Minion: Sir, I think this is a bad idea…
Megamind: Yes! It’s a very wickedly bad idea for the greater good of bad!
Minion: Okay, you might think it’s good from your bad perception, but from a good perception… it’s just plain bad.
Megamind: Oh, you don’t know what’s good for bad!

(Movie: Megamind)

 Commentary

“Even the smallest bite from Arachnus Interesthics will instantly paralyze my Vertical Bull Put Credit Spreads!”
– Megamind (paraphrased by Damocles)

Beyond a COVID-Crash, a nation-wide lockdown, a brutal election season, and other significant geopolitical events, there is not too much more that can send a bull market into disarray than the threat of rising interest rates. And when rising interest rates become inevitable, the most we can do is grin and bear it.

As comically confusing as the Megamind quote above, I need to understand that good news can be bad. And the greater good the bad news is, the better the bad can get (for all the good it will do me). And last week’s knee-jerk selloff and this week’s collapse in most of the major markets is a reminder of what may be the greater good for bad.

I’m Confused!

2020 Was a Lost Year

Political machinations prompted the shuttering of millions of small businesses, the loss of millions of jobs, and the explosion in the national debt to help ease the blow. The Federal Reserve’s discount rate is near zero, inflation rates remain at near-record lows at 1.4%, and the nation’s GDP fell nearly 30% during the second quarter of 2020. As a country, we came to a standstill to combat the pandemic – or expel a president.

Bad Good News

With 2021 rolling in, we now have new COVID vaccines, a new president, and a joint incentive to rebuild the economic engine that was shuttered last year. We now have to press harder on the political gas peddle to reestablish those small businesses lost and get more Americans working.

But to rebuild the economy, businesses will have to borrow money, Corporations will have to sell bonds, and interest rates will be forced to rise. As more people are working and more business-related activities are increasing, supply-and-demand will push prices up, and inflation will increase. And to combat the inevitable runaway inflation, the Federal Reserve will have to increase the discount rate, starting a feedback loop that can send interest rates soaring and the Stock Market gyrating. And soon, the US economic engine will be purring as it did before the COVID-CON.

Good Bad News

The investment community and financial media tend to obsess over interest rates, and for a good reason. Interest rates refer to the cost someone pays for the use of someone else’s money. The more it costs to borrow reconstruction money, the more the reconstruction will cost. It will have a rippling effect across the entire U.S. economy, including weighting heavy on the U.S. stock market.

Last week, the momentum that bolstered stocks to all-time highs earlier encountered heavy-handed resistance with the sudden rise in bond yields for the first time since before the Corporate’s COVID-Coup. The U.S. 10-year Treasury note boiled to 1.6% on Thursday before simmering down to around 1.5%, its highest level since February 2020. But yet, the rise of these bond yields is a signal that we are on our way to recovery.

Just Plain Bad

Frequent market adjustments will be expected in 2021 as the Federal Reserve starts feeding the Marketeers bite-size interest changes and other ominous messages on rising inflation. I expect that my new Vertical Bull Put Credit Spreads will start experiencing some close-calls.

Greater Good for Bad

As a COVID analogy, the vaccine will cause some short-term discomfort when received, but the long-term effort is to be inoculated from the virus’s devastating effects. Likewise, rising interest rates and inflation are going to be the toxic waste of a regenerating economy. But eventually, there will be an equilibrium that will inoculate us from the devastation of the 2020 lockdowns.

I make bad look good!

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This Week’s Market Sentiment

(As of 02/29/2021)

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 poped to 24% by the end of last week, from 22% the week before. The one-week deviation went wild at 2.9% thrashing from last week’s 0.6%.

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 - 02/28/2021
CBOE Market Volatility Index – 02/28/2021

The 1-month regression channel for the VIX continues its slow and steady decline from the uncertainty of the COVID-CON and election hysteria. But it is also easy to see that from the angst of Election Day, it has been functional flat as the Marketeers continue to try to assess the new Biden Administration.

The VIX currently is 28%, which is still above 15%. The market shock from the Treasury Note jump threw the markets into a panic late last week. That market uncertainty breached the trend channel’s resistance line and shot above the 9/50-day SMA.

Since the VIX continues to hover above 15, flew past the channel’s Resistance line, and the short-term trajectory is still moving north, it would seem the Marketeers are at an elevated rate of jitters. But the 30-day Regression Trend Channel continues to edge downward. I would initially set this week’s DEFCON (Options Trading Readiness Signal) level to 3. Let’s see if the other indicators will change this level.

DEFCON = 3

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.

S&P 500 Put/Call Ratio - as of 2/28/21
S&P 500 Put/Call Ratio – as of 2/28/21

First: “Point-of-Order.” I am adjusting the Put/Call Ratio chart to make a new baseline of 0.5. I feel this will provide a more relevant indicator of Investor’s degrees of panic than sticking with the true 1.0 line.

The interest shock of last week set the Marketeers into a CYA mode as the Put/Call Ratio rose above 0.5 to 0.63. This is reinforcing the notion of market jitters and also reinforces the current setting of DEFCON. The telling question will be if this continues to rise on Monday/Tuesday of this coming week.

The ratio being above 0.5 is not butt-clinching event, but it does support the DEFCON level 3 from the VIX section.

Maintain DEFCON = 3

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Consumer Sentiment Index (CSI):

As of Feb, 26 ’21 CSI’s level stayed mostly lower at 76.8. (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.

Updated: Feb 26, 2020

The US Consumer Confidence index’s bump from the election was negated by the end of Feb. The general sentiment that the economy remains stagnant as the pandemic starts to wind down and all eyes are on Washington to see how they will proceed.

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

Maintain DEFCON = 3

Market Indexes:

DOW (DJX) = 30,932 – Down 1.8% from 31.494 last week. (4 week deviation: 4.8, down from 6.1 last week)
S&P 500 (SPX) = 3,811 – Down 2.5 % from 3,907 last week. (4 week deviation: 58.2 down from 62.6 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 (Updated 02/28/2021)
Daily S&P 500 Index – Four-Months (Updated 02/28/2021)

The S&P 500 took a good hit last week, as new economic numbers were published. The most actionable indicator was the 10-Year Treasury Note jumping to 1.6%. In the real world viewpoint, this is really good news for the US but a negative foretelling for the Stock Markets.

Market Thrashing

4-Week Thrashing of DJX = +/- 4.8 points or < 0.1% of the market’s volume. Flat from < 0.1% last week.
4-Week Thrashing of SPX = +/- 58.2 points or 1.5% of the market’s volume. Flat from 1.6% last week.

The S&P has seen some hefty swings over the last month as the index first jumped > 5% near 2.9% in the final 2 days of trading. But the DOW mostly stayed committed to the current bull-trend (except for the last 2 days).

Even as this interest rate causing the Marketeers to pull back at the end, I’m inclined to think of this as a market adjustment to what is inevitably coming. I believe that we are on a bullish track yet rough seas ahead.

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

Maintain DEFCON = 3

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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 the drop of a hat.

  • New COVID cases dropping dramatically – more States removing restrictions
  • Johnson & Johnson’s one-poke vaccine was approved
  • Good economic data is spurring the likelihood of increasing interest rates and rising inflation
  • Highly partisan $1.9B Stimulus Bill (that includes a poison-pill provision) passed through the House
  • Extraordinary blustering from leftist politicians demanding canceling the Senate Filibuster

The GTS that may have the biggest effect on my Options Trading is the revelations that the pandemic may be ending much sooner than expected. The vaccine improvements are showing greater effectiveness with just one dose, leaving the presumed second required shot for the other as the first. Therefore I would anticipate rallies in airlines, hotels, cruises, and other travel-related businesses that took it on the chin last year.

However, the certainty of the $1.9 billion stimuli is still in limbo and the final version is still in question (minimum-wage change). And even though Jerome Powers have reiterated a state course of for maintaining a historically low-interest rate, inflation fears are starting to rattle some cages. Because the events (plus a high VIX) can affect short-term traders, I’m going to be more cautious this week.

Maintain DEFCON = 3

My sentiment for this coming week:

There is a general contraction in economic and political concerns at the moment. Although the CSI indicator is being a little blind to the environment, a sense of growth for the US economy is evident. And the growth will inevitably raise interest rates, and inflation will follow – but not all this week.

Trading Readiness Level

DEFCON = 3

This week, I will focus on:

  • Two 10-Strike-Width spread.
  • Spread term of 8-weeks or less.
  • Probability of OTM > 80%

If the underlings continues to retreat during the week, I will delay opening new positions until late in the week.

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Cash Flow Statement

(As of 03/05/2021)

Year
2021
Month
Mar
Week
#9
Beginning Account Balance$16,000.00$16,486.26$16,486.26
Deposits (Div. & Int.)$0.23$0.00$0.00
Withdraws (paycheck)-$600.00-$0.00-$0.00
Premiums on Open$1,195.01$102.00$102.00
Premiums on Close-$91.00-$0.00-$0.00
Fees Paid (total)-$17.98-$1.03-$1.03
Ending Account Balance$16,587.23$16,587.23$16,587.23
Total Gain/Loss$587.23$100.97$100.97
ROR0.6%0.6%
ROC3.7%

Realized Profit by Strategy

Year
2021
Month
Mar
Week
#9
Vertical Bull Put Credit Spread$432.75$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
Icon Condors$0.00$0.00$0.00
Margin Interest-$0.53$0.00$0.00
Total$432.22$0.00$0.00
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Schedule for this Week

Goals for this week: (03/01/2021 – 03/05/2021) (Week #9)

  • 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 23 (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.
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This Week’s Trade Activity

(As of 03/05/2021)

Spread Count Summary:

Year
2021
Month
Mar
Week
#9
Vertical Bull Put Credit Spread1311
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Margin Interest100
Total1411

Current Dollars at Risk:

Year
2021
Month
Mar
Week
#9
Vertical Bull Put Credit Spread$7,237.$898.$898.
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$7,237.$898.$898.
Max Risk Allowed$16,000.00$8,000$2,000.

New Trades Opened This Week

(03/01/2021 – 03/05/2021)

IWM: 195p/185p  – Open 03/02/21 – Expires 04/16/21 – Max Gain = $102.00 – Open Price = $223.41
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.2%, Head Room=-12.7%, Max Loss=$897.00, ROC 11.3%, 45d Dev = 6.6

IWM: 195p/185p  – Open 03/02/21 – Expires 04/16/21

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($7,237)
  • Max dollar at risk this week < $2,000? Yes ($898)
  • Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (45 days)
  • Long-term trend (four months) bullish? Yes (see chart)
  • Short-term trajectory of the underlying bullish? Yes (see chart)
  • Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.9 falling)
  • Current price above 9-Day SMA?: Yes (see chart)
  • 9-Day SMA above 50-Day SMA?: Yes (see chart)
  • Short-strike < 1 SD below the current price? Yes (1SD=196.5)
  • Short-strikes Prob-OTM > 80%? Yes (81.2%)
  • Short-Strike price below the trend channel at expiration?: Yes (see chart)
  • Current price within the bottom 1/2 of Trend Channel?: Yes
  • Long-strike at maximum width (>= 15)? Yes (10 strike width)
  • Set a GTC Conditional Trailing Stop Limit (CTSL): (Not Set)

This position is identical to the one I opened last week.

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Trades Currently Cooking

(As of 03/05/2021)

IWM: 195p/185p  – Open 02/24/21 – Expires 04/16/21 – Max Gain = $99.00 – Open Price = $224.68
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.6%, Head Room=-13.2%, Max Loss=$900.00, ROC 10.9%, 51d Dev = 8.7
Now: Prob. OTM=81.7%, Head Room=-13.0%, IV%=11%

SPY: 360p/350p  – Open 02/19/21 – Expires 04/01/21 – Max Gain = $85.00 – Open Price = $391.93
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.4%, Head Room=-8.1%, Max Loss=$914.00, ROC 9.2%, 41d Dev = 6.3
Now: Prob. OTM=74.6%, Head Room=-6.1%, IV%=14%

QQQ: 305p/295p  – Open 02/16/21 – Expires 04/01/21 – Max Gain = $100.00 – Open Price = $337.49
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=79.7%, Head Room=-9.7%, Max Loss=$900.00, ROC 11%, 43d Dev = 8.5
Now: Prob. OTM=62.6%, Head Room=-3.7%, IV%=15%

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
Now: Prob. OTM=68.9%, Head Room=-5.2%, IV%=15%

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
Now: Prob. OTM=81.3%, Head Room=-7.1%, IV%=24%

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=76.5%, Head Room=-6.8%, IV%=15%

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=80.8%, Head Room=-8.3%, IV%=15%

Trades Closed This Week

(As of 03/05/2021)

Positions set to expire this week was close early.

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Conclusion

This week, interest-rate shock sent the markets on a wild ride. Thrashing nearly 50 points (or 1.3% of the market’s value), the S&P escaped with only a marginal loss of about .7%, and the DOW eked just over 0.8%. This week continued the market bludgeoning that started at the end of last week with the reports that the 10-Year Treasury Notes were on the rise.

Because of the unsteady trajectory for the markets, I only entered into one spread position early in the week.

Because the markets have taken a beating, I need to prepare myself for losing trades within the next two weeks, if nothing changes. Next week’s commentary will focus on what to expect when the short-leg of the spread is assigned or revisit the process of rolling positions.

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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

#OptionsTrades by Damocles
Options Trades by Damocles

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