Entry 21 Jan 23: Preparing for Earnings

By: nic

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

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

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

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

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

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

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

Options as a Strategic Investment

The book is over 1000 pages, and I am now at page 705 reading about volatility trading.

Fishing for good earnings trades
Fishing for good earnings trades

Table of Contents

Last Week’s Options Trading

In the second week of this year, I didn’t do much trading. I closed down some positions (SHOP) of which some were being challenged (SHOP), rolled the RIOTs out (again) for some extra credit, and opened a QQQ bear call and XLU iron condor to replace the bull put (which I also closed).

Options Strategy Risk Management Rules​

  1. Sell options to collect premium income while spreading the risk over various expiration dates (staggering dates to avoid expiration density).
  2. Sell options on tickers that are liquid in the options market (to open and close positions easily and ensure trades can be filled with narrow bid-to-ask spreads for optimal option pricing ​).
  3. Sell options across tickers with broad sector diversity across uncorrelated sectors to spread risk (too much concentration into any given sector runs the risk of stocks auto-correlating in the same direction and potentially jeopardizing all trades within the sector-specific bucket of trades ).
  4. Sell options at high IVR (>30)  to extract high (overpriced) premiums (‘overpriced’, since predicted volatility is nearly always overestimated, and stocks are less volatile than predicted so implied volatility implosion or IV reversion to the mean allows for profits to be taken early when stocks fail to be as volatile as predicted). ​
  5. As much as possible (given a small account) stick to risk-defined trades (put spreads, call spreads, and iron condors) to mitigate risk and reduce the amount of capital required for any given trade.
  6. Probability of success (P50 in Tastyworks platform)> 70% to ensure a statistical edge
  7. Closing the trade and realizing profits at >50% premium early in the option lifecycle and re-invest the capital made free towards additional trades.
  8. Closeout trades prior to expiration (before strike price gets challenged just before expiration (high volatility and higher loss probability!).
  9. Maximize the number of trades to allow the expected probabilities to play out (trade small, trade often).
  10. Size position/portfolio allocation to manage risk exposure (worst-case scenarios always need to be considered therefore I conservatively use small allocations to options trades, so only 4% of my portfolio should only be used for any given trade). 
  11. Keep an adequate amount of cash on hand (~40% in my case) to protect your portfolio against any major market downturns (i.e., Covid-19 and Q1 2022, 2023 recession(?). Cash also gives me the possibility of buying of stocks/long equity at heavily discounted valuations. ​

Alternatives for Short Premium Strategies

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

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

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

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

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

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

In addition, I will start studying earnings plays.

Opened POSITIONS

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

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

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

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

Underlying

$29.18

PoP

59%

DTE

55

IVR

30.2

Δ Delta

1.023

Θ Theta

n/a

Other

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

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

Underlying

$29.29

PoP

57%

DTE

56

IVR

31.6

Δ Delta

-0.05

Θ Theta

n/a

Other

67% P50 (probability of reaching 50% profit)

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

Delta neutral

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

21 Jan 23: The underlying price went up, IVR increased, delta moving to more short. I amd now -$2 in the red.

Underlying

$395.88

PoP

54%

DTE

55

IVR

9.7

Δ Delta

-2.75

Θ Theta

0.016

Other

-0.28 delta now for OTM short call leg

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

Underlying

$391.85

PoP

51%

DTE

56

IVR

8.5

Δ Delta

-1.81

Θ Theta

n/a

Other

72% P50 (probability of reaching 50% profit)

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

Delta neutral

Opened on Jan 18: XLF Mar 31 Bear Put 37/34 for $132 debit

21 Jan 23: Three days later my P/L Open is at $0. The underlying went slightly down, same with IVR (for a bear put you’d rather having it going up). Delta more short, theta down to nearly notjing.

Underlying

$35.35

PoP

54%

DTE

69

IVR

9.1

Δ Delta

-43.48

Θ Theta

0.003

Other

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

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

Underlying

$35.42

PoP

54%

DTE

72

IVR

10.5

Δ Delta

-40.58

Θ Theta

0.204

Other

66% P50 (probability of reaching 50% profit)

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

Here my set-up for bear puts:

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

Running and Closed Positions

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

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

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

Here my set-up for bull calls:

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

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

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

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

Opened on Jan 13: RIOT Feb 17 Iron Condor 3.5/5.5/8/10 for $70 credit

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

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

Opened on Jan 10: RIOT Feb 24 Short Put 5 for $59 credit

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

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

Opened on Jan 10: RIOT Feb 17 Short Put 5 for $60 credit

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

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

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

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

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

Here are the possibilities:

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

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

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

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

Running: Opened on 30 Dec: SPY Iron Condor Feb 17 343/348/411/416 for $128 credit

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

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

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

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

Running: Opened on 29 Dec: QQQ Iron Condor Feb 17 235/240/294/299 for $138 credit

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

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

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

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

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

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

QQQ

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

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

QQQ stock breakdown

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

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

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

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

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

Rolled: Opened on 28 Dec: AAPL Iron Condor Feb 17 105/110/145/150 for $136 credit and rolled the 105/110 put legs to 120/125 for a $61 credit.

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

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

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

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

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

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

AAPL

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

Running: Opened on 23 Dec 22: Feb 17 TLT Iron Condor 92/95/111/114 for $77 credit

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

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

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

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

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

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

TLT

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

Closed: Opened on 22 Dec 22: Mar 17 EEM Bull Call 37/39 for $110 debit and closed on 18 Jan for $173 credit

21 Jan 23: closed at the 60% target I had set for it in the Tastyworks platform.

14 Jan 23: See above: I entered a position with an underlying who I should not have selected. My rule is that the bid-ask spread should not be wider than $0.10. EEM has spreads that go far beyond this rule.

Also, never leg out if the underlying price goes up/increases fast: lock in profits by purchasing the put counterpart (for a fractional debit), adding risk to the initial strategy, neutralizing the portfolio’s ∆β to rebalance (improve the statistical edge). I found this in a Tastyworks book but it was not further explained. I have to understand this. Do they mean a bear put? And what is ‘fractional?

7 Jan 23: 17 days since opening and both legs are IT now. P/L is at $39 in the green and PoP at 66% now. If the underlying price increases to/slightly above the short call (higher strike) profit increases because the short call is now closer to the money and decreases in value faster than the long call: both calls are ITM and the potential profit = spread width – net debit (‘theoretical profit’). However, there also is a theoretical assignment risk. However, this happens mainly related to dividends, and there is no dividend upcoming soon for EEM.

If I see better opportunities, I will close this one for a smaller profit.

31 Dec 22: P/L Open is now at $58 which is above 50% profit and coming close to my 60% profit target.

24 Dec 22: EEM looks bullish to me but has very low volatility, so I am trying out a bull call debit play. At entry, I looked at the intrinsic value of the long call at 60 delta (should be equal to or higher than the net debit you pay, which itself should be in the middle of the spread, 50% PoP, short call at 40 delta, etc.). $21 in the red now. I already see that bull calls are not as easy as a bull put or bear call spread.

Running: Opened on 19 Dec: XLE Iron Condor Feb 17 73/75/96/98 for a $59 credit

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

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

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

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

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

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

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

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

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

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

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

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

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

SLV

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

Running: Opened on 7 November: EWZ Bull Put 16 Dec 26/30 for $102 Credit, Rolled to Mar 17 for Additional $22 Credit

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

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

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

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

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

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

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

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

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

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

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

EWZ

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

Closed: AAPL Bull Put 20 Jan 120/125 Opened 23 Dec for $64 Credit, rolled to Feb 17 for additional $33 credit and closed on 20 Jan for a $74 debit.

21 Jan 23: Closed this one for a small profit, so I could make room for rolling up the put wing of my iron condor on the same date. I am finding out you cannot have two separate positions at the same strikes on the same date in Tastyworks (and maybe all other platforms). So in this case I wanted to roll my iron condor put-wing to the same 120/125 position. This cannot be done. I need to see whether there are workarounds.

14 Jan 23: 35 days since opening and also this one really did well: $66 in the green now and PoP at 77%, short call leg now highest at -0.22 delta.

7 Jan 23: 28 days since opening and $6 in the green now and PoP at 64%, short put leg still at 0.37 delta.

31 Dec 22: $2 in the green, 62% PoP, and short leg at 37 delta.

24 Dec 22: closed the 160/165 call leg of the AAPL Iron Condor 20 Jan 120/125/160/165 Opened 29 Nov for $123 Credit for $4 a debit, making a $55 profit.

17 Dec 22: at $23 profit now, both short strikes are still around 15 delta, PoP at 70%.

10 Dec 22: at $24 profit now, both short strikes are still around 13-15 delta, PoP at 72%.

3 Dec 22: $1 in the green. Mainly a volatility play.

AAPL

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

End-of-Week Active Positions Overview

Financials

Cash Balance 21 January 2023

This week my P/L YTD shot up to close to $600. But on Friday I saw it melting away like snow. And I ended up below $500. The main reason was that the market decided to have a Friday late afternoon rally. And it is still more than the week before, so I should be (and am) happy.

And as I described in the last entries, I had an issue reconciling the 2022 and 2023 P/L YTD numbers. I have stopped worrying about this since the difference is under $100. Something must have gone wrong around 31 December in noting down the net liq. It was not $1588 but around $65 higher.

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

The points I have to look at are:

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

Find out more about the platform I love to use for my options trading:

If you like it as much as I do and want to open an account, click here:

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Market Sentiment 21 January 2023

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

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

1. Geopolitical Events and Economic Trends

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

  • The war between Russia and Ukraine is still raging on; nobody except Putin is happy with Germany.
  • Despite a difficult year for most global equity markets, the S&P Latin America BMI gained 4.9% in 2022, and it was the only major regional equity market to close the year in positive territory.
  • The U.S. reached its statutory debt limit of $31.4T this week, prompting a series of extraordinary measures to avoid a default on government debt. There might be drastic impacts on the financial condition of the Fed.

2. VIX Index

  • The CBOE Volatility Index (^VIX) — Wall Street’s “fear gauge” — still under 20.
  • 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

Wall Street’s classic “fear gauge” hasn’t been this subdued since before the Federal Reserve started raising interest rates and Russia invaded Ukraine. It is now at 19.85 after this week being above 20 again.

So my maximum portfolio capital allocation for short premium strategies should be reduced to 30% of net liq.

See also on this subject this Tastytrade video.

VIX

< 15

15-19

20-29

30-40

>40

Volatility

Lowest volatility, all comfortable

Market in ‘lull’ mode

Volatility high

Volatility very high

Volatility and fear levels highest

Maximum portfolio capital allocation

25%

30%

35%

40%

50%

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

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

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

Today, the VVIX went considerably up to 81.03. So moving back to the mean.

The VVIX/VIX Ratio

See more in this Tastyworks video.

3. Oil and Gas

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

  • Crude Oil WTI +2.4% to $81.96/bbl.
  • Natural Gas -8.3% to 3.134 (warm weather).

4. Gold, Silver, and Copper (Metals & Mining)

To understand the market sentiment, I look at the following sectors: precious metals and mining due to their massive impact on the global economy.

  • Gold  +0.3% to $1,927.7/oz. continuing strong uptrend.

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 U.S. dollar was mixed, declined though outperformed against the Japanese yen rising 1%. 

6. Bitcoin AND crypto

  • Better times for most crypto (and therefore also everything blockchain).
  • Bitcoin rises for the 16th time in the last 17-trading days, up roughly 29% YTD after a dismal 2022 campaign, now 22950 (!) from 20823 last week.

7. Yield Curves

  • U.S. Treasury yields rose Friday, with two- and 10-year bonds extending a rise from four-month lows at mid-week but still posted a third straight weekly decline as investors weighed mixed signals on the economy.
  • Ten-Year Bond Yield -0.2 bps to 3.482.

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

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

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

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

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

Source: Investopedia

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

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

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

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

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

  • The 2s10s curve is at its deepest level of inversion in forty years. For only the fourth time on record and for the first time since 2009, bearish sentiment has fallen double digits in back-to-back weeks
  • Ten-Year Bond Yield -0.2 bps to 3.482.

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

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

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

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

Source: SeekingAlpha

8. Producer Price Index

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

Source: Bureau of Labor Statistics (BLS).

9. Consumer Price Index (CPI)

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

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

10. Consumer Sentiment Index

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

Source: Surveys of Consumers (umich.edu).

  • Consumer sentiment (as per the UoM data) going up again after hitting its lowest level.
  • U.S. consumer sentiment was the most positive in eight months as falling energy prices brought down inflation expectations.

11. Put/Call Ratio

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

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

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

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

NASDAQ, DJIA, SPX, IWM

  • All again very green AGAIN at the end of the week.

Major Stock Market Sectors

I also follow the major market sectors in Barchart.

  • Every sector closed green. Communication services (+3.13%) led, and health care (+0.53%) lagged 
  • S&P 500: up 1.89% from 0.40% up last week
14 January 2023.40
21 January 2023

Summary Market Sentiment

Bull market

Bullish

Neutral/bearish

Bearish

Bear market/crash

1. Geopolitical events and economic trends

Positive trends, stable supply chains

Minor market issues, minor supply chain issues

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

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

The total collapse of the global market, deep recession

2. VIX (VIX)

<15

Lowest volatility, all comfortable

15-19

Market in ‘lull’ mode

20-29

Volatility high (down from above 30)

30-39

Volatility very high

>40

Volatility and fear levels highest

3. Oil & Gas (XOP)

Oil & gas

Minor market issues, minor supply chain issues

National events, market issues

International supply chain interruptions, high oil & gas prices

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

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

Gold, silver, and Copper stable

Minor market issues, minor supply chain issues

National events, market issues

International supply chain interruptions

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

5. US Dollar Currency Index (DXY)

Very weak dollar versus other currencies

Weak dollar

Neither weak/nor strong dollar

Strong dollar

Very strong dollar

6. Bitcoin (BTCUSD)

Bitcoin rising

Bitcoin rising slightly slower

Bitcoin “thrashing” at the same level

Crypto crashes, market corrections

Bitcoin or other cryptos or companies collapse

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

Considerably steep curve

Steep curve

Average but still positive curve

Flattening, inverting, and approaching zero

Inverted curve and negative

8. Producer Price Index (PPI)

Lowest price level

Price level higher than normal

Price levels rising fast

The price level is very high

Highest price level

9. Consumer Price Index (CPI)

Lowest price level

Price level higher than normal

Price levels rising fast

The price level is very high

Highest price level

10. Consumer Sentiment Index (CSI)

High consumer confidence

Consumer confidence is less high

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

Low consumer confidence

No consumer confidence

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

Well below 0.5 (very bullish)

Close to 0.5 (bullish)

Between 0.5 and 1.0 (neutral)

Between 1.0 and 2.0 (bearish)

Above 2.0 (severely bearish)

12. Dow Jones (DJI)

S&P 500 (SPX)

Russel 2000 (RUT)

Major Market Sectors (XLE, XLF, etc)

Strong bull market
No real changes in an upward trend

Bullish market
Minor changes in an upward trend

Moving to neutral bullish/bearish market

Increased (positive/negative) changes and “thrashing”

Bearish market (with bear rallies)

In general, going down, many negative changes

Bear market

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

Trading style

No restrictions on trading (except for VIX rules)

Closer watch and reduce trades

More caution needed and reduce trades further

Extreme caution and reduce trades even further

Look to close any open positions and no new trades

This Week’s Economic Calendar

  • No spectacles this week

Earnings and Dividend Calendar

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

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

97 stocks will report earnings next week.

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 (if they are at around $133 profit and 70% wins) is slightly above the average I need to have running to maximize my portfolio allocation.

I am now at above 40% buying power usage, which is above the 30% I am ‘allowed’ to use under my portfolio allocation rules based on VIX for short premium strategies. 10 % of my positions are still debit spreads. So 50% is active now. My goals for now is 60%.

The remaining 10% (I want to have 60%) must be filled with long options and passive income strategies. I want to have 40% in cash at all times.

Goals and Schedule for this week

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

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

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

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

Underlyings Selected for Trading This Week

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

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

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

I added stocks with lower (<40) IVR/volatility since I want to true out some long positions and debit spreads.

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

$11,819.96

Buying Power/Net Liq

$11,068.96

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

30%

$3,320.69

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

30%

$3,320,69

Average Max Position Allocation (BP)

4%

$442,76

If I look at Buying Power usage, I have reached my max for short premium positions.

Portfolio allocation undefined vs defined risk

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

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

This Week’s Rules

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

Conclusion

I consider this still to be a good start of the year.

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.

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