Like Plato, Aristotle, and Socrates, Trade-Trudging is how I can maintain a dizzying intellect while avoiding the classic blunders. Never go in against a Sicilian when Vertical Spreads are on the line!

Trade Trudging Week

A Trade Journal would be inconceivable if I don’t stay dutiful in documenting all new positions I open. And I can’t open new positions if I don’t first complete my “This Week’s Market Sentiment” section (below) to give me trading guidance.

So, for this Trade Trudging week, I want to stage my Vertical Spreads possibilities and watch if the market bounce continues, or if the Marketeers pick the cup with the Iocane.

All though, President Zelenskiy is doing his best to keep the Ukraine crisis on the world’s front page, the mainstream media is becoming less interested. The market effects from the Russian invasion have been assessed and are now baked into the equations (barring a market shock, like Russia lobbing a low-grade battlefield nuke). Now the media is switching gears back to their bread-n-butter issues – political fear-mongering (like how our country will come to an end if the Republicans take Congress in November).

(Note: most of the 117th Congress has been defined by a small group of Progressives. With a super slim majority, the Democrat House leadership abdicated control of their agenda narrative to individuals like Pramila Jayapal, Alexandria Ocasio-Cortex, and Rashida Tlaib. A Republican victory in November will not necessarily be a rebuke of mainstream Democrat policies, but rather the Democrats’ rejection of woke politics.)

There’s nothing to explain.
You’re trying to kidnap what I’ve rightfully stolen.

Vizzini (Movie: Princess Bride)

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 04/04/2022)

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 – Yawns – Yays

• Mid-Term rhetoric ramping – Yikes
• Inverting Yield Curve shouting ‘recession’ – Yikes
• Will Russia likely default 4/4 debt payment – Yikes

• Slow growth vs recession – Yawn
• Bear market’s drumbeat – Yawn
• Expecting a .5% interest rate boost in May – Yawn

• WTI oil drooped below $100 is lowering gas prices – Yay
• Jobs jumped 431K in March – Yay
• April is historically the best month of the year – Yay
• Corporate earnings have been improving for a month – Yay

Geopolitical

• Russia’s war strategy appears to be changing from ‘Denazifying Ukraine’ to a possible land grab. The mostly defeated Russian army is regrouping towards their East Ukraine brethren to set up a new exit scenario where they can claim a victory.

• The Marketeer’s interest span in the war in Ukraine is starting to wane. The market’s disruption caused by shutting down Russian oil exports, punishing sanctions effects and interruption in supply-chain has mostly been assessed. What was a knee-jerk reaction, may now only be a shrug.

• The $2.2B debt payment due by Russia on Monday, April 4, 2022, is currently up in the air. On Monday, the US cut off Russia’s access to $600 million currently held in US banks in order to apply more pressure.

• High inflation and Biden’s low approval have zapped the spirit of the democrats’ hopes to hang onto the House. The Senate is also prime for a change in leadership. So I expect the DNC to go nuclear – scare the hell out of their base to get them to the polls.

Socioeconomics 

• There continues to be a split decision on the inevitability of a 2022 recession. Some Economists assessing the Russia/Ukrainian war are suggesting that that crisis will slow global growth in 2022 and not necessarily usher in a recession. But the Inverted Yield Curve indicator is prophesying differently. And since the Marketeers tend to react to what they ‘think will happen’ maybe the recession scare was baked into this year’s Correction.

• President Biden’s decision to let loose 1 million barrels of oil a day from the Strategic Reserves appears to have had the desired effect – initially. WTI dropped below $100/bbl and the nation’s gas prices averages have started a trend downward. But as the week moved on, oil regain up to $105 and is still rising.

• The Federal Reserve is set to release its March meeting minutes this Wednesday. This will be where we learn about the Central Bank’s plan for shrinking $9 trillion off its balance sheet. But as the Feds start tightening their fiscal belts, expect the profit margins of many dividend-paying Corps to lose a little weight.

• Is a Bear-Market on the horizon? There’s a lot of economist thinking so. But for my Vertical Bull Put Credit Spreads investment strategy, I would still be able to make money (as long as the decline is not too aggressive). But a Bear Market will not do my Buy-and-Hold portfolio any favors. I may need to increase my cash holdings to cover a downturn – if there is one.

• The job market continues to rebound. With 431,000 new addition to the payrolls, unemployment fell to 3.6%. Plus, the new employees are coming into their jobs with enhanced wages and benefits. More people making more money will buy more stuff. This will add fuel to the Fed’s fire to pump interest rates up next month.

There appears to be more Yays than Yikes in this week’s Market Sentiment section – so I am encouraged. But I can’t help to think that the current Correction bounce is too fragile to not continue to be cautious.

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 4-week trajectory of the VIX Regression Channel continued a dramatic swing down as the Marketeers assess the current market trajectory.

• Last week the VIX ended at 19.6%, a psychological drop below 20% from the previous week of 20.8%.
• The current VIX is below the 9-Day and 30-Day SMA
• The 9-Day SMA is now below the 50-Day SMA

The trajectory of the VIX is decisively moving towards lower volatility. With the current value below the 9-Day SMA and the 9-Day below the 50-Day, it’s hard to not be optimistic about the current bull run-up of the markets.

Being blind to all other indicators, I will vote for a cautious DEFCON level 4

VIX votes a cautious DEFCON 4

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 for 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 end of the week value of .7 is a tilt-up from .55 last week
• The 9-Day SMA continues to drop to 0.57 – a little below last week’s 0.59

Last Tuesday (3/29) the Put/Call Ratio fell below the 0.5 line, briefly. This insinuates the Marketeers are gaining confidence that we are back on a bull market trajectory.

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)

March Finals was a disappointment as the indexes continue to inch downward.

March index of 59.4% is a disheartening 5.4% lower than just a month ago. And now, 59.4% is the lowest in 10-years.

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: March rate = 3.6%. Continue slight drop from 3.8% in Feburary.

Misery Index = 11.5% (7.9% + 3.6%). Slightly down from 11.7% last month.

CSI votes a dismal DEFCON 3

Market Indexes:

DOW (DJX) = 34,818 – down 0.1% from 34,861 last week. (4 weeks deviation: 848 up from 695 last week)
S&P 500 (SPX) = 4,546 – up 0.1% from 4,543 last week. (4 weeks deviation: 148.65 up from 112.54 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 = +/- 848 points or 2.4% of the market’s volume is up from 2.0% last week.
4 Weeks Thrashing of SPX = +/- 112.54 points or 2.5% of the market’s volume is flat from 2.5% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)

The Markets ended last week mostly flat from when it began. But, since the past 4-weeks were a bull-wise tear, that’s pretty good.

• The 4-month trend continues decisively bearish
• The 4-week trajectory is aggressively bullish
• Current SPX is above the 9-Day SMA
• The 9-Day SMA rose above the 50-Day SMA
• High Thrashing suggests the aggressive rebound may not last long

The 4-Month Trend will continue Bearish for a while due to the Correction data on the back end. But the 50-Day SMA continues to move Bullish and 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 few systemic issues – cautious DEFCON 4
• The VIX is falling and below 20% – cautious DEFCON 4
• The P/C Ratio is in good shape – cautious DEFCON 4
• The CSI shows a consumer base not excited about our economic future – dismal DEFCON 3
• The Market Indexes look to hold rebound – cautious DEFCON 4

It seems that we have returned to a DEFCON 4 status – YAY! But I have a concern with the fragileness of the rebound.

Trading Readiness Level for this week

DEFCON = 4

This week’s Rules:

Maintain vigilance.

I have one rolled DIA Vertical Spread set to expire this week and the probability of expiring worthlessly is good.

Entry Rules:

• Open 2 20-wide or 1 40-wide Strike-Width Spread (as the market sees fit)
• Max-risk for week < $4K
• Spread term of 8-weeks or less.
• Short Strike > 1SD below Current Underlying Price
• If POTM is still < 83%, lower Short Strike until > 83%

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 within 1 week of expiration if:
  • Short Strike is ITM
  • Short Strike < 1.0% below the current price and 1-week trajectory is bearish
  • Short Strike < 55% POTM and 1-week trajectory is bearish

Profit and Loss Statements

(As of 04/08/2022)

Note: This month was my first for the year (and hopefully my last). This is solely from last week’s loss of $802 from a roll that, as it turned out, I did not need to roll.

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 the year 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: (04/04/2022 – 04/08/2022) (Week #14)

• 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 on the watch list
• Set target expiration dates for all Options as follows:
  • Bull Credit Spreads: May 27, 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 on 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 a weekly journal (this blog) with any lessons learned or strategy changes.

This Week’s Trade Activity

(As of 04/08/2022)

Spread Count Summary:

Current Dollars at Risk:

Options Buying Power:

Unallocated dollars available to open new Vertical Credit Spreads:

Vertical Spreads Opened This Week

(04/04/2022 – 04/08/2022)

QQQ:310p/290p  – Open 04/07/22 – Expires 05/13/22 – Max Gain = $120.00 – Open Price = $353.44
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 86.5%, Headroom= -12.3%, Max Loss= $1,880, AROR= 64.2%

Entry Rules for Vertical Bull Put Credit Spreads:

1. Current maximum dollars at risk < $28,000? Yes ($15,746)
2. Max dollar at risk this week < $4,000? Yes ($3,779)
3. Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (36 days)
4. Long-term trend (two months) bullish? Yes (see chart)
5. Short-term trajectory of the underlying bullish? No (see chart)
6. 2-week Thrashing < 1% & Bullish: No (2-week Thrashing = 1.5% / Bearish)
7. Put/Call Ratio < 1, (or falling if it is > 1)? Yes (0.9 down from 1.8)
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? Yes (1SD=$321.97)
11. Short-strikes Prob-OTM >= 83.0%? Yes (86.5%)
12. Short-Strike price below the trend channel at expiration?: Yes (see chart)
13. Strike Width minimum (>= 15)? Yes (20 strike width)

This is my first non-rolled QQQ Vertical Spread since the market downturn in Jan.

Since the beginning of this week, the markets have been mostly sour since the speculation of the Fed’s soon-to-be-released March Minutes. To compensate for the downturn, I upped the probability of OTM from 83% to 85%. This change pushed the Short Strike over 12% below the current QQQ value.

DIA:320p/300p  – Open 04/05/22 – Expires 05/20/22 – Max Gain = $101.00 – Open Price = $350.13
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 85.7%, Headroom= -8.6%, Max Loss= $1,899, AROR= 42.7%

Entry Rules for Vertical Bull Put Credit Spreads:

1. Current maximum dollars at risk < $28,000? Yes ($16,206)
2. Max dollar at risk this week < $4,000? Yes ($1,899)
3. Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (45 days)
4. Long-term trend (two months) bullish? Yes (see chart)
5. Short-term trajectory of the underlying bullish? No (see chart)
6. 2-week Thrashing < 1% & Bullish: Yes (2-week Thrashing = 0.7% / Bullish)
7. Put/Call Ratio < 1, (or falling if it is > 1)? No (1.6 up from 1.5)
8. Current price above 9-Day SMA?: Yes (see chart)
9. 9-Day SMA above 50-Day SMA?: Yes (see chart)
10. Short-strike > 1 SD below the current price? Yes (1SD=$325.27)
11. Short-strikes Prob-OTM >= 83.0%? Yes (85.7%)
12. Short-Strike price below the trend channel at expiration?: Yes (see chart)
13. Strike Width minimum (>= 15)? Yes (20 strike width)

Rule 6 is the second time it’s been yes this year. The two-week trend is decisively bullish and the thrashing for these weeks is less than 1.0%. This shows a level of confidence from the Marketeers that the next few weeks should continue positive.

As I was recording this new position, a news alert came out from Brainard that the Feds are “prepared to take stronger actions on inflation.” If that means that next month’s interest rate hike will be 0.5% (as predicted) or if it will be more than that. The market’s reaction to this news was immediately negative. I think I need to wait until 10:00 AM before I submit any new Spreads.

Vertical Spreads Currently Cooking

(As of 04/08/2022)

Currently rolled Spreads: 3
Spreads currently ITM: 0

IWM:180p/160p  – Open 03/31/22 – Expires 05/20/22 – Max Gain = $94.00 – Open Price = $208.31
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 86.7%, Headroom= -13.6%, Max Loss= $1,906, AROR= 35.6%
Now: Prob. OTM= 80.4%, Headroom= -9.2%

SPY:410p/390p  – Open 03/29/22 – Expires 05/20/22 – Max Gain = $112.00 – Open Price = $459.50
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 86.4%, Headroom= -10.8%, Max Loss= $1,888, AROR= 41.3%
Now: Prob. OTM= 82.3%, Headroom= -8.2%

(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%
Now: Prob. OTM= 73.7%, Headroom= -5.8%

(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= 57.8%, Headroom=-1.5%

(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 = 97.8%, Headroom = -8.3%

Vertical Spreads Closed This Week

(As of 04/08/2022)

(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=$2,340.00, AROR=239.1%
At Close: Prob. OTM = 99.6%, Head Room = -7.6%

Cost to open: $6.60 premium collected * 100 shares = $660.00
Cost to close: $0.00 premium paid * 100 shares = $0.00 (closed worthlessly)
Net Profit = $660.00 to open – $0.00 to close – $1.00 fees = $659.00
AROR = ($659.00 / 43 days in play) *365 / $2,340.00 = 239.1%

1. Spread opened (original) open 1/14/22, initial premium collected = $95.00
2. Spread closed (rolling) 02/24/22, premium paid = $535.00
3. Spread reopened (rolled) 02/24/22, premium collected = $660.00
4. Rolled Spread closed 04/08/22, premium paid = $0.00 (expired worthlessly)
Profit from this effort = ($95 – $535 + $660) $220.00 (less fees)

The original Spread’s construction was 330p/315p. When this Spread was closed (rolled on 2/25), DIA’s current price was $325.22. If I would have let it expire, my Short would have been assigned and my Long would have expired worthlessly. The net loss would have been ($325.22 – $330 * 100 shares =) -$478.00.

By rolling the original Spread, instead of a -$478 loss, I realized a gain of $220.00. Rolling this Spread turned this loss into a profit during the time the markets were plummeting into a Correction.

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 was an Options Trading Beginner, 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 for beginners (me). I will record my weekly Options contract 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 are 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.”