It was a wild week for banks due to the downfall of SVB and Credit Suisse plummeting.
SVB Financial Group, the parent company of Silicon Valley Bank, filed for Chapter 11 bankruptcy protection. The Silicon Valley Bank was not included because it was taken over by the Federal Deposit Insurance Corporation (FDIC) last week.
Before I left last week, volatility went sky-high again (VIX went up to around 2), so I quickly added some short premium strategies at the end of the day, which one week later has proven to be a good move.
Getting Started with Python for Quant Finance
This was my first week doing Getting Started with Python for Quant Finance. The course has been set up by Jason Strimpel, Head of Startup Data Strategy at Amazon Web Services and founder of Pyquant News.
You can find more information on the course and follow Pyquant and Jason here:
- Website: https://www.pyquantnews.com
- Twitter: https://twitter.com/pyquantnews
And how is my Beta-weighting Exercise Going?
I can use Tastyworks’ beta-weighting deltas indicator to benchmark individual positions and sum them to understand the directional exposure of my whole portfolio.
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 now in reading about the strategies.
Table of Contents
- Last Week’s Options Trading
- Options Strategy Risk Management Rules
- Alternatives for Short Premium Strategies
- Opened Positions
- Opened on 17 Mar: RIOT Apr 28 (w) Short Put 6.5 for $64 credit
- Opened on 15 Mar: XLF Apr 28 (w) Iron Condor 27/30/33/36 for $106 credit
- Opened on 16 Mar: KRE Apr 28(w) Iron Condor 37/41/50/54 for $180 credit
- Opened on 14 Mar: KRE Apr 21 Bear Call 54/50 for $100 credit
- Opened on 14 Mar: IWM Apr 28 Iron Condor 158/163/187.5/192.5 for $167 credit
- Running and Closed Positions
- Running: DIA Apr 21 Bear Call 330/335 opened on 10 Mar for $165 credit
- Running: EEM Apr 21 Iron Condor 33/35/39/41 opened on 10 Mar for $1 debit
- Closed: RIOT Apr 14 Short Put 5 opened on 10 Mar for $60 credit and closed on 14 Mar for $24 debit
- Running: IWM Apr 21 Delta Buster 176/174 bear put 178/180 bear call opened on 10 Mar for $1 debit and closed the 176/174 leg for $105
- Opened: T Apr 21 Long Call 19 opened on Marc h 10 for $27 debit
- Running: ORCL Apr 21 Iron Condor ‘Earnings Play’ 75/80/95/100 for $131 credit
- Running: XLF Apr 21 ‘Delta Buster’ consisting of bear put 34/33 ($42 debit) bear call 34/35 ($44 credit) for $2 credit and the bear put closed on 10 Mar for $52 credit and closed the 34/35 leg on 15 Mar for $18 debit
- Running: TLT Apr 21 94/97/107/110 Iron Condor Opened on March 9 for $105 credit
- Rolled: RIOT Mar 31 5.5 Short Put Opened on Feb 16 for $49 credit and rolled up and out on Mar 6 to Apr 21 6 for $40 credit
- Rolled: TSLA Mar 31 160/165/255/260 Iron Condor Opened on Feb 17 for $150 credit and rolled the 255/260 leg down to 210/215 and out to 21 Apr on Mar 9 for a $71 credit and rolled the 160/165bput leg out to Apr 21 for $35 credit
- End-of-Week Active Positions Overview
- Financials
- Market Sentiment 18 March 2023
- 1. Geopolitical Events and Economic Trends
- 2. VIX Index
- 3. Oil and Gas
- 4. Gold, Silver, and Copper (Metals & Mining)
- 5. USD and Other Currencies
- 6. Bitcoin AND crypto
- 7. Yield Curves
- 8. Producer Price Index
- 9. Consumer Price Index (CPI)
- 10. Consumer Sentiment Index
- 11. Put/Call Ratio
- 12. NASDAQ, DJI, SPX, Russel 2000 Indices, and Main Market Sectors
- Summary Market Sentiment
- This Week’s Economic Calendar
- Earnings and Dividend Calendar
- This Week’s Guidelines
- Conclusion
Last Week’s Options Trading
In the past few weeks, I have had to manage my positions for the following reasons increasingly:
- The still low volatility disallowed me to continue with short premium strategies.
- Unexpected bull rallies in what I still consider a bearish market caused some of my positions to go deep ITM, so they had to be closed with a loss.
- I was opening bull calls market was going up, and the market then decided to go down again.
- And vice versa.
- I was still not strictly following my >33% PoP, max 50% loss, and other rules.
- I again started backtesting.
- Diverting my attention and little time, I have to learn Python for algotrading, which gives me less time to focus on options trading. And in March, I will be doing Pyquant’s’ quant finance and Python course.
So let’s repeat the rules again:
Options Strategy Risk Management Rules
- In high volatility (VIX >20) sell high vol (IVR>30) options to collect premium income while spreading the risk over various expiration dates (staggering dates to avoid expiration density); the higher the volatility, the more of your account you can allocate to short premium strategies.
- Sell options at high IVR (>30) to extract high (overpriced) premiums (‘overpriced’, since predicted volatility is nearly always overestimated, and stocks are less volatile than predicted, so implied volatility implosion or IV reversion to the mean allows for profits to be taken early when stocks fail to be as volatile as predicted).
- In low volatility (VIX < 20) buy low vol (IVR <30) debit options (you pay the premium) and lower the total allocation; the less volatility, the less money you should allocate to options trading. New rule: only sparingly enter into debit spreads (especially bear puts!), and only do this when more than three signals (technical indicators) confirm this.
- Sell and buy options on underlyings that are liquid in the options market (to open and close positions easily and ensure trades can be filled with narrow bid-to-ask spreads for optimal option pricing ).
- Sell and buy options across tickers with broad sector diversity across uncorrelated sectors to spread risk (too much concentration into any given sector runs the risk of stocks auto-correlating in the same direction and potentially jeopardizing all trades within the sector-specific bucket of trades).
- As much as possible (given a small account) stick to risk-defined trades (put spreads, call spreads, and iron condors) to mitigate risk and reduce the amount of capital required for any given trade.
- Probability of success (P50 in Tastyworks platform)> 70% to ensure a statistical edge
- 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 17 Mar: RIOT Apr 28 (w) Short Put 6.5 for $64 credit
Date
18/3/23
Underlying
6.97
PoP/P50
DTE
43
IVR
27.1
Δ Delta
Θ Theta
Other
17 Mar 23: opened another short put RIOT to replace the one I closed earlier this week
Opened on 15 Mar: XLF Apr 28 (w) Iron Condor 27/30/33/36 for $106 credit
Date
18/3/23
Underlying
31.07
PoP/P50
50%/71%
DTE
43
IVR
70.3
Δ Delta
-12.43
Θ Theta
1.297
Other
Deltas: -0.10/-0/27/0.38/-0.08
16 Mar 23: opened another high volatility play with XLF (surfing on the bearish bank trend).
I found this on the Internet (source below).
” … Selling near-dated OTM cash-secured puts or bull puts on KRE, given the incredibly high IV and the substantial skew in the near-dated options, may be an extremely high-probability trade.
Calendar or diagonal spreads to bet on a mean reversion of volatility, while expressing some directional preference, may also work. For instance, one can buy an ITM call option expiring in a year and sell an OTM call expiring in a month.
So, selling near-dated options and taking an upward bias on price (positive delta).
XLF also lends itself to a similar setup but it’s IV profile did not seem as egregiously overpriced as KRE.”
Source: Seeking Alpha
Opened on 16 Mar: KRE Apr 28(w) Iron Condor 37/41/50/54 for $180 credit
Date
18/3/23
Underlying
45.26
PoP/P50
47%/59%
DTE
43
IVR
71.3
Δ Delta
-3.23
Θ Theta
1.776
Other
Deltas: -0.18/-0.30/0.32/0.17
15 Mar 23: Opened another high volatility play with KRE (regional banks which are bearish). Short deltas may be not enough OTM. Normally I play 20 deltas. Let’s see.
Opened on 14 Mar: KRE Apr 21 Bear Call 54/50 for $100 credit
Date
18/3/23
Underlying
PoP/P50
DTE
IVR
Δ Delta
Θ Theta
Other
14 Mar 23: opened another high volatility play with KRE (regional banks which are bearish)
Opened on 14 Mar: IWM Apr 28 Iron Condor 158/163/187.5/192.5 for $167 credit
Date
18/3/23
Underlying
177.59
PoP/P50
56%/76%
DTE
45
IVR
34.5
Δ Delta
-5.0
Θ Theta
2.378
Other
Deltas: -0.18/-0.13/0.26/0.15
14 Mar 23: opened another high volatility play with IWM
Running and Closed Positions
Running: DIA Apr 21 Bear Call 330/335 opened on 10 Mar for $165 credit
Date
18/3/23
Underlying
318.54
PoP/P50
72%
DTE
34
IVR
41.4
Δ Delta
-9.81
Θ Theta
2.254
Other
Date
10/3/23
Underlying
319.74
PoP/P50
68%/78%
DTE
42
IVR
45.2
Δ Delta
-9.14
Θ Theta
1.665
Other
18/3/23: $29 profit
Running: EEM Apr 21 Iron Condor 33/35/39/41 opened on 10 Mar for $1 debit
Date
18/3/23
Underlying
37.61
PoP/P50
69%
DTE
34
IVR
34.2
Δ Delta
-10.58
Θ Theta
1.050
Other
Date
10/3/23
Underlying
37.98
PoP/P50
59%/72%
DTE
42
IVR
46.7
Δ Delta
-12.39
Θ Theta
0.857
Other
Deltas: -0.08/-0.17/0.38/0.16
18/3/23: $36 in the green
Closed: RIOT Apr 14 Short Put 5 opened on 10 Mar for $60 credit and closed on 14 Mar for $24 debit
Date
18/3/23
Underlying
PoP/P50
DTE
34
IVR
Δ Delta
Θ Theta
Other
Date
10/3/23
Underlying
PoP/P50
DTE
42
IVR
Δ Delta
Θ Theta
Other
18/3/23: RIOT went up bigly so closed for over 50% profit.
10/3/23: another short put lay in RIOT
Running: IWM Apr 21 Delta Buster 176/174 bear put 178/180 bear call opened on 10 Mar for $1 debit and closed the 176/174 leg for $105
Date
18/3/23
Underlying
171.39
PoP/P50
53%
DTE
34
IVR
62.2
Δ Delta
-5.46
Θ Theta
0.706
Other
Date
10/3/23
Underlying
174.93
PoP/P50
59%
DTE
42
IVR
60.7
Δ Delta
-9.52
Θ Theta
0.478
Other
18/3/23: Closed the bear put part of this delta buster. Two considerations: I don’t need to delta bust any further now, and the bear put leg was already giving me a nice profit.
10/3/23: Opened to neutralize my delta beta, but also seeing a bearish trend in IWM
Opened: T Apr 21 Long Call 19 opened on Marc h 10 for $27 debit
Date
18/3/23
Underlying
18.13
PoP/P50
26%
DTE
34
IVR
64.3
Δ Delta
-9.26
Θ Theta
0.955
Other
Date
10/3/23
Underlying
PoP/P50
DTE
IVR
Δ Delta
Θ Theta
Other
18/3/23: wrong gamble most probably. PoP under 33% so may close it if P/L also goes down to -50%.
10/3/23: just a gamble, based on tech indicators that look positive for going up, and the first time I do a simple, slightly ITM long call.
Running: ORCL Apr 21 Iron Condor ‘Earnings Play’ 75/80/95/100 for $131 credit
Date
18/3/23
Underlying
85.26
PoP/P50
71%
DTE
34
IVR
30.6
Δ Delta
8.34
Θ Theta
1.741
Other
Date
9/3/23
Underlying
86.69
PoP/P50
62%/–
DTE
43
IVR
45.4
Δ Delta
—
Θ Theta
–
Other
18 Mar 23: P/L Open 37.4%
9 Mar 23: This is the second play of two to see the difference n iron condor earnings play placed just before earnings at a standard monthly expiry date around 45 DTE after earnings. According to what I know today, also a longer-term should profit from the ‘volatility crush’.
Running: XLF Apr 21 ‘Delta Buster’ consisting of bear put 34/33 ($42 debit) bear call 34/35 ($44 credit) for $2 credit and the bear put closed on 10 Mar for $52 credit and closed the 34/35 leg on 15 Mar for $18 debit
Date
18/3/23
Underlying
PoP/P50
DTE
33
IVR
Δ Delta
Θ Theta
Other
Date
9/3/23
Underlying
33.68
PoP/P50
56%/–
DTE
43
IVR
31.1
Δ Delta
-29.57
Θ Theta
0.226
Other
Deltas: -0.39/-0.53/0.47/0.32
18 Mar 23: I could close the bear call for an over 50% profit. The bear put is still in play.
10 Mar 23: The Bear Put closed for $52 credit, so $54 profit until now. The remaining bear call is now at $8 in the green. With all the other adjustments and closures, the delta beta is still nice and low at 6.
9 Mar 23: To reduce my positive delta exposure and seeing the VIX rapidly going up, I chose an already down trending underlying (XLF) to do a ‘delta buster‘
Running: TLT Apr 21 94/97/107/110 Iron Condor Opened on March 9 for $105 credit
Date
18/3/23
Underlying
106.85
PoP/P50
47%
DTE
34
IVR
64.3
Δ Delta
-9.26
Θ Theta
0.955
Other
Deltas: –5.42/10.03/-50.85/36.98
Date
9/3/23
Underlying
101.58
PoP/P50
68%
DTE
44
IVR
31.1
Δ Delta
-0.15
Θ Theta
1.393
Other
Deltas: -0.15/-0.25/0.24/0.13
18 Mar 23: going completely in wrong direction with calls ATM and volatility up. P/L Open at -$44 (-41.9%) so in danger area for closing
9 Mar 23: one of the few underlyings with an IVR above 30 and quite rangebound between 97 and 107. So I placed an iron condor.
This week I am only updating adjusted and closed positions (since I am away from home in the weekend when I normally update my entries).
Rolled: RIOT Mar 31 5.5 Short Put Opened on Feb 16 for $49 credit and rolled up and out on Mar 6 to Apr 21 6 for $40 credit
Date
18/3/23
Underlying
8.10
PoP
83%
DTE
34
IVR
32.5
Δ Delta
15.78
Θ Theta
1.121
Other
IVR upagain!
Date
04/3/23
Underlying
6.34
PoP
77%
DTE
27
IVR
15.3
Δ Delta
26.72
Θ Theta
1.045
Other
IVR down again! Earnings 15 March!
Date
15/2/23
Underlying
5.87
PoP
64%
DTE
34
IVR
22.7
Δ Delta
36.62
Θ Theta
1.105
Other
IVR halved! Earnings 15 March!
Date
18/2/23
Underlying
6.59
PoP
71%
DTE
41
IVR
41
Δ Delta
26.46
Θ Theta
1.048
Other
18 Mar 23: $34 in the green due to price going up (IVR as well, but this couldn’t prevent profit increase.)
6 Mar 2023: rolled RIOT up and out since it was 21 DTE, and I could make some profit.
4 Mar 23: IVR going down for a short put is good. Price going up as well. $15 profit now. I may close this position and look at a calendar spread earnings play on Monday.
25 Feb 23: moving up and down with BTC, now down again and $15 in the red
18 Feb 23: $6 in the red
Rolled: TSLA Mar 31 160/165/255/260 Iron Condor Opened on Feb 17 for $150 credit and rolled the 255/260 leg down to 210/215 and out to 21 Apr on Mar 9 for a $71 credit and rolled the 160/165bput leg out to Apr 21 for $35 credit
Date
18/3/23
Underlying
180.13
PoP
46%
DTE
34
IVR
25.1
Δ Delta
1.13
Θ Theta
2.544
Other
Underlying considerably down
Date
09/3/23
Underlying
173.83
PoP
90%
DTE
22/43
IVR
17.9
Δ Delta
-3.13
Θ Theta
0.822
Other
Underlying considerably down
Date
25/2/23
Underlying
196.88
PoP
68%
DTE
34
IVR
30.2
Δ Delta
1.54
Θ Theta
0.02
Other
IVR also down here (-20%)
Date
18/2/23
Underlying
208.31
PoP
63%
DTE
41
IVR
38.6
Δ Delta
0.05
Θ Theta
2.348
Other
18 Mar 23: Drop in PoP and P/L now at $17 only.
9 Mar 23: The markets were going down, and also Tesla started to dive, moreover, expiry was within 21 days so I decided to roll the call leg. After rolling, I saw that PoP is at 90%; this means I could have taken on more risk by even rolling further down. P50, though is just above 50%, so maybe not? The put leg is still at Mar 31 160/165 and also needs attention.
4 Mar 23: quickly becoming some of my best of recent plays. $72 in the green at nearly 50% P/L Open.
25 Feb 23: $26 in the green
18 Feb 23: $10 in the green
End-of-Week Active Positions Overview
Financials
Cash Balance 18 March 2023
P/L YTD went up to $613 from $231 last week. Volatility and short premium are my friends!
I am more and more trading optimally, making full use of my cash, optimizing my positions etc . but I am still making mistakes in choosing the right directions and the right options strategies.
The points I have to look at are:
- In general, my positions are placed on the safe side with low deltas, there is less risk and low profit. I am already increasing risk by widening spreads and picking higher deltas.
- For a better-balanced portfolio allocation (based on VIX), I am adding non-short premium and passive income strategies to optimize my portfolio.
- Except for a small short put undefined risk play in RIOT, I have been only doing a limited number of defined risk strategies which are lower risk but also less profitable: I may need to start looking at adding other defined risk strategies, and once in a while short straddles and strangles based on low prices underlyings. But my account is, at this stage, really too small for this.
- I now select positions with higher premiums compared to the commissions and fees I have to pay and the target profit I have set as a rule (50%).
- I am now also monitoring the beat-weighted delta of my positions and total portfolio; in periods like this, I need to manage it in such a way that it remains close to 0. I am far away from achieving this.
- BUT MOST IMPORTANTLY: I SHALL ABIDE 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 18 March 2023
- Below is the sentiment of last week.
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.
- French citizens are protesting in the streets after President Emmanuel Macron bypassed lawmakers to raise the retirement age from 62 to 64
- In the US SVB filed for Chapter 11 and internationally, Credit Suisse shares tumbled another 7% on news that it’s borrowing up to 50 billion Swiss francs ($54 billion) from the Swiss National Bank.
2. VIX Index
- The CBOE Volatility index (VIX) is at 25.51 after an already volatile week
- The VIX Index measures the level of the expected volatility of the S&P 500 Index over the next 30 days that is implied in the bid/ask quotations of SPX options. Thus, the VIX Index is a forward-looking measure, in contrast to realized (or actual) volatility, which measures the variability of historical (or known) prices.
- A VIX below 15% is very low volatility. A 15% or below VIX is assumed to be a market at rest. Since the intrinsic nature of the Stock Market is to move up, a VIX close to 15% or lower will tell us that the broader market is likely to head higher.
- Up to 19% VIX means the market is in ‘lull’ mode. 19% is seen as the ‘steady state’ VIX. This arena is inadequate for short premium plays, which require high volatility. This is where long calls, puts, and debit spreads may be set up. Only when VIX gets closer to 30%, selling options become viable.
- At 20% or higher means medium volatility.
- A VIX of 30% or higher means high volatility. When selling options, you want to sell out of stocks when the VIX is near 30. This is where credit spreads, short strangles, straddles, short iron condors, etc., can be played.
- Above a VIX of 40%, this is still the case, but given the extreme volatility, you should be very careful.
VIX for position sizing
So my maximum portfolio capital allocation for short premium strategies should remain at 35% of net liq.
See also on this subject this Tastytrade video.
VIX
< 15
15-19
20-29
30-40
>40
Volatility
Lowest volatility, all comfortable
Market in ‘lull’ mode
Volatility high
Volatility very high
Volatility and fear levels highest
Maximum portfolio capital allocation
25%
30%
35%
40%
50%
Volatility and the VIX are significant in how I size positions and portfolio allocation. Since my focus is on short premium trading, I must balance exposure to substantial losses and reaching sufficient occurrences.
In 2022 the VVIX Index (VIX Volatility Index) has also traded within a fairly reasonable range (roughly between 83 and 150). The long-term average is 86, and the VVIX is mean-reverting.
The VVIX is nicknamed the “VIX of VIX” because it is calculated using the implied volatility of ATM and OTM options in the VIX itself, using the same calculation method as VIX. The index measures the “volatility of volatility, or the “vol of vol.”
Today, the VVIX went down to 124.75 which is very high volatility for the VIX itself .
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.
- With the energy sector shifting from last year’s best performer to this year’s worst, many investors are trying to determine whether the downward trend will continue or if this is a potential buying opportunity.
- After looking stronger into the open, WTI April crude futures slipped $1.61, or -2.36% to settle at $66.74/bbl, while Brent fell $1.73, or 2.32% to finish at $72.97/bbl. The WTI settlement marked the lowest level since December 2021, despite a mid-day bounce that kept futures off their lows of the day. The move completed the largest weekly drop since June for WTI and August for Brent, with both WTI and Brent also marking fifteen-month lows.
4. Gold, Silver, and Copper (Metals & Mining)
To understand the market sentiment, I look at the following sectors: precious metals and mining due to their massive impact on the global economy.
- April gold settled +$50.50/oz, or +2.62%, at $1,973.50. Gold has returned to safe-haven status thanks to the recent bank-related turmoil, finishing at the highest level in eleven months and posting the best weekly gain in almost three years. Next week’s Fed activity will propel the next move, with many investors expecting a raise and pause stance.
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 also dipped, with the dollar index (DXY) falling -0.35% back below the 105 level.
6. Bitcoin AND crypto
- Bitcoin prices fell over 4% to 2-week lows around $22,300 from $ 23,023 last week!
7. Yield Curves
- Following the collapse of the Silicon Valley Bank (SIVB) and the Federal Reserve’s intervention to support bank liquidity, yields fell dramatically across the board, from the short end to the long end.
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 curves dropped considerably this week
- 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
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).
- 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%
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.
- n/a
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).
- University of Michigan Consumer Sentiment reported at 63.4 vs. est. 66.9; the 1-Year Inflation Expectations: 3.8% vs. prior 4.1% and the 5-Year Inflation Expectations rose 2.8%, vs. est.2.9%.
- Consumer sentiment still remains historically low, since concerns over the economy remain, with many consumers stepping up their savings to prepare for a potential recession.
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 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.
12. NASDAQ, DJI, SPX, Russel 2000 Indices, and Main Market Sectors
In general, I look at the leading indices DJIA, SPX, and Russell 2000 (IWM) and the level of volatility or ‘market thrashing’ (excessive volatility with significant rising then near proportionate falling in markets’ values within a trading period): above 1% in any or all of them might indicate indecision in the market.
NASDAQ, DJIA, SPX, IWM
- For the week, the Dow Jones dropped 1.19% for another losing week, the S&P 500 shed 0.74% in this bad , and the tech-heavy Nasdaq sank 0.74%.
- IWM dropped even -2.56%
Major Stock Market Sectors
I also follow the major market sectors in Barchart.
- Every sector closed red.
Summary Market Sentiment
Bull market
Bullish
Neutral
Bearish
Bear market/crash
1. Geopolitical events and economic trends
Positive trends, stable supply chains
Minor market issues, minor supply chain issues
National events, market issues, bad economic data, mini-corrections
Negative indicators, international events, serious market issues, broader market correction (-10%)
The total collapse of the global market, deep recession
2. VIX (VIX)
<15
Lowest volatility, all comfortable
15-19
Market in ‘lull’ mode
20-29
Volatility high (down from above 30)
30-39
Volatility very high
>40
Volatility and fear levels highest
3. Oil & Gas (XOP)
Oil & gas
Minor market issues, minor supply chain issues
National events, market issues
International supply chain interruptions, high oil & gas prices
International conflicts involving US, Russia or China, and other main producing countries
4. Gold, Silver & Copper (GLD & SLV & Copper)
Gold, silver, and Copper stable
Minor market issues, minor supply chain issues
National events, market issues
International supply chain interruptions
International conflicts involving US, Russia or China, and other main producing countries
5. US Dollar Currency Index (DXY)
Very weak dollar versus other currencies
Weak dollar
Neither weak/nor strong dollar
Strong dollar
Very strong dollar
6. Bitcoin (BTCUSD)
Bitcoin rising
Bitcoin rising at a slow rate
Bitcoin “thrashing” at the same level
Crypto crashes, market corrections
Bitcoin or other cryptos or companies collapse
7. US Yield Curve (T10Y3M and US10Y vs US02Y)
Considerably steep curve
Steep curve
Average but still positive curve
Flattening, inverting, and approaching zero
Inverted curve and negative
8. Producer Price Index (PPI)
Lowest price level
Price level higher than normal
Price levels rising fast
The price level is very high
Highest price level
9. Consumer Price Index (CPI)
Lowest price level
Price level higher than normal
Price levels rising fast
The price level is very high
Highest price level
10. Consumer Sentiment Index (CSI)
High consumer confidence
Consumer confidence is less high
Consumer confidence going down from very high or up from very low
Low consumer confidence
No consumer confidence
11. S&P 500 Put/call ratio (PCR)
Well below 0.5 (very bullish)
Close to 0.5 (bullish)
Between 0.5 and 1.0 (neutral)
Between 1.0 and 2.0 (bearish)
Above 2.0 (severely bearish)
12. Dow Jones (DJI)
S&P 500 (SPX)
Russel 2000 (RUT)
Major Market Sectors (XLE, XLF, etc)
Strong bull market
No real changes in an upward trend
Bullish market
Minor changes in an upward trend
Moving to neutral bullish/bearish market
Increased (positive/negative) changes and “thrashing”
Bearish market (with bear rallies)
In general, going down, many negative changes
Bear market
A deep recession or the market is collapsing, or already did so
Trading style
No restrictions on trading (except for VIX rules)
Closer watch and reduce trades
More caution needed and reduce trades further
Extreme caution and reduce trades even further
Look to close any open positions and no new trades
This Week’s Economic Calendar
- Fed rate decision on Wednesday
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 13 positions which is 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 below 34% buying power usage of which most is for short premium strategies. I have set the maximum allocation at 50%, so I still have room for new long or debit spread positions.
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
This is my selection for this week. I am still avoiding the earnings as much as possible, looking for high IVRs.
And during the week I will monitor stocks coming out of earnings.
For this week, I will continue applying my underlying selection rules and focus on high volatility (IVR >40) and higher premium underlyings that have no significant events (like earnings < 30 days) coming up.
My expectation (or rather: hope) is that this week’s volatility will increase.
Options Buying Power and Portfolio Allocation This Week
Based on my current buying power and portfolio allocation rules, I determine whether I can open new positions to maximize such portfolio allocation.
I use VIX to determine the allocation percentage for short premium strategies. Since I until now only opened short strategies, this is still applicable to my whole portfolio.
However, with VIX going down to 20, I should be looking at using 5% of my total NetLiq for other strategies.
Allocation based on VIX (for short premium strategies)
VIX
< 15
15-19
20-29
30-40
>40
Volatility
Lowest volatility, all comfortable
Market in ‘lull’ mode
Volatility high
Volatility very high
Volatility and fear levels highest
Maximum portfolio capital allocation
25%
30%
35%
40%
50%
In allocating portfolio capital, I need to use Buying Power (NetLiq)
Cash Balance
$12,180.88
(was $10,371.60 )
Buying Power/Net Liq
$10,974.88
(was $10,644.60 )
Max Portfolio Capital Allocation Short Premium (Cash Available for Trading)
35%
$3,841,21
Max Portfolio Capital Allocation Other (low risk, long positions)
15%
$1,646.23
Average Max Position Allocation (BP)
3%
$319,33
I now am max allocated for short premium, so can 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 $310, 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.
