The advice I would give to someone– Eddie Murphy
is to not take anyone’s advice.
When I think of “wide-spread,” a few images come to mind. But none of those images are Options Spreads.
This week is mainly a “Trade Trudging” week. Being the first trading opportunity for 2021, I’m more focused on updating my Watch List and Log File for the new year.
But this week, I am asking myself this question. When my goal is to make a consistent income throughout the year from Options Spreads, is it better to deal with only a few wide-strike widths positions or several narrow-strike widths positions?
So in this week’s Journal Entry, I will outline Vertical Bull Put Credit Spreads’ dynamics using different strike widths.
Difference Between Wide Strikes and Narrow Strikes Spreads
On 1/4/2021, I put together four Vertical Bull Put Credit Spreads positions to compare. These are four ETF/DIA Vertical Bull Put Credit Spreads, with a target expiration date of 2/19/21 (45 days from now). The current price of DIA = $304.
According to my Entry Rules, I will set my estimated short strike price to be over 1-Standard Deviation below the current price. With today’s volatility, that computes to -27.44, or a targeted short strike of 276.56. The best available short strike below this is 275. (The equation to calculate a short strike price that is 1-Standard Deviation from the current underlying price is documented in my Entry Rules post.)
In the table below, I show four different ETF/DIA Vertical Bull Put Credit Spreads configuration.
|Short Strike Price||275||275||275||275|
|Short Strike Premium||$2.23||$2.23||$2.23||$2.23|
|Short Strike Probability of OTM||83.4%||83.4%||83.4%||83.4%|
|Long Strike Price||274||270||265||260|
|Long Strike Premium||$2.13||$1.79||$1.45||$1.18|
|Long Strike Probability of OTM||84.1%||86.4%||88.8%||90.8%|
|Spread Premium Collected||($2.23 – $2.13) * 100|
|($2.23 – $1.79) * 100|
|($2.23 – $1.45) * 100 = $78.00||($2.23 – $1.18) * 100 = $105.00|
|Spread Maximum Risk||(275 – 274) * $100 |
|(275 – 270) * $100|
|(275 – 265) * $100|
|(275 – 260) * $100|
|Spread Max Loss||$100 – $10 = $90||$500 – $44 = $456||$1,000 – $78 = $922||$1,500 – $105 = $1,395|
|ROC||$10 / $90 = 11.1%||$44 / $500 = 8.8%||$78 / $1,000 = 7.8%||$105 / $1,500 = 7.0%|
Strike-Width Difference Interpretation
- The narrow spread position pays an aggregate premium higher than a wide spread. Thus 15 1-Strike-Width positions will produce a total premium collected of ($10.00 * 15 =) $150.00. Compare that to 1 15-Strike-Width position with a premium of $105.00. So on premiums alone, many narrow-spread positions are better than one wide-spread.
- The dollar risk to open an option spread is defined by the strike width. I can calculate the technical dollars at risk by simply multiplying the difference between the long and short strikes by $100. So a 1-Strike-Width position will require (1 * $100 =) $100.00 to be set aside in my trading account to cover a total loss. Likewise, 1 15-Strike-Width position will require (15 * $100 =) $1,500.00 to be set aside. Both the narrow and wide strike positions will carry an equal aggregate dollar risk.
- The short strike side of the spread is what I can sell. All of these positions in the table above carry the same short strike dynamics. The number of points that DIA will have to fall to place any part of these positions ITM is the same (9.5%). The probability of having the short strike go ITM is the same (16.6%). And the amount of premium that I collect on the short strike is the same ($2.23).
- The long strike side of the spread is what I have to buy. Of all these positions outlined above, the long strike defines my profit – and they are all very different.
- For the 1 strike width spread, the long strike will cost me $2.13 to buy, making my total premium collected ($2.23 – $2.13) * 100 = $10.00. For the 15 strike width spread, the long strike will only cost me $1.18, making my total premium collected = ($2.23 – $1.18) * 100 = $105.00.
- However, the 1 strike width long position has a much greater chance of max-loss than the 15 strike width. For the 1 strike width position, if DIA falls 9.9% (not quite a correction), this position will suffer max loss. But for the 15 strike width position, if the DIA falls 9.9%, the position can dip ITM but still make a profit. The DIA will have to fall by 14.5% to have a max-loss.
Which to Choose
My experience from 2020 is that a major market downturn at the wrong time during my trading schedule will negate any attempt to make a profit for the year. And since my trading schedule assumes an active portfolio throughout the year, this makes my income attempts highly susceptible to any major downturn at any time.
To make a regular and consistent paycheck each month (and to follow my plan trading budget), I need to open approximately $2,000 worth of new spreads risk each week. At an expected average of 7.5% ROC, this should produce approximately $150 each week or about $600 each month should every open position close with max profit. Therefore I have these options:
- 1-strike-width positions: too many to manage and too high risk for max-loss.
- 5-strike-width positions: will keep me busier than I want, but less max-loss risk.
- 10-strike-width positions: 2 a week is about right and much less risky for max loss.
- 15-strike-width positions: 1 a week is easy.
My schedule will then be, 2 10-strike-widths per week, except for those weeks where I fear a market event is imminent. If there is a lot of jitters in the market, I will limit myself to 1 15-strike-width. But if the markets are moving in the wrong direction, I will not enter any new positions.
This Week’s Market Sentiment
(As of 01/03/2021)
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 22.9 from 23.1 from two weeks ago. Deviation is 4.7 from 4.2 one week 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.
For over four months, the VIX has been trending down (suggesting a lower amount of Investor Jitters). But in the last 30 days, it’s been on an uptick. I will assume this is because Election Challenges are heating up, as deadlines for power transfers are getting really close.
The approval of a pre-2021 Stimulus Package came with a lower payout than expected. Attempts to up the payouts were thwarted.
S&P 500 9-day SMA: stays mostly flat at 0.4 from 0.37 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.
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 Confidence was not updated since last week.
DOW (DJX) = 30,606 – Up 1.3% from 30,200 last week. (4 week deviation: 119, down from 119 last week)
S&P 500 (SPX) = 3,756 – Up 1.4% from 3,703 last week. (4 week deviation: 26.2 – mostly flat to 25.01 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):
- Continued contested election
- Georgia Senate elections Tuesday
- Jan 6th congressional certification of President-Elect Biden.
- Vaccines slow rollout
- Fauci is insinuating another round of COVID Lockdowns, but this time more targeted
- Rouge scientists have suggested that the current vaccine will not stop the new corona variant
- $900B Stimulus past
A lot of fearmongering is now going on about the Georgia elections and the ramification to the country. But now it is from the Trumpers-Bitter-Enders instead of the Never-Trumpers.
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 the Georgia Senate Election and new news from the COVID front.
This week, I will focus on:
Even with this week’s start, 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 3.
Being the first trading week of 2021, I will only look at one 15-strike-width spread to get the juices flowing again. I need to confirm my new 2021 Watch List and Log Files are reset and ready to go.
Cash Flow Statement
(As of 01/08/2021)
|Beginning Account Balance||$16,000.00||$16.000.00||$16,000.00|
|Deposits (Div. & Int.)||$0.00||$0.00||$0.00|
|Premiums on Open||$0.00||$0.00||$116.00|
|Premiums on Close||-$0.00||-$0.00||-$0.00|
|Fees Paid (total)||-$1.03||-$1.03||-$1.03|
|Ending Account Balance||$16,114.97||$16,114.97||$16,114.97|
Realized Profit by Strategy
|Vertical Bull Put Credit Spread||$0.00||$0.00||$0.00|
|Vertical Bear Call Credit Spread||$0.00||$0.00||$0.00|
|Vertical Bull Put Debit Spread||$0.00||$0.00||$0.00|
|Vertical Bull Call Debit Spread||$0.00||$0.00||$0.00|
Schedule for this Week
Goals for this week: (01/04/2021 – 01/08/2021) (Week #1)
- Document lessons learned or new thoughts
- Open just one wide-strike spread
- Update Trading Log as trades occurs
- 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: Feb 26 (6-8 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.
- 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 01/08/2021)
Spread Count Summary:
|Vertical Bull Put Credit Spread||1||1||1|
|Vertical Bear Call Credit Spread||0||0||0|
|Vertical Bull Put Debit Spread||0||0||0|
|Vertical Bull Call Debit Spread||0||0||0|
Current Dollars at Risk:
|Vertical Bull Put Credit Spread||$1,384.||$1,384.||$1,384.|
|Vertical Bear Call Credit Spread||$0.||0.||$0.|
|Vertical Bull Put Debit Spread||$0.||$0.||$0.|
|Vertical Bull Call Debit Spread||$0.||$0.||$0.|
|Total Dollar Risk||$1,384.||$1,384.||$1,384.|
|Max Risk Allowed||$16,000.00||$8,000||$2,000.|
At the closing of this journal entry, I have not positions at risk
New Trades Opened This Week
(01/03/2021 – 01/08/2021)
IWM: 180p/165p – Open 01/06/21 – Expires 02/019/21 – Max Gain = $116.00 – Open Price = $202.92
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.2%, Head Room=-11.7%, Max Loss=$1,383.00, ROC 8.3%, 44d Dev = 6.4
Entry Rules for Vertical Bull Put Credit Spreads:
- New maximum dollars at risk < $8,000? Yes ($1,383.00)
- Max dollar at risk this position < $2,000? Yes ($1,383.00)
- Max time to have any dollars at risk < 8 weeks? Yes (44 days)
- Is the long-term trend (four months) bullish? Yes (see chart)
- Is the short-term trajectory of the underlying bullish? Yes (see chart)
- Is the Put/Call Ratio < 1, (or falling if it is > 1)? No (3.3)
- The current price above 9-Day SMA?: Yes (see chart)
- 9-Day SMA above 50-Day SMA?: Yes (see chart)
- Is the Short-strike > 1 SD below the current price? Yes (1SD=182.82)
- Is the short-strikes Prob-OTM > 70%? Yes (83.2%)
- Short-Strike price below the trend channel at expiration?: Yes (see chart)
- The current price within the bottom 1/2 of Trend Channel?: No (see chart)
- Is the long-strike at maximum width (> 10)? Yes (15 strike width)
- Set a GTC Conditional Trailing Stop Limit (CTSL): (Not Set)
This position was open with a term of 44 days. The 44 Day Liniar Regression Deveation = 6.4. I am being a review of the regression deveaton as 1) a thrashing indicator, and 2) a more consistant trend channel.
Trades Currently Cooking
(As of 01/08/2021)
Empty Options Spread inventory. Nothing is cooking
Trades Closed This Week
(As of 01/08/2021)
Position inventory is empty – nothing to close
At the closing of this week, there was a significant breach of the Capitol Building on Jan 6. The breach shutdown the certification process and sent all Congressmen into underground shelters. The breach was a response to a Trump rally where Trump incited the notion that Congress was stealing the election. An insurrection was not the apparent goal but more so to disrupt the certification processes.
This event could have many market-related ramifications as the politicians decide how to respond to this.
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.”
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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