Trade Trudging Week on the Beach. Everyone needs time off!

Trade Trudging in the Sand

Out of the Office

We all need a week at the beach. Ours was this week.

I did complete this week’s Market Sentiment below and sold a couple of Spreads – see below.

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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 08/23/2021)

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.

  • The botched Afghan pullout is doing its job – distracting Marketeers from distressing over a slowing economy
  • Federal Reserve policymakers to virtually meet at the end of this week – think tapering to start in September
  • Tech stocks are nearing buy calls again.
  • Pfizer’s COVID vaccine to get full FDA approval this week
  • Expect loss of recovery momentum

The pullout debacle in Afghanistan has dominated the news cycle this past week. And this week’s horrific Kabul bombing is reminiscent of the 2012 Benghazi attack. So I am hard-pressed to find something economic new to add to the list above.

There is functionally no change in this week’s GTS from last week, except now last week’s is old news. And like most news items, it goes from OMG to yawn.

I don’t foresee too much in a knee-jerk reaction this week unless the Federal Reserve boy says something to cause a tantrum.

GTS votes a DEFCON 4

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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 - 08/22/2021
ThinkorSwim/CBOE Market Volatility Index – 08/22/2021

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

The VIX ended last week at 14.35%, down from 15.45% the week before, but only after it shot up to nearly 22%. The 9-Day SMA rose above the 50-Day SMA, and the 50-Day SMA appears to be leveling off.

The VIX bump this past week coincides with bumps about the same time each month for the past three months.

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

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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 08/22/21
ThinkorSwim/S&P 500 Put/Call Ratio – as of 08/22/21

The Put/Call Ratio stayed mainly in the fear zone over the past two weeks. The jump during last week seems timed with the Jobs Report, which shows a corresponding jump around the same time during the previous four months.

The Put/Call Ratio ended Friday at .59, well above the 9-Day SMA. In addition, the 9-Day SMA is above the 50-Day, and the 50-Day-SMA is above the 0.5 line. Thus, all short-term trajectories are indicating a continuation towards fear.

There are three other peaks at about the same time of the month over the previous three months. If history is any indicator, then this would suggest a reversal is due soon.

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

But I cannot ignore that the ratio is still well below the insidious 1.0 line (1 Put to 1 Call). Being below 1.0 suggests that even though we have some bad days, we are generally in good shape.

Put/Call Ration votes a DEFCON 4

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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

No updates to the CSI this week. But it got crushed last week as we had a staggering loss of consumer confidence from the end of July. So 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.

Being blind to all other indicators and just looking at the last update for the CSI, I still feel we should be extremely cautious.

CSI votes a DEFCON 3

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Market Indexes:

DOW (DJX) = 35,120 – Down 1.1% from 35,515 last week. (4 week deviation: 229 down from 344 last week)
S&P 500 (SPX) = 4,442 – Down 0.6% from 4,468 last week. (4 week deviation: 24.81 down 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 08/22/2021)
ThinkorSwim/Daily S&P 500 Index – Four Months Trend (Updated 08/22/2021)

Market Thrashing

4-Week Thrashing of DJX = +/- 229 points or 0.7% of the market’s volume is down from 1.0% last week.
4-Week Thrashing of SPX = +/- 24.81 points or 0.6% of the market’s volume is down from 1.1% 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 falling. All of this signals a motivated Bull Market.

If history is any predictor, the monthly tantrums shown in the previous three months were also seen this month, but much moderated (indicated above with red arrow). Add to that, Market thrashing is settled quite a bit and looks to restart a positive trajectory.

Being blind to all other indicators and just looking at current market trends, I must say YEAH! This week will be the first DEFCON 5 rating!

Market Index votes a DEFCON 5

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My sentiment for this coming week:

Of the five indicators:

  • The GTS lacks kneejerkable content for this week – DEFCON 4
  • The VIX improved but remains above 15% – DEFCON 4
  • The P/C Ratio consern but not too much fear – DEFCON 4
  • The CSI shows a consumer base not excited about our economic future – DEFCON 3
  • The Market Movement continue to defiantly inch bullish – DEFCON 5

This week’s Market indicators show a strong DEFCON 4 level. Monday morning’s futures are up .25% – .5% suggesting the weekend warriors are shrugging off last week’s slump. The top economic news stories for this Monday morning are Bitcoins and vaccine mandates – so not much to shake the tree.

Just considering the Markets’ pattern over the past four months, there has been a short price adjustment towards the end of each month. This has been followed by two or three weeks of strong growth. I’m interpreting last week’s slump in the markets as one of those adjustments. And since there is a shortage of GTSs and the other indicators looking pretty good, I’m going big for this week.

Trading Readiness Level for this week

DEFCON = 4

This week, I will focus on:

This week begins with minor jitteriness in the Markets. I’m going for a couple of weeks of good growth that will either exit Spreads early of position then far enough OTM to not be a concern.

  • Open 2 15-Strike-Wide Vertical Put Spreads for a total market risk this week of < $3K 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 08/27/2021)

Balance Sheet

Year
2021
Month
July
Week
#34
Beginning Account Balance$16,000.00$18,808.78$19,176.68
Deposits (Div. & Int.)$0.97$0.00$0.00
Withdraws (paycheck)-$2,400.00-$300.00-$300.00
Premiums on Open$5,946.01$587.00$206.00
Premiums on Close-$380.00-$8.00-$0.00
Fees Paid (total)-$86.34-$7.14-$2.04
Ending Account Balance$19,080.64$19,080.64$19,080.64
Total Gain/Loss$3,080.64$271.86-$96.04
ROR1.4%-0.5%
ROC19.3%

Progress Graph

YOD Vertical Options Spreads Running P&L – As of 08/27/21

(Note1: the negative weekly results for weeks 4, 8, 12, 17, 21, 25, 30, and 34 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$5,946.98
(Premiums)
0.45 shares
(Dividends Reinvested)
Funds Removed-$464.30
(Early Close & Fees)
$0
(Fractional Shares Sold)
Ending Balance$21,480.64
(Cash)
$19,672,47
(43.83 shares * $448.82 CV)
ROI+34.3%+23.0%
As of 8/25/2021
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Schedule for this Week

Goals for this week: (08/23/2021 – 08/27/2021) (Week #34)

  • 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 15 (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.
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This Week’s Trade Activity

(As of 08/27/2021)

Spread Count Summary:

Year
2021
Month
Aug
Week
#33
Vertical Bull Put Credit Spread6062
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Margin Interest100
Total6162

Current Dollars at Risk:

Year
2021
Month
Aug
Week
#34
Vertical Bull Put Credit Spread$10,802.$8,913.$2,794.
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$10,802.$8,913.$2,794.
Max Risk Allowed$16,000.$12,000.$3,000.
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Vertical Spreads Opened This Week

(08/23/2021 – 08/27/2021)

SPY: 415p/400p  – Open 08/24/21 – Expires 10/15/21 – Max Gain = $116.00 – Open Price = $447.85
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=80.7%, Headroom=-7.4%, Max Loss=$1,384, AROR=58.3%

Vertical Bull Put Credit Spread – SPY – Short: 415 Put – Long: 400 Put
Vertical Bull Put Credit Spread – SPY – Short: 415 Put – Long: 400 Put

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($9,392)
  • Max dollar at risk this week < $3,000? Yes ($1,384)
  • Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (52 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 (1.1 down from 1.7)
  • 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=$419.13)
  • Short-strikes Prob-OTM > 80%? Yes (80.7%)
  • 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)
  • Strike Width minimum (>= 15)? Yes (15 strike width)

QQQ: 350p/335p  – Open 08/25/21 – Expires 09/24/21 – Max Gain = $90.00 – Open Price = $374.19
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.0%, Headroom=-6.4%, Max Loss=$1,410, AROR=76.8%

Vertical Bull Put Credit Spread – SPY – Short: 350 Put – Long: 355 Put
Vertical Bull Put Credit Spread – SPY – Short: 350 Put – Long: 355 Put
  • Current maximum dollars at risk < $16,000? Yes ($10,802)
  • Max dollar at risk this week < $3,000? Yes ($2,794)
  • Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (30 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 (1.6 down from 1.8)
  • 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=$353.13)
  • Short-strikes Prob-OTM > 80%? Yes (83.0%)
  • 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)
  • Strike Width minimum (>= 15)? Yes (15 strike width)

This position was opened with only 30 days to expiration because I did not want to bunch Spreads together in one week as I did for Aug 20.

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Vertical Spreads Currently Cooking

(As of 08/27/2021)

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: 410p/400p  – 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%

Vertical Spreads Closed This Week

(As of 08/27/2021)

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%
At Close: Prob. OTM=99.9%, Head Room=-11.4%, AROR= 61.3%

Cost to open: $1.02 premium collected * 100 shares = $102.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expire worthlessly)
Net Profit= $102.00 to open – $0.00 to close – $1.00 fees = $101.00
AROR= ($101.00 / 43 days in play) * 365 / $1,398= 61.3%

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%
At Close: Prob. OTM=99.9%, Head Room=-8.4%, AROR= 63.0%

Cost to open: $1.09 premium collected * 100 shares = $109.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expire worthlessly)
Net Profit= $109.00 to open – $0.00 to close – $1.00 fees = $108.00
AROR= ($108.00 / 45 days in play) * 365 / $1,391= 63.0%

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%
At Close: Prob. OTM=99.9%, Head Room=-6.1%, AROR= 53.5%

Cost to open: $1.35 premium collected * 100 shares = $135.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expire worthlessly)
Net Profit= $135.00 to open – $0.00 to close – $1.00 fees = $134.00
AROR= ($134.00 / 49 days in play) *365 / $1,865 = 53.5%

The underlying asset (IWM) never rose above the cost basis.

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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).

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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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