Step in time – Step in Time! Exploring the supposition that I can maximize my Vertical Bull Put Credit Spreads’ income by leading the premium’s target price as I open new positions.

Kindly
do not attempt to
cloud the issue
with facts!

Mr. George Banks (Movie: Mary Poppins)

Commentary

My business plan assumes I will enter into a new Vertical Bull Put Credit Spread(s) each week – unless the Markets are dire. To do so, a lot of effort goes into reading the weeks’ financial news and puzzling out the week’s Market Sentiment (below). Afterward, I will stage four plausible Vertical Spread possibilities in my watchlist.

Then sometime during the week, after I observe/confirm current market movements, I’ll decide which position to open and enter an order in my ThinkorSwim trading platform. But before I submit the order, I have one more decision to make – do I lead the premium price up a couple of pennies, or do I enter the order at the Mark price for immediate execution?

This week, I want to document my general observation (pure speculation) of how the current premium mark price for Options contracts can lag behind the underlying asset price’s fluid changes. I want to see if I can take advantage of this lag on deciding whether I can lead the target premium price to capture a few extra dollars.

Markets Always Move

Step in time, step in time,
come on, mateys, step in time!

The Markets are always moving. On the micro-scale, the ebb and flow of the asset’s price gyration from one second to the next will have little relevance to a Vertical Spread position that will last 45 days. But it may be a clue on when to step into the new position. Or where might be the premium prices be in the next hour or two.

Asset Movement vs. Premium Mark Price

Calculating the current mark price of a spread requires a lot of hocus-pocus math that must first pass through many sequential steps. Specifically, the Black-Scholes-Merton model is used in pricing Option contracts. So the premium prices I see on the Option Chain are set only when the Market-Makers make it so. And that only happens after the BSM model has crunched all the numbers, and that happens after the Marketeers interject their volatility opinions by how they buy/sell Options orders, and that happens after underlying assets records a price change and all that is a function of how much time has passed since the last price-change cycle. Step-In-Time!

So from my perspective, I can watch the underlying asset price (say QQQ) slowly tick up or down in price, but the corresponding Options contract will not change its premium mark price for several seconds to minutes.

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Trading the VIX

The VIX (the CBOE Market Volatility Index) is a good indicator of the overall market’s dynamics. In the post “Guardian of the VIX,” I explained that the VIX would not show which way the Markets will move but more of how fast it will get there. There is no mathematical link between the market direction and the VIX, but there is an observable correlation. The quicker the VIX rises, the faster the Broader Markets fall.

Before I submit a Vertical Spread order, I should first check the current VIX:

  • If the VIX is quickly falling, then the broader markets will tend to rise. This may be a clue to execute my order at the current premium mark before the premium price falls further.

  • If the VIX is quickly rising, then the broader market will tend to fall. If this is the case, then I might lead the premium mark price to collect a few extra dollars.

  • If the VIX is near or below 15%, the short-term trajectory could change quickly.
Leading the Premium via VIX

But my underlying asset may not be following this tendency.

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One Hour Trajectory of Underlying Asset

More relevant to my order decision will the one-hour trajectory of the underlying asset for my prospective Vertical Bull Put Credit Spread.

As the minutes tick by, if the underlying asset price of my staged Spread is inching down, then eventually, the premium mark price for Options contracts in my Spread will tick up. This increase will happen as the asset price moves closer to my Spread’s Short-Strike.

Conversely, as the asset price moves away from my staged Spread’s Short-Strike, the premium mark price should drop.

Many other events will move the mark price one way or another, but this is just my observation.

DIA Example

If I decided to enter into a new DIA Vertical Bull Put Credit Spread, I should first observe the one-hour underlying asset price movement.

  • If the ETF/DIA price is falling, I could reasonably assume that the lagging Option Contracts mark price will increase in price within the next minute or so.
  • If the VIX is near or below 15%, I could also assume the asset’s trajectory would continue in the long term.

I would then add a few pennies to the limit price of the spread order in ThinkorSwim in hopes to meet the Spread’s mark price when it catches up. This is “Leading the Premiums.”

IWM Example

If I decided to enter into a new IWM Vertical Bull Put Credit Spread, I should first observe the one-hour underlying asset price movement.

  • If the price of ETF/IWM is rising, I could reasonably assume that the Options Contracts mark price will decrease in price.

  • If the VIX is near or below 15%, it could also assume the asset’s trajectory would continue in the long term.
Leading the Premium - IWM

With this situation, I can assume the Spread’s premium mark price will drop as the underlying asset moves away from the Short-Strike. At this point, I may want to enter a limit order at the Spread’s current mark price for immediate execution, so I don’t lose a few dollars.

A Caveat To Take Note

  1. Looking at a one-hour trajectory of any asset immediately after the Market opens in the morning can give you a misleading signal of the short-term trajectory. Every asset’s prices will open slightly eschewed by the shenanigan of the overnight traders.
  1. This topic is mostly speculation. And it is also primarily a nuance. The effort expended to make a dollar or three may not be worth it.
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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):

Geopolitical events can abruptly change the dynamics of the current Market movements. 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)
  • Feds tiptoe into Tapering
  • Rising interest/inflation rates will be a continued background pressure for some time
  • May’s Employment Report was another disappointment, but employment/unemployment numbers are still improving
  • The G7’s agreement to the 15% Corporate tax
  • Ransomware criminals are getting a terrorist classification
  • Critical Race Theory (CRT) is getting on the nerves of the majority of us regular folks

The Fed meetings are now broaching the topic of rewinding stimulus policies used during the COVID lockdowns. Quantitative easing (Feds are currently buying about $120 billion-ish of Corporate Bonds each month) helped to keep interest rates down during the pandemic, but now they need to start tapering back. As the Feds start to back off from bond-buying, long-term interest rates will rise, and this will start massive portfolio rebalancing from stocks to interest institutions.

Rising interest rates are bad for the Stock Markets because it creates more competition for the available cash from other interest-bearing accounts. But while this is not good for my all-stock portfolio, it is good for the local economies. Higher interest rates mean more people are socking away cash in local bonds and banks (Savings/Money Markets/CDs) and not buying the more risky stocks. More money in the local banks means more money available to loan to new homeowners, car buyers, upgraders, and fledgling small businesses.

This week’s GTS suggests that stocks will continue to slow from the aggressive growth of the past four years. I foresee my Spread’s underlying assets will slow its growth volatility (smaller premiums to collect) and continue to mostly move sideways – depending on how the Feds slide into tapering over this summer.

I will initially set the DEFCON (Damocles Options Trading Readiness Signal) to 4, but will keep a close eye on the June Fed meeting.

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 - 06/06/2021
CBOE Market Volatility Index – 06/06/2021

The 1-month Regression Channel for the VIX readjusted its trajectory back to bullish over the past 30 days. With the Biden Administration’s economic policy still not realized (still negotiating) the future of the Marketeer’s mental health remains in question.

The VIX ended last week at 16.4%, basically the same place when the week stated (16.7%). But the 9-Day SMA is now below the 50-Day SMA, showing that the VIX storm continues to calm.

For the last two-months, the VIX has been flirting with the 15% line, we are still above it.

Note: Those events that are shaking the Geopolitical tree are apparently not sever enough the make the Marketeers rethink their portfolios.

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 06/06/21
S&P 500 Put/Call Ratio – as of 06/06/21

The Put/Call Ratio for the S&P 500 continues its steady march sideways. The 9-Day SMA has finally fallen below the .05 line for the first time since April. So even though we are getting some wild kneejerk reactions from the Marketeers, the trend is lowering. Even the 50-Day SMA has started to decline.

(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.)

For the past 30 days, the Put/Cal Ratio has been jerkingly declined. This is agreeing with the VIX.

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

The CSI has not changed since last week. But last week’s 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 could be showing that the general consumers out there are just not yet bought into Biden’s economic vision. This is also supporting the disappointment of the May’s Employment Report.

Maintaining DEFCON = 4

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Market Indexes:

DOW (DJX) = 34,756 – up 0.7% from 34,529 last week. (4 week deviation: 299 up from 280 last week)
S&P 500 (SPX) = 4,230 – up 0.6% from 4,204 last week. (4 week deviation: 41.64 up from 37.73 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 06/06/2021)
Daily S&P 500 Index – Four Months Trend (Updated 06/06/2021)

Market Thrashing

4-Week Thrashing of DJX = +/- 299 points or 0.9% of the market’s volume is a little higher from 0.8 % last week.
4-Week Thrashing of SPX = +/- 41.64 points or 1.0% of the market’s volume is flat from 0.9% 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 slightly bullish, 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 near-term jitteriness is subsiding. 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.

Maintain DEFCON = 4

My sentiment for this coming week:

Of the five indicators:

  • the GTS is listing some sustainable angst but should not affect me this cycle – Shrug
  • the VIX righting itself – YEAH
  • the P/C Ratio shows less fear of a big market pullback – YEAH
  • the CSI suggest stagnation for the current economy – Shrug
  • the Market Movement inching bullish – YEAH

I believe the final Federal Budget and Tapering will set the market’s direction for the next two years. Until the budge bill is sent to a willing Biden’s desk, the Markets will probably plod slowly sideways.

Trading Readiness Level for this week

DEFCON = 4

This week, I will focus on:

This is the first week in a while that I feel comfortable with my guestimated market direction.

  • 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 > 80%
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Profit and Loss Statement

(As of 06/11/2021)

Balance Sheet

Year
2021
Month
June
Week
#23
Beginning Account Balance$16,000.00$17,811.04$17,953.96
Deposits (Div. & Int.)$0.65$0.00$0.00
Withdraws (paycheck)-$1,500.00-$0.00-$0.00
Premiums on Open$3988.01$386.00$201.00
Premiums on Close-$280.00-$38.00-$0.00
Fees Paid (total)-$55.74-$6.12-$2.04
Ending Account Balance$18,152.92$18,152.92$18,152.92
Total Gain/Loss$2,152.92$341.88$198.96
ROR1.9%1.1%
ROC13.5%

Progress Graph

Running P&L - As of 06/10/21
Running P&L – As of 06/10/21

(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$3,988.66
(Premiums)
0.31 shares
(Dividends Reinvested)
Funds Removed-$333.70
(Early Close & Fees)
$0
(Fractional Shares Sold)
Ending Balance$19,652.92
(Cash)
$18,475.61
(43.70 shares * $422.83 CV)
ROI+22.8%+15.5%
As of 6/04/2021
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Schedule for this Week

Goals for this week: (06/07/2021 – 06/11/2021) (Week #23)

  • 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 30 (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 06/11/2021)

Spread Count Summary:

Year
2021
Month
June
Week
#23
Vertical Bull Put Credit Spread3842
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Margin Interest100
Total3942

Current Dollars at Risk:

Year
2021
Month
June
Week
#2
3
Vertical Bull Put Credit Spread$12,075.$5,114.$2,299.
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$12,075.$5,114.$2,299.
Max Risk Allowed$16,000.00$8,000$2,500.
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New Positions Opened This Week

(06/07/2021 – 06/11/2021)

SPY: 400p/390p  – Open 06/10/21 – Expires 07/23/21 – Max Gain = $85.00 – Open Price = $423.75
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=78.8%, Headroom=-5.4%, Max Loss=$915, ROC 8.3%, 43d Dev = $2.93

Vertical Bull Put Credit Spread - SPY- Short: 400 Put - Long: 390 Put
Vertical Bull Put Credit Spread – SPY- Short: 400 Put – Long: 390 Put

QQQ: 310p/295p  – Open 06/09/21 – Expires 07/23/21 – Max Gain = $116.00 – Open Price = $337.24
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.9%, Headroom=-8.1%, Max Loss=$1,384, ROC 8.3%, 44d Dev = $6.17

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($5,114)
  • Max dollar at risk this week < $2,500? Yes ($2,299)
  • Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (43 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 (1.4 up from 0.8)
  • 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=$398.53)
  • Short-strikes Prob-OTM > 80%? No (78.8%)
  • 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 (10 strike width)
  • Set a GTC Conditional Trailing Stop Limit (CTSL): (Not Set)

I violated my own rule by opening this position within the first hour after market opening. The underlying asset price was advancing making the premiums available smaller. When I entered the order, the Prob-OTM was near 81%, and the 1-SD price was $401. I lead the mark price by .01 and then left for a meeting.

When I returned and discovered this new SPY position was opened, the asset price fell along with the stats I need to record. So the red rules violations shown above was record about an hour after opening.

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 ($9,660)
  • Max dollar at risk this week < $2,500? Yes ($1,384)
  • 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)? Yes (1.2 down 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=$316.69)
  • Short-strikes Prob-OTM > 80%? Yes (81.9%)
  • 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)

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.

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Trades Currently Cooking

(As of 06/11/2021)

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
Now: Prob. OTM=90.2%, Headroom=-11.7%, IV%=4.8%

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
Now: Prob. OTM=90.2%, Headroom=-11.7%, IV%=4.8%

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%

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
Now: Prob. OTM=90.5%, Headroom=-8.8%, IV%=4.0%

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%

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 06/11/2021)

No positions were closed this week.

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Conclusion

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Disclaimer

Even though I have tried to make it clear that this blog is my personal trading journal, 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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