Unfortunately, there seems to be far more opportunity
― Thomas A. Edison
out there than ability….
We should remember that good fortune often happens
when opportunity meets with preparation.
Commentary
Technically, this week should be a “Power-Nap” week, being the week between Christmas and New Year. There are no new positions to enter, and all current positions’ inventory has been liquidated. I have already published my 2020 Performance Results, defined my 2021 Mission Statement, and my 2021 Budget Plan. Nothing to do now but enjoy football.
However, in this week’s journal entry, I want to propose a new Readiness Indicator for knowing when to open/close Options Spreads:
DEFCON
Damocles’ Expected Financial Condition for new Options transactioNs.
DEFCON – the current state of Options Trading Readiness.
Going forward, I will display a DEFCON level for each journal entry for that week. At the end of the Market Sentiment Section (below), I will compile everything in that section into a single DEFCON level between 5-1 – with DEFCON-5 being the elusive “all clear” signal for opening new positions and DEFCON-1 signaling a complete market collapse.
The 5 levels of the DEFCON Trade Readiness indicator:
| DEFCON | Comments | Spread Consideration |
| Level 5 Bull Market | The lowest level of market jitteriness. Band the bears and build the bull. VIX is below 15, and the S&P 500 Put/Call Ratio is below 0.5. The latest economic data are all positive, and most Geopolitical and Sociopolitical news is boring. Consumer Confidence is high, and there are love and peace throughout the world (snort). At DEFCON 5, I will assume no restrictions to any new positions. Let ride any Bear Call Spreads already at max-loss (Long Strike in ITM) – I can’t lose more. Purge any Bear Spreads not at max-loss. | Vertical Bull Put Credit Spreads Short Strike Low Prob-OTM (below 80%). Open multiple spreads with narrow Strike-Widths. 1 |
| Level 4 Bull Market | Minor market jitters over menacing Geopolitical news, ominous Governmental actions, or unexpected corporate events are causing the broader markets to drop below Support Lines for several days in a row. The VIX may rise (if coming from DEFCON-5) or slowly fall (from DEFCON-3). But the VIX is most likely near or under 20% for several days. The S&P 500 Put/Call Ratio solidly oscillates about 0.75. Therefore, I will enter new positions with caution and keep a vigilant eye on the market condition. Unwind any existing Bear Call Spreads. | Vertical Bull Put Credit Spreads Short Strike Prob-OTM (85% +/-) depending on market conditions Strike-Width 20 or more |
| Level 3 Bear or Bull Market | Marketeers are in a high state of jitters due to unexpectedly bad economic data, poor corporate earnings, or a national event that may last for a while. The VIX is oscillating around 25%, and the S&P 500 Put/Call Ratio may have spent time between 0.75 and 1.0. The markets may have had a mini-Correction. Therefore, only consider low-risk positions, if any. Close winning position early if possible. | Vertical Bull Put Credit Spreads or, Iron Condor or, Vertical Bear Call Credit Spreads Short Strike high Prob-OTM (85% or more) for both Put and Calls. Open Spreads between 10-20 strike-width each. 2 |
| Level 2 Bear Market | A precursor to DEFCON 1, the broader market has been in a Correction for a number of weeks/months. The DOW has collapsed more than 1,000 points several times within a short period of time. So things are agitated, and there is a lot of worrying. Geopolitical/Sociopolitical issues have legs and may continue for some time. The VIX is mostly above 25% and is trending up. The S&P 500 Put/Call Ratio is near or above 1.0. Unwind any Bull Put Spreads. | Vertical Bear Call Credit Spread Short Strike Prob-OTM (85% +/-) depending on market conditions. Strike-Width 20 or more |
| Level 1 Bear Market | Market crash, deep recession, deep Geopolitical/Sociopolitical issues. Marketeers, Fed Regulators, and my know-everything neighbors are running in circles. The VIX is well above 30% and is trending up. The S&P 500 Put/Call Ratio is above 1:0 and trending up. Compare this to the 2007-2008 Subprime Crisis. When the President of the United States goes on television to warn the country of emergency funding for the financial markets, it’s time to duck and cover. Let ride any existing Bull Spreads that are at max-loss (Long Strike at ITM) – I can’t lose more. Any Bull Spreads not at max-loss, exit ASAP. Be careful trading Short-Term Vertical Spreads at this DEFCON level. Dramatic market losses are usually followed by dramatic market gains. “V” shape recoveries are not unheard of. It may be best to not have a dog in this fight (see Selling Vertical Spreads – The Kenny Rogers Strategy). | Vertical Bear Call Credit Spread or, No Spreads Short Strike Low Prob-OTM (below 80%) Open multiple spreads with narrow Strike-Widths. 1 |
1 The narrower the Spread-Width, the higher the available premium, and the fewer dollars at risk from each open position. I can open more positions with a greater accumulated premium.
2 The wider the Spread-Width, the higher the total premium available, but the higher dollars at risk from each open position. Thus, I can maximize the premiums collected from fewer risk-tolerant spreads.
This Week’s Market Sentiment
(As of 12/28/2020)
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. Deviation is 4.2
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.
After a brief jump two weeks ago, the VIX continued on a sideways movement last week.
Put/Call Ratio:
S&P 500 9-day SMA: stays mostly flat at 0.37 from 0.4 last week.
Put Options are frequently used as protection 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 for 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.
Ignoring the last point on the chart (obvious recording error), the Put/Call Ratio for the S&P 500 remained in the “shrug stage.” Implying, for now, the Investors are still not too concerned about any significant market dips. The current value is below the 50-Day SMA and 9-Day SMA, signaling a relative calm.
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.
U.S. consumers have remained 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.
The news from the Stimulus Bill is still flat, and the sentiment remains muted.
Market Indexes:
DOW (DJX) = 30,200 – Flat from 30,187 last week. (4 week deviation: 119, down from 255 last week)
S&P 500 (SPX) = 3,703 – Flat from 3,710 last week. (4 week deviation: 25.01 – less than 41.72 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 continues a lazy bull run. The current price is slightly above the 9-Day SMA and well above the 50-Day SMA. This signals that the current Bull Run is still… running.
The price-thrashing deviation for both the S&P and DOW continues to drop. I will interpret this as the Marketeers is steady on the current trend.
Geopolitical Tree-Shakers (GTS):
- COVID Spikes for Christmas
- Pfizer and Maderna’s vaccines deploying/administering
- $900B stimulus bill remains in limbo
- Previous stimulus benefits for unemployment expired this past Saturday (12/26)
- Pervasive cyber attacks by Russia is going under-reported
My sentiment for this coming week:
Of my five indicators, the S&P 500 continue to assert a bull-market trend, all the while the VIX and the Put/Call Ratio are not putting up much of an argument.
The CSI has not changed much over the past two months. Although it has remained primarily in the doldrums, it has not had an effect on the Marketeers.
Finally the GTS is being dominated by pandemic-related hits as Christmas comes around. But it is not taken much notice by the markets.
This week, I will focus on:
For this week, I would set my trading readiness level to DEFCON 4, coming up from 3. Being in the post-COVID-Con and National Election, my market awareness DEFCON status has come up from I am pretty much on edge, but confident that
With the last week in 2020, I will not open any new positions. But I will be aware and report on my Market Sentiment.
Trading Readiness
DEFCON 4
From this point in this Journal Entry and below, nothing new will be seen since last week’s Entry.
Cash Flow Statement
(As of 12/25/2020)
| Year 2020 | Month Dec | Week #53 | |
| 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 #53 | |
| 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 |
Schedule for this Week
Goals for this week: (12/28/20 – 12/31/20) (Week 53)
- 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 a weekly journal (this blog) with any lessons learned or strategy changes.
This Week’s Trade Activity
(As of 12/31/2020)
Spread Count Summary:
| Year 2020 | Month Dec | Week #53 | |
|---|---|---|---|
| Vertical Bull Put Credit Spread | 73 | 0 | 0 |
| Vertical Bear Call Credit Spread | 12 | 0 | 0 |
| Vertical Bull Put Debit Spread | 0 | 0 | 0 |
| Vertical Bull Call Debit Spread | 7 | 0 | 0 |
| Iron Condor | 0 | 0 | 0 |
| Total | 92 | 0 | 0 |
Current Dollars at Risk:
| Year 2020 | Month Dec | Week #53 | |
|---|---|---|---|
| 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 no positions at risk
New Trades Opened This Week
(12/28/2020 – 12/31/2020)
No new positions were opened this week. Allowing all open positions to close and setting the trading account to cash only.
Trades Currently Cooking
(As of 12/31/2020)
Empty Options Spread inventory. Nothing is cooking
Trades Closed This Week
(As of 12/31/2020)
Position inventory is empty – nothing to close
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
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
14 THOUGHTS ON “DEFCON: Options Trading Readiness Signal?”