A trading budget for my 2022 Vertical Put Credit Spreads project is a great tool to help me keep focused on the prize. It will help me pace myself with a systematic approach to managing risk and (most importantly) allow me to sleep at night.
We have… checking, savings and checking, CDs, savings and CDs, checking and CDs, savings, checking, and CDs, T-bills,
Stanley Ipkiss (Movie: The Mask)
or we can just take all your money and throw it in a big mattress back there.
Trading Budget for 2022 Vertical Spreads
My initial investment for the 2022 Trading Account is a full year’s commitment. I view this as any other risky buy-and-hold stock investment I would make.
The amount I will invest for 2022 will not be more than I can afford to lose (this is not from my children’s college fund). And, I will not depend on this money during the year (I won’t rely on my trading account to pay my monthly mortgage).
The intention of this week’s journal entry is to define how much money I want to risk in 2022, and how I want to manage the risk.
Commentary Contents
- 2022 Market Assumptions
- 2022 Budget Basis
- 2022 Budget For Options Spreads Income
- Monthly Salary
- Expected End-of-Year Results
2022 MARKET ASSUMPTIONS
Before filling in the blanks to my 2022 budget spreadsheet, I need to consider what I think next year will be like. This is the only time of the year, where I will pull out my crystal ball and try to see what awaits me.
Generally, I expect 2022 to end positively, but I don’t believe it will be as good as 2021 – where I made over 50% return on my Options Vertical Spreads and the S&P 500 is up over 30%. Both of those are highly unusual and definitely not sustainable.)
- I believe 2022’s broader market will continue to ride the bull to newer highs. I will expect corrections (>10%) and a few mini-corrections (<10%). But I will assume the rebound from such corrections will be relatively fast.
- Marketeers will start the year with a Misery Index at the highest level since Carter, a spuddering pandemic recovery, and the expectation of three increases of the Federal Discount Interest Rates. Inflation is also expected to stay or rise through the middle of the year.
- COVID-19 is assumed to move from pandemic to endimic this coming year. We have vaccines, therapies, and a better understanding of the virus. Spring and Summer will unwind much of the COVID spread that is expected over the Winter, and the vaccine should keep the virus manageable through the Fall.
- We will have the insanity of a desperate mid-term elections run by jingoistic campaigners and the yellow press. Although the end-times fear mongering will ratchet up to epic level next Summer, I beleive Marketeers will mostly dismiss it as the same o’ political election rhetoric.
2022 Budget Basis
For my 2022 effort, I want to scale up from 2021 which began with an initial investment of $16,000 and ended near $24,000.
After fiddling with my budget spreadsheet, I found a starting capital of $28,000 allows me an increased weekly risk to another $500 and make the other calculated values nice round numbers – so I’ll go with that.
2022 BUDGET FOR OPTIONS SPREADS INCOME
This table is the input and calculations for my spreadsheet.
| Item | Parameters or Equation | Results |
| Estimated Starting Capital 1 | $28,000 | $28,000 |
| Maximum Spread Term 2 | 8 weeks | 8 |
| Average # of New Position per Week 3 | 2 Vertical Spreads | 2 |
| Average Max Risk per Week 4 | = Starting Capital / Max Spread Term | $3,500 |
| Anticipated Account’s Max Risk 5 | = Risk per week * Max Spread Term | $28,000 |
1 Estimated Starting Capital: The total amount of money I need to invest in my trading account on Jan 1, 2022. The beginning estimate is based on the 2021 end-of-year balance of my account, plus an incremental increase to scale everything up.
2 Maximum Spread Term: Need a) time to fortify collected premiums, or b) time to recover for a wrong-way market. If the term is longer than 8 weeks, then I would need to either reduce the number of Spreads or increase my starting capital – both of which I don’t want to do. If the term is less than 6 weeks, then the premiums collected may not be worth the dollars at risk.
3 Average # of New Positions per Week: Limit the number of new positions per week to 2 or fewer. If I open 2 positions per week, at the end of 8 weeks, I could conceivably have 16 open positions. I see that as barely manageable. Hopefully, I will be closing OTM Spreads early thus manage a lot less.
4 Average Max Risk per Week: Defining the maximum dollar amount I am willing to risk weekly, averaging out. The Spreads I actually open will depend on market conditions.
5 Anticipated Account’s Max Risk: The maximum amount of my trading account that I am willing to place at risk at any one time. Even though my account balance should grow as I collect premiums, I need to set a hard limit on what I will risk.
Monthly Salary
Like in 2021, I will pay myself a salary of 22.5% of the starting capital. This is certainly not a livable wage. But the current project’s goal is to prove I can eventually make it a livable wage. Everything is scalable.
| Month | Year | |
| Startup Capital Investment | $28,000 | |
| Damocles’ Paycheck 22.5% of Initial Investment ($28,000 * .225 / 12) | $525 | $6,300 |
| Required ROC to breakeven | 22.5% |
EXPECTED END OF YEAR RESULTS
The question I have to answer by the end of 2022: “What would have been more profitable: invest in an Index ETF, or in a trading account where I sell Vertical Bull Put Credit Spreads?”
- At best, by Dec 31, 2022, my trading account will close with a ROC equal to or higher than an ROI from an equal investment in SPY.
- At breakeven, the end ballance in my trading account should match or be better than an equal investment in SPY.
- At worst, my end-of-year Trading Account balance should be higher than the start-of-year balance.
(A definition: ROC (Return on Capital) refers to the “business” perspective, which includes withdrawing a monthly paycheck. ROI (Return on Investment) refers to the “investment” perspective, which compares my total return from selling Vertical Spreads to the years S&P 500 performance, vis-à-vis, SPY.)
To be at all competitive, I would have to be highly active in selling Vertical Bull Put Credit Spreads for the year (which my 2022 Options Spreads Budget assumes.)
It’s party time!
– Stanley Ipkiss (Movie: the Mask)
P-A-R-T. Why?
Because I gotta!
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 12/05/2021)
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.
ecopolitical Tree Shakers:
Ecopolitical (Sociopolitical-Economics) Tree Shakers (ETS) 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.
ETS 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 ETS can significantly disrupt all the other indicators at the drop of a hat.
- New jobless claims plunged to 50 year low
- Feds to increase pace of tapering at December’s meeting – expect early start to increase interest rates
- Senate Dems to raise Debt ceiling as soon as this week
- Nov. payroll growth was strong, but few are coming back off the sidelines
- COVID varient Omicron a bust
- Debating the $1.9 trillion Build Back Better bill
- End of year Federal budgets marithon
- End-of-Year typical selloff
– December 3rd, Congress passed a Continuing Resolution (CR) to fund the government until February 18, effectively removing the threat of a government shutdown this year;
– December 8th, the House passed the $768 Billion Defence Spending Bill by a wide, bipartisan victory. The bill is expected to easily pass the Senate this week or next;
– December 15, Senate passes raising the Debt Ceiling by $2.5 Trillion. This puts the Build Back Better Bill in focus. I still expect BBB will be watered down significantly before passage.
– December 16, Senate shelves BBB until later.
These were the major sticking points that had most of the Marketeers cashing out during the last weeks of November. With these contentious bills now in the rearview mirror, the expected December market pressures seem to be avoided.
The COVID variant Omicron is being reclassified as a nuisance whether than devastation. Current vaccines appear to stave off the worst effects of Omicron, current therapies work well against the virus and the knowledge that we have gained over the last year is helping us to put all of this in perspective. The threats of new lockdowns are being dismissed.
Novembers payroll growth was strong and last week’s jobless claims hit a 50 year low. Although these are good numbers, from one perspective these number also means the cost of goods will continue to rise. Inflation is expected to be on the rise through the first half of 2022.
The Federal Reserve meeting this week is expected to announce aggressive tapering (ending the pandemic economic stimulus efforts) and a quick start to raising the Federal Discount Interest Rates. (Raising the Interest Rate is the Fed’s go-to tactic to battle inflation.)
I’m starting to see a collective sigh of relief as many of our economic pressures find release valves. But any announcement from the Feds on raising interest rates can turn the markets sour in the short term.
I also do expect the fearmongering to ratchet up as the 2022 mid-term elections start to heat up. But I feel better about the next 6-8 weeks than I did a couple of weeks ago.
ETS votes a DEFCON 4
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 changed from screaming “selloff” to screaming “buy-buy-buy”. The VIX ended last week at 19%, way down from 30.7% the week before.
The VIX’s fast fall from last week corresponds to the epic buyback the markets enjoyed last week. Moving down towards the 15% line matches the speed the Marketeers were buying back what they dumped earlier.
With the VIX now under 20 and appears to be dropping is a good sign that the December pullback, like Omicron, was a little underwhelming. I will vote for a cautious DEFCON level 4
VIX votes a DEFCON 4
Put/Call Ratio:
Put Options are frequently used as protection against existing investments falling. When the ratio between Put Options bought versus Call Options bought is above 1, then this is an indicator that the Marketeers are buying insurance to what they may see as declining Markets. Conversely, when the Put/Call Ratio falls below 1, then there is a general sense that the broader Markets will increase, and more investors are buying more than selling.
The S&P 500 Put/Call Ratio took a wild ride over the past couple of weeks. Although I am not buying the fact that the ratio fell to 0.1, the high jump to over 0.8 looks knee-jerk-ish in light of the Omicron stories.
Over the past week, the Marketeers appeared to go on a buying spree – buying Call Options expecting to take advantage of unreasonably low stock prices. This suggests that most Marketeers believe the expected December market pummeling may not materialize.
Last week’s Put/Call Ratio ended at 0.53, just an itty-bit above the 0.5 “feeling safe” line. But, coming off of wild swings also suggests that we may not be done.
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. Surveys of Consumers (umich.edu)
This week’s CSI had a surprising bounce from 67.4 to 70.4. Not a good level overall, but a decisive move in the right direction. Inflation is probably the biggest drag to the index, but it appears the Omicron news is being shrugged.
Being blind to all other indicators and just looking at this week’s CSI, I feel we should be extremely cautious.
CSI votes a DEFCON 3
Market Indexes:
DOW (DJX) = 35,971 – up 4.0% from 34,580 last week. (4 weeks deviation: 608 down from 690 last week)
S&P 500 (SPX) = 4,712 – up 3.8% from 4,538 last week. (4 weeks deviation: 61.18 up from 58.92 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 = +/- 608 points or 1.7% of the market’s volume is down from 2.0% last week.
4 Weeks Thrashing of SPX = +/- 61.18 points or 1.3% of the market’s volume is flat from 1.3% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)
The broader markets had a good week last week. They appeared to have recovered most of their losses from the previous weeks and the high thrashing I documented here could be the Marketeers buying back what they just dumped.
The S&P 500, after hitting an all-time high just prior the Thanksgiving, fell over 3.5% in two weeks. Now in just over a week, it has recovered and ended (this past week) at a new all-time high. It now seems the pummeling that I expected December to have is fizzling.
If the long-term markets are decisively bullish, and if the 2-week thrashing is less than 1.0 with a bullish trajectory, then I would give this indicator a DEFCON 5. If one of those is false, then a DEFCON 4, and if both are negative, then DEFCON 3 or less.
Being blind to all other indicators and just looking at current market trends I will continue to vote for DEFCON 4.
Market Index votes a DEFCON 4
My sentiment for this coming week:
Of the five indicators:
- The ETS is showing improving content – DEFCON 4
- The VIX falling sharply – cautious DEFCON 4
- The P/C Ratio shot up over 0.8 – cautious DEFCON 4
- The CSI shows a consumer base not excited about our economic future – DEFCON 3
- The Market Movement rebounded from November selloff – DEFCON 4
I still think that December is going to test my resolve, but a turnaround with the ETS and Market Movement is suggesting that a lowering of temperature is up ahead.
Trading Readiness Level for this week
This week, I will focus on:
This week is a wait-and-see on what the Feds will do about inflation. Therefore, my markets expectation is several weeks in moderation with thrashing and moving mostly sideways or up.
At DEFCON 4 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-wide Strike-Width Spread or 2 20-wide Spreads.
- Select the Short with POTM >= 85%
- Spread term of 8-weeks or less
Profit and Loss Statement
(As of 12/17/2021)
Balance Sheet
| Year 2021 | Month Dec | Week #50 | |
| Beginning Account Balance | $16,000.00 | $20,342.72 | $20,513.66 |
| Deposits (Div. & Int.) | $1.61 | $0.00 | $0.0 |
| Withdraws (paycheck) | -$3,300.00 | -$0.00 | -$0.00 |
| Premiums on Open | $9,188.01 | $320.00 | $141.00 |
| Premiums on Close | -$1,118.00 | -$5.00 | -$0.00 |
| Fees Paid (total) | -$117.98 | 4.08 | -$1.05 |
| Ending Account Balance | $20,653.64 | $20,653.64 | $20,653.64 |
| Total Gain/Loss | $4,653.64 | 310.92 | $139.98 |
| ROR | 1.5% | 0.7% | |
| ROC | 29.1% |
Progress Graph
(Note: the negative weekly results for weeks 4, 8, 12, 17, 21, 25, 30, 34, 38, 43, and 47 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 | $9,189.62 (Premiums) | 0.45 shares (Dividends Reinvested) |
| Funds Removed | -$1,235.98 (Early Close & Fees) | $0 (Fractional Shares Sold) |
| Ending Balance | $23,953.64 (Cash) | $20,684.33 (43.83 shares * $471.90 CV) |
| ROI | +49.7% | +29.3% |
Schedule for this Week
Goals for this week: (12/13/2021 – 12/17/2021) (Week #50)
- 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: Feb 04, 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). Beyond 4-week expirations, only the monthly chains are available to trade.
- Bull Credit Spreads: Feb 04, 2022 (6-8 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 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 12/17/2021)
Spread Count Summary:
| Year 2021 | Month Dec | Week #50 | |
| Vertical Bull Put Credit Spread | 82 | 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 | 83 | 3 | 1 |
Current Dollars at Risk:
| Year 2021 | Month Dec | Week #50 | |
| Vertical Bull Put Credit Spread | $15,407. | $6,680. | $2,859. |
| 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 | $15,407. | $6,680. | $2,859. |
| Max Risk Allowed | $16,000. | N/A | $3,000. |
Vertical Spreads Opened This Week
(12/13/2021 – 12/17/2021)
SPY:425p/395p – Open 12/15/21 – Expires 01/28/22 – Max Gain = $141.00 – Open Price = $470.18
(Vertical Bull Put Credit Spread)
Entry Rules for Vertical Bull Put Credit Spreads:
- Current maximum dollars at risk < $16,000? Yes ($15,407)
- Max dollar at risk this week < $3,000? Yes ($2,859)
- 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? No (see chart)
- Put/Call Ratio < 1, (or falling if it is > 1)? No (1.1 up from 0.7)
- 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=$458.02)
- Short-strikes Prob-OTM > 85%? Yes (86.2%)
- Short-Strike price below the trend channel at expiration?: Yes (see chart)
- Current price within the bottom 1/2 of Trend Channel?: No (see chart)
- Strike Width minimum (>= 15)? Yes (30 strike width)
Vertical Spreads Currently Cooking
(As of 12/17/2021)
IWM: 195p/180p – Open 12/09/21 – Expires 01/21/22 – Max Gain = $95.00 – Open Price = $222.37
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.0%, Headroom-12.3%, Max Loss=$1,405, AROR=56.8%
Now: Prob. OTM=84.6%, Headroom=-11.0%
QQQ: 330p/305p – Open 12/01/21 – Expires 01/21/22 – Max Gain = $87.00 – Open Price = $399.23
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=91.4%, Headroom-17.4%, Max Loss=$2,411, AROR=26.0%
Now: Prob. OTM=93.2%, Headroom=-16.1%
SPY: 415p/385p – Open 11/23/21 – Expires 12/31/21 – Max Gain = $82.00 – Open Price = $468.17
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=90.3%, Headroom-11.3%, Max Loss=$2,918, AROR=26.7%
Now: Prob. OTM=97.3%, Headroom=-12.0%
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%
Now: Prob. OTM=96.8%, Headroom=-13.6%
SPY: 420p/390p – Open 11/18/21 – Expires 12/23/21 – Max Gain = $0.73 – Open Price = $469.01
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=91.1%, Headroom-10.4%, Max Loss=$2,927, AROR=27.7%
Now: Prob. OTM=98.7%, Headroom=-11.0%
Vertical Spreads Closed This Week
(As of 12/17/2021)
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%
At Close: Prob. OTM=99.8%, Head Room=-9.9%, AROR= 51.6%
Cost to open: $1.18 premium collected * 100 shares = $118.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (closed worthless)
Net Profit= $118.00 to open – $0.00 to close – $1.00 fees = $117.00
AROR= ($117.00 / 44 days in play) *365 / $1,882.00 = 51.6%
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%
At Close: Prob. OTM=99.8%, Head Room=-12.3%, AROR= 45.2%
Cost to open: $1.22 premium collected * 100 shares = $122.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (closed worthless)
Net Profit= $122.00 to open – $0.00 to close – $1.00 fees = $121.00
AROR= ($121.00 / 52 days in play) *365 / $1878.00 = 45.2%
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
– Damocles
I’m about to make the same mistake again.
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.”
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