This is a results update for this post yesterday:
— The God of Trading (@TheGodOfTrading) April 6, 2020
This is a results update for this post yesterday:
— The God of Trading (@TheGodOfTrading) April 6, 2020
Day trading weekly short strangles on TSLA, even as the market swung wildly both up and down, has turned out a steady 62% gain for March.
The total cash gain per options contract for the month was $10,969, using a maximum margin of just under $18k. Every week had a double-digit gain.
See the green-colored weekly totals and the final yellow-colored cumulative total for the month on the table below.
Each short strangle had a hard %200 stop loss. If stopped out the strangle is rewritten for new strikes calculated on the stop’s price level. Each trade is closed at the market at the end of the day to eliminate overnight risk.
The same short strangle strategy can be applied to any volatile stock with liquid weekly options – TSLA here, but other prospective stocks would include AAPL, NVDA, BA, ROKU, GS, FB, WYNN and NFLX. No doubt others from time to time depending on market conditions and an individual stock’s story (for instance, BA of late).
The reference for this strategy is this link: $TSLA – Day trading short strangles for simplicity’s sake.
There are many complicated options strategies but this blog strives to apply the idea that simple is best, or at least better…
Remember this information is presented here, and throughout this blog, for entertainment purposes and as my personal journal for trading and tracking strategies, and should not in any way be construed as investment advice.
This is what happens when the US taxpayers put up $50 or so billion dollars to buy your company and then don’t take it away from the shareholders.
BA (Boeing) is up 85 percent this week (in four days) thanks to the general market bounce and being a large part of a $50-billion taxpayer bailout in the stimulus bill.
It’s up 55 percentage points higher than the next nearest stocks in the DOW Industrial Average (CVS, UTX, HD).
All those percentage points this week for a company that was crying for a bailout even before the market selloff, and a company that last week shut down its operations in the Puget Sound area (laying off 7000 employees) even before the Washington State Governor ordered ALL essential business closed to fight the virus.
It turned out in the last couple of years, Boeing has become the poster child of all of American corporate malfeasance. Buying back stocks with tax breaks instead of attending to core businesses. Taking advantage of artificially low interest rates, courtesy of a loose Federal Reserve, to add debt and to hide diminishing earnings per share. Having wildly over paid chief executives. Those guys at Boeing a few years back moved their executive offices to Dennis Hastert’s district in Chicago when he was Speaker of the House – just before he was indicted and sent to prison. Having atrocious labor relations. They moved an entire manufacturing division to South Carolina to avoid the unions in Seattle and had to admit later they would never make up the multi-billion-dollar shortfall it took to train those yahoos to make airplaines. And finally, characteristically in the Trump era, the company got caught slipshod production values, but not before it killed a lot of passengers in two crashes. Simply said, it’s probably more known for the Max-737 and that fuck-up grounding of what? A third of the fleet?
Nevertheless Boeing, admittedly, is also so important to the US economy it is truly too big to die. It does not, however, need yet another corporate bailout by beleaguered US taxpayers.
It needs to be nationalized.
Instead, it’s pretty much leading the bounce and flying in the same thin bear-market air as the rest of the market.
And along with it, there are the rest of the birds feahtered in its bailout nest. AAL (American Airlines) up 45%, DAL (Delta) up 44%, UAL (United) up 39%, ALGT (Allegiant) up 39%. We all love these airlines, right? Love the service? Paying for extra bags? Getting stranded by canceled flights?
And the food, airline food, now that’s the best the world has to offer, right?
See the chart below. Big pop. And, of course, it better not come down with the next decline otherwise the big check from the taxpayers will be wasted.
Choppy week in TSLA short strangles but still netted a 12% gain.
In the five days of the week the initial strangles were stopped out every day except Monday and twice on Friday, forcing a rewrite of the strikes each time.
The reference for this strategy is this link: $TSLA – Day trading short strangles for simplicity’s sake.
For anyone who pays attention to FINRA margin debt this market crash was no surprise.
If there was anything surprising about what is now 30% plunge in the SPX, it was that it took so long to happen.
I had a clear warning here as far back as six months ago in this post:
Now all I can say is anyone who was not paying close attention to margin debt or was disregarding its warning was asking to get their stock profits ripped apart.
Once margin debt starts down, it feeds on itself with margin calls leading to stock sales and more margin calls leading to more stocks sales with each jolting decline in the market. And besides the profits lost, there is time lost, sometimes a lot of time lost, before the market can even begin to recover.
If we take a look at the history on the chart below it’s pretty obvious the divergences between margin-debt and price of the SPX foretells the market sell-offs. In 2000 and in 2008 margin debt dropped down (the black boxes on the chart) while each time the market went higher for a few months before plummeting. Again these last six months (another lower black box lower than the previous peak), history repeated.
Granted it’s hard to believe as the market keeps going up and up the bull will ever end — earnings seemed good, the Fed was on board, Trump was bragging on Twitter at each new high — but long-term investors could not ask for a better advance notice it was their time to sell or at least tighten their stop-loss levels to preserve capital. All this market needed was one small trigger for the full unwinding of margin debt to usher in a bear market, instead it got a big one. But if it hadn’t been the Covid-19 pandemic, it would have been something else.
Now that the bear market has begun, margin debt is indicating it is not done yet.
History says, like in 2000 and 2008/2009, the S&P500 is going down around 50% before this bear market is finished. If history repeats again, there is another 20 or so percent more downside to go.
Margin debt during this long bull market went higher than either 2000 and 2007 so there’s no telling how that’s going to play out. From its 2019 peak it has a lot farther to fall – and if the news keeps getting worse — since the US, thanks to a lying President and his incompetent Federal administration is getting a late start on coming to grips with the pandemic it’s possible it could be more than 50%.
If the dire damage being done to the economy is not mitigated sufficiently by a Congress that was supposed to have a stimulus package out last week and hasn’t managed get one done yet or if the stimulus is too small or if it’s aimed at the wrong people, we could be looking beyond a historical 50-percent decline to something more like 1932.
You ask me, we’re at a point when we need a Franklin Roosevelt in the White House and instead we’re still stuck with worse than a Herbert Hoover.
But as history shows on the chart, whatever the final decline is to be, it’s likely it won’t be until after a big bounce any a week, any day, any minute now.
This market is massively oversold and it’s a positive sign that governors and mayors, allied with scientists and health-care providers across the country, have taken over the front-line fight against the pandemic as Washington goes on dithering.
The trouble with the margin-debt numbers is they are reported a month late so one pretty much has to guess, based the price action during the month, where the debt level might be in the current month. While we can see the SPX crash here in March on the chart, the margin debt line is only up to date through February. I would assume from the current price action in March it’s now a lot lower, probably akin to that drop in 2008 marked by the black vertical line.
If so, we may be closer to a bear-market bottom (six months or so) than the pattern in 2000 (which took about three years).
Regardless, the bounce, which could be spectacular, is not going to be a resumption of the bull underwater long-term holders are hoping for. More likely it’s going to be a bull to be slaughtered so severely by the next bear move no one, as despair sets in, will be looking to buy any stocks.
In despair is when a new bull market can be born.
But I could be wrong. It could be different this time. Uh, huh…
Ah, yes, I remember it well… In fact I’ll never forget…
I began investing in the stock market in September of 1987. My wife was having our second child that month. I figured I had to make some financial provisions for the future. I was beginning to make some extra money so I put our savings into the stock market. I bought stock in Compaq and Intel. The stocks were roaring up and continued to rise. I was a very happy young father.
Then about four weeks later on October 19th, the market crashed. In a panic I sold all the stock. That was on the Tuesday after Monday’s crash. That time was in so much chaos it wasn’t until Saturday before I got the fills to learn we had no savings left.
I didn’t tell my wife. She was busy with our newborn. I had a job so we had money coming in. I didn’t want to worry her. But I was virtually catatonic for weeks, until Dec 4th, 1987 (coincidentally our anniversary), when the market made a successful retest of the crash lows.
That was the day I learned what matters most in trading the market – no matter what happens, it’s all happened before.
History, history, history.
There is the famous curse, usually attributed to George Santayana, that “he who does not learn from history is doomed to repeat it.” In the stock market it’s the opposite – “he who learns from history is is blessed to repeat it.”
Which brings us to the VIX, the Volatility Index.
The mass psychology of the market – because money is always at stake – is either in some degree of fear or some degree of greed with both emotions filtered by time.
While history serves as context, the VIX measures the market endless wheeling back and forth between fear and greed. The index itself runs opposite the other major indexes, the S&P500 (the SPX), Dow Jones Industrial Averasge, the Nasdaq Composite…in other words, it runs opposite the market.
When the VIX is low the market is in a bull market, and most stocks are rising, virtually all stocks, and when it is high (as it is now), the market is a bear market, and stocks go down, virtually all stocks.
But the VIX says more than the obvious.
Right now because we’ve just finished a very long bull market there is a lot of belief that the recent stock crash is just a temporary drop and prices will soon be hurtling upwards to new highs.
And yet…right now the VIX says “not so fast.”
Consider the chart below showing the VIX with a monthly chart of the SPX.
I’ve outlined the effect of the VIX on the general market.
First, let me say what I consider the key levels on the VIX itself. Under 15, the market is in a steady advance, a bull market. At 25, the market is in a normal “correction” and the price will soon continue to climb. But if the VIX rises through 25 convincingly and vaults past 40, it ia a bear market. At that point the VIX will have to convincingly fall back through 25 before stocks can in general begin to move up again.
On the chart the red vertical rectangles mark the periods in which the VIX last went through 40 and dropped again below 25. In the 2008 bear market it took eight months before prices began to rise again. Although it doesn’t show here on a monthly chart, a weekly chart of 2010 has the VIX also above 40 (marked by the red circle on this chart) when it took five months for the prices to rise again. In 2012, it took four months for prices to rise gain.
These are measures of time.
I am suggesting this is the time it’s going to take for the current bear market to subside so prices can rise again in a steady climb. Months at best, and even then only for those not holding long term. This crash has caused a lot of damage and a lot of stock holders are trapped at higher levels (the entire advance from the day Trump was inaugurated as President has been erased). William O’Neil of Investor Daily called this “overhead supply,” meaning those holding stock above current prices will be looking for bounces to get out so going forward is going to be a choppy ride and it’s going to take time to work off the effects of the bear.
To say nothing of the fact there are very few signs the market has, as yet, quit falling.
Still, there’s more…
By my reckoning the VIX is also a calendar. The market always has a bullish bias (this is America after all!) but there are months and even years lost along the way.
The shaded blocks on chart below illustrate the time it takes for prices, once the bear market has begun, to regain their former highs. For instance if one invested in the market at the top in mid-2007, it would have taken more than five years to breakeven; in the 2015/2016 and 2018/2019 corrections approximately a year each to regain the losses, or move sideways to new highs.
When the bull is going strong, everyone forgets it takes just one down day for a bear market to begin. Of course, until it’s later and one can look back, no one can know which down day, like February 20th this year, is THE DAY.
Which is also why since December 4th, 1987, as a day and swing trader, and having learned the market’s history, I sell, every time, on the first day down.
If you haven’t been sitting on the edge of your SVXY already, now is the time.
TVIX was at 40 or so then and hit a high of 1000 yesterday, while its little sister in the land of leveraged VIX relatives, UVXY started its own spectacular launch from 12 or so and hit 134 yesterday.
There’s only a month of it but enough of this past history. Can anyone hear me laughing at how insane this rum has been? It is time to turn attention to opposite trade on the VIX.
See the charts below.
VIX already is going sideways at an extremely high level but until today TVIX and UVXY didn’t seem to notice. Both took new stabs the highs today and closed below both their respective opens and closes from yesterday. While they haven’t quite broken any trend lines or any reasonable moving average, they both have truly big ugly, ominous, candles.
If TVIX and UVXY didn’t know the VIX might be done with its move until today, it would appear their leveraged counterpart, SVXY, hasn’t quit notice it yet (see the chart). With all this volatility ripping back and forth, it finished up a relatively paltry 3.3% today and produced a perfectly reasonable little white candle.
SVXY goes up as the VIX goes down. If it gets moving it can hit 35 in a flash, and 50 in a quick explosion of its own.
So heads up – there’s a good chance SVXY runs up tomorrow. If not tomorrow, soon…
Bloomberg reported yesterday that the major American airlines used their free cash flow for buybacks and may be bankrupt by May.
Trump is already talking a taxpayer bailout.
How about buyouts instead?
Again and again, these industries (last time it was the banks) recklessly practice free-market capitalism and eventually a crisis comes and again they need a socialist intervention to go on with their business as usual.
Don’t these guys ever plan ahead? Don’t they ever realize all good times come to an end to one degree or another (all bad times too for that matter)?
Isn’t it time for this periodic sucking on the taxpayer tit stops? Maybe a lesson needs to be learned. If the taxpayer is going to have to subsidize and/or finally bail them out in the end, maybe it’s time the taxpayers take ownership.
Not that Trump would know what to do being on the opposite side of his own bankruptcy history but he won’t be President forever (at least I hope American voters have wised up enough to flush the con king).
Anyway, this is what these once high flying birdS look like crash landing together:
Got the bounce Friday in a frenzied last half hour as suggested Thursday in this post: #MarketTiming $SPY – Buy now, resell later….
No doubt it was primarily short covering but the rapidness of the run-up was bolstered by the announcement that the confused disingenuous Trump Administration is trying to catch up to the actual facts of the Covid-19 virus.
Trump and his team of appointed incompetents had no choice since the scientists within the CDC are coming to the fore and not putting up with the bullshit anymore, and Governors Jay Inslee of Washington State, who Trump called a “snake” (I guess because Inslee was teaching him leadership by example), Andrew Cuomo of New York and Gavin Newsom of Califonia, as well as hundreds of mayors across the country, who could not wait any longer on the dithering Feds, were moving aggressively to confront the virus in order to protect the citizens in each of their states and municipalities.
Regardless, this bounce, even if it becomes a rally is not going to last. As also noted in the post Thursday, the economic damage that’s begun hasn’t even begun to move through the market. Companies may begin warning this week of earning shortfalls.
There are going to be a lot of earnings shortfalls.
The S&P is down 16% for the year, even after Friday’s nine percent bounce. If is FINRA Margin Debt is unraveling (it’s reported a month late), and it probably is, and if history means anything, the S&P has another 30 or so percent to the downside to go over time. Margin calls feed on themselves as the calls bring more selling and more selling brings more margin calls.
The point is it is not buy-the-dips anymore, it’s sell the bounces. Friday’s was a big bounce. Did anyone sell or just started praying for more?
In the meantime, I thought I’d take a look at a few stock sectors I follow to see how bad it’s been even with Friday’s bounce in the numbers. Interesting among the biotechs: both REGN and GILD are up for the year so far, the only glimmers of green. Those are among the drug companies working on a vaccine for the virus. I will get to the tech stocks later. They have held up somewhat but the bear will bite them too before this is over. And the marijuana stocks…ah, the weeds, they are worthy of a blog post all their own.
The tables below are a year-to-date (less than three months). Take note of the percentage decline columns next to of the raging red bars:
I’ve been told repeatedly on Facebook and Reddit that no one can day trade options on stocks. No one?
Is that a flat-out challenge or what?
So I set about to see if it could be simple enough to be possible. Simple because it’s a day trade, and because I’ve been chasing the simple in trading forever. To my mind Henry David Thoreau -“Simplify, simplify, simplify’ – is the greatest stock market guru of all. And I wanted it to be systematic so it could be done day in and day out as rhythmically as a perfect golf swing.
First, a few simple basics.
When one buys an option in the stock market there are only three things that can happen and two of them are bad for the buyer. It goes your way right away which is good. It goes against you, which is bad. Or it goes sideways and time decay eats away the premium paid, which is bad. It’s the same selling an option but much better because the time decay is on the seller’s side. If the stock goes sideways, the seller keeps the premium on the option. In other words, if one buys an option, one has a 66% chance of losing money; if one sells the option, it’s a 66% chance of making money.
So, obviously, it’s best to be on the sell side…
Simple as that?
Not so fast, if one does this without owning the stock, it’s called being “naked”, being naked a call, naked a put. The trouble is the margin requirement on those are often times so high one might as well be trading the stock. One might have to put up as much as $20,000 on a day trade with the prospect of making a couple of hundred bucks. A lot of risk, it would seem, for not much return. And it’s a day trade so there’s not all that much time to have the stock go your way or sideways.
No wonder the guy knocking me on Facebook is certain day-trading options of stocks can’t be done.
He’s wrong, of course, or I wouldn’t writing this.
On the table below I’ve taken the margin requirements calculated by the Chicago Board Options Exchange (CBOE) and applied to day trading short strangles on weekly TSLA options for every trading day for a month. A short strangle is selling both an out-of-the-money call and an out-of-the-money put.
To illustrate the day trade:
Let’s take the last trade on the table, the 3/13 short selling the 540 call and the 520 put while TSLA itself was at 530.89. This is a trade on the day of the weekly expiration.
The maximum gain on this trade would have been $1,511 if TSLA had stayed between 540 and 520 by the end of the day. But TSLA vaulted to 546 on the market’s last-half-hour rally cutting the gain at the close to $810, a 53% gain on the actual credit received for selling the two options. Not bad. However, the margin requirement was $11,217 on the naked sales for the expiration day so the gain was actually 7.2% on overall margin for the day. Also not bad.
This is a strategy that can be used on a any prominent stock — AAPL, NFLX SHOP, NFLX BA, NVDA — with decent options liquidity and worthwhile price swings. And it’s a strategy that can be used week in and week out without ever having to buy the stock itself.
On the table below, there are the details for each day trade on TSLA (peruse if you choose), but what’s most important are the weekly totals in green boxes for each week, the net cash for the week and the percentage gain; and the final gain for the past four weeks in the yellow stripe, $11,478, generally a 57.3 gain on margin.
Because this is a day trading strategy the same cash margin is being used over and over again anew each day and although it is most often a lower requirement day by day, the percentage gain here is calculated on a flat $20,000 margin requirement…for simplicity’s sake.