May the Market Force Be With You! How can I use the Market Force to help make Loss-Resistant Vertical Spreads?

Loss Resistant Vertical Spread

Loss-resistant Vertical Spreads are Vertical Bull Put Credit Spreads that can generate a modest income during most market conditions. For example, if the underlying asset rises, moves sideways, or falls slightly, I still want the best probability that my Spreads will yield a profit.

Lamely using a derivative from Star Wars, I’ll try to demonstrate that there is an organic force behind the broader markets. And that force is to rise continually. So, if I want to create loss-resistant Vertical Spreads, I need to understand that force.

Commentary Contents

• The Innate Nature of the Markets
  • The Force of Money
  • The Force of Corporations
  • The Force of Government
  • The Force of Markets
• Dow Jones Over the Years
• How to Make Loss-Resistant Vertical Spreads
• Conclusion

May the Market Force Be With You

Are Stocks the midi-chlorians of the Stock Markets?

“Without the Stocks, the Markets could not exist… and we would have no knowledge of the Market Force. Stocks continually speak to us… telling us the will of the Market Force. When you learn to quiet your mind, you’ll hear them speaking to you.“

Damocles Skywalker: “I don’t understand.”

The Innate Nature of the Markets

There is a lot of forces behind the Stock Markets to make sure it rises over time. Here are a few.

The Force of Money

Stock Markets are made up of a lot of money from a lot of people. And the goal for every one of those people is to make more money. So the trading activity of all these people will organically keep the markets rising.

The Force of Corporations

Corporations require significant capital to operate and to grow. One source of such money is selling corporate stocks to people like me. Since rising stocks are more likely to be bought, corporations are constantly working to grow the value of their Stocks.

The Force of Government

The Federal Government does not create wealth – it can only consume wealth via taxation. And a major source of taxable income is personal Capital Gains and Corporate taxes. Therefore, the Feds will pass laws to help make corporations successful and investors profitable.

The Force of Markets

Our society is dependent on a rising market. So if the Stock Markets have a force, that force is to rise.

Dow Jones Over the Years

As a demonstration:

I feel that the following charts illustrate these market forces. These charts show the DJX over 100 years, 20 years, and this past year. Each graph displays a Bull Market (the trend channel over time has risen).

How to Make Loss-Resistant Vertical Spreads

One method of creating a loss-resistant Vertical Spread is to enter into news Spreads where the underlying assets have been reliably bullish over the past two to four months and closely follow the broader market indexes.

When opening new short-term Vertical Spreads, I have found that technical analysis has a far greater value than studying the fundamentals of my underlying assets. Technical analysis (such as Trend Trading) can provide some degree of predictability into the underlying’s future movement.

For more information on Trend Trading, consider the following posts:

Trend Trading Options – the Samwise Strategy
Trend Trading Using TOS Regression Channel

Conclusion

A critical key to crafting Loss-Resistant Spreads is to be Market Aware. And to be Market Aware, I need to study national economic fundamentals and keep on top of geopolitical events (the king influencer to all short-term Vertical Spreads is geopolitical events and how that can influence my investment’s destiny).

There is no such thing as a loss-proof Vertical bull Put Credit Spread. But I can shift the probability to my favor by betting on the house.

Other Posts from Options Trades By Damocles

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 09/13/2021)

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.

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.

• 9/11 and 12/7 – NEVER will forget!
• Last Friday’s Producer Prices Index (PPI) jumped a recore 8.3%
• Consumer Price Index due out this Tuesday,
• Consumer Sentiment Index update due this Friday
• Biden’s Administration testing the limits of Federal power vs States Rights
• Post Biden/Xi Jinping phone call may boost tech sector

Last week’s news was mostly dominated by the 9/11 anniversary, continue reaction to the Afghanistan pullout, and various attempts of flagrant Federal overreach by the Administration. But I do not think that any of these were was the reason for the Market’s downturn. I instead believe that most of these news stories are more of a deliberate distraction from what appears to be a surreptitiously controlled Biden Administration.

There is growing angst over the appearance of Federal Overreach:

• The Biden Administration instructing OSHA to label COVID a workplace hazard has raised Constitutional eyebrows.
• The Administration opening a Civil-Rights investigation in Florida over the Governer’s Mask Mandate ban in direct challenge to State Governors’ powers.
• U.S. Attorney-General Garland’s suit to overturn Texas Abortion Law (which the Supreme Court allowed to stand).

Are we courting a Correction with the Markets being up 20% – 30% this year; inflation is out of control, Delta Varient is threatening new lockdowns, and Congress is considering massive tax and spending?

The Labor Department’s August Consumer Price Index (CPI) will be released on Tuesday. Expect a jump from July and an orbital number from August a year ago. The Inflation infection is spreading across sectors. I better increase my budget for pizza this week.

This week’s CSI could show people continuing to grow pessimistic because of the COVID mongering. As we run up to this Friday’s report release, I’m predicting that the Marketeer’s will continue last week’s selloff.

I believe that this week will end lower than its start because inflation will continue to spook many Marketeers. I also believe that the expectantly bad news on inflation will be brushed off over the following several weeks. So my 4-8 week sentiment continues to be positive.

GTS votes a DEFCON 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. 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.

The trajectory for the 1-month VIX Regression Channel took a turn north. This is supporting the axiom that a rising VIX shows a falling Market – which is a dubious axiom. But if I look over a four-month trend, I do see a steady decline towards the 15% line.

The VIX ended last week at 20.95%, a jump from 16.41% the week before. The 9-Day SMA continues below the 50-Day SMA, while the 50-Day SMA still demonstrates a leveling off.

The VIX is above 15%, and the weekly trajectory has moved higher, so I’m thinking that this coming week may see so more selling.

We are still within the easy reach of the 15% line, so I’m not too worried about the short-term.

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.

Last week, the Put/Call Ratio see-sawed above and below the 0.5 line. This continues to happen just before the Producer Price Index and Jobs Report are published. I suspect that most of this will be shaken off by the end of this coming week.

The Put/Call Ratio ended Friday at .7, a skittish jump above the 9-Day SMA. The 9-Day SMA remains above the 50-Day, and the 50-Day-SMA grew a smidgeon above the 0.5 line. Thus, all short-term trajectories are indicating a continuation towards concern and not so much toward fear.

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

I cannot ignore that the ratio is still well below the insidious 1.0 line (1 Put to 1 Call). Being below 1.0 and above the .5 line suggests that we are generally in good shape even though we have some bad days.

Put/Call Ratio 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.

The boys at U-M will release the preliminary Sept data for the CSI this week. So until then, everything I said last week still stands today.

The final two weeks of August showed no improvement from the collapse last month. 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 this week’s CSI, I still feel we should be extremely cautious.

CSI votes a DEFCON 3

Market Indexes:

DOW (DJX) = 34,608 – Down 2.2% from 35,369 last week. (4 weeks deviation: 249 up from 179 last week)
S&P 500 (SPX) = 4,459 – Down 1.7% from 4,535 last week. (4 weeks deviation: 39.32 down from 40.72 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.

Market Thrashing

4-Week Thrashing of DJX = +/- 249 points or 0.7% of the market’s volume is up from 0.5% last week.
4-Week Thrashing of SPX = +/- 39.32 points or 0.8% of the market’s volume is down from 0.9% last week.
(Market Thrashing above 1.0% might indicate 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 low. All of this signals a motivated Bull Market.

For the past five months, the S&P took a sharp downturn around the same time then quickly recovered. The lows for these dips have occurred 5/12, 6/18, 7/19, and 8/18. If history is any predictor of the future, then I would think that the selloff will continue this week culminating around 9/17, to rebound back to the last four month’s trajectory.

These S&P 500 adjustments appear to be a knee-jerk reaction prior to the mid-month Producer Price Index report or the Job’s Report. But once these adjustments happen, the Marketeers seems to brush it off quickly, I will not be bothered by it.

Being blind to all other indicators and just looking at current market trends, this week will vote for DEFCON 5!

Market Index votes a DEFCON 5

My sentiment for this coming week:

Of the five indicators:

• The GTS is advertizing possible kneejerkable content, but I should not be too concern – DEFCON 4
• The VIX improved but remains above 15% and rising – DEFCON 4
• The P/C Ratio shows 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 DEFCON 4 level.

Trading Readiness Level for this week

DEFCON = 4

This week, I will focus on:

This week begins with some growing jitteriness in the Markets. But I’m still looking forward to a couple of weeks of good growth.

Because I see the next couple of weeks as a DEFCON 4, I will set my POTM sights to 80%.

• Open two 15-Strike-Wide Vertical Put Spreads for a total market risk this week of < $3K (as the Markets see fit)
• Spread term of 8-weeks or less
• Probability of OTM > 80%

Note: The Consumer Price Index is scheduled to be released Tuesday morning (9/14) before the Markets open. If the data is higher than expected, then the Markets will likely turn negative. Therefore, I will not enter into any new Vertical Bull Put Credit Spreads Monday.

Profit and Loss Statement

(As of 09/17/2021)

Balance Sheet

	Year 2021	Month Sep	Week #37
Beginning Account Balance	$16,000.00	$19,080.64	$19,538.69
Deposits (Div. & Int.)	$0.97	$0.00	$0.00
Withdraws (paycheck)	-$2,400.00	-$0.00	-$0.00
Premiums on Open	$6,658.01	$712.00	$250.00
Premiums on Close	-$380.00	-$0.00	-$0.00
Fees Paid (total)	-$92.46	-$6.12	-$2.04
Ending Account Balance	$19,786.65	$19,786.65	$19,786.65
Total Gain/Loss	$3,786.65	$705.88	$247.96
ROR		3.7%	1.3%
ROC	23.7%

Progress Graph

(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	$6,659.11 (Premiums)	0.45 shares (Dividends Reinvested)
Funds Removed	-$472.46 (Early Close & Fees)	$0 (Fractional Shares Sold)
Ending Balance	$22,186.65 (Cash)	$19,367.62 (43.83 shares * $441.86 CV)
ROI	+38.7%	+21.0%

Schedule for this Week

Goals for this week: (09/13/2021 – 09/17/2021) (Week #37)

• 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: Nov 5 (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.

This Week’s Trade Activity

(As of 09/17/2021)

Spread Count Summary:

	Year 2021	Month Sep	Week #37
Vertical Bull Put Credit Spread	66	6	2
Vertical Bear Call Credit Spread	0	0	0
Vertical Bull Put Debit Spread	0	0	0
Vertical Bull Call Debit Spread	0	0	0
Margin Interest	1	0	0
Total	67	6	2

Current Dollars at Risk:

	Year 2021	Month Sep	Week #37
Vertical Bull Put Credit Spread	$15,783.	$8,288.	$2,750.
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	$15,783.	$8,200.	$2,750.
Max Risk Allowed	$16,000.	$12,000.	$3,000.

Vertical Spreads Opened This Week

(09/13/2021 – 09/17/2021)

QQQ: 345p/330p  – Open 09/16/21 – Expires 10/29/21 – Max Gain = $119.00 – Open Price = $375.27
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.3%, Headroom=-8.1%, Max Loss=$1,381, AROR=72.5%

Entry Rules for Vertical Bull Put Credit Spreads:

• Current maximum dollars at risk < $16,000? Yes ($15,783)
• Max dollar at risk this week < $3,000? Yes ($2,750)
• 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)? No (1.8 up from 1.4)
• 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=$345.40)
• Short-strikes Prob-OTM > 80%? Yes (81.3%)
• 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 (15 strike width)

SPY: 415p/400p  – Open 09/14/21 – Expires 10/29/21 – Max Gain = $131.00 – Open Price = $445.14
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=78.7%, Headroom=-6.7%, Max Loss=$1,369, AROR=77.0%

Entry Rules for Vertical Bull Put Credit Spreads:

• Current maximum dollars at risk < $16,000? Yes ($14,402)
• Max dollar at risk this week < $3,000? Yes ($1,369)
• 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)? Yes (1.3 down from 1.6)
• 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? No (1SD=$414.53)
• Short-strikes Prob-OTM > 80%? No (78.7%)
• 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 (15 strike width)

This week, the value of SPY has lowered to the same relative point observed in the last five months. Those past lows were quickly recovered the week after the CSI and CPI were published. In a chicken-esk response, I elected to open with a Short Strike just below the 80% suggestion for this week.

Vertical Spreads Currently Cooking

(As of 09/17/2021)

SPY: 425p/410p  – Open 09/09/21 – Expires 10/22/21 – Max Gain = $119.00 – Open Price = $452.05
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=79.5%, Headroom=-6.0%, Max Loss=$1,381, AROR=72.5%
Now: Prob. OTM=75.7%, Headroom=–4.7%

QQQ: 350p/335p  – Open 09/08/21 – Expires 10/22/21 – Max Gain = $120.00 – Open Price = $379.40
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=80.7%, Headroom=-7.8%, Max Loss=$1,380, AROR=71.5%
Now: Prob. OTM=81.3%, Headroom=-7.0%

QQQ: 355p/340p  – Open 08/30/21 – Expires 10/15/21 – Max Gain = $123.00 – Open Price = $379.55
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=79.0%, Headroom=-6.5%, Max Loss=$1,377, AROR=70.3%
Now: Prob. OTM=80.0%, Headroom=-5.7%

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%
Now: Prob. OTM=85.1%, Headroom=-6.9%

SPY: 430p/415p  – Open 09/02/21 – Expires 10/08/21 – Max Gain = $100.00 – Open Price = $453.48
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=80.7%, Headroom=-5.2%, Max Loss=$1,400, AROR=71.7%
Now: Prob. OTM=76.2%, Headroom=-3.6%

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%
Now: Prob. OTM=96.2%, Headroom=-11.4%

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=94.1%, Headroom=-9.1%

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%
Now: Prob. OTM=94.1%, Headroom=-7.0%

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=99.5%, Headroom=-10.3%

Vertical Spreads Closed This Week

(As of 09/17/2021)

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%
At Close: Prob. OTM=99.9%, Head Room=-10.9%, AROR= 59.6%

Cost to open: $1.11 premium collected * 100 shares = $111.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expire worthlessly)
Net Profit= $111.00 to open – $0.00 to close – $1.00 fees = $110.00
AROR= (110.00 / 50 days in play) *365 / $1,889= 42.5%

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 things 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.”