Trading low volatility is complicated
Options trading in low volatility (VIX at 16.77) remains is tough. We are sailing in the doldrums now waiting for the wind to pick up again.
The positive side is that it force me to learn more about new options trading strategies like debit spreads, calendars, etc.
I can use Tastyworks’ beta-weighting deltas indicator to benchmark individual positions and sum them to understand the directional exposure of my whole portfolio.
I still have a negative delta beta , even after I added some more positive delta, since the market is still showing bullish rallies. For now, though, i stick to my view that we still will get a correction down.
How am I Doing Overall?
I am now over a year into options trading. Although I am still far away from the goals I have set for myself, I have shown a consistently positive balance since September of last year. I had two dips, but in March reached the optimum of my options trading by making close to $900. I am down to $700 now.
I still make many mistakes, my trading discipline has become better but still needs further working on.
I am now at a $768 P/L YTD and have -$142 unrealized gain.
What am I Reading?
And I started re-reading another ‘must-read-for-options-traders’ book that is really helping me in learning options trading.
The book is over 400 pages, and I am cherry-picking my way through the book.
I am also reading a lot about Python.
Table of Contents
- How am I Doing Overall?
- What am I Reading?
- Last Week’s Options Trading
- Options Strategy Risk Management Rules
- Alternatives for Short Premium Strategies
- Opened Positions
- Opened on 21 Apr: NIO May 19 Short Put 7.5 for $30 credit
- Opened on 21 Apr: SOFI Jun 16 Short Put 7 for $32 credit
- Opened on 21 Apr: PTON Jun 16 Short Put 7 for $32 credit
- Opened on 21 Apr: RIOT Jun 2 Bear Put Spread 10.5/8 for $94 debit
- Opened on 20 Apr: KRE Jun 2 Bull Put Spread 41/43 for $67 credit
- Running and Closed Positions
- Opened on 13 Apr: 2 x MRVL May 12/Jun16 Long Call Diagonal Spread -51/50 for $122 debit
- Opened on 13 Apr: 5 x CHPT May 19/Jun16 Long Put Calendar Spread -8/8 for $28 debit
- Opened on 11 Apr: NKE May 26 (w) Bear Put 126/120 for $257 debit
- Opened on 5 Apr: XLE Jun 16 (w) Bear Put 88/83 for $225 debit
- Opened on 4 Apr: MCD May 19 Bear Put 285/280 for $215 debit
- Opened on 31 Mar: GLD May 12 (w) Iron Condor 175/178/194/197 for $103 credit
- Opened on 29 Mar: GLD May 19 Iron Condor 171/174/191/194 for $101 credit
- Closed: Opened on 27 Mar: KRE May 19 Iron Condor 34/38/49/53 for $145 credit and closed on 17 Apr for $54 debit
- End-of-Week Active Positions Overview
- Financials
- Market Sentiment 22 April 2023
- 1. Geopolitical Events and Economic Trends
- 2. VIX Index
- 3. Oil and Gas, GOLD, SILVER, AND COPPER (METALS & MINING)
- 4. USD and Other Currencies, BITCOIN AND CRYPTO
- 5. Yield Curves
- 6. Producer Price Index (PPI), Consumer Price Index (CPI), Consumer Sentiment Index (CSI)
- 7. Put/Call Ratio
- 8. 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
We’re at low (17) volatility, so I need to adjust my trades again. I only had 8 positions end of the week, using around 15% of Buying Power. One of my rules is not to put on more than 30% trades at low volatility.
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
- Close the trade and realize profits at >50% premium early in the option lifecycle (21 DTE)
- Re-invest the capital made free towards additional trades.
- Close-out 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 on 21 Apr: NIO May 19 Short Put 7.5 for $30 credit
Date
22/4/23
Underlying
8.33
PoP/P50
70
DTE
27
IVR
22.7
Δ Delta
26.98
Θ Theta
0.941
Other
22 Apr 23: opened based on technical indicators showing oversold and upward trend again. Now at $2
21 Apr 23: Another short put experiment with a low price (under 10) stock.
NIO Inc. designs, develops, manufactures, and sells smart electric vehicles in China. It offers five, six, and seven-seater electric SUVs, as well as smart electric sedans. The company is also involved in the provision of energy and service packages to its users; design and technology development activities; manufacture of e-powertrains, battery packs, and components; and sales and after sales management activities. In addition, it offers power solutions, including Power Home, a home charging solution; Power Swap, a battery swapping service; Power Charger, a fast-charging solution; Power Mobile, a mobile charging service through charging vans; Power Map, an application that provides access to a network of public chargers and their real-time information; and One Click for Power valet service, where it offers vehicle pick up, charging, and swapping services. Further, the company provides repair, maintenance, and bodywork services through its NIO service centers and authorized third-party service centers; statutory and third-party liability insurance, and vehicle damage insurance through third-party insurers; courtesy vehicle services; roadside assistance; data packages; and auto financing and financial leasing services. Additionally, it offers NIO Certified, a used vehicle inspection, evaluation, acquisition, and sales service. The company was formerly known as NextEV Inc. and changed its name to NIO Inc. in July 2017. NIO Inc. was incorporated in 2014 and is headquartered in Shanghai, China.
Opened on 21 Apr: SOFI Jun 16 Short Put 7 for $32 credit
Date
22/4/23
Underlying
5.94
PoP/P50
73%
DTE
13
IVR
19.2
Δ Delta
29.26
Θ Theta
1.126
Other
22 Apr 23: opened based on technical indicators showing oversold and upward trend again. Now at $0
21 Apr 23: Another short put experiment with a low price (under 10) stock.
SoFi Technologies, Inc. provides digital financial services. It operates through three segments: Lending, Technology Platform, and Financial Services. The company’s lending and financial services and products allows its members to borrow, save, spend, invest, and protect their money. It offers student loans; personal loans for debt consolidation and home improvement projects; and home loans. The company also provides cash management, investment, and technology services. In addition, it operates Galileo, a technology platform that offers services to financial and non-financial institutions; and Apex, a technology enabled platform that provides investment custody and clearing brokerage services, as well as Technisys, a cloud-based digital multi-product core banking platform. The company was founded in 2011 and is headquartered in San Francisco, California.
Opened on 21 Apr: PTON Jun 16 Short Put 7 for $32 credit
Date
22/4/23
Underlying
9.48
PoP/P50
81%
DTE
55
IVR
29.9
Δ Delta
15.34
Θ Theta
0.703
Other
22 Apr 23: opened based on technical indicators showing oversold and upward trend again. Now at $0
21 Apr 23: Another short put experiment with a low price (under 10) stock.
Peloton Interactive, Inc. provides interactive fitness products in North America and internationally. It offers connected fitness products with a touchscreen that streams live and on-demand classes under the Peloton Bike, Peloton Bike+, Peloton Tread, and Peloton Tread+ names. The company also provides connected fitness subscriptions for various household users, access to various live and on-demand classes, and Peloton Digital app for connected fitness subscribers to provide access to its classes. As of June 30, 2021, it had approximately 5.9 million members. The company markets and sells interactive fitness products directly through its retail showrooms and at onepeloton.com. Peloton Interactive, Inc. was founded in 2012 and is headquartered in New York, New York.
Opened on 21 Apr: RIOT Jun 2 Bear Put Spread 10.5/8 for $94 debit
Date
22/4/23
Underlying
10.52
PoP/P50
40%
DTE
34
IVR
4.4
Δ Delta
-26.09
Θ Theta
-0.598
Other
22 Apr 23: opened based on technical indicators showing overbought and downward trend again, mainly due to BTC going down. Now at $6
21 Apr 23: I can’t resist playing RIOT which until now has been one of my more profitable symbols
Opened on 20 Apr: KRE Jun 2 Bull Put Spread 41/43 for $67 credit
Date
22/4/23
Underlying
42.92
PoP/P50
54%
DTE
41
IVR
23.1
Δ Delta
15.32
Θ Theta
0.049
Other
22 Apr 23: opened based on technical indicators showing oversold and upward trend again. Now at -$13 (-19.4%)
20 Apr 23: opened
Running and Closed Positions
Opened on 13 Apr: 2 x MRVL May 12/Jun16 Long Call Diagonal Spread -51/50 for $122 debit
Date
22/4/23
Underlying
39.02
PoP/P50
8%
DTE
20/55
IVR
9.4
Δ Delta
17.92
Θ Theta
-1.462
Other
Date
15/4/23
Underlying
40.29
PoP/P50
11%
DTE
27/62
IVR
3.5
Δ Delta
24.97
Θ Theta
-1.670
Other
Date
13/4/23
Underlying
40.59
PoP/P50
–/>99.5%
DTE
29/64
IVR
4.4
Δ Delta
26.43
Θ Theta
-1.705
Other
delta 0.04/0.17
22 Apr 23: At -$58 now (-47.5%) since going into the wrong direction still
15 Apr 23: -$14 (-11.5%) now
Marvell Technology, Inc., together with its subsidiaries, designs, develops, and sells analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. It offers a portfolio of Ethernet solutions, including controllers, network adapters, physical transceivers, and switches; single or multiple core processors; ASIC; and printer System-on-a-Chip products and application processors. The company also provides a range of storage products comprising storage controllers for hard disk drives (HDD) and solid-state drives that support various host system interfaces consisting of serial attached SCSI (SAS), serial advanced technology attachment (SATA), peripheral component interconnect express, non-volatile memory express (NVMe), and NVMe over fabrics; and fiber channel products, including host bus adapters, and controllers for server and storage system connectivity. It has operations in the United States, China, Malaysia, the Philippines, Thailand, Singapore, India, Israel, Japan, South Korea, Taiwan, and Vietnam. Marvell Technology, Inc. was incorporated in 1995 and is headquartered in Wilmington, Delaware.
Opened on 13 Apr: 5 x CHPT May 19/Jun16 Long Put Calendar Spread -8/8 for $28 debit
Date
22/4/23
Underlying
8.83
PoP/P50
<1%
DTE
27/55
IVR
1.0
Δ Delta
-24.54
Θ Theta
0.773
Other
Date
15/4/23
Underlying
8.71
PoP/P50
<1%
DTE
34/62
IVR
6.2
Δ Delta
-13.20
Θ Theta
0.845
Other
Date
13/4/23
Underlying
8.60
PoP/P50
–/–
DTE
36/64
IVR
3.9
Δ Delta
-8.90
Θ Theta
0.880
Other
delta: -0.33/0.14
22 Apr 23: $5 in the green still.
15 Apr 23: $0 (0%) P/L now
Opened on 11 Apr: NKE May 26 (w) Bear Put 126/120 for $257 debit
Date
22/4/23
Underlying
125.52
PoP/P50
41%
DTE
34
IVR
0.3
Δ Delta
-26.24
Θ Theta
-0.145
Other
Date
15/4/23
Underlying
125.91
PoP/P50
41%
DTE
41
IVR
-2.1
Δ Delta
-21.86
Θ Theta
-0.287
Other
Date
11/4/23
Underlying
123.24
PoP/P50
52%/68%
DTE
45
IVR
0.0
Δ Delta
-23.12
Θ Theta
0.362
Other
22 Apr 23: -$65 in the red (-25.3%) since it is still not going down
15 Apr 23: -$63 (-24.5%) now
Opened on 5 Apr: XLE Jun 16 (w) Bear Put 88/83 for $225 debit
Date
22/4/23
Underlying
84.95
PoP/P50
53%
DTE
55
IVR
2.4
Δ Delta
-26.22
Θ Theta
0.411
Other
Date
15/4/23
Underlying
87.24
PoP/P50
44%
DTE
62
IVR
0.9
Δ Delta
-21.11
Θ Theta
0.005
Other
22 Apr 23: $6 in the green
15 Apr 23: -$44 (-19.6%) now
Opened on 4 Apr: MCD May 19 Bear Put 285/280 for $215 debit
Date
22/4/23
Underlying
292.04
PoP/P50
26%
DTE
27
IVR
1.1
Δ Delta
-9.55
Θ Theta
-1.04
Other
Date
15/4/23
Underlying
289.01
PoP/P50
35%
DTE
34
IVR
6.0
Δ Delta
-10.85
Θ Theta
0.845
Other
22 Apr 23: still a loser, -$121 in the red (so over 50% loss limit) and I should close it in 4 days (since then also earnings).
15 Apr 23: Two weeks later, it still doesn’t look like a good idea. $89 (-47.5%) in the red and very close to 50% loss level. I may need to close it this week.
04 Apr 23: Here I followed Cherry Bomb’s Tom Preston’s advice.
Opened on 31 Mar: GLD May 12 (w) Iron Condor 175/178/194/197 for $103 credit
Date
22/4/23
Underlying
184.25
PoP/P50
78%
DTE
22
IVR
25
Δ Delta
3.24
Θ Theta
2.153
Other
Date
29/3/23
Underlying
183.21
PoP/P50
58%
DTE
40
IVR
37.4
Δ Delta
4.61
Θ Theta
1.376
Other
22 Apr 23: $54 in the green at 52.4% P/L, and gold has gone down, so better close this week.
01 Apr 23: -$3 now
Opened on 29 Mar: GLD May 19 Iron Condor 171/174/191/194 for $101 credit
Date
22/4/23
Underlying
184.25
PoP/P50
75%
DTE
27
IVR
25
Δ Delta
-4.31
Θ Theta
1.616
Other
Date
29/3/23
Underlying
183.21
PoP/P50
59%
DTE
40
IVR
37.4
Δ Delta
-0.66
Θ Theta
1.08
Other
22 Apr 23: $42 in the green at 41.6% P/L and still has some toom on the downside
01 Apr 23: $6 in the green
Closed: Opened on 27 Mar: KRE May 19 Iron Condor 34/38/49/53 for $145 credit and closed on 17 Apr for $54 debit
Date
27/3/23
Underlying
43.84
PoP/P50
65%
DTE
47
IVR
37.9
Δ Delta
-5.3
Θ Theta
1.652
Other
22 Apr 23: Closed for 63% profit
1 Apr 23: $11 in the green
End-of-Week Active Positions Overview
Financials
Cash Balance 22 April 2023
P/L YTD increased slightly to $768 from $740 one week ago. Low volatility doesn’t make me much money!
Due to the low volatility and not being able to find enough plays, my trading is suboptimal, I am not making full use of my cash, optimizing my positions enough, etc . and I am still making mistakes in choosing the right directions and the right options strategies. Still looking for the edge!
The points I have to look at are:
- In general, my positions are placed on the safe side with low deltas, low 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 too small for this.
- I now select positions with higher premiums than 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 BY MY ENTRY, ADJUSTMENT, AND EXIT RULES !
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:
Disclosure: for each referral I will get credits for items or cash to support this website! Thanks!
Market Sentiment 22 April 2023
Maintaining this part of the journal is taking too much time, so I will start rationalizing it.
A busy earnings week where the major indexes sat idle. After months of volatility for U.S. markets, April has been anything but, trading in a narrow, choppy, and listless range for weeks heading into the busiest week of earnings of the quarter.
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.
2. VIX Index
- The CBOE Volatility index (VIX) is lower at 16.77
- 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 30% of net liq. Last week it was higher an I could trade 35%. At the end of this week I closed and now only have 15% allocated.
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 is up and at the all-time average of 97.
The VVIX/VIX Ratio
See more in this Tastyworks video.
3. Oil and Gas, GOLD, SILVER, AND COPPER (METALS & MINING)
The following sectors I look at – to understand the market sentiment – are, due to their massive impact on the global economy, commodities.
- Oil prices slipped, with WTI crude $0.50, or 0.65% to settle at $77.87 per barrel, posting its first weekly loss since last month’s banking crisis, weighed down by concerns over demand and the US economy.
- Gold prices end lower, falling -$28.60 or 1.4% to settle at $1,990.45 an ounce – close back below $2,000 and down over 1% on the week, pressured by a stronger dollar after hawkish commentary from Federal Reserve officials that could foreshadow further interest rate increases.
4. USD and Other Currencies, BITCOIN AND CRYPTO
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. I also look at crypto trends, especially Bitcoin
- The U.S. dollar faded end of the week
- Bitcoin continued its drop, losing 2.8% to $27,400.
5. Yield Curves
- The 2-year yield rose 8.5 bps to 4.188% this week (up over 21 bps last 2-weeks)
- The 10-yr yield rises 4.9 bps to 3.57% this week (and up over 18 bps last 2-weeks).
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 separation between the two instruments still predicts recession.
“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
6. Producer Price Index (PPI), Consumer Price Index (CPI), Consumer Sentiment Index (CSI)
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).
- Industrial Production for February was unchanged vs. consensus +0.2% and below Jan +0.3%; Capacity utilization rate 78.0% vs. est. 78.4% and in-line with January; U.S. Feb manufacturing output +0.1% vs. est. (-0.2%) and Jan +1.3%
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.
- Consumer Inflation in the United States cooled down further in March as the consumer price index rose 0.1% in the month, following a 0.4% increase in February. Annual inflation also dropped from 6% to 5%, the smallest annual gain since May 2021, and is now down by almost half from its peak of more than 9% in June last year.
- U.S. Producer Price Index (PPI) too recorded the biggest annual decline since January 2021. The Producer Price Index for final demand declined 0.5% in March. The PPI rise of -0.5% in March came in against the expected PPI of 0.1%. On the year-on-year basis, the March PPI inflation increased 2.7%, against the expected rise of 3%. Whereas the year-on-year PPI inflation rise in February was 4.9%.
- The significant downside surprise in U.S. PPI has led people to believe that the Fed will soon be done with the policy tightening and may even start to cut rates before the end of the year. If this happens, we may see the comeback of risk-on trade sentiments ahead despite the regional banking crisis emanating in Mar 2023. Source: BarChart.
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).
- University of Michigan sentiment
7. Put/Call Ratio
- Moving sideways
- 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.
- Moving sideways if the Put/call Ratio oscillates between 0.5 and 1.0.
- 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.
- The put/call ratio went at 1.0, which indicates sideways movement.
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.
8. 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 in the green today.
Major Stock Market Sectors
I also follow the major market sectors in Barchart.
- 6 of 11 sectors closed green. Consumer discretionary (+1.10%) led, and materials (-0.88%) lagged
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. Commodities
Oil & gas (XOP), gold (GLD), silver SLV), and copper (COPX) stable
Minor market issues, minor supply chain issues
National events, market issues
International supply chain interruptions, high oil & gas prices
International conflicts involving US, Russia or China, and other main producing countries
4. Currencies & Crypto
Very weak dollar (DXY) versus other currencies, crypto (BTCUSD) crashing)
Weak dollar, Bitcoin
Neither weak/nor strong dollar, Bitcoin
Strong dollar, Bitcoin
Very strong dollar, Bitcoin
5. US Yield Curve s(T10Y3M and US10Y vs US02Y)
Considerably steep curve
Steep curve
Average but still positive curve
Flattening, inverting, and approaching zero
Inverted curve and negative
6. Producer Price Index (PPI), Consumer Price Index (CPI), Consumer Sentiment Index (CSI)
Lowest price level
High consumer confidence
Price level higher than normal
Consumer confidence is less high
Price levels rising fast
Consumer confidence going up and down from very high or up from very low
The price level is very high
Low consumer confidence
Highest price level
7. 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)
8. 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
- Consumer confidence
- GDP
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 6positions which is way below 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 15% buying power usage of which most is for short premium strategies. I have set the maximum allocation at 50%, so I need to add new positions quickly
I can exceptionally 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
And during the week I will monitor stocks going into 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 again.
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). I use average, rounded numbers from now on.
Cash Balance
$10,509.76
(was $10,515.26 )
Buying Power/Net Liq
$11,065.76
(was $11,046.26 )
Max Portfolio Capital Allocation Short Premium (Cash Available for Trading)
30%
$3,300
Max Portfolio Capital Allocation Other (low risk, long positions)
20%
$2,200
Average Max Position Allocation (BP)
3%
$330
I am now under-allocated for short premium, so need to add new debit position (s).
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 $330, I need to be looking for higher priced underlyings or increasing the number of contracts per position.
This Week’s Rules
I will start a post this week 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 continue to work on: weekly reminder: 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. The focus is now on learning Python and quant finance to further support and improve my options trading.
