I need to start using the Mark-to-Market (MTM or M2M) accounting method in my P&L statement to give me a better idea of my performance. Like Globodyne, I’ve been overstating the value of my open Vertical Spreads over the last year.

Calculating Mark-To-Market

In the shades of Dick Harper, for over a year I touted my Options-Trading acumen by comparing “My Performance vs. SPY” in my Profit and Loss Statement. This comparison was showing that I was CRUSHING the market. But now I may have to trade in my sagacity for audacity.

Having a market comparison is reasonable as I wanted to make sure that my efforts in trading Vertical Spreads are yielding a better return than a boring buy-n-hold stock strategy. After all, if I can do financially better just by buying shares in SPY, then why spend loads of time working the Option Chains?

But an insightful individual pointed out that I am doing a Globodyne – and he is right. I feel so… Enrony!

This week’s commentary will document how I will calculate the fair market value (mark-to-market) for my open Vertical Spread inventory and insert this liability into my SPY comparison.

Commentary Contents

• Problem Review
• Mark-to-Market
• Calculating Vertical Spreads Closing Price
• Revising “My Performance vs. SPY”

Reviewing the Problem

The error that I’ve been making was to compare the organic growth of my cash account with the market value of the EFT SPY. I used this comparison to affirm that I was outperforming the markets. But a very astute individual pointed out that I should add the fair market value of my open Spreads in my P&L calculations to make the apple/apple comparison.

Managing my Trading Account as a cash account is necessary. I need to make sure that I maintain adequate cash to open Spreads weekly plus have sufficient cash at the end of each month to issue me a paycheck.

Mark-to-Market

Mark-to-market (MTM or M2M) or fair value accounting is a method that includes the current market values of all my open Spreads in my P&L Statement. With MTM, I can calculate a current value on my Options Trading Account – as if I was going to sell my business.

The MTM value is really nothing more than the sum of my unrealized gains/loss for my Spread inventory.

Calculating Vertical Spreads Closing Price

To determine what my current asset-liability is, I have to figure out what it would cost to close all my Vertical Spreads. The best way for me to do this is to use my Custom Watchlist.

Referencing previous journal entries:
Using Excel with ThinkorSwim – Options Trades by Damocles
Custom Options Watchlist using Thinkorswim in Excel – PT 1 – Options Trades by Damocles
Custom Options Watchlist using Thinkorswim in Excel – PT 2 – Options Trades by Damocles

In my Custom Watch List, I already calculate the closing price of my open Spreads in cells under column AF. The formula I use is as follows:

7. Calculate the closing costs
   • AE21= the current Mark price of the Spread. This will be negative since I would have to buy at this price if I wish to close early.
     • AE21: =-N24
   • AF21 = the total cost to me if I close now
     • AF21: =IF(AE21=””,””,AE21*(X21*100)+AG21+AH21)

To determine the fair market value (Mark-to-Market) for all my open Spreads right now, all I have to do is sum up all the numerical values in column AF:

=sum(AF<first row>:AF<last row>)

As all the RTD cells in my spreadsheet are dynamically updated from ThinkorSwim, then the sum values in column AF will be the current fair market value of all my Spreads at this moment.

Revising “My Performance vs. SPY”

Comparing Performance tables:

I need to point out that before I was adding the MTM liability, I was proud to show a +3.5% profit in my Trading Account (which was true). After adding the MTM value, my actual profit for this week is -7.6%. I went from besting the market big time, to being bested. Big difference!

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):

• Last Fridays unexpected payroll gains surged to 457,000
• Inflation now soring to 7.5% over last year.
• The National Misery Index is now up to 11.5%
• Omicron is quickly declining
• Tech corporation reporting punctuating the market correction
• Inflation data is still the number 1 market influencer

In a surprising stat last Friday, the Labor Department reported an astounding monthly payroll gain of 457,000 new jobs – where the economists were expecting only 150,000. This caps off a year where nearly 6.6 million jobs were created. But don’t go too far!

Like the giant jump in 2021’s GDP (6.9%), the historic jobs growth for 2021 came after the equally historic economic lockdowns of the Pandemic-2020 (we are still not at the pre-COVID labor force). But this is still good news and should help the Marketeers define a bottom the current Bear Markets.

The Labor Department will make public the CPI report this Thursday. The White House spinmeisters are already ginning up blame.

Omicron is starting to take up less room on the liberal media’s headline space. The newly reported cases are falling 20% each week (and by having a Democrat President there is no need to hype the hyperbole).

Several of the world’s largest corporations are falling in line with the past month’s market corrections. PayPal, Peloton, Netflix, and others have reported a significant decrease in their subscribers. FB has exploded, based on new laws designed to reign in their privacy reach.

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.”

New rounds of earnings reports are coming out from high-profiled companies. Harley-Davidson and Peloton on Tuesday. CVS and Disney on Wednesday.

Misery Index

With the copious amount of economic pressures throughout the nation this year (inflation, employment, interest rates, etc.), knowing what the Misery Index is and what direction the index is moving can cast a long shadow on Marketeer’s sentiment. Numbers are coming from the U.S. Bureau of Labor Statistics (bls.gov).

• Inflation Rate: rose 0.6% in Jan ’22. Up to 7.5% from a year ago.
• Unemployment Rate: January rate = 4.0%

Misery Index = 11.5% (7.5% + 4.0%). Up from 10.8% last month

Systemic economic pressures are starting to fall behind. Inflation is not getting worse, omicron is less destructive, and no asset-sucking financial policies are being debated in Congress. I will vote for a cautious DEFCON 4

ETS votes cautious 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 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, but the last two weeks of lowering volatility have made a restorative tilt towards the bulls.

Last week the VIX ended at 23.7% which is a refreshing drop from the previous week of 32.0%. The lowering of the VIX’s temperature signals Marketeers may be reevaluating the past month’s trajectory.

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

VIX votes an optimistic 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.

• The S&P 500’s Put/Call Ratio spent last week in the “Good Shape” region.
• The 9-Day SMA took a decisive turn south with the week’s ending value of 0.53.

To me, this week’s ThinkorSwim chart suggests the Marketeers have let out a collective breath over the past month’s market rumpus.

Being blind to all other indicators, I’ll vote for a refreshing 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 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) = 35,090 – up 1.1% from 34,725 last week. (4 weeks deviation: 733 goodly drop from 917 last week)
S&P 500 (SPX) = 4,501 – up 1.6% from 4,432 last week. (4 weeks deviation: 123.57 goodly drop from 156.04 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 = +/- 733 points or 2.1% of the market’s volume is down from 2.6% last week.
4 Weeks Thrashing of SPX = +/- 123.57 points or 2.7% of the market’s volume is a sizable drop from 3.5% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)

The 4-week Market Thrashing continues to be high but is still a marketable drop from last week. High Thrashing is a signal of uncertainty by the Marketeers, and the Marketeers hate uncertainty. But a falling Thrashing may signal a locking-in to the current week’s trajectory.

• The 4-month trend now looks flat but is still slightly bullish
• The 4-week trajectory continues it’s steep decline, but not as steep as last week’s journal entry
• The 9-Day SMA and the 50-Day SMA are running with the Bears
• The 9-Day SMA has taken a notible turn towards the Bulls
• Current value of SPX is above the 9-Day SMA
• Falling Thrashing suggests a testing of a bottom

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

Market Index votes an optimistic DEFCON 3

My sentiment for this coming week:

Of the five indicators:

• The ETS is showing concerning content – caustious DEFCON 4
• The VIX is starting to fall – optimistic DEFCON 3
• The P/C Ratio shows good shape – DEFCON 4
• The CSI shows a consumer base not excited about our economic future – DEFCON 3
• The Market Indexs suggests a testing of a bottom – optimistic DEFCON 3

My indicators are suggesting that we may be on the bottom side of the January bruising I got from the correction. New Spreads should be easier, but I may still have a couple of at-risk positions that may need to roll.

Trading Readiness Level for this week

DEFCON = 3

This week, I will focus on:

With this week’s DEFCON 3, I’m going to maintain 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 the premiums 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 show a return towards the Bulls, then I may lower my POTM to 83%.

Profit and Loss Statements

(As of 02/11/2022)

Cash Balance Sheet

Cash Flow Chart

(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: (02/07/2022 – 02/11/2022) (Week #6)

• 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: Apr 01, 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 02/11/2022)

Spread Count Summary:

Current Dollars at Risk:

Vertical Spreads Opened This Week

(02/07/2022 – 02/11/2022)

(Rolled) QQQ:360p/320p  – Open 02/08/22 – Expires 03/25/22 – Max Gain = $1,178.00 – Open Price = $353.65
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=40.4%, Headroom=+1.8%, Max Loss=$2,822.00, AROR=338.3%

Entry Rules for Vertical Bull Put Credit Spreads:

1. Current maximum dollars at risk < $28,000? Yes ($17,686)
2. Max dollar at risk this week < $4,000? Yes ($2,822)
3. Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (45 days)
4. Long-term trend (four months) bullish? No (see chart)
5. Short-term trajectory of the underlying bullish? No (see chart)
6. 2-week Thrashing < 1% & Bullish: No (2-week Thrashing = 2.4% / Bullish, )
7. Put/Call Ratio < 1, (or falling if it is > 1)? No (1.4 up from 1.2)
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? No (1SD=$329.18)
11. Short-strikes Prob-OTM >= 85.0%? No (40.4%)
12. Short-Strike price below the trend channel at expiration?: No (see chart)
13. Strike Width minimum (>= 15)? Yes (40 strike width)

Opening this Vertical Spread violates most of my parameters Entry Rules. But desperate times calls for desperate measures. I should create Entry Rules for Rollers.

This Spread is a roll from QQQ:368p/348p  – Open 01/03/22 – Expires 02/18/22. With only 10 days left until expiration, I wasn’t feeling too confident that the Short Strike would not be assigned.

Vertical Spreads Currently Cooking

(As of 02/11/2022)

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

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

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: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%

Vertical Spreads Closed This Week

(As of 02/11/2022)

(Rolling) 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%
At Close: Prob. OTM=16.3%, Head Room=+3.9%, AROR= -500.8%

Cost to open: $1.72 premium collected * 100 shares = $172.00
Cost to close: $10.77 premium paid * 100 shares = -$1,077.00 (closed to roll)
(Net Profit= -$1,077 to open – $172.00 to close – $2.00 fees = -$903.00
AROR= (-$903.00 / 36 days in play) *365 / $1,828 = -500.8%

At the time I closed this Spread, QQQ = $353.61 (12.8% below the 52-week high and still 2.8% in correction). With 10 days to expiration Friday, the Short Strike $14.39 (3.6%) ITM, and both the long and short term trajectory is bearish. I feel pretty confident that the Short Strike would not recover and be assigned before 2/18.

I rolled this trade to QQQ: 368p/348p exp 3/18 (see Vertical Spreads Opened This Week section above).

(Rolled) SPY:420p/380p  – Open 01/24/22 – Expires 02/11/22 – Max Gain = $829.00 – Open Price = $423.65
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=51.8%, Headroom=-0.4%, Max Loss=$3,171, AROR=529.5%
At Close: Prob. OTM=98.7%, Head Room=-6.6%, AROR= 529.5%

Cost to open: $8.29 premium collected * 100 shares = $829.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expired worthless)
(Net Profit= $829.00 to open – $0.00 to close – $1.00 fees = $828.00
AROR= ($828.00 / 18 days in play) *365 / $3,171 = 529.5%

This Spread was rolled 1/24 from SPY: 425p/395p exping 1/28. At the time this was rolled, SPY was valued at $439. The Short Strike was still OTM when rolled,(.4% from ITM) and the Prob-OTM fell to just above 50%. With 5 trading days to go, I judged that this was too risky to hold, so I rolled it out for another two weeks. How did my judging go?

SPY fell to 431 just before closing Friday then rebounded. The original spread would have closed worthlessly.

But this play gained me an additional $103 in premiums. So, even though I rolled this Spread unnecessarily, it was mostly no different than having a regular Spread.

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.”