Options Puts, Strikes, and expiration dates aren’t just Bazinga! But when asked to explain Stock Options trading, I come across as pedantic, pretentious, and indecipherably nerdy. I feel like a real-life Big Bang Theory character.
So if I make slightly asymmetric knots with sheets in four dimensions, then I can bootstrap the whole idea to a large asymmetry in eleven dimensions.
– Sheldon Cooper (TV: Big Bang Theory)
Are Options Nerdy?
Options Puts, Strikes, and expiration dates aren’t just Bazinga! But when asked to explain Stock Options to someone, I come across as pedantic, pretentious, and indecipherably nerdy. I might as well be explaining Super Asymmetry.
So, in this Trade Trudging week’s journal entry, I want to try out some short, simplistic, and genuinely descriptive Options trading descriptions. Something that I can throw out during casual conversations without careening into a lecture.
How To Explain Options to the Disinterested?
To people who are truly apathetic about Stocks and Options, my trying to explain Options makes me sound supercilious. So when casually asked at social gatherings, I am truly at a loss what to say that won’t get me the “glassy-eye.” I need something better than:
Options are derivatives of an underlying that gives a trader the right, but not the obligation, to buy or sell 100 shares of a stock at a pre-agreed upon price and date.
I might as well be explaining “Rock, Paper, Scissors, Lizard, Spock.”
What are Options?
So, here’s my attempt at some one-liners:
- Options are IOUs that I can buy and sell in the Stock Exchanges when I can’t afford to actually buy or sell stocks.
- Options can milk an extra percentage point or two from Stocks I already own.
- Options are a way for someone with little money to make a little more.
- Options trading is an easy way to make a easy money (if you know what you are doing).
- Options trading is an easy way to lose lots of money (if you don’t know what your are doing).
- Options are not for sissies.
- Options are what nerds get into once they retire.
If anyone in the Optionsphere can add a clever one-liner to this list, then please send a reply at the bottom of this post.
Leonard: What would you be if you were attached to another object by an inclined plane, wrapped helically around an axis?
– The Big Bang Theory
Sheldon: Screwed?
A neutron walks into a bar and asks “how much for a drink?”
– Sheldon Cooper (TV: The Big Bang Theory)
The bartender replies, “for you, no charge.”
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 01/02/2022)
In this section, I review five indicators: VIX, Put/Call Ratio, S&P 500, Consumer Sentiment Index, and Ecopolitical 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 (ETS):
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.
- CDC kiboshes Ocean Liners’ cruises
- Omicron is surging, but appears flu-like managible
- Watch for BBB 2.0
- Federal Budget battles to reignite – Feb 18 deadline
- Inflation still problem #1
- The Federal Reserve may surpass COVID as the biggest ETS in 2022
- Will there be a “January Effect”
Biden’s Build Back Better (BBB 2.0) social spending bill will be a priority for the first order of Senate business. Expect a significantly reduce revision with fewer programs that will be funded longer. I also expect this to be more of a watered-down “Climate Change” bill than a social support bill.
The December minutes for the FOMC (Federal Open Market Committee) were released. Expressing increased intention to sell back to the Marketeers the assets the Federal Reserve was buying over the past two years. And with nearly $9 Trillion in assets on the Balance Sheet, that is a lot of stuff to sell.
In addition to faster tapering, the Feds also signaled their anticipated Interest Rate hikes of just under .75% per year for the next three years. I won’t bet they will not go even higher as time goes on.
With the increased asset supply into the markets plus the raising of stock alternatives (interest-bearing assets), the Marketeers are in for a rough next couple of years.
Government Funding debates reigniting. Early December, Congress passed a stop-gap bill funding the Government to Feb 18. The Senate needs to break the months-long stalemate and pass the full-year funding bill by Feb 18 to avoid another Valentine’s Day Massacre.
Many groups are still trying to stoke the COVID fears. The CDC shut down US cruises, many schools are starting the year with remote learning and the Blue States are pushing mask mandates. But the spread of the vastly more transmissible Omicron has not lived up to the early hype, and the symptoms are not severe. Maybe we should start mass-administer Valium?
Expect the fearmongering to ratchet up early in 2022 as the mid-term elections campaigning start to heat up.
The DNC appears to be previewing their 2022 electioneering playbook. Where in 2020, the COVID-CON was used as a political cudgel to outs a sitting president, it now seems the Jan 6th, Capital ransacking will be to used prosecute the Republican party.
The expected Feds actions have me a bit concerned. But my concern may just be a knee-jerk reaction. I will vote for a cautious DEFCON 4
ETS votes 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 a 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 1-month trajectory of the VIX Regression Channel continues to relax on lower market volatility. Since the anticipated December Federal Budget fights did not occur, seems like the Marketeers are gaining more confidence that the current bull market will continue.
Lowering of the VIX suggests a lowering of market angst, but it also suggests lower premiums.
The trajectory for the 1-month VIX Regression Channel ended last week at 17%, slightly down from 18% the week before. But since the VIX is still above 15% (but falling), I still see this as the Marketeers remaining strained with the current market sentiment – but hopeful.
Being blind to all other indicators, I will vote for a 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 ended 2021 with a rise in Put Options buying. This suggests Marketeers are betting that the beginning of 2022 may be a little questionable.
Ending with 0.56 this past Friday, the Put/Call Ratio bounced back above the .5 line. But the 9-Day SMA and the 50-Day SMA are below 0.5. This suggests the Marketeers are buying and starting to feel a little confident about the future.
Note: if the current ratio, the 9-Day SMA, and the 50-Day SMA are all below the .5 line, I might have to give this a DEFCON 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)
December’s Sentiment Index improved over November’s. This could be because of income gains (including the 5.9% increase in Social Security payments).
But 70.6% is still not a good level overall. Inflation is probably the biggest drag to the index, but it appears the Omicron news is being shrugged. This may change with the Omicron wind.
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) = 36,338- up 1.1% from 35,951 last week. (4 weeks deviation: 487 down from 557 last week)
S&P 500 (SPX) = 4,766 – up 0.8% from 4,726 last week. (4 weeks deviation: 72.31 up from 61.18 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 = +/- 487 points or 1.3% of the market’s volume is down from 1.5% last week.
4 Weeks Thrashing of SPX = +/- 72.31 points or 1.5% of the market’s volume is up from 1.3% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)
The S&P 500 ended its 2021 trek decisively bullish with its 52-week high on Dec 29.
The 4-week Market Thrashing is still relatively high, but this may be influenced by President Biden’s “Winter of Death” speech.
The 4-month trend, 4-week trajectory, and the 50-Day SMA are all strongly bullish. The 9-Day SMA is above the 50-Day SMA and rising.
If the market thrashing were below 1.0% I might declare this indicator a DEFCON 5. But just because of the thrashing, I’ll vote (being blind to all other indicators) 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 dropped below 0.5 – 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
Trading Readiness Level for this week
This week, I will focus on:
At DEFCON 4 I will set my Spread strategy sights as follows:
- Enter into new Spreads for a total market risk this week of < $3.5K (as the Markets see fit)
- Open 1 15-wide Strike-Width Spread and 1 20-wide Spreads.
- Select the Short Strike with POTM >= 80.0% (without going over 1-SD)
- Spread term of 8-weeks or less
Profit and Loss Statement
(As of 01/07/2022)
Balance Sheet
| Year 2022 | Month Jan | Week #1 | |
| Beginning Account Balance | $28,000.00 | $28,000.00 | $28,000.00 |
| Deposits (Div. & Int.) | $0.00 | $0.00 | $0.00 |
| Withdraws (paycheck) | -$0.00 | -$0.00 | -$0.00 |
| Premiums on Open | $286.00 | $286.00 | $286.00 |
| Premiums on Close | -$0.00 | -$0.00 | -$0.00 |
| Fees Paid (total) | -$2.04 | -$2.04 | -$2.04 |
| Ending Account Balance | $28,283.96 | $28,283.96 | $28,283.96 |
| Total Gain/Loss | $283.96 | 283.96 | $283.96 |
| ROR | 1.0% | 1.0% | |
| ROC | 1.0% |
Progress Graph
(Note: the negative weekly results for weeks 4, 8, 12, 17, 21, 25, 30, 34, 38, 43, 47, and 52 are when I withdrew $300 from the Trading Account for my paycheck.)
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?
| Options Trading Account | SPY (Fictional) | |
| Initial Investment (As of Jan 4, 2021) | $28,000.00 (Cash) | $28,000.00 (58.9523 shares @ $474.96) |
| Funds Added | $286.00 (Premiums) | 0.0 shares (Dividends Reinvested) |
| Funds Removed | -$2.04 (Early Close & Fees) | $0 (Fractional Shares Sold) |
| Ending Balance | $28,283.96 (Cash) | $27,586.15 (58.9523 shares * $467.94 CV) |
| ROI | +1.0% | -1.5% |
Schedule for this Week
Goals for this week: (01/03/2022 – 01/03/2022) (Week #1)
- 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 25, 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 25, 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 01/07/2022)
Spread Count Summary:
| Year 2022 | Month Jan | Week #1 | |
| Vertical Bull Put Credit Spread | 0 | 0 | 0 |
| 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 | 0 | 0 | 0 |
| Total | 0 | 0 | 0 |
Current Dollars at Risk:
| Year 2022 | Month Jan | Week #1 | |
| Vertical Bull Put Credit Spread | $13,287. | $0. | $0. |
| 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 | $13,287. | $0. | $0. |
| Max Risk Allowed | $28,000. | N/A | $3,500. |
Vertical Spreads Opened This Week
(01/03/2022 – 01/07/2022)
QQQ:368p/348p – Open 01/03/22 – Expires 02/18/22 – Max Gain = $172.00 – Open Price = $399.76
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=80.0%, Headroom-7.9%, Max Loss=$1,828, AROR=74.2%
Entry Rules for Vertical Bull Put Credit Spreads:
- Current maximum dollars at risk < $24,000? Yes ($15,115)
- Max dollar at risk this week < $3,500? Yes ($1,828)
- Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (46 days)
- Long-term trend (four months) bullish? Yes (see chart)
- Short-term trajectory of the underlying bullish? Yes (see chart)
- 2-week Bullish & Thrashing < 1%: No (1.8%)
- Put/Call Ratio < 1, (or falling if it is > 1)? No (1.2 up from 0.8)
- 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=$369.00)
- Short-strikes Prob-OTM >= 80.0%? Yes (80.0%)
- Short-Strike price below the trend channel at expiration?: Yes (see chart)
Current price within the bottom 1/2 of Trend Channel?: Yes (see chart)- Strike Width minimum (>= 15)? Yes (20 strike width)
One of my most ignored Entry Rules is the “Current price within the bottom 1/2 of Trend Channel.” (Because it does not really matter where the current price lies in respect to the Trend Channel, it is “is the trend(s) moving in the right directions?”) Therefore, I will remove this rule and add a new rule.
The most recent rule of “2-Week Thrashing < 1%” is getting a slight facelift. Now it will be if the past two weeks are both bullish AND the Thrashing is less than 1%.
With this change, I will now have three Trend Channels to review before opening a new Vertical Spread; a 4-month, a 2-Week Trend Channel, and a 1-Week Trend Channel.
SPY:431p/416p – Open 01/07/22 – Expires 02/18/22 – Max Gain = $172.00 – Open Price = $399.76
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.0%, Headroom-8.0%, Max Loss=$1,386, AROR=69.2%
Entry Rules for Vertical Bull Put Credit Spreads:
- Current maximum dollars at risk < $24,000? Yes ($16,501)
- Max dollar at risk this week < $3,500? Yes ($3,214)
- Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (43 days)
- Long-term trend (four months) bullish? Yes (see chart)
- Short-term trajectory of the underlying bullish? No (see chart)
- 2-week Bullish & Thrashing < 1%: No (2-week = Bearish, Thrashing =0.9%)
- Put/Call Ratio < 1, (or falling if it is > 1)? No (1.2 up from 0.8)
- 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=$434.83)
- Short-strikes Prob-OTM >= 80.0%? Yes (83.0%)
- Short-Strike price below the trend channel at expiration?: Yes (see chart)
Current price within the bottom 1/2 of Trend Channel?: Yes (see chart)- Strike Width minimum (>= 15)? Yes (15 strike width)
This week I was more interested in getting in my first two Spreads for the year than I was to follow my entry rules. Of my 13 Entry Rules, 4 are in the red (70% adherence).
Because rules 5 and 6 are both negative, I dialed back my Prop-OTM to 83% instead of the 80% guidance for the week.
Vertical Spreads Currently Cooking
(As of 01/07/2022)
QQQ:360p/340p – Open 12/28/21 – Expires 02/18/22 – Max Gain = $144.00- Open Price = $402.27
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.0%, Headroom-10.1%, Max Loss=$1,856, AROR=54.1%
Now: Prob. OTM=83.1%, Headroom=-9.5%
QQQ:365p/345p – Open 12/27/21 – Expires 02/04/22 – Max Gain = $127.00- Open Price = $401.79
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.1%, Headroom-9.1%, Max Loss=$1,873, AROR=63.0%
Now: Prob. OTM=85.1%, Headroom=-8.3%
DIA:320p/290p – Open 12/21/21 – Expires 01/28/22 – Max Gain = $122.00 – Open Price = $352.64
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85.3%, Headroom-9.3%, Max Loss=$2,878, AROR=40.4%
Now: Prob. OTM=93.9%, Headroom=-12.0%
SPY:425p/395p – Open 12/15/21 – Expires 01/28/22 – Max Gain = $141.00 – Open Price = $470.18
(Vertical Bull Put Credit Spread)
Now: Prob. OTM=93.7%,Headroom=-10.7%
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=94.5%, Headroom=-12.5%
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=96.4%, Headroom=-14.1%
Vertical Spreads Closed This Week
(As of 01/07/2022)
Vertical Spreads opened with a 01/07/22 expiration date were all closed early via ThinkorSwim Trade Triggers.
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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