At what point do I need to sell an ITM Spread early for a loss or just let the Option be assigned? This month’s Trade Journal will revisit the Good, the Bad, and the Ugly of Options Assignments and what role they should play in my Vertical Spread strategy.

Vertical Spread Assignments

2022 has not been a good year for selling weekly Vertical Credit Spreads.

The focus of the 2021 COVID Recovery Policies shielded the citizens (which was good) but at the expense of economic stability.

The misbalance in the Federal recovery policies exacerbated inflation and inflamed an already dangerously divided nation. And as 2022 rolled in, vaccine/masks mandates, shockingly high inflation, and tanks rolling into Ukraine blew the top off of the two-year market recovery from the COVID Crash. With debilitating inflation, soaring gas prices, and a paralyzed government – six months later, the S&P 500 lost nearly 25% of its value.

I spent the better part of this year protecting my Bull Put Spreads that I open in late 2021. The stubbornest of the downturn exhausted my trading account and patience. In May, I surrendered to the trend and turned my attention to Bear Call Spreads.

Act 2: During the past 2 months, oil fell below $80, inflation ticks down, the war in Ukraine became boring, and the S&P has rallied by 17%. Now a large percentage of my Bear Call Spread inventory is threatening ITM. I am again faced with the same protection decision I had in the first half of this year. I fear I won’t fair any better.

The commentary for this month’s Trade Journal is to revisit what role Options Assignment should play in my strategy. I need to ask myself, at what point do I need to sell early for a loss or just let an ITM Spread be assigned? I need to revisit the Good, the Bad, and the Ugly of Options Assignments.

  Commentary Contents

• Anatomy of a Vertical Put Spread
  • Options Contracts
  • Short vs. Long Puts
  • Short vs. Long Calls
  • Short Leg’s Obligation
  • Long Leg’s Obligations
  • Other Players (The Options-Verse)
  • Options Clearing Corporation
  • Same-Day Substitution Rule
  • Risk Dollars Vs. Max Loss
  • Short Assigned, Long Expired – An Account Calamity
• Assignments – What Happens
  • What Happens – Put Options Assignment
  • What Happens – Call Options Assignment
• Options Assignments – The Good
  • Lemonade from Lemons
• Options Assignments – The Bad
  • The Bad – Losing the Battle
  • The Worse – Losing the War
• Options Assignments – The Ugly
• Options Assignments – The Easy
• The Short Conclusion

Anatomy of a Vertical Spread

To understand what happens when my Options get assigned, I need a basic review of the parts of a Vertical Spread.

Options Contracts

Buying or selling Options establishes a contractual agreement between my broker and me. One clause of that agreement acknowledges that each Options contract represents 100 shares of the underlying asset. Another clause requires me to buy (Put Options) or sell (Call Options) 100 shares of the underlying at a predetermined price (the “Short Strike Price”) – should my broker demand.

Short vs. Long Puts

When I open a new Vertical Bull Put Credit Spread, I am entering a position that includes two different Put Option contracts that will expire on the same day – a Short Put and a Long Put.

1. The Short Put: I will sell one Put contract that will become my Short leg (“Short” because I am selling an Option contract that I do not own, so literally, I am “short” that contract).
2. The Long Put: At the same time, I will buy another Put contract that will become my Long leg (long because I will own that contract, and I can do with it as I want for as long as I want).

Short vs. Long Calls

When I open a new Vertical Bear Call Credit Spread, I am entering a position that includes two different Call Options contracts that will expire on the same day – a Short Call and a Long Call.

1. The Short Call: I will sell one Call contract that will become my Short leg (“Short” because I am selling an Option contract that I do not own, so literally, I am “short” that contract).
2. The Long Call: At the same time, I will buy another Call contract that will become my Long leg (long because I will own that contract, and I can do with it as I want for as long as I want).

Short Leg’s Obligation

Selling (shorting) an Option contract comes with some obligations. Specifically, any time the contract becomes ITM (In the Money), I am obligated to honor the Options’ contract agreement. That agreement states that if my broker “chooses,” they can demand that I buy (if my Put contract is being assigned) or sell (if my Call contract is being assigned) the 100 shares of the underlying asset at the agreed Short Strike price. Or, my broker can wait until a later time to make the assignment. Or maybe not make the call at all.

But if the Option contract expires with the Short Strike ITM, then the assignment will be automatic and unforgiving.

Long Leg’s Obligations

Buying an Option contract does not obligate me in any way. I already paid for it, so technically, my part is done. I can sell it when I want, and I can exercise it if goes into ITM or keep it until the contract expires – all my options.

Other Players (The Options-Verse)

For me to enter into a Spread, someone else within the Options-verse will have to buy the same Put/Call Options contract that matches what I want to sell as my Short Leg. Likewise, someone will have to sell the same Put/Call configuration that I want to buy as my Long Leg. And those “someones” don’t need to be the same someone.

The point to make is the buy and sell transaction between two separate people does not create a connected pair (someone did not buy my Put, but rather two Puts with the same configuration were both bought and sold simultaneously.) Thus, the fate of my Vertical Bull Put Credit Spread is NOT beholden to a specific individual.

Options Clearing Corporation

All options transactions are rolled up from the brokers to the “Options Clearing Corporation (OCC)” – the arbiter of the Options-verse.

Same-Day Substitution Rule

Brokers have a “Same-Day Substitution” rule that will exempt margin interest charges if the buy/sell transaction happens the same day.

Risk Dollars Vs. Max Loss

Risk Dollars for any Vertical Credit Spread is the dollar difference between the Short Strike and the Long Strike times 100 (one options contract assumes 100 shares). This is the required available cash I need to have in my Trading account to cover the risk of the new Vertical Credit Spread in case things get “Ugly.”

Once my new order transaction is completed, my trading broker, Ameritrade, will set aside (flag) the Risk Dollars as unavailable from all future transactions until the Spread contracts are completed. Ameritrade will not allow me to enter into a Spread unless I have the corresponding Risk Dollars available.

For example:
Spread’s Short-Strike = $345
Long-Strike = $325
Maximum risk dollars = ($345 – $325) * 100 = $2,000

Max Loss is the maximum amount of money I can lose from a Vertical Spread.

When opening a Credit Spread, I receive a premium upfront. This is cash that is mine and is not allocated to anything. And assuming my Credit Spread exits worthlessly, then this premium is my total profit. But if my Spread ends in a total loss (both Short and Long Legs are ITM), then my actual loss would be the set-aside Risk Dollars minus the premiums collected.

For example:
Risk Dollars = $2,000
Premium Collected = $100.
Max Loss = ($2,000 – $100) = $1,900

Short Assigned, Long Expired – An Account Calamity

There is a gut-wrenching caveat to the Max Loss definition.

If Monday morning, I find that I’m either in huge debt because I now own hundreds of shares of the underlying, or I now owe hundreds of shares of the underlying to my broker, I am now at risk for unlimited losses. There is no protective Long Leg to limit my losses. (See Options Assignments – The Bad.) If news comes out over the weekend that accelerates the trajectory of my Spread’s underlying further into ITM, I could lose much more than Max-Loss.

Assignments – What Happens

Short Leg assignments can happen at any time they are ITM. So I need to be aware of what happens during the assignment process to avoid accruing expensive margin interests, complicated closings, or additional significant losses.

To help me better understand what happens when the Short Leg of my Spread is assigned, I documented two different assignments in the sections below.

Things to remember:

• Exercising a Long Option contract anywhere in the Options-verse will automatically trigger the process of assignment of a Short Option elsewhere in the Options-verse. Therefore, I need to be aware that my ITM Short Option contract can be assigned any time before expiration.
• If the Short Leg of my Vertical Spread is assigned, the Long Leg is NOT automatically exercised. It is only automatically exercised if it is ITM at expiration.
• The assignment of my Short Leg Option contract WILL result in me automatically buying 100 shares of the underlying asset (if a Put) or automatically short-selling 100 shares of the underlying (if a Call).
• I can avoid this risk of Short Options assignments in my open Vertical Spreads by closing ITM Spreads early – typically for a sizable loss.

What Happens – Put Options Assignment

The Short Strike Put contract of this Vertical Bull Put Credit Spread was allowed to be assigned:

QQQ:330p/290p  – Open 03/25/22 – Expires 05/06/22 – Max Gain = $322 – Open Price = $359.08

Trading Account cash balance = $25,139.07
QQQ closing value 05/06/22 = $310.38
QQQ Short Put Strike = $330 (ITM and was assigned)
QQQ Long Put Strike = $290 (OTM and expired worthlessly)

After the markets closed on expiration Friday:

• Broker executed my Short Put contract by buying (on my behalf) 100 shares of QQQ for $33,000 ($330 Short Strike * 100 shares)
• Broker removed my Short Put Options contract due to the assignment
• Broker removed my Long Put Options contract due to expiring worthlessly
• My Trading Account cash balance was updated to -$2,139.07 ($25,139.07 – $33,000)
• My account now has 100 shares of QQQ
• Potential Maintenance Call due to negative cash balance

Note: On Friday, after the market closed, I found I now own 100 shares of the underlying (QQQ) in my trading account. My broker cannot auto-sell the QQQ asset to balance the spread. And from the “Potential Maintenance Call” messages in my trading platform, they were kindly asking that I increase my cash balance amount quickly.

To completely close this Spread on Monday, I had to consider the following:

1. The assignment happened after the market closed on expiration Friday.
   • The margin interest meter is running.
   • The Same-Day Substitution Rule does not apply since the closing transaction cannot happen until the markets open Monday morning (65.5 hours later).
2. I cannot sell my QQQ asset until I submit a trading order Monday morning and the order is filled.
3. The price of the underlying (QQQ) can change over the weekend.
   (I no longer have a protective Put since it expired Friday. So a large change can have a devastating effect.)
   • If the underlying continues further ITM, then my loss will be more.¹
   • If underlying rebounds away from ITM, then my loss will be less.

(The price trajectory of the asset will most likely continue through the weekend.)

¹ By Monday morning, QQQ continued to drop. By the time I could sell my newly acquired QQQ shares, the price had plunged to $302.17. If I had closed my Spread early on Friday, my loss would have been about ($310.38 (closing price) – $330 (Short-Strike) = -$19.62 * 100 shares =) -$1,962 (intrinsic value) – time value left. However, by waiting until Monday morning, I sold my 100 QQQ for a loss of –$2,783 ($302.17 – $330 = -$27.83 * 100 shares). Allowing the Short Leg to be assigned cost me an extra $821.

What Happens – Call Options Assignment

The Short Strike Call contract of this Vertical Bear Call Credit Spread was allowed to be assigned:

DIA:335c/345c/X2 – Open 06/30/2022 – Expires 08/12/22 – Max Gain = $120.00 – Open Price = 307.90
(This position’s closing was recorded in the “Vertical Spreads Closed This Week” section below)

Cash balance Trading Account = $17,059.23
DIA closing value 08/12/22 = $337.83
DIA Short Call Strike = $335 (ITM and was assigned)
DIA Long Call Strike = $345 (OTM and expired worthlessly)

After the markets closed on expiration Friday:

• Broker executed my Short Call Options contract by selling (on my behalf) 200 shares of DIA for $66,998.44 ($335 Short Strike * 100 shares * 2 contracts – $1.56 fee)
• Broker removed my Short Call Options contract due to the assignment
• Broker removes my Long Call Options contract due to expiring worthlessly
• My Trading Account cash balance was updated to $84,057.67 ($17,059.23 + $66,998.44)
• My account now has -200 shares of DIA
• Potential Maintenance Call

Note: at this point, I owe 200 shares of the underlying (DIA) to my broker since my broker cannot auto-buy to balance the spread. And from the “Potential Maintenance Call” messages in my trading platform, they are kindly asking that I return 200 shares of DIA to them toot-sweet.

To completely close this Spread Monday, I have to consider the following:

1. The assignment happened after the market closed on expiration Friday.
2. I cannot buy 200 shares of DIA until I submit a trading order and the order is filled Monday Morning.
3. The price of the underlying (DIA) can change over the weekend.
   1. If it continues further ITM, then my loss will be more.
   2. If it rebounds away from ITM, then my loss will be less.¹

(The price trajectory of the asset will most likely continue through the weekend.)

¹ Over the weekend, DIA reversed its bullish run. By Monday morning, when I bought the 200 shares of DIA to return to my broker, the price had dropped to $336.62. If I had closed my Spread before the market closed on Friday, my loss would have been about ($335 (Short Strike) – $337.83 (closing price) = -$2.83 * 100 shares * 2 contracts =) -$566 (intrinsic value) – time value left. However, by waiting until Monday morning, I bought my 200 DIA at $336.62 for a spread closing of -$324.00 ($335 – $336.62) = -$1.62 * 100 shares * 2 contracts). Allowing the Short Leg to be assigned cut my Spread loss by $242 (-$566 – -$324).

Options Assignments – The Good

The only good assignment – is no assignment.

Lemonade from Lemons

Beyond no assignment:

If the Short Leg in my Vertical Spread is assigned, and over the weekend the underlying asset reverses its fortunes and is now moving towards OTM (Out-of-the-Money) before I can balance my account, then I can lessen my loss.

Lemons: As a matter of observation, the underlying asset is currently moving against my Spread, hence the reason why my Short Leg failed. If the final week’s short-term trajectory continues into ITM, it will be unlikely that the trajectory will miraculously reverse over the weekend (unless I know something the rest of the Marketeers don’t).

Lemonade: Fortune smiles upon me, and news over the weekend reverses my underlying and is now moving towards OTM.

Break out the antacids: By allowing my Short-Leg contracts to be assigned, I will purposely turn this Good Assignment into an Ugly Assignment. Additionally, I run the risk of my newly acquired (short) assets reestablishing their longer-term trend and moving further into ITM. This could then turn into a very Bad Assignment.

Options Assignments – The Bad

The Bad – Losing the Battle

If both my Long and Short Legs in my Vertical Spread are ITM at expiration, then this is a total loss. After the market closes on Expiration Friday, my Short Leg will get auto-assigned, and my Long Leg will be auto-exercised. (I will automatically buy and sell the underlying without my involvement.)

The end result will be Max Loss for my Spread (see Max Loss vs. Risk Dollars section).

The Worse – Losing the War

My Short Leg is assigned at expiration, but my Long Leg expires worthlessly:

Vertical Bull Put Credit Spreads:

At expiration, if my Short Put contract is ITM and is auto-assigned, I will be the new owner of 100 shares of the Spread’s underlying asset already underwater (an asset that is falling, hence the reason the Short Put was assigned). And since I no longer own a protective Put contract (just expired worthlessly), I am now at risk of a greater loss than max-loss. (See “What Happens – Put Options Assignment“)

If bad news comes over the weekend and my now already battered asset takes a major plunge before the markets can open on Monday, I can be at risk of an account-killing blowout.

Vertical Bear Call Credit Spreads:

At expiration, if my Short Call contract is ITM and is auto-assigned, I am now in debt to my broker for 100 shares of the Spread’s underlying asset (an asset that is rising, hence the reason why the Short Call was assigned). And since I no longer own a protective Call contract (just expired worthlessly), I am now at risk of a greater loss than max-loss.

If good news comes over the weekend and my already rallying assets skyrockets before the markets can open on Monday, then I am at risk of an account-killing blowout.

Options Assignments – The Ugly

(Also, The Complicated)

The Ugly is when my Short Leg is auto-assigned at expiration, and my Long Leg expires worthlessly. Regardless if the Spread is a Bull Put or a Bear Call, the status of the position is incomplete until I can balance out my account deficits when the market reopens.

If Friday is a holiday (Expiration Thursday) or Monday is a holiday, or Thanksgiving weekend, holding wayward assets for 2.5 to 4.5 days can cause great gastric distress. Any news during the time the markets are closed can make my losing Spreads worse.

Additionally, my unresolved trading account deficits will accrue margin interest until I can balance my account. And, if I am not able to make the necessary adjustments soonest, I am at risk of being banned from trading.

Options Assignments – The Easy

Or, if both legs of my Spread are ITM, then let them both be automatically assigned/exercised.

I now have the weekend to drink plenty of beer and relax.

The Short Conclusion

There are a lot of pitfalls in having my Vertical Credit Spreads go through the assignment process. For me, it is best to close a losing Spread early at less than Max-Gain. But a losing Spread can go south faster than I can react, so I need to understand how to Roll Vertical Spreads.

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 08/22/2022)

This section reviews five indicators: Ecopolitical events, VIX, Put/Call Ratio, Consumer Sentiment Index, the S&P 500, and how these could affect the market’s direction. Then, 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.

Ecopolitical Influencers

Ecopolitical (Sociopolitical-Economics) Influencers (EPIs) 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. U.S. political polarization’s impact on Wall Street cannot be glossed over.

EPIs are 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 EPIs can significantly disrupt all the other indicators at the drop of a tweet.

Yikes – Yawns – Yays

• Bed Bath & Beyond – Yikes
• Chernobyl 2.0 – Yikes
• Student Loans Cancelation teeing up Supreme Court crisis – Yikes

• Inflation Reduction Act (aka Climate Change) passes – Yawn
• Russia/Ukraine War – Yawn

• Federal Reserve Meeting this Week – Yay
• Has inflation peaked? – Yay
• WTI oil prices under$80/bbl – Yay

Geopolitical

• News about the war in Ukraine can be found on page 23. No longer front page news, the financial effects of the conflict are becoming baked in. But the rage-stream media is pushing hard the threat of a Chernobyl or a Fukushima-esk nuclear calamity from one of Europe’s largest Nuclear plants in Ukraine. The reason for the media hyped hysteria is that “we don’t know.” I’m sure that once the IAEA can inspect the facility, the result will be a shrug.

• China, the world’s largest manufacturing economy and exporter of goods, is continuing to struggle to get production up to pre-COVID numbers. Not helped at all by their Zero-COVID policies, China has gone through a second Central Bank rate cut in as many weeks to jumpstart their engine. Although they, too, are suffering through debilitating inflation, they are cutting rates where the US Feds are hiking.

• The ostensibly named Inflation Reduction Act will fork over $365 billion on climate change directives over the next decade. This will make the 2022 spending on climate change more than $500B if you add in $98B from the Infrastructure act and $54B from the CHIPS law – all of which have climate-changing requirements. But will it have an effect?
  – The Climate Pragmatist side of me gives it a dismissive shrug. 71% of the earth is covered by water, and the primary offending earth-warming greenhouse gas is water vapor (>54%), while carbon dioxide contributes 17.5% and methane 6.5% (note: CO2 is necessary for life – think photosynthesis). Adjunct to that, the US is only 1.97% of the earth’s total surface area (spin a globe). Whatever the US can do to reduce CO2 worldwide is going to be minuscule at best.
  – The Climate Capitalist side of me says hell yes! The Apollo Moon Mission (1960-1973) cost the US $25.8B (258B in today’s dollars). Other than bragging rights, we won no prize by having a man on the moon. But the act of getting there produced incalculable world-changing technologies and advancements for the human condition – think digital flight controls, food safety processes, quake-proof shock absorbers, advanced installation, filters, foam, and much MUCH more. The economic effects of all the spin-offs from the US trying to control climate could fuel a new boom.
  – The Climate Conservationist side of me agrees we should do something. Everyone living on earth has an implied responsibility to their immediate environment. Whether it’s sanitation, air quality, or just not littering. And managing the local climate we live in is necessary for a good quality of life. And unlike attempting to change the global climate, we can easily change that that surrounds us.

• The imminent adoption of the Iran Nuclear Deal will lift sanctions and allow Tehran to export 50 million barrels of oil per day. Add to this the 182.6 million barrels released in the past 6 months from the Strategic Petroleum Reserve and the District Court’s permanent injunction on Biden’s 2021 moratorium on new oil and gas leasing on federal lands. These three news items have assisted in pulling back the high cost of oil below $90/bbl (note that last year, the average price of oil was $76). And as oil prices fall, so does the price of gas. Lower gas prices mean more trucks on the road. More trucks on the road mean more stuff to sell. More stuff to sell means lower prices for stuff.

• In the next week or two, the Biden Administration is expected to announce a $10,000 loan forgiveness and the continuation of the pause on a student loan payment that is set to expire Aug 31.
  – Canceling student loans is a political show: Note: the discussion over Fed’s “canceling student loans” is more a political marketing scheme, much like the Inflation Reduction Act has nothing to do with reducing inflation. To date, all the announcements of the Administration “canceling” current student loans are just the continuation of the long-term practice of suing snake-oil colleges, seizing assets, then returning those millions back to the students who were bilked. But what IS happening is a Socialist-pushed Democratic party is deliberately creating a humongous backlog of personal debt that will eventually force Congress to pass a “too big to fail” style bailout in the future. Talk about snake oil.
  – Article I of the Constitution places the sole power of the purse on the House of Representatives. The Biden Administration cannot constitutionally borrow $300B, nor can they set fees on colleges/universities to pay for the $10,000 forgiveness. So, I suspect that the details (which have been kept a secret) of the student loan forgiveness will show that the Administration will lay blame for all student debts squarely on the COVID pandemic, thus, they will redirect unused COVID relief money towards the forgiveness. This would be a huge violation of the intent of Article I and will likely be struck down by the conservative Supreme Court.
  – Teeing up a Supreme Court Crisis: I suspect that the strategists in the Administration know where this is going. If Biden can give the Woke-Millennials a bowl full of sugar, only to have a mean Supreme Court take it away, then they (the Biden Administration Strategists) are creating a “bad-guy” court to do battle against for the mid-terms and to remove evil judges that are not politically aligned.

Socioeconomics 

• Major investors followed Ryan Cohen’s abandon ship call for Bed Bath and Beyond this past week. Not only did Cohen dump all his shares in BBBY, but he also closed all his Call Options. BBBY tanked over 40% Friday (8/19), pulling most of the markets down with it. So, does Cohen know something us minor Marketeers don’t?

• Has the worst inflation in 40 years finally peaked? It’s not so much that July’s CPI dropped slightly to 8.5%, it’s what has dropped that is more telling. Critical food staples slid 9.5%, a gallon of unleaded gas dipped 8%, an airline ticket fell 7.8%, and a night in a hotel was lower by 3.5%. But we have to be careful – one month does not make a trend.
  – Inflation dipping to 8.5% from 9.1% is great news, but 8.5% is still a debilitating high (see “Are We Miserable Yet?” for a table of inflation indexes over the past 50 years). But keep in mind, although July’s CPI showed prices rose 8.5% from a year ago, July a year ago (2021), inflation was already on the rise at 5.4%. So, accumulatively, we are up 13.9% (8.5% + 5.4%) above July 2020.

• The Federal Reserve is serious about curbing inflation. And while the US is in a technical recession, they know they have to tread carefully. Minutes from the July 26 meeting suggest that they may need to back off from aggressive rate hikes. If that means backing off from the current 0.75% rate regiment or forgoing the threatened 1% bump, we won’t know until Friday. But I suspect that the Feds don’t want to be blamed for an economic meltdown prior to the mid-terms. Therefore, I’ll bet a DEFCON 3 that a Sept rate increase will remain at 0.75%, but with encouraging words about the possible Oct scale back.

ETS votes a cautions 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 move but rather 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 4-week trajectory of the VIX Regression Channel continues towards less volatility over the past four weeks.

• VIX spent most of last week under 20% but ended at 21%, flat from 21% the week before
• The current VIX continues below the 9-Day (until last Friday) and the 120-Day SMA
• The 9-Day SMA has fallen well below the 120-Day SMA

Volatility continues its two-month decline. Declining volatility means less premiums collected from my Vertical Spreads, but it also means that the current underlying’s bullish trajectory is likely to continue as well.

The VIX’s Thrashing has moderated over the past 60 days as it continues to move lower.

Being blind to all other indicators, I will vote for a cautious DEFCON 3

VIX votes a DEFCON 3

Put/Call Ratio

Put Options are frequently used as protection against existing investments falling. When the ratio between Put Options bought and Call Options bought rises, this indicates that the Marketeers are buying insurance for what they may see as declining markets (or a pending market collapse). Conversely, when the Put/Call Ratio falls, there is a general sense that the broader markets will increase, and more investors are buying more than selling.

• The S&P 500’s Put/Call Ratio narrowly oscillated around the 0.75 line
• The 9-Day SMA is well below the 0.75 line, suggesting a slight market change.

The majority of this past week was in the “Good Shape” region, I will give this week’s indicator a DEFCON 3.

Put/Call Ratio votes a DEFCON 3

Investors’ Sentiment

Marketeers are consumers too. And when the economy is humming, investments are smoking. Conversely, when the economy is threatening their portfolios, they tend to run for cover.

Consumer Sentiment Index

A low Consumer Sentiment 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. Surveys of Consumers (umich.edu)

August’s preliminary shows a sizable bump in sentiment from last month. And July’s index was nearly 3.0% above June’s. Although the indexes are still at a dismally low number, there appears to be a trend towards improvement.

Misery Index

With the copious amount of economic pressures throughout the nation this year (inflation, employment, interest rates, etc.), knowing what the Misery Index is and what direction the index is moving can cast a long shadow on Marketeer’s sentiment. Numbers are coming from the U.S. Bureau of Labor Statistics (bls.gov).

(Note, as I write this on Monday, the revised inflation rates have not been published.)

• Inflation Rate: unchanged in July after rising 1.3 in June. Now up to 8.5% from a year ago ¹.
• Unemployment Rate: July rate = 3.5%. Slightly down from 3.6% in June.
• ¹ A year ago (July 2021), inflation was already sky-high at 5.4%. So being at 8.5% now means that we are actually up by 13.9% over the past two years (Biden’s Administration).

Misery Index = 12.0% (8,5% + 3.5%). Down from 12.7% last month.
(Note: Ideally, the Misery Index should be well below 10% for a growing economy.)

The Misery Index continues to be high as nearly half of all consumers believe our economy is moving in the wrong direction. But since the Misery Index actually fell this month, I’ll take the “dismal” adjective off this week’s DEFCON.

CSI votes a DEFCON 2

Market Trajectories

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 in the country. The S&P is widely considered the best indicator of how all the U.S. markets are performing.

The Russell 2000 Index is commonly considered an indicator of the U.S. economic direction due to its focus on small-cap companies. The growth potential of small-cap stocks is attractive to Marketeers when economic expansion is expected. These same small-cap stocks are also the first to be jettisoned at the start of economic turmoil.

S&P 500 (SPX) = 4,228 – up 10.5% from 3,825 last 2 weeks.
Russell 2000 (RUT) = 1,957 – up 13.2% from 1,728 last 3 week.

Market Performance

• Both indexes jumped +10% in the last month
• Trends are rotating bullish
• 9-Day and 28-Day SMAs are bullish
• 9-Day SMA are both above the 120-Day SMA

The 4-month Trend Channel for SPX is now mostly flat – a far cry from the mostly bearish a month ago.

The RUT 4-month Trend Channel is now bullish (along with the 60-day and 14-day). Marketeers are definitely pilling back into the higher-risk small caps stocks. This is a great sign that the Bulls may be back in town.

If the 120, 60, and 14-day trends for both indexes were bullish, then his would be a DEFCON 4. But since the SPX is slightly bearish, I’ll go with an optimistic DEFCON 3.

Market Index votes an optimistic DEFCON 3

My sentiment for this coming week:

Of the five indicators:

• Ecopolitical Influencers softening – DEFCON 3
• The VIX is barely above 20% – DEFCON 3
• The P/C Ratio is in good shape – DEFCON 3
• Investors’ Sentiment shows a consumer base not excited about our economic future – DEFCON 2
• The market indexes in a bull rally – optimistic DEFCON 3

All my technical indicators are showing an improvement in the Markets’ direction.

Trading Readiness Level for this week

DEFCON 3

This Week’s Guidance

The general trends of the technical indicators are starting to calm down, and the eco-political events moderating. This may be a sign that the markets have mostly reached their depletion level (the bottom) and may start moving mostly sideways.

1. Open 1 or 2 Spreads (think just 1 Spread due to cash shortages)
2. Be cautious of Iron Condors – Short Call Options may be risky
3. Bull Spreads look attractive

Entry Rules

Vertical Bear Call Credit Spread (DEFCON 1, 2):

• Entry Rule 3: Prob-OTM >= 85%
• Entry Rule 5: Call Short Strike >= 1 Standard Deviation
• Entry Rule 13: Strike-Width >= 10 (sum of all contracts)

Iron Condors (DEFCON 2, 3, 4):

• Entry Rule 3: Call Prob-OTM >= 95%
• Entry Rule 3: Put Prob-OTM >= 82.5%
• Entry Rule 5: Call Short Strike >= 1 Standard Deviation
• Entry Rule 5: Put Short Strike <= 1 Standard Deviation
• Entry Rule 13: Strike-Width >= 20 (sum of all legs and contracts)

Vertical Bull Put Credit Spreads (DEFCON 4, 5):

• Entry Rule 3: Prob-OTM >= 82.5%
• Entry Rule 4: Put Short Strike <= 1 Standard Deviation
• Entry Rule 13: Strike-Width >= 20 (per leg)

Exit Rules:

• Early close following this schedule:
  • 85% of max-gain if 4 or more weeks out
  • 90% of max-gain if 3 or more weeks out
  • 95% of max-gain if 2 or more weeks out
  • Let expire if less than 2 weeks out

• Roll or Close Spreads within 1 week of expiration if:
  • Short Strike is ITM, or
  • Short Strike < 1.0% below the current price and 1-week trajectory is bullish, or
  • Short Strike < 55% POTM and 1-week trajectory is bullish
  • In a bull market, do not roll Bear Spreads
  • In a bear market, do not roll Bull Spreads

• Allow NO leg to expired ITM and be assigned!

(Note: The markets have been collapsing for over four months, and I do not think we are toying with the bottom yet. Therefore, it will be unwise to roll any Bull Spreads.)

Profit and Loss Statements

(As of 08/26/2022)

Cash Balance Sheet

Cash Flow Chart

Note: Negative weeks 4, 8, 12, 25, and 34 were solely from withdrawing my monthly paycheck. The other negative weeks are from losing positions plus monthly paychecks.

My Performance vs. SPY

Hypothetically, instead of depositing $28,000 in my Options Trading Account, could I have done better if I bought $28,000 of the ETF/SPY instead?

Schedule for this Week

Goals for this week: (08/22/2022 – 08/29/2022) (Week #34)

• Document lessons learned or new thoughts in Commentary Section
• Open one or two Vertical Options Spreads
• Update Trading Log as trades occurs

Monday:

• Determine/update this week’s market sentiment section
• Review/tweak Trend-Channels for all stocks on the watch list
• Set target expiration dates for all Options as follows:
  • Bull Credit Spreads: Oct 14, 2022 (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).
• 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 early trading.)

Tuesday – Thursday:

• Review how yesterday’s staged trades moved. Then, 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 open on any one day).
• Be mindful of this week’s 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 a weekly journal (this blog) with any lessons learned or strategy changes.
• Watch one Webcast or take one online mini-course to be completed by Friday.

This Week’s Trade Activity

(As of 08/26/2022)

Spread Count Summary:

Current Dollars at Risk:

Note: no new Spreads this week.

Options Buying Power:

Unallocated dollars available to open new Vertical Credit Spreads:

Vertical Spreads Opened This Month

(08/01/2022 – 08/26/2022)

(Note: trying out different reporting formats…)

SPY:380pp/360p/X1 – Open 08/25/2022 – Expires 10/07/22 – Max Gain = $145.00 – Open Price = 416.80
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 84.1%, Headroom= -8.8%, Max Loss= $1,855, AROR=65.9%
Now: Prob. OTM= 85.5%p, Headroom= -9.4%

Of my 13 Entry Rules & This Week’s Rules Guidance, 4 Rules Failed:

Rule	Actual
1: Max T <= $28,000	$10,016
2: Max W <= $4,000	$3,727
3: POTM >= 82.5%	84.1%
4: SS Below Channel	See Chart
5: SS < 1-SD	383.05
6: Dur < 56 Days	43 Days
7: 60 Day Bullish	Yes
8: 7 Day Bullish	No
9: 14 Day Bullish	No
10: P/C < 1 or falling	1.4
11: V > 9-Day SMA	No
12: 9D > 50D SMA	Yes
13: Width >= 20	20

QQQ:280pp/260p/X1 – Open 08/25/2022 – Expires 09/30/22 – Max Gain = $128.00 – Open Price = 316.05
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 86.0%, Headroom= -11.5%, Max Loss= $1,872, AROR=68.8%
Now: Prob. OTM= 88.4%p, Headroom= -12.7

Of my 13 Entry Rules & This Week’s Rules Guidance

3 Rules Failed:
Rule 8: Short-term trajectory bearish
Rule 9: 2-Week trajectory bearish
Rule 11: Current value below 9-Day SMA

The QQQ underlying fell 15 points (4.5%) last week when BBBY tanked and took the markets with it. But since this past Monday, the markets have been mostly flat as the Marketeers await the sage words from the Feds on Friday.

SPY:375pp/355p/X1 – Open 08/11/2022 – Expires 09/30/22 – Max Gain = $115.00 – Open Price = 421.37
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 86.8%, Headroom= 11.0%, Max Loss= $1,885, AROR=44.1%
Now: Prob. OTM= 89.6%p, Headroom= -10.6%

Of my 13 Entry Rules & This Week’s Rules Guidance

1 Rules Failed:
Rule 10: The Put/Call Ratio: 1.5, up from 1.3

The SPY underlying is on a +60 rally. The July CPI came in below estimate, and oil has dropped below $90. There is a strong indication that the bull rally may have some more legs.

QQQ:280p/270p/X2 – Open 08/3/2022 – Expires 09/16/22 – Max Gain = $174.00 – Open Price = 318.18
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 84.8%, Headroom= 11.9%, Max Loss= $1,826, AROR=78.1%
Now: Prob. OTM= 93.4%p, Headroom= -12.7%

Of my 13 Entry Rules & This Week’s Rules Guidance

4 Rules Failed:
Rule 3: Prob-OTM: 84.8% < 85%
Rule 10: The Put/Call Ratio: 1.4, up from 1.3
Rule 12: The 9-Day SMA is still below the 50-day
Rule 13: Spread Width: 10 Strikes < 20

This is my first Vertical Bull Put Spread in a while because:

• The 10-day trend has gone aggressively bullish, and those Bear Call Spreads coming due are at risk of ITM
• Those ETSs have gone soft
• Marketeers are getting back into the high-risk small caps (RUT)

Vertical Spreads Currently Cooking

(As of 08/26/2022)

SPY:425c/435c/330p/320p/X1 – Open 07/26/2022 – Expires 09/16/22 – Max Gain = $148.00 – Open Price = 391.36
(Iron Condor)
At Open: Prob. OTM= 88.1%c/91.2%p, Headroom= +8.7%c/-15.6%p, Max Loss= $852, AROR= 120.3%
Now: Prob. OTM= 62.7c%/98.9p, Headroom= +1.3c%/-21.3%p

QQQ:340c/350c/270p/260p/X1 – Open 07/28/2022 – Expires 09/09/22 – Max Gain = $148.00 – Open Price = 307.57
(Iron Condor)
At Open: Prob. OTM= 90.0%c/86.1%p, Headroom= +10.5%c/-12.3%p, Max Loss= $850, AROR= 147.8%
Now: Prob. OTM= 91.5c%/98.1p, Headroom= +6.1c%/-15.8%p

QQQ:340c/350c/260p/250p/X1 – Open 07/22/2022 – Expires 09/02/22 – Max Gain = $124.00 – Open Price = 306.92
(Iron Condor)
At Open: Prob. OTM= 90.3%c/90.0%p, Headroom= +10.8%c/-15.2%p, Max Loss= $876, AROR= 121.0%
Now: Prob. OTM= 95.5c%/99.7p, Headroom= +6.1%/-19.5%p

Vertical Spreads Closed This Month

(As of 08/26/2022)

QQQ:325c/335c/250p/240p/X1 – Open 07/19/2022 – Expires 08/26/22 – Max Gain = $126.00 – Open Price = 292.83
(Iron Condor)
At Open: Prob. OTM= 90.6%c/89.6%p, Headroom= +11.0%c/-14.9%p, Max Loss= $874, AROR= 138.8%
At Close: Prob. OTM= 76.9%c/99.9%p, Headroom= +1.4%c/-22.0%p

Income to open: $1.26 premium collected * 100 shares * 1 contracts = $126.00
Cost to close: $0.00 premium paid * 100 shares * 1 contracts = $0.00 (closed closed worthlessly)
Net Profit = $126.00 to open – $0.00 to close – $2.00 fees = $124.00
AROR = ($124.00 / 38 days in play) *365 / $874 = 136.3%

DIA:335c/345c/270p/260p/X1 – Open 07/12/2022 – Expires 08/26/22 – Max Gain = $121.00 – Open Price = 311.81
(Iron Condor)
At Open: Prob. OTM= 88.8%c/90.5%p, Headroom= +7.4%c/13.6%p, Max Loss= $879, AROR= 109.8%
At Close: Prob. OTM= 61.0%c/99.9%p, Headroom= +0.6%c/-19.0%p

Income to open: $1.21 premium collected * 100 shares * 1 contracts = $121.00
Cost to close: $0.50 premium paid * 100 shares * 1 contracts = $50.00 (closed 3 days early)
Net Profit = $121.00 to open – $50.00 to close – $3.00 fees = $68.00
AROR = ($68.00 / 43 days in play) *365 / $879 = 65.6%

I closed the Call Leg of this Iron Condor early (Wednesday) primarily because the Call Short Strike has been ITM for the past three weeks. But last Thursday’s (8/18) BBBY rout abruptly tanked the DOW by 1,100 points (3.2%) by yesterday (8/23). This fall sent my hopeless ITM Spread into OTM by this morning with a 1.5% headroom until Friday. But, as of this writing (10:25 AM 8/24), DIA started a new small rally which I am taking as the Fed’s reporting just might not be so bad, and the 1.5% headroom could easily be eaten up by Friday.

The Put Leg of the Iron Condor is still in my inventory and will expire worthlessly. I didn’t bother closing the Put side so I could save the $1.00 fee.

QQQ:320c/330c/X2 – Open 06/29/2022 – Expires 08/19/22 – Max Gain = $158.00 – Open Price = 281.85
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 89.8, Headroom= +13.5%, Max Loss= $1,842, AROR= 60.6%
At Close: Prob. OTM= 42.%, Headroom= -0.2%

Income to open: $0.79 premium collected * 100 shares * 2 contracts = $158.00
Cost to close: $5.78 premium paid * 100 shares * 2 contracts = $1,156.00 (Short Strike Assigned)
Net Profit = $158.00 to open – $1,156.00 to close – $4.00 fees = -$1,002.00
AROR = (-$1,002.00 / 51 days in play) * 365 / $1,842 = -389.3%

This Spread began Expiration Week with both legs deep ITM. But QQQ reversed and, by Friday morning, had pulled back significantly. But the likely hood of an Ugly Assignment was high, so I closed the Spread shortly after the markets opened.

(Note: By 9:00 AM-ish, QQQ fell even further, and I could have closed at $3.90 instead.)

QQQ:325c/335c/X2 – Open 06/21/2022 – Expires 08/19/22 – Max Gain = $162.00 – Open Price = 282.21
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 90.3, Headroom= +15.2%, Max Loss= $1,838, AROR= 53.9%
At Close: Prob. OTM= 61.5%, Headroom= +0.3%

Income to open: $0.81 premium collected * 100 shares * 2 contracts = $162.00
Cost to close: $0.00 premium paid * 100 shares * 3 contracts = $0.00 (closed closed worthlessly)
Net Profit = $162.00 to open – $0.00 to close – $2.00 fees = $160.00
AROR = ($160.00 / 59 days in play) *365 / $1,838 = 53.9%

DIA:335c/345c/X2 – Open 06/30/2022 – Expires 08/12/22 – Max Gain = $120.00 – Open Price = 307.90
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 91.3, Headroom= +8.8%, Max Loss= $1,880, AROR= 53.3%
At Close: Prob. OTM= 0.0%, Headroom= -0.8%

Income to open: $0.60 premium collected * 100 shares * 2 contracts = $120.00
Cost to close: -$1.62 premium paid * 100 shares * 2 contracts = -$324.00 (Short Strike assigned)
Net Profit = $120.00 to open – $324.00 to close – $3.60 fees = -$207.60
AROR = (-$207.6 / 43 days in play) *365 / $1,880 = -93.7%

DIA = $337.83 at market close on 8/12. DIA’s rally reversed over the weekend. At the market-opening Monday morning, DIA = 336.22. I had a trade trigger to buy back the 200 shorted shares at $335. DIA’s price bobbed around but continued its decline to $335.90-ish. It then started a resurgence, and I jumped in and snag a close at $336.62. It would have been nice to buy back my short sale at $335.90, but my crystal ball was a little cloudy.

Closing premium: $335 (DIA bought at the Strike Price) – $336.62 (purchase price of DIA) = -$1.62.

SPY:415c/425c/X2 – Open 06/23/2022 – Expires 08/05/22 – Max Gain = $160.00 – Open Price = $376.95
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 89.8, Headroom= +10.0%, Max Loss= $1,840, AROR= 72.9%
At Close: Prob. OTM= 95.5%, Headroom= +5.8%

Income to open: $0.80 premium collected * 100 shares * 2 contracts = $160.00
Cost to close: $0.04 premium paid * 100 shares * 2 contracts = $4.00 (closed 4 hours early)
Net Profit = $160.00 to open – $4.00 to close – $4.00 fees = $152.00
AROR = ($152.00 / 43 days in play) *365 / $1,840= 70.1%

Because SPY was moving precariously close to ITM when this week started, I had a .04 trade trigger set to close the Spread a couple of days early. But on Expiration Friday, I forgot to delete the trigger, so it was unnecessarily executed a few hours before closing. 6 bucks wasted.

Conclusion

Can selling options for income 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 could 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.”