Update on IWM Call Credit Spread, OCT/28/21

I was waiting for my two candles since Monday but the underlaying took a small retraction. Today on Thursday we saw a bullish engulfing. It was rejected at the 229-230 Resistance level. An area with over 100,000 Call and 50,000 Put options. If this level is broken the MM will have to hand out more money to the players. And this, they do not like. The Market Maker Sweet Spot is between $228 and $222. This is were I expect the price to settle for the end of this week. This is the zone where the MM make the most profit.

What do I expect tomorrow OCT 30th?

The US Economy is deteriorating further

The US Economy is deteriorating further. Now GDP estimates reach 0.2%!!! While the Bank of Canada cuts QE to damp inflation, Jerome Powell seems to be in inflation denial. What will he do?

Go Brandon, Go!

Here I try to explain why Inflation is always a problem that is created by the Central Banks and FOMC. It is not coming from “nature”. It is a manmade Inflation. Also, Shortages like Gasoline shortages are created by the regulatory and fiscal policies of the Government. You cancel all drilling activities on public land, you kill the Keystone XL pipeline, you terminate fracking, you overregulate natural gas extraction. These things were the first things the Biden Administration did when they came to power. They created shortages.

https://www.youtube.com/watch?v=aw4xygPswqo

Bear Call Credit Spread. Final Setup #5

Make sure that you understand all four previous blogs. They are fundamentally important to this trading tactics.

bear-call-credit-spread-histogram-3_20

Additions

I introduced the True Average and the Average True Range, ATR, into the equation. To calculate the True Range is easy, please look it up on the web. For EVERYTHING you need there is a exact equation somewhere in the EXCEL websites. Guaranteed. I am not providing this here. I just explain the concept in detail as a guideline.

Having the weekly TR you also can calculate the Average True Range, the ATR.

I calculate the ATR only off 4 weeks. That is the average of one month movement. It is not so much of a difference to the typical 14 day ATR but for me I want the empathize the immediate past. Do as you see fit.

These data are also collected from Yahoo and should already be part of the download. 

We already calculated the Average Return per week, our Pos Avg Return, the worst case scenario of 100% uptrend! And we multiplied it with the occurrences in the data set, here 53.05% of the weeks. The amount of weeks that the underlaying is actually up by incorporating the downturns from the dataset. This is our mean average return.

Now that we have three averages, the worst case, the mean case, and the ATR I summed them all up and averaged them. This is what I call the BINGO NUMBER, in yellow circle. This is my STRIKE PRICE.

= AVERAGE(237.35 + 246.80 + 235.50)

= 239.89

So far the Bingo Number is slightly below the 2StdDev. So the Entry can be 2StdDev. If the Bingo number comes out above the 2StdDev take that as an entry.

What is the reason behind these calculations?

These calculations give us the best probable setup for our SHORT CALL Option that still makes sense for a better ROC. For the Return On Capital Ratio, the credit in relation to the collateral capital of the trade you have to come up with, we want to go as close as possible to the current price, "ATM", At The Money. This gives the highest CREDIT.

But also we want to stay as far away as possible from the current price of the underlaying, Out of The Money, OTM, to not hit the Strike. The calculated Bingo Number will be the STRIKE Price of the trade and brings Risk/Reward into balance. 

All over all it stays 2 Standard Deviations away and hence has a trigger rate of about 10.7%. The ROC is about 6.5-7.5% depending on volatility and Yield Rate.

ROC Considerations.

The IWM is creating more ROC than the QQQ and the SPY. The two latter ones are close to 5% with this setup. The DIA (Dow Jones Industrial Average) runs under 2% with this setup and hence is completely excluded.

In our example we calculate ROC as 

144 -(2 x 10.95) / 1,866.95 = 6.5%. 

122.10 / 1,866.95 = 6.5%

Dont forget to substract 2 x FEES for the full turnaround.

With a 10% chance of getting hit and we reserve $50 for max losses per contract due to volatility and treasury yields (just close the trade at Strike Price) we have to substract this from the net ROC. 

We might have 
45 winners at net of $122.10, times 45 = $5,500
5 losers at 4 x $50.00, times 5 = $1,000
Net gain in one  year of $4,500

The gain percentage would be 4,500 / 7,600 = 60%
If you can pull this off every hedge fund manager will hire you. 

WHY?

Because your Kelly Criterion would be 

Everything above 2.00 profit per Dollar is exceptional. And everything about 20% trade size is exceptional. 

You are free to add any ZEROS to this game. We are not here to calculate hard numbers but to give examples and percentages.

Take a trade per week and do it 50 weeks a year! This will double your account. 

Trade Entry

We enter the trade NOT to follow a trend up or down. We dont pick bottoms or tops! We try to get in, in the middle. For that reason we wait for two green (blue) candles and enter on the third day after 30 minutes of the Opening. We try to jump in on the top then, which occurs roughly at 0900-1000 NY Time. Let the rush go and try to sell at the top. Thats it! If that doesnt work out we enter anyways. Dont worry.

Why do we try to get in at the middle?

We know the swings in that stock and we calculated the deviations and when you look at the swing pattern and the technicals we see that after a few days up there are coming a few days down! These down days decay the Days To Expiration, Theta of the Option trade and hence it will have to come out from the bottom. We want to take advantage of this and further add to our odds. We want to own the bank in the casino. We are not here to play! Take a look at this image and you know what I mean.

Another reason for letting two green candles pass is that in an upward move CALLs become more expensive and hence give us a bigger credit. This is important. If you follow the stock you will notice that.

Definition of two Green Candles

• Two bull candles
• One bull candle and a gap n' crap with a doji

The third last candle was a bull candle and hence valid, the next candle was a red DOJI and it gapped open, which means there was a lot of after market trading and I count this as a bull candle for the purpose of this exercise. You want to sell into the uptrend. So we entered on the last candle.

Daily Charts

5 Minute Charts

Days to Expiration

We chose 30 DTE. I was considering 45 DTE since there is more money for a credit to get, true, but I decided for a monthly roll over and my calculations run on a 4 week base for some numbers. This is all up to ones liking.  

Exit Trade

• Let the Trade expire and keep the CREDIT.
• If the trade runs against us close at Strike Price! Remember, you get the credit up front and when you are down by the total amount of your credit you are at Break Even only. This means at Strike your OPEN P/L should be negative CREDIT RECEIVED. You close and just give back the credit. There should not be any losses. Except commissions and fees.
• You might endure some losses due to volatility and yield rate. That amount might vary some from the BE. 

GDP Growth at a 0.5% estimate.

With an estimated GDP growth of only 0.5% for Q3 21 it tell me that the Bull Market is coming to an end. My Flags going on "Stay Flat" Yellow!! This would be a catastrophic drop of -3.7% from Q2. #Stagflation #GDP #Options Maybe it is time to Buy some PUTS in the S&P500. One year to expiration.

Inflation will getting worse! Too Much Money Printing.

STOP PRINTING MONEY!

Bear Call Credit Spread Histogram #4

Here is a visual of the Towers of Truth as I call them. The 1st Standard Deviation of a stock. With the QQQs we see different heights and with the IWM we see more balanced towers. The mean is the statistical mean and we see the chance of the stock to be above the mean or below the mean. The QQQs tend to the upside while the IWM is more ranging! Where do you want to be if you like neutral markets that are not going anywhere? IWM. Statistics tell you exactly what the probability is of being above the current market price and what is the probability of being below the current market price. You can also visualize what the potential losses are.

https://www.youtube.com/watch?v=Qj3TD9cCQAU

Bear Call Credit Spread Histogram #3

We are the Option Crusaders. We trade Credit Spreads. We crunch numbers. Visit our Military Camp at: Http://OptionCrusader.com Follow us on Twitter: AndrewLander13 Here is a visual of the Towers of Truth as I call them. The 1st Standard Deviation of a stock. With the QQQs we see different heights and with the IWM we see more balanced towers. The mean is the statistical mean and we see the chance of the stock to be above the mean or below the mean. The QQQs tend to the upside while the IWM is more ranging!  

Where do you want to be if you like neutral markets that are not going anywhere? IWM. Statistics tell you exactly what the probability is of being above the current market price and what is the probability of being below the current market price. You can also visualize what the potential losses are. 

https://www.youtube.com/watch?v=Qj3TD9cCQAU

Bear Call Credit Spread Characteristics #2

As discussed before in an environment that is poised for a downturn in 6 or 12 month we want to have a trading strategy that has the following criteria. We want to make money when the stock market moves up moderately. We want to make money when the stock market moves sideways. We want to make money when the market goes down. We are the Option Crusaders. We trade Credit Spreads. We crunch numbers.

 https://youtu.be/U-gEWa8QtfY

The Bear Call Credit Spread Basic Thoughts #1

The basic thoughts on the Bear Call Credit Spread and in what economic environment we what to place this kind of trade. There will be more to follow. One step at a time.

https://youtu.be/aNR5SaDtpeU

2018 Interest Rate Hike 1

What is the difference between 2018 and 2021 and the coming Stock Market crash? There are similarities and there are huge implicating differences.

https://www.youtube.com/watch?v=Am9IaYVLxjM

Introduction into our work

GDP Now and STAGFLATION

GDP Now and STAGFLATION: 

With the collection of data from the Atlanta FEDs we see a rapidly deteriorating US economy. The GDP forecast dropped from 6.1 annualized GDP growth to 1.3!! This is a major concerning development. 

The FOMC interest rate hikes in 2018 and now

The FOMC interest rate hikes in 2018 and now:

The Federal Reserve raised interest rates four times this year (2018). Earlier this month, at the Fed’s last meeting of 2018, Chairman Jerome Powell signaled that the central bank’s board of governors would likely issue fewer rate hikes next year, but investors were not appeased and the Dow Jones Industrial Average fell 352 points.

The vast majority of losses have come since October, when the stock market, which was experiencing the longest bull-run in history, took a turn for the worst. The stock market is on pace for its worst December since 1931, but it also set record single-day gains Wednesday, when the Dow jumped by more than 1,000 points.

The stock market woes come despite signs that the general economy is still doing well — with record low unemployment, strong GDP growth and relatively low inflation.

Article extract from

https://www.pbs.org/newshour/economy/making-sense/6-factors-that-fueled-the-stock-market-dive-in-2018

We see similar things in the economy in 2021 except that the unemployment numbers are higher and 10 million open jobs to fill. Also the prices are extremely hot. Core inflation is surging above 5.2%.
Prices will inflate with a growing economy as we had under the Trump policies. We can see the production index of the PMI (red line) rising since 2015. Prices following suite.

AMC Update 10/09/2021

AMC Update 10/09/2021: 

Hovering around the 38.50 and 37.50 level for the past 4 weeks AMC seem to break below the triangle and the 50% Fibonacci line. The trading volume is also dramatically reduced it reached 29% of the current average trading volume. This about 16% of the trading volume in August, which was at 176,000,000 shares a day.

I hope AMC will drop to 30 so that I can cash in my puts.

IWM Update 10/06/21

IWM Update 10/06/21:

After the SPY dropped by 5% all commentators are in a tantrum. This will get worse. Why?

• The Feds keep pumping printed money into circulation, which immensely inflates the currency.
• We seem to be in the initial step of the “Blow Off Phase” of a trading cycle. Or the end of the “Denial” phase

Are we entering the BLOW OFF Phase?

Are we entering the BLOW OFF Phase?: Housing bubble. The excessive growth in the housing market is a concern. 

The Bear Call Credit Spread Strategy

Condition we need

As discussed before in an environment that is poised for a downturn in 6 or 12 month we want to have a trading strategy that has the following criteria. 

• We want to make money when the stock market moves up moderately.
• We want to make money when the stock market moves sideways.
• We want to make money when the market goes down.

Specifics of the Setup

As outlined before the Call Spread is not that profitable as an Iron Condor and needs a little more capital but it has the following great characteristics. 

• The upward risk can be determined and is limited by historical data. No market collapses to the upside and goes down at a constant rate. Just the opposite.
• The upward move of the underlaying is not a profit hindering development as long as the trend is at a moderate historical proven pace.
• The probability of being taken out can be calculated based on data sets. That level is around 5% in our method.
• This trade makes money even the stock does not move at all. 
• This trade makes money when the price of the underlaying collapses. Great for an expected market crash. When all hell breaks lose you go like: YEAH, YEAH, Yummy Money!

The basic setup goes as follows. 

We sell a call option at 2.5 Standard Deviation of the actual stock price.
We buy a call option further away than the first call for less money. Hence we end up with a credit. We are technically shorting the underlaying stock. We are "short".

Why are we buying another CALL when we are short? That second Call is the hedge. It limits our losses and winds down the collateral we have to come up with. We never do naked calls.

I personally do not like to call it a "Bear Call Credit Spread" but a credit spread or Call Spread because this spread makes money in a moderate uptrend, in a neutral market and in a bearish market. But not ONLY in a bearish market as the official name suggests!

Examples

Here is the IWM (Russel2000 ETF) as an example. Anyone who had bought this ETF in January would not have made any money. Why? Because the price today is the same as it was end of January, $222. 

In these 8 months, THEORETICALLY, you could have sold every week a Call Spread Expiring 30 days thereafter. With a 5 years data set of weekly OHLC prices we know how much the IWM moves up and down. What is the volatility? What is the expected Gain per year in the IWM? What is the probability that the IWM moves to a certain level within 4 weeks? Is the IWM an up moving ETF or a slow moving ETF or what? We know all these data. And they are all publicly available. All of them. Ok, lets move on.

Basic math and Dollars of the Example

Assuming as the new package is set up now, we will sell every week this spread and wait for one month until it expires and so we can keep the CREDIT received upfront. 8 months to go. There is a weekly payday for the IWM. Every Friday is payday.

We can calculate 4 trades a month. We stick to the graph above. Just to use the easy numbers. You can run the details yourself. 

• You need 4 x $1,850 to place a trade as collateral. This is $7,400, US Dollar in a month since this trades are rolling trades. 4 trades will be always on.
• Sell the spread for some money and never buy it back. Let it expire!! If you sold a PUT SPREAD it is more like selling insurances. You insure other traders against a huge downturn and guarantee them to buy their position for a written contract price, which will be executed if the market price is below that said contracts price.
• Selling a CALL SPREAD is more like selling lottery tickets with a certain (5%) chance of winning. Like in the Casino but you are the bank running the roulette table. After 4 weeks you let the ticket expire, like a lottery ticket. You buy it every week, no? I sell them every week to you. Run new numbers and sell a new Spread. Every week. Repeat.

• In 8 months you would have sold 8 months x 4 spreads. The credit received would have been 8 x 4 x ($162 - 7.95)= $5,000. 
• Compared to the risk placed on the table, $7,400, the earnings would have been 67.6% or annualized 101.4%. 

The four major ETFs

Before going deeply into the setup, lets take a look at the characteristics of the 4 major ETFs. Those are one of the most liquid ETFs on the market and hence your best chance to terminate your position in bad times.

The Qs and the IWM have the highest swing of the major ETFs. 2% and 1.8%. But when you put the days where the stock is down into calculation the ratio becomes more upward leaning for the Qs. 

• For the QQQ (NASDAQ ETF) 1.1% up and 0.6% down on a weekly base.
• For the IWM (RUSSEL 2000 ETF)1.1% up and 0.97% down on a weekly base.
• The SPY (Standard and Poor 500 ETF) and the DIA (Dow Jones industrial Index ETF) run about the same. 0.85% up and 0.65% down. This is so when you incorporate the loosing days. If you invested in the S&P 500 or into the Dow Jones you would have made the same money.
• I love when the market doesnt move at all or when it crashes. I am naturally always a contrarian. Who would have thought!!!

Here is a visual of the Towers of Truth as I call them. The 1st Standard Deviation of a stock. With the QQQs we see different heights and with the IWM we see more balanced towers. The mean is the statistical mean and we see the chance of the stock to be above the mean or below the mean. The QQQs tend to the upside while the IWM is more ranging!

Where do you want to be if you like neutral markets that are not going anywhere? IWM. Statistics tell you exactly what the probability is of being above the current market price and what is the probability of being below the current market price. You can also visualize what the potential losses are.

As we saw from the graph above the swings are not very shallow but have some ripples, 2% wave swings. And the towers show you how balanced the stock is or how skewed it is. The QQQ is more skewed to the upside but similar volatile, wave ripples of 1.79%, as the IWM.

Winner and Loser Examples

Here is an example of a winner and a looser. But the trades happened in the past examined with current data. Hence the line of the Standard Deviation would be slightly different, maybe turning the looser into a winner.

We see a trade entry at the worst time when the stock is down at the bottom. And then it runs against you all month long. The upper turquoise line is 2.5 SD. Add $200 to it and that is your CUT OFF. Your Strike is being hit. That's why I say it is better to wait for two "green" candles in the daily charts and calculate the levels from there. You will avoid being hit too often.

And this is the QQQ, which we already know is leaning very much to the upside. Here probably wait for 4 green candles and in the 5th daily candle sell when seem fit at daily high. 

For the IWM we only let two candles pass and decide in the third. But we can wait longer since we dont want a trend. The longer we wait and the stock is moving up the more probable it becomes that it will peak and retrace and the month is over. The Spread is dead.

Here is an example of a winner.

Here again is the SETUP

1. Sell IWM Call Credit Spread at 2.5 / 3.5 SD every week
2. Sell IWM only. 
3. Sell after 2 days of Green candles in a row. Sell in the third candle at daily high.
4. Set Alarm when it hits the Strike Price at 2.5 SD
5. Close it if the trade is losing $200
6. Otherwise dont do anything and let the cat run dead.

Make yourself a nice spreadsheet where you have a simple data line up and input.

After Burner

I also put LONG CALL expectations together based on the same stats to see what the gain of long calls would be. Here we would go with the QQQs since they are the strongest in a trending market. But since the rumors are about that the Feds will be tapering soon we stay out of these things. The coming tapering will dive the market maybe by 25-30% and a follow up in interest rate hikes will crash the market. My numbers are 10 Year US Note Yield at 2.2% And commercial lending hitting pre-pandemic levels. BOOM and BUST. But here is the QQQ long call in an up trending market.

We can see that the QQQ might run up to $494 after one year according to the pricing from ETF . com and the data analysis from 5 years weekly data by me. Thus, buying a long call for QQQ with an expiration of 364 days and cashing it in during the last 10 days it is still alive, would make you pay $3,033 upfront for the contract and receiving a NET of $10,032 at selling. This is an astonishing 330% ROI!! You tripled your money. That's why nobody wants to taper and cool down the inflation since there is toooooo much money to be made. Who cares about inflation for the normal people? Nobody. Fact. And "normal" people care more about wearing the mask than how they get ripped off!