Trade Trudging week continues as I consider rolling another ITM QQQ Vertical Bull Put Credit Spread. But are we at the emergence of a market rebound? Has the patience of the Marketeers finally been spent? Go-Go Rebound!

Go-Go Vertical Spreads

Are we at the emergence of a market bounce? Has the patience of the Marketeers finally been sapped? Go-Go Market Rebound!

Trade Trudging continues this week as I consider rolling another ITM QQQ Vertical Bull Put Credit Spread. But I need to be more careful than I was last week. Last week’s head fake cost my Trading Account $800. See “This Week’s Trade Activity” to see what I came up with.

Last week’s deep ITM QQQ Vertical Spread roll was very disheartening. As a demonstration of my complete lack of Market-Timing awareness, I entered the rolled the QQQ Spread last week on Tuesday morning for my first-of-the-year debit of $800. Then literally, LITERALLY, about 5 minutes after the rolling transaction was completed, the markets (especially QQQ) soared on an epic 3-day bounce. And the ITM QQQ that I rolled at a debit of $800 would have closed worthlessly! Wowser!

This week’s expiring QQQ Vertical Spread is also ITM, but not as deep as last week’s. But this week, QQQ has aggressively been rising, so I plan to wait until Wednesday or Thursday before I make a rolling decision. I understand that by waiting, I run the risk of either having my Short Leg assigned at someone else’s will. I also risk having no takers to close my Spread if I wait too long.

Wowser!

Inspector Gadget

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 03/21/2022)

This section reviews five indicators: Ecopolitical events, VIX, Put/Call Ratio, Consumer Sentiment Index, and the S&P 500, and how these 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.

Yikes – Yawn – Yay

• Russia going nuclear? – Yikes
• WTI oil wobbling at the $115 level, keeping gas prices high – Yikes
• Inflation/Interest Rates cast dark shadows over my at-risk Spreads – Yikes
• China eyeing Taiwan – Yikes
• Stagflation nears – Yikes
• Expect a half-point interest hike next month – Yikes

• China sides with Russia on Ukraine war- Yawn
• Feds rasies Interest Rates 0.25% – Yawn

• Is higher interest rates better than intrenched inflation? – Yay
• Job’s rebound on fire – Yay
• S&P 500 reclaimed nearly 8% of losses in the last 15 days – Yay

• Daylight Saving Time permanent? – About damn time

Geopolitical

• Russia’s aggression into Ukraine is still dominating the headlines. And the signal from Russia that they could use low-grade field nukes to scare Ukraine into surrendering will change the geopolitical dynamics globally and could shock the markets into another correction should they follow through.

• If a nuke is used in Ukraine, expect oil to skyrocket and drag inflation with it.

• China wants to dominate the global economy and the only way to do so is to participate in it. But the Xi’s government is sending mixed messages about propping up Russia ecconomically. They really cannot afford to be on the receiving side of global sanctions if they want to be seen as the world’s leader. How this plays out can affect our already depressed markets.

Socioeconomics 

• There are a lot more references to “Stagflation” in the financial circles. The last time we seen a serious bout of stagflation (inflation + recession) was in the ’70s.

• Federal Reserve is considering regulation of cryptocurrency and exploring Central Bank approved digital dollars.

• This week’s job’s report reported its lowest new claims number since 1969. This is evidence that the COVID-Recovery is continuing. Additionally, applications for continuing unemployment benefits fell to 1.35 million – lowest since 1970.

• The markets have made a stunning return to a bull trajectory over the past two weeks with the past 4-week trend now positive. I’m hoping that this is a comformation that the Correction’s bottom has now bounced and that we can start running with the bulls.

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 limit of the Marketeer’s patience towards the current 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.

What a difference a day makes!

The 1-month trajectory of the VIX Regression Channel took a dramatic swing down as the Marketeers assess the ETSs.

• Last week the VIX ended at 23.87%, a significant drop from the previous week of 32.4%.
• The current VIX is below the 9-Day SMA, but the 9-Day SMA is well above the 50-Day SMA
• The 50-Day is 49% above the 15% line and falling.

From mid-week-before to the end of last week, the VIX fell from a new 52-week high to end at 23.87%. This is affirming that we are still in times of high volatility and a high degree of market uncertainty. But broad market volatility has started a decisive movement down, suggesting that we may be at the start of a rebound.

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 of .57 is a good drop from .75 last week
• The 9-Day SMA was mostly flat from last week – ending value of 0.67
• Current ratio dropped below the 9-Day SMA but the 9-Day is still above 50-Day SMA

Last week’s Put/Call Ratio ended with a collective sigh of relief as the ratio plunged towards the Safe Zone. Noticeably more Call Options are being purchased suggesting a belief by the Marketeers that the Markets may be ready to turn bullish.

The shiny star of the Put/Call Ratio indicator is getting polished!

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 preliminary’s shows a disappointing fall to new lows. This appears to come from high gas prices and disappointment in a prolonged Russian war with Ukraine (amongst other things).

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 0.8% in Feb ’22. Now up to 7.9% from a year ago.
• Unemployment Rate: Febuary rate = 3.8%. Slight drop from 4.0% in January

Misery Index = 11.7% (7.9% + 3.8%). Slightly up from 11.5% last month. (Unchanged from last week)

CSI votes a dismal DEFCON 3

Market Indexes:

DOW (DJX) = 34,755 – up 5.5% from 32,944 last week. (4 weeks deviation: 552 down from 684 last week)
S&P 500 (SPX) = 4,463 – up 6.1% from 4,204 last week. (4 weeks deviation: 80.75 down from 85.24 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 = +/- 552 points or 1.6% of the market’s volume is down from 2.1% last week.
4 Weeks Thrashing of SPX = +/- 80.75 points or 1.8% of the market’s volume is up from 1.4% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)

The Markets had a Wowser week last week. Soaring over 5% was the best in a year. But does this mean that we are on a go-go rebound?

• The 4-month trend continues decisivly bearish
• The 4-week trajectory finally turned bullish (barely)
• The 9-Day SMA turned bullish
• The 50-Day SMA looks to be slowing its descent
• Current value of SPX shot well above the 9-Day SMA
• A leveling in Thrashing suggests this coming week is still an unknown

The 4-Month Trend and the 50-Day SMA will continue to push bearish for a while. There is a lot of negative data on the tail end. But the short-term trajectories are suggesting a possible return to a bullish direction.

Being blind to all other indicators, I’ll go with a cautious DEFCON 4.

Market Index votes a cautious DEFCON 4

My sentiment for this coming week:

Of the five indicators:

• The ETS has systemic issues – optimistic DEFCON 3
• The VIX is falling but still above 20% – optimistic DEFCON 3
• The P/C Ratio shows continuing improvement – cautious DEFCON 4
• The CSI shows a consumer base not excited about our economic future – dismal DEFCON 3
• The Market Indexs looks to rebound – cautious DEFCON 4

When combining falling volatility (VIX) and lower Put/Call ratio, the Marketeers may be seeing a bounce back from the Corrections bottoms. But the ETS has some heavy issues that could still shock the markets. Even though I’m hoping that we are at the beginnings of a rebound, I still want to be super cautious for the next couple of weeks. And since the year is still young, I’ll continue with an optimistic DEFCON 3.

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 QQQ Vertical Spread that is set to expire ITM this week. But it’s not so deep I might not profit from a roll. I will wait until Wednesday before I make any Spread decisions.

Because I have rolled 5 Vertical Spreads, the availability of unallocated working capital is getting low (Options Buying Power). So I need to start rationing.

If I wind up rolling my ITM QQQ, then this 40 Strike-Width Spread will utilize my week’s allocation of risk money. If I get to Friday and it looks my ITM QQQ might expire worthlessly, then I’ll open a last-minute Vertical Spread.

Entry Rules:

If my ITM QQQ can expire worthlessly:

• Short Strike > 1SD below Current Underlying’s Price
• 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 < $4K (as the Markets see fit).
• Open 2 20-wide or 1 40-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% below current price and 1-week trajectory is bearish
  • Short Strike < 55% POTM and 1-week trajectory is bearish

Profit and Loss Statements

(As of 03/25/2022)

Note: It was bound to catch up with me. The year’s steep market correction has taken its first casualty this week. Rolling a deep ITM QQQ (see Vertical Spreads Opened This Week below) cost my trading account $805.05 this week and that has set me back to square one. If this is the only hit I take this year then I will be extremely lucky.

Cash Balance Sheet

Cash Flow Chart

(Note: the negative weekly results for weeks 4, 8, and 12 were when I withdrew $525 from the Trading Account for my paycheck. Negative week 11 is from an unnecessarily bad roll.)

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: (03/21/2022 – 03/25/2022) (Week #12)

• 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 13, 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 open in any one 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 03/25/2022)

Spread Count Summary:

Current Dollars at Risk:

Options Buying Power:

Unallocated dollars available to open new Vertical Credit Spreads:

Vertical Spreads Opened This Week

(03/21/2022 – 03/25/2022)

(Rolled) QQQ:330p/290p  – Open 03/25/22 – Expires 05/06/22 – Max Gain = $322 – Open Price = $359.08
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 77.5%, Headroom= -8.2%, Max Loss= $3,678.00, AROR= 75.8%

Entry Rules for Vertical Bull Put Credit Spreads:

1. Current maximum dollars at risk < $28,000? Yes ($15,312)
2. Max dollar at risk this week < $4,000? Yes ($3,678)
3. Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (42 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 = 3.8% /Bullish)
7. Put/Call Ratio < 1, (or falling if it is > 1)? Yes (1.5 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? No (1SD=$326.44)
11. Short-strikes Prob-OTM >= 85.0%? No (77.5%)
12. Short-Strike price below the trend channel at expiration?: No (see chart)
13. Strike Width minimum (>= 15)? Yes (40 strike width)

This QQQ Vertical Spread was rolled from QQQ:360p/320p  – Open 02/08/22 – Expires 03/25/22.

Even though I have 6 violated rules, this is the best position rolled Spread in 3 months. The Short-Strike POTM of 77.5% is a great sign that we have bounced from the bottom.

Vertical Spreads Currently Cooking

(As of 03/25/2022)

Currently rolled Spreads: 5
Spreads currently ITM: 0

(Rolled) QQQ:345p/305p  – Open 03/15/22 – Expires 04/29/22 – Max Gain = $1,996.00 – Open Price = $319.40
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 21.1%, Headroom= +7.2%, Max Loss= $2,004, AROR= 807%
Now: Prob. OTM= 64.7%, Headroom=-3.6%

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%
Now: Prob. OTM= 95.9%, Headroom=-15.7%

(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 = 91.5%, Headroom = -9.6%

(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= 93.5%, Headroom=-8.0%

(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 = 73.5%, Headroom = -2.7%

Vertical Spreads Closed This Week

(As of 03/25/2022)

DIA:290p/270p  – Open 03/11/22 – Expires 04/29/22 – Max Gain = $113.00 – Open Price = $438.66
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 86.0%, Headroom= -13.1%, Max Loss= $1,887, AROR= 129.9%
At Close: Prob. OTM = 96.0%, Head Room = -16.9%, AROR= 129.9%

Cost to open: $1.13 premium collected * 100 shares = $113.00
Cost to close: $0.17 premium paid * 100 shares = $17.00 (closed 35 days early)
Net Profit = $113.00 to open – $17.00 to close – $2.00 fees = $94.00
AROR = ($94.00 / 14 days in play) *365 / $1,887 = 129.9%

Note: This Spread was closed after 2 weeks of activity at 85% of Max Gain. This is a great sign that a turnaround is happening.

(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=-245.46%
At Close: Prob. OTM = 51.4%, Head Room = 0.0%, AROR= 49.3%

Cost to open: $11.78 premium collected * 100 shares = $1,178.00
Cost to close: $3.22 premium paid * 100 shares = $322.00 (rolled)
Net Profit = $1,178.00 to open – $322.00 to close – $2.00 fees = -$854.00
AROR = (-$854.00 / 45 days in play) *365 / $2,822 = -245.46%

Note: this QQQ was rolled mid morning of 3/25 (expiration Friday). The Spread was too close to ITM with the markets mostly undecided in trajectory. The opening legs of this roll generated enough premium to make the week’s premium-production good.

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%
At Close: Prob. OTM = 99.5%, Head Room = -13.5%, AROR= 49.3%

Cost to open: $1.25 premium collected * 100 shares = $125.00
Cost to close: $0.00 premium paid * 100 shares = 0.00 (expired worthlessly)
Net Profit = $125.00 to open – $0.00 to close – $1.00 fees = $124.00
AROR = ($125/ 49 days in play) *365 / $1,875 = 49.3%

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.”