SPY Bull Put Expiration and Insurance Purchases

Around July 8, SPY fell below $205, threatening the short strike of $202. Along with the threats for the XLE bull put spreads in the portfolio, I decided to purchase some insurance to mitigate some risks. I analyzed the SPY chart and felt there might be a short term descending triangle pattern as shown below. Thus I bought 2 SPY Aug21 $198 put for $2.74 triggered at SPY below $205.06.

I used a spreadsheet to calculate my entry, stop and target points, as well as the reward to risk ration as shown below. In the end, this pattern failed and I sold the put at $1.2 after SPY gapped up on July 13. The insurance loss was $174 x 2 = $348. Thus the July SPY position had a minor loss $12 (=348 - 6 x 56) after SPY puts expired worthless yesterday.

Short Stock	Price
ATR	2.19
Swing low/Breakout	205.28
Resistance	208.02
Trade Trigger - Below prior day low by 10% ATR	205.061
Entry limit order - Buy stop limit at 10% ATR below trigger	204.842
Initial Stop - Sell stop market is higher value of (1) 0.1 ATR above resistance, (2) Trigger price + ATR	208.239
Price to set break-even stop - equal Entry limit - (Initial Stop -Buy stop limit) - Drop new BE stop after a new swing high of 5 days+ is made	201.445
Target - Lower horizontal support - Range % within down trend line in last 5 weeks - Sell half & Trailing another half at 0.1 ATR above prior swing high or break-even - Sell last half at new target based on new pattern or larger time pattern (whichever is closer)	198.5263
Reward/Risk ratio - Must be greater than 2	1.8592028

In the meantime, the XLE was also moving against my position after my adjustment last time. Since I have a larger position on XLE, I felt safer to insure for this position in order to reduce risk. It looked to me that USO was falling faster than XLE. So I decided to use USO put for the insurance to trade its low base break down pattern. My order was triggered on Friday as USO fell below $16.97. I bought 4 USO Aug21 $18 puts for $1.36. I plan to sell the puts if USO rises above $17.97 by setting a GTC conditional order for stop loss. My other trade management rules are shown in the table below. If XLE continues to show weakness, I might have to add more insurance to limit overall risks. Due to the high level of risked capital for XLE, I’m withholding any new entries in case I need additional capital for another round of adjustment.

Short Stock	Price
ATR	0.58
Swing low/Breakout	17.03
Resistance	17.91
Trade Trigger - Below prior day low by 10% ATR	16.972
Entry limit order - Buy stop limit at 10% ATR below trigger	16.914
Initial Stop - Sell stop market is higher value of (1) 0.1 ATR above resistance, (2) Trigger price + ATR	17.968
Price to set break-even stop - equal Entry limit - (Initial Stop -Buy stop limit) - Drop new BE stop after a new swing high of 5 days+ is made	15.86
Target - Lower horizontal support - Range % within down trend line in last 5 weeks - Sell half & Trailing another half at 0.1 ATR above prior swing high or break-even - Sell last half at new target based on new pattern or larger time pattern (whichever is closer)	14.08381
Reward/Risk ratio - Must be greater than 2	2.6851898

XLE spread rolled out to August $70/66p

The Delta of the my short XLE put strike July$76 fluctuated around 0.65 in the last couple of days as XLE was around $75 with about 16 DTE. I had placed the adjustment orders to close the existing position and sell Aug$70.5/66.5p for a credit of about $44 yesterday. But they were not filled.

Today, the Delta seemed to break down 0.65 level (which was my adjustment level) firmly as XLE traded near $74.4.  Today, I found the IV for XLE actually dropped a bit even though XLE fell hard. Though this was not desirable for premium sellers, I still sold 41 contracts of Aug$70/66p vertical put spread which has 51 DTE with a credit of $0.43. The return was 10% which met my target. I did not sell the normal $5 width, because the Aug$65p had relatively wider bid/ask spread and the associated return would be under 10% target (credit of $0.48).

As I was waiting for my August vertical spread to be filled, I could see that the value of the closing July spread order was increasing faster than that of the August vertical. This was due the Gamma of the July vertical was larger. In the end, my August order was filled first and my July closing order was filled 30 minutes later with a debit of $1.73 as XLE prices pulled up.

To determine the adjustment size, I used my spreadsheet. Basically I rolled out the July spread to August which gave me much more time to receive the desired profit. Again, the closing target is 50% of maximal potential profit of the spread which was described in a previous post. I had not bought any put as insurance at the moment. The rest of the portfolio (SPY) was behaving OK today. I intentionally hold off opening other positions to reduce the capital consumption as the adjustment used a lot of buying power.

Exited IWM July$117/112 bull put spread on profit target

In a little over 3 weeks after IWM July$117/112 bull put spread entry, IWM rose from around $124.5 to $128.5. It followed the trending channel I drew before. My general exit rule is to take profit around 70% of max potential profit. But I was not able to access my broker’s web site as I was vacationing in a mountain area on last Thursday. So I closed it today for a debit of $0.10, which gave me 81% of the max potential profit with 25 DTE.

For the SPY July$202/197 bull put spread, the SPY did broke the up-trending support line but formed another bottom around $208, which was far away from the short strike of $202. Due to the general bullish outlook, I’ll target for 70% of the max potential profit for closure on this position. For the XLE July$76/71 bull put spread, XLE dropped after the day of entry to as low as $75.88. It did not trigger my adjustment yet, as the Delta of the short strike did not reach 0.65. For this position, I might try to exit as it reaches break-even point in the last 3 week before its expiration, following my exit plan for failing positions. Contrary to normal actions, XLE’s IV reduced as XLE price fell in the last month.

Based on my current projection, SPY may rise to $213 area in a few days. It would be good for a bear call entry for IWM at that time since IWM outperforms SPY for now and will be extended from upper Bollinger band most likely.

Sold SPY July$202/197 bull put spread

I have a general bias towards a slightly up-trending market as shown in the SPY diagram below. Today, I felt the SPY had pulled back for 7 days and was about to rise again. After looking at the SPY July$202/197p which had its short strike Delta of 0.2 and 44 DTE with a satisfactory credit of 0.56, I decided to use my last power for the portfolio to entry this bullish position. The short strike $102 is below the 200DMA and other support levels as shown in the diagram.

My two other positions on XLE & IWM are behaving normally at the moment. Now my portfolio is fully positioned and my task will be managing the existing positions in the remaining days of the July option cycle based on my trading plan.

Sold IWM July $117/112 bull put spread

Market dropped less than half of yesterday’s big rise. Since my overall stance on market is slightly bullish, I decided to take the opportunity to sell IWM bull put spreads if the put options look appealing. My next levels of support of IWM, along with its uptrend lines are shown in the image below as $122.5, $120.5, $118.5. The July short strike $117 of 50DTE has a delta of 0.19 which fits my short option selection criteria and it’s below multiple support levels. Thus, I sold July$117/112p vertical spread for $0.54 which also met my 10% return requirement. With 2 positions open, I still have power to enter another one for the portfolio.

Exited June$116/111p TLT position with a targeted profit

Yesterday, TLT finally rallied back to the entry price level and a bit higher, after 3 weeks of entry and with 24 DTE. Its IV also dropped a bit. Since my bull put June$116/111p position was against TLT downtrend, my profit target was 50% of max potential. So I set a closing order for $30 around 9:00 AM PDT yesterday as my entry credit was $0.60. It got filled in about one or two hours later. The TLT trade went against me immediately after the entry but was never seriously endangered as it did not touch short strike $116 at all. The 50% of max potential profit in 3 weeks worked perfectly for the strategy.

Now I have one XLE bull put position open and two potential positions to be opened for this portfolio. Looking at the other 5 remaining ETF candidates, I don’t feel they are at any turning boundaries yet. So I’ll wait for new opportunities to come.

Sold July$76/71 bull put spread on XLE

Of the 6 ETF candidates, SPY was at the top Bollinger bands. Since the bear call spread was against the trend, I decided waiting a bit more time for SPY trade. XLE had rebound in the last couple of days from lower Bollinger bands. I liked the bull put spreads which were following the slight uptrend for XLE since 4 months ago. The July short strike $76p of Delta 0.22 was above the low channel line acting a support and offered the July$76/71p spread a credit of $0.55, with 57 DTE. So I sold this vertical as my 2nd position in the portfolio. I still have enough margin for a 3rd position.

Exit of IWM June$114/109 bull put spread with a profit

In about 3 weeks after entry of Jun$114/109p, IWM pulled back to a high level to give the position a major profit. With 30 DTE, I decided to exit according to the trading plan and it would give me additional power for new opportunities. With IWM at $124.87, the cost to close the position was about $0.12. Since the entry credit was $0.52, the profit percentage was 76% of max potential profit. Now, I have opened more funds for two positions.

Among all of my 6 trading ETF’s, XLE had touched the lower Bollinger bands. A bull put spread seemed to align with XLE uptrend in the last few months. The trending conforming spread was what I needed for the portfolio for now. So I entered an order to sell July$74/69p vertical for $0.50 with 58 DTE. The next major support appeared to be around $74, the short strike with a Delta of 0.19 as well. However, the order was not filled today.

Exited XLE Jun$87/92 bear call with a profit

XLE refused to drop for more than 2 weeks after my bear call spreads June$87/92c were entered on 4-17. But due to market pressure, XLE made significant drops in the last 3 days. With 43 DTE, I was able to get out for $0.21 to obtain a profit of $0.33 (.54-.21, 61%) when XLE was trading around $80.5. Market offered me an higher return for this trade than my average expectation of 50%.

Looking at the chart, XLE has made a higher low 6 weeks ago and higher high a few days ago. So it seems to show an uptrend now. I may enter bullish put spreads if I have the opportunity in the future. Now I have fund available for another new position. I’ll look for a new trade after I come back from vacation in about 1 week.

Separately, I noticed TOS chart might have an issue. The 200 DMA was above the last swing high in this chart. But there are two other chart software, i.e. StockCharts.com and ProphetCharts from TOS that indicated the last swing high touched 200 DMA. So the spike in the TOS chart for the IV may be erroneous as well.

Sold June $116/111 put vertical spreads on TLT

Yesterday, TLT finally dropped to the 6 month support level around $122 that I had been waiting for. So I sold TLT Jun$116/111p vertical spreads with the short strike Delta of 0.20 as planned for a credit of $0.60 and 45 DTE. TLT was trading around 121.9, which was a bit below the lower Bollinger band. The next major level of support I saw was around $118. Since it was above the short put strike, I think chances of success are good enough for the trade. Now I have used all the trading power for the monthly cycle and will spend time manage these three positions.

Sold IWM Jun$114/109 bull put spread

Market was falling in the last couple of days. With the overall uptrend intact and 200 DMA going up, I felt safe to enter a bull put spread on IWM Jun$114/109p for $0.52 credit with 50 DTE. At this time, IWM dropped outside the Bollinger band and to a prior low set 1 month ago. It seemed to rise after the touching. The short strike was of Delta 0.19 area and the strike price was below a couple of major resistance levels.

At this time, I still have one more position to entry to reach my entry margin limit. TLT may be close to its lower boundary now. I may sell some credits tomorrow if possible.  The XLE position has been flat since its entry about 2 weeks ago, as XLE moved sideways to slightly up. Selling another XLE bull put spread may be another option to benefit from its possible rise.

Sold XLE Jun$87/92 bear call spreads last Friday

To keep better track of my strategy of selling verticals at the edges, I'd like to start posting my trades here to keep more accountability for myself and seek inputs from others as well.

With full fund available for opening trades for a new option cycle, I reviewed my ETF candidates for entry at the trading hours on Friday. XLE was closest to the upper Bollinger band, since it rose about $8 from recent trough of $74. It had fallen from around $82.87 to $81.87 in the last couple of days. The next levels of resistances on my chart are $85.50 by 200DMA and $89 to $90 area. I decided to sell Jun$87/92c for a credit of $0.54 with 63 DTE. The short strike had Delta of 0.21/ITM probability of 19.35%. I'll adjust if XLE short strike delta reaches 0.65 and above.

Overcoming weaknesses of trading personalities

I had studied the mind set of successful traders before. Recently, I've been reading a book named "Proven strategies for generating greater profits from the award-winning team at maverick trading" by Darren Fischer, et. al. This book covers a broad range of trading topics in about 300 pages, and gives an excellent introduction on how to become a professional trader.


Here, I'd like to focus my study on one of the chapters regarding how to overcome weaknesses of a trader's personality. In order to identify a trader's strength and weakness, the book presents a series of questions in the following 4 aspects to categorize trader's personality, depending on the answers of the reader:

• How does the energy come from: Introversion or Extroversion
• How are decisions made: Intuition or sensation
• What kind of attention is used: Thinker or feeler
• What kind of lifestyle of a trader: Judging or perceiving

As an example, the trader with the following set of personality has specific strength and weakness as shown in the table below.

	Strength	Weakness
Introvert	Informed decisions; thorough in analysis	Analysis paralysis; less comfortable trading with a team
Intuitive	Good chart reader; look for relationships	Deviate from rules; overuse indicators to support biases
Feeler	In tune with market; understand big picture; trade with good accuracy	Stick to losing trades; emotional; too many bearish trades
Judging	Decisive; self-starter; take action quickly; good risk management skills	Susceptible to noises; not taking advises

The book gives some other insights beyond the typical baseline solution of imposing trading discipline: create specific trading rules and environments so that the weaknesses have minimal chances to show up in the trading process. This methodology, rather than trying to correct the weakness, should help to overcome the weaknesses since trader's personality is likely to remain over a long time in the trading career.

It's stated that the root cause of all weakness is the fear and greed. The only way to remove this element completely is not to care about profit and loss. Trade the amount that is totally comfortable for you if you face maximum loss. Personally, I think we can also avoid looking at the P&L all the time, by not showing the P&L in the trading software windows during trading battles.

For intuitive decision makers who like to look for evidence to support some trading biases, this type of traders needs to simplify the indicators to just one or two. For feelers whose trading action may be clouded by emotions, they need to calm down or look for the trades opposite to the extreme mood. For the judging traders, they may get out of trades too early due to market fluctuations. So they may trade a basket of positions so that the overall portfolio does not produce extreme losses.

I don't think there are any recommendations about how to tackle the shortcomings of introversion in the book. Personally, I think the establishment of simple but specific rules would help minimize the analysis paralysis. Actively participating group discussions should also make it more comfortable for taking advises.

Overall, this book of "Professional techniques to create generational wealth" provides an extensive range of topics on trading successfully as a professional trader. If a trader would like to deep dive into any one of the individual topics, he can find other books on each specific topic with similar length.

Review of Jan and Feb Trades and max drawdowns

In January, I started trading my option selling strategy "Selling verticals at the edges". I paper tested this strategy and traded it with real money with 1 to 2 positions last year. They were posted in the blog. This year, I decided to increase the position to 3 which means my monthly open margin is close to 25% of my capital.

I posted the individual trades, as well as the trading plan, in our study group in the last couple of months. Now, I'd like to review and share the overall trades that were closed in Jan/Feb. January was a seriously challenged month for my trades, as all 3 opening positions were tested as shown in the chart below. 

The prices of TLT and GLD moved in sync upward, pressuring my bear call spreads. The short strike $134 of the Feb$134/139c had a Delta of 0.67 when TLT rose to $137 area. So I had to adjust the position by rolling out and up on Jan 29. The next day, TLT continued to rise with a big gap up. It did give me a bit of psychological stress. I was evaluating the possibility to buy call options as insurance.

However, TLT started to turn down on the following day and had never gained strength to test the peak level so far. Interesting enough, the same behavior happened for my last October TLT adjustment (See surviving a 3 SD test on TLT). On the 1^st day of adjustment, TLT shot up and my portfolio was showing the largest drawdown of the cycle. On the 2^nd day of the adjustment, TLT started to pulls down.

With my TOS script, I was able to see the daily P&L for the portfolio and the largest drawdown based on closing prices. If I had not made the adjustment, the largest daily drawdown would be about $2.8K (2800/9000=31% of initially used margin). With the adjustment for which more capital was put in use, the largest daily drawdown increased to $3.5K (39%) roughly.  This is a major characteristic of the strategy, because more capital risks are added due to adjustments. But the probability of profits also gets increased after the adjustment.

Option early assignments due to stock dividends

Recently, I received a broker’s email regarding possible early assignments for my option positions on TLT which was approaching Ex-dividend date in two days. So I studied option early assignments for option sellers due to dividends.

First, here are the major dividend dates and events.

1. Declaration Date - date at which company approves dividend payment and designates the Payment Date and Record Date.

2. Ex-Dividend Date - the date on or after which the stock will be traded without the right to receive the dividend. The Ex-Dividend Date is two business days before the Record Date.

Call option early assignment dates are usually one or a few days before this Ex-dividend date. Put option early assignments usually happen on the Ex-dividend date.

3. Record Date - the date which determines which stockholders are entitled to receive the dividend payment. They have to own the (settled) shares as of the close of this date in order to receive the dividend. Because most stock trades in the US settle three business days after the trade, a trader must purchase the stock three business days before the Record Date to qualify for the dividend.

4. Payment Date - the date on which the declared dividend is paid to all stockholders owning shares on the record date.

Next, let’s take a look what kind of and when options are susceptible for early assignments.

The owner of the call often exercises certain type of call options at the strike price of the call, one the day before the stock goes ex-dividend, to receive the dividend, if the call option is in the money and the amount of the dividend exceeds the remaining time value of the call. As an option seller, the trader may get early assignment as a result of exercises of the call buyer.

For short puts, early assignment usually occurs exactly on the ex-dividend date, when those puts go in the money and expiration is a few days out or less (not much time value left). This happens when the long protective put holders who also own the stock can remain as the shareholder of record to receive the dividend on payment since they own the stock before the Ex-dividend date, and possibly benefit from the stock price drop at the opening of the ex-dividend date caused by the dividend. On the morning of the ex-dividend date, the opening price of the stock is reduced by the amount of the dividend. After the put exercise, the trader can receive cash and earn interests as well. Note exercising a put option on the day before an ex-dividend date means the put owner will have to pay the dividend.

Early assignment occurs when an option holder exercises his option by notifying his broker, who then notifies the Options Clearing Corporation (OCC). The OCC fulfills the contract, then selects, randomly, a member firm who was short the same option contract. The OCC then notifies the firm. The firm then carries out its obligation, and then selects a customer, either randomly, first-in, first-out, or some other equitable method who was short the option, for assignment. That customer is assigned the exercise requiring him to fulfill the obligation that he agreed to when he wrote the option.

Early assignment’s impact for covered call positions

For a covered call seller, it means the seller will not only unexpectedly lose the stock position, but also the next dividend payment. The early assignment forces the call seller to sell the stock in order to fulfill the obligation of the short call.

How does stock option impact stock prices?

How does stock option trading impact the stock prices? This is an interesting topic that many professional researchers trying to figure out. I had always thought options had minimal effects on the prices of the underlying other than the pinning to heavily traded option strikes at the expiration (pin risk) dates. This was in-line with the posted view expressed by Thomsett, the author of an option book:


However, after a recent study of a couple of academic papers and an investment company report, I found there are some evidences of the option trading that impacts the stock prices. The academic papers also provide theoretical models along with the empirical data (which I don't fully understand).

N. Pearson, et. al. of University of Illinois at Urbana-Champaign published a paper titled "Does Option Trading Have a Pervasive Impact on Underlying Stock Prices?" on Feb. 23, 2007. The paper introduces the following areas of research on how options impact underlying stock prices and mentioned that there were no conclusions before their publishing date except for the pinning:

• Whether option generation has a one-time price impact
• Whether option activities cause systematic price change at expiration dates (pinning)
• whether options produce pervasive changes in stock prices

They reported that there are about 12% of optioned stock daily absolute return that can be accounted for by option trader's hedging of their option positions. This constituted the first evidence that the option markets have a pervasive influence on underlying stock prices.

More recently, D. Yang, et. al. of Harvard published another paper titled "Does the Tail Wag the Dog? How Options Affect Stock Price Dynamics" on Dec. 13, 2014.  They demonstrated that institution call option sellers would buy stocks to hedge their short calls. It would create an upward trend. If the dynamic hedging is larger, the upward trend curve increases the auto-correlation of stock return in a higher degree. The opposite is true for institutional put selling.

Finally, a recent report from a Shanghai investment company studied the underlying stock price rising magnitude as a result of the very first introduction of options for the stock in a large number of countries. It claims that it's a worldwide phenomena that underlying stock prices would increase in the first month of the initial option introduction for the stock. The report thus asserts that Chinese stock market will rise this month since stock options are introduced for the first time in Chinese stock market.

The US stock market is included in this study. It finds that US stock prices increased, on average, an annualized rate of 50.4% in the very first month of option introduction. Comparing to S&P 500, the initially-optioned stock prices outperformed S&P500 by 45% in that month. The report states it would be a high probability event for the fundamentally sound stocks to rise during their 1st month of option introduction. Since there is no detailed information about the number of stocks used in the study and the years of the stock trades used in the study, I was not very sure about this result.

Therefore, I spent some time to verify this study a little bit. I reviewed the stock and option trading history for two of my positions on China: HAO & FXI. To my surprise, the first month price rise were 5.4% for them during the 1st month of option introduction. This is close to the average annualized rate provided by the report. Accidental or not, it gives me a little bit feeling of credibility of this report.

FXI	StockAvail	10/12/2004
	OptionAval	10/15/2004
	StockPrice	17.21
	1CycleLater	18.14
	Percentange	5.40%
	ATMExpireOI	904
HAO	StockAvail	1/30/2008
	OptionAval	5/27/2009
	StockPrice	20.25
	1CycleLater	21.34
	Percentange	5.38%
	ATMExpireOI	11