Trade Trudging is what I do when I don’t have any curious commentary on Vertical Spreads – BUT, I still need to record this week’s Vertical Spread transaction in my Trading Journal.

Trade Trudging Week 5

A Trade Journal would not be a Trade Journal if I don’t stay faithful in documenting all new positions I open. And I can’t open new positions if I don’t first complete my “This Week’s Market Sentiment” section (below) to give me trading guidance. So, even though I have nothing curiously illuminating to document, I still need to post.

It was a relief to see the beginning of this week continue the bounce-back that start last Friday. QQQ had retreated from correction territory, SPY (which came this close to a correction) had a sharp bounce back, and all of my ITM Vertical Spread’s short-Strikes quickly vanished – then came Thursday…

By the end of Wednesday, I was encouraged by the 5 trading days’ bounce back and thought a recovery had begun. But the fragile bump in the markets was no match to the shellacking that Facebook and PayPal got on Thursday. Friday morning (as I write this), the broader markets seemed to have gotten back on the bull.

So I will end this week with two new Spreads and a fear that I will have to roll a couple of QQQs at the start of next week.

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 01/24/2022)

This section reviews 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. U.S. political polarization’s impact 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.

Last week’s critical economic numbers were better than expected (expected a bee sting but only got a chigger bite):

• There will be 5 (maybe 7) interest rates increases in 2022 insteads of 4
• The 4th Quarter GDP was 6.9% – better than expected
• The PCE rose 4.9% – slightly less than expected (still huge)
• National wage average increased 4.0% in 2021, fastest pace in history (history began in 2002) yet – slightly less than expected

The Markets are adjusting to the major policy pivots from the Federal Reserve – moving from cheap money to expensive money in such a short period of time. Wall Street heavyweights have predicted up to 7 rate hikes this year. I should expect to see near 2% in the national discount rates by year-end. (As necessary these policy adjustments are to rein in inflation, it’s not doing my Vertical Spread inventory any good.)

Friday +3% jump in the S&P came after the PCE reported a slightly lower than expected inflation rate. Last week closed as the first win of the year. But the NASDAQ and Russel 2000 are still in correction territory.

I’m expecting a reigniting of the bitter Government Funding debates soon. Congress’s stop-gap bill passed in December expires on February 18.

Expect the fearmongering to ratchet up early in 2022 as the mid-term elections campaigning start to heat up. With the “Right to Vote” act defeated, the media-mantra will now be “we can not trust the 2022 election – except if Democrats win.”

As of the end of last week, both the tech-heavy Nasdaq and the small-caps Russell are deep in correction territory. The DOW and S&P are not too far behind.

Systemic economic pressures are going to keep a lid on the Stock Markets. I will vote for a DEFCON 3

ETS votes 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 move but rather 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 an aggressive push bearish.

Last week the VIX reached its 52-Week High of 32.0%, then gratefully retreated down ending the week at 27.7%. The aggressive risk in the VIX signals a continue trek towards correction.

Being blind to all other indicators, I will vote for a DEFCON level 3

VIX votes a DEFCON 3

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.

Last week, the S&P 500’s Put/Call Ratio retreated a little, but still ended within the nervous region. The 9-Day and 5-Day SMA are still heading north so the trend is still definitely heading towards insecurity. But last week ended at .77, which is a step in the right direction.

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

Put/Call Ratio votes a DEFCON 3

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 continue to tick downward as January’s final survey is out. 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 continues to generate 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) = 34,725- up 1.3% from 34,265 last week. (4 weeks deviation: 917 hugely up from 640 last week)
S&P 500 (SPX) = 4,432 – up 0.8% from 4,398 last week. (4 weeks deviation: 156.04 hugely up from 108.83 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 = +/- 917 points or 2.6% of the market’s volume is up from 1.9% last week.
4 Weeks Thrashing of SPX = +/- 156.04 points or 3.5% of the market’s volume is hugely up from 2.5% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)

After three weeks of sharp declines, the S&P 500 had its best show last week by ending up 0.8%.

The 4-week Market Thrashing continues to skyrocket. This higher Thrashing is a signal of uncertainty by the Marketeers, and the Marketeers hate uncertainty.

• The 4-month trend remains bullish, but turning downward fairly fast
• The 4-week trajectory continues it’s steep decline
• The 9-Day SMA and the 50-Day SMA are running with the bears
• S&P 500 down 7.6% since start of year, missing correction by ‘this much’ only thanks to last Friday’s rally
• High Thrashing suggests 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 – DEFCON 3
• The VIX rising sharply – DEFCON 3
• The P/C Ratio shows nervousness – DEFCON 3
• The CSI shows a consumer base not excited about our economic future – DEFCON 3
• The QQQ and IWM in correction territory, DIA and SPY fast approaching – DEFCON 3

Every indicator still screams “BEAR!”.

If I had a chart that shows the probabilities of the market continuing to push towards correction, I believe it would be showing the beginnings of a push back from its resistant line. I’m hoping that the next week or two will show signs of a bottom.

Trading Readiness Level for this week

DEFCON = 3

This week, I will focus on:

With this week’s DEFCON 3, I’m going to continue on defense.

• Roll the most at-risk opened Vertical Spreads.
  • Rolled Spreads to be pushed towards OTM if possible.
  • Be OK with paying a premium as long as the debit is not more than originally collected.
  • Be OK with a widening the strike width, as long as the additional risk does not exceed the week’s max
• Spread term of 8-weeks or less.

If the first 2-3 days are positive, and if existing ITM spreads improve then:

• Enter into new Spreads for a total market risk this week of < $4K (as the Markets see fit)
• Open 2 20-wide Spreads.
• Select the Short Strike with POTM >= 85.0%
• Spread term of 8-weeks or less

But! If the first three days are showing a return towards the Bulls then I may wait until the end of the week to make my trading decisions.

Profit and Loss Statement

(As of 02/04/2022)

Balance Sheet

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?

Schedule for this Week

Goals for this week: (01/31/2022 – 02/04/2022) (Week #5)

• 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 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.
• 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 02/04/2022)

Spread Count Summary:

Current Dollars at Risk:

Vertical Spreads Opened This Week

(01/31/2022 – 02/04/2022)

SPY:390p/370p  – Open 02/04/22 – Expires 03/25/22 – Max Gain = $125.00 – Open Price = $446.66
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85.9%, Headroom-12.7%, Max Loss=$1,875, AROR=49.3%

Entry Rules for Vertical Bull Put Credit Spreads:

1. Current maximum dollars at risk < $28,000? Yes ($19,863)
2. Max dollar at risk this week < $4,000? Yes ($3,752)
3. Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (49 days)
4. Long-term trend (four months) bullish? Yes (see chart)
5. Short-term trajectory of the underlying bullish? Yes (see chart)
6. 2-week Thrashing < 1% & Bullish: No (2-week Thrashing = 1.8% / Bullish, )
7. Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.3 down from 1.5)
8. Current price above 9-Day SMA?: Yes (see chart)
9. 9-Day SMA above 50-Day SMA?: No (see chart)
10. Short-strike > 1 SD below the current price? Yes (1SD=$413.11)
11. Short-strikes Prob-OTM >= 85.0%? Yes (85.9%)
12. Short-Strike price below the trend channel at expiration?: Yes (see chart)
13. Strike Width minimum (>= 15)? Yes (20 strike width)

I’m looking at this Spread as a sell of opportunity. The start of the week was a good sign that we may have hit a bottom on this correction. The shellacking the fragile markets took on Thursday sent the VIX soaring. Then Friday morning’s small bump has caused the volatility of SPY to go nuts. And high volatility means higher premiums I can collect. Thus, this volatility allowed me to open a SPY Spread with the Short Strike deeper (>12% below current price) and still collect a near 50% AROR premium.

SPY:415p/395p  – Open 02/02/22 – Expires 03/11/22 – Max Gain = $123.00 – Open Price = $455.27
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.5%, Headroom-8.8%, Max Loss=$1,877, AROR=64.1%

Entry Rules for Vertical Bull Put Credit Spreads:

1. Current maximum dollars at risk < $28,000? Yes ($17,988)
2. Max dollar at risk this week < $4,000? Yes ($1,877)
3. Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (37 days)
4. Long-term trend (four months) bullish? Yes (see chart)
5. Short-term trajectory of the underlying bullish? Yes (see chart)
6. 2-week Thrashing < 1% & Bullish: No (2-week Thrashing = 1.8% / Bullish, )
7. Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.5 down from 1.7)
8. Current price above 9-Day SMA?: Yes (see chart)
9. 9-Day SMA above 50-Day SMA?: No (see chart)
10. Short-strike > 1 SD below the current price? Yes (1SD=$426.64)
11. Short-strikes Prob-OTM >= 85.0%? No (84.5%)
12. Short-Strike price below the trend channel at expiration?: Yes (see chart)
13. Strike Width minimum (>= 15)? Yes (40 strike width)

My first normal Vertical Spread for several weeks. The worse of the market corrections seem to be over as most underlyings have rebound.

The Prod-OTM was above 85% when I entered the Spread’s order, but dropped slightly. Both the one-week and two-week trajectories are bullish.

Vertical Spreads Currently Cooking

(As of 02/04/2022)

My inventory of open Spreads has taken a beating the past four weeks. Three of my current positions have the Short Strike ITM already.

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%
Now: Prob. OTM=72.3%, Headroom=-6.4%

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=66.4%, Headroom=-3.6%

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=55.9%, Headroom=-1.8%

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=55.6%, Headroom=-1.6%

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=23.2%, Headroom=+4.6%

Short-Strike ITM by 4.4%. Long-Strike OTM with -1.0% 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=34.9%, Headroom=+2.4%

Short-Strike ITM by 2.3%. Long-Strike OTM with -3.3% headroom.

Short-Strike ITM by 3.8%. Long-Strike OTM with -1.9% headroom.

This Spread has 12 days to expiration. I will wait until Monday (1/24/22) and roll to March 4.

Vertical Spreads Closed This Week

(As of 02/04/2022)

No Vertical Spreads closed this week.

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.”