What does a successful Vertical Spread Roll look like? This week’s commentary reviews a Vertical Spread that was rolled last month and came to a close late this week. – Damocles

Rolling Vertical Spread – A Success Story

Biden's Build Back Rosie
Build Back Rosie

I did a last-minute switching of gears for this week’s commentary. Originally, I was going to mock Biden’s Build Back Better agenda – pointing out the massive dollars designated to get women back into the workforce – bring back Rosie the Riveter (hence the graphics). But with a late-week closing of a couple of rolled Vertical Spreads, I instead decided to document what a successful rolling of a Vertical Spread looks like:

In a past post: “HOW TO ROLL A VERTICAL SPREAD IN THINKORSWIM,” (published Oct 8), I was whining about two of my vertical Spreads that went ITM after the September market thumpings. The Congressional debate over revising the Federal Debt Ceiling spilled beyond the actual Sept 30 deadline, and the constant drumbeat of defaults and government closings sent the markets reeling.

Rolling my QQQ Vertical Spread

Following my Entry Rules at the time, on August 30th I entered into a Vertical Bull Put Credit Spread for a take-home premium of $123 – fees.

08/30 – Opening Oct 15 QQQ Vertical Spread

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%

But as September rolled in, the Congressional budget battle over Biden’s Build Back Better got heated. And when the bidder debates switched over to raising the Debt Ceiling for FY 2022, the recalcitrant Senate Republican refused to vote for raising the limit.

This weeks-long partisan angst caused QQQ to tumble over 8% during September. Thus, on October 4, my QQQ Spread went ITM – 11 days prior to expiration.

With 11 days to expiration, I decided not to live the next two weeks sweating this Spread.

10/06 – Closing Oct 15 QQQ Spread at a Loss

As explained in the “HOW TO ROLL A VERTICAL SPREAD IN THINKORSWIM” post, to roll a Vertical Spread, I need to first close the original position. So I closed my 10/15/21 QQQ position for a $177 loss.

QQQ: 355p/340p  – Open 08/30/21 – Closed 10/06/21 – 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: $1.23 premium collected * 100 shares = $123.00
Cost to close: $2.98 premium paid * 100 shares = $298.00 (Rolled)
Net Profit= $123.00 to open – $298 to close – $2.00 fees = -$177.00
AROR= (-$177.00 / 46 days in play) *365 / $1,377= -102%

10/06 – Opening Nov 15 QQQ Spread

Rolling a Vertical Spread means that immediately after I close the original position, I then reopen a new position with the same parameters, but with a new expiration date six-weeks out.

Rolled from 10/15: QQQ: 355p/340p  – Open 10/06/21 – 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%

Opening this new position was high risk (probability of expiring Out-of-the-Money = 53.4%). The Short Strike was barely above the current value of the underlying QQQ ETF asset. But since the Markets have been generally good, I was betting that in six weeks from this opening, QQQ will recover, and this position would ultimately close worthless.

11/10 – Exiting the Rolled QQQ Spread

Shortly after opening the Nov-19 QQQ Vertical Spread, I entered a 98% of max-gain trade trigger in my ThinkorSwim trading platform. (See post EXIT RULES: VERTICAL CREDIT SPREADS – PT 1 to see how to calculate an exit price and set a trade trigger in ThinkorSwim.)

Late in the day on Nov 10th, this position closed for $0.08.

Rolled from 10/15: QQQ: 355p/340p  – Open 10/06/21 – Closed 11/10/21 – 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%
At Close: Prob. OTM=96.0%, Head Room=-8.9%, AROR= 366.7%

Cost to open: $4.08 premium collected * 100 shares = $408.00
Cost to close: $0.08 premium paid * 100 shares = $8.00 (closed 9 days early)
Net Profit= $408.00 to open – $8.00 to close – $2.00 fees = $398.00
AROR= ($398.00 / 36 days in play) *365 / $1,092= 369.3%

Final Tally for Rolling Vertical Spread

Rolling a Vertical Spread is technically two separate Spreads. For a roll to be successful, the final tally should equal about what I would expect from two winning Spreads.

If the original Spread had exited as a win, the expected profit would have been $123 – fees. But since I rolled the Spread, I wound up losing $177 from this original Spread.

But, Since my rolled Spread was a win, I made $398 from that position.

Final tally for the two Spreads = -$177 + $398 = $221.00 profit.

Other dynamics can certainly be considered, but rolling this Vertical Spread was a success story.








Entry Rules for Vertical Bull Put Credit Spreads
The "limiting loss by limiting risk" blunder. One 10-Strike-width Vertical Bull Put Credit Spread has a significant loss-buffer built-in.
Using Excel with ThinkorSwim
Walking through steps of installing thinkorswim on a new laptop and how to get Excel to pull live data …
Exit Rules: Vertical Credit Spreads – Pt 1
Having an Escape Plan (Exit Rules) for my open Vertical Bull Put Credit Spreads is just as critical as …

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.

  • Unrealistic exuberance is pushing the markets to new highs
  • The $1.2T Infrastructure Bill was past last Friday
  • $1.7T Build Back Better Bill delayed until CBO scoring
  • The Federal Debt Ceiling is yet to be resolve
  • Feds to start tapering, expecting interest rates to rise

The Build Back Better social spending bill is now ground zero for a bitter partisan battle. Without the Infrastructure Bill being withheld as insurance, most Democrat moderates in both chambers can now be free to debate what needs to be included.

I am expecting a drawn-out Senate debate over raising the Debt Ceiling and modifying the Build Back Better bill. This will have a predictable negative effect on the markets.

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.

ThinkorSwim Chart: CBOE Market Volatility Index (VIX) - 11/07/2021
ThinkorSwim Chart: CBOE Market Volatility Index (VIX) – 11/07/2021

The trajectory for the 1-month VIX Regression Channel started to move sideways just above the 15% line. The VIX ended last week at 16.5%, down from 17.6% the week before.

Generally, the VIX continues to suggest that the Marketeers are “OK” 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 has moved mostly sideways, signaling a steady concern for the health of the bull market. It could be concern over the new Administration’s financial policies and a deep political division that will not be able to provide any direction.

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.

ThinkorSwim Chart: S&P 500 Put/Call Ratio - as of 11/07/21
ThinkorSwim Chart: S&P 500 Put/Call Ratio – as of 11/07/21

This week’s Put/Call Ratio is well below 0.5 as the Marketeers continue an aggressive buying spree for the last four weeks.

The 9-Day SMA ended the week at 0.43, below the 0.48 from the week before. The 9-Day SMA is 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 Index as of 11/01/2021
Consumer Sentiment Index as of 11/01/2021

Consumer sentiment continues to tilt negative for the month of October – no change from last week.

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) = 36,328 – up 1.2% from 35,896 last week. (4 weeks deviation: 571 down from 600 last week)
S&P 500 (SPX) = 4,698 – up 2.1% from 4,603 last week. (4 weeks deviation: 102.5 up from 98.3 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.

ThinkorSwim Chart: Daily S&P 500 Index - Four Months Trend (Updated 11/07/2021)
ThinkorSwim Chart: Daily S&P 500 Index – Four Months Trend (Updated 11/07/2021)

Market Thrashing

4 Weeks Thrashing of DJX = +/- 571 points or 1.6% of the market’s volume is slightly down from 1.7% last week.
4 Weeks Thrashing of SPX = +/- 102.5 points or 2.2% of the market’s volume is slightly down from 2.1% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)

Even with the aggressive growth 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 significant 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 still expect a turbulent December as Congress fight through the confluence of raising the debt ceiling and passing the Build-Back-Better Spending bill. The possibility of a government shutdown looms 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, the GTS expectation for the Debt Ceiling fight to start soon is causing me to be overly cautious for this week’s trades. 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) wide Strike-Width Spread with the Short POTM > 87.5%
  • Spread term of 8-weeks or less







Profit and Loss Statement

(As of 11/12/2021)

Balance Sheet

Year
2021
Month
Nov
Week
#45
Beginning Account Balance$16,000.00$20,329.53$20,390.66
Deposits (Div. & Int.)$1.45$0.19$0.0
Withdraws (paycheck)-$3,000.00-$0.00-$0.00
Premiums on Open$8,713.01$236.00$118.00
Premiums on Close-$1,113.00-$70.00-$16.00
Fees Paid (total)-$111.86-$6.12-$3.06
Ending Account Balance$20,489.60$20,489.60$20,489.60
Total Gain/Loss$4,489.60$160.07$98.94
ROR0.8%0.5%
ROC28.1%

Progress Graph

YOD Vertical Options Spreads Running P&L - As of 11/12/21
YOD Vertical Options Spreads Running P&L – As of 11/12/21

(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?

Options Trading
Account
SPY
(Fictional)
Initial Investment
(As of Jan 4, 2021)
$16,000
(Cash)
$16,000
(43.39 shares @ $368.55)
Funds Added$8,714.46
(Premiums)
0.45 shares
(Dividends Reinvested)
Funds Removed-$1,224.86
(Early Close & Fees)
$0
(Fractional Shares Sold)
Ending Balance$23,489.60
(Cash)
$20,382.77
(43.83 shares * $465.02 CV)
ROI+46.8%+27.4%
As of 11/12/2021







Schedule for this Week

Goals for this week: (11/08/2021 – 11/12/2021) (Week #45)

  • 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 31 (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 11/12/2021)

Spread Count Summary:

Year
2021
Month
Nov
Week
#45
Vertical Bull Put Credit Spread7721
Vertical Bear Call Credit Spread000
Vertical Bull Put Debit Spread000
Vertical Bull Call Debit Spread000
Margin Interest100
Total7821

Current Dollars at Risk:

Year
2021
Month
Nov
Week
#45
Vertical Bull Put Credit Spread$10,405.$4,764.$2,882.
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$10,405.$4,764.$2,882.
Max Risk Allowed$16,000.N/A$3,000.







Vertical Spreads Opened This Week

(11/08/2021 – 11/12/2021)

QQQ: 340p/310p  – Open 11/11/21 – Expires 12/31/21 – Max Gain = $1.15- Open Price = $391.45
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=88.6%, Headroom-13.1%, Max Loss=$2,886, AROR=28.6%

ThinkorSwim Chart: Vertical Bull Put Credit Spread – QQQ – Short: 340 Put – Long: 310 Put
ThinkorSwim Chart: Vertical Bull Put Credit Spread – QQQ – Short: 340 Put – Long: 310 Put

Entry Rules for Vertical Bull Put Credit Spreads:

  • Current maximum dollars at risk < $16,000? Yes ($10,405)
  • Max dollar at risk this week < $3,000? Yes ($2,882)
  • 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? No (see chart)
  • Put/Call Ratio < 1, (or falling if it is > 1)? No (1.6 up from 0.9)
  • Current price above 9-Day SMA?: No (see chart)
  • 9-Day SMA above 50-Day SMA?: Yes (see chart)
  • Short-strike > 1 SD below the current price? Yes (1SD=$366.98)
  • Short-strikes Prob-OTM > 87.5%? Yes (88.6%)
  • 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 (30 strike width)

I am tip-toeing through this and the next couple of weeks. Not knowing how the markets will react to a renewed Debt Ceiling fight n Congress, I am being extra, extra, EXTRA cautious.







Vertical Spreads Currently Cooking

(As of 11/12/2021)

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%
Now: Prob. OTM=87.8%, Headroom=-9.3%

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=91.5%, Headroom=-13.4%

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=90.3%, Headroom=-9.3%

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=92.3%, Headroom=-9.3%

Vertical Spreads Closed This Week

(As of 11/12/2021)

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%
At Close: Prob. OTM=96.0%, Head Room=-8.9.%, AROR= 366.7%

Cost to open: $4.03 premium collected * 100 shares = $403.00
Cost to close: $0.08 premium paid * 100 shares = $8.00 (closed 9 days yearly)
Net Profit= $403.00 to open – $8.00 to close – $2.00 fees = $395.00
AROR= ($395.00 / 36 days in play) *365 / $1,092= 366.7%

This rolled position was closed 9 days early via a 98% of Max Gain trade Trigger.

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%
At Close: Prob. OTM=96.3%, Head Room=-7.3%, AROR= 318.9%

Cost to open: $4.03 premium collected * 100 shares = $403.00
Cost to close: $0.08 premium paid * 100 shares = $8.00 (closed 9 days yearly)
Net Profit= $403.00 to open – $8.00 to close – $2.00 fees = $393.00
AROR= ($393.00 / 41 days in play) *365 / $1,097 = 318.9%

This rolled position was closed 9 days early via a 98% of 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.”