Markets begins 2022 by pushing towards a correction. So, I need to wisely use ThinkorSwim’s Regression Line to choose this week’s Vertical Credit Spreads’ Short-Strike. I need to look for the “cup of a carpenter.”

Choosing THe Best Vertical Credit Spread

I’m not at all interested in winning the best-trade trophy or picking winners to an Options beauty contest. My goal is not to be clever or insightful. I don’t need the most tweets on Twitter or the most followers on Facebook. My Options effort is not looking for glory or riches.

I’m looking for the “cup of a carpenter.”

Commentary Contents

• A New Technical Matrix
• Two-Week Regression Trend (ThinkorSwim)
• Narrative for this Week’s SPY Vertical Spread

As of mid-week, the DOW has slipped 4.7% from its start-of-year (52 weeks) high, and the S&P 500 has lost over 5%. Worse, the tech-heavy QQQ is teasing correction levels with a 9.3% drop, and the small-cap IWM is already in a correction at 15.2% in the hole.

2022 is feeling Joe Biden’s pain – both are NOT starting out well. But I do want to continue making weekly Vertical Credit Spreads sales.

A New Technical Matrix

Because of the persistent 3-week drop in the broader markets, I’m going to try a new matrix in this week’s Technical Analysis charts to help me choose a Short Strike for my Vertical Credit Spread.

My strategy for a sustainable income from trading Options is based on short-term, high-probability Vertical Spreads. And winning Vertical Spreads depends on four things:

1. Pick a winning underlying
2. Trade the Trend
3. Be aware what moves the markets
4. Leave emotions at the door

Current ecopolitical events are dialing in significant changes on the backend of my 4-month Trend Channel that will undoubtedly change its trajectory. And although I know these negative market changes are transitory (a way overused word), I need to include this dynamic in my Vertical Spread’s Short-Strike decision.

Two-Week Regression Trend (ThinkorSwim)

For this week, I am adding a 2-week “Projected Decline” line to my Technical Analysis chart. This line should give me a visual of where the value of my underlying asset will be if the current decline rate continues.

We do not follow maps to buried treasure,
and “X” never, ever marks the spot.

Indiana Jones (Movie: … The Last Crusade)

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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. The impact U.S. political polarization has on Wall Street cannot be glossed over.

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.

• Hello Market Correction?
• Inflation still problem #1
• Expect aggressive interest rates increases soon
• Government funding debate to reignite soon
• Omicron is more of a cudgle than a disease

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Bond yields are turning Bullish for the first time in years. Many Indexes are slowly approaching Correction level. And the COVID-19 pandemic plus stimulus-created inflation have given us the one-two punch. Now, to add a little lemon to our wounds, expect an aggressive rate of interest increase over this year.

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Expect a reigniting of the bitter Government Funding debates soon. Congress’s stop-gap bill passed in December is set to expire on Feb 18. And with all of Congress working so well together (NOT!) I will presume another stop-gap bill.

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Expect the fearmongering to ratchet up early in 2022 as the mid-term elections campaigning start to heat up. And with an ever-increasing ratcheting up of vitriol by those who should be uniting us,

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Raising interest rates and flooding the Bond Markets will put heavy pressure on the stocks (and my Vertical Spreads), but I do not anticipate a 2020 style market collapse. Instead, I believe the markets will end in 2022 higher than the year began – but the days of +20% yearly gains are over.

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Systemic economic pressures are going to keep a lid on the Stock Markets. 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 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 a downward trend even as January struggles.

We are still better off than the last couple of weeks in November when a bitter Senate battle over the debt ceiling predicted doom and gloom for the country. The steep drop in volatility at the start of last December came when the Senate passed a “Continuing Resolution” to kick the debt ceiling problem to Feb 14 – which is only four weeks away!

Even with the 4-week VIX trend declining, last week’s VIX did pop up briefly above the 20% level, ending at 19.2%. So, even as the VIX is not in panic mode, it is inching in the wrong direction.

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, this is an indicator that the Marketeers are buying insurance to what they may see as declining Markets (or a pending Market collapse). Conversely, when the Put/Call Ratio falls below 1, 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 starts 2022 in good shape. The 9-Day SMA peeked above the 0.5 line, while the 50-Day SMA remained slightly below. But the last week’s value jumped to 0.69 (the highest for over a month).

The ratio oscillating around the 0.5 lines basically indicates a baseline sentiment. Even with other indicators are throwing warning flags, this indicator suggests the Marketeers are hanging on to their current portfolios.

Being blind to all other indicators, I’ll vote a DEFCON 4

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)

The CSI data ticked downward as January started. This sentiment is approaching the worst in a decade. Compare this to the average of 82.9 in 2021.

Inflation is probably the biggest drag to the index, as the Omicron news generates a collective shrug.

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) = 35.912 – down 0.9% from 36,232 last week. (4 weeks deviation: 435 down from 459 last week)
S&P 500 (SPX) = 4,663 – down 0.3% from 4,677 last week. (4 weeks deviation: 63.93 slightly down from 64.97 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 = +/- 435 points or 1.2% of the market’s volume is slightly down from 1.3% last week.
4 Weeks Thrashing of SPX = +/- 63.93 points or 1.4% of the market’s volume is flat from 1.4% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)

The S&P 500 continues its January decline as the Feds try to figure out the best policies to tackle runaway inflation. If there will be a “January Effect,” then it should get going soon.

The 4-week Market Thrashing remains relatively high. This higher Thrashing is a signal of uncertainty by the Marketeers, and the Marketeers hate uncertainty.

• The 4-month trend, 4-week trajectory remains strongly bullish.
• The 9-Day SMA and the 50-Day SMA are starting a turn towards the bears.
• January continues it marketable decline
• Thrashing is still high suggesting the decline will continue

Being blind to all other indicators, I’ll go with a DEFCON 3

Market Index votes a DEFCON 3

My sentiment for this coming week:

Of the five indicators:

• The ETS is showing concerning content – cautious DEFCON 4
• The VIX falling sharply – cautious DEFCON 4
• The P/C Ratio remains in “good shape” – DEFCON 4
• The CSI shows a consumer base not excited about our economic future – DEFCON 3
• The Market Movement showing signs of corrections- DEFCON 3

Markets are currently moving Bearish, and Consumer Sentiment is negative, but the VIX and Put/Call ratio has not exploded (yet). The ETS suggests some market pressures are queued, but I don’t see anything that would cause a collapse (I never do). This tells me the markets will continue their slow decline for the next couple of weeks.

I need to be more conservative (higher Prob-OTM).

Trading Readiness Level for this week

(Cautious)DEFCON = 4

This week, I will focus on:

With this week’s cautious DEFCON 4, I need to observe market movement early in the week to see if last week’s selloff continues. Therefore, I will delay any new positions until I see the beginnings of a bounce back.

• Enter into new Spreads for a total market risk this week of < $3.5K (as the Markets see fit).
• Be leary of QQQ Spreads
• Open 1 15-wide Strike-Width Spread and 1 20-wide Spreads.
• Select the Short Strike with POTM >= 85.0% (without going under 1-SD).
• Analysze and raise the POTM if the two-week trend continue to be negative.
• Spread term of 8-weeks or less.

Profit and Loss Statement

(As of 01/21/2022)

Balance Sheet

	Year 2022	Month Jan	Week #3
Beginning Account Balance	$28,000.00	$28,000.00	$28,468.88
Deposits (Div. & Int.)	$0.00	$0.00	$0.00
Withdraws (paycheck)	-$0.00	-$0.00	-$0.00
Premiums on Open	$606.00	$606.00	$115.00
Premiums on Close	-16.00	-$16.00	-$0.00
Fees Paid (total)	-$7.14	-$7.14	-$1.02
Ending Account Balance	$28,582.86	$28,582.86	$28,582.86
Total Gain/Loss	$582.86	$582.86	$113.98
ROR		2.1%	0.4%
ROC	2.1%

Progress Graph

(Note: the negative weekly results for weeks 4 were when I withdrew $525 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	$606.00 (Premiums)	0.0 shares (Dividends Reinvested)
Funds Removed	-$23.14 (Early Close & Fees)	$0 (Fractional Shares Sold)
Ending Balance	$28,582.86 (Cash)	$26,188.98 (58.9523 shares * $444.24 CV)
ROI	+2.1%	-6.5%

Schedule for this Week

Goals for this week: (01/17/2022 – 01/21/2022) (Week #3)

• 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: Mar 11, 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.
• 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 01/21/2022)

Spread Count Summary:

	Year 2022	Month Jan	Week #3
Vertical Bull Put Credit Spread	5	5	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	0	0	0
Total	5	5	1

Current Dollars at Risk:

	Year 2022	Month Jan	Week #3
Vertical Bull Put Credit Spread	$14,982.	$8,394.	$1,885.
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	$14,982.	$8,394.	$1,885.
Max Risk Allowed	$28,000.	N/A	$3,500.

Vertical Spreads Opened This Week

(01/17/2022 – 01/21/2022)

SPY:410p/390p  – Open 01/19/22 – Expires 03/04/22 – Max Gain = $115.00 – Open Price = $458.30
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=86.5%, Headroom-10.7%, Max Loss=$1,885, AROR=50.2%

Entry Rules for Vertical Bull Put Credit Spreads:

1. Current maximum dollars at risk < $24,000? Yes ($14,982)
2. Max dollar at risk this week < $3,500? Yes ($1,885)
3. Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (44 days)
4. Long-term trend (four months) bullish? Yes (see chart)
5. Short-term trajectory of the underlying bullish? No (see chart)
6. 2-week Bullish & Thrashing < 1%: No (2-week = Bearish, Thrashing =1.0%)
7. Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.0 down from 1.7)
8. Current price above 9-Day SMA?: No (see chart)
9. 9-Day SMA above 50-Day SMA?: No (see chart)
10. Short-strike > 1 SD below the current price? Yes (1SD=$422.68)
11. Short-strikes Prob-OTM >= 85.0%? Yes (86.5%)
12. Short-Strike price below the trend channel at expiration?: Yes (see chart)
13. Strike Width minimum (>= 15)? Yes (20 strike width)

Plenty of red in this Spread’s Entry Rules. For this reason, I chose a Short Strike that was 10+ Strikes below 1 Standard Deviation.

Vertical Spreads Currently Cooking

(As of 01/21/2022)

My inventory of open Spreads is taking a beating the past three weeks. Three of my current positions have the Short Strike ITM already.

If the correction bottom can be hit by next week, then I may still have a chance with most of these. But as it stands now, I may do a Vertical Roll on one or two next week.

DIA:330p/315p  – Open 01/14/22 – Expires 02/25/22 – Max Gain = $95.00 – Open Price = $358.51
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.3%, Headroom-8.0%, Max Loss=$1,405, AROR=58.1%
Now: Prob. OTM=72.1%, Headroom=-4.6%

SPY:430p/410p  – Open 01/12/22 – Expires 02/25/22 – Max Gain = $110.00 – Open Price = $470.75
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85.8%, Headroom-8.7%, Max Loss=$1,890, AROR=47.8%
Now: Prob. OTM=64.0%, Headroom=-3.2%

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%
Now: Prob. OTM=64.3%, Headroom=-2.9%

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%
Now: Prob. OTM=32.6%, Headroom=+3.0%

Short-Strike ITM by 3.1%. Long-Strike OTM with -2.5% headroom.

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=44.2%, Headroom=+0.8%

Short-Strike ITM by 0.8%. Long-Strike OTM with -4.8% headroom.

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=34.6%, Headroom=+2.2%

Short-Strike ITM by 2.2%. Long-Strike OTM with -3.4% headroom.

This Spread has 14 days to expiration. I will wait until Monday (1/24/22) and roll to March 4.

SPY:425p/395p  – Open 12/15/21 – Expires 01/28/22 – Max Gain = $141.00 – Open Price = $470.18
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=86.2%, Headroom-9.6%, Max Loss=$2,859, AROR=40.6%
Now: Prob. OTM=83.8%,Headroom=-4.3%

Vertical Spreads Closed This Week

(As of 01/21/2022)

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%
At Close: Prob. OTM=92.1%, Head Room=-1.0, AROR= 56.8%

Cost to open: $0.95 premium collected * 100 shares = $95.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expired worthlessly)
Net Profit= $95.00 to open – $0.00 to close – $1.00 fees = $94.00
AROR= ($94.00 / 43 days in play) *365 / $1,405= 56.8%

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.”