The enormous amount of stimuli the Federal Government pumped into the US economy is creating a Sugar-High for the Markets. The enviable Sugar Crash that will follow could blow up my trading account. What can I do to prepare?

“Oh, you should never, never doubt
what nobody is sure about.”

– Willy Wonka (Movie: Willy Wonka & the Chocolate Factory)

Commentary

Willy Wonka
& the Chocolate Factory

When competing for the title of “Candy Man”, Willy Wonka has nothing on Joey Biden (or Donald Trump). The necessary rescuing of the US economy from the devastation caused by last year’s COVID lockdown is now turning our congressmen into the Candy Man.

Washington has become the “Candy Congress.” It has already rolled out sugary treads to the tune of $5,736,300,000,000.00 to regenerate the economy just over the last 12 months. That, in itself, is over three times what the government allocated during the 2008-2009 Financial Crises / Recession.

But the surge of dopamine won’t stop there. The anticipated two-part “Infrastructure Bill” will be rolled out later this month, and another COVID Stimulus later this summer is expected to reach $12.6 Trillion total.

Durn, that’s a lot of candy corn!

The Candy Man Can

Below is a abbreviated list of the stimulus efforts since the pandemic started.

BillBecame LawPriceOverview
Coronavirus Preparedness and Response Supplemental Appropriations Act 3/6/2020 $8.3B Fight the spread of COVID-19 in the United States by funding vaccine and testing development
Families First Coronavirus Response Act 3/18/2020 $225B Provided COVID-19 testing funds, paid sick leave, and food assistance funding
CARES Act 3/27/2020 $2.2T$1,200 stimulus checks, enhanced unemployment benefits, created the Paycheck Protection Program small business forgiveness loan program, aid for state and local governments, and aid for corporations.
Paycheck Protection Program and Health Care Enhancement Act 4/24/20$483BMore funding for the Paycheck Protection Program and funding for COVID-19 testing.
Consolidated Appropriations Act, 2021 12/28/20$920BAttached to a larger government funding bill – included $600 stimulus checks, renewed the Paycheck Protection Program, billions for vaccines, and a renewal of a federal boost to unemployment benefits at $300 per week
American Rescue Plan, 20213/11/21$1.9T$1,400 stimulus checks, money for schools to reopen, and billions for vaccine distribution and development
American Jobs Plan, 2021Developing $2.3TDeveloping in the White House. Will focus on traditional infrastructure, environmental justice, and racial equity.
Human Infrastructure Bill, 2021Developing $2.6T Developing in the House. Will focus on “workforce development” and “human infrastructure” 
A planned COVID StimulusPlanning$2TAdditional stimulus checks and continues the expansion of unemployment benefits.

How to Undo the Sugar Binge?

The minute I pop a sweet in my mouth, I get a surge of dopamine, a feel-good hormone with addictive properties. There is no difference between that and sticking trillions of dollars in front of people to spend. It’s like Congress giving heroin addicts more juice.

Biden's Golden Ticket

But sooner or later, there will be no more candy piñatas. And when that happens, there will be an emotional and physiological crash amongst the juiced-up Marketeers. People will stop spending at the eye-popping rate, demand will evaporate, and over-supply will crush the economic momentum. (Remember when the price of oil dropped below zero on April 20, 2020?)

How Should I Consider New Positions in the Short-Term

Between now and the end of Summer, I would suspect more and more sugary goodies to flow from Congress. The Fake Newsgroups will laud the artificial market growth, celebrate the many millions of people who are benefitting, and voice adoration to the Biden Administration’s extraordinary compassion for saving America. (What a stark turn-around from the perpetual bad news the media was giving Trump last year!)

These tasty treats will surely be good news to the 6-8 weeks Options Spreads that I will sell over the next month or two. During this short term, I will slightly increase risk.

How Should I Consider New Positions in the Long-Term

But eventually, we all have to pay the Piper. Once the moderate Democrats start joining the fiscal Republicans, that candy funding is getting way out of hand, the call of budgetary austerity will roil over the Markets. I can then imagine most of my open Spreads quickly losing ground and several weeks of negative returns.

In preparation, I should consider:

  1. Keep my Open Position inventory as few as possible. Let winning position exit early with lower ROR.
  2. Open wider-spread positions. This tactic will push up the dollars-at-risk, but these positions should be more loss-tolerant.
  3. As summer approaches, consider only one 20 Strike-Width Spreads instead of two 10 Strike-Width Spreads.
  4. Focus on 8-weeks expiration more so than on shorter times. As the markets move bullish, these will be the first to show “Early-Exit” flags.

One Consideration about
Stimulus / Bailout Bills

Congressional bills like these run through Congress quite often. The price tag that is associated with these bills is primarily defined as “funds to be allocated” and is intended to provide perspective on the possible upper-end cost. (In other words, guessing on what the worst-case cost might be). Typically only a fraction of the “allocated funds” are ever distributed.

As an example, the 2008 Troubled Asset Relief Program, or TARP, moved through Congress and reported by all sides of the aisle as a $700 billion bailout. Congress later (without much fanfare) reduced that to $475 billion. The actual ultimate expenditure of TARP was lower than that, at $431 billion. And much of that was repaid back to the Treasury’s coffers.

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This Week’s Market Sentiment

(As of 03/29/2021)

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

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 - 04/11/2021
CBOE Market Volatility Index – 04/11/2021

The 1-month Regression Channel for the VIX continues to shows a steady decline, suggesting that the Marketeers are settling into the current economic environment. Note: a low VIX does not mean that the market will rise (although it usually does). What it does mean is whatever direction the market is moving now, will more like continue.

The VIX ended last week at 16.7%, a little lower than the week’s before 17.3%.

The current VIX (16.7%) is below the 9-Day SMA and the 9-Day SMA is below the 50-Day.

The VIX continues to hover slightly above 15, which in itself is waving the jitters flag. But it looks like the withdrawals the Marketeers were going through at the start of the pandemic are about over. I will initially set this week’s DEFCON (Options Trading Readiness Signal) level to 4 simply because the VIX is over 15%. 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 04/11/21
S&P 500 Put/Call Ratio – as of 04/11/21

At 0.48, there is nothing this Put/Call Ratio is saying other than most Marketeers are “going long.” This is a good sign of confidence.

The 9-Day SMA has also dropped below 0.5. So it looks like the trend has some legs.

There is nothing here that will drop the DEFCON lower. I’m going to leave DEFCON to 4.

Maintain DEFCON = 4

Consumer Sentiment Index (CSI):

(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: 03/13/21

This week’s CSI’s level has not changed. At 84.9 from 83.0 two weeks earlier. But it is below 100%, so I can’t say “things are peachy.” But the continued improvement in Consumer Sentiment is a good sign that the economy is ramping up.

This index lever reinforces that current DEFCON level.

Maintain DEFCON = 4

Market Indexes:

DOW (DJX) = 33,801 – Up 2.0 % from 33,153 last week. (4 week deviation: 370 down from 463 last week)
S&P 500 (SPX) = 4,129 – Up 2.7% from 4,020 last week. (4 week deviation: 69.3 up from 47.9 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 (Updated 04/11/2021)
Daily S&P 500 Index – Four Months Trend (Updated 04/11/2021)

Market Thrashing

4-Week Thrashing of DJX = +/- 370 points or 1.0% of the market’s volume is down from 1.4% last week.

4-Week Thrashing of SPX = +/- 69.3 points or 1.7% of the market’s volume is up from 1.2% last week.

The DOW thrashing in the 1.x% is indicating a steady-hand market. And since the DOW’s trend trajectory is bullish, there is no reason to believe that will change. So with the VIX being near 15%, the P/C Ratio below 0.5 and calming market is bullish, I will not change the DEFCON.

Maintain 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 the drop of a hat.

The GTS for this week:

  • A Federal Infrastructure/Tax bill is being negotiated – expect lots of pork
  • The lowest number of unemployment claims filed since March 14, 2020.
  • Record vaccinations are easing COVID concerns
  • Immigration crisis continues
  • Progressive Dems roll out the “Judicial Act of 2021” (aka, pack the Supreme with liberal judges)

Rising interest/inflation rates will be at the top of the GTS for some time. As long as we continue to rebuild the jobs lost in 2020, demand for more stuff will increase, and supply will lag. I expect interest rates to start a year-long creep up until we get into the pre-Trump economy.

The Infrastructure Bill as crafted by the White House, has not yet hit Congress. The early review suggests this bill is less about “traditional infrastructure” improvements and more about making our infrastructure more green (a giant win for the Climate Change group).

The migration log-jam at the southern borders is being ignored by the liberal media and begrudgingly back-burner by Congressional Democrats.

Consumer spending is up and last week’s Retail Price (Inflation) report jump much more than expected. This will eventually trickle to higher interest rates and that will put a damper on spending. But promise goodies from Washington will probably delay the sugar-crash until later.

The Judicial Act of 2021 is an overt act to appease the progressive left of the Democratic party. It is functionally dead on arrival in both houses. But just the hole notion of court manipulation is going to set off many months of wild news stories. I need to make sure my pants legs are rolled up.

Maintain DEFCON = 4

My sentiment for this coming week:

The indicators (VIX, CSI, P/C Ratio, and Market Trends) show a happy group of Marketeers for this coming week. But geopolitical events will always be a significant influencer for my Vertical Bull Put Credit Spreads. Regardless of whether the events are real or fake, hyper-political news can send the markets into a tizzy at any time.

The GTS for this week definitely has some low-level rumbleings. Rising interest rates (good news for a rebuilding economy but bad news for Stock Markets) will be a long-term concern.

VIX, GTS, P/C Ratio and current Markets are strong motivators to maintain DEFCON 4.

Trading Readiness Level

DEFCON = 4

This week, I will focus on:

Because the markets seem to be on a long-term growth pattern after the initial Interest Rates dump, I’ve started to violate the $2,000 max-risk per week rule. But I’m still maintaining no more than two new positions per week.

  • Two spreads (both totaling < $2.5K risk) as the Markets see fit.
  • Spread term of 8-weeks or less.
  • Probability of OTM > 80%
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Profit and Loss Statement

(As of 04/16/2021)

Balance Sheet

Year
2021
Month
Apr
Week
#15
Beginning Account Balance$16,000.00$17,057.20 $17,176.06
Deposits (Div. & Int.)$0.37$0.00$0.00
Withdraws (paycheck)-$900.00-$0.00-$0.00
Premiums on Open$2,545.01$428.00$229.00
Premiums on Close-$213.00-$81.00-$7.00
Fees Paid (total)-$37.38-$9.20-$3.06
Ending Account Balance$17,395.00$17,395.00$17,395.00
Total Gain/Loss$1,395.00$337.80$218.94
ROR2.0%1.3%
ROC8.7%

Progress Graph

Running P&L – As of 4/16/21

(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

Hypothetically, 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?

Options TradingSPY
(Fictional)
Initial Investment
(As of Jan 4, 2021)
$16,000
(Cash)
$16,000
(43.4 shares @ $368.55)
Funds Added$2,316.38
(Premiums)
0.17 shares
(Dividends Reinvested)
Funds Removed-$250.38
(Early Close & Fees)
$0
(Fractional Shares Sold)
Ending Balance$18,295.00
(Cash)
$18,129.47
(43.6 shares * $416.30 CV)
ROI+14.3%+13.3%
As of 4/16/2021

Schedule for this Week

Goals for this week: (04/12/2021 – 04/16/2021) (Week #15)

  • 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: Jun 4 (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 04/16/2021)

Spread Count Summary:

Year
2021
Month
Apr
Week
#15
Vertical Bull Put Credit Spread2442
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Margin Interest100
Total2542

Current Dollars at Risk:

Year
2021
Month
Apr
Week
#15
Vertical Bull Put Credit Spread$8,247.$5,072.$2,271.
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$8,247.$5,072.$2,271.
Max Risk Allowed$16,000.00$8,000$2,500.

New Trades Opened This Week

(04/12/2021 – 04/16/2021)

IWM: 205p/195p  – Open 04/16/21 – Expires 05/28/21 – Max Gain = $100.00- Open Price = $244.17
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=80.3%, Head Room=-8.5%, Max Loss=$900.00, ROC 11.0%, 42d Dev = $5.42

Vertical Bull Put Credit Spread - IWM- Short: 205 Put - Long: 195 Put
Vertical Bull Put Credit Spread – IWM- Short: 205 Put – Long: 195 Put
  • Current maximum dollars at risk < $16,000? Yes ($8,247)
  • Max dollar at risk this week < $2,500? Yes ($2,271)
  • Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (42 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)? No (1.6 up from 1.2)
  • Current price above 9-Day SMA?: Yes (see chart)
  • 9-Day SMA above 50-Day SMA?: No (see chart)
  • Short-strike < 1 SD below the current price? Yes (1SD=205.50)
  • Short-strikes Prob-OTM > 80%? Yes (80.3%)
  • Short-Strike price below the trend channel at expiration?: Yes (see chart)
  • Current price within the bottom 1/2 of Trend Channel?: Yea (see chart)
  • Long-strike at maximum width (<= 15)? Yes (10 strike width)
  • Set a GTC Conditional Trailing Stop Limit (CTSL): (Not Set)

QQQ: 310p/295p  – Open 04/14/21 – Expires 05/28/21 – Max Gain = $129.00- Open Price = $339.95
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.4%, Head Room=-8.8%, Max Loss=$1,374.00, ROC 9.0%, 44d Dev = $10.35

Entry Rules for Vertical Bull Put Credit Spreads:

Vertical Bull Put Credit Spread - QQQ - Short: 310 Put - Long: 295 Put
Vertical Bull Put Credit Spread – QQQ – Short: 310 Put – Long: 295 Put

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($5,976)
  • Max dollar at risk this week < $2,500? Yes ($1,371)
  • Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (44 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)? No (1.3 up from 1.0)
  • 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=313.14)
  • 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?: No (see chart)
  • Long-strike at maximum width (<= 15)? Yes (15 strike width)
  • Set a GTC Conditional Trailing Stop Limit (CTSL): (Not Set)

There was a tech selloff (Correction) back in mid Feb when the Interest rates for the 10-Year Treasure jump (indicating a return to rising interests and inflation). But since then, there was a near V-Shape recovery.

Even though QQQ has breached the Resistant Line of the trend-channel, it looks like it is falling back into the same trend pattern that it had before the correction.

I’m leery of this position because of the adage of “what goes up, must come down.” But looking at the recent history of QQQ, it looks more like “what fell down will bounce back up.”

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Trades Currently Cooking

(As of 04/16/2021)

QQQ: 300p/280p  – Open 04/08/21 – Expires 05/21/21 – Max Gain = $119.00- Open Price = $333.83
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85.4%, Head Room=-10.1%, Max Loss=$1,879.00, ROC 6.3%, 43d Dev = $7.80

IWM: 200p/190p  – Open 04/06/21 – Expires 05/21/21 – Max Gain = $80.00- Open Price = $225.02
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.8%, Head Room=-11.1%, Max Loss=$919.00, ROC 8.6%, 45d Dev = $5.80

QQQ: 285p/270p  – Open 03/31/21 – Expires 05/21/21 – Max Gain = $91.00- Open Price = $318.83
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.9%, Head Room=-10.6%, Max Loss=$1,368.00, ROC 9.5%, 51d Dev = $9.4

DIA: 305p/390p  – Open 03/30/21 – Expires 05/21/21 – Max Gain = $131.00- Open Price = $318.83
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.0%, Head Room=-7.7%, Max Loss=$908.00, ROC 9.9%, 52d Dev = $6.9

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%

Trades Closed This Week

(As of 04/16/2021)

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
At Close: Prob. OTM=97.9%, Head Room=-11.7%, IV%=1.5%, ROR= 7.4%

Cost to open: $0.75 premium collected * 100 shares = $75.00
Cost to close: $0.07 premium paid * 100 shares = $7.00
Net Profit= $75.00 to open – $7.00 to close = $68.00 – fees
Actual ROR = $68.00 / 924.00 = 7.4%

This position closed 17 days early via a 90% of max gain trade trigger of $.08 (closed at $.07)

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Conclusion

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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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