Mankind was my business.
The common welfare was my business;
charity, mercy, forbearance, benevolence, were all my business.
The dealings of my trade were but a drop of water in the comprehensive ocean of my business!

– Jacob Marley (Movie: Disney A Christmas Carol)

 Commentary

Jacob Marley
(Disney A Christmas Carol)

Working on my 2021 Operational Budget during Christmas Week makes me feel like Ebenezer Scrooge. This should be the time for family, friends, and community – not for counting the tuppence that I hope to make from next year’s Options Spreads.

The message from Marley is crystal clear. Mine is not in the business of mankind – but mankind IS my business. A distinction that I should appreciate before it’s too late. What I do now does not matter an iota as much as what I do for others.

But the COVID-Grinch has isolated us with an over-exaggerated abundance of caution. And now, with the fear of a COVID 2.0 coming around, all I can do is hunker down and wait it out.

Basic Assumptions for a 2021 Options Spread Budget

Before filling in the blanks to my 2021 budget spreadsheet, I need to consider what I think 2021 will be like. This is the only time of the year, where I will pull out my crystal ball and try to see what waits for me. But in general, I am optimistic that 2021 will be a better year than 2020 (YA-THINK!).

Market Assumptions

  1. The 2021 broader market will continue the new Bull Market to newer highs. Although I will expect corrections (>10%) and a few mini-corrections (<10%), I will assume the rebound from such corrections will be relatively fast.
  1. Marketeers will start the year in a pandemic. But we have vaccines, we have a better understanding of the virus, and we have a general belief that the pandemic’s end is near. Spring and Summer will unwind much of the COVID spread, and the vaccine should keep the virus manageable through the Fall.
  1. We don’t have the insanity of a desperate national election run by jingoistic campaigners and the yellow press. The fear-mongering should be a few notches lower.
  1. The constant drumbeat from the Never-Trumpers will be replaced by the Trumpers’ Bitter-Enders.
  1. Priority effort by new Federal laws and regulations will be to rebuild America’s small businesses devastated by the 2020 lockdowns. I will expect more stimulus efforts and ultra-low interest rates to last through 2021.

Performance Assumptions

To define a budget, I need to speculate how my Option Spreads will perform over the next year. Again, the crystal ball comes out, and the parameters I will use are just an educated guess. But now I have two years behind me, so I hope my guesses are better than before.

  1. Anticipated win ratio > 85%. Of the 15% expected losses, I will prevent max-loss by rolling the position each week until OTM. Every rolled position will be counted as that week’s new open position.
  1. New positions will be at a minimum of 10 strike-width unless constrained by budget limits.
  1. New positions will have an expiration duration (term) of 6 to 8 weeks. This will require me to deal equally with Monthly Options as well as Weeklys.
  1. The Targeted ROC ratio will continue with 7.5%, but expected premiums from a wider spread position will be between $90 and $110.
  1. As a salary for my efforts, I will pay myself $300 each month. This transfer will happen regardless of the month’s performance.
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2021 Budget for Options Spreads Income

This budget is a ‘Position Centric’ operational plan. For 2021, I am targeting specific Options Spread configurations as my guiding principle as I work through this year’s learning curve.

This section aims to tell me what my starting capital needs to be, based upon the Options Spreads configuration I want to work with this year.

Target Options Spread Configuration

Wider Spreads-Width: I want to work primarily with either 10-Strike-Widths or 15-Strike-Widths.
More time to expiration: I will focus on 6-8 weeks instead of 3-5 weeks terms.
One-Two Positions per week: To keep things interesting but not too much at risk.

This table is the input and calculations for my spreadsheet.

ItemParameters or EquationResults
Average Risk per New Position 1$1,000 =$1,000
Average Position Term 28 weeks =8
Average # of New Position per Week 32 =2
Anticipated Account’s Max Risk 4= Risk * Term * Number of New Positions $16,000
Anticipated Max Risk per Month 5= Account’s Max Risk / 2 months =$8,000
% of Capital at Risk 61/2=50.0%
Estimated Starting Capital 7= Account’s Max Risk / % of Capital at Risk = $32,000 8

1 Average Risk per New Position: I want to try 10-Strike-Widths, and 15-SW Options Spreads. Setting an average risk per new position of $750 allows me to open (1) 15-SW, or (1) 10-SW plus a 5-SW or any combination as long as I do not exceed $1,500 new risk per week.

2 Average Position Term: Needing a) more time-value in the collected premiums, b) more time to recover for a wrong-way market, and c) a spread configuration where a 1-Standard Deviation Short-Strike will yield a greater headroom, I’m going to focus more on 6-8 week terms for each new Options Spread position.

3 Average # of New Position per Week: I want to limit the number of new positions per week to 2 or less. If I open 2 positions per week, at the end of 8 weeks, I could conceivable have 16 opened positions. I see that as barely manageable. Hopefully, I will be closing ITM positions early and watch over a lot less.

4 Anticipated Account’s Max Risk: The maximum amount of my trading account that I am willing to place at risk at any one time. Part of my management goals is to keep this amount at a minimum.

5 Anticipated Max Risk per Month: This is the maximum amount of new risks I will enter in any given month.

6 % of Capital at Risk: A major reason why most new businesses fail their first years is that they started under-capitalized. Therefore for 2021, I want to have 2 times my required max risk as my initial capital investment.

7 Estimated Starting Capital: The total amount of money I need to invest in my Trading Account on Jan 1, 2021

8 The $32,000 Starting Capital will be allocated to my Trading Account as $16,000 as of 01/01/2021, and $16,000 in cash reserve in a separate account.

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Personal Compensation

Like in 2020, I will pay myself a monthly salary of $300. This is certainly not a livable wage. But the current project’s goal is to prove I can make a livable wage. Everything is scalable.

MonthYear
 Damocles’ Pay Check$300$3,600
Startup Capital Investment$32,000
Required ROC to breakeven11.3%

Expected End of Year Results

Investing $36,000 into an Index ETF (like DIA) on Jan 1, 2021, I would expect a return of at least 7.5% (or $2,700) by the end of the year. So the question I have to answer by the end of this year is: “What would be the most profitable: invest in an Index ETF, or in a trading account where I sell Vertical Bull Options Spreads?”

To be at all competitive, I would have to be highly active in selling Options Spreads for the year (which my 2021 Options Spreads Budget assumes.) So by Dec 31, 2021, my Trading Account needs to close with a ROC much higher than 10%. The amount higher than 10% will need to be balanced against the year-long effort.

God Bless Us – Everyone

– Tiny Tim (Movie: A Christmas Carol)
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This Week’s Market Sentiment

(As of 12/21/2020)

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 rose to 23.1 from 21.8 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.

CBOE Market Volatility Index – 12/21/2020

The four-month trend-channel for the VIX continues to rotate downward. This decline is good for the Marketeers who are faint at heart, and also good for the Options Spread traders who are more interested in predictability than Jack-Pots. But I believe the VIX will stay elevated until the Yellow-Journalists finds something else besides the pandemic to scare folks.

Monday morning’s (12/21/20) current VIX (27.8%) is now above both the 9-Day SMA and the 50-day SMA. It is about to breach the Resistance-Line of the trend channel. This quick jump correlates with the steep market dive.

As a falling VIX is a signal that direction changes in the broader markets are decreasing, it also means that premiums will be harder to find – since validity drives premiums.

Put/Call Ratio:

S&P 500 9-day SMA: stays flat at 0.4 from 0.2 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.

Daily Put/Call Ratio for all S&P 500 Constituents Options – 12/14/2020

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).

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Consumer Sentiment Index (CSI):

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.

Updated: Dec 15, 2020

U.S. consumers remain mostly unchanged for the past month. The COVID-Con continues in the media and I’m sure it is affecting most surveyees’ attitudes for the next couple of months.

Lots of economic news are focusing on the dismal retail sales for Box-Stores prior to this Christmas. And they continue to not qualify the doldrums with the fact the online sales have broken all records – including Box-Stores.

Market Indexes:

DOW (DJX) = 30,187 – Up 0.4% from 30,046 last week. (4 week deviation: 255)
S&P 500 (SPX) = 3,710 – Up 1.3% from 3,663 last week. (4 week deviation: 41.72 – less than 43.16 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.

Daily S&P 500 Index – Four-Months

The S&P 500 continues to slog its way into historic highs. But as of today (Monday, 12/21/20) the S&P 500 nose dived on news of the mutated variant of COVID currently in the UK.

A curious secondary one-month trend channel (in yellow) shows some of the smallest price-trashing in a long while.

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. But as of this morning, the current value dropped below the 9-Day SMA.

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Geopolitical Tree-Shakers (GTS):

  • UK entering into new lockdown due to a new variant of COVID – stoking fear worldwide
  • Pfizer and Maderna’s vaccines deploying/administering, but not in time?
  • Catastrophic rise in COVID infections predicted for Christmas (guys! election over!)
  • $900B stimulus bill congressional agreement was achieved over the weekend
  • Pervasive cyber attacks by Russia is going under-reported

Approved COVID vaccines by two separate companies are increasing confidence in a widespread vaccination effort and a return to normalcy sooner than later – however:

The “mutant” COVID strain that is being reported from the UK is setting most of the world on edge – even though we really do not know much about it. Yellow Journalism is speculating that this particular mutation of COVID-19 might not be stopped with these new vaccines. Prime Minister Boris Johnson is ordering a new round of Tier-4 lockdowns for London and South England. Several EU countries have issued travel bands to the UK.

The presumption that a Biden Administration will not be nearly aggressive towards Russia’s intrusion into our data infrastructure will also have a calming effect. No one likes aggression.

My sentiment for this coming week:

Of my five indicators, the S&P 500 continue to assert a 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.

CSI is mostly flatlining it at this point. They are mostly offering a “no opinion” for this coming week. Since the trend is bullish, I would continue with the new Vertical Bull Put Credit Spreads.

The VIX and Put/Call Ratio indicators were agreeing with the S&P 500 – until the weekend news start to report on the UK mutation of COVID-19. As of today (Monday, 12/21/20) the VIX jumped above the 9 and 50-Day SMA and is about to breach the Trend-Channel’s Resistance Line. This jump is a near 30% above what it was EOD Friday.

The Put/Call Ratio for the S&P 500 also shot up above the 50-Day SMA, suggesting an increase if Put insurance being bought.

Finally the GTS is being dominated with pandemic related hits as Christmas comes around.

This week, I will focus on:

For this week, I would set my trading threat level to DEFCON 3->2 (wait to see if conditions approve).

With two weeks left in 2020 I will not open any new positions. But I will be aware and report on my Market Sentiment.

From this point in this Journal Entry and below, nothing new will be seen since last week’s Entry.

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Cash Flow Statement

(As of 12/25/2020)

Year
2020
Month
Dec
Week
#52
Beginning Account Balance$9,000.00$2,461.76$2,458.75
Deposits (Div. & Int.)$38.54$0.00$0.00
Withdraws (paycheck)-$2,875.24$0.00$0.00
Premiums on Open$6,053.00$0.00$0.00
Premiums on Close-$9,581.00-$2.00-$0.00
Fees Paid (total)-$173.55-$1.02-$0.00
Ending Account Balance$2,458.75$2,458.75$2,458.75
Total Gain/Loss-$6,541.25-$3.02$0.00
ROR-0.1%0.0%
ROC-41.2%

Realized Profit by Strategy

Year
2020
Month
Dec
Week
#52
Vertical Bull Put Credit Spread-$3,454.95$130.94$56.98
Vertical Bear Call Credit Spread-$182.79$0.00$0.00
Vertical Bull Put Debit Spread$0.$0.00$0.00
Vertical Bull Call Debit Spread-$66.83$0.00$0.00
Icon Condors$0.$0.00$0.00
Cover Calls
Total-$3,704.57$130.94$56.98
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Schedule for this Week

Goals for this week: (12/21/20 – 12/25/20) (Week 52)

  • Document lessons learned or new thoughts
  • No new positions this week
  • Update Trading Log as trades occurs

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.
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This Week’s Trade Activity

(As of 12/125/2020)

Spread Count Summary:

Year
2020
Month
Dec
Week
#52
Vertical Bull Put Credit Spread7300
Vertical Bear Call Credit Spread1200
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread700
Iron Condor000
Total9200

Current Dollars at Risk:

Year
2020
Month
Dec
Week
#52
Vertical Bull Put Credit Spread$0.$0.$0.
Vertical Bear Call Credit Spread$0.0.$0.
Vertical Bull Put Debit Spread$0.$0.$0.
Vertical Bull Call Debit Spread$0.$0.$0.
Iron Condor$0.$0.$0.
Total Dollar Risk$0.$0.$0.
Max Risk Allowed$3.000.00$1,000.

At the closing of this journal entry, I have not positions at risk

New Trades Opened This Week

(12/21/2020 – 12/25/2020)

No new positions were opened this week. Allowing all open positions to close and setting the trading account to cash only.

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Trades Currently Cooking

(As of 12/125/2020)

Empty Options Spread inventory. Nothing is cooking

Trades Closed This Week

(As of 12/25/2020)

Position inventory is empty – nothing to close

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Conclusion

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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.”

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Contact Me

To contact me or ask me a non-post related question, please use this form. If you want to comment on this post’s topic, please use the “Leave a Reply” box below so it can be attached to the post for future reference. – Thanks

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