Do I need to roll more Vertical Spreads? With the seemingly inevitable military action in Ukraine, I need to prepare for a short-term market shock that can snag a couple of my already brutalized Vertical Spreads deeper into ITM.

Ukrainian Effect on my Vertical Spreads

(As of 2/21/22)

Beyond our federal economic malfeasance or my naive investment bungling, geopolitical (or ecopolitical) events will have the biggest effect on my investment decisions. And since the Marketeers are human and tend to react based on euphoria or fear, looking at the current Ukrainian issue is necessary when considering any Options trading decisions for this week.

This topic began as a line item under my Ecopolitical Tree Shakers (ETS) section below, but the more I thought about this, the more I felt it was necessary to think through the different ramifications of a Russian intrusion into Ukraine. And since I have two Vertical Spreads expiring this Friday with one is already at a 44% probability of being assigned, I need to gauge market direction then make a decision to roll my Spreads or not.

Tempest in a Teapot?

Doing a couple of hours’ worth of Ukrainian research, and considering the broader context of Asian history, I am starting to see that the Russian military threat to Ukraine could eventually be no more of a tempest in a teapot. Although Ukraine has internationally recognized borders, it is the respect for the assumed International Laws (as flimsy as those are) that’s actually being bruised.

Personal caveat:

1. A teapot tempest is still a tempest for those in the teapot. I’m not minimizing the human effect for those caught in the crosshair of a brutal seizure of land and government. Ukrainians need our prayers and support. Russia deserves our condemnation.
2. Our national media has proven to be politicaly bias and Woke-Wacky. They tend to peddle histeria to get clicks. So it’s hard to be empathetic when I think I’m being played.

Two Market Reaction Scenarios

Any Russian aggression into Ukraine will ignite a market shock and any at-risk Spreads that I have expiring this week will surely be in danger. Plus, for my near-term Spreads (expiring next week or more) I can see one of these two scenarios:

Russia takes Kyiv and subsumes a sovereign nation

This would ignite a firestorm of worldwide condemnation and significant economic reactions.

It will take a while for the Marketeers to figure out how much this will affect their investments. But I don’t expect to see a 14% plunge in the S&P 500 as we did after 9/11.

If the Russian forces roll into Kyiv, I might expect a short-term market drop of 2% to 5% over several days – while the Marketeers assess the ramifications. So any Vertical Spreads expiring this Friday whose Short-Strikes are less than 3% under the current value, I may want to roll ASAP.

Russia carves out the eastern regions of Donetsk and/or Luhansk

Russia could limit its incursion by just recognizing either Donetsk and/or Luhansk and carving out these most eastern regions from Ukraine. This would not be too unexpected as these regions are already under Russian rules and any troops trundling into these areas will be generally welcomed by the locals.

If the incursions into the eastern regions are mostly uneventful, I will expect most of the geopolitical elites of the world to whine and moan, but any market reaction will be tepid. I would expect an initial market kneejerk reaction of 0.5% to 1.5% inside of a day or two with a quick recovery.

Depending on the scope of Russia’s aggression (territory seized and loss of human lives), any military action here will eventually earn an international shrug – the same as what Crimea, Georgia, and Chechnya got.

Don’t Get Cocky!

This is NOT the same as China’s tenuous claim to Taiwan or Texas’ past allegiance to Mexico. There is little cultural identity, loyalty, or history that uniquely separates Eastern Ukraine from Russia. Plus the eastern block of Ukraine has been in a 6-year rebellion against Kyiv.

But any European military action rekindles the memory of the Great Wars, and that alone can cause a market shock.

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 02/20/2022)

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.

• Is the Ukraine military action more of a tempest in a teapot – Shrug
• Sanctions from a Russia/Ukraine military action can shock global energy prices – Yikes
• Senate pass Continuing Resolution to fund the Government until March 11 – Shrug
• Fed’s aggressive in interest rates rollout can put US on fasttrack to Stagflation – Yikes
• A JCPOA 2.0 may moolify the markets – Yay
• More cities are rolling back COVID restrictions – Yay
• Rebalancing GDP production (shifting assets production from lockdown centric businesses to open-society business) – Ouch

Rebalancing the markets

We are going through a major market rebalancing as corporations that benefitted the most during the lockdowns (in-home-centric businesses such as Amazon, Netflix, etc.) are now being replaced by corporations that benefit the most from an open society (such as airlines, hotels, and sports). The technology industries that significantly profited from increased usage during the lockdowns (Zoom, Apple, etc.) are being placed on the back burners to make room for (Home Depot, Khols, etc.).

Ukrainian Effect

This week is starting with a significant unknown via the Ukrainian Effect. Depending on the scope of Russia’s aggression (territory seized and loss of human lives), any military action will push the market needle further towards the bears.

But since we are testing the bottom of the market’s correction, there may not be too much room for more negativity. A short-term market reaction is expected regardless of any aggression the Russians take into Ukraine, but I don’t expect it to go too deep for too long (crossing-fingers).

November Elections

I suspect that I will start hearing all about death and destruction, the rise of white supremacy, and the total loss of democracy should the Republicans take control of Congress. I also suspect that I will start seeing a total makeover on the Democratic policies, brilliant foreign policies achievements (Afghanistan and Ukraine), and what a dolt Durhan is.

Yep, the November election is in full swing and this is when media-machinations are at their best.

ETS votes optimistic 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 made a noticeable trend change downward. This is suggesting that the short-term market volatility is starting to wane.

• Last week the VIX ended at 27.8%, a slight jump from the previous week of 26.4%.
• The current VIX is above the 9-Day SMA, the 9-Day SMA is above the 50-Day SMA, and the 50-Day is 32% above the 15%. This is a slight drop from last week.

All VIX signs suggest we are in a time of high volatility and a high degree of market uncertainty – and the Marketeers hate uncertainty.

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 most of last week in the “Good Shape” region.
• The end of the week value to 0.78
• The 9-Day SMA continue to rise with the week’s ending value of 64.
• Current ratio is above 9-Day SMA, 9-Day is above 50-Day SMA, and the 50-Day is rising

To me, this week’s ThinkorSwim chart suggests the Marketeers have not bailed the markets at this point and are sticking to their existing portfolios.

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

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)

The CSI data fell 8.9% from January’s already dismal numbers. Punishing inflation is the primary contributor to the poor sentiment.

Being blind to all other indicators and just looking at this week’s CSI, I feel we should be extremely cautious.

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%). Unchanged from 11.5% last month

CSI votes a dismal DEFCON 3

Market Indexes:

DOW (DJX) = 34,079 – down 1.9% from 34,738 last week. (4 weeks deviation: 506 down from 524 last week)
S&P 500 (SPX) = 4,349 – down 1.6% from 4,419 last week. (4 weeks deviation: 76.34 down from 86.81 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 = +/- 506 points or 1.5% of the market’s volume is flat from 1.5% last week.
4 Weeks Thrashing of SPX = +/- 76.34 points or 1.8% of the market’s volume is down from 2.0% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)

The 4-week Market Thrashing continues to be high but also continues to fall week to 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 continues decisivly bearish
• The 4-week trajectory has turn slightly bullish
• The 9-Day SMA and the 50-Day SMA continue running with the Bears
• Current value of SPX is well below the 9-Day SMA and the 9-Day is well below the 50-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 voting a optimistic – DEFCON 3
• The VIX took an inflationary bounce – optimistic DEFCON 3
• The P/C Ratio shows nervousness – cautious 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 continue to suggest that we may be testing the bottom side of the January bruising. But pressures are still there for a short-duration downturn as we watch the Russia/Ukraine issue play out.

Trading Readiness Level for this week

DEFCON = 3

This week, I will focus on:

With this week’s optimistic DEFCON 3, I’m going to maintain defensive vigilance.

I have one SPY Vertical Spread expiring this week that is only 1% from ITM. But since this week is a short 4-day trading week and I may wait to see if my Prob-OTM improves before I decide to roll it.

If the Markets turn sour early:

• 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 I do not roll my one SPY Spread, I will need to open one low-risk spread to make the month’s cash-flow positive:

• 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 30-wide Strike-Width Spread.
• 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 Statements

(As of 02/25/2022)

Cash Balance Sheet

Cash Flow Chart

(Note: the negative weekly results for weeks 4 and 8 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?

Note: The markets have started 2022 terribly. But I still believe that it will end higher than it began. So if I can keep my at-risk Spreads safe until the markets start a slow trackback, then all this negative unrealized market value will reverse.

Schedule for this Week

Goals for this week: (02/22/2022 – 02/25/2022) (Week #8)

• 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 14, 2022 (6-8 weeks) (April 15 is Good Friday)
    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 02/25/2022)

Spread Count Summary:

Current Dollars at Risk:

Vertical Spreads Opened This Week

(02/21/2022 – 02/25/2022)

(Rolled) DIA:320p/290p  – Open 02/24/22 – Expires 04/08/22 – Max Gain = $660.00 – Open Price = $2,340.00
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=55.6%, Headroom=-2.0%, Max Loss=$2,491.00, AROR=239.1%

Entry Rules for Vertical Bull Put Credit Spreads:

1. Current maximum dollars at risk < $28,000? Yes ($18,921)
2. Max dollar at risk this week < $3,500? No ($4,831)
3. Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (43 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 = 2.6% / Bearish)
7. Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.2 down from 1.5)
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=$289.86)
11. Short-strikes Prob-OTM >= 85.0%? No (55.6%)
12. Short-Strike price below the trend channel at expiration?: Yes (see chart)
13. Strike Width minimum (>= 15)? Yes (30 strike width)

Thursday DIA opened down 2.6% or (>800 points) on news of the Ukraine invasion. My DIA Spread set to expire tomorrow now looks pretty hopeless. I decided to roll

This Spread is a defensive roll from DIA:330p/315p  – Open 01/14/22 – Expires 02/25/22. With only 1 day left until expiration, Russia invading Ukraine prior to this morning’s market open, and the probability of ITM at 80%, I wasn’t feeling too confident that the Short Strike would not be assigned.

(Rolled) SPY:410p/380p  – Open 02/23/22 – Expires 04/14/22 – Max Gain = $509.00 – Open Price = $430.68
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=65.5%, Headroom=-4.8%, Max Loss=$2,491.00, AROR=148.9%

Entry Rules for Vertical Bull Put Credit Spreads:

1. Current maximum dollars at risk < $28,000? Yes ($17,986)
2. Max dollar at risk this week < $3,500? Yes ($2,491)
3. Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (50 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 = 2.0% / Bearish)
7. Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.4 down from 1.5)
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=$381.03)
11. Short-strikes Prob-OTM >= 85.0%? No (65.5%)
12. Short-Strike price below the trend channel at expiration?: Yes (see chart)
13. Strike Width minimum (>= 15)? Yes (30 strike width)

This Spread is a defensive roll from SPY:430p/410p  – Open 01/12/22 – Expires 02/25/22. With only 3 days left until expiration, Russia/Ukraine tension ramping up, and this Spread already fell ITM, I wasn’t feeling too confident that the Short Strike would not be assigned.

Rolling these two resulted in a violation of the 1-week max risk rule. But this action takes me out of the immediate crosshairs of losing hundreds.

Vertical Spreads Currently Cooking

(As of 02/25/2022)

(Rolled) QQQ:350p/310p  – Open 02/14/22 – Expires 04/01/22 – Max Gain = $1,059.00 – Open Price = $349.53
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=46.8%, Headroom=+0.2%, Max Loss=$2,941.00, AROR=285.4%
Now: Prob. OTM=40.0%, Headroom=+1.7%

(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%
Now: Prob. OTM=25.2%, Headroom=+4.6%

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=86.6%, Headroom=-10.4%

(Rolled) QQQ:350p/310p  – Open 01/25/22 – Expires 03/18/22 – Max Gain = $1,310.00 – Open Price = $442.47
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=40.6%, Headroom= +2.1%, Max Loss=$2,690, AROR=341.6%
Now: Prob. OTM=39.1%, Headroom=+1.6%

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=78.7%, Headroom=-4.6%

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=89.6%, Headroom=-5.8%

Vertical Spreads Closed This Week

(As of 02/25/2022)

(Rolled) 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%
At Close: Prob. OTM=50.2%, Head Room=-0.0%, AROR= -125.5%

Cost to open: $1.10 premium collected * 100 shares = $110.00
Cost to close: -$3.83 premium paid * 100 shares = -$383.00 (closed Rolling)
(Net Profit= $110.00 to open – $383.00 to close – $2.00 fees = -$273.00
AROR= (-$273.00 / 42 days in play) *365 / $1,890 = -125.5%

Russia drove into eastern Ukraine before the markets openned on Tuesday. SPY closed in ITM on Tuesday. However, there was a Wednesday morning rebound at which time I rolled this spread.

Being 3 days to expiration and a 50/50 chance of assignment, I decided to roll.

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%
At Close: Prob. OTM=17.5%, Head Room=+1.8%, AROR= -289.1%

Cost to open: $0.95 premium collected * 100 shares = $95.00
Cost to close: -$5.35premium paid * 100 shares = -$535.00 (Rolled)
(Net Profit= $95.00 to open – $535.00 to close – $2.00 fees = -$442.00
AROR= (-$442.00 / 41 days in play) *365 / $1,405 = -289.1%

Russia started a full state invasion this morning and markets fell just under 3%. This DIA Spread’s went $5.20 ITM. If allowed to be assigned, this would be a $520 cash hit. By rolling it, I am pursuing the risk over a month out. I firmly expect the markets to recover before this expires (fingers cross).

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.”