Rolling Vertical Put Spreads: There is no such thing as a loss-proof Vertical Spread. So this week, I will use my wizardly powers and review how to rolling losing Vertical Put Credit Spreads using ThinkorSwim.

Rolling a Vertical Spread

It is not magic that makes one a wizard – but knowledge. And it does not take a wizard to save a losing Vertical Spread – but ThinkorSwim.

I start this week dreadfully reminded that no matter how “Loss-Resistant” I construct my weekly Options orders, there is no such thing as a loss-proof Vertical Spread. And to punctuate this reality, I will be rolling a QQQ Vertical Spread this week that has fallen into ITM.

Oz? That’s my name.
Oscar Zoroaster Phadrig Isaac Norman Henkel Emmannuel Ambroise Diggs.
But everyone calls me Oz

– Oscar Diggs (Movie: Oz the Great and Powerful)

Commentary Contents

Marketeers Hate Uncertainty
What is Rolling a Vertical Spread?
When to Roll a Vertical Spread
How to Calculate Premiums from Rolling Vertical Spreads
How to Roll a Vertical Spread Using ThinkorSwim
Conclusion

Marketeers Hate Uncertainty

September began with the S&P 500 at its 52 week-high of 4,537. However, a short 30 days later, it has fallen 5.5% to 4,290. This adjustment appears to be the beginnings of a Market Correction, as the Marketeers react to Congress’ inability to manage its budgets on time.

This past month has set my Vertical Spread inventory back on its heels. And to avoid significant losses from my short-term Vertical Spreads, I need to start considering rolling.

What is Rolling a Vertical Spread?

Rolling a Vertical Spreads is a “loss management” technique I can use to mitigate the possible significant losses from a losing Vertical Spread. To roll a Vertical Spread, I will enter a “Vert Roll” order that executes these four transactions simultaneously:

1. Cover (buy back) the Short-leg of my losing Vertical Spread
2. Sell my protective Long-leg of my losing Vertical Spread
3. Sell a new Short at the same Strike-Price but 6-8 weeks out
4. Buy a new Long at the same Strike-Price but 6-8 weeks out

Below is what a transaction chart for rolling my QQQ Spread will look like:

Take Away

Rolling a losing Vertical Bull Put Credit Spread does not reduce the risk. In fact, the newly rolled Spread has the same Strikes configuration, where only the expiration date moves forward. Therefore, entering into a rolled Vertical Spread assumes that the near-future market forces will recover.

This is technically just kicking the endanger Spread-can a bit further down the road.

When to Roll a Vertical Spread

I’m not as delicate as I look

– China Girl (Movie: Oz the Great and Powerful)  

The timing to roll a Vertical Spread can be a little – delicate. If I wait too late, there is a high likelihood of no takers to my order. I will then be left holding the bag and taking the entire loss.

On the other hand, if I roll too early, then I may miss a QQQ bounce.

As a Rule of Thumb, Trust My Gut

I have no desire to live my life with my Options Trading guts tied into knocks as my positions dance way too close to ITM. So, if my Vertical Spread is:

• Within two weeks of expiration
• Overhead is under 2%
• Probability-OTM is below 60%
• Underlying asset’s trajectory has been bearish for the past few weeks and there is nothing to suggest that will change

Then my Vertical Spread is just too uncomfortably close to losing.

If the markets are volatile, 2% thrashing is not unreasonable. I should take the opportunity to take a potentially losing Spread off the table and sleep better at night.

How to Calculate Premiums from Rolling Vertical Spreads

How much will it cost (or profit) to roll a losing Vertical Spread? For this journal’s commentary, I will look at rolling this current position as my example.

QQQ: 355p/340p  – Open 08/30/21 – Expires 10/15/21 – Max Gain = $123.00 – Open Price = $379.55

If I were to close this position today, I will:

• Buyback Oct-15 355 Put Short Strike = -$4.01 x 100 shares = -$401.
• Sell Oct-15 340 Put Long Strike = $1.16 x 100 shares = -$116
• Paying -$401 + $116 = -$285 to close the Spread

This transaction will be a loss of $185 ($100 collected at open -$285 paid to close).

But if I choose to roll, then I would at the same time:

• Sell a new Nov-19 355 Put Short Strike for a premium of $9.89
• Buy a new Nov-19 340 Put Long Strike at a premium cost of -$5.87
• Collecting = $9.89 – $5.87 = $4.02 X 100 shares = $402

The net price result to roll the QQQ 355p/340p Spread from the existing Oct 15 expiration to a new Nov 19 expiration = -$285 to close Oct-15 + $402 to open Nov-19 = $117 profit

Take away

I do not know if QQQ will rebound during the next ten days or if it will continue the thumping it has received over the past 4-weeks. But the 3^rd Quarter Federal Jobs numbers are coming out this week, the Federal Debt Ceiling wrangling will continue, and the $5 Trillion Spending Bill is still in an unknown state. Therefore, I believe that the markets will continue to be under pressure through next week.

How to Roll a Vertical Spread Using ThinkorSwim

An easier way to calculate the premiums from rolling a Vertical Spread is to use Ameritrade’s ThinkorSwim Trading Platform. For example, using ThinkorSwim, I can set up a Vertical roll as follows:

• Click the “Monitor” tab
• Open up the position section
• Drill down to the list of QQQ Options
• Click-hold, drag and highlight the two options that make the losing Vertical Spread
• Right-click over the highlighted two options
• Hover over the “Create Rolling Order”
• Click “Sell -1 Vert Roll QQQ 100 Oct 15 21/15 Oct 21 355/340/355/340 Put”

In the “Order Entry” section, notice that the default “roll-to” date is the next available Options date for QQQ. (In this screenshot, the roll-to date is Oct 18 – the following Monday).  

I don’t want this.

• Click the default “roll-to” date. (This will produce a pop-up list of all the available Options dates)
• Scroll down the list of “roll-to” dates and click the expiration date that is 6-8 weeks out.

• Enter a premium price
• Click “Confirm and Send”

Verify that I entered the new parameters as intended.

• Click “Send”

Once Ameritrade accepts the order, the “Working Orders” section will look like this.

Conclusion

Rolling Vertical Put Credit Spreads is not nearly as hard as rolling one beautiful Genda to the next. But with a little “tinkering” it can be done…

Glinda : Well done, Tinker, your machine works beautifully!
Master Tinker : That’s just workmanship. What you displayed was true courage

– Oz (Movie: Oz the Greate and Powerful)

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 10/04/2021)

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.

• $5T Spending Bills
• 2022 mid-term elections campaingning has begun
• Don’t take eyes off the inevitable rise in interets rates
• Central Banks tightening their belts
• China’s Evergrande threat to default
• Debt Ceiling
• COVID

I’m expecting Oct to have higher returns across the markets

A shape rise in Interest rates will give the skittish Marketerers an alternative place to put their money.

The S&P 500 lost over 5% in September. Primarily because of the bring-it-to-the-wire brinksmanship in Congress over the Debt Ceiling extension.

Marketeers hate uncertainty. And with $5 Trillion up for grabs with no one really knowing what that means for inflation, job markets, or businesses, I will suspect that the next couple of weeks will continue with wild daily market rides – but mostly moving sideways.

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 has not changed from last week’s. It continues to be moving in a skittish direction.

The VIX ended last week at 21.2%, a strong jump from 17.75% the week before, yet about the same as it was the week before (20.8%).

I continue 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. And as the budget battles in Congress have risen to a crescendo, I expect the VIX to continue to rise. And after the Spending Bills are approved, I will also expect the VIX to continue to rise as the Marketeers rebound their cash back into the markets.

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.

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.

The Put/Call Ratio continued at an elevated state. But I am still not too concerned since it appears to be hinged with the budget battles in Congress. The political melee should be mostly over by mid to last October.

The 9-Day SMA ended the week at 0.6. Although it is above 0.5, I would not consider this as “running towards the hills.”

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.

Being mostly above 0.5, yet not dangerously close to the insidious 1.0 line, 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.

Consumer sentiment inched upward towards the end of September, giving a little gain over last month. But the leveling off of the CSI over the last few months does not bode well for a quick return to pre-pandemic confidence.

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) = 34,326 – down 1.4% from 34,798 last week. (4 weeks deviation: 396 down from 451 last week)
S&P 500 (SPX) = 4,357 – down 2.3% from 4,455 last week. (4 weeks deviation: 63.93 up from 54.25 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 = +/- 396 points or 1.2% of the market’s volume is slightly down from 1.3% last week.
4-Week Thrashing of SPX = +/- 63.93 points or 1.5% of the market’s volume is up from 1.2% last week.
(Market Thrashing above 1.0% might indicate indecision for the Marketeers.)

Despite the end-of-week rally, last week the Marketeers were primarily taking profit off the table.

September is historically market-bad due to it being the end of the Federal Fiscal Year. Political wranglings over the next year’s federal spending bills are easy fodder for grandstanders predicting dire consequences bills pass or not.

The Marketeers hate uncertainty. And with $5 Trillion up for grabs with no one really knowing what that means for inflation, job markets, or businesses, I will suspect that the next couple of weeks will continue with wild daily market rides – but mostly moving sideways. But by mid-October, the budget battles should be over and the market trajectory should return to the bullish regression channel above.

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

Septembers markets have dropped and the VIX is on the rise. Just looking at these two indicators suggests that I would be prepared for a continued bear market. But the GTS predicts that the market angst is mostly influenced by the congressional budget battle, which should be over soon.

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 10/08/2021)

Balance Sheet

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?

Schedule for this Week

Goals for this week: (10/03/2021 – 10/08/2021) (Week #40)

• 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 26 (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 10/08/2021)

Spread Count Summary:

Current Dollars at Risk:

Vertical Spreads Opened This Week

(10/04/2021 – 10/08/2021)

QQQ: 330p/315p  – Open 10/07/21 – Expires 11/26/21 – Max Gain = $133.00 – Open Price = $363.94
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.2%, Headroom-9.3%, Max Loss=$1367, AROR=70.5%

Entry Rules for Vertical Bull Put Credit Spreads:

• Current maximum dollars at risk < $16,000? Yes ($15,110)
• Max dollar at risk this week < $3,000? Yes ($2,459)
• Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (50 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)? No (1.7 up from 1.4)
• 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? Yes (1SD=$340.29)
• Short-strikes Prob-OTM > 80%? Yes (81.2%)
• 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)

Congress reported a Debt Ceiling deal that should take the pressure off the markets until Dec – which Act 2 of this issue starts up. By that time (hopefully) this Spread will be well out of reach of the budget battle.

Rolled from 10/15: QQQ: 355p/340p  – Open 10/5/21 – Expires 11/19/21 – Max Gain = $408.00 – Open Price = $357.90
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=53.4%, Headroom-1.1%, Max Loss=$1,092, AROR=302.3%

Entry Rules for Vertical Bull Put Credit Spreads:

• Current maximum dollars at risk < $16,000? Yes ($13,743)
• Max dollar at risk this week < $3,000? Yes ($1,092)
• 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 1.3)
• 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=$323.10)
• Short-strikes Prob-OTM > 80%? No (53.3%)
• 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)

September’s market-thumping has put many of my current Spreads in jeopardy. The Oct 15th version of this Spread went ITM on Monday (yesterday) and was way too close to ITM at its expiration that I decided to roll it out for a month. I am depending on Congress to get beyond its budget woes in the next two weeks so I am expecting a QQQ rebound.

This Spread was used in this week’s commentary. I the commentary, the example price I used was $1.18 total premium. I wound up executing this trade at $1.10 because QQQ was starting to drop. Holding out about an hour longer would have gotten me that $1.18 price, but I was more focusing on completing the transactions than gaining that extra $8.00.

The reporting of a Debt Ceiling deal in Congress was happy news to the Marketeers during Thursday’s trading. The Broader Markets made a nice bounce and those Vertical Spreads that I have at high risk don’t look so dire.

But I am happy that I rolled my QQQ Spread because I got a good week’s profit from the transaction and I don’t have to worry about another downturn before the end of next week. (Even with the nice bounce, it was still within 2% of ITM.)

Vertical Spreads Currently Cooking

(As of 10/08/2021)

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%
Now: Prob. OTM=60.4%, Headroom=-1.9%

SPY: 410p/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%
Now: Prob. OTM=79.6%, Headroom=-6.4%

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=84.6%, Headroom=–6.5%

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=77.5%, Headroom=–4.6%

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=84.5%, Headroom=–5.4%

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=78.6%, Headroom=–3.1%

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=75.4%, Headroom=-3.2%

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=94.8%, Headroom=-5.3%

Vertical Spreads Closed This Week

(As of 10/08/2021)

Rolled to 11/19: 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%
At Close: Prob. OTM=59.2%, Head Room=-0.1%, AROR= -114.1%

Cost to open: $1.00 premium collected * 100 shares = $100.00
Cost to close: $2.98 premium paid * 100 shares = $298.00 (Rolled)
Net Profit= $100.00 to open – $298 to close – $1.00 fees = -$198.00
AROR= (-$198.00 / 46 days in play) *365 / $1,377= -114.1%

This Spread went ITM 10/04, 11 days prior to expiration. On 10/5, QQQ recouped above 355 briefly where I executed a Vertical Roll to Nov 19. See the “Vertical Spreads Opened This Week” for the rolled 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).

This blog is my Options Trading Journal. I will record my weekly Option Contracts buys and sells in hopes of gaining experience.

Experience is the ability to recognize that
I’m about to make the same mistake again.

– Damocles

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.”