I see Expiration Dates. Does it require a Sixth Sense to pick the expiration date that makes my Vertical Bull Put Credit Spreads loss resistant?

Loss Resistant Vertical Spread

Dr Crowe doesn't know that he is a loss-resistant Vertical Spread. Here's why.
Dr. Malcolm Crowe
Movie: The Sixth Sense

One way to make steady income selling Options is to focus on loss-resistant Vertical Spreads.

What is a 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 goes up, moves sideways, or falls marginally, I still want the best probability that my Spreads will yield a profit.

One tactic for creating a loss-resistant Spread is to place the Expiration Date far enough in the future to recover from a market rout.

Expiration Dates

I see Expiration Dates
But my Vertical Spreads don’t know they’re Loss-Resistant.

(Lame parody of the movie The Sixth Sense)
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In a previous post, “How To Make Loss Resistant Vertical Spreads – Market Forces,” I implied that the broader markets have an innate propensity to rise. Of course, there are crashes, corrections, and the occasional bear markets, but I see these as adjustments to a continuing bull market that has lasted for well over 100 years.

Therefore, as a general rule of thumb, given enough time my open Vertical Bull Put Credit Spreads should always win. But the question is, “how much time should I allocate to a working Spread?”

Comparing Expiration Dates

The graph below compares (3) ETF/SPY Vertical Spreads and their effective risk across their expiration dates. The Spread’s criteria:

Underlying: SPY
Opening Date: 9/23/21
Opening Price: $444.45
Short Strikes: Selected based on an 80% Prob-OTM

Comparing the Headroom Between Different Expiration Dates - Vertical Bull Put Credit Spreads
ThinkorSwim Chart: Comparing the Headroom Between Different Expiration Dates

Vertical Spread Expiration Date = 1 week

Looking at the above chart, selecting a Vertical Spread with an expiration date of only one week affords me a headroom of just 2.5% (how much the market can drop before my Short Strike goes ITM). And with only one week at play, if the market had a couple of bad days, there would not be enough time to recoup. Therefore, I would assess a 1-week Vertical Spread to be mostly high risk.

Expiration Date = 4 weeks

A Vertical Spread with an expiration date of 4-weeks out has a headroom of more than 5%. Since I believe that the market’s general tendency is to rise, that headroom should improve over that four weeks. So at any time during the life of the Spread, should SPY tank 5%, I should still profit. This Spread is more loss-resistant than the 1-week Spread described above.

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Expiration Date = 8 Weeks

Finally, the 8-week Vertical Spread has nearly 8% headroom before it is threatened with ITM. Thus, throughout the eight-week time, even if the market did tank 8% after entering the position, there is plenty of time for the innate Market Force to compensate. Therefore, of the three Expiration Dates examples, this duration is the most loss-resistant.

Conclusion

Following my other Entry Rules, I should find that the further out the Vertical Bull Credit Spread’s expiration dates I have, the more acceptable my dollar risk should be. And keep with my suggestion of Loss-Resistant Short Strikes and Loss-Resistant Strike-Widths, I should be inching that probability of profiting more towards me.

Also, I need to keep reminding myself that no Vertical Spreads are loss-proof – regardless of my expiration date machinations.

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Entry Rules for Vertical Bull Put Credit Spreads
The "limiting loss by limiting risk" blunder. One 10-Strike-width Vertical Bull Put Credit Spread has a significant loss-buffer built-in.
Using Excel with ThinkorSwim
Walking through steps of installing thinkorswim on a new laptop and how to get Excel to pull live data …
Exit Rules: Vertical Credit Spreads – Pt 1
Having an Escape Plan (Exit Rules) for my open Vertical Bull Put Credit Spreads is just as critical as …

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 09/20/2021)

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.

  • Bank of America & Morgan Stanley warned that internal indicators are close to a sell signal
  • Last Friday’s Producer Prices Index (PPI) jumped a record 8.3%
  • Federal Reserve meets this week, expecting details on tapering
  • Political hardball over increasing Federal Debt Ceiling
  • Inflation is hitting the pocket books pretty hard
  • Mask and vaccination mandates can squelch the meager recovery

Speaker Pelosi is attempting to tie the votes for the popular $1T Infrastructure bill (already passed the Senate) to the full bore $3.5T spending bill. This appears to indicate that she does not have the votes in the Democratic caucus to pass the spending bill on its own and is hoping to blackmail Republicans. I really doubt Pelosi will execute a scorch-earth on Biden’s agenda, so I see this as a good sign that a spending bill will ultimately be much lower.

The Federal Reserve will hold its September policy meeting this week. Economists are expecting the central bank to set its rudders towards tapering its $120B per month asset purchases starting the next month or two. This should be a signal that interest rates are about to rise.

Unemployment claims for the week ending Sept 4 fell to 2.67 million.

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 Chart: CBOE Market Volatility Index - 09/19/2021
ThinkorSwim Chart: CBOE Market Volatility Index – 09/19/2021

The trajectory for the 1-month VIX Regression Channel still looks to be in a skittish direction. Looking over a four-month trend, I do see a steady decline towards the 15% line.

The VIX ended last week at 20.81%, functionally flat from 20.95% the week before. The 9-Day SMA shot up above the 50-Day SMA, while the 50-Day SMA is leaning towards a slight rise.

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

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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 Chart: S&P 500 Put/Call Ratio - as of 09/19/21
ThinkorSwim Chart: S&P 500 Put/Call Ratio – as of 09/19/21

Last week, the Put/Call Ratio see-sawed above the 0.5 line and ended the week at about the same spot as it began. This continues to happen just before the Producer Price Index, but this week’s ratio is a bit more concerning.

The Put/Call Ratio ended Friday at .7, with a skittish jump above the 9-Day SMA. The 9-Day SMA remains above the 50-Day, and the 50-Day-SMA continues to rise 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. I’ll give a cautious DEFCON 4.

Put/Call Ratio 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 09/19/2021

The preliminary Sept data for the CSI took a lethargic jump sideways. Showing no improvement from the collapse last month may indicate that consumers feel the recovery is running out of gas.

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

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Market Indexes:

DOW (DJX) = 34,585 – Down 0.1% from 34,608 last week. (4 weeks deviation: 304 up from 249 last week)
S&P 500 (SPX) = 4,433 – Down 0.6% from 4,459 last week. (4 weeks deviation: 31.62 down from 39.32 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 Chart: Daily S&P 500 Index - Four Months Trend (Updated 09/19/2021)
ThinkorSwim Chart: Daily S&P 500 Index – Four Months Trend (Updated 09/19/2021)

Market Thrashing

4-Week Thrashing of DJX = +/- 304 points or 0.9% of the market’s volume is up from 0.7% last week.
4-Week Thrashing of SPX = +/- 39.32 points or 0.9% of the market’s volume is flat 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, but the four-week trajectory turned decisively bearish. The overall Market thrashing is below 1.0% but has signs of rising.

The downturn over the past two weeks was expected due to the continued concern over inflation. The PPI and CSI published last week showing not too much improvement.

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, 8/18, and now 9/17. If history is any predictor of the future, then I would expect a rebound back to the last four month’s trajectory.

Being blind to all other indicators and just looking at current market trends, this week will vote for DEFCON 4.

Market Index votes a DEFCON 4

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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 inch bullish – DEFCON 4

As the markets opened Monday morning, all the indexes appeared to have jumped off a cliff. The DOW fell -1.5% points and S&P 500 nearly 1.5% as well. This reaction may be from fears the Federal Reserve meeting this week will start using the “I” word (interests). I’m going to leave the DEFCON at 4 but be ultra-conservative with my Vertical Bull Put Credit Spread pick.

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 elevated 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 as follows:

  • Enter into new Spreads for a total market risk this week of < $3K (as the Markets see fit)
  • Open either (2) 15 Strike-Wide spreads with the Short POTM > 82% or (1) 30 Strike-Wide Spread with the Short POTM <= 80%
  • Spread term of 8-weeks or less
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Profit and Loss Statement

(As of 09/24/2021)

Balance Sheet

Year
2021
Month
Sep
Week
#38
Beginning Account Balance$16,000.00$19,080.64$19,786.65
Deposits (Div. & Int.)$0.97$0.00$0.00
Withdraws (paycheck)-$2,700.00-$300.00-$300.00
Premiums on Open$6,658.01$866.00$154.00
Premiums on Close-$380.00-$0.00-$0.00
Fees Paid (total)-$92.46-$7.14-$1.02
Ending Account Balance$19,639.63$19,639.63$19,639.63
Total Gain/Loss$3,639.63$558.86-$147.02
ROR2.9%-0.7%
ROC22.7%

Progress Graph

YOD Vertical Options Spreads Running P&L – As of 09/23/21

(Note1: the negative weekly results for weeks 4, 8, 12, 17, 21, 25, 30, 34, and 38 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$6,813.11
(Premiums)
0.45 shares
(Dividends Reinvested)
Funds Removed-$473.48
(Early Close & Fees)
$0
(Fractional Shares Sold)
Ending Balance$22,339.63
(Cash)
$19,388.65
(43.83 shares * $442.34 CV)
ROI+39.6%+21.2%
As of 9/23/2021
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Schedule for this Week

Goals for this week: (09/20/2021 – 09/24/2021) (Week #38)

  • 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 12 (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 09/24/2021)

Spread Count Summary:

Year
2021
Month
Sep
Week
#38
Vertical Bull Put Credit Spread6771
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Margin Interest100
Total6871

Current Dollars at Risk:

Year
2021
Month
Sep
Week
#38
Vertical Bull Put Credit Spread$15,789.$10,634.$2,346.
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$15,789.$10,634.$0.
Max Risk Allowed$16,000.$12,000.$2,346.
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Vertical Spreads Opened This Week

(09/20/2021 – 09/24/2021)

DIA: 325p/300p  – Open 09/23/21 – Expires 11/05/21 – Max Gain = $154.00 – Open Price = $346.46
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=79.5%, Headroom=-6.2%, Max Loss=$2,346, AROR=55.4%

 ThinkorSwim Chart: Vertical Bull Put Credit Spread – DIA – Short: 325 Put – Long: 300 Put
ThinkorSwim Chart: Vertical Bull Put Credit Spread – DIA – Short: 325 Put – Long: 300 Put

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($15,789)
  • Max dollar at risk this week < $3,000? Yes ($2,346)
  • 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 (1.2 flat from 1.2)
  • Current price above 9-Day SMA?: Yes (see chart)
  • 9-Day SMA above 50-Day SMA?: No (see chart)
  • Short-strike < 1 SD below the current price? No (1SD=$324.72)
  • Short-strikes Prob-OTM > 80%? No (79.5%)
  • 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 (25 strike width)

Due to the market rout late last week and early this week, I delay any new positions to see if the markets recover – they are. This Spread was open Thursday and is the only Spread for the week. Congress is still playing Russian Roulette with the Debt Ceiling, and I suspect some market reactions (up or down) over the next three weeks.

To get a 25 Strike Wide Spread, I had to lower the Prob-OTM to below 80% because I ran out of Long Strikes. This change also lowered the Standard Deviation ceiling.

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Vertical Spreads Currently Cooking

(As of 09/24/2021)

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%
Now: Prob. OTM=80.2%, Headroom=7.0%

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%
Now: Prob. OTM=80.5%, Headroom=6.1%

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=74.4%, Headroom=3.8%

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=78.9%, Headroom=-5.5%

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=76.9%, Headroom=-4.2%

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=85.6%, Headroom=-6.1%

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=75.3%, Headroom=-2.7%

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=97.8%, Headroom=-10.6%

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=97.2%, Headroom=-8.3%

Vertical Spreads Closed This Week

(As of 09/24/2021)

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%
At Close: Prob. OTM=99.9%, Head Room=-5.5%, AROR= 76.8%

Cost to open: $0.90 premium collected * 100 shares = $90.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expire worthlessly)
Net Profit= $90.00 to open – $0.00 to close – $1.00 fees = $89.00
AROR= (89.00 / 30 days in play) *365 / $1,410= 76.8%

Note: The value of QQQ was lower when this Spread closed than when I sold it 6 weeks ago. Thus QQQ fell slightly and I still made full profit.

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%
At Close: Prob. OTM=99.9%, Head Room=-7.1%, AROR= 63.0%

Cost to open: $0.70 premium collected * 100 shares = $70.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expire worthlessly)
Net Profit= $70.00 to open – $0.00 to close – $1.00 fees = $69.00
AROR= (69.00 / 43 days in play) *365 / $930.00= 63.0%

Note: The value of SPY was slightly higher at the Spread’s close than when it was opened. Thus SPY move mostly sideways and I still made full profit.

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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 things 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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