Updating my Entry Rules each week will help my Vertical Put Credit Spreads become more lost resistant. This week’s Journal Entry will revisit and reformat the Entry Rules I will use before opening new Options Spreads.

Entry rules Vertical Put Spreads

Out there, on my own, my Options Trades life expectancy is going to be low without Entry Rules. With entry rules, high… without entry rules, low… with rules, high… without rules, low… with, high… without, low.

This week’s post theme will not make sense without first watching this short scene from the hilarious and action-pack movie “Knight and Day” starring Tom Cruise and Cameron Diaz. So to provide a little context, here is a link to a short YouTube video showing the scene.

Defining a broad narrative of what should be included in my Entry Rules was best said in my earlier post, “ENTRY RULES FOR VERTICAL BULL PUT CREDIT SPREADS.” But I found that that narrative can change from one week to the next, or even within a week. So, this week’s Journal Entry will revisit my Entry Rules and reformat.

 Nobody follow us or I kill myself!
And then her!

–Roy Miller (Movie: Knight and Day)

Below is a reformated table of my Entry Rules matrix. Few rules (like Rules 1-3) are immutable (immutables are rules I consider required for any new Vertical Spread, except when rolling). Few of these rules (like Rule 4) can change from week to week depending on this week’s DEFCON level and may even change during the week based on current market conditions. And others are designed to make sure I am aware of the technical dynamics of the Vertical Spread’s underlying asset before opening a new position.

If all 13 of these rules pass, I may consider adjusting the Short Strike a little to improve the premiums I can collect. If a bulk of these rules fail and I still feel it is ok to open a new Spread, I should explain why for future analysis.

All 13 of these rules should be answered BEFORE I enter a new Vertical Bull Put Credit Spread order in my ThinkorSwim trading platform.

I don’t believe in fate.
I believe in luck.

Roy Miller (Movie: Knight and Day)

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 04/18/2022)

This section reviews five indicators: Ecopolitical events, VIX, Put/Call Ratio, Consumer Sentiment Index, the S&P 500, and how these could affect the market’s direction. Then, 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
• Misery Index rises to 12.1% – Yikes
• Natural gas prices surge – Yikes
• 10-year Treasury on the rise – Yikes
• Are we in a Housing Bubble – Yikes
• Powell to speak Thursday – Yikes

• Bear market’s drumbeat – Yawn
• World Bank lowers global growth rate – Yawn

• April is historically the best month of the year – Yay
• Financial news is being trumped by non-financial news – Yay
• Is the Federal Reserve rethinking interest rates – Yay
• Post-Pandemic economic activity continues to increase – Yay

• Will Russia’s financial calamity cause chaos in the US Markets? – next week

Geopolitical

• Michael Cohen (an Opinion Columnist for MSNBC) has made the case that the philosophical underpinnings of the Progressive movement is Marxist. In his article “Inflation dooms Dems’ midterm chances, so they should pass as much as they can now,” he advises the Dems to defiantly continue with their progressive agenda, even though it would surely cost them the mid-term elections. He encourages immediately ending all drilling and mining on federal lands even though the current high price of oil is fueling inflation. He suggests Biden unilaterally declare a climate emergency and create federal parks to protect lands. He’s pushing to tear down Trump’s border wall, nationalize (seize) patent licenses for prescription drugs, and forgive billions of dollars in student debt. All this is Marxism, and for Marxism to work you need a strong central government – be more Communistic.

• Ukraine has completed its application to join the EU and Finland and Sweden are working to join NATO. This should exacerbate Putin’s paranoia that the world is out to get him.

• The World Bank lowered its 2022 growth rate forecast from 4.1% to 3.2%. This is a slowdown in growth which will certainly impact my long-term strategies, but if I can keep cautious with my Vertical Spreads forecasts, I should still make money.

Socioeconomics 

• 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 should still be able to make money (as long as the decline is not too aggressive).

• The price of energy continues to press a heavy toll on consumers. WTI oil continues in the $105 range and natural gas has jumped 8.5% to $7.93 BTU (gas is now up 102% for the year). LNG exports have significantly increased science Russia’s invasion of Ukraine.

• Market values of homes have exploded in some parts of the country, and imploded in others. This is due to the Great Migration as millions of families are relocating to friendlier States. Plus, with the long-term ultra-low interests rates set to mushroom this year, home buying is going to be hot through the first half of this year. But are we creating a bubble primed for a 2008-style housing crash? Shades of 2008 – no! Totally different dynamics. The 2008 housing crash was caused by politically driven subprime loans and shady brokers. Most of those people were not buying new, they were refinancing their old homes. (Which was great until the interests rates increased and these loans were foreclosed.)

• Atlanta Federal Reserve President Raphael Bostic is expressing caution about being too aggressive in raising interest rates. Where earlier “trial balloons” were forecasting a 3% increase for this year, Bostic is floating 1.75% instead. But Powell will speak Thursday and it is thought he will confirm a 0.5% interest rate jump is what’s in store for May. If this is true, expect a market shock Thursday and/or Friday.

• Rummaging through the usual financial news websites, I find most of the headlines are being dominated by the sensationalization of trivial stories. Musk messes with Twitter, SCOTUS scuddles SALT, Apple Stores to unionize, Mask mandates ends, and the likes. This falls in the category of “no news is good news.”

The Yikes reported here lean more towards a slow down in general economic growth, from 8% down to maybe 2% growth. This adjustment will result in a corresponding adjustment to stock prices, and that adjustment will certainly bear pressure on the existing Vertical Spreads. So, as the growth spindown continues, I need to be more cautious in opening new Spreads until the slowdown, slows down. But the unknown on what Jerome Powell will say on Thursday my turn my early Vertical Spreads sour.

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 hovered between 20 and 24. This continues to suggest a deepening concern about the current market condition. This will also keep show-term volatility elevated.

• Last week the VIX ended at 22.70%, keeping to the long term value above 20%
• The current VIX is above the 9-Day but barely below the 30-Day SMA
• The 9-Day SMA remains below the 50-Day SMA

The trajectory of the VIX is maintaining the longer-term volatility, but a short-term leveling may suggest the Marketeers are not willing to go too much lower. With all three of the measuring values above 20, it is hard to be too optimistic.

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 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 .6 is flat from .6 last week
• The 9-Day SMA stayed mostly flat at 0.6 from last week’s 0.59

The S&P 500’s Put/Call Ratio continues to suggest that the Marketeers are not too concerned with a significant market change. Yet the values are not below .5, so they appear to be standing ready for one way or the other.

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)

April’s preliminary had a welcome jump of > 10% over March’s finals. But it is still 20% down from a year ago and nearly 30% lower than the Trump era’s policies.

Continued low CSI numbers confirm the general dissatisfaction with the government’s economic policies.

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 1.2% in March. Now up to 8.5% from a year ago.
• Unemployment Rate: March rate = 3.6%. Continue slight drop from 3.8% in Feburary.

Misery Index = 12.1% (8.5% + 3.6%). Up from 11.5% last month.

CSI votes a dismal DEFCON 3

Market Indexes:

DOW (DJX) = 34,451- down 0.8% from 34,721 last week. (4 weeks deviation: 270 down from 619 last week)
S&P 500 (SPX) = 4,392 – down 2.1% from 4,488 last week. (4 weeks deviation: 64.81 down from 121.28 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 = +/- 270 points or 0.8% of the market’s volume is down from 1.9% last week.
4 Weeks Thrashing of SPX = +/- 64.81 points or 1.5% of the market’s volume is down from 2.7% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)

For the second week, the Markets continue to give up some of their aggressive gains from the month prior – which was not unexpected. The biggest contributor appears to be the continued aggressive rise in inflation.

• The 4-month trend continues decisively bearish
• The 4-week trajectory concurs by being bearish as well
• Current SPX is below the 9-Day SMA
• The 9-Day SMA is below the 50-Day SMA
• Falling Thrashing suggests the bears may be here for a while

With the rapid fall of Market Thrashing, I might expect the Bear Market sentiment might just be true, at least for the next several weeks. We might even return to the correction level lows, but I don’t see anything that would precipitate a precipitous plunge.

Being blind to all other indicators, I’ll go with an extremely 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 trending above 20% – optimistic DEFCON 3
• 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 slow the rebound – cautious DEFCON 4

Where it seems that I should see my Market sentiment as a cautious DEFCON 4, the market’s bearing more towards the bears is disconcerting. This may suggest a continuing short-term pullback over the next week or two. Just out of caution, I’m going to declare an optimistic DEFCON 3

Trading Readiness Level for this week

DEFCON = 3

This week’s Rules:

Maintain vigilance.

Entry Rules:

• Probability of Out-of-the-Money (Prob-OTM) >= 85% (Entry Rule 3)
• (See this week’s Entry Rules Table in the Vertical Spreads Opened This Week section below)

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 04/22/2022)

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: (04/18/2022 – 04/22/2022) (Week #16)

• 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: Jun 10, 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 early trading.)
• Watch one Webcast or take one online mini-course to be completed by Friday.

Tuesday – Thursday:

• Review how yesterday’s staged trades moved. Then, 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 04/22/2022)

Spread Count Summary:

Current Dollars at Risk:

Options Buying Power:

Unallocated dollars available to open new Vertical Credit Spreads:

Vertical Spreads Opened This Week

(04/18/2022 – 04/22/2022)

IWM:180p/160p  – Open 04/20/22 – Expires 05/27/22 – Max Gain = $93.00 – Open Price = $202.33
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 85.9%, Headroom= -11.0%, Max Loss= $1907.00, AROR= 47.6%

Entry Rules for this week. Always complete BEFORE submitting a trade order.

Of the 13 rules, 1 has failed:

• Rule 12 will require more time as the tail end of the 50-Day is still reacting to the correction.

DIA:335p/315p  – Open 04/21/22 – Expires 05/13/22 – Max Gain = $95.00 – Open Price = $354.44
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 85.9%, Headroom= -5.5%, Max Loss= $1,905, AROR= 81.9%

Entry Rules for this week. Always complete BEFORE submitting a trade order.

Out of 13 Entry Rule, 3 failed:

• Rule 5 passed with 22 days to expiration. In an odd event, there are no weekly options chains for the 2 weeks after May 27. And since I already have 3 Vertical Spreads opened with the expiration of 5/27 and 5/20 each, I choose 5/13 for this position.
• Rule 9 barely failed. The 2-week trajectory is strongly bullish but thrashing was right at 1.0%. I deemed this borderline.
• Rule 10 showed an increase in Bear sentiment by the Marketeers. This is a concern and I will watch this matrix as the order tick cooks. If it flies up too high, I’ll cancel.
• Rule 12 will show failed until we can move through the Correction data.

Vertical Spreads Currently Cooking

(As of 04/22/2022)

Currently rolled Spreads: 2
Spreads currently ITM: 1

DIA:315p/295p  – Open 04/14/22 – Expires 05/27/22 – Max Gain = $101.00 – Open Price = $346.61
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 86.3%, Headroom= -9.2.0%, Max Loss= $1,899, AROR= 44.7%
Now: Prob. OTM= 91.3%, Headroom= -10.4%

SPY:395p/375p  – Open 04/12/22 – Expires 05/27/22 – Max Gain = $113.00 – Open Price = $443.40
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 86.6%, Headroom= -11.0%, Max Loss= $1,885, AROR= 49.1%
Now: Prob. OTM= 91.4%, Headroom= -11.2%

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%
Now: Prob. OTM= 91.0%, Headroom= -9.0%

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= 89.6%, Headroom= -11.0%

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= 87.6%, Headroom= -7.8%

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%
Now: Prob. OTM= 87.0%, Headroom= -9.1%

(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= 77.5%, Headroom= -3.3%

(ITM)(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= 49.0%, Headroom= +1.1%

Vertical Spreads Closed This Week

(As of 04/22/2022)

No Spreads closed this week.

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.”