Underlying assets are the undercover agents of the Vertical Spread world. And when I need to engage in some shady Spread Strategies, I need to call upon the IMF (Imagine Money Freedom) to help make my Spreads loss resistant.

Loss Resistant Vertical Spread – Underlying Assets

In my last few posts, I’ve been summarizing what I understand to be “Loss-Resistant Vertical Spreads.” So far, I have covered Short-Strikes, Strike-Widths, Market Forces, and Expiration Dates. In this week’s journal, I want to consider what makes the underlying asset loss resistant.

Commentary Contents

• Picking an Underlying Asset
• Stocks vs. ETFs
  • Stocks
  • ETFs
  • My Index-ETF Picks
• Conclusion

Picking an Underlying Asset

The premium prices of Options (as a derivative) are based on underlying assets. These assets can be stocks, bonds, currencies, commodities, market indexes, and others.

Selecting the right underlying asset for any Spreads goes beyond my narrow criteria for loss-resistant Vertical Spreads – the topic of this post. It is, in fact, one of the more consequential decisions I can make.

But, I am limiting this week’s overview to those few asset characteristics that help make my Vertical Spreads loss resistant. Discussing the other vital attributes for good underlyings will come in a separate post.

Stocks vs. ETFs

There is no need for me to blog about the fundamental differences between Stocks and ETFs. There are way too many details to dig into the nuance of Stocks. Instead, if I need to delve deeper into the basics, then I can use Google.

I will cover why using Index-ETFs as my underlying assets is more loss tolerant than individual corporate stocks.

Stocks

I don’t particularly like using individual stocks for my Vertical Spread’s underlying asset because too many influencing factors can tank my Spreads.

• Corporation’s performance
• Corporate leadership, projections, and Analyst’s predictions
• Market Herd mentality
• Upcoming conference/earnings calls
• Rumors, news stories, and lawsuits
• Supply-chain issues, neighboring industry, city politics

August Walker: Hope is not a strategy!
Elsa Faust: Oh, you must be new.

– (Movie: Mission Impossile – Fallout)

Individual corporate stock’s values are highly influenced (justifiably or not) by just about anything. The high volatility makes using stocks as my underlying more premium-profitable but makes them less loss resistant.

ETFs

ETFs, on the other hand, are more docile and Market-Force predictable. And Index-ETFs are widely reported and are easy to follow. So I can limit my attention to just a few indicators to help me make my weekly Spread choices.

The primary influencers for Index-ETFs are easy to keep track of:

• Geopolitical events (Federal Reserve news, national/global finances policy changes, national disasters, Consumer Sentiment, Twitter Tweets) 
• Market Trends (VIX, Put/Call Ratios, Market Force)

My Index-ETF Picks

For 2021, I’ve been primarily focusing on these four Index-ETFs:

Conclusion

As I enter this week, I am reminded that no Spreads are loss-proof – regardless of my expiration date manipulations. But if I keep to a total loss-resistant Vertical Spread strategy, I hope to profit regardless.

My next week’s Journal Commentary may cover “how to Manage losing Spreads,” as I deal with a Vertical Spread that is approaching ITM.

Your mission,
should you choose to accept it.

Mission Impossible

---

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 09/20/2021)

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.

• Political hardball over increasing Federal Debt Ceiling
• China’s Evergrande set to default
• Upcoming, high drama vote on $5 Trillion Federal Budget is staged for this week
• Rising inflation expectations could cause the Federal Reserve to change policy
• China bans cryptocurrencies

China’s real estate giant Evergrande is on the verge of default on its $300B debt. That could have a 2008-esque reaction within the global markets. China is good at silencing its own people so this event may be contained.

The schoolyard tussle over raising the Federal Debt Ceiling is going to jerk the markets around for the next few weeks. But like it always does (every year) the whistle gets blown, the children return to class, the Debt Ceiling is raised, and all is good.

The promised vote on the $1.2T bipartisan Infrastructure Bill was supposed to happen on Feb 27. But Speaker Pelosi has postponed the vote until after the $3.5T Spending bill is agreed upon, then changed her mind to a Sept 30th vote (women!?). This is playing out like Russian roulette for the entire Biden Build-Back-Better agenda.

There are several points within the GTS that can force the broader markets into a short-term, pre-Christmas correction. But I don’t see anything that will extend adjustment (if there is one) more than a couple of weeks. But because of this probability, I am going to move cautiously.

GTS votes a cautious 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.

The trajectory for the 1-month VIX Regression Channel continues to be moving in a skittish direction. This past week pushed the 4-month trend upward.

The VIX ended last week at 17.75%, down from 20.81% the week before. But that was only after a major surge up to near 26% at the start of the week.

The 9-Day SMA and the 50-Day SMA continue to rise. Thus, the general trend of the VIX is towards higher volatility.

I need to remind myself that a rising VIX does not “necessarily” mean the markets are falling, it just means that the market’s direction (up or down) is increasing in speed. But observationally, the closer the VIX is to 15%, the more likely a rising VIX is due to a falling market. So I need to keep a close eye on other indicators.

There is a silver lining to a rising VIX. The higher the volatility, the higher the available premiums I can collect from my Vertical Bull Put Credit Spreads.

On the final three days from last week, the VIX dropped as fast as it rose. At the current 17.75%, we are still within the easy reach of the 15% line, so I’m still 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, I saw the Put/Call Ratio rise steadily. This is not all that concerning since it appears to be hinged with the Federal Budget battles in Congress, and that fight should only last a couple more weeks.

When the Marketeers feel that stocks will continue a retreat, then they can make a little profit by selling Put Options. And the more Puts that we notice being sold can signal that more Marketeers are betting that stocks will keep falling. So a rising trajectory in Puts being sold does not bode well with what is perceived to be the short-term future sentiment.

But even though the Put/Call Ratio rise is disturbing, we are still well within the “Good Shape” zone (below the 1:1 Ratio), albeit moving in the wrong direction.

I’ll give a cautious DEFCON 4.

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 CSI data has not changed since last week, so my last week’s comments still stand.

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

Market Indexes:

DOW (DJX) = 34,798 – up 0.6% from 34,585 last week. (4 weeks deviation: 451 up from 304 last week)
S&P 500 (SPX) = 4,455 – Up 0.5% from 4,433 last week. (4 weeks deviation: 54.25 up from 31.62 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 = +/- 451 points or 1.3% of the market’s volume is up from 0.9% last week.
4-Week Thrashing of SPX = +/- 54.25 points or 1.2% of the market’s volume is up from 0.9% last week.
(Market Thrashing above 1.0% might indicate indecision for the Marketeers.)

The markets started last week with a trouncing that claimed nearly 1,000 points. I blame this wild ride on the hysterical new reporting of the coming armageddon once the Federal Government defaults on its debt obligations, the Lehman Brother’s like collapse of China’s Evergrande, and continue bottlenecks in the supply chain. But by the end of the week, stocks calmed quite a bit.

The five-month history of the S&P 500 shows a market adjustment occurring every month. If this is any predictor of the future, then I would expect a fairly quick recovery. But since this chart continues to show a 4-week trajectory downward, I’m going to have to qualify the word “recovery”.

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

Market Index votes a DEFCON 4

My sentiment for this coming week:

Of the five indicators:

• The GTS is continues to show kneejerkable content, but they appear to be a little longer than shot-lived – DEFCON 3
• The VIX popped but fell back to just 15% – DEFCON 4
• The P/C Ratio shows consern but still in the “good shape” zone – cautious DEFCON 4
• The CSI shows a consumer base not excited about our economic future – DEFCON 3
• The Market Movement took a short-term bear hit but continues long-term bullish – cautious DEFCON 4

I’ll keep a close eye on the market opening this week to see if the rebound continues.

This week’s Market indicators show a cautious DEFCON 4 level.

Trading Readiness Level for this week

DEFCON = 4

This week, I will focus on:

Market jitteriness is predominant. My markets expectation is a couple of weeks of higher-than-usual thrashing and moving mostly sideways.

Since “cautious” seems to be the word of the week, 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 (1) 30 Strike-Wide Spread with the Short POTM > 80%
• Spread term of 8-weeks or less

Profit and Loss Statement

(As of 10/01/2021)

Balance Sheet

	Year 2021	Month Sep	Week #39
Beginning Account Balance	$16,000.00	$19,080.64	$19,639.63
Deposits (Div. & Int.)	$1.26	$0.16	$0.16
Withdraws (paycheck)	-$2,700.00	-$300.00	-$0.00
Premiums on Open	$7,402.01	$1,456.00	$590.00
Premiums on Close	-$703.00	-$323.00	-$323.00
Fees Paid (total)	-$96.54	-$10.20	-$3.06
Ending Account Balance	$19,903.73	$19,903.73	$19,903.73
Total Gain/Loss	$3,903.73	$822.96	$264.10
ROR		4.3%	1.3%
ROC	24.4%

Progress Graph

(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	$7,403.27 (Premiums)	0.45 shares (Dividends Reinvested)
Funds Removed	-$799.54 (Early Close & Fees)	$0 (Fractional Shares Sold)
Ending Balance	$22,603.73 (Cash)	$18,764.49 (43.83 shares * $428.10 CV)
ROI	+41.8%	+17.3%

Schedule for this Week

Goals for this week: (09/27/2021 – 10/01/2021) (Week #39)

• 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 19 (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 10/01/2021)

Spread Count Summary:

	Year 2021	Month Sep	Week #39
Vertical Bull Put Credit Spread	68	8	1
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	69	8	1

Current Dollars at Risk:

	Year 2021	Month Sep	Week #39
Vertical Bull Put Credit Spread	$14,331.	$12,947.	$2,313.
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	$14,331.	$12,947.	$2,313.
Max Risk Allowed	$16,000.	N/A	$3,000.

Vertical Spreads Opened This Week

(09/27/2021 – 10/01/2021)

Rolled from 10/8: SPY: 430p/415p  – Open 10/1/21 – Expires 11/19/21 – Max Gain = $403.00 – Open Price = $431.38
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=47.1%, Headroom+0.1%, Max Loss=$1,097, AROR=273.0%

Entry Rules for Vertical Bull Put Credit Spreads:

• Current maximum dollars at risk < $16,000? Yes ($14,028)
• Max dollar at risk this week < $3,000? No ($3,410)
• Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (49 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 (1.3 up from 1.3)
• 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? No (1SD=$391.02)
• Short-strikes Prob-OTM > 80%? No (45.1%)
• 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)

Originally opened 9/2, SPY took an immediate month-long dive, dropping over 5.7% into ITM. On 10/1 I crated a Vertical Roll to extend the Spread to 11/19.

September has always been defined as a down month. I now believe that it is due to the end of the Federal Fiscal Year and all kinds of doomsday predictions and political wrangling will but press on the markets. I need to keep this in mind for next year.

SPY: 310p/385p  – Open 09/27/21 – Expires 11/19/21 – Max Gain = $187.00 – Open Price = $442.85
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=80.1%, Headroom=-7.4%, Max Loss=$2,313, AROR=55.4%

Entry Rules for Vertical Bull Put Credit Spreads:

• Current maximum dollars at risk < $16,000? Yes ($14,331)
• Max dollar at risk this week < $3,000? Yes ($2,313)
• Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (53 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 (1.0 down from 1.6)
• 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? Yes (1SD=$411.58)
• Short-strikes Prob-OTM > 80%? Yes (80.1%)
• 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)

Vertical Spreads Currently Cooking

(As of 10/01/2021)

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

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%

Vertical Spreads Closed This Week

(As of 10/01/2021)

Rolled: 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%
At Close: Prob. OTM=47.9%, Head Room=+0.1%, AROR= -200.5%

Cost to open: $1.00 premium collected * 100 shares = $100.00
Cost to close: $3.23 premium paid * 100 shares = $323.00 (Rolled)
Net Profit= $100.00 to open – $323 to close – $1.00 fees = -$223.00
AROR= (-$223.00 / 29 days in play) *365 / $1,400= -200.5%

This Spread went ITM 9/30, 8 days prior to expiration. On 10/1, SPY recouped above 430 briefly where I executed a Vertical Roll to Nov 19. See the “Vertical Spreads Opened This Week” for the rolled position.

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%
At Close: Prob. OTM=99.9%, Head Room=-5.5%, AROR= 47.3%

Cost to open: $1.33 premium collected * 100 shares = $133.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expire worthlessly)
Net Profit= $133.00 to open – $0.00 to close – $1.00 fees = $134.00
AROR= (134.00 / 43 days in play) *365 / $2,367= 47.3%

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%
At Close: Prob. OTM=99.9%, Head Room=–5.8%, AROR= 48.4%

Cost to open: $0.96 premium collected * 100 shares = $96.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expire worthlessly)
Net Profit= $96.00 to open – $0.00 to close – $1.00 fees = $95.00
AROR= (95.00 / 51 days in play) *365 / $1,404.00= 48.4%

When I opened this Spread, SPY was S443.20. When it expired on 10/1 the price of SPY fell 2% to $433.72. Yet, this position expired worthless and I profited $95.

This is an illustration of Loss-Resistant Vertical Spreads – as the underlying fell slightly and I still won the position.

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.”