This week I examine the effects of rolling 6 Vertical Spreads over the past two months. Asking myself: am I effectively using the practice of ‘rolling’? and what are the ramifications of rolling too many Spreads? Am I protecting myself from the market meanies?

Rolled Vertical Spreads Vanishing Point

This week’s commentary is to examine the effects of my rolling 6 Vertical Spreads over the past two months. The questions I want to ask are “is rolling at-risk Vertical Spreads a reasonable defense against an unfriendly market?”, “am I effectively using the practice of ‘rolling’?” and “what are the ramifications of rolling too many Spreads?”

Commentary Contents

• Six Rolled Vertical Spreads
• Problem with Too Many Rolls
• 2D or 3D – A Matter of Perspective
• Conclusion

The fracas in the Markets over the past two months has turned my Vertical Spread inventory mostly negative. I have spent the better part of this year being chased by the market meanies.

Six Rolled Vertical Spreads

Most markets indexes began 2022 at all-time highs. But within a few short weeks, we saw the major market indexes crumble as we fell into correction territories.

With most of my Spread inventory heading to (or in) ITM, I rolled 6 Vertical Bull Put Credit Spreads over the past 8 weeks.

This chart is my closing transactions that began my 6 rolls. Here I wanted to compare my realized cost of closing early to the hypothetical of just letting it all expire.

¹ The -$4,895.00 is actual realized Capital Gains losses to date.

The gist of this table is to show that closing early saved me $176 over that of letting the Spreads ride to expiration. But this is NOT where the story ends. Each of those closed Vertical Spreads were ‘rolled’ to a corresponding ‘not-as-high’ risk position. So if the market meanies don’t let up, I could be heading to an explosive ending.

Rolling to Rolled Vertical Spreads

Each of the rolled Spreads above now corresponds to new Spreads that are still at high risk – but the inevitability of assignment is far less. And now I have time on my side.

Additionally, all the premiums collected from the new positions offset the premiums I paid to close early. So if the underlying can now stay flat (or inch up a little) over the next few weeks, I will negate the significant realized losses above with substantial realized gains.

If I were to open any of these new ‘rolled’ Spreads as a standalone action, I would not have done so. These Spreads’ configuration would have violated every one of my Entry Rules. But the reason for rolling a Vertical Spread is not to simply enter this week’s planned transaction, but to salvage what could eventually become a devastating loss.

Using the ThinkorSwim Rolling Dialog, I can change the rolled Spread from debit to credit by simply widening the Strike-Width (say from 20 wide to 40 wide). And, moving the Long Strike further out will enhance my ‘loss resistance‘ aspect of the new Spread.

The resulting position (as a stand-alone Vertical Spread) will still have an unacceptable risk, but that risk will not be imminent and not as destructive.

– It’s all about perspective.

The downside of this change is that instead of freeing up $2,000 at the original Spread’s expiration, I’m adding another $2,000 to the position ($4,000) and delaying the expiration to much later.

Problem with Too Many Rolls

The problem with rolling a Vertical Spread is with how I can manage my cash account.

My business plan for this year was to schedule opening 1 to 2 Vertical Bull Put Credit Spreads each week for a max risk of $3,500. The maximum duration for a Spread was projected to be 8 weeks or less. So, I calculated that if I entered into 8 weeks of Spreads I will need $28,000 of set-aside cash to support the risk. Then on the 9th week, I would have the cash from the 1st week’s expired spread to use. I can then ride that wheel throughout the year.

Rolling a losing Spread to a wider Strike-Width will not release set-aside cash. And the more I roll to wider Spreads, the less available cash I have to open new Spreads. So eventually, I will bunch my set-aside cash to later and later expirations dates when, sooner than later, I won’t have any available cash to open new Spreads.

2D or 3D – A Matter of Perspective

I guess I don’t trust things
that don’t come with a repair manual.

– Jimmy Kowalski (Movie: Vanishing Point)

My high school art class introduced us to perspective drawings. This is a technique of turning 2D drawings into a virtual 3D effect. And the classical example is the vanishing point of a highway. But in the reality of it all, it’s still a flat piece of paper.

Similarly, rolling Vertical Spreads can turn a losing 2D Spread into a virtual 3D hybrid for a win.

Technically, a Vertical Spread is just two individual Options Contracts that are bought and sold together. When I enter into a new Vertical Put Credit Spread, I sell the Short Strike to make the money. And from the premiums collected, I will buy a Long Strike for protection (and for limiting my allocated cash to cover the risk). The dollar difference from this buy and sell transaction is my profit (if I can keep it).

Rolling a Vertical Spread is nothing more than buying and selling four contracts. It is closing out the original Vertical Spread (typically at a loss), then opening a new Spread (hopefully in a better position to expire worthlessly). But instead of looking at this separately as a big loss and a big win, I want to consider this as one 3D transaction.

So in the example above, the SPY Vertical Spread that I opened on 12/15/21 was closed 4 days early because it was fast approaching ITM. I could have just declared that I lost $721 on this position, then move on to something new.

But by rolling the original Spread, I can construct the new expiration date and the new Short Strike so collectively I can still have the hope of calling this a win.

– It’s a matter of perspective.

Conclusion

I can’t really answer my opening questions. I’m going to have to wait until the last of the rolled Vertical Spreads expires and the markets have regained their bullish trends.

But what I can say is, by this time in the COVID Crash of 2020, I had lost so much cash from my Trading Account that I was never able to recover, and I ended that year at a significant loss. So by aggressively rolling in this year’s market correction, I have (so far) kept my cash account above water. If I can keep my account positive until the rebound, then I will have the entire year to make up ground.

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 02/28/2022)

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.

• Russia raising nuclear status – Yikes
• Near 13% delcine in incomes from those makeing $100K or more – Yikes
• Ukraine invasion seems to be driving the markets – Yikes
• Feds to announce how much interest rate hike for March – Yikes
• Punishing inflation is still the primary culprit – Yikes

Geopolitical

Last week I speculated that the Ukraine/Russia conflict will be eventually be viewed as a Tempest in a Teapot. But with Russia raising the nuclear flag this past weekend, the teapot appears to be getting bigger. I just hope that Ukraine will not become this generation’s version of the Lusitania.

But what we are learning from the Russia/Ukraine fracas is that Russia’s military is not up to propaganda standards. They appear to be more ill-maintained and ill-trained than we were told.

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, Kohl’s, etc.).

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 (such as 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.

Most ETS items appear to have legs. So what is depressing the markets now may continue to do so. But it also seems that we may have reached the bottom of the market correction and hopefully we won’t lose too much more ground over the next few weeks.

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 again changed direction towards the bulls with the short-term volatility taking a jump on the Ukraine invasion news.

• Last week the VIX ended at 27.6%, a slight slip from the previous week of 27.8%.
• The current VIX dropped below the 9-Day SMA, but the 9-Day SMA is well above the 50-Day SMA
• The 50-Day is 53% above the 15%, a big pop 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 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.

• 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 0.56
• The 9-Day SMA continue to rise with the week’s ending value of 68
• Current ratio is below 9-Day SMA but the 9-Day is above 50-Day SMA
• 50-Day SMA appears to be leveling

The Put/Call Ratio indicator continues to be the shiny star in the otherwise dismal Market Sentiment section. The ratios oscillating in the “Good Shape” region tells me that the Marketeers are not seeing this downturn to last long.

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)

February’s final results were just a smidgeon improvement over the preliminary numbers. But these numbers are still at historic lows.

Continued low CSI numbers are conformation of the general dissatisfaction with the government’s economic policies.

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) = 34,059- down 0.1% from 34,079 last week. (4 weeks deviation: 741 up from 506 last week)
S&P 500 (SPX) = 4,385 – up 0.8% from 4,349 last week. (4 weeks deviation: 96.16 up from 76.34 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 = +/- 741 points or 2.8% of the market’s volume is a jump up from 1.5% last week.
4 Weeks Thrashing of SPX = +/- 96.16 points or 2.2% of the market’s volume is a jump up from 1.8% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)

The 4-week Market Thrashing took a significant jump last week as Russia rolled into Ukraine. The DOW initially reacted with a near 3.5% selloff early Monday that kept falling until Wednesday. Then it quickly returned that 3.5% (almost) by the end of the week.

• The 4-month trend continues decisivly bearish
• The 4-week trajectory affirms the trend as bearish
• The 9-Day SMA and the 50-Day SMA continue running with the Bears
• Current value of SPX bounced above the 9-Day SMA by the end of the week.
• Increase Thrashing suggests more bears coming.

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 has systemic issues – optimistic DEFCON 3
• The VIX shows a Ukrainian jolt – DEFCON 3
• The P/C Ratio shows good-shape – cautious DEFCON 4
• The CSI shows a consumer base not excited about our economic future – DEFCON 3
• The Market Indexs taking geopolitical hits – optimistic DEFCON 3

There is a sense of market foreboding that seems a little reminiscent of the 2020 COVID-Crash. The big difference now is that the mainstream media is not actively exacerbating the doldrums as they did in 2020 to outs Trump. This year they are suspiciously quiet so to minimize their losses in the November elections.

My indicators continue to suggest that we may be testing the bottom side of the January/February bruising. But pressures of rising prices, interest rates, and the Russia/Ukraine issue are putting a lid on any upward movement. Any new Spreads this week still need to be an ultra-low risk.

Trading Readiness Level for this week

DEFCON = 3

This week’s Rules:

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

I have one expiring Vertical Spread that looks to be in good shape (current price > 6% above the Short Strike and the Short is > 90% prob-OTM). So I am not anticipating rolling anything this week.

Because I have rolled 6 Vertical Spreads, the availability of unallocated working capital is getting low (Options Buying Power). So I need to start rationing.

Entry Rules:

• Short Strike < 1SD
• If 4-month Trend Channel is bearish then – 5 from Short Strike
• If 2-week trajectory is bearish then another -5 from Short Strike
• If 1-Week trajectory is bearish then another -5 from Short Strike
• If POTM is still < 85%, lower Short Strike until > 85%

• Max-risk < $2K (as the Markets see fit).
• Open 1 15-wide or 1 20-wide Strike-Width Spread.
• Spread term of 8-weeks or less.

Exit Rules:

• Early close following this schedule:
  • 85% of max-gain if 4 or more weeks out
  • 90% of max-gain if 3 or more weeks out
  • 95% of max-gain if 2 or more weeks out
  • Let expire if less than 2 weeks out
• Roll Spreads inside of 1 week of expiration if:
  • Short Strike is ITM
  • Short Strike < 0.5% and 1-week trajectory is bearish
  • Short Strike < 55% POTM and 1-week trajectory is bearish
• Close rolled QQQs at $1 profit if it ever gets there.
  • Set QQQ 350p/310p exp. 3/18 GTC Closing Order Trade Trigger to $0.39
  • Set QQQ 360p/320p exp. 3/25 GTC Closing Order Trade Trigeer to $0.99

Profit and Loss Statements

(As of 03/04/2022)

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 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: (02/28/2022 – 03/04/2022) (Week #9)

• 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 22, 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 03/04/2022)

Spread Count Summary:

Current Dollars at Risk:

Options Buying Power:

Unallocated dollars available to open new Vertical Credit Spreads:

Vertical Spreads Opened This Week

(02/28/2022 – 03/04/2022)

SPY:380p/360p  – Open 03/03/22 – Expires 04/22/22 – Max Gain = $142.00 – Open Price = $438.66
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=84.7%, Headroom=-13.5%, Max Loss=$1,858, AROR=55.4%

Entry Rules for Vertical Bull Put Credit Spreads:

1. Current maximum dollars at risk < $28,000? Yes ($18,894)
2. Max dollar at risk this week < $3,500? Yes ($1,858)
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? Yes (see chart)
6. 2-week Thrashing < 1% & Bullish: No (2-week Thrashing = 1.2% / Bullish)
7. Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.3 down from 1.8)
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=$388.42)
11. Short-strikes Prob-OTM >= 85.0%? No (84.7%)
12. Short-Strike price below the trend channel at expiration?: Yes (see chart)
13. Strike Width minimum (>= 15)? Yes (20 strike width)

Rule 6: This was what mostly put me in the buying mood. With the 1-week trajectory bullish, the 2-week has also turned bullish. Even though the 2-week thrashing is above 1.0, it is significantly lower than the previous weeks.

Rule 11: was teasing the 85.0% POTM line when I entered the order. But it dropped to 84.7% by the time the order was opened and I was able to record the transaction.

In a sign that seems to be confirming a bottom to this market craziness, I am seeing a whole lot less red in the rules above.

Vertical Spreads Currently Cooking

(As of 03/04/2022)

As of this date, I have three positions currently at ITM.

(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%
Now: Prob. OTM= 63.1%, Headroom=-4.3%

(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%
Now: Prob. OTM= 64.4%, Headroom=-4.0%

-ITM- (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=29.9%, Headroom=+4.2%

-ITM- (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=15.4%, Headroom=+7.2%

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= 82.3%, Headroom=-9.1%

-ITM-(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= 23.6%, Headroom=+4.3%

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= 72.2%, Headroom=-3.2%

Vertical Spreads Closed This Week

(As of 03/04/2022)

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%
At Close: Prob. OTM=98.0%, Head Room=-4.4%, AROR= 50.2%

Cost to open: $1.15 premium collected * 100 shares = $115.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (expired worthless)
(Net Profit= $115.00 to open – $0.00 to close – $1.00 fees = $114.00
AROR= ($114.00 / 44 days in play) *365 / $1,885 = 50.2%

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.”