The purpose of this week’s Journal Entry is to expand on how I calculate year-to-date Profit and Loss for my Trading Account (for all my Options’ Credit Spreads).

“Aah, safety’s overrated!”

– Gobber The Belch (Movie: How to Train Your Dragon)

Commentary

Can Gobber help me calculate Profit & Loss for my Credit Spreads?
Gobber the Belch

How to Train Your Options

Dragons and Stock Options are very similar creatures. I need to understand them, tame them, and learn how to command them. I can train my Dragons/Options by:

  1. Hatch my dragon egg: Start from the beginning and learn the basics of Dragons/Options anatomy.
  2. Train my dragon: Engage in low-impact/low-risk tasks and trades to learn how these creatures behave.
  3. Respect my dragon: Dragons/Options can make toast out of my Trading Account if I don’t respect their power.
  4. Measure my dragon’s progress: I can’t know where they’re going if I don’t know where they’ve been.

The best way to know where I’ve been is to establish means for self-evaluation and personal performance reviews. This week’s Journal Entry will introduce two additional performance measuring vehicles for monitoring my progress selling Vertical Bull Put Credit Spreads.

New Measurements

How do I know if I’m too risky or too safe? How would I know if I could do better putting my money somewhere else? How do I know if I am improving my strategy skills? The Profit and Loss section in my trading journal (below) already has a Balance Sheet. And the Balance Sheet shows the dollars and cents of my progress. But the section does not have a quick-glance Profit/Loss chart that lets me see if I’m moving in the right direction.

Profit/Loss Chart

For a quick visual, I compiled data from my log file and created a graph to show my progress. This graph (below) shows two overlapping matrices;

  1. The scale on the left shows my current Trading Account cash balance. Starting at the initial deposit of $16,000 on Jan 1, 2021, the blue line has steadily risen to just under $17,000.
  1. The scale on the right shows the dollar added or dollars removed from my Trading Account for each week. Above the $0 line, the green bars are those weeks that I gain (added cash to my account). The red bars below the $0 line are those weeks where I lost money.
Chart for Profit & Loss
As of 3/19/2021

(Note: The negative weeks (#4 and #8) are the weeks where I withdraw $300 for my paycheck.)

Advertisements

Compare Performance to ETF/SPY Investment

If I ask the question: “instead of depositing $16,000 in my Options Trading Account, could I have done better if I bought $16,000 of the ETF/SPY instead?” So every week, I will keep track of a theoretical purchase of ETF/SPY on Jan 4 and compare that with my current ROC from my Trading Account

Options TradingETF/SPY
(Fictional Purchase)
Initial Investment
(As of Jan 4, 2021)
$16,000
(Cash)
$16,000
(43.4 shares @ $368.55)
Funds Added$1,721.01
(Premiums)
$0
(Dividends Reinvested)
Funds Removed-$126.08
(Early Close & Fees)
$0
(Fractional Shares Sold)
Ending Balance$17,594.93
(Cash)
$17,013.37
(43.4 shares * 392.55 CV)
ROI+9.1%+6.1%
As of 3/19/2021

(Note: Since I am comparing my Options Spreads activity to a year-long, buy-and-hold investment strategy, this comparison table is adding back the $300/m paychecks.)

This table shows after 81 days (since Jan 1), my Options Spreads efforts have netted me a 9.1% return on my initial investment. Compare that to the 6.1% increase for my fictional investment of SPY during the same period. Therefore, at the time of this writing, selling Vertical Bull Put Options Spreads beats buy-and-holding an Index Fund.

“Oh my! Me Likey!”
– Ruffnut (Movie: How to Train Your Dragon)

Ruffnut likey my Profit & Loss.
Ruffnut

Previous Post from OptionsTradesByDamocles

How To Make Loss Resistant Vertical Spreads – Market Force
May the Market Force Be With You! How can I use the Market Force to help …
How To Make Loss Resistant Vertical Spreads – Short Strikes
This week’s journal entry will continue my review of making loss-Resistant Vertical Bull Put Credit Spreads. …
How To Make Loss Resistant Vertical Spreads – Strike Width
In this week's journal entry, I want to look at what makes a Loss-Resistant Vertical Spread. …
Advertisements

This Week’s Market Sentiment

(As of 03/22/2021)

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

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. 
Profit & Loss
CBOE Market Volatility Index – 03/20/2021

VIX 9-Day SMA dropped to 21.2% from last week’s 24%. The one-week deviation was +/- 0.78 points, which is quite a bit lower than last week’s 1.6 points (thrashing fell to 3.7% of the current VIX (21.2%). Last week the thrashing was 7.7%. As a signal, this continues to show less market uncertainty from the previous week.

The 1-month Regression Channel for the VIX reversed its trajectory from last week to suggest less volatility as the Marketeers start to digest the Interest Rates issues.

The VIX ended last week at 20.9%, which is pretty much flat to what it was when the week started. (But in a sign of progress, the VIX did dip below 20% to 19.2% this past Wednesday). And the 9-Day SMA is rightly below the 50-Day, and the current VIX is below the 9-Day. All this indicates that the Marketeers are getting more comfortable with the change in Federal Economic Policies and economic recovery. But the other shoe has not yet dropped, so we are still jittery.

The VIX continues to hover above 15, which in itself is waving the jitters flag. But the steep drop over last week to barely above 20% is a good sign that we are moving in the right direction. I will initially set this week’s DEFCON (Options Trading Readiness Signal) level to 4. Let’s see if the other indicators will change this level.

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.

S&P 500 Put/Call Ratio - as of 03/20/21
S&P 500 Put/Call Ratio – as of 03/20/21

The Federal Reserve meeting concluded on Thursday of last week, which corresponds to the Put/Call Ratio’s small jump at the end of the week. The Feds tend to spook investors, and that seems to be what happened. Beyond that, there seems to be little concern to protect current holding, but there seems to be an active rotation out of tech and retail.

I’m reading this indicator as a support to the VIX. So I’m going to leave DEFCON to 4.

Maintain DEFCON = 4

Advertisements

Consumer Sentiment Index (CSI):

As of Mar ’21 CSI’s level rose to 83.0 from at 76.8 last week. (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.

Consumer Sentiment Index.
Profit & Loss
Updated: 03/13/21

The US Consumer Confidence Index remained unchanged (since it is only updated once a month – duh!).

This index lever reinforces that current DEFCON level.

Maintain DEFCON = 4

Market Indexes:

DOW (DJX) = 32,629 – Down .4% from 32,779 last week. (4 week deviation: 670 up from ?? last week)
S&P 500 (SPX) = 3,913 – Down .8% from 3,943 last week. (4 week deviation: 45.6 flat from 45.8 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 trend
Daily S&P 500 Index – Four Months Trend (Updated 03/20/2021)

Market Thrashing

4-Week Thrashing of DJX = +/- 670 points or 2.1% of the market’s volume is a steady increase from 1.9% last week.

4-Week Thrashing of SPX = +/- 55.2 points or 1.4% of the market’s volume is a steady increase to 1.3% last week.

High thrashing is a signal for increased volatility. Even though there is a consensus of returning to the bull markets, it also means that there may be some short-term profit-taking continuing.

So far, all indicators are signaling caution ahead.

Maintain DEFCON = 4

Advertisements

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.

  • Record vaccinations are easing COVID concerns
  • Becoming hyper-aware of the inevitable rising of interest/inflation rates
  • A Federal Infrastructure bill is being negotiated – expect lots of pork
  • The restart of the China Trade negotiation started with a sputter

Rebuilding the decimated small-business sector will raise the interest rates – as supply-and-demand dictates. And rising interest rates are always a competitor to stocks as many Marketeers will sell stocks and buy bonds. But this kind of shift in the equity markets has always been quickly absorbed, and market adjustments always rebound. I need to expect Market-Shock (adjustments) as Interest/Inflation Rates start reaching new highs.

Maintain DEFCON = 4

My sentiment for this coming week:

There continues to be a lowering of the temperature in economic and geopolitical concerns at the moment. The VIX continues to fall, and the Put/Call Ratios are confident. If it wasn’t for the Markets trying to find a new trend and the Inflation Rates getting a little scary, I would be inclined to lower the DEFCON to 3.

We are definitely moving is the right direction and I will maintain a solid DEFCON 4.

Trading Readiness Level

DEFCON = 4

This week, I will focus on:

I’m going to put the super-wide spreads (20-Strikes) in the DEFCON 3 or lower category. Two 10-Strike spreads this week seem reasonable.

  • Two spreads (both totaling @ $2K risk) as the Markets see fit.
  • Spread term of 8-weeks or less.
  • Probability of OTM > 80%
Advertisements

Profit and Loss Statement

(As of 03/26/2021)

Balance Sheet

Year
2021
Month
Mar
Week
#12
Beginning Account Balance$16,000.00$16,486.26$ 16,995.16
Deposits (Div. & Int.)$0.23$0.00$0.00
Withdraws (paycheck)-$900.00-$300.00-$300.00
Premiums on Open$1,895.01$700.00$174.00
Premiums on Close-$103.00-$12.00-$0.00
Fees Paid (total)-$25.12-$7.14-$2.04
Ending Account Balance$ 16,867.12 $ 16,867.12 $16,867.12
Total Gain/Loss$867.12$380.86-$128.04
ROR2.3%-0.8%
ROC5.4%

Progress Graph

Running P&L – As of 3/26/21

(Note: the negative weekly results for weeks 4, 8 and 12 are when I withdrew $300 from the Trading Account for my paycheck.)

My Performance vs. SPY

Options TradingSPY
(Fictional)
Initial Investment
(As of Jan 4, 2021)
$16,000
(Cash)
$16,000
(43.4 shares @ $368.55)
Funds Added$1,895.01
(Premiums)
$0
(Dividends Reinvested)
Funds Removed-$128.12
(Early Close & Fees)
$0
(Fractional Shares Sold)
Ending Balance$17,766.89
(Cash)
$16,869.44
(43.4 shares * $391.78 CV)
ROI+9.9%+5.9%
As of 3/26/2021
Advertisements

Schedule for this Week

Goals for this week: (03/22/2021 – 03/26/2021) (Week #12)

  • 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: May 14 (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.
Advertisements

This Week’s Trade Activity

(As of 03/22/2021)

Spread Count Summary:

Year
2021
Month
Mar
Week
#12
Vertical Bull Put Credit Spread1862
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Margin Interest100
Total1962

Current Dollars at Risk:

Year
2021
Month
Mar
Week
#12
Vertical Bull Put Credit Spread$10,921.$7,300.$2,326.
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.$0.
Total Dollar Risk$ 10,921 .$ 7,300 .$ 2,326 .
Max Risk Allowed$16,000.00$8,000$2,000.

New Trades Opened This Week

(03/22/2021 – 03/26/2021)

DIA: 305p/390p  – Open 03/24/21 – Expires 04/30/21 – Max Gain = $99.00- Open Price = $326.73
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.2%, Head Room=-6.3%, Max Loss=$1,400.00, ROC 7.0%, 37d Dev = $6.5

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($10,921)
  • Max dollar at risk this week < $2,000? No ($2,326)
  • Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (37 days)
  • Long-term trend (four months) bullish? Yes (see chart)
  • Short-term trajectory of the underlying bullish? No (see chart)
  • Put/Call Ratio < 1, (or falling if it is > 1)? No (1.2 raising from 0.7)
  • Current price above 9-Day SMA?: No (see chart)
  • 9-Day SMA above 50-Day SMA?: Yes (see chart)
  • Short-strike < 1 SD below the current price? Yes (1SD=307.15)
  • 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?: No
  • Long-strike at maximum width (<= 15)? Yes (15 strike width)
  • Set a GTC Conditional Trailing Stop Limit (CTSL): (Not Set)

Being the last new position for March, I chose a 15 strike-side spread because I was below the maximum of the month.

There were also sever other Entry Rules that I did not follow.

SPY: 365p/355p  – Open 03/23/21 – Expires 04/30/21 – Max Gain = $75.00- Open Price = $392.34
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.4%, Head Room=-6.9%, Max Loss=$924.00, ROC 8.0%, 38d Dev = $5.15

Credit Spreads
Advertisements

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($9,520)
  • Max dollar at risk this week < $2,000? Yes ($925)
  • Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (38 days)
  • Long-term trend (four months) bullish? Yes (see chart)
  • Short-term trajectory of the underlying bullish? No (see chart)
  • Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.0 falling from 1.5)
  • Current price above 9-Day SMA?: No (see chart)
  • 9-Day SMA above 50-Day SMA?: Yes (see chart)
  • Short-strike < 1 SD below the current price? Yes (1SD=366.95)
  • Short-strikes Prob-OTM > 80%? Yes (82.4%)
  • 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)

I picked the SPY spread primarily because I have more QQQ than I should. IWM drop over 2% from this morning so I’m standing clear. Finally, DIA has a scary low Headroom. So this selection was more about diversifying than profit.

All of the underlying ETFs in my Watch List have a bearish 7-Day trajectory. But IV is so low that I didn’t think it would far much further.

(Question to put on my to-do list: if a “low” IV typically means that steady-state market, and the 7-Day trajectory is moving down, the does that mean that ETF is turning into a bear?

Trades Currently Cooking

(As of 03/26/2021)

QQQ: 290p/270p  – Open 03/16/21 – Expires 04/30/21 – Max Gain = $177.00- Open Price = $323.99
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.3%, Head Room=-10.5%, Max Loss=$1,822, ROC 9.7%, 45d Dev = $9.91

IWM: 205p/195p  – Open 03/11/21 – Expires 04/23/21 – Max Gain = $103.00 – Open Price = $230.45
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=80.5%, Head Room=-11.4%, Max Loss=$896.00, ROC 11.4%, 43d Dev = 6.5
Now: Prob. OTM=88.0%, Head Room=-9.4%, IV%=6%

QQQ: 270p/255p  – Open 03/08/21 – Expires 04/23/21 – Max Gain = $145.00 – Open Price = $308.79
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.7%, Head Room=-12.5%, Max Loss=$1,354.00, ROC 10.6%, 46d Dev = 8.9
Now: Prob. OTM=73.8%, Head Room=-7.5%, IV%=11.2%

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
Now: Prob. OTM=92.%, Head Room=-13.9%, IV%=6%

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=90.2%, Head Room=- 13.9%, IV%=6%

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=92.1%, Head Room=-7.6%, IV%=21%

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=66.0%, Head Room=-2,7%, IV%=?

Trades Closed This Week

(As of 03/19/2021)

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
At Close: Prob. OTM=98.5%, Head Room=-3.8%, IV%=29.5%, ROR= 10.5%

Cost to open: $0.95 premium collected * 100 shares = $95.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (Expired)
Net Profit= $95.00 to open – $0.00 to close = $95.00 – fees
Actual ROR = $95.00 / $904.00= 10.5%

Advertisements

Conclusion

Advertisements

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.”

Advertisements

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