Guys, I’m eating junk and watching rubbish!
You better come out and stop me! 

– Kevin (Move: Home Alone)

 Commentary

This day starts the dreaded task of reviewing my 2020 Options Trading performance. I am already sorely aware of just how dismal my record is, and now is the time to admit that I was “eating junk and watching rubbish!”

My 2020 endeavor was to verify that I learned something in 2019 about selling Vertical Options Spreads. Instead, I revealed I still have a lot to learn. So in this week’s commentary, I have laid out my (presumably) final 2020 Profit and Loss Statment, reviewed those significant events that drove my (lack of) profits, and lastly, gave myself some critical advice for when I go into 2021.

“Keep the change, ya filthy animal.”

Gangster Johnny

I learned the most after I thought I knew everything!

The mission for 2020 was to prove to myself that I can make a consistent income from buying/selling Vertical Options Spreads. I wanted to reveal that I do not need to have money to make money when dealing in Options Spreads.

The charge was to start in January with $9,000 in my trading account. From there, I would sell Vertical Options Spreads each week – while paying myself $250 each month as a paycheck. I then expected to have at least $9,000 in my trading account at the end of 2020, plus $3,000 ($250 * 12) back in my savings.

Even though I failed to achieve the +$9,000 ending account balance, I’m not disappointed. I have successfully paid myself the $250 each month – reaching at least that part of the mission.

This week’s journal is to document why my Options Trading activity did not pan out. To start the review, below are the spread strategies I executed this year.

Realized Profit by Strategy

The vast majority of my trading activity has been in Bull Spreads. My market movement assumptions were that there is more pressure for the broader markets to move up.

Percentage-wise, I did better with the Call Debit Spreads, but I think that was only because of timing. After the COVID-Crash, I was more desperate to see credits boosting my account and not many debits.

The Bear Spreads fared ok, but I could not see when the COVID-Crash bottom was about to see a bounce. So as the last four Vertical Bear Spreads were expiring, the crash bottom had already had a massive bounce back, and these positions fell ITM. From this loss, I learned that I could not market-time, and the better decision during this (12 positions) time was not to play at all.

Almost Final Profit/Loss Statement

Assuming that my two currently-open positions expire worthless (highly likely), and I do not open any new positions (somewhat unlikely), below could be the final P/L statement for 2020. I will record the final-final statement in the last post of this fiscal year – but nothing will change the tenor of this year’s performance.

Income

Expenses

Profit & Loss

My Options trading efforts for 2020 cost my account $6,788. But from that $6,788, I paid myself $3,000. So technically, I lost $3,788 this year (little comfort).

I overlayed my running Account Balance throughout 2020 with my weekly Gain/Loss activity in the chart below. This chart shows those weeks with the biggest losses and how those losing weeks drove my account.

Two significant events defined my performance for the year: The first was the COVID Crash (Weeks 9 thru 15). The second was my ineffective attempts to prove different Exit Strategies (Weeks 26, 30, 36, and 39).

COVID-Crash

During the six weeks of the COVID Crash, I lost -$4,351 – a deficit from which there was no return.

But if the pandemic never happened (just zeroing out those seven weeks), instead of having my Options positions lose -$3,528 for the year, I would have ended the year with a gain of $823 (-$3,528 + $4,351 = $823). This difference alone would not make a winning year, but it would have stung a lot less. (This alone is also evidence that this year’s performance should have an asterisk.)

To illustrate how massive the crash effects were to my Options effort, I recreated the chart (below), removing Weeks 9-15.

2/24/2020 (Week 9) – Market Meltdown

The journal entry “Market Meltdown” on 2/24/20 describes the initial market meltdown. And every entry after that outlined what was happening as the pandemic sucked the financial marrow from my investments.

Exit Strategies Boondoggle

The one good that came from the COVID-Crash was it exposed the woeful way I managed a controlled exit from Options positions that were ITM (not having an Exit Strategy is not an Exit Strategy). To help me better understand my exit options, I experimented with a couple of Exit Strategy variants several times during the summer.

06/26/20 (Week 26)

Week 26 had a loss of -$865. This was my biggest one-week post-crash loss. Looking back on my journal entry, Two Impediments to Options Trading, I can review the six Spreads that closed that week. Each of these six was early-stopped by a Trailing Stop order using different percentages of the positions’ mark prices. Two of these positions were opened and then stopped out the same day.

Needless to say, depending on a Trailing Stop Limit Order did not work.

07/24/20 (Week 30)

Stimulating my Options Spread Strategies

Week 30 saw a loss of -$365. The two positions that were closed this week did so with large losses.

Before this week, I attempted to develop a Conditional Trailing Stop Limit order strategy (Trading Spreads with Stop Loss – Pt 3). The plan was to open a new position with the Short-Strike just below ATM and expected my CTSL’s to keep it from going too far south.

The underlings for the two positions that I lost saw an immediate pullback to trigger the conditional part of the orders, then gapped down very fast to activate the Limit Order. Even though I exited these positions early for a loss to my account, both underlying’s recovered relatively quickly, and both would have expired worthless if left alone.

Also in Week 30’s journal entry, I noted that I knew that several of these experimental CTSL orders were going to close at a loss. But I wanted to see the actual effects, so I deliberately allow them to expire ITM to see how my Think or Swim trading platform handled these transactions. I chalked this up to the cost of learning the cause-and-effects.

08/28/20 (Week 35)

Are We Miserable Yet?

Week 35 stung with a loss of -$378.

The primary culprit this week was one UNH Spread position that lasted five days. Minutes after I open this position, it went south. On the fifth day, it breached the Short-Strike throwing the CTSL into action. The Limit Order was activated when the price gapped down past the $.50 Trailing Stop value. The following week, UNH quickly recovered and would have expired worthless if left alone.

The point here is at a time of significant Market Thrashing, individual stocks will whipsaw faster than Index ETF, and auto position exits will be more dangerous.

09/25/20 (Week 39)

Choosing My Spreads – Wisely?

Finally, on Week 39, my one trade closed for a loss of -458.00.

This DIA Spread position was automatically closed by my CTSL order that fell well below my trigger prices. On this positon’s final day, the DOW dropped 800 points to trigger this closer.

This week was also the last week I entered any Stop Loss order.

The journal entries listed above reviewed the results of testing Limit Orders, Stop Orders, and Conditional Trailing Stop Orders. I feel I did an OK job describing each, but the end message is – don’t use them.

Critical Advice:

1. Stop, Look, and Listen!

It wasn’t too hard to figure out that we were entering a significant market event soon after the start of February. The VIX was skyrocketing beyond the norm of the previous four years. By the end of February, the VIX was already above 40%, and the 50-Day SMA crossed above the 200-Day. Soon after that, the Put/Call Ratio shot up above 1.

In addition to the above negative indicators, the political media saturated the news with the “greatest pandemic since the 1918 Spanish Flu.” Plus, Trump’s impeachment was seriously dividing the country. These geopolitical events threw a lot of uncertainty into the markets.

Technical indicators and GTS were screaming a warning. I should have immediately stopped all new positions at that time until the two-week mini-trend was once again bullish. Not being hyper-aware of the news that would affect my performance was a rookie mistake that cost me this year.

2. Have an Exit Plan!

It wasn’t until mid-April, where I discovered that “No Exit Plan” was not an “Exit Plan.”

I need to document a complete Exit Plan and commit it to Muscle Memory by reviewing my plan every week. Then when the next unexpected events happen, I want to react.

1. Don’t let losing positions expire at max-loss. Instead of accepting the loss, then reflexively open a new position in hopes of marginally recouping on a bounce, consider rolling the losing position a couple of weeks out.

Having an Exit Plan is imperative, but planning for an exit is equally important.

2. Favor a wide strike spread for over multiple narrow spread. The increased premiums that I can collect will be less the further the long-strike is from the short-strike, but the long-strike will have a much lower ITM probability. For next year, I will primarily open new positions with a strike-width of 10 or more.
3. Select Short-Strikes as a function of One Standard Deviation. Short-Strikes less than 1SD will have a higher premium than those that are more than 1SD. But a Short-Strike at 1SD will have a consistent Prop-OTM of 80%.
4. Open positions with an extended expiration date. A short-term Vertical Spreads (< 3 weeks) may not be able to self-correct should there be a one-day or so mini correction. Long-term Vertical Spreads (> 8 weeks) run a greater risk of being caught in a correction. For 2021, consider spreads with an expiration of 6 to 8 weeks.

3. Pitch the Crystal Ball!

The markets, on the whole, do have an intrinsic nature. When looking at the Indexes’ history, they move up a lot more often than they move down. The pressure to drive the market up is because it is made from lots of people’s money – all desiring to make more. Individuals depend on a Bull Market to build personal savings. Corporations rely on a Bull Market to support pensions and develop capital. Governments require a Bull Market to have something to tax. Therefore laws are written to keep a thriving market thriving.

1. Let a falling underlying fall. Only work with underlying that have long-term AND short-term Bull Trend-Channels. If an underlying is falling, let it drop until the bounce is pronounced. If it falls enough that the one-week trajectory is negative, then wait until the trajectory turns positive.

It will be better to miss a couple of premium opportunities than to recover from one max-loss position.

4. Keep Both Hands on the Wheel!

I spent the better part of the Summer of 2020 researching automated trade triggers as a means of managing losses. The theory of using such technology is great but fails in the application.

The time-value of the open Vertical Bull Put Credit Spread will work against me if the position falls off a cliff. When the underlying is tanking, its Implied Volatility is usually skyrocketing – which makes the underlying’s vega huge, making the mark-price to close the position almost as high as max-loss. This sort of drastic detonation usually happens when the underlying gaps down or during mini-corrections.

Trade Triggers and Conditional Trailing Stop Limits can close a position at its lowest point, even though a quick recovery is likely. Be aware of this technology but don’t use it.

This Week’s Market Sentiment

(As of 11/30/2020)

This Market Sentiment Section is typically completed by midday Monday morning. By the time this journal is published, it will be a week old.

In this section, I review five indicators: VIX, S&P 500 Put/Call Ratio, S&P Market movement, Consumer Sentiment Index, and Geopolitical events that could affect the market’s direction. I will use these indicators to help guide my trading decisions for this week.

VIX: Broad Market Volatility

VIX 9-Day SMA leveled off at 21.2 from 23.6 from two weeks ago.

The VIX is an emotion-gauge for the general investing population. It is thought to be driven by the Marketeers’ current level of greed or fear. As a one-month forward-looking volatility matrix, it is not designed to tell us which direction the market will be going, but more of how fast it can get there.

A VIX of 15% is assumed to be a market at rest. But since the intrinsic nature of the Stock Market is to move up, a VIX closer to 15% or below will have an innate tendency to rise.

The VIX is dropping steadily over this last month. Post-election sanity is starting to take hold, and the Democrats are pleading for unity (after three years of demanding resistance).

The current VIX (20.8%) has broken through the trend channel’s Support-Line and continues to drop. It is now below the 9-Day SMA, and the 9-Day SMA is below the 50-Day SMA. It is starting to look as if the Marketeers are beginning to give a collective sigh of relief.

As the VIX continues to drop, the implications could be that the recent exuberance climb may be the starting point of a new trend. If the Markets continue upward and the VIX falls below 15, then maybe 2021 will be a winning year.

A falling VIX is also a signal that premiums will be harder to find – since validity drives premiums.

Put/Call Ratio:

9-day SMA (all OCC options): stays flat at .05 from 0.5 last week.

Put Options are frequently used as protections against existing investments falling. When the ratio between Put Options bought versus Call Options bought is above 1, then this is an indicator that the Marketeers are buying insurance to what they may see as declining Markets. Conversely, when the Put/Call Ratio falls below 1, then there is a general sense that the broader Markets will increase, and more investors are buying more than selling.

The Put/Call Ratio for the S&P 500 remained in the “shrug stage.” Implying, for now, the Investors are not too concerned about any significant market dips. But that can change at a drop of a hat (or a tweet).

At the end of last week, the daily Put/Call Ratio was barely below the 9-Day SMA but climbing. The 9-Day continues to fall below the 50-Day SMA. This tells me that the Marketeers are mostly buying Call Options in the belief that there is still a lot of upside to the markets.

Consumer Sentiment Index (CSI):

In this journal entry, I am changing my CSI source from the University of Michigan to the Morning Consult surveys. The frequency of reporting plus the number being surveyed gives a more refined view of the current Consumer Sentiment.

Morning Consult surveys around 6,000 U.S. consumers every day on their views regarding the current and future personal financial conditions and business conditions in the country as a whole. The results from those survey interviews are inputted into the Morning Consult Index of Consumer Sentiment (ICS), which rises as consumer confidence increases.

US Consumer Confidence & Sentiment – Morning Consult

A low rating is a general dissatisfaction with our current management of U.S. economic policies. This dissatisfaction will imply that something has to change.

A high satisfaction rating suggests approval of the current policy management and implies market stability.

US consumers gain more confidence during the last week of Nov. According to the narrative of this chart, the rising confidence came mainly from high and middle-income homes.

But with the CSI remaining significantly lower than the pre-pandemic highs, not too many people are convinced that the next few months will be any better. Most of us will hold our breaths for the Vaccines to be distributed and see some verification of the falling infection rate.

Market Indexes:

DOW = 30,218 – Up 1.0% from 29,910 last week.
S&P 500 = 3,699 – Up 1.6% from 3,638 last week.

The S&P 500 is a stock market index that tracks the 500 largest companies in the U.S. This index represents about 80% of all the capitalization for the country. The S&P is widely considered the best indicator of how all the U.S. markets are performing.

The S&P 500 shook off the minor correction of three weeks ago to regain a new all-time high of 3,699. I’m hoping to see a fresh start of a trend-channel.

The current S&P 500 value has broken through the Resistance-Line for the second time over the past two weeks. This implies a continuing of a bullish direction.

The current S&P 500 value is also above the 9-Day SMA, and the 9-Day SMA is above the 50-day. These technical indicators confirm a continuing Bull Market.

Geopolitical Tree-Shakers (GTS):

• Voter fraud challenges keep the Election results on edge (Pennsylvania)
• Supreme Court actions on the Texas Election Integrity suit will shake all markets
• Vaccines are being deployed around the US in prep for the FDA approval
• Rise in COVID infections during Thanksgiving and prediction for Christmas
• The Senate Majority in question (not necessarily at risk)
• A lower price Stimulus Bill was agreed to, rising hopes of passage before the end of the year
• End of year profit-taking

The promise of a vaccine and less uncertainty in the government has allowed the markets to surge over the last three weeks. But the fear of COVID is putting a significant damper on the holidays.

My sentiment for this coming week:

Of my five indicators, the VIX, Put/Call Ratio, and the S&P 500 agree to a new bull-market trend. After a significant bounce back from the COVID-Con crash, a calming of the market is an excellent sign for future Options Spreads sales. A record Black Friday will trump most negatives of my GTS.

While waiting for the vaccines to be released, the CSI will be pessimistic for the next few months as we wait for confirmation of a drastically lowering infection rate. But with reporting that the vaccines’ distribution would likely not be completed until Spring 2021, it will be Summer before seeing a noticeable decline. Then the question will be; was it the vaccine? Was it the masks? Or was it the flu letting up during the heat of Summer.

Again, my activity this week will primarily be limited to my dwindling available funds at risk. If I want to open a new trade this week, I will have to close one first.

This week, I will focus on:

As of the start of this week, the most I have available to trade is $461.00. This might be enough for a five-strike-width trade. But, depending on the market’s direction at the start of the week, it is possible to close my QQQ position – freeing up $921 for a new trade.

1. Limit the max risk per trade to < $1,000.00
2. Short-Stike price to be > 6% below the current underlining’s price
3. Keep the week’s total dollar risk < $1,000.00
4. Keep the overall dollar risk to be below $3,000
5. Will focus on mid-term trades: 4-5 weeks (no positions beyond Dec 31)
6. Credit spreads only (need positive cash flow for psychological reasons)
7. Will consider only Bull Spreads
8. Set alarms

Profit and Loss Statement

(As of 12/11/2020)

Realized Profit by Strategy

Schedule for this Week

Goals for this week: (12/07/20 – 12/11/20) (Week 50)

• Document lessons learned or new thoughts
• Open new positions
• Update Trading Log as trades occurs

Entry Rules for Vertical Bull Put Credit Spreads:

• Current maximum dollars at risk < $3,000? Yes/No ( )
• Max dollar at risk this position < $1,000? Yes/No ( )
• Max time to have any dollars at risk < 4 weeks? Yes/No ( )
• Is the long-term trend (four months) bullish? Yes/No (see chart)
• Is the short-term trajectory of the underlying bullish? Yes/No (see chart)
• Is the Put/Call Ratio < 1, (or falling if it is > 1)? Yes/No ( )
• The current price above 9-Day SMA?: Yes/No (see chart)
• 9-Day SMA above 50-Day SMA?: Yes/No (see chart)
• Is the Short-Strike > 1 SD below the current price? Yes/No ( )
• Is the Short-Strike > 6% below the current price? Yes/No ( )
• Is the short-strikes Prob-OTM > 70%? Yes/No ( )
• Short-Strike price below trend channel at expiration?: Yes/No (see chart)
• Current price within bottom 1/2 of Trend Channel?: Yes/No (see chart)
• Is the long-strike at maximum width? Yes/No (?? strike width)

• Set a GTC Conditional Trailing Stop Limit (CTSL): (?)

Monday:

• Determine/update this week’s market sentiment section
• Calculate/record Put/Call Ratios for all stocks on the watch list
• Review/tweak Trend-Channels for all stocks in the watch list
• Set target expiration dates for all options as follows:
  • Bull Credit Spreads: Dec 31 (<4 weeks)
• Look up Ex-Dividend dates for positions in/approaching ITM (MarketWatch/Calendar)
• Stage possible trades for all watch list stocks by 10:00 AM
• NO TRADING BEFORE 10 AM. (Let the Market find its direction after the weekend.)
• Watch one Webcast or take one online mini-course to be completed by Friday.

Tuesday – Thursday:

• Review how yesterday’s staged trades moved. Adjust premiums to take advantage of movements.
• Submit a couple of Spreads, but keep a close watch. If one is accepted, cancel the others (we want only one new active trade per day).
• Be mindful of Entry Rules.

Friday:

• Review the total technical dollars at risk for this week. If significantly below $500, then submit additional spreads if prudent.
• Update and post weekly journal (this blog) with any lessons learned or strategy changes.

This Week’s Trade Activity

(As of 12/11/2020)

Spread Count Summary:

Current Dollars at Risk:

New Trades Opened This Week

(12/7/2020 – 12/11/2020)

No new positions were opened this week.

All underlying ETFs in my watchlist broke through their respective trend-channels’ resistance line by Monday of this week. That market movement either means that a new trend starts, or there will be pressure to take profits. So I wanted to wait a day or so to see how the markets perform.

Shortly after the start of the week, all my ETFs started to recede and flipped the one-week trajectory downward. Likewise, the VIX jumped once again as the Marketeers continue to wait for a Federal stimulus agreement.

For these reasons, I did not see an opportunity to open a new position that would not violate my Entry Rules.

Trades Currently Cooking

(As of 12/11/2020)

SPY: 338p/328p  – Open 11/27/20 – Expires 12/18/20 – Max Gain = $57.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=86.7%, Head Room=-7.1%, Max Loss=$941.00, IV%=17%

Trades Closed This Week

(As of 12/11/2020)

QQQ: 270p/260p  – Open 11/19/20 – Expires 12/11/20 – Max Gain = $78.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.3%, Head Room=-7.3%, Max Loss=$921.00, IV%=20%
At Close: Prob. OTM>99.4%, Head Room=-11.9%, IV%=21%, ROR= 8.3%

Cost to open: $0.78 premium collected * 100 shares = $78.00
Cost to close: $0.02 premium paid * 100 shares = $2.00
Net Profit= $78.00 to open – $2.00 to close = $76.00 – fees
Actual ROR = $76.00 / $921.00= 8.3%

I closed this position a could of days early, primarily because this week is the last chance to enter into a full spread position prior to year-end. And because my account balance is low, I needed to close this position in order to free enough cash to open another.

Conclusion

Disclaimer

Even though I have tried to make it clear that this blog is my journal, documenting my trek into Options Trading, it has been suggested by others that I, nevertheless, include a general disclaimer. So here goes…

“This blog and the information contained herein is not intended to be a source of advice or analysis concerning the material presented. The information and/or documents contained in the blog do not constitute investment advice.”

Contact Me

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