Entry 27 Nov 22: Short Break While Shorts Break

By: nic

Options Trading Journal Entry 27 November 2022

I went on a short break this week to the white truffle market in Alba and came back to see some of my shorts have continued to break.

This week I was mainly paying attention to my challenged EWZ and QQQ positions. I added no new positions.

The FCX iron condor got filled, and I made a nice on-target 60% profit there. This happened on Friday. I thought the exchanges would still be closed due to Thanksgiving. I’m not sure why, and anyway, no harm was done. But I must become more vigilant and understand when the US exchanges are open and when not.

This blog entry will this week be relatively short, and I will only focus on the main events.

I rolled up the put strike of my QQQ 2 Dec iron condor for a nice premium. The short strike of the call leg has been continuously ITM for some time now. The long strike also.

And although the price is not going up anymore, and there are several signals it will either go sideways or down from here, I don’t see it coming down to the right level anymore in the next five days. I had several opportunities in the last two weeks to pull out for credit but waited too long (or was traveling), which also seems to be rapidly becoming impossible.

I violated one of my rules that if PoP goes under 33%, I should adjust (roll up/out, close), and am now being punished.

The Brazil ETF EWZ bear call was already being challenged last week, and the short strike dipped slightly into ITM. The price still hovers under the 30 put strike after slightly going above 30 this week. We are two weeks out from expiry (16 Dec), and I will continue to monitor this position.

I only added one new position in CLF (iron condor) and, therefore, still need to look at adding long positions ( including debit spreads) if I want to maximize my portfolio allocation, which I have now set to 50% (based on the portfolio rule I imposed on myself).

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

This time, I am looking at a slightly negative week P/L ($50 down).

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

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

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

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

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

Options as a Strategic Investment

The book is over 1000 pages, and I am now at page 280, reading about put strategies.

Breaking the wave
Short breaking waves!

Table of Contents

Last Week’s Options Trading

No significant changes compared to last week.

Status running Active Positions

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

It is still closer to the put leg short strike (27), but I need to remain vigilant, especially since I was alerted the stock price went below 30.

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.

EWZ Bull Put 16 Dec 26/30 opened 7 November for $102 credit

Still hovering just under the put short strike, which is ITM, so I need to continue to monitor this closely.

I can do a few things:

  • Nothing and see where the stock goes (this is my position today)
  • Roll the bear call to a later expiration date (and get more credit which will improve break-even)
  • Consider adding a bear call spread to create an iron condor or iron butterfly
  • Close it, even if for no or a small profit.

IWM Iron Condor 18 Nov (W) 162/165/190/193 call leg 190/193 Rolled to 16 Dec on Nov 11 (bear call now) for $35 credit

The call leg of what was originally the iron condor (so it is now a bear call spread) is still in the green but far away from the 60% profit target.

This position moves away from the call leg, so fewer worries.

IWM

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

RIOT Short Put 28 Oct (W) 5 Opened on Oct 14 for a $21 credit and rolled up to 5.5 and out to Nov 18 for extra $30 credit and rolled out to Dec 16 and down to 5 extra $20 credit

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

Lately, RIOT had been quite stable with low IVRs compared to early this year. But this week, with Bitcoin going down fast, news about FTX going into liquidation, and other crypto companies going bad, RIOT tanked to below $5 again. So this position is again ITM and – as I said before – may be assigned to me one day.

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

RIOT

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

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

In addition to the bull put I already opened, mainly due to the high volatility of FXI, I decided to open an iron condor which is faring less well and still shows a small (-$4) P/L loss today. This is mainly due to the fact that the FXI stock price (up to over 25) is still close to the short strike of the call leg (27).

FXI

FXI was created on 10/05/04 by Blackrock. The ETF tracks an index of the 50 largest and most liquid Chinese stocks traded on the Hong Kong Stock Exchange.

The iShares China Large-Cap ETF seeks to track the investment results of the FTSE China 50 Index composed of large-capitalization Chinese equities that trade on the Hong Kong Stock Exchange. Currently, almost 80% of the index is in consumer cyclical stocks (33%), financial services (27%), and communication services (19%).

Top 10 stocks represent almost 58% of the index, with the three large tech stocks Alibaba (BABA), Tencent (OTCPK:TCEHY) and JD.com (JD) representing almost 25% of the index.

So to be monitored!

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

In the green and steadily going up. I really need to start looking at rolling up the 244/248 put strikes to get more credit. I will review this week when it gets two weeks from expiry.

QQQ Iron Condor 2 Dec (W) 238/242/280/284 Opened November 4 for $133 credit, Rolled Put leg 238/242 to 269/273 for a $24 credit

This is a weekly, so I told myself to monitor it closely.

Since the call leg is continuously being challenged, and we’re now only one week out of expiry,

This position is still killing me:

  • The call leg is still ITM, although the long strike now and then popped into OTM
  • I am still at a negative P/L

So I may need to close at a considerable loss! I want to do that before the end of Wednesday.

AMZN Iron Condor 83/85/112/114 Opened on Nov 11 for $54 Credit

Still in the green and edging toward the 60% profit target.

SPY Iron Condor 365/367/422/424 Opened on Nov 11 for $60 Credit

No real change, and in the green at close to 50% profit.

CLF Iron Condor 16 Dec 11/12/17/18 Opened on Nov 16 for $26 credit

Another high volatile short premiums strategy play I just opened and which is in the green.

Positions Opened Last week

No positions opened last week

Positions Rolled or Closed Last Week

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

Far in the green (over 40% profit), and the stock price moved to the middle of the short strikes again.

End-of-Week Active Positions Overview

Market Sentiment 29 November 2022

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

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

I didn’t have time to update all of the below, so this is last week’s news but I will do my best to catch up.

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 GOP captured the House with a very slight majority
  • Trump thinks he is back again; anyway, Mucky Musk allowed him back on Twitter
  • Ukraine is suffering from Russia’s relentless missile attacks
  • U.K. residents see living standards fall back to 2013-2014 levels. 

2. VIX Index

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

VIX for position sizing

With a VIX of around 20, so my maximum portfolio capital allocation for short premium strategies is 35% of net liq.

See also on this subject this Tastytrade video.

VIX

< 15

15-19

20-29

30-40

>40

Volatility

Lowest volatility, all comfortable

Market in ‘lull’ mode

Volatility high

Volatility very high

Volatility and fear levels highest

Maximum portfolio capital allocation

25%

30%

35%

40%

50%

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

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

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

Today, the VVIX went down again to around 82 from 77 last week. So moving away 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.

  • Oil slipped, with WTI crude around $76.75 per barrel, down over 2% for a 3rd straight week of declines heading into December 4th OPEC meeting. Note markets remain focused on the price cap that the U.S., the European Union, and their allies plan to impose on Russian crude on Dec. 5.

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

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

  • Gold prices slipped as the U.S. dollar regained ground ahead of Fed Beige Book next week, nonfarm payrolls, and several inflation data points.

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 dollar index (DXY) +0.15% at 106, snapping 3-day losing streak
  • The British Pound moved back above $1.20 on Wednesday (well off Sept record low $1.0327),
  • The Euro moves around $1.04 (off its 52-week lows 0.9537).

6. Bitcoin AND crypto

  • Bad times for everything crypto (and therefore also everything blockchain) continue
  • Bitcoin at 16551 today; 16600 looks like a strong resistance level. Next level being 24000

7. Yield Curves

  • Treasury yields bounced off earlier lows (10-yr 3.65%) to 3.71%.

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
It still doesn’t look good

“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).

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

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 U.S. Labor Department published new Consumer Price Index (CPI) data last week, and lower-than-anticipated inflation in October has helped spur a dramatic uptick in bullish momentum for the market at large.
  • The CPI rose 0.4% on a sequential basis and 7.7% year over year, while economists were expecting a 0.6% sequential increase and a 7.9% increase compared to October 2021. The better-than-expected data has investors pouring back into stocks.

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) hits lowest level since June as fear of recession looms.

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 0.897, which indicates a much higher number of people are selling and buying and that the market is more 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. DJI, SPX, Russel 2000 Indices, and Main Market Sectors

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

DJIA, SPX, IWM

  • Nasdaq [<0.52%], and Dow [+0.45%] posted modest gains to close out the week slightly higher.
  • The small-cap Russell 2K [+0.3%] performed in line with the larger indexes.
  • For the week, the S&P 500 went slightly down with .03%

Major Stock Market Sectors

I also follow the major market sectors in Barchart.

  •  10 of 11 sectors closed green. Consumer discretionary (+1.47%) led, and energy (-1.08%) lagged.
  • S&P 500: – 0,03%
19 November
26 November (source: Barchart)

Summary Market Sentiment 26 NOVEMBER 2022

Bull market

Bullish

Neutral/bearish

Bearish

Bear market/crash

1. Geopolitical events and economic trends

Positive trends, stable supply chains

Minor market issues, minor supply chain issues

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

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

The total collapse of the global market, deep recession

2. VIX (VIX)

<15

Lowest volatility, all comfortable

15-19

Market in ‘lull’ mode

20-29

Volatility high (down from above 30)

30-39

Volatility very high

>40

Volatility and fear levels highest

3. Oil & Gas (XOP)

Oil & gas

Minor market issues, minor supply chain issues

National events, market issues

International supply chain interruptions, high oil & gas prices

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

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

Gold, silver, and Copper stable

Minor market issues, minor supply chain issues

National events, market issues

International supply chain interruptions

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

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

Neutral bullish/bearish market

Increased (negative) changes and “thrashing”

Bearish market

Going down, many negative changes

Bear market

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

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

  • ECB, CPI, the Fed, PMI, PCE coming up this week!

Earnings and Dividend Calendar

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

The first dividends are in December for GDX.

Financials

Cash Balance 26 November

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

And this week, again, I slightly improved, but it is really going much too slow.

Cash balance 26 November

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

The root causes are the following:

  • In general, my positions are placed on the safe side with low deltas, so less risk, and low profit
  • I just started using max portfolio allocation (should be 35% based on VIX today, but on average, I only reach half of that) and need to add non-short premium strategies to optimize my portfolio.
  • Except for a small short put undefined risk play in RIOT, I have been only doing defined risk strategies which are lower risk but also less profitable: I may need to start looking at adding once in a while short straddles and strangles based on low prices underlyings to my strategies
  • The positions I select have too low premiums compared to the commissions and fees I have to pay and the target profit I have set as a rule (50%): I need to go for higher premiums/max loss by widening spreads, taking more risk, adding higher priced underlyings without overexposing myself to too much risk.

Portfolio allocation

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

This Week’s Guidelines

Open Positions Status at Beginning Of the Coming Week

I now have 10 positions: in SPY, FXI, QQQ (2x), RIOT, EWZ (2x), CLF, AMZN, and IWM.

I am now at 20.1% buying power usage, close to 40% under my (new) target of 60%.

With a VIX of around 20, my maximum portfolio capital allocation for short premium strategies is 35% of net liq. All my strategies up to date are short premium.

This means I can add up to a max 14% this week with other short premium strategies. The remaining 25% must be filled with long options strategies.

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 a minimum of 2 vertical spreads or iron condors and 2 debit spreads or long positions.

Thursday and Friday are Thanksgiving.

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

Start looking at how short straddles and strangles work.

Underlyings Selected for Trading This Week

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

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

There are only two really high: EWZ and RIOT.

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

I added underlyings that just came out of earnings.

Options Buying Power and Portfolio Allocation This Week

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

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

However, with VIX going down to 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

$11,179.64

Buying Power/Net Liq

$10,236.64

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

35%

$3,582.82

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

25%

$2,559.16

Average Max Position Allocation (BP)

4%

$409,46

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 $448, 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.

Overview Option Positions AS PER Today

Conclusion

Having a short break is nice, but seeing your shorts slowly break is less pleasant.

Opening positions is improving now, but I need to continue optimizing portfolio allocation and position size.

Moreover, I shouldn’t too much revert to weeklies to achieve my portfolio allocation goals is what I learned with my QQQ 2 December position.

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