I still am very much trying to find my edge in options learning and trading after trading now for over 10 months. I am still waiting for a more volatile market since I like trading delta-neutral short premium a la Tastyworks (‘Tastytrade’ now) volatility much better. And I seem to have been more successful doing that.
I am still at minus $100 P/L (excluding fees!) over this year. After the first two months, and if things had been going to plan I should have already reached around $1,200.
I have been doing too many debit spreads and need to learn more about and return to short premium strategies, even when the market is low volatile.
This week I stayed on the sideline, only did a few adjustments, and opened 3 iron condors in SPY, QQQ and IWM.
I alos did some backtest retroactively. I am finding out that many of my bear puts on average are not profitable, whatver delta, DTE or duration I use. So I will for now stop with bear puts until I understand better why they are losing all the time.
I have to keep on revisiting and sticking to my playbook, and better prepare for the different moves I make. And I need to do more backtesting.
Algotrading, Quant Finance and Python
In the past few weeks, I have started reading about algotrading and using Python to program my own options trading strategies, backtesting and at certain stage even automated ordering.
Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of computers relative to human traders.
Quantitative options trading consists of trading options strategies based on quantitative analysis, which rely on mathematical computations and number crunching to identify trading opportunities.
Python is a high-level, general-purpose programming language. Its design philosophy emphasizes code readability with the use of significant indentation. Python is dynamically typed and garbage-collected. It supports multiple programming paradigms, including structured, object-oriented and functional programming.
Wikipedia
Instead of reading thick books and watching videos on YouTube, this may be a very effective way to get a better understanding of all the moving parts in the options trading engine.
There is also a large community of algotraders, quants, and Python developers on the Internet. I am now looking at courses that can help me quickly master this exciting new domain of knowledge I hope to be using in my options trading. In this journal, I will keep track of my advancements in this area.
And IS my Beta-weighting Exercise Going?
I told myself last week I needed to start monitoring beta-weighted delta! Because my strategies are too dependent on the directional move of the market.
I can use Tastyworks’ beta-weighting deltas indicator to benchmark individual positions and sum them to understand the directional exposure of my whole portfolio.
This is where I was last week when I started buying more positive delta:
And this is where I ended up this week:
Again not much progress due to the fact I still have (too?) many call debit spreads in the equation. I repeat: this game of keeping my portfolio neutrally beta-weighted is not so easy, it seems.
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.
The book is over 1000 pages, and I have finished it (by skipping the last chapters). It will be a book I will frequently revisit. It has given me a deep insight in the world of options trading and the nuts and bolts you have to understand of the engines behind it.
Table of Contents
- Last Week’s Options Trading
- Options Strategy Risk Management Rules
- Alternatives for Short Premium Strategies
- Opened Positions
- Running and Closed Positions
- Running: GLD Apr 21 173/170 Bear Put Opened on Feb 17 for $145 debit
- Running: AMD Mar 24 80/75 Bear Put Opened on Feb 17 for $245 debit
- Opened: AMD Mar 24 83/87 Bull Call Opened on Feb 7 for $200 debit
- Running: SHOP Mar 31 46/41 Bear Put Opened on Feb 17 for $260 debit
- Running: RIOT Mar 31 5.5 Short Put Opened on Feb 16 for $49 credit
- Running: TSLA Mar 31 160/165/255/260 Iron Condor Opened on Feb 17 for $150 credit
- Running: SHOP Mar 31 42/48 Bull Call Opened on Feb 16 for $300 debit
- Running: TSLA Mar 24 150/155/230/235 Iron Condor Opened on Feb 10 for $170 credit
- Running: SLV Mar 24 21.5/19.5 Bull Call Opened on Feb 8 for $103 debit
- Running: BAC Apr 21 Bull Call 35/37 Opened on Jan 27 for $105 debit
- Running: IWM Mar 17 Bull Call 186/190 Opened on Jan 27 for $243 debit
- Rolled: DAL Mar 17 Bull Call 37/41 Opened on Jan 27 for $215 debit and rolled the 41 short C down to 39.5 to a $21 credit
- 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 and closed this call wing on 30 Jan for a $240 debit, moved the put wing out on 1 Feb to Mar 17 for $30 credit and up to $286/291 on 2 Feb for $45 credit
- Running: 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 and rolled and widened the 84/86 put wing to 78/83 for a $32 credit, closed the 95/100 for a $4 debit and rolled the 78/83 puts out to Mar 31 for $33 credit
- End-of-Week Active Positions Overview
- Financials
- Market Sentiment 25 February 2023
- 1. Geopolitical Events and Economic Trends
- 2. VIX Index
- 3. Oil and Gas
- 4. Gold, Silver, and Copper (Metals & Mining)
- 5. USD and Other Currencies
- 6. Bitcoin AND crypto
- 7. Yield Curves
- 8. Producer Price Index
- 9. Consumer Price Index (CPI)
- 10. Consumer Sentiment Index
- 11. Put/Call Ratio
- 12. NASDAQ, DJI, SPX, Russel 2000 Indices, and Main Market Sectors
- Summary Market Sentiment
- This Week’s Economic Calendar
- Earnings and Dividend Calendar
- This Week’s Guidelines
- Conclusion
Last Week’s Options Trading
In the past few weeks, I have had to increasingly manage my positions for the following reasons:
- The decreasing volatility disallowed me to continue with short premium strategies.
- Unexpected bull rallies caused some of my positions to go deep ITM, so had to be closed with a loss.
- I was opening bull calls market was going up, and the market then decided to go down again.
- And vice versa.
- I was not strictly following my >33% PoP, max 50% loss, and other rules.
- I completely stopped backtesting (just forgot about it)
- Diverting my attention and little time I have to learn Python for algotrading which gives me less time to focus on options trading.
So let’s repeat the rules again:
Options Strategy Risk Management Rules
- In high volatility (VIX >20) sell high vol (IVR>30) options to collect premium income while spreading the risk over various expiration dates (staggering dates to avoid expiration density); the higher the volatility, the more of your account you can allocate to short premium strategies.
- 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).
- In low volatility (VIX < 20) buy low vol (IVR <30) debit options (you pay the premium) and lower the total allocation; the less volatility, the less money you should allocate to options trading. New rule: only sparingly enter into debit spreads (especially bear puts!), and only do this when more than three signals (technical indicators) confirm this.
- Sell and buy 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 ).
- Sell and buy options across tickers with broad sector diversity across uncorrelated sectors to spread risk (too much concentration into any given sector runs the risk of stocks auto-correlating in the same direction and potentially jeopardizing all trades within the sector-specific bucket of trades).
- 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.
- Probability of success (P50 in Tastyworks platform)> 70% to ensure a statistical edge
- 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.
- Closeout trades prior to expiration (before strike price gets challenged just before expiration (high volatility and higher loss probability!).
- Maximize the number of trades to allow the expected probabilities to play out (trade small, trade often).
- 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).
- 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:
- Long bull call and (sparingly) bear put vertical spreads
- Ratio spreads
- Long put calendars and call calendars
- Long diagonal spreads
- 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.
Opened Positions
Opened: SPY Mar 31 371/374/421/424 Iron Condor Opened on Feb 21 for $101 credit
Date
21/2/23
Underlying
400.01
PoP/P50
60%/76%
DTE
38
IVR
26.8
Δ Delta
-1.67
Θ Theta
1.792
Other
So below required IVR 30
Deltas: -0.11/-0.16/0.18/0.14
25 Feb 23: $18 in the green. I backtested this set-up after the event. I normally try to look around 200 trades examined. For Spy this goies back two years. Win rate is not so high (58%). But Median profit per day is quite high! See alos the forward startegy results. It lookst good if price remains the same.
Opened: IWM Mar 31 168/172/201/205 Opened on Feb 21 for $100 credit
Date
21/2/23
Underlying
187.34
PoP/P50
67%/81%
DTE
38
IVR
27.8
Δ Delta
-2.35
Θ Theta
2.222
Other
So a little below required IVR 30
Deltas: -0.11/-0.16/0.16/0.10
25 Feb 23: $14 in the green
Opened: QQQ Mar 31 266/269/315/318 Opened on Feb 21 for $102 credit
Date
21/2/23
Underlying
294.52
PoP/P50
62%/72%
DTE
38
IVR
29
Δ Delta
-1.556
Θ Theta
1.827
Other
So a little below required IVR 30
Deltas: -0/15/-0.17/0.21/0.17
25 Feb 23: $19 in the green
Running and Closed Positions
Running: GLD Apr 21 173/170 Bear Put Opened on Feb 17 for $145 debit
Running: AMD Mar 24 80/75 Bear Put Opened on Feb 17 for $245 debit
Date
25/2/23
Underlying
78.09
PoP
48%
DTE
28
IVR
13.8
Δ Delta
14.20
Θ Theta
-0.19
Other
Date
18/2/23
Underlying
78.50
PoP
40%
DTE
34
IVR
13.4
Δ Delta
-/-
Θ Theta
-/-
Other
25 Feb 23: $6 in the red
18 Feb 23: $16 in the red. I opened this one since my bull call was going wrong.
Let’s also retro-backtest this one.
Doesn’t look to have been a good idea.
Opened: AMD Mar 24 83/87 Bull Call Opened on Feb 7 for $200 debit
Date
25/2/23
Underlying
78.09
PoP
27%
DTE
27
IVR
13.8
Δ Delta
14.2
Θ Theta
0.14
Other
Date
11/2/23
Underlying
81.48
PoP
39%
DTE
41
IVR
16.8
Δ Delta
11.43
Θ Theta
-0.495
Other
25 Feb 23: Tumbled down and should be closed. $97 in the red.
18 Feb 23: No update
11 Feb 23: PoP is getting very low: 39%. And P/L Open % is now 20%.
7 Feb 23: opened an AMD bull call following my entry rules.
Running: SHOP Mar 31 46/41 Bear Put Opened on Feb 17 for $260 debit
Date
25/2/23
Underlying
40.74
PoP
63%
DTE
35
IVR
4.0
Δ Delta
-25.46
Θ Theta
-0.25
Other
Date
18/2/23
Underlying
43.61
PoP
49%
DTE
41
IVR
4.1
Δ Delta
-23.8
Θ Theta
-0.24
Other
25 Feb 23: $61 in the green. I did several backtest also with SHOP. Doesn’t look good for bear puts.
Bull calls are much more successful:
18 Feb 23: $24 in the green
Running: RIOT Mar 31 5.5 Short Put Opened on Feb 16 for $49 credit
Date
15/2/23
Underlying
5.87
PoP
64%
DTE
34
IVR
22.7
Δ Delta
36.62
Θ Theta
1.105
Other
IVR halved! Earnings 15 March!
Date
18/2/23
Underlying
6.59
PoP
71%
DTE
41
IVR
41
Δ Delta
26.46
Θ Theta
1.048
Other
25 Feb 23: moving up and down with BTC, now down again and $15 in the red
18 Feb 23: $6 in the red
Running: TSLA Mar 31 160/165/255/260 Iron Condor Opened on Feb 17 for $150 credit
Date
25/2/23
Underlying
196.88
PoP
68%
DTE
34
IVR
30.2
Δ Delta
1.54
Θ Theta
0.02
Other
IVR also down here (-20%)
Date
18/2/23
Underlying
208.31
PoP
63%
DTE
41
IVR
38.6
Δ Delta
0.05
Θ Theta
2.348
Other
25 Feb 23: $26 in the green
18 Feb 23: $10 in the green
Running: SHOP Mar 31 42/48 Bull Call Opened on Feb 16 for $300 debit
Date
25/2/23
Underlying
40.74
PoP
30%
DTE
34
IVR
4.7
Δ Delta
25.93
Θ Theta
0.26
Other
Date
18/2/23
Underlying
43.61
PoP
43%
DTE
41
IVR
3.8
Δ Delta
26.37
Θ Theta
-0.431
Other
25 Feb 23: $68 in the red, and PoP in danger zone (<33%)
Running: TSLA Mar 24 150/155/230/235 Iron Condor Opened on Feb 10 for $170 credit
Date
15/2/23
Underlying
196.8
PoP
68%
DTE
27
IVR
37.5
Δ Delta
-0.74
Θ Theta
-0.01
Other
Date
18/2/23
Underlying
208.31
PoP
59%
DTE
34
IVR
37.5
Δ Delta
-2.13
Θ Theta
2.288
Other
Date
11/2/23
Underlying
196.89
PoP
57%
DTE
41
IVR
44
Δ Delta
-0.37
Θ Theta
2.218
Other
25 Feb 23: $44 in the green
18 Feb 23: $ 11 in the red
10 Feb 23: Finally again a short premium play today. TESLA had higher volatility and I was able to construct an iron condor for a nice credit.
Running: SLV Mar 24 21.5/19.5 Bull Call Opened on Feb 8 for $103 debit
Date
25/2/23
Underlying
19.09
PoP
17%
DTE
27
IVR
1.6
Δ Delta
32.63
Θ Theta
-0.572
Other
Date
18/2/23
Underlying
20.01
PoP
38%
DTE
34
IVR
2.5
Δ Delta
63.07
Θ Theta
-0.935
Other
Date
11/2/23
Underlying
20.24
PoP
44%
DTE
41
IVR
7
Δ Delta
66.02
Θ Theta
-0.089
Other
25 Feb 23: Going further down and against the position. PoP far below 33% (exit rule), P/L Open% now minus 66% so must be closed (I don’t see adjustment opportunities). This was just a bad bet on SLV staying strong.
In trading on Friday, shares of the iShares Silver Trust ETF (Symbol: SLV) crossed below their 200 day moving average of $19.33, changing hands as low as $19.15 per share.
18 Feb 23: $25 in the red
8-11 Feb 23: Opened another SLV position to capture upward price. Not sure anymore why ( I am writing this three days later), so note to myself: I need to record immediately my thoughts and capture those in this journal.
Running: BAC Apr 21 Bull Call 35/37 Opened on Jan 27 for $105 debit
Date
25/2/23
Underlying
34.20
PoP
32%
DTE
55
IVR
7.2
Δ Delta
20.80
Θ Theta
-0.1483
Other
–
Date
18/2/23
Underlying
35.35
PoP
43%
DTE
62
IVR
6.2
Δ Delta
21.87
Θ Theta
-0.159
Other
–
Date
11/2/23
Underlying
35.58
PoP
45%
DTE
69
IVR
14.1
Δ Delta
18.93
Θ Theta
-0.118
Other
–
Date
4/2/23
Underlying
36.43
PoP
53%
DTE
76
IVR
5.2
Δ Delta
18.16
Θ Theta
-0.020
Other
–
Date
27/1/23
Underlying
36.67
PoP
44%
DTE
84
IVR
0.0
Δ Delta
18.83
Θ Theta
-0.101
Other
–
25 Feb 23: Further down again so going against the position. $41 in the red (39% loss). Also, PoP is below 33% now. Also with this position there seems no other way than to close it.
18 Feb 23: $13 in the red.
11 Feb 23: Going the wrong direction! But volatility going up is helping a bit, although P/L is now negative at -$5.
4 Feb 23: Not much change in the underlying price, 53% PoP now, P/L now positive $12.
27 Jan 23: To bring more delta-neutrality into my portfolio I added a BAC bull call.
Running: IWM Mar 17 Bull Call 186/190 Opened on Jan 27 for $243 debit
Date
25/2/23
Underlying
187.50
PoP
46%
DTE
20
IVR
13
Δ Delta
11.29
Θ Theta
-0.743
Other
V = 0.40
Date
18/2/23
Underlying
193.13
PoP
65%
DTE
27
IVR
0.5
Δ Delta
11.12
Θ Theta
-0.379
Other
V = -2.28
Date
11/2/23
Underlying
190.31
PoP
55%
DTE
34
IVR
16.7
Δ Delta
10.01
Θ Theta
-0.112
Other
V = -1.14
Date
4/2/23
Underlying
196.99
PoP
71%
DTE
41
IVR
5.6
Δ Delta
6.89
Θ Theta
0.271
Other
V = -2.54
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
25 Feb 23: ETF went down again and is below opening of underlying price (188.82). $25 in the red now.
18 Feb 23: $2 in the red.
11 Feb 23: Also going into the wrong direction (down). P/L took a blow and now at $11.
4 Feb 23: the underlying price went up, 71% PoP now, P/L now positive $72.
27 Jan 23: To bring more delta-neutrality into my portfolio I added an IWM bull call.
Rolled: DAL Mar 17 Bull Call 37/41 Opened on Jan 27 for $215 debit and rolled the 41 short C down to 39.5 to a $21 credit
Date
25/2/23
Underlying
$37.36
PoP
<1%
DTE
20
IVR
4.4
Δ Delta
32.79
Θ Theta
-0.797
Other
Date
18/2/23
Underlying
$38.36
PoP
41%
DTE
27
IVR
2.5
Δ Delta
46.01
Θ Theta
-0.78
Other
Date
4/2/23
Underlying
$39.58
PoP
53%
DTE
41
IVR
0.4
Δ Delta
34.07
Θ Theta
0.34
Other
Date
27/1/23
Underlying
$38.73
PoP
50%
DTE
49
IVR
0.8
Δ Delta
33.73
Θ Theta
-0.278
Other
25 Feb 23: rolled the call short for a small credit, but $169 in the red now with P/L loss since open of -61.9% so way beyond closing
18 Feb 23: $31 in the red now.
4 Feb 23: 53% PoP now, P/L at $25.
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 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 and closed this call wing on 30 Jan for a $240 debit, moved the put wing out on 1 Feb to Mar 17 for $30 credit and up to $286/291 on 2 Feb for $45 credit
25 Feb 23: 53% PoP $115 in the red; a failed play which I need to close.
18 Feb 23: $28 in the red.
3 Feb 23: The Qs also went up again, and given the fact that I really need to start trading more disciplined and actually apply my exit rules, and I was far above the 50% loss target I have set myself, I closed the ITM call wing; by rolling the put wing I can win some money back. What is left from this iron condor play is a Mar 17 bull put 286/291 at 72% PoP, $14 in the red, and put strikes at -21/27 delta.
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%.
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.
Running: 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 and rolled and widened the 84/86 put wing to 78/83 for a $32 credit, closed the 95/100 for a $4 debit and rolled the 78/83 puts out to Mar 31 for $33 credit
25 Feb 23: $16 in the green
18 Feb 23: $89 in the green (at 40% profit) with 66% PoP
4 Feb 23: As long as I can get extra credits along the way to expiration I will do so. The Mar 17 iron condor 78/83/95/100 now shows a 61% PoP and is $66 in the green with now the short put at 0.34 delta since XLE went down in price to 85.96.
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 is 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.
End-of-Week Active Positions Overview
Financials
Cash Balance 25 February 2023
I again went onto the reed with my P/L YTD. In the week it nearly reached minus $200. On Friday it went back to around -$100.
I am more and more trading optimally, making full use of my cash, optimizing my positions etc . but am still making mistakes in chosing the right directions and the right options strategies.
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), I am adding non-short premium and passive income strategies to optimize my portfolio.
- Except for a small short put undefined risk play in RIOT, I have been only doing a limited number of defined risk strategies which are lower risk but also less profitable: I may need to start looking at adding other defined risk strategies, and once in a while short straddles and strangles based on low prices underlyings. But my account is at this stage really to small for this.
- 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. I am far away from achieving this.
- BUT MOST IMPORTANTLY: I SHALL ABIDE TO MY ENTRY, ADJUSTMENT AND EXIT RULES !
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Market Sentiment 25 February 2023
- Stocks fell sharply Friday to wrap up their worst week so far this year, as the Federal Reserve’s preferred inflation gauge unexpectedly accelerated in January and consumer spending surged.
- Consumer spending surged 1.8% last month, the biggest increase in nearly two years. Investors worry the figures will add pressure on Fed policymakers to keep ratcheting up interest rates.
- U.S. Treasury yields rose in response, with the two-year note climbing nine basis points to 4.78% and the benchmark 10-year yield adding seven basis points to 3.95%.
- Stocks and other risk assets continued to pull back as the threat of an inflation acceleration pushed bond yields higher.
- The Fed’s preferred inflation metric, core personal consumption expenditures (PCE), came in hotter than expected in January. With the tight labor market, the Fed’s likely to keep rates higher for longer to avoid inflation reaccelerating. This month’s data is concerning.
- US equities slid after disappointing inflation data but found some support around the 200dma in the S&P 500. An array of Fed speakers then took over, but comments were fairly measured, if not a bit dovish.
- And then news on one of the symbols I trade in: SQ 4Q22 results came in above expectations on both the top and bottom line as impressive results in Cash App offset softer Seller results as FX headwinds; said it was slowing down hiring this year but would still increase headcount by around 10% through the end of 2023.
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.
- China apparently weighing in on Ukraine? (Source: Seeking Alpha)
2. VIX Index
- A bit more fear in the market again this week (and month) as the CBOE Volatility index (VIX) is now at 21.67.
- 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 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 up to 85.26 so close to the long-term average. Down from last week.
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.
- April WTI crude oil settled +$0.93, or +1.23%, at $76.32/bbl., while Brent crude April futures finished at $83.16/bbl, up $0.95, or 1.16%. The better close marked the second consecutive up day for WTI futures after a six-session decline.
- April natural gas settled +$0.116, or +4.77% to finish a strong week and mark the best weekly gain since late November.
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.
- April gold settled -$9.70, or -0.53%, at $1,817.10/oz. The move marked another new lowest close of 2023 and the fourth consecutive down week after today’s stronger inflation data again reinforced the higher-for-longer rates reality.
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.
- The US dollar hits fresh two-month high above of 136 vs yen, and the dollar index (DXY) hits 7-week highs above 105 after this mornings’ economic data.
6. Bitcoin AND crypto
- Bitcoin up to 23023!
7. Yield Curves
- U.S. Treasury yields jumped with two-year yields hitting highest levels since 2007 above 4.77% after data showed that U.S. consumer spending rebounded sharply in January amid strong income growth, while inflation accelerated.
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
- The inversion of the yield curve revisited its widest point since 1981 on Thursday morning, as the spread between the U.S 10 Year Treasury yield (US10Y) and the U.S. 2 Year Treasury yield (US2Y) reached a gap of more than 80 basis points.
- The separation between the two instruments touched -85 basis points. This came as the 10Y dipped 5 basis points to 3.58% and the 2Y slid 2 basis points to 4.43%.
“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).
- See chart above.
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.
- December monthly CPI was revised from -.1% to +.1%. Bureau of Labor Statistics released benchmark revisions. Revisions include seasonal adjustment factors. Ex food and energy was up +.4% vs +.3%.
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).
- Meanwhile, February’s Michigan Consumer Sentiment rose 3.2% to its highest level in about a year. Driving that was a reduction in fuel prices, which helped improve consumers’ outlook on inflation and the economy
- 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.
- Consumer sentiment was essentially unchanged at 1.5 index points above January. Recent developments in the economy, both positive and negative, have led to mixed attitudes among consumers with little net change in February.
- After three consecutive months of increases, sentiment is now 6% above a year ago but still 14% below two years ago, prior to the current inflationary episode.
- Overall, high prices continue to weigh on consumers despite the recent moderation in inflation, and sentiment remains more than 22% below its historical average since 1978.
- Combined with concerns over rising unemployment on the horizon, consumers are poised to exercise greater caution with their spending in the months ahead.
- Source: Survey of Consumers University of Michigan
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 up to 1.144, which indicates bearishness.
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
- For the week, the Dow Jones dropped 3% for its fourth straight losing week, the S&P 500 shed 2.7% in its worst week since early December, and the tech-heavy Nasdaq sank 3.3%.
Major Stock Market Sectors
I also follow the major market sectors in Barchart.
- 3 of 11 sectors closed green. Materials (+0.68%) led, and real estate (-1.85%) lagged
- S&P 500: down -1.05% from –1.38% last week
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 at a slow rate
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
- PMIs, Consumer confidence, CPI and ECB
Earnings and Dividend Calendar
In general, I tend to avoid earnings or dividends (and other major events within 30 days of opening a position). Earnings are somewhat out again (start next month).
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 17 positions which is around the average I need to have running to maximize my portfolio allocation at 2-3% position sizes and 50% overall allocations.
I am now at below 40% buying power usage of which half is for iron condors. I have set the maximum allocation at 50%, so I still have some room for new positions.
I can exceptionall7 go up to 70% but I want to have at least a minimum of 30% in cash at all times, so can use 20% more in my account for emergencies or opportunities (so now 35% short premium and 15% debit/long strategies and 20% for emergencies).
Goals and Schedule for this week
Sunday: set up options strategy ideas and perform backtesting; select at least two options strategy ideas.
Until Tuesday: open one more vertical spread or iron condor and a long position.
Rest of the week: start looking at strategies involving buying bills or bonds for the remaining 10% of the 50%.
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.
My expectation (or rather: hope) 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
$9,788.20
(was $9,453.11 )
Buying Power/Net Liq
$10,327.20
(was $10,462.11 )
Max Portfolio Capital Allocation Short Premium (Cash Available for Trading)
35%
$3,614,52
Max Portfolio Capital Allocation Other (low risk, long positions)
15%
$1,549.08
Average Max Position Allocation (BP)
3%
$309,82
I now have only $2,870 allocated for short premium, so can add new credit position (s) up to $750. For long premium, I have only $1,200 in place, so ! can add new debit position (s) up to $350.
Portfolio allocation undefined vs defined risk
All my plays are ‘defined risk.’ I need to add undefined risk positions at a later stage. I will explain why in my blog post on constructing trades.
Since my average maximum position allocation is up to 3% and close to $310, 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
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.
