Stock Market Gremlins

Stock Market Gremlins: I anticipate the markets will struggle to stay positive this holiday season as there are too many Gremlins causing malevolent mischief for the Marketeers. – Damocles

Stock Market Gremlins

“With Mogwai, comes much responsibility” – so warned the Chinese boy to the American inventor. “Because, from Mogwai’s wet hair, Gremlins come alive.”

I don’t have any of these cute little critters. But this holiday season, I will have to contend with their mischievous cousin – Congress.

Commentary’s Contents

Dysfunctional Congress
Continue Inflation Pressure
Federal Reserve to Boost Interest Rates
Federal Gremlins

 – Chinese Boy: Look, mister, there are some rules that you’ve got to follow.
– Billy Peltzer: Yeah, what kind of rules?

-Movie: Gremlins (partial)

I expect this holiday season to be tough for Vertical Spreads. The mischievous horde of Gremlins that Congress has unleashed by not following their fiscal rules will indeed cause havoc on any new positions I open.

Here are some Gremlins that I will have to deal with over the next couple of months:

Dysfunctional Congress

– Chinese Boy: First of all, keep him out of the light,
he hates bright light,
especially sunlight,
it’ll kill him

-Movie: Gremlins (continued)

Congress hates this too – especially the spot-light…

Failure to deal with the Debt Ceiling issue, can’t agree on trillions of dollars of new tax and new spending, the death of bipartisanism, and the politics of Personal Destruction will keep the Marketeers dodging. All because the rules they “got to follow” are not being followed.

Continue Inflation Pressure

– Chinese Boy: Second, don’t give him any water,
not even to drink.

-Movie: Gremlins (continued)

Rising wages, labor shortage, tangled supply chains, and spiking energy costs will keep pressure on the holiday buying season. This pressure is exacerbated by the “get vaccinated or get fired” movement – which is not helping the nation’s labor shortage.

The current inflation rate is at a 30-year high. And regardless of the political spin that our trusted politicians have assured us, this rate is only transitory until it becomes the base rate for next year’s inflation reporting.

Federal Reserve to Boost Interest Rates

– Chinese Boy: But the most important rule,
the rule you can never forget,
no matter how much he cries,
no matter how much he begs,
never feed him after midnight.”

-Movie: Gremlins (continued)

The primary weapon the Federal Reserve has to combat out-of-control inflation is to hike interest rates. And this week, the IMF (International Monetary Fund – not the Impossible Mission Force) is warning the global Central Banks to prepared for battle.

With short-term interest rates cut to near-zero, the Federal Reserve has been feeding the Gremlins by buying large quantities of corporate bonds, Treasury securities, and MBS every month since March 15, 2020 (Quantitative Easing). QE has helped keep long-term interest rates down at the start of the COVID economic shutdown, but at the same time has fired up the economy into overdrive.

But, now the Feds are signaling that they will start tapering off these mass purchases of assets as soon as mid-November. This action will increase long-term interest rates for treasuries and corporate bonds and put the US on the path to even higher inflation. I expect to see a resurgent of the Misery Index.

Federal Gremlins

Combining QE tapering, renegotiating a new Debt Ceiling, and the prospect of $5 Trillion of new spending deal (all within the next two or three months) is going to unleash a horde of malevolently mischievous Gremlins that will create havoc within my Vertical Bull Put Credit Spreads during the last quarter of the year. I should only consider loss-resistant Vertical Spreads during this time.

Fantastic Ideas for a Fantastic World.
I make the illogical logical.

– Rand Peltzer: (Movie: Gremlins)

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Other Posts from OptionsTradesByDamocles

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 10/11/2021)

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.

• Kicking the Debt Ceiling can into the Holidays
• A huge miss with the Sept Jobs Report
• Supply-chain tangles – container ships logjammed at US ports
• Inflation to remain high through Christmas
• Feds starting pullback on economic stimulus (tapering) soon
• Central Banks interest rates set to rise
• Major budget disagreement for Federal Fiscal Year 2022

The Feds have been purchasing an average of $120B worth of corporate bonds each month. This Quantitative Easing (QE) has kept the interest rates for these bonds down and, conversely, stocks up. But once the tapering starts, corporate bonds interest rates will begin to rise, providing a profitable alternative to stocks. This will shortly force the Central Banks to start raising their interest rates to compete.

Upward inflation pressure (rising wages, labor shortage, supply chain, spiking energy cost), Debt Ceiling negotiation Act 2 in November, plus Fed tapering is going to keep a lot of pressure on my Vertical Spreads for the next several weeks.

GTS votes a 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 correspond with the market’s innate tendency to rise.

The trajectory for the 1-month VIX Regression Channel tilted down quite a bit from last week.

The VIX ended last week at 18.8%, down from 21.2% the week before but only after a mid-week jump. And after the Debt deal was announced late Wednesday night, it dropped to the week’s low.

As the budget battles in Congress continue, I expect the VIX to continue to rise or move mostly sideways in an elevated state. And after the Spending Bills are approved, I will also expect the VIX to continue higher as the Marketeers return their cash back into the markets.

The VIX has been rising over the past three months. This signals a continued confusion with the Marketeers on if the Bull market is petering out.

VIX votes a cautious 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 concern since it appears to be hinged with the budget battles in Congress. But since the Congressional decision was to – make no decision (until Dec.), I will expect the political melee to continue.

The 9-Day SMA ended the week at 0.6, mostly flat from 0.6 the week before. 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).

Mainly being 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 cautious DEFCON 4

Consumer Sentiment Index (CSI):

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 last week, but that was before Congress kicked the Debt Ceiling decision into Dec. I would suspect that that act will not bode well for the Consumer Sentiments.

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) = 34,746 – up 1.2% from 34,326 last week. (4 weeks deviation: 324 down from 396 last week)
S&P 500 (SPX) = 4391 – up 0.8% from 4,357 last week. (4 weeks deviation: 54.7 down from 63.93 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 Weeks Thrashing of DJX = +/- 324 points or 0.9% of the market’s volume is slightly down from 1.2% last week.
4 Weeks Thrashing of SPX = +/- 54.7 points or 1.2% of the market’s volume is down from 1.5% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)

After falling over 5% over the past six weeks, the Debt Ceiling deal Thursday was good news to the Marketeers. The late-week rebound was good to see.

But the Debt Ceiling agreement was nothing more than teeing up a renew gremlin outbreak for November.

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. It won’t be until December before I would expect the budget battles to be over. But as toxic as our political system has become, this uncertainty may spill over into the new year.

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

Market Index votes a cautious 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 short-lived – DEFCON 3
• The VIX popped, but fell back to just below 20% – cautious DEFCON 4
• The P/C Ratio shows consern but still in the “good shape” zone – 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

The VIX has been rising over the past three months, the COVID-recovery has definitely slowed, inflation is staying for a while, jobs are not rising (and the “get vaccinate or your fired” mandates are not helping), Congress can’t agree on a 2022 operational budget, energy prices are pegging, container ships (supply-chain bottleneck) are logjammed.

This week’s Market Sentiment shows 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 > 82%
• Spread term of 8-weeks or less

Profit and Loss Statement

(As of 10/15/2021)

Balance Sheet

	Year 2021	Month Oct	Week #41
Beginning Account Balance	$16,000.00	$19,903.72	$20,143.65
Deposits (Div. & Int.)	$1.26	$0.00	$0.00
Withdraws (paycheck)	-$2,700.00	-$0.00	-$0.00
Premiums on Open	$8,118.01	$716.00	$175.00
Premiums on Close	-$1,001.00	-$298.00	-$0.00
Fees Paid (total)	-$100.64	-$4.09	-$1.02
Ending Account Balance	$20,317.63	$20,317.63	$20,317.63
Total Gain/Loss	$4,317.63	$413.91	$173.98
ROR		2.1%	0.9%
ROC	27.0%

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	$8,119.27 (Premiums)	0.45 shares (Dividends Reinvested)
Funds Removed	-$1,100.64 (Early Close & Fees)	$0 (Fractional Shares Sold)
Ending Balance	$23,017.63 (Cash)	$19,516.86 (43.83 shares * $445.27 CV)
ROI	+43.9%	+22.0%

Schedule for this Week

Goals for this week: (10/11/2021 – 10/15/2021) (Week #41)

• 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: Dec 03 (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 10/15/2021)

Spread Count Summary:

	Year 2021	Month Oct	Week #41
Vertical Bull Put Credit Spread	72	3	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	73	3	1

Current Dollars at Risk:

	Year 2021	Month Oct	Week #41
Vertical Bull Put Credit Spread	$16,551.	$5,284.	$2,825.
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	$16,551.	$5,284.	$2,825.
Max Risk Allowed	$16,000.	N/A	$3,000.

Vertical Spreads Opened This Week

(10/11/2021 – 10/15/2021)

SPY: 410p/380p  – Open 10/14/21 – Expires 11/26/21 – Max Gain = $175.00 – Open Price = $440.43
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.6%, Headroom-6.9%, Max Loss=$2,825, AROR=52.3%

Entry Rules for Vertical Bull Put Credit Spreads:

• Current maximum dollars at risk < $16,000? No ($16,551)
• Max dollar at risk this week < $3,000? Yes ($2,825)
• 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)? Yes (1.72 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=$416.02)
• Short-strikes Prob-OTM > 82%? Yes (82.6%)
• 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 (30 strike width)

This position is my first super-wide Spread (30 wide). Since I believe that the markets will be struggling to keep positive (or even sideways) over the rest of the year, I decided to only enter into one trade this week and make it deep.

But I kept my eye off the Max-Risk ball and overshot my $16,000 limit.

Vertical Spreads Currently Cooking

(As of 10/15/2021)

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%
Now: Prob. OTM=89.0%, Headroom=-10.4%

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%
Now: Prob. OTM=66.2%, Headroom=-2.8%

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=74.1%, Headroom=-3.5%

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=88.6, Headroom=-7.9%

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=93.2%, Headroom=-7.6%

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=91.2%, Headroom=-6.3%

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=94.7%, Headroom=-6.8%

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=95.2%, Headroom=-4.6%

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=93.6%, Headroom=-5.0%

Vertical Spreads Closed This Week

(As of 10/15/2021)

SPY: 415p/400p  – Open 08/24/21 – Expires 10/15/21 – Max Gain = $116.00 – Open Price = $447.85
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=80.7%, Headroom=-7.4%, Max Loss=$1,384, AROR=58.3%
At Close: Prob. OTM=99.8%, Head Room=-6.8%, AROR= 58.8%

Cost to open: $1.16 premium collected * 100 shares = $116.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expired worthless)
Net Profit= $116.00 to open – $0.00 to close – $1.00 fees = $116.00
AROR= ($116.00 / 52 days in play) *365 / $1,384 = 58.8%

This position went negative since open. It recouped some but still closed at 445.30. This should be a testament to “loss-Resistant Vertical Spreads.

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.”