Is it time to go big? Or is it time to regroup? Or can we even bargain with President Biden’s Fiscal Year 2022 six trillion dollars Federal budget proposal? The enormity of the proposed budget is enough to keep the current Markets at bay – to say the least.

Might I offer you some advice?
Forget everything
that you think you know.

Karl Mordo (Movie: Doctor Strange)

Commentary

Might I offer you some advice?
Forget everything that you think you know.
Karl Mordo - Dr Strange

This week’s short commentary is to consider the effect of a Green New Deal type Federal Budget. Can it inflict damage on my Vertical Options Spread efforts? Short answer, yes.

Is Biden’s Budget Negotiable?

It’s only a starting point for negotiations, but is President Biden’s Fiscal Year 2022 Federal budget proposal one for the time? Starting at six trillion dollars (a whopping 25% jump over last year’s Federal budget), President Biden wants this epic budget to be a bipartisan agreement – but I do not think the Progressive Left will allow it.

Today’s interest rates are at historic lows, and borrowing money now will give us a bigger bang for our 2022 deficit bucks. But interest rates over the next several years will NOT be at historical lows. And the Biden Budget assumes $1,000,0000,0000 per year deficit spending for the next ten years (to say nothing about future Administrations’ requirement to rebuild the military, respond to disasters, etc.)

For Congress to get close to financing this epic plan, Biden’s budget also includes dismantling the “Tax Cuts and Jobs Act of 2017 – Trump’s signature legislation achievement. I suspect this fact is one of the impetus for this effort.

Preparing for Market Madness

Raising taxes and adding more stimulus will result in an overheated economy. Demand will outstrip supply which will increase the cost of the products and services we all use. To tamp down the growing inflation, the Federal Reserve will need to raise interest rates to counter the pressure, thus starting a spiral that will rob stocks’ value and trigger lethargic Markets.

But since the Markets are a huge discounting apparatus (see post “Rebooting the US Economy“), the Marketeers will likely have kneejerk reactions over what they “think” will happen long before a budget deal. This could result in a significant near-term negative Market adjustment that would quickly rebound over the following couple of weeks.

When these predicted adjustments happen, my open positions that will be the most vulnerable are those whose expiration dates are just a couple of weeks away, the Short-Strike is only a couple of percentages from the current value, and the probability of OTM has fallen significantly from opening.

So my task between now and a budget deal is to make sure my nearing expiration positions are either well above the opening P-OTM, or closed early at the first sign of profit.

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Divisional Activism

In the era of Divisional Activism, there is no political policy, program, or law that will survive a vicious partisan win. A partisan win one year is a partisan target the next. Every Executive Order one President writes (without passing legislation) is an Executive Order the next President can reverse.

Do you still think there will be no consequences?
No price to pay? We broke our rules.
The bill comes due. Always!

– Karl Mordo (Movie: Doctor Strange)

For Instance

The 2010 Affordable Care Act became law only through a savage political battle where no Republicans voted for it (House nor Senate). So starting at the following Administration and Congress, Obamacare was systematically dismantled regardless of its noble intention.

The “Tax Cut and Jobs Act of 2017” was approved with no Democrats in support. Now that we are in the next Congress, this law is enemy number one and will be totally reversed (via this new budget).

If Biden’s “Build Back Better” programs pass strictly along party lines, then it will be the first priority of the next Congress to crush.

Ronald Regan once quoted “it’s amazing what you can get done – if you don’t care who takes the credit.”

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Entry Rules for Vertical Bull Put Credit Spreads
The "limiting loss by limiting risk" blunder. One 10-Strike-width Vertical Bull Put Credit Spread has a significant loss-buffer built-in.
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Exit Rules: Vertical Credit Spreads – Pt 1
Having an Escape Plan (Exit Rules) for my open Vertical Bull Put Credit Spreads is just as critical as …

This Week’s Market Sentiment

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

(As of 05/24/2021)

In this section, I review five indicators: VIX, Put/Call Ratio, S&P 500, 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.

Geopolitical Tree-Shakers (GTS):

GTS 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.

  • Biden’s $6 Trillion Budget (a 24.2% increase over last year)
  • Russia-based hacker groups
  • Rising interest/inflation rates will be a continued background pressure for some time
  • May’s Employment Situation Summary (aka Job’s Report) Friday before Market open.
  • Employment/unemployment numbers improving

Many major retailers (Cosco, Walmart…) are seeing a jump in inflation for a slew of consumer products. Cosco CFO Galanti sees inflation rising from 2% in March to 3% to 3.5% by the end of May. This collective rise in inflation will force T-Bills to increase and that will force the Federal Reserve to start raising interest rates. This will add pressure to the markets.

There will be a Market shock factor if the Democrats successfully pass the $6T Federal Budget bill unaltered later this summer through reconciliation. Raising corporation rates does not take money from the paychecks of the CEOs but will be passed to me as higher prices for the products/services I consume. This will exacerbate inflation and can send Markets into another correction with a slower recovery period. The only way this budget can mollify the Marketeers is if it is passed with large bipartisan support.

Russia-supported hackers struck the Colonial Pipeline, water-treatment plants, small businesses, Washington D.C.’s Metropolitan Police Department, hospitals, and most recently JBS Foods. These cybercriminals are learning that Ransomware can be a lucrative revenue stream, especially when protected by a Super Power.

April’s Jobs Report was a huge disappointment. The employment rate was only a quarter as much as the analyst predicted. This Friday’s Jobs Report for May is in major focus. It needs to confirm a resuming of job growth, or the markets may go through more adjustments.

This week’s GTS outlines several disturbing market-plays that can keep many Marketeers on the sidelines for weeks, if not months. But none of this should translate into a sustained negative to the broader markets. I would expect over the next several weeks that Thrashing will be the biggest market activity. So based on this week’s GTS alone, I will initially set the DEFCON (Damocles Options Trading Readiness Signal) to 4 (but will hold my breath).

Setting DEFCON to 4

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 one-month forward-looking volatility, 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, the markets with a VIX closer to 15% or below will have an innate tendency to rise.

CBOE Market Volatility Index - 05/30/2021
CBOE Market Volatility Index – 05/30/2021

The 1-month Regression Channel for the VIX took a dramatic bearish trajectory over the past 30 days. The Marketeers appear to struggle for a direction because of the contrary economic reports.

The VIX ended last week at 16.7%, higher than the week before at 20.2%, nearly matching the 52-week low of 16.2. This insinuates the some of jitteriness is lessening. But we are still above 15.0% so I can change the DEFCON.

Due to the change of VIX trajectory, I am downgrading the DEFCON to 3. Let see if the following indicators will change that level.

Maintaining DEFCON = 4

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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 5/30/21
S&P 500 Put/Call Ratio – as of 5/30/21

The Put/Call Ratio for the S&P 500 continue it’s steady march up. But both the 9-Day and 50-Day SMA remain above the jitter-line. This implies that the trend is still moving scared.

(Even though the P/C Ratio over the past month averaged above the .5 line, it is still far below the “Head for the Hills” 1.0 line.)

The continued steady rise in the 50-Day SMA confirms a rising jitters. So far, the GTS, VIX, and this P/C Ratio appear to be a response to worse-than-expected economic news.

Maintaining DEFCON = 4

Consumer Sentiment Index (CSI):

I’m searching for a new Consumer Sentiment Index (CSI) chart as provided by the University of Michigan.

A low CSI index 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 Index for May

This week’s CSI is the final results for May. This chart shows the CSI falling to 82.9 from April’s final of 88.3. This is not good news for the Biden Economic Policies. Rising Inflation is signaling higher prices, and the rising unemployment (low employment) suggests that supply shortages may continue (creating a feedback loop of higher prices for demand products).

This CSI continues to illustrate the jitters showing in the VIX and P/C Ratio, Nothing here suggests raising the DEFCON level.

Maintaining DEFCON = 4

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Market Indexes:

DOW (DJX) = 34,529 – up 0.9% from 34,208 last week. (4 week deviation: 2.8 significantly down from 283 last week)
S&P 500 (SPX) = 4,204 – up 1.2% from 4,156 last week. (4 week deviation: 37.73 mostly flat from 36.82 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 05/23/2021)
Daily S&P 500 Index – Four Months Trend (Updated 05/23/2021)

Market Thrashing

4-Week Thrashing of DJX = +/- 2.8 points or 0.8% of the market’s volume is a substantial drop from 3.8 % last week.
4-Week Thrashing of SPX = +/- 37.73 points or 0.9% of the market’s volume is flat from 3.4% last week.

The Indexes thrashing below 1.x% is indicating a steady-hand market. Since both the S&P 500 and DOW’s 4-month trend trajectory is mostly sideways, there is no reason to believe that will change.

The S&P 500’s Trend Channel has not changed much for the past four months. Thrashing has dropped considerable with the trajectory moving mainly sideways.

The short-term market data is agreeing with the GTS, VIX, and P/C Ratio that general jitteriness is on the rise. But this movement follows recent similar movements but continues to maintain a Bullish trajectory. I do not think all this will pull the markets down into bear territory.

I will maintain the DEFCON level at 4. But I will probably start lowering the “Exit Prices” with hopes of exiting winning positions sooner.

Maintain DEFCON = 4

My sentiment for this coming week:

Of the five indicators:

  • the GTS is listing some sustainable angst – Shrug
  • the VIX righting itself a little – Shrug
  • the P/C Ratio shows a growing number of Marketeers are continuing to bet on a market pull-back – BOO
  • the CSI screams a falling sentiment of the current economy – BOO
  • the Market Movement mostly moving sideways – Shrug

I will predict that the markets will move primarily sideways, but there is the air of a collective breath being held. I believe the final Federal Budget will set the market’s direction for the next two years. Until the bill is sent to a willing Biden’s desk, the Markets will probably plod slowly sideways.

I feel the markets have a higher potential to move mostly sideways over the next couple of weeks.

Trading Readiness Level for this week

DEFCON = 4 (but with an attitude!)

This week, I will focus on:

Because I feel like I’m on the borderline between DEFCON 3 and 4 –

  • One or two spreads this week totaling < $2.5K risk) as the Markets see fit
  • Spread term of 8-weeks or less
  • Probability of OTM > 83%
  • Adjust exit prices higher to encourage early exits.
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Profit and Loss Statement

(As of 06/04/2021)

Balance Sheet

Year
2021
Month
June
Week
#22
Beginning Account Balance$16,000.00$17,811.04$17,811.04
Deposits (Div. & Int.)$0.65$0.00$0.00
Withdraws (paycheck)-$1,500.00-$0.00-$0.00
Premiums on Open$3,787.01$185.00$185.00
Premiums on Close-$280.00-$38.00-$38.00
Fees Paid (total)-$53.70-$4.08-$4.08
Ending Account Balance$ 17,953.96 $17,953.96$17,953.96
Total Gain/Loss$1,953.96$142.92$142.92
ROR0.8%0.8%
ROC12.2%

Progress Graph

Running Profit and Loss chart
Running P&L – As of 6/3/21

(Note: the negative weekly results for weeks 4, 8, 12, 17 and 21 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 Trading SPY
(Fictional)
Initial Investment
(As of Jan 4, 2021)
$16,000
(Cash)
$16,000
(43.39 shares @ $368.55)
Funds Added$3,787.66
(Premiums)
0.31 shares
(Dividends Reinvested)
Funds Removed-$333.70
(Early Close & Fees)
$0
(Fractional Shares Sold)
Ending Balance$19,453.96
(Cash)
$18,418.81
(43.70 shares * $421.53 CV)
ROI+21.6%+15.1%
As of 6/04/2021
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Schedule for this Week

Goals for this week: (05/31/2021 – 06/04/2021) (Week #22)

  • 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: Jul 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 06/04/2021)

Spread Count Summary:

Year
2021
Month
June
Week
#22
Vertical Bull Put Credit Spread3622
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Margin Interest100
Total3722

Current Dollars at Risk:

Year
2021
Month
June
Week
#22
Vertical Bull Put Credit Spread$9,776.$2,815.$2,815.
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$9,776.$2,815.$2,815.
Max Risk Allowed$16,000.00$8,000$2,500.
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New Positions Opened This Week

(05/31/2021 – 06/04/2021)

SPY: 385p/370pp  – Open 06/03/21 – Expires 07/16/21 – Max Gain = $85.00 – Open Price = $419.10
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85%, Headroom=-8.2%, Max Loss=$1,415, ROC 5.9%, 43d Dev = $1.15

Vertical Bull Put Credit Spread - SPY - Short: 385 Put - Long: 370 Put
Vertical Bull Put Credit Spread – SPY – Short: 385 Put – Long: 370 Put

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($12,074)
  • Max dollar at risk this week < $2,500? Yes ($2,815)
  • 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)? 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=$395.11)
  • Short-strikes Prob-OTM > 83%? Yes (85.0%)
  • Short-Strike price below the trend channel at expiration?: Yes (see chart)
  • Current price within the bottom 1/2 of Trend Channel?: Yes (see chart)
  • Long-strike at maximum width (>= 10)? Yes (15 strike width)
  • Set a GTC Conditional Trailing Stop Limit (CTSL): (Not Set)

The suggested Short Strike was the floor below the 1SD value. 1SD = 395.11, suggested Short = $395. But to get the P-OTM above 83%, I went 10 Strikes further down to $385.

QQQ: 300p/285pp  – Open 06/01/21 – Expires 07/16/21 – Max Gain = $100.00 – Open Price = $332.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.1%, Headroom=-9.7%, Max Loss=$1,400, ROC 7.1%, 45d Dev = $6.67

Vertical Bull Put Credit Spread - QQQ - Short: 300 Put - Long: 285 Put
Vertical Bull Put Credit Spread – QQQ – Short: 300 Put – Long: 285 Put

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($10,659)
  • Max dollar at risk this week < $2,500? Yes ($1,400)
  • 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? No (see chart)
  • Put/Call Ratio < 1, (or falling if it is > 1)? No (1.5 up from 1.4)
  • 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=309.53)
  • Short-strikes Prob-OTM > 80%? Yes (84.1%)
  • 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 (>= 10)? Yes (15 strike width)
  • Set a GTC Conditional Trailing Stop Limit (CTSL): (Not Set)

This 15 Strike-Wide spread was open at a cautionary P-OTM of > 83% as per the guidelines set in the Market Sentiment section above.

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Trades Currently Cooking

(As of 06/04/2021)

SPY: 390p/365pp  – Open 05/27/21 – Expires 07/16/21 – Max Gain = $160.00 – Open Price = $420.24
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.4%, Headroom=-7.2%, Max Loss=$2,340.00, ROC 6.8%, 50d Dev = $3.79
Now: Prob. OTM=90.2%, Headroom=-11.7%, IV%=4.8%

DIA: 315p/305pp  – Open 05/21/21 – Expires 07/02/21 – Max Gain = $60.00 – Open Price = $343.45
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85.7%, Headroom=-8.3%, Max Loss=$940.00, ROC 6.3%, 42d Dev = $2.86
Now: Prob. OTM=90.5%, Headroom=-8.8%, IV%=4.0%

DIA: 325p/315p  – Open 05/07/21 – Expires 06/18/21 – Max Gain = $81.00- Open Price = $347.06
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.3%, Headroom=-6.4%, Max Loss=$919.00, ROC 8.7%, 42d Dev = $4.23
Now: Prob. OTM=89.6%, Headroom=-6.0%, IV%=4.0%

QQQ: 297p/282p  – Open 05/05/21 – Expires 06/18/21 – Max Gain = $131.00- Open Price = $329.06
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.7%, Headroom=-9.8%, Max Loss=$1,369.00, ROC 9.5%, 44d Dev = $9.88
Now: Prob. OTM=93.8%, Headroom=-11.1%, IV%=5.2%

IWM: 205p/190p  – Open 04/28/21 – Expires 06/18/21 – Max Gain = $134.00- Open Price = $228.03
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=80.9%, Headroom=-10.2%, Max Loss=$1,366.00, ROC 9.7%, 51d Dev = $5.12
Now: Prob. OTM=90.1%, Headroom=-9.0%, IV%=1.1%

Trades Closed This Week

(As of 06/04/2021)

QQQ: 295p/280pp  – Open 05/21/21 – Expires 07/02/21 – Max Gain = $104.00 – Open Price = $329.59
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.8%, Headroom=-10.4%, Max Loss=$1,369.00, ROC 7.4%, 42d Dev = $7.19
At Close: Prob. OTM=96.5%, Head Room=-11.3%, IV%=16.2%, ROR= 8.1%

Cost to open: $1.31 premium collected * 100 shares = $131.00
Cost to close: $0.13 premium paid * 100 shares = $13.00 (Closed Early)
Net Profit= $131.00 to open – $13.00 to close = $118.00 – fees
Actual ROR = $118.00 / $1,369.00 = 8.1%

This position was closed 14 days early via an 90% of Max Gain Trade-Trigger. This was closed early to remove total dollar risk as suggested in the Market Sentiment section above.

SPY: 365p/345p  – Open 05/13/21 – Expires 06/30/21 – Max Gain = $138.00 – Open Price = $408.94
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.2%, Headroom=-10.6%, Max Loss=$1,862.00, ROC 7.4%, 48d Dev = $8.18
At Close: Prob. OTM=95.3%, Head Room=-13.4%, IV%=0.9%, ROR= 6.1%

Cost to open: $1.38 premium collected * 100 shares = $138.00
Cost to close: $0.25 premium paid * 100 shares = $25.00 (Closed Early)
Net Profit= $138.00 to open – $25.00 to close = $113.00 – fees
Actual ROR = $113.00 / $1,862.00 = 6.1%

This position was closed 30 days early via an 82% of Max Gain Trade-Trigger. This is just two 2 weeks after the position was opened.

I opened this position at the nadir of a market adjustment that quickly recovered.

IWM: 205p/195p  – Open 04/29/21 – Expires 06/04/21 – Max Gain = $71.00- Open Price = $227.79
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.8%, Headroom=-9.9%, Max Loss=$929.00, ROC 7.4%, 36d Dev = $4.11
At Close: Prob. OTM=99.6%, Head Room=-9.5%, IV%=7.5%, ROR= 7.6%

Cost to open: $.71 premium collected * 100 shares = $71.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (Expired Worthless)
Net Profit= $71.00 to open – $0.00 to close = $71.00 – fees
Actual ROR = $71.00 / $929.00 = 7.6%

The current value of IWM was lower than the cost basis. This asset has been moving sideways since February.

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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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