Biden’s Build-Back-Better (aka The Andrea Gail) is heading for a December Perfect Storm. Are the Markets being pumped for a December dump? I need to batten down my Vertical Bull Put Credit Spreads. – Damocles

Biden’s Perfect Storm

The last Monday of an expiring Vertical Put Credit Spread could show it with a high probability of expiring worthless (winning). But on Tuesday, bad economic news, dreadful political fearmongering, or an announced SEC investigation can send my Spread ITM. Thus I need to beware that upcoming Geopolitical events can change my fortune at a snap of a finger.

Are there upcoming Geopolitical events? You betcha!

Two Significant Congressional Actions to Watch

First: The Market’s melee that happened in September was primarily due to the Senate’s battle over raising the Federal Debt Ceiling before Oct 1. The only agreement they came up with was to raise it just enough to delay it until Dec 18.

Second: The House intends (if they follow through) to vote this Friday to send the Build-Back-Better Spending Bill to the Senate without getting assurances from Senate Moderates. And since they do not have a full agreement with the Senate, the House Democrats are reloading the bill with all the costly social projects that were eliminated. This will certainly be a lengthy negotiation to realign projects with costs.

No Time for Lengthy Negotiations

With a 50/50 split in the Senate, plus a couple of very recalcitrant moderate Democrats, the Spending Bill will not pass without some cross-party cooperation. And since the Congressional Democrats have not sought collaboration with the Republicans, but subjugation, Senate Republicans will use their debt ceiling vote as a bargaining chip to significantly curtail the scope of Biden’s agenda.

These negotiations will go well beyond Dec 18, will include massive political fearmongering and maybe a government shutdown that could last well into Jan. (Remember the shutdown from Dec 22, 2018, until Jan 25, 2019. The Markets dropped 20.5% over two months.) So I need to keep this in mind when I open Vertical Put Credit Spreads that span this December timeframe.

Pump and Dump?

The exuberance in the Markets over the past couple of weeks has sent indexes to their all-time highs. And being so close to the end of the year, with so many unfinished critical fiscal policies to be decided, I can’t help from thinking – “Pump and Dump?”

Brewing a Perfect Storm

1. Debt Ceiling Negotiation 2.0

Created under the Second Liberty Bond Act of 1917, the debt ceiling is a legislative limit that sets the amount of national debt that can be incurred by the U.S. Treasury. If the debt ceiling is reached, then the US will not be able to pay the interests on the debt they already own – thus a default.

On October 1, interest payments for our existing $28.5 trillion ($28,500,000,000,000) national debt became due. And with Congress being leg-locked in a bitter partisan budget battle, they could only agree to raise the debt ceiling just enough to pay interests until December 18.

2. Build-Back-Better Social Spending Bull (oops, I mean “Bill”)

After months of House negotiations, the $3.5T Social Spending Bill was pared down to $1.7T. But still not able to get an agreement, the House Democrats will punt the unfinished bill to the Senate. And in a show of true adolescent behavior, Democrats are reloading the bill with all the costly extras that were eliminated during the negotiations and will dare the Senate to cut them.

3. Feds Drop Support For Economy – Expect Rising Interest Rates

Quantitative easing (QE) is a form of national money management that allows a central bank to purchase securities for the purpose of lowering interest rates and putting money into a floundering economy. Rushing into a COVID Lockdown early in 2020, QE helped to keep the U.S. economic engine running.

But now that the rebooted economy is starting to run too hot, the Central Bank will start tapering its massive securities purchase – starting this week. This pullback will have the adverse effect of raising interest rates and lowering stock prices.

4. Historically High Inflation

Supply shortages caused by COVID-managed seaports, labor shortages, high oil prices, and other COVID restrictions have exacerbated a not-so-transitory inflation rate for all market sectors. Gas above $4/gal, the cost to heat homes this winter will be high, and food and basic items are expected to keep rising.

The holiday buying season is expected to be a bust.

5. Unfinished 2022 Federal Budget

Trillions of new taxes will be required to pay for the Trillions of new spending. And with not even a blueprint to work on, Market uncertainty will weigh heavy on my Vertical Spreads.

6. Political Paralisis creates Market Uncertainty

The progressive wing of the Democratic Party has been playing a game of scorch-earth brinkmanship with the 2022 Federal Budget. Forcing Democratic leadership to make concessions after concessions to support their progressive agenda. They have created uncertainty with Federal Taxes, Court Packing, abolishing the filibuster, and demands on a troubled President.

A Perfect Storm

A fiscal perfect storm is brewing and it looks to be coming this December. With the concurrence of many critical and disastrous political and fiscal factors, it seems that Biden’s Build Back Better is heading to the same fate as the Andrea Gail.

Biden’s Build Back Better agenda
is starting to look a lot like…

the Andrea Gail!

Personal note: Biden’s 2020 campaign primarily focused on vanquishing COVID. The “Build Back Better” campaign slogan was characterized as the recovery from the COVID Lockdowns. But after the election, the Build Back Better directive was shanghaied by the Progressives into a “generational transformation of America” – a bait and switch.

If the Progressives are confident that most Americans approve of Bernie Sander’s Social agenda, then they should hold back on the Social Spending project, and campaign on it in the 2022 mid-terms. If they are right then they will gain the seats in Congress to do it right.

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 11/01/2021)

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.

• The $3.5T Social Spending bill is being redefined below $2T
• Disapointment and missing another Pelosi deadline for voting of the $1.2T Infrastruture Bill.
• The Federal Debt Ceiling is yet to be resolve
• Labor shortages continues to exacerbate supply-chain tangles
• Supply shortages continues to jack-up Inflation
• Feds to start tapering soon – maybe t his week
• Vaccine mandates aggrevates the public
• December profit-taking

The biggest news from the Federal Social Infrastructure front is the list of programs that are being cut from the bill. The conflict in the Democratic Caucus has stalled the US recovery and exacerbated inflation. Expect a House vote on both the $1.3T Infrastructure and a $1.7T Social Expansion bill this week. The Infrastructure Bill has already passed the Senate and will go directly to Biden’s desk. The Social Expansion will go to the Senate where it will be stalled and further widdled down.

The Feds are meeting this week, and talks will center around Tapering. This will have a negative effect on stock prices.

Any Spreads opened this week and next will have to contend with the renewed Congressional budget battles that will restart within the next 2 – 3 weeks. The Dec 18 deadline for the Debt Ceiling will surely rekindle the market-beating that we saw in September.

Upward inflation pressure (rising wages, labor shortage, supply chain, spiking energy cost), Debt Ceiling negotiation Act 2 in November/December, 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 continues an aggressive trek towards the 15% line

The VIX ended last week at 17.6%, up from 15.4% the week before.

Generally, the VIX is suggesting that the Marketeers are starting to feel good about the Markets. But a continued gloom on where we are economically going is keeping the markets slightly volatile.

Over the past 6-months, the VIX signaled a steady concern for the health of the bull market. It could be concern over the new Administration’s financial policies, the deep political division, or the fear of a $5T tax/spend bill may exacerbate the already devastating inflation rate. But the past couple of weeks showed a decisive return to a market VIX norm.

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.

This week’s Put/Call Ratio retreated back to below 0.5 as the Marketeers went on a buying spree for the last four weeks.

The 9-Day SMA ended the week at 0.48, below the 0.53 from the week before. And the 9-Day SMA has dropped below the .5 line. This continues to show a belief that future market trajectories will remain strongly bullish..

Just because the 50-Day SMA is above 0.5, this week will get a DEFCON 4. (To make a DEFCON 5, the 9-Day, the 50-Day, and the current Put/Call Raito needs to be below 0.5)

Put/Call Ratio votes a 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. Surveys of Consumers (umich.edu)

Consumer sentiment continues to tilt negative for the month of October.

The lack of a 2022 Federal Budget, Congressional stalemate, and the general perception of a lack of direction from the Administration is keeping a funk on the economy as we enter the holidays.

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) = 35,896 – up 0.6% from 35,677 last week. (4 weeks deviation: 600 up from 533 last week)
S&P 500 (SPX) = 4,603 – up 1.3% from 4,545 last week. (4 weeks deviation: 98.3 up from 77.1 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 = +/- 600 points or 1.7% of the market’s volume is up from 1.5% last week.
4 Weeks Thrashing of SPX = +/- 98.3 points or 2.1% of the market’s volume is aggressively up from 1.7% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)

Even with the stellar returns for the past four weeks, the high market thrashing signals that the Marketeers still do not have a comfort zone for the future market direction. I feel that in a short amount of time, there will be some profit-taking and a minor retreat may be in the cards.

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

I’m expecting a turbulent December as Congress fight through the confluence of raising the debt ceiling and passing Build-Back-Better Spendining bull. The possibility of a government shutdown is high and that will send my Vertical Spreads towards, ITM.

This week’s Market Sentiment shows a high cautious DEFCON 4 level.

Trading Readiness Level for this week

DEFCON = 4

This week, I will focus on:

The teeing up of a spectacular Senate battle in December can send the markets into correction territory. Therefore, my markets expectation is several weeks of higher-than-usual thrashing and moving mostly sideways.

Even at DEFCON 4, I’m going to take extreme caution this week. I will set my POTM sights as follows:

• Enter into new Spreads for a total market risk this week of < $2K (as the Markets see fit)
• Open (1) wide Strike-Width Spread with the Short POTM > 83%
• Spread term of 8-weeks or less

Profit and Loss Statement

(As of 11/05/2021)

Balance Sheet

Progress Graph

(Note1: the negative weekly results for weeks 4, 8, 12, 17, 21, 25, 30, 34, 38, and 43 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: (11/01/2021 – 11/05/2021) (Week #44)

• 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 23 (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 11/05/2021)

Spread Count Summary:

Current Dollars at Risk:

Vertical Spreads Opened This Week

(11/01/2021 – 11/05/2021)

SPY: 425p/405p  – Open 11/03/21 – Expires 12/17/21 – Max Gain = $1.18- Open Price = $461.10
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.6%, Headroom-7.9%, Max Loss=$1,882, AROR=51.6%

Entry Rules for Vertical Bull Put Credit Spreads:

• Current maximum dollars at risk < $16,000? Yes ($9,712)
• Max dollar at risk this week < $3,000? Yes ($1,882)
• Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (44 days)
• Long-term trend (four months) bullish? Yes (see chart)
• Short-term trajectory of the underlying bullish? Yes (see chart)
• Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.3 down from 1.6)
• Current price above 9-Day SMA?: Yes (see chart)
• 9-Day SMA above 50-Day SMA?: Yes (see chart)
• Short-strike > 1 SD below the current price? Yes (1SD=$433.93)
• Short-strikes Prob-OTM > 83%? Yes (84.6%)
• 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 (20 strike width)

Vertical Spreads Currently Cooking

(As of 10/29/2021)

SPY: 425p/410p  – Open 10/28/21 – Expires 12/10/21 – Max Gain = $1.01- Open Price = $456.89
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.9%, Headroom-7.0%, Max Loss=$1,399, AROR=60.7%
Now: Prob. OTM=81.8%, Headroom=-6.2%

QQQ: 345p/325p  – Open 10/26/21 – Expires 12/17/21 – Max Gain = $122.00 – Open Price = $381.02
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.2%, Headroom-9.4%, Max Loss=$1,878, AROR=45.2%
Now: Prob. OTM=81.8%, Headroom=-6.2%

SPY: 425p/400p  – Open 10/22/21 – Expires 12/03/21 – Max Gain = $136.00 – Open Price = $454.01
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.1%, Headroom-6.4%, Max Loss=$2,364, AROR=49.6%
Now: Prob. OTM=81.8%, Headroom=-6.2%

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=80.0%, Headroom=-4.9%

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=82.6%, Headroom=-4.9%

Vertical Spreads Closed This Week

(As of 11/05/2021)

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%
Now: Prob. OTM=91.1%, Headroom=-9.4%
At Close: Prob. OTM=94.4%, Head Room=-10.8%, AROR= 99.0%

Cost to open: $1.75 premium collected * 100 shares = $175.00
Cost to close: $0.35 premium paid * 100 shares = $35.00 (closed 25 days yearly)
Net Profit= $175.00 to open – $35.00 to close – $2.00 fees = $138.00
AROR= ($138.00 / 18 days in play) *365 / $2,825= 99.0%

This Spread was closed after only 18 days in play via an 80% Max-Gain trade trigger. Gaining 80% in such a short time gave this position an 99% Anualized-ROR for it’s investment.

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=92.7, Headroom=-9.4%
At Close: Prob. OTM=95.2%, Head Room=-13.4%, AROR= 146.2%

Cost to open: $1.87 premium collected * 100 shares = $187.00
Cost to close: $0.19 premium paid * 100 shares = $19.00 (closed 18 days yearly)
Net Profit= $187.00 to open – $19.00 to close – $2.00 fees = $166.00
AROR= ($166.00 / 35 days in play) *365 / $2,313 = 74.8%

Opened the at the end of the Sept mni-correction, SPY bounced back fairly quick bringing this position to an early close. This Spread closed via an 90% Max Gain trade trigger.

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 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.”