hit 10.0% in September, a new record high and above the 9.1% in August and ahead of economist estimates of 9.7%, that will reinforce expectations for another jumbo interest rate hike next month from the European Central Bank.
  • The UK PM and Chancellor and their ‘mini-budget’ caused investor panic and a near collapse of the UK pension system, which was prevented by the Bank of England intervening
  • Russia annexed four Ukrainian regions ‘; Putin on Friday to sign treaties with Russia-appointed occupation officials and make a substantial speech during the ceremony in the Kremlin; Zelensky pledges a tough military response from Kyiv to Russia’s annexation – Financial Times

2. VIX Index

  • The CBOE Volatility Index (^VIX) — Wall Street’s “fear gauge” — moves around 32 (highest volatility of this year).
  • 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 20% or higher is medium volatility
  • A VIX at 30% or higher means high 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 32, my maximum portfolio capital allocation is 40% 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 went further up to 106.19 from around 101, which means it is moving up from the mean (higher volatility of VIX itself).

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.

  • November WTI oil loses $1.74, or 2.1%, to settle at $79.49/bbl on Nymex

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 futures rose $3.40, or 0.2%, to settle at $1,672 per ounce on Comex, the highest finish since Sept. 22. Prices for the most-active contract ended 1% higher for the week, but they fell 3.1% for the month — down a sixth straight month — and lost 7.5% for the quarter
  • Silver futures advanced 33 cents, or nearly 1.8%, to $19.039 per ounce, with prices scoring gains of 0.7% for the week and 6.5% for the month, but down nearly 6.5% for the quarter

5. Yield Curves

  • Fears of aggressive moves from the Fed have created a rapid climb in Treasury yields, keeping sustained pressure on gold. 

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 nearly doubled in a week up to 0.50 so still moving away from 0 .
  • For some time now, the indicator has been predicting a recession.

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

  •  The 2-year yield has now posted another 12-consecutive high yield close as per CNBC, rising above 4.28% today (15-year highs). 
  • The benchmark 10-yr yield hit an 11-year high above 3.83% earlier

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).

  • University of Michigan surveys of consumers sentiment final sept 58.6 (consensus 59.5) vs preliminary sept 59.5 and final aug 58.2; current conditions index final sept 59.7 vs prelim sept 58.9 and final aug 58.6 and consumers expectations index final sept 58.0 vs prelim sept 59.9 and final aug 58.0; the 1-year inflation outlook final September 4.7% vs prelim 4.6% and final August 4.8% and 5-year inflation outlook final September 2.7% vs prelim 2.8% and final August 2.9%

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 1.122, which indicates more people are selling than buying and that the market is bearish.

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 Dow Jones Industrial [-1.6%] set a new YTD-low in last week’s session after it closed at 29,590.
  • The S&P 500 [-1.7%], Nasdaq [-1.8%] and Russell 2000  [-2.5%] closed last trading week with steep losses, which they didn’t recover this week: they went further down.

Major Stock Market Sectors

I also follow the major market sectors in Barchart.

  • Real Estate the only one green this week
  • Utilities and Information Technology in the last two places.
  • S&P 500 Index going down again, now with -1.51% compared to last week.
Main Sectors 24 Sep 2022
Main Sectors 2 Oct 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 dollar index (DXY) traded below its 20-year high of 114.78, reached on Wednesday, falling to the 112 level in recent days while Treasury yields slipped off more than 10-year highs this week for the 10-year and 2-year
  • The pound claws back the budget-shock loss it saw this week, rebounding to around 1.12/USD and outperforming G-10 FX 9hit all-time lows 1.0327 earlier this week on UK tax news)

The DXY now stands at 112.173.

12. Bitcoin

Bitcoin went up to above 19600 and is at 19261 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

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

News from the ECB on Monday and Wednesday, from the Fed on Tuesday. And data on GDP US and CPI EU.

Earnings and Dividend Calendar

Next earnings season coming up for my selected underlyings.

The first dividends are in December for GDX.

Financials

Cash Balance 1 October

Portfolio allocation

Not started

Last Week’s Options Trading

Positions Closed Last Week

None

Status Positions Active Last Week

EWZ

The price of the ETF is coming close to the put leg and short strike of, respectively, my EWZ iron condor and bull put spread. So I need to watch closely what happens next week.

I have drawn the Tastyworks ‘expected move’ for the 28 October bull put spread into my Tradingview graph, since the short strike at 28 is the first level a decreasing price will reach.

I can see immediately that the center of the position is skewing down the break-even of my bull put spread’s short strike.

Short strike bull put spread being challenged!

Also,  next week, Brazil will hold its first round of elections, and tensions are high.  Fear of political violence is one thing weighing on the ETF that tracks Brazilian stocks. 

The other is the falling price of oil.  EWZ’s holdings are heavy in oil stocks, and as /CL dropped over the past few days, so did EWZ. 

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.

FCX

With FCX I need to be extra careful since on 13 October there will be dividends and shortly thereafter on 26 October earnings. So ideally, I manage to get out latest at the end of next week.

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.

However, at this stage FCX is still in the red. Also, the price this week came down towards the short strike of the iron condor’s put spread. It bumped back later in the week and is at a respectable distance again, but still within the range of the expected move.

Expected move mapped int Tradingview
Expected move (orange) in Tastyworks platform

Positions Opened Last week

IWM

An interesting observation on Stockinvest.us regarding IWM: The ETF is at the lower part of a wide and horizontal trend in the short term, and normally this may pose a good buying opportunity, though a breakdown through the bottom trend line at $164.06 will give a strong sell signal and a trend shift may be expected. Given the current horizontal trend, you can expect iShares Russell 2000 ETF with a 90% probability to be traded between $162.70 and $198.53 at the end of this 3-month period. A break of a horizontal trend is often followed by a large increase in the volume, and ETFS seldom manage to go directly from the bottom of a trend up to the top. ETFS turning up in the middle of a horizontal trend are therefore considered to be potential runners.

Options Strategies Count Summary

Defined Risk

Week 24 September -1 October

YTD

Bull Put Spread (credit)

1

1

Bear Call Spread (credit)

1

1

Bear Put Spread (debit)

0

0

Bull Call Spread (debit)

0

0

Short Iron Condor

2

5

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 Of the Coming Week

I have now opened seven positions in AMZN, EEM, EWZ (2x), FCX, and IWM (2x).

Goals and Schedule for this week

At the end of September, I didn’t yet reach my maximum portfolio allocation. Whereas I now should be profiting with my short premium strategies from the opportunities presented by the high volatility in the market.

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 and underlyings trading in ranges with clear resistance and support areas.

Underlyings Selected for Trading This Week

This is my selection of this week. Avoiding the earnings as much as possible, looking for high IVRs.

CCL I selected since it dramatically went down after it announced earnings last Friday. I will see what happens on Monday (en Tuesday) to see whether it stays down or recovers lost ground.

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%

In allocating portfolio capital I need to use Buying Power

Cash Balance

$4.803

Buying Power

$3.653

Max Portfolio Capital Allocation (Cash Available for Trading)

40%

$1.461

Average Max Position Allocation (BP)

4%

$150

Portfolio allocation undefined vs defined risk

All my plays are defined risk. I need at later stage 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 options strategy. I will describe how I am setting up a playbook with all the strategies I want to deploy.

Example Option Playbook Bull Put Vertical Spread

Option Positions in Play

Vertical Bull Put Credit Spread

14/09/22: Sold – EWZ 28 Oct BPS 27/28 @ 25.00

Vertical Bear Call Credit Spread

27/09/22: Sold – EEM 21 Oct BCcS 36.5/38 @38.00

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

14/09/22: Sold – FCX 21 Oct Short IC 24/25/35/36 @ 26.00

26/09/22: Sold – IWM21 Oct Short IC147/149/180/182 @ 51.00

23/09/22: Sold – AMZN 21 Oct Short IC 97/99/128/130 @ 53.00

7 IWM Nov18 IC 146-149-190-193 @77

Short Straddles

To be filled in

Other Strategies

To be filled in

Conclusion

I’m going slow and am still busy trying to reach full portfolio allocation in October. I am only halfway. But the idea of trading based on high VIX levels only when all entry indicators are on green and holding back in rough and choppy times is part of the game to reach my goals.

Let’s see whether October will be bullish again and allows me to open new bull positions.

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