We keep moving forward, opening new doors,
and doing new things, because we’re curious
and curiosity keeps leading us down new paths.

– Walt Disney

 Commentary

Another axiom that I find motivating; “I cannot know where I’m going if I do not know where I’ve been.” All of this is true for successful Options Trading and the reason to keep a good Trading Journal.

Keeping a well-documented journal of all my Options transactions is essential for developing an effective trading plan. The 80 or so journal entries (posts) I made over the past two years allow me to revisit bad decisions, remember the things I did right and set relevant trading rules. It helps me focus, weighs pros and cons, and brings clarity.

An active journal is essential for becoming a successful trader. My journal is my education.

Sections in my Trading Journal

“OptionsTradesbyDamocles.com” is my personal trading journal. It is a simple cookie-cutter post layout where all I have to do is fill in the blanks. The goal is not to make journalling too time-consuming, but I can confidently record the necessary information. Below are the sections I have in my journal:

Commentary

The Commentary section is where I document any pithy revelations. These insights could be critical explanations on the mechanics of Options Spread construction, geopolitical events that could change my short-term trading strategy, forehead-slapping miss-calculations on my part, or something just plain fun.

This Week’s Market Sentiment

I will review five indicators that I believe will affect my trades decisions. These indicators are the VIX, P/C Ratios, CSI, Market Indexes, and GTS. From these five, I will set a DEFCON level to guide me with entering into new positions.

Completing this section every Monday makes me fully aware of this trading week’s Markets’ environment. I should not consider any trades if I’m blind to what is coming.

Cash Flow Statement

How much money am I making? How much am I losing? This section is a table displaying my Year-to-Date, Month-to-Date, and this week’s snapshot of how my efforts are performing. The goal here is to see no red.

Realized Profit by Strategy

Although I am focusing primarily on “Vertical Bull Put Credit Spreads,” I do want to keep track if I try something different. (I hope to experiment with Debit Spreads sometime this year.)

My Schedule for This Week

Defining and following a weekly trading schedule is part of “Options Trading 101.” It may not change much from week to week, but I want to make sure I review it at the start of every week.

This Week’s Activity

This section lists the specific Vertical Spread positions that I have opened and why I opened them. This section will also list all the positions I closed this week, how these closed positions performed, and a short commentary if one is needed.

“This Week’s Activity” is the crux of this journaling effort.

Conclusion

Before I publish my journal on Friday, I may comment on various events that happened throughout the week. This section is the opposite side of “This Week’s Market Sentiment” from the Monday before.

We learn by observation, imitation and repetition.

Finally, near the bottom of this journal entry are links to three “Related” posts of past JEs. I find it very reinforcing to jump back and review one or two pasts entries to remind myself of lessons learned.

Other Posts from OptionsTradesByDamocles

This Week’s Market Sentiment

(As of 02/08/2021)

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.

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

VIX: Broad Market Volatility

VIX 9-Day SMA stayed last week to 27% from 27% last week. The one-week deviation dropped to 4.1 from last week’s 5.8.

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 4-month regression channel for the VIX continues its slow and steady decline from the uncertainty of 2020 and the COVID-CON hysteria. But from Election Day, it has been functional flat as the Marketeers try to assess the new Biden Administration.

The GameStop Short Squeeze of two weeks ago had pumped volatility across the board. But the aftermath appears stable as most investors shrugged off the jolt.

The VIX currently is 20.9%, which is the lowest in a year – but since that year was 2020, this low is not saying much…

Even though the VIX profoundly broke through the Resistant Line of the trend-channel two weeks ago, it is now below the 9-DAY SMA, 50-Day SMA, and has dropped into the bottom half of the channel.

The VIX is still above 15% but falling. I would initially set this week’s DEFCON (Options Trading Readiness Signal) level to 4.

DEFCON = 4

Put/Call Ratio:

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 continues to roll flat for several months. The value, the 9-Day SMA, and the 50-Day SMA are almost at a convergence.

I Still believe that the bulk of the Marketeers who cashed out of the markets throughout 2020 have not yet put that back in. But from the Put/Call Ratio for the past several months, no one is too concern about protecting what is already invested.

DEFCON = 4

Consumer Sentiment Index (CSI):

The Jan ’21 CSI’s level settled down to 79.0, flat from 80.7 from last month. (ycharts.com)

This Consumer Sentiment Index (CSI), as provided by the University of Michigan. This indicator tracks US consumer sentiment based on surveys on random samples of US households.

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.

The US Consumer Confidence continues to lay low for the past couple of months. The Jan ’21 value of 79 is only marginally better than the post-COVID-Crash of 72 at the end of April. But the rate of change does not affect the general sentiment that the economy remains stagnant as the pandemic rages on.

There is not a suggestion that the CSI should change the DEFCON rating.

DEFCON = 4

Market Indexes:

DOW (DJX) = 31,148 – Up 3.9% from 29,983 last week. (4 week deviation: 3.6, flat from 3.4 last week)
S&P 500 (SPX) = 3,887 – Up 4.7% from 3,714 last week. (4 week deviation: 47.8 up from 39.8 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.

Sticking it to the guys who stuck it to the guys, the Marketeers snatched back everything the Short Squeeze took from them. The current S&P 500 is above the 9-Day SMA and the 9-Day is above the 50-Day. It looks as if the markets are set to continue their lazy bull run.

So far, there is nothing to suggest more caution is required for next week.

DEFCON = 4

Geopolitical Tree-Shakers (GTS):

One way to look at the GTSs is like a lit fuse to a bomb. The fuse can be fast or slow, and the bomb can easily be a dud. But I need to watch this closely as an indicator. The GTS can significantly disrupt all the other indicators at a drop of a hat.

• 1.9 Trillion Stimulus bill will pass congress
• Trumps pending Senate trial is predicted to in with acquittal
• The COVID vaccine rollout is still fumbling
• Iran’s nuclear ambitions

The Biden Administration is taring through the regulations changes the the Trump Administration initiated in record time. But this was pretty much expected and State challenges will occur when necessary. This is not too unexpected.

The 1.9 Trillion Stimulus bill is being past on Reconciliation, meaning the passage will not need the traditional 60 Senate votes to pass. But since Reconciliation can only be used once a year, all other bills will need to bipartisan.

Congressional talks still continue on a high-cost infrastructure bill that is agreed by most. The destruction of the small business economy by the 2020 needless lock-downs needs to be rebuilt quickly. So could 2021 be the year of Big Government Spending?

Currently, there is no earth-shattering Geopolitical news that I can see that could derail a recovering market.

DEFCON = 4

My sentiment for this coming week:

Trading Readiness Level

DEFCON = 4

This week, I will focus on:

• Two 10-Strike-Width spread.
• Spread term of 8-weeks or less.
• Probability of OTM > 70%

Cash Flow Statement

(As of 02/05/2021)

Realized Profit by Strategy

Schedule for this Week

Goals for this week: (02/08/2021 – 02/12/2021) (Week #6)

• Document lessons learned or new thoughts
• Open one or two wide-strike spread
• 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: Apr 2 (6-8 weeks)
    Note: If there are no Options Chains published for the 8-week expiration, then use the next Options Chain down from 8-weeks (7-weeks, 6-weeks). Beyond 4-week expirations, only the monthly chains are available to trade.
• 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 02/12/2021)

One notable event this week needs to be documented. On Monday I inadvertently purchased shares of stock in my dedicated Options Trading account that was intended to be in my other buy/hold account. I did not have the cash in my Trading account to cover the accidental transaction and as such triggered my margin to “loan” me the money needed to complete the total cost.

Upon realizing what I did I immediately sold the stock. The result of this error, I was charged .53 for the margin/fee and interest.

Spread Count Summary:

Current Dollars at Risk:

New Trades Opened This Week

(02/08/2021 – 02/12/2021)

QQQ: 300p/290p  – Open 02/11/21 – Expires 03/26/21 – Max Gain = $95.00 – Open Price = $333.57
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.1%, Head Room=-10.1%, Max Loss=$904.00, ROC 10.4%, 43d Dev = 7.9

Entry Rules for Vertical Bull Put Credit Spreads:

• Current maximum dollars at risk < $8,000? Yes ($5,429)
• Max dollar at risk this week < $2,000? Yes ($1,812)
• Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (43 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 (1.8 and slightly rising)
• 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=301.37)
• Is the short-strikes Prob-OTM > 70%? Yes (81.1%)
• Short-Strike price below the trend channel at expiration?: Yes (see chart)
• The current price within the bottom 1/2 of Trend Channel?: No
• Is the long-strike at maximum width (>= 15)? Yes (10 strike width)
• Set a GTC Conditional Trailing Stop Limit (CTSL): (Not Set)

DIA: 290p/280p  – Open 02/09/21 – Expires 03/26/21 – Max Gain = $93.00 – Open Price = $313.15
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=80.7%, Head Room=-7.4%, Max Loss=$906.00, ROC 10.2%, 45d Dev = 3.7

Entry Rules for Vertical Bull Put Credit Spreads:

• Current maximum dollars at risk < $8,000? Yes ($4,524)
• Max dollar at risk this week < $2,000? Yes ($907)
• Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (45 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 (1.4 and slightly rising)
• 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=291.28)
• Is the short-strikes Prob-OTM > 70%? Yes (80.7%)
• Short-Strike price below the trend channel at expiration?: Yes (see chart)
• The current price within the bottom 1/2 of Trend Channel?: Yes
• Is the long-strike at maximum width (>= 15)? Yes (10 strike width)
• Set a GTC Conditional Trailing Stop Limit (CTSL): (Not Set)

The only scary part about this new position is the Headroom is only -7.4, which is much less than previous opens. But since the IV for DIA is falling, the calculated standard deviation for new positions will be less than expected. This should not have a difference in the probability of OTM, but it does raise eyebrows.

Trades Currently Cooking

(As of 02/12/2021)

QQQ: 295p/285p  – Open 02/05/21 – Expires 03/19/21 – Max Gain = $88.00 – Open Price = $329.98
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82,5%, Head Room=-10.6%, Max Loss=$911.00, ROC 9.5%, 42d Dev = 6.8
Now: Prob. OTM=85.2%, Head Room=-11.0%, IV%=14%

IWM: 190p/180p  – Open 02/03/21 – Expires 03/19/21 – Max Gain = $107.00 – Open Price = $212.91
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=79.7%, Head Room=-10.8%, Max Loss=$892.00, ROC 11.9%, 44d Dev = 7.24
Now: Prob. OTM=87.8%, Head Room=-14.3%, IV%=25%

QQQ: 290p/280p  – Open 01/26/21 – Expires 03/19/21 – Max Gain = $101.00 – Open Price = $329.04
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.3%, Head Room=-11.9%, Max Loss=$898.00, ROC 11.1%, 52d Dev = 7.0
Now: Prob. OTM=87.6%, Head Room=-12.5%, IV%=18%

Trades Closed This Week

(As of 02/12/2021)

SPY: 350p/340p  – Open 01/14/21 – Expires 02/26/21 – Max Gain = $87.00 – Open Price = $380.48
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.3%, Head Room=-8.0%, Max Loss=$912.00, ROC 9.4%, 43d Dev = 4.7
At Close: Prob. OTM=97.3%, Head Room=-10.9%, IV%=13%, ROR= 8.6%

Cost to open: $0.87 premium collected * 100 shares = $87.00
Cost to close: $0.09 premium paid * 100 shares = $9.00
Net Profit= $87.00 to open – $9.00 to close = $78.00 – fees
Actual ROR = $78.00 / $912.00= 8.6%

This position was closed 14 days year with a trade trigger of $.09 (90% of max gain).

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