How fast can I become a Crypto-Millionaire? What cryptocurrency should I buy that will centuple next? When I began this week’s Journal Entry, my goal was to do a little digging into which cryptocurrency I should invest in. But, what I learned is that the current public version of blockchain/cryptocurrency has serious systemic flaws and is not ready for earnest investors.
American millionaires must be all quite mad.Charles Bonnet (Movie: How to Steal a Million)
Perhaps it’s something they put in the ink
when they print the money
Time for Crypto?
How fast can I become a Crypto-Millionaire? What cryptocurrency should I buy that will centuple next? As Yogi Berra quoted, “when you come to a fork in the road, take it.” So, in this week’s Journal Entry, I’m going to pick up a fork and write about Cryptocurrency.
My goal when I began this week’s Journal Entry was to do a little digging into which cryptocurrency I should invest in for my buy-hold portfolio. Cryptocurrencies have been around for many years, the blockchain technology is interesting, I’m a nerd, and I figure that if I just dived into to industry a little, I will learn a lot more about it.
And what I learned this week is that the current public version of blockchain/cryptocurrency is not ready for prime-time investing.
Blockchain applications have risen above the fad and fables stage and are gaining commercial recognition. But it lacks stability and longevity. Making an overly presumptuous statement – every public cryptocurrency available today has severe systemic problems in sustaining trust/value, and all will eventually be liquidated into a next-generation version of cryptos.
Here are my reasons why I say this:
- What I know about Cryptocurrency
- What I Know About Blockchain
- What Should I Invest In?
- The Future of Blockchain/Cryptocurrency
What I Know About Cryptocurrency
It is Inevitable
Over the years, Cryptocurrency has been slowly transitioning from the cypherpunk community into mainstream economics. Today many retailers are now accepting bitcoins through their online stores. With bitcoins, I can buy a Tesla, software from Microsoft, and make payments at AT&T. Countries have developed forms of regulations allowing Bitcoins to be recognized as legitimate assets. El Salvador has declared bitcoin to be legal tender. The US is working on strong cryptocurrency regulations.
The cryptocurrency paradigm has value, utility, and support. Broad adoption is not a matter of if – but when.
It is Immature
Cryptocurrency has been around since 2010 with the debut of Bitcoin. Now there are over 12,000 different crypto coins. And the vast majority of these are self-regulated and primarily supported by cyberpunks. Very few of the intrinsic cryptocurrency applications have the serious development investment incentives that one would get from mega commercial corporations. (Cryptocurrency has yet to enter the realm of commercial competition.)
As an analogy, I would compare cryptocurrency today with the “World Wide Web” of the mid-1990s.
It is Precarious
During the dot-com craze of the 90s, thousands of businesses came online with goofy websites and no business plan. And there were millions of investors eagerly paying big bucks for meme stocks in hopes of becoming the next instant dot-com millionaires. But these investors went bust when the dot-com bubble burst in the late 90s.
Today’s cryptocurrency craze is the same tune, only a different verse. Thousands of meme coins are being created with no functional utility or backings other than cute names. Billions are being spent buying these meme coins in hopes of being the next crypto millionaire. Eventually, the crypto bubble will pop.
It is Insecure
One of the cryptocurrencies’ greatest strengths is its innate security. But one of its greatest weaknesses is that innate security totally depends on – me.
The keys to accessing my crypto coins are kept in my crypto wallet, and my crypto wallet is secured using a 14-word passphrase. If I lose my wallet (my desktop PC disk drive crashes, and I don’t have an accessible offline backup), then my entire investment is gone forever. If I forget my passphrase and can’t open my wallet, then all my crypto investments are gone. If someone finds my passphrase and hacks access to my wallet, they can transfer the ownership of my crypto investments, and all my cryptos are gone. There is no bank to call to reset my password, there is no credit card company to call to report my card stolen, and there is no brokerage firm to call to rediscover what assets I own.
To date, 20% of all bitcoins ever mined are lost forever. Until cryptocurrency allows for institutional support (which is contrary to its doctrine), it will only be used by the cybernerds.
A person is smart.– K (Movie: Men in Black)
People are dumb, panicky dangerous animals and you know it.
It is Slow
The Achilles Heel of widespread adoption of cryptocurrency is its speed. Visa can process over 24,000 transactions per second, and bitcoin manages 7. Other crypto coins are faster than bitcoin but not nearly fast enough to be a dominant POS utility for the Internet.
Blockchain’s most significant benefit is that it can be trusted. The trust of the recorded transactions in the blocks cannot be tampered with, hacked, or changed in any manner. And all related transactions, future, and past, can be verified.
The primary culprit of a slow crypto economy is the “consensus layer” that grants trust to blockchain transactions. Verifying the validity of an incoming transaction is divided amongst members of the blockchain network (miners), and they use a consensus process called Proof of Work (PoW). Any results from any miner that does not match exactly with other miners are ignored.
PoW is deliberately slow and intentionally expensive to discourage shady characters from trying to game the system. A trusted 3rd party (like the US Government or Visa) can do this verification near-instantly, but having them involved is violating the utopian tenets of the blockchain purists.
It is Volatile
Like penny stocks, the asset price of a crypto coin is highly volatile. A corporation will issue a limited set of stocks, and from there, the price of stocks is subjected to the supply and demand laws. But a corporation can always issue more stocks to help manage the stock price (i.e., a stock split).
Conversely, all crypto coins have a maximum limit programmed in their blockchain code. For example, bitcoin can only have a maximum of 21 million coins. There are already over 19 million bitcoins in existence, which means that only 2 million more can be minted. And at a mining rate of about 900 per day, the last bitcoin that will ever be made should happen on June 2, 2028. thus the daily price of bitcoin will significantly change due to the limited supply and high demand. Compare this to Apple’s nearly 90,000,000 shares of stock in circulation, and they can create more if needed.
This is why one day I will hear about new crypto millionaires, then the next day, those millionaires are broke.
It is Expensive
The use of the blockchain network is free. But there are all kinds of hidden fees that make using cryptocurrency too expensive for casual transactions. There is a heavy fee to transfer US dollars from my bank to a crypto broker, such as CoinBase.com. There is a hefty transaction fee to convert my deposited dollars to crypto. There is a hefty fee to convert one crypto to another. The PoW miners peel off a little for their fees. There is a hefty fee for converting crypto back to dollars. And there is a hefty fee (to say nothing of a long delay) to transfer my dollars from the broker back to my bank.
What does hefty mean? Depending on the value amount of the transaction and the broker I use, that fee could be up to 50% of the total transaction.
On top of the hefty fees, the IRS recognized cryptocurrency as assets. So the buying and selling of cryptos are reported to the IRS via a 1099 and are subjected to capital gains taxes. So if I use a fraction of a bitcoin to buy a little game on someone’s website, then I will have to record that transaction on my tax return and pay capital gains taxes on the trivial amount exchanged.
It is Not Sustainable
Governance without government is a form of governance that uses non-governmental means of government.
The purpose of cryptocurrency is to have all transactions happen outside of any government, regulations, and any authoritative oversite. And the current blockchain/bitcoin implementation is proof that such a system can exist. But lacking the resources that can only come from capitalism and coordination through centralized regulations, the use of the current cryptocurrencies will always be in the realm of cyberpunks.
I suspect that a blockchain 2.0 will eventually emerge. The new version of cryptocurrencies will not have the debilitating downsides of the current versions. Most of the existing coins will be liquidated as our society moves to a commercialized supported system. Those that stay on the existing platforms will be relegated back to the cyberpunk society used for drug sales and ransomware payments.
Don’t you know that in his lifetime Van Gogh only sold one painting?Charles Bonnet (Movie: How to Steal a Million)
While I, in loving memory of his tragic genius, have already sold two.
What I Know About Blockchain:
It is Early
Like everything from medicines to building a better burger, blockchain is an ever-evolving development project. It reuses innovative technologies that have passed from high dollar proprietary into the public domain and then reassembled towards new applications.
Blockchain is early in its maturation. I would look at the current implementation of blockchain as a successful “proof of concept” that a speciously trusted, publicly accessible network can piggyback on the open Internet and be used for critically legal and financial transactions.
It is Inefficient
What goes in a block stays in a block. Transactions recorded in a blockchain block are immutable and unreadable without the proper codes. If those codes are lost, then so is the information stored. And without any way to purge dead blocks, the storage requirement will continually grow exponentially.
Has Diminishing Trust
The key tenet to the wide adoption of the blockchain is the absolute conviction of trust. And blockchain’s method of providing absolute trust is to make it hard (not impossible) to cheat. This trustworthiness is provided via the consensus layer of the blockchain protocol. The current system of providing trust is the Proof of Work (PoW) and soon to be a faster Proof of Stake (PoS) system.
The PoW system that authenticates blockchain transactions comprises a high number of network-connected yet unaffiliated computer centers around the world. So, when I create a new cryptocurrency transaction, my transaction (originally encrypted by me) is sent to a lottery selected number of PoW centers worldwide. “Miners” at the PoW sites will run my encrypted transaction through a series of complicated programs to create a verification key. This verification key, plus the verification key from the previous adjoining block and my encrypted transaction, are connected (chained) together as a block (a verified transaction) and then sent to every node in the blockchain’s network.
Thus, if (say) 50 randomly selected PoW sites created a verification key of my transaction, then every node in the blockchain network will eventually get 50 copies of my key-coded verified transaction. Then each node receiving these 50 blocks will compare the verification codes with each other, and the block that matches a consensus (typically a majority) of the other key codes is added to that node’s database. Finally, the rest of the 49 blocks are discarded.
One big problem with PoW verification is that it requires substantial and increasing investment in equipment and energy by organizations that are not getting proportionally reimbursed for the cost. Literally, the equipment, time, electricity, facility, and labor cost to create one verification key from my meager cryptocurrency transaction 50 times is vastly disproportionate to the value. So the attrition rate of volunteer PoW facilities is a problem.
Another big problem with PoW verifications is that it is slow. By design, calculating one verification key code can take over 10 minutes, even with the fastest of computers. Again, the intent is to deliberately slow down creating a code so that one bad miner can’t flood the blockchain network with counterfeit transactions.
The next generation authenticator, Proof of Stake (PoS), transfers the responsibility of verification from the worldwide pool of blockchain-enthusiast to sites owned by large crypto investors with a significant financial “stake” in the trustworthiness of the network. PoS miners are assumed to be more motivated not to cheat. So, PoS miners will use an improved verification process that will take less time and require fewer resources.
Has Imminent Threats
Quantum computing is moving from science fiction stories to live applications. And once these next-generation computers come online, blockchain’s sacred feature of immutable secrets will be totally compromised.
A quantum computer of sufficient size and sophistication – also known as a cryptanalytically relevant quantum computer – will be capable of breaking much of the public-key cryptography used in securing blockchain – and by extension, all cryptocurrencies.
(See President Biden’s May 4th, 2022 National Security Memorandum instructing agencies to beef up crypto security to combat quantum threats.)
Has Tremendous Potential
Blockchain has a nearly unimaginable number of quality-of-life-changing possibilities. If developed to its fullest potential, I would expect to see blockchain technologies include:
- Local and national voting online
- Corporate stocks will be converted to blockchain tokens
- Buy a house without the need of a Real Estate Broker
- International legal tender for local commerce
- Interchangeable banks
- Digital ownership
- Medical records
Blockchain developers constantly innovate on the public-domain code to speed up the trust process. But the lack of commercializing resources will always be a barrier. Therefore, a private blockchain network using a trusted 3rd party validator (US IRS, New York Stock Exchange, Visa Corporation, etc.) is the necessary next step in the blockchain evolution.
Blockchain and cryptocurrencies’ development is currently in the hands of the world’s utopians. Staying true to the tenet of being free of government control or commercial abuses, the current version of the public blockchain is destined to stay relegated to the backrooms of crypto enthusiasts. But there are tremendous financial rewards to taking blockchain private. Commercializing the many uses of blockchain will drive it to the forefront of human applications – like the web or mobile phones are today.
What Should I Invest In?
Blockchain, as it is today, is not a scam. It is a developing technology that is being overhyped. It has systemic problems in the trust layer that will prevent it (in the current form) from going mainstream with a Central Banks validation and judicial backing.
Public cryptocurrencies cannot flourish on top of today’s blockchain. Other than trying to catch the next uptrend of a new meme coin or playing the volatility of bitcoin, I don’t see any of the current cryptocurrencies surviving once the US implements widespread crypto regulations. Establishing rules for a regulated 3rd-party trust system with oversite will enable the beginning of blockchain commercialization.
Personally, I will be more interested in investing in the brick-and-mortar companies at the forefront of developing the next generation of blockchain.
The Future of Blockchain/Cryptocurrency
To envoke an overused baseball analogy, we are only at the 3rd ending of blockchain development. Once governments provide legal parameters, there will be an Amazon version of the blockchain, a Meta (Facebook) version, a Microsoft version, etc. There will be an epic battle for blockchain protocol dominance that will only be seconded by the 1970’s Beta-VHS battle – then only to be subjugated by the DVD version of blockchain.
Simon Dermott: Why must it be this particular work of art?Movie: How to Steal a Million
Nicole Bonnet: You don’t think I’d steal something that didn’t belong to me, do you?
Simon Dermott: Excuse me, I spoke without thinking.
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 04/25/2022)
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
- Feds may raise interest rates higher than we think – Yikes
- 1st Quarter GDP down 1.4% – Yikes
- Is a 2022 Recession becoming more likely – Yikes
- Federal Reserve meets this week – Yikes
- Russia playing the nuclear card – Yikes
- Back to back market collapse – Yikes
- Unemployment Rate to be released Friday (May 6) – Yawn
- 2022 mid-term rhetoric escalates – Yawn
- Russia makes last-minute payment on debt – Yay
- It’s a small world, after all! The unmistakable takeaway from the Russia/Ukraine wars is just how much our everyday stables have a production component in countries around the world. Semiconductors shortages from Taiwan, rare-earth metals from China, coffee beans from Columbia, oil from Russia, and fertilizer from Ukraine. An Earth in turmoil (pandemic or wars) will cause empty shelves at my grocery stores. Supply-chain disruptions caused by geopolitical events continue to have a negative effect on my investments.
- After emphatically stating that the Russian Finance Ministry would pay its April 6th bond debt in Rubles (take it or leave it), they were forced to instead tap into its precious little foreign currency reserves, avoiding a default. But the method of payment is dubious and under investigation to determine if the money was funneled through intermediaries that violated sanctions.
- Are we already in a recession? Advanced estimates of 2022 1st quarter GDP was down 1.4% from the last quarter. Technically, a recession is recognized when the GDP declines, but there are other extenuating circumstances. Some of these circumstances are rising unemployment, which does not seem to be the case today. But looking down this tunnel, I’m starting to see that light that is NOT the way out.
- The start of the year’s market correction gets fresh legs. Last Thursday and Friday, the DOW fell nearly 1,000 points. The week before, the DOW gave up over1,300. Currently, a significant percentage of our Marketers are buying protective puts as insurances against their investments. There is growing pessimism about market growth.
- This week, the Federal Reserve will meet and finalize our interest rate future. They will also report their views on the State-of-the-Economy.
- Consumer goods companies will have less rosy guidance during their quarterly earnings calls.
There are not many “Yays” to hang my hat on this week. An aggressive Federal Reserve and the probable inflation amplifying Build-Back-Better 2.0 Bill are not signaling to me that the broader markets will be healing anytime soon. And since it appears we are still in a four (maybe five) month correction, I need to be wary of entering into any new Spreads.
ETS votes a DEFCON 2
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 the aggressive rotation into higher volatility.
- Last week the VIX leaped to 33.4% from 28.21% the week before
- The VIX spent most of last week above 30%
- The current VIX is well above the 9-Day and 120-Day SMA
- The 9-Day SMA is well above the 120-Day SMA
The trajectory of the VIX is shouting, “Volatility!” This is good for collecting premiums or pushing the Short-Strike further out. But this is not good for opened Vertical Spreads getting close to ITM.
Being blind to all other indicators, I will vote for a neutral DEFCON level 3
VIX votes a neutral DEFCON 3
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 continued in the “Feeling Nervous” region for a second week
- The end of the week value of 0.8 is a slight improvement from .9 last week
- The 9-Day SMA stayed is ended last week at 0.75, up from last week’s 0.65
- The 9-Day SMA is not in the “Nervous” region.
The Marketeers appear to remain spooked concerning the effects of interest rate hikes on top of high inflation, the rising cost of wages, and lower corporate guidance due to the all-the-above. A growing number of Marketeers are now buying protective Puts against an increasing indicator of an aggressive Bear.
Being blind to all other indicators and just reacting to the end-of-week Put/Call spike, I’ll vote for a neutral DEFCON 3
Put/Call Ratio votes a cautious DEFCON 3
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 final’s was little chance from its preliminary but is nearly 10% better than March’s. So for a trajectory, it’s better, but for the current sentiment, it still shows the doldrums of Biden/Progressive financial policies.
Continued low CSI numbers confirm the general dissatisfaction with the government’s economic policies.
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
DOW (DJX) = 32,977 – down 2.5% from 33,811 last week. (4 weeks deviation: 585 up from 320 last week)
S&P 500 (SPX) = 4,132 – down 3.3% from 4,272 last week. (4 weeks deviation: 124.97 up from 86.72 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.
4 Weeks Thrashing of DJX = +/- 585 points or 1.8% of the market’s volume is up from 0.9% last week.
4 Weeks Thrashing of SPX = +/- 124.97 points or 3.0% of the market’s volume is up from 2.0% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)
- The 4-month trend continues decisively bearish
- The 2-month Trend remains a bull, but it took a major rotation towards the bears last week
- The 4-week trajectory is siding with the bears
- Current SPX is below the 9-Day SMA
- The 9-Day SMA is below the 50-Day SMA
- Current SPX fell below the 4-month support line
- Thrashing is high
Over the last four weeks, the S&P 500 lost over 10% of its value, reestablishing (or continuing) the start of the year’s Correction. The market thrashing skyrocketed as the Marketeers tried desperately to figure out what is next. For the second time in two weeks, the DOW last week saw a +1,000 point plunge in just two days. The Feds meeting this week will keep the knees wobbling.
These matrices are NOT looking good for short-term Vertical Spreads
Being blind to all other indicators, I’ll go with a paralyzing DEFCON 2.
Market Index votes a DEFCON 2
My sentiment for this coming week:
Of the five indicators:
- The ETS has many systemic issues – DEFCON 2
- The VIX is trending above 25% – Neutral DEFCON 3
- The P/C Ratio stood in the Feeling Nervous region – cautious DEFCON 3
- The CSI shows a consumer base not excited about our economic future – dismal DEFCON 3
- The Market Indexes look to slow the rebound – DEFCON 2
I’m not feeling too optimistic about markets’ growth for the next couple of weeks.
Trading Readiness Level for this week
This week’s Rules:
This week, my primary focus will be on the ITM QQQ Vertical Spread set to expire this Friday.
No new Vertical Spreads this week, except I may roll my deep ITM QQQ Vertical Spread expiring this Friday.
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)
- 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 05/06/2022)
Cash Balance Sheet
|Beginning Account Balance||$28,000.00||$25,139.07||$25,139.07|
|Deposits (Div. & Int.)||$0.91||$0.00||$0.00|
|Premiums on Open||$9,803.00||$0.00||$0.00|
|Premiums on Close||-10,527.00||-$2,783.20||-$2,783.20|
|Fees Paid (total)||-$37.84||-$0.00||-$0.00|
|Ending Account Balance||$22,355.87||$22,355.87||$22,355.87|
Cash Flow Chart
(Note: the negative weekly results for weeks 4, 8, 12, and 17 were when I withdrew $525 from the Trading Account for my paycheck. Negative week 11 is from an unnecessarily bad roll. Negative week 17 was from closing a deep ITM QQQ Vertical Spread that was too far ITM to roll a third time, plus 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?
| Options Trading|
(As of Jan 4, 2021)
(58.9523 shares @ $474.96)
(Early Close & Fees)
(Fractional Shares Sold)
(Open Spreads’ Fair Market Value )
(59.1706 shares * $427.81 CV)
Schedule for this Week
Goals for this week: (05/02/2022 – 05/06/2022) (Week #18)
- Document lessons learned or new thoughts
- Open one or two wide-strike spread
- Update Trading Log as trades occurs
- 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 24, 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.
- Bull Credit Spreads: Jun 24, 2022 (6-8 weeks)
- 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.
- 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 05/06/2022)
Spread Count Summary:
|Vertical Bull Put Credit Spread||25||0||0|
|Vertical Bear Call Credit Spread||0||0||0|
|Vertical Bull Put Debit Spread||0||0||0|
|Vertical Bull Call Debit Spread||0||0||0|
No Vertical Spreads were opened this week.
Current Dollars at Risk:
|Vertical Bull Put Credit Spread||$15,169.||$0.||$0.|
|Vertical Bear Call Credit Spread||$0.||$0.||$0.|
|Vertical Bull Put Debit Spread||$0.||$0.||$0.|
|Vertical Bull Call Debit Spread||$0.||$0.||$0.|
|Total Dollar Risk||$18,847.||$0.||$0.|
|Max Risk Allowed||$28,000.||N/A||$4,000.|
Options Buying Power:
Unallocated dollars available to open new Vertical Credit Spreads:
|Current Cash Balance||$22,355.87|
|Set-Aside Dollars for Existing Spreads||-$16,000|
|Cash Available for New Spreads||$6,355.87|
(Options Buying Power)
Vertical Spreads Opened This Week
(05/02/2022 – 05/06/2022)
No new Vertical Spreads this week – DEFCON 2
Vertical Spreads Currently Cooking
(As of 05/06/2022)
Currently rolled Spreads: 0
Spreads currently in ITM: 1
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%
Now: Prob. OTM= 56.2%, Headroom= -1.7%
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= 69.9%, Headroom= -4.0%
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= 67.5%, Headroom= -4.0%
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= 65.2%, Headroom= -4.2%
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= 58.4%, Headroom= -1.8%
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= 49.7%, Headroom= -0.2%
(ITM)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%
Now: Prob. OTM= 27.9%, Headroom= +2.2%
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= 49.3%, Headroom= -0.1%
Vertical Spreads Closed This Week
(As of 05/06/2022)
(ITM)(Assigned) 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%
At Close: Prob. OTM= 0.0%, Headroom= +5.4%, AROR= -581.5%
Cost to open: $3.22 premium collected * 100 shares = $322.00
Cost to close: -$27.83 premium paid * 100 shares = -$2,783.00 (allowed to expire/assign)
Net Loss = $322.00 to open – $2,783.00 to close – $1.00 fees = -$2,461.00
AROR = (-$2,461.00 / 42 days in play) *365 / $3,678.00 = -581.5%
Letting this QQQ Vertical Spread be assigned at a deep loss was a hard decision.
My other choices were to close early for a deep loss or roll my Vertical Spread to a marginally better Short Strike for an extraordinarily high cost.
If I rolled, I would have to pay $950 in premiums to open the 3rd rendition of this QQQ Vertical Spread. And once I did, I would still be in high danger of an even bigger big loss. I believe that I would have only compounded my losses with an expensive roll while at DEFCON 2. So rolling was out.
I decided to close early and take my loss like a man.
The final week for this Spread started with QQQ making a stellar comeback. By Wednesday, QQQ was at $329.60 – just $0.40 away from OTM with just two days left. I was quite excited that I may have dodged a huge bullet. But by the end of the following day (Thursday) QQQ gave back 5.5%.
Friday morning, I was prep to close this QQQ Spread while its current price was at $305. But I didn’t pull the trigger on the closing order because QQQ started a significant bounce up to $316 in less than two hours. I got excited that QQQ could continue the bounce through the day and market close. I was jazzed that my huge loss might be just minimal.
So I decided to let it ride and see where it took me.
Friday, QQQ closed at $309.25, better than the $305 where I would have closed earlier that morning. I was now interested to see what the fallout will be when I finally calculate the margin interest for holding the 100 shares of QQQ over the weekend. I was pretty sure that, dollarwise, I will make out better.
(Note: At Friday’s market closing, my QQQ Short Strike of 330 was assigned and my QQQ Long Strike of 290 expired worthless. The assignment of my Short Strike automatically purchased 100 shares of QQQ at $309.25/share * 100 = $30,925.00. Since I did not have $30,925 in my Trading Account, the difference was borrowed from my margin, and I was flagged with a “POTENTIAL REGULATION-T CALL: $5,109.02” and “DOLLARS TO POSITIVE STATUS: $5,109.02.” My first priority for Monday morning was to sell my newly acquired QQQ shares at Market Price before the Markets opens, and settle my account.)
But Market Futures continued to fall sharply over the weekend. QQQ fell to $302.17 before I had the opportunity to address my margin maintenance call and sell the 100 shares.
Greed is seductive and does not pay!
I knew that the assignment process at expiration would trigger a purchase of 100 shares of QQQ at $330/share. I also understood that purchasing QQQ at market close on Friday would require me to carry a hefty margin debit through the weekend. See post: VERTICAL SPREAD ASSIGNMENTS – THE GOOD THE BAD AND THE UGLY.
But the last two weeks of this Spread (particularly on expiration Friday (05/06)), QQQ’s prices were thrashing wildly. I was a hair-trigger from closing QQQ Friday morning when I was seduced into thinking that a comeback was possible.
I have an exit rule to let no Spread be Assigned. If my Vertical Bull Put Credit Spread is ITM on the final week, it is ITM for a reason (falling market). I need to heed my own rules!
Nicole Bonnet: I keep telling you, when you sell a fake masterpiece, it’s a crime!Movie: How to Steal a Million
Charles Bonnet: But I don’t sell them to poor people, only to millionaires.
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– Damocles
I’m about to make the same mistake again.
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.”
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If you take the QQQ assignment today, don’t you need 33,000 cash in your account? If you only have ~25k cash (before deducting margins for your other open positions), will they give you a margin call or will they sell the shares to realize the loss?