This “Trade Trudging” week, I want to briefly consider the Market Maker’s influence over my Vertical Bull Put Credit Spreads.

Market Maker

Market Maker for the Land of Oz
The Wizard of Oz
(Frank Morgan)

Most traders never consider the role of the Market Makers – and for good reasons. They are mostly invisible yet all-powerful and all-necessary for retail traders like me. The Market Makers are the true wizards of the markets – granting wishes to buy and sell on demand.

Market Makers are the ones that actually execute/fill requested trades by matching a buyer with a seller. Their responsibility is to maintain liquidity within the markets by timely fulfilling all trade requests. So I don’t have to Google “who wants to buy my 100 shares of AAPL? Please email me at …” All I have to do is to make my request know to my Market Maker, and he does all the rest.

What Is A Market Maker?

Market makers are either an individual, a firm or a computer system.

Brokerage Market Makers will facilitate trade orders typically from their inventory. For example, I can call my broker and request that he sells 100 shares of Apple stocks from my account. He will either buy my shares at the current market rate and add them to his inventory or locate a willing buyer. And for his troubles, he will charge me $49.

Institutional Market Makers are specialists working for central banks or firms like Goldman Sachs, JPMorgan, and Morgan Stanley. They typically buy/sell tens of thousands to millions of shares for stock. These professionals can “work” the markets to ensure the best trade values for their clientele.

ECN Market Makers are relatively new to the Merry Old Land of Oz by replacing the middleman with a computer system. An Electronic Communication Network (ECN) is a computerized system that automatically matches buy and sell orders for securities in the market. ECN trading is beneficial when investors in different geographic areas wish to complete a secure transaction without using a third party.

Human Market Makers vs. ECNs

Market Makers are the Gatekeepers
The Gatekeeper
(Frank Morgan)

Electronic communications networks (ECNs) are computer systems performing the same role as Market Makers. They are a decentralized platform for matching buyers and sellers without going through a third party. As a result, they are the primary competitors to their human counterparts.

ECNs can match and execute my Vertical Spread orders with willing buyers at very high speeds – milliseconds. This amazing function gives me the needed liquidity to enter or exit a position when I desire.

ECN systems are widely used via online trading. When I look through the Option Chain within my ThinkorSwim trading platform, I am actually looking at data received from an ECN. When I submit an order to sell a Vertical Spread, the ECNs locates the price that I want and execute the order.

ECN Market Makers

  • Near real-time access to the current Stocks and Options prices
  • Access to alternative exchanges
  • Usually no Brokerage fees (there is a small transaction fee)
  • Buyers and sellers ultimately determine prices

Human Market Makers

  • Requires a much longer time to execute
  • Has special skills to “work” the markets for a better price
  • Brokerage fees can be high
  • Market Makers makes their income from the order spread

Conclusion

The path taken to execute my trade request is complicated and depends on how the Market Markers (human or ECNs) match orders. But regardless of being human or a computer system, making rapid and high-volume trading is essential to keeping the market fluid.

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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 06/13/2021)

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 be breaking news, political machinations, Federal Reserve musings, or even Twitter Trends. They are events that can abruptly change the dynamics of the current markets. 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.

  • Federal Reserve June policy declaration will be made this week
  • Leisure traveling picking up
  • Biden’s $6 Trillion Budget
  • Feds tiptoe into Tapering
  • Rising interest/inflation rates will be a continued background pressure for some time
  • May’s Consumer price spiked 5% over last year
  • G7 piling on China
  • Cyber currency gaining legitimacy

Thumbing the nose to the pandemic, over 2 million Americans trudged through the nation’s airport on Friday, 6/11. This is the first time in fifteen months that the daily screening surpassed 2 million. And where millions are flying, millions more are driving. And when millions are not isolated at home, there are millions of hotel rooms being rented and millions of hamburgers being consumed. Not to mention millions of souvenirs being sold and swimsuits being bought. Americans on the move is a great boon for an economy that thrives on… moving.

But the resurgent of leisure travel will put enormous pressure on the demand for travel-related consumables. With a year of Americans sitting on their hands and our production capabilities shuttered, there is not as much available as supply. This dearth will cause the cost of those consumables to increase. And this increase (aka inflation) will put pressure on the financial institution to raise Interest Rates. And rising Interest Rates are going to put pressure on stocks.

If 2020 was the lost year (for many things but in this context, for dismantling a fine-tuned national production capacity), then 2021 will be the year of rebuilding JIT (Just-In-Time) to match what we had before. Therefore, this year will necessarily be burden with high inflation and high interest while rebalancing out predictable consumption with predictable manufacturing.

This week’s GTS suggests that stocks will continue to slow from the aggressive growth of the past four years. As a result, I foresee my Spread’s underlying assets will slow its growth volatility (smaller premiums to collect) and continue to mostly move positive to 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 - 06/13/2021
CBOE Market Volatility Index – 06/13/2021

The 1-month Regression Channel for the VIX continued in the same trajectory as last week – even with the gyration from the previous week.

The VIX ended last week at 15.65%, down from 16.7% the week before.
The 9-Day SMA is below the 50-Day SMA, and the current VIX is below the 9-Day SMA, and the current VIX is flirting with the elusive 15% line.

These values suggest the Marketeers are not too worried about the current GTS. Even a sideways market is good at times.

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 06/13/21
S&P 500 Put/Call Ratio – as of 06/13/21

The Put/Call Ratio for the S&P 500 continues its steady march mostly sideways. The 9-Day SMA continues to stay below the .05 line for two weeks in a row. And for the past 30 days, the Put/Call Ratio has been jerkingly declining. This is agreeing with the VIX that there is not a perception of market upheaval in the future. (But give it time…)

(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.)

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.

This week’s CSI shows the preliminary numbers for June. It is a markable improvement over last weeks and suggests some good news for Biden’s policies. This is hard evidence that America’s economy is coming back.

Maintaining DEFCON = 4

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Market Indexes:

DOW (DJX) = 34,480 – down 0.8% from 34,756 last week. (4 week deviation: 210 down from 299 last week)
S&P 500 (SPX) = 4,247 – down 0.4% from 4,230 last week. (4 week deviation: 34.64 down from 41.64 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 06/13/2021)
Daily S&P 500 Index – Four Months Trend (Updated 06/13/2021)

Market Thrashing

4-Week Thrashing of DJX = +/- 210 points or 0.6% of the market’s volume is down from 0.9 % last week.
4-Week Thrashing of SPX = +/- 34.64 points or 0.8% of the market’s volume is down from 1.0% last week.

This week’s CSI shows the Indexes thrashing well below 1%, 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 thrashing has dropped considerably, with the trajectory moving mainly sideways. And, the 4-week and 4-month trajectory confirm that we are still bullish on these indexes.

Maintain DEFCON = 4

My sentiment for this coming week:

Of the five indicators:

  • the GTS is listing some sustainable concerns about rising inflation and interests
    • the Fed’s June report (info on tappering) can spook the markets – BOO
    • Descrationary travel up – YEAH
  • the VIX is confirming a unified market perception amongst the Marketeers – YEAH
  • the P/C Ratio shows a minor concern to the increasing Interest Rates but less fear of a big market pullback – YEAH
  • the CSI shows a consumer base getting excited about our economic future – YEAH
  • 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 positive or 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 guesstimated market direction.

With falling volatility comes falling premiums. So, this week I’m going to increase my weekly dollar risk from $3,000 to allow me to open two 15 Strike-Wide Vertical Bull Put Credit Spreads.

  • One or two 15 Strike-Wide spreads this week totaling < $3.0K 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 06/18/2021)

Balance Sheet

Year
2021
Month
June
Week
#24
Beginning Account Balance$16,000.00$17,811.04$18,152.92
Deposits (Div. & Int.)$0.65$0.00$0.00
Withdraws (paycheck)-$1,500.00-$0.00-$0.00
Premiums on Open$4,171.01$569.00$183.00
Premiums on Close-$280.00-$38.00-$0.00
Fees Paid (total)-$57.79-$8.17-$2.05
Ending Account Balance$18,333.87$18,333.87$18,333.87
Total Gain/Loss$2,333.87$522.83$180.95
ROR2.9%1.0%
ROC14.6%

Progress Graph

Running P&L – As of 06/18/21

(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$4,171.66
(Premiums)
0.31 shares
(Dividends Reinvested)
Funds Removed-$337.79
(Early Close & Fees)
$0
(Fractional Shares Sold)
Ending Balance$19,833.87
(Cash)
$18,205.14
(43.70 shares * $416.64 CV)
ROI+24.0%+13.8%
As of 6/18/2021
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Schedule for this Week

Goals for this week: (06/14/2021 – 06/18/2021) (Week #24)

  • 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: Aug 06 (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 06/18/2021)

Spread Count Summary:

Year
2021
Month
June
Week
#24
Vertical Bull Put Credit Spread4062
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Margin Interest100
Total4162

Current Dollars at Risk:

Year
2021
Month
June
Week
#24
Vertical Bull Put Credit Spread$12,607.$7,931.$2,817.
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$12,607.$7,931.$2,817.
Max Risk Allowed$16,000.00$8,000$3,000.
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Vertical Spreads Opened This Week

(06/14/2021 – 06/18/2021)

SPY: 375p/360p  – Open 06/18/21 – Expires 07/30/21 – Max Gain = $70.00 – Open Price = $416.54
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=86.9%, Headroom=-10.0%, Max Loss=$1,430, ROC 4.8%, 42d Dev = $4.62

 Vertical Bull Put Credit Spread - SPY - Short: 375 Put - Long: 360 Put
Vertical Bull Put Credit Spread – SPY – Short: 375 Put – Long: 360 Put

QQQ: 315p/300p  – Open 06/15/21 – Expires 07/30/21 – Max Gain = $113.00 – Open Price = $342.62
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.9%, Headroom=-8.0%, Max Loss=$1,387, ROC 8.1%, 44d Dev = $6.54

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($12,607)
  • Max dollar at risk this week < $3,000? Yes ($2,817)
  • 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? No (see chart)
  • Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.0 flat from 1.0)
  • Current price above 9-Day SMA?: No (see chart)
  • 9-Day SMA above 50-Day SMA?: No (see chart)
  • Short-strike < 1 SD below the current price? Yes (1SD=$390.05)
  • Short-strikes Prob-OTM > 80%? Yes (86.9%)
  • 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)

I opened this position Friday morning after a brutal week with the markets. Most all indexes fell below the support line of the trend channel, except SPY (but it’s getting close).

With the market’s near future in doubt, I adjust the Entry Rules to set the “Head Room” for the Short strike to be above 10%. Thus SPY will need to drop to a Correction from this point before the Short goes ITM.

Vertical Bull Put Credit Spread - QQQ - Short: 315 Put - Long: 300 Put
Vertical Bull Put Credit Spread – QQQ – Short: 315 Put – Long: 300 Put

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($11,177)
  • Max dollar at risk this week < $3,000? Yes ($1,387)
  • 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 (1.5 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=$320.23)
  • 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)

Most market movement for the past week has been mostly lethargic. There’s a collective breath holding to see what the Fed’s Meeting (tomorrow) brings.

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Vertical Spreads Currently Cooking

(As of 06/18/2021)

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
Now: Prob. OTM=73.4%, Headroom=-3.9%, IV%=13.2%

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
Now: Prob. OTM=87.3%, Headroom=-9.8%, IV%= 13.2%

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=93.0%, Headroom=-12.8%, IV%=12.9%

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=69.9%, Headroom=-7.5%, 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=83.7%, Headroom=-6.3%, IV%=14.4%

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=96.7%, Headroom=-14.0%, IV%=13.9%

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=88.2%, Headroom=-5.4%, IV%=4.0%

Vertical Spreads Closed This Week

(As of 06/18/2021)

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
At Close: Prob. OTM=97.2%, Head Room=-2.5%, IV%=20.0%, ROR= 8.8%

Cost to open: $0.81 premium collected * 100 shares = $81.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (Expired Worthless)
Net Profit= $81.00 to open – $0.00 to close = $81.00 – fees
Actual ROR = $81.00 / $919.00 = 8.8%

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=97.5%, Headroom=-11.5%, IV%<1.0%
At Close: Prob. OTM=99.3%, Head Room=-8.3%, IV%=15.0%, ROR= 9.8%

Cost to open: $1.34 premium collected * 100 shares = $134.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (Expired Worthless)
Net Profit= $134.00 to open – $0.00 to close = $134.00 – fees
Actual ROR = $134.00 / $1,366.00 = 9.8%

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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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