Can Schrodinger’s cat foretell if my Quantum Vertical Spreads (Vertical Bull Put Credit Spreads) will win? Let’s ask his cat.

Schrodinger’s Cat

Erwin Schrodinger

According to Schrodinger’s cat, if I open a new Vertical Bull Put Credit Spread today with an expiration date in four weeks, I can be assured that it will both win and lose. And if I have that assurance, then do I have a Quantum Vertical Spread? I’m confused – I’ll talk to the cat.

(Note: “Schrodinger’s Cat” is a nerdy thought experiment meant to help Quantum Newbs like me to understand what “Superpositions” are in the spooky world of Quantum Physics. In short, Superposition is that state between yes and no, between true and false, between heads and tails. It is the eerie realm of the ‘maybes.’)

This week is officially a “Trade Trudging” week. Meaning I’ve been distracted by other pursuits and don’t have any pithy Options Spreads observations, but I still need to define this week’s market sentiment (below) to consider new Spreads. I also need to document what Vertical Spreads I entered this week.

Trudging Through Quantum Physics for Vertical Spreads

This journal entry is a short musing over Erwin Schrodinger’s Quantum Wave equation and how I relate it to picking my Vertical Put Credit Spreads. (NERD ALERT! Just trying to spice up an otherwise bland commentary.)

Can I Use Quantum Physics to Pick My Spreads?

In short, I sort of already do.

Quantum Mechanics

As an analogy, Classical Physics says that I can look at the larger universe through the lens of a telescope (or microscope). But on the other hand, Quantum Physics says that I can only look at the smaller universe (subatomic) through the lens of mathematics. And that mathematics is nothing more than calculating probabilities.

Erwin Schrodinger was an Austrian physicist who was a pivotal contributor to Quantum Physics via his breakthrough Quantum Wave equation. He (and others) asserted that since no one can observe the quantum world to see how things work, we can only deduce how the quantum world works through probability.

Schrodinger’s Quantum Wave equation does give physicists a reasonable ability to deduce the workings of sub-atomic particles. And today’s engineers do use these results in real-world applications. For example, we use it to develop solid-state drives for computers, lasers, transistors, and MRIs. But just like Options Traders using the Black-Sholes equation to help deduce the probability of future Options prices, it is still a guessing game.

A Quantum Look at the Black-Sholes Model

The essence of Schrodinger’s Quantum Wave equation is to calculate probabilities on how quantum particles behave over time. And those behaviors that generate the highest probability are deduced to be what actually happens.

Likewise, the heart of the Black-Sholes equation is to calculate probabilities on the current price of Stock Options over time. And the higher the probability, the more likely I believe the Options will expire either ITM or OTM.

But both equations deal with a ton of uncertainties, and both can only give theoretical estimates. In the end – they are just educated guesses.

Damocles’ Quantum Thought

As a Quantum newb, I appear to get hung up on what I see as a philosophical flaw in Schrodinger’s wave function reasoning –

Because the quantum realm is not directly observable by humans, I understand that we cannot apply the time-tested math of Einstien’s Relativistic Physics. So reasonably, the best we can do is to deduce particle behavior through quantum probability.

But somewhere between promoting Schrodinger’s Wave Equation and the successful applications of the theory, the term “deduce” is surreptitiously replaced with “predict.” So, when there are the inevitable unexpected anomalous results from these complicated math equations, instead of assuming the math may be wanting, we try to interpret these weird effects with some real-world representation. Fortunately, these creative explanations make for some very surreal Sci-Fi-ish results.

Taking a Quantum Look

Ant Man to the Quantum Vertical Spreads realm

But if I could push the Pym Particle button on my Ant-Man suit to shrink down to be smaller than a quark (where the Quantum dimension is now observable by my human standards), will the Quantum domain become Relativistic? Could we then use Einstein’s Special Relativity theory to predict the behavior of particles more accurately than Quantum Wave probability?

Albert Einstien was a central developer of Quantum Physics, but he went to his grave believing that it was an incomplete theory. He always called it a “spooky action at a distance.” I think he was right.

If you cannot tell everyone what you have been doing,
your doing has been worthless.

– Erwin Schrodinger
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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 08/16/2021)

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.

Each of my five indicators will “vote” on a DEFCON (Damocles Options Trading Readiness Signal) level, exclusive to that indicator. Then, In the final sub-section “My sentiment for this coming week” below, I’ll compile the votes into a DEFCON level for the 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.

  • July’s Retail Sales Report due out Tuesday – expecting slowdown
  • Corpate America is warning about out-of-control inflation
  • New Zealand’s Central Bank expected to raise interest rates .25%-.5% this week
  • European Central Bank will announce plans to start tapering COVID stimulus buying Q4 this year
  • Consumer Sentiment took a big hit on the August preliminary numbers (see CSI below)
  • Fed’s to announce the start of tapering in this week’s meeting minutes
  • Delta varient is darkening our economic outlook

The pandemic stimulus spending by the Feds has ignited the mass return of the pre-pandemic consumer. But this explosion in spending has far outpaced the crippled manufacturing capabilities caused by the 2020 lockdown. As a result, inflation is now in record territory, forcing the Feds to move up their plans to start pulling back on their assets buying. This will result in a .25% to .5% interest rates increase by the end of this year and more next.

Exacerbating the fear of prolonging inflation is the $3.5 trillion spending bill being considered in Congress. Not labeled as a “stimulus,” but it will have the same effect by mostly putting more unearned money in an individual’s hands.

A block of House Dems has threatened not to vote on the $3.5T Federal Budget (framework now – not yet a budget bill) until after the $1.2T Infrastructure bill has passed. If successful, this will put significant pressure on the Progressive agenda buried in the $3.5T if they cannot hold the $1T Infrastructure Bill hostage.

Rising interest rates will take a toll on stock prices (BOO!). This will result in higher volatility and that means more premiums (YEAH!). But it will also lower the probabilities of my Vertical Bull Put Credit Spreads ending Out-of-the-Money (BOO!).

GTS votes a DEFCON 3

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. Since the intrinsic nature of the Stock Market is to move up, a VIX close to 15% or below will have an innate tendency to rise.

ThinkorSwim/CBOE Market Volatility Index - 08/15/2021
ThinkorSwim/CBOE Market Volatility Index – 08/15/2021

The 1-month Regression Channel for the VIX trajectory swung from bullish last week to bearish this week (bearish for the VIX is good).

The VIX ended last week at 15.45%, down from 16.2% the week before. And the 9-Day SMA fell below the 50-Day SMA, showing that the latest drop has some legs.

The VIXis still above 15%, so I cannot vote a DEFCON 5 for this section, but the direction is looking pretty good,

VIX votes a DEFCON 4

Put/Call Ratio:

Put Options are frequently used as protection 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.

ThinkorSwim/S&P 500 Put/Call Ratio - as of 08/15/21
ThinkorSwim/S&P 500 Put/Call Ratio – as of 08/15/21

The Put/Call Ratio continues to show the beginnings of fear as it oscillates around the 0.5 line. But in a sign of Market calming, the 9-Day SMA has dropped below the 50-Day, and the 50-Day-SMA is below the 0.5 line.

The Marketeers continue to show a moderate degree of indecision, as indicated in the increased amplitude of the Put/Call Ratio.

I can’t ignore the lowering of the 9-Day SMA and the decrease in amplitude, so I will begrudgingly vote for a DEFCON level 4.

Put/Call Ration votes a 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 Sentiment Index as of 08/15/2021

The CSI got shellacked this past week as we had a staggering loss of consumer confidence from the end of July. Whether it is inflation fears, COVID fears, trillions of dollars Federal Budget fears, or the Fed’s preparation of raising interest rates to cool down an overheated economy – the future has started to look economically bleak to most folks.

CSI votes a DEFCON 3

Market Indexes:

DOW (DJX) = 35,515 – Up 0.9% from 35,209 last week. (4 week deviation: 344 up from 262 last week)
S&P 500 (SPX) = 4,468 – Up 0.7% from 4,437 last week. (4 week deviation: 49.24 slightly up from 41.11 last 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.

ThinkorSwim/Daily S&P 500 Index - Four Months Trend (Updated 08/15/2021)
ThinkorSwim/Daily S&P 500 Index – Four Months Trend (Updated 08/15/2021)

Market Thrashing

4-Week Thrashing of DJX = +/- 344 points or 1.0% of the market’s volume is up slightly from 0.7% last week.
4-Week Thrashing of SPX = +/- 49.24 points or 1.1% of the market’s volume is up from 0.9% last week.
(The Market Thrashing is now above 1.0%. This might indicate the beginnings of indecision for the Marketeers.)

Just looking at the Market’s performance, the four-month trend is strongly bullish, the four-week trajectory is strongly bullish, and overall Market thrashing is rising. All of this signals a motivated market that may be starting to strain.

It appears the Marketeers are having a monthly tantrum that sends the Markets into adjustment territory. These drops appear when the Feds are close to reporting employment or inflation data. And if history is any predictor, then another tantrum may happen this week. So it may be advisable to wait until late-week before opening any new Vertical Spreads.

Market Index votes a DEFCON 4

My sentiment for this coming week:

Of the five indicators:

  • The GTS suggests that there are some sustainable issues on the horizon – BOO!
  • The VIX improved but remains above 15% – YAWN!
  • The P/C Ratio shows a reaction that may continue to spill over to the comming weeks – BOO!
  • The CSI shows a consumer base not excited about our economic future – BOO!
  • The Market Movement continue to defiantly inch bullish – YEAH!

There is a strong consensus toward the “BOOs” this week. But, I have a slightly positive outlook that the BOOS will not last for eight weeks and will not be “THAT” severe. But in case, I may want to wait towards the end of the week (after the Retail Report comes out) before opening new positions.

Trading Readiness Level for this week

DEFCON = 3

This week, I will focus on:

This week begins with a bleaker outlook (barely) than last week, but still at a DEFCON 3 level. So I’m still recommending one 20-25 Strike-Width Spread. But if the week improves, I’m may change my suggestion to two 15 Strike-Width Spreads for more premium. but because of the GTS, I will suggest staying deep at +85% P-OTM.

  • One 25 (or two 15 Strike-Wide if outlook improves) Vertical Put Spreads < $3K risk) – as the Markets see fit
  • Spread term of 8-weeks or less
  • Probability of OTM > 85%

Profit and Loss Statement

(As of 08/20/2021)

Balance Sheet

Year
2021
Month
July
Week
#33
Beginning Account Balance$16,000.00$18,808.78$19,044.70
Deposits (Div. & Int.)$0.97$0.00$0.00
Withdraws (paycheck)-$2,100.00-$0.00-$0.00
Premiums on Open$5,607.01$381.00$133.00
Premiums on Close-$380.00-$8.00-$0.00
Fees Paid (total)-$83.28-$5.10-$1.02
Ending Account Balance$19,176.68$19,176.68$19,176.68
Total Gain/Loss$3,176.68$235.92$131.98
ROR2.0%0.7%
ROC19.9%

Progress Graph

YOD Vertical Options Spreads Running P&L – As of 08/13/21

(Note1: the negative weekly results for weeks 4, 8, 12, 17, 21, 25, and 30 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
Account
SPY
(Fictional)
Initial Investment
(As of Jan 4, 2021)
$16,000
(Cash)
$16,000
(43.39 shares @ $368.55)
Funds Added$5,740.98
(Premiums)
0.45 shares
(Dividends Reinvested)
Funds Removed-$464.30
(Early Close & Fees)
$0
(Fractional Shares Sold)
Ending Balance$21,276.68
(Cash)
$19,405.31
(43.83 shares * $442.72 CV)
ROI+33.0%+21.3%
As of 8/20/2021

Schedule for this Week

Goals for this week: (08/16/2021 – 08/20/2021) (Week #33)

  • 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: Oct 8 (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, if 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.

This Week’s Trade Activity

(As of 08/20/2021)

Spread Count Summary:

Year
2021
Month
Aug
Week
#33
Vertical Bull Put Credit Spread5841
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Margin Interest100
Total5941

Current Dollars at Risk:

Year
2021
Month
Aug
Week
#33
Vertical Bull Put Credit Spread$12,662.$6,119.$2,367.
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$12,662.$6,119.$2,367.
Max Risk Allowed$16,000.00$12,000$0.

Vertical Spreads Opened This Week

(08/16/2021 – 08/20/2021)

SPY: 395p/370p  – Open 08/19/21 – Expires 10/01/21 – Max Gain = $133.00 – Open Price = $2,367
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85.4%, Headroom=-10.1%, Max Loss=$2,367, AROR=47.3%

Vertical Bull Put Credit Spread – SPY – Short: 395 Put – Long: 370 Put
Vertical Bull Put Credit Spread – SPY – Short: 395 Put – Long: 370 Put

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($12,662)
  • Max dollar at risk this week < $3,000? Yes ($2,367)
  • 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? No (see chart)
  • Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.3 down from 1.7)
  • Current price above 9-Day SMA?: No (see chart)
  • 9-Day SMA above 50-Day SMA?: Yes (see chart)
  • Short-strike < 1 SD below the current price? Yes (1SD=$404.48)
  • Short-strikes Prob-OTM > 85%? Yes (85.4%)
  • 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)
  • Strike Width minimum (>= 15)? Yes (25 strike width)

I open this position Thursday (8/19) as my only Spread for this week. The Markets have been taking a pounding the past three days (S&P 500 has dropped 1.5% since Monday). So I decided to only consider one Wide-Strike spread for this week.

For this Spread to go ITM, the S&P will have to fall another 10% over the next six weeks – which it could. But this 25-Wide Spread has a greater loss resistance than a narrower 15-Wide.

Vertical Spreads Currently Cooking

(As of 08/20/2021)

SPY: 405p/390p  – Open 08/10/21 – Expires 09/30/21 – Max Gain = $96.00 – Open Price = $443.20
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.3%, Headroom=-8.6%, Max Loss=$1,404, AROR=48.4%
Now: Prob. OTM=83.7%, Headroom=-8.4%

SPY: 415p/390p  – Open 08/12/21 – Expires 09/24/21 – Max Gain = $70.00 – Open Price = $442.89
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.6%, Headroom=-7.4%, Max Loss=$930, AROR=63.0%
Now: Prob. OTM=82.8%, Headroom=-7.3%

SPY: 400p/380p  – Open 07/29/21 – Expires 09/17/21 – Max Gain = $1.11 – Open Price = $441.40
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85.7%, Headroom=-9.4%, Max Loss=$1,889, AROR=42.5%
Now: Prob. OTM=89.6%, Headroom=-9.6%

QQQ: 340p/325p  – Open 08/05/21 – Expires 09/10/21 – Max Gain = $82.00 – Open Price = $368.11
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85.1%, Headroom=-7.6%, Max Loss=$1,418, AROR=59.6%
Now: Prob. OTM=87.7%, Headroom=7.4%

QQQ: 330p/315p  – Open 07/15/21 – Expires 08/27/21 – Max Gain = $102.00 – Open Price = $362.23
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.7%, Headroom=-8.9%, Max Loss=$1,398, AROR =61.3%
Now: Prob. OTM=97.4%, Headroom=-10.2%

SPY: 410p/395p  – Open 07/13/21 – Expires 08/27/21 – Max Gain = $109.00 – Open Price = $437.47
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.2%, Headroom=-6.3%, Max Loss=$1,391, AROR=63.0%
Now: Prob. OTM=95.7%, Headroom=-7.2%

IWM: 205p/185p  – Open 07/09/21 – Expires 08/27/21 – Max Gain = $135.00 – Open Price = $225.54
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.2%, Headroom=-9.1%, Max Loss=$1,865.00, AROR =53.5%
Now: Prob. OTM=80.5%, Headroom=-3.8%

Vertical Spreads Closed This Week

(As of 08/20/2021)

DIA: 325p/320p  – Open 07/07/21 – Expires 08/20/21 – Max Gain = $41.00 – Open Price = $346.97
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.5%, Headroom=-6.3%, Max Loss=$918.00, AROR =72.3%
At Close: Prob. OTM=99.9%, Head Room=-6.9%, AROR= 72.3%

Cost to open: $0.41 premium collected * 100 shares = $41.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expire worthlessly)
Net Profit= $41.00 to open – $0.00 to close – $1.00 fees = $40.00
AROR= ($40.00 / 44 days in play) * 365 / $459 = 72.3%

IWM: 205p/195p  – Open 07/02/21 – Expires 08/20/21 – Max Gain = $56.00 – Open Price = $229.36
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.2%, Headroom=-10.6%, Max Loss=$944, AROR =43.4%
At Close: Prob. OTM=97.5%, Head Room=-3.7%, AROR= 43.4%

Cost to open: $0.56 premium collected * 100 shares = $56.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expire worthlessly)
Net Profit= $56.00 to open – $0.00 to close – $1.00 fees = $55.00
AROR= ($55.00 / 49 days in play) * 365 / $944.00 = 43.4%

(Note: the underlying asset value for this spread never rose above the original cost basis. Here is an example of winning, even thought the market went down.)

DIA: 325p/310p  – Open 07/07/21 – Expires 08/20/21 – Max Gain = $82.00 – Open Price = $344.22
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.0%, Headroom=-7.0%, Max Loss=$930, AROR =53.1%, 52d Dev = $3.20
At Close: Prob. OTM=99.8%, Head Room=-7.2%, AROR= 47.4%

Cost to open: $0.82 premium collected * 100 shares = $82.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expire worthlessly)
Net Profit= $82.00 to open – $0.00 to close – $1.00 fees = $81.00
AROR= ($81.00 / 44 days in play) * 365 / $1,418 = 47.4%

SPY: 400p/390p  – Open 06/29/21 – Expires 08/20/21 – Max Gain = $74.00 – Open Price = $428.20
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.9%, Headroom=-6.6%, Max Loss=$926, AROR =55.3%, 52d Dev = $5.00
At Close: Prob. OTM=99.9%, Head Room=-9.5%, AROR= 55.3%

Cost to open: $0.74 premium collected * 100 shares = $74.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expire worthlessly)
Net Profit= $74.00 to open – $0.00 to close – $1.00 fees = $73.00
AROR= ($73.00 / 52 days in play) * 365 / $926= 55.3%

Conclusion

Can Options Trading be considered a Home Business? Can I make money at home by selling Vertical Bull Put Credit Options Spreads? These are questions that I am trying to answer for myself.

Three years ago, I set out on a task to see if I can make a retirement income from home by trading Stock Options. I began with NO knowledge of Options mechanics and only $8,000 to risk. And because I learn best when I write down, I have documented every step of the way (every bonehead mistake, process epiphanies, interconnecting events, externalities, and so on).

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.”