Hey Boo Boo! It’s time to run with the Bears! The bears are stealing my pic-a-nic baskets full of scrumptious Vertical Bull Put Credit Spreads. I think it’s time to be smarter than the average Newb Trader. Here are my new Entry Rules to be used with Vertical Bear Call Credit Spreads.

Vertical Bear Call Credit Spreads – Entry Rules

Bear proofing - Vertical Bear Call Credit Spreads.

As the bears are stealing my pic-a-nic baskets full of scrumptious Vertical Bull Put Credit Spreads. I think it is now time to be smarter than the average Newb Trader.

I may be a couple of months behind the learning curve, but I think we are now well established in a Bear Market. All of my indicators are streaming recession; the Federal fiscal policies are laser-focus on crushing inflation, the Marketeers are stockpiling cash, and my pic-a-nic basket of Vertical Bull Put Spreads is being snatched.

Time to run with the bears!

(Note: This week, I am closing two Vertical Bull Put Credit Spreads that are deep ITM. The costs to close these are going to set me back probably to an unrecoverable level for my trading account. But the notion of rolling and re-rolling ITM positions in a collapsing market does not make sense. I need to reevaluate my strategies, purge my inventory of Bull Spreads and start rebuilding.)

Commentary Contents

A Change in Strategy

For the past 3 years, I’ve been focusing on Vertical Bull Put Credit Spreads. And during rising markets like the past two years, it was easy to get lost in the simplicity.

But starting this week, I’m modifying my Entry Rules to require me to consider different Spread strategies based on the current DEFCON Level. And for this week’s commentary, I’m going to reintroduce myself to the Vertical Bear Call Credit and the Iron Condor Spreads.

DEFCON 2 for a Bull Put Spreads is, conversely, a DEFCON 4 for a Bear Call Spread. And for the past few weeks, I’ve been at DEFCON 2 and not entering any new Spreads. So starting this week, I’m going to revise my Entry Rules to include “Vertical Bear Call Credit Spreads.” And going forward, I need to be clearer on which strategy to use.

Yogi Bear: Check the safety manual!
Boo-Boo: It’s just a picture of us screaming!

– The Yogi Bear Show

Vertical Bear Call Credit Spreads

Entering an order to sell a Vertical Bear Call Spread is as easy as its opposite – a Vertical Bull Put Spread. Except the Short Strick for the Call Spread needs to be 1 Standard Deviation (1-SD) or more above the current underlying’s price, whereas, for the Put Spread, my Short Strike is more than 1-SD below the current price.

Thus, a typical Vertical Bull Put Credit Spread may look like this:

Underlying: IWM at $174.95
1-SD from current price = +/- 20.22
Short Put Strike = 174.95 – 20.22 = 154.73 (round down to the nearest available Strike Price = 150)
Long Put Strike = 145 or lower depending on market conditions

Conversely, a typical Vertical Bear Call Credit Spread will look like this:

Underlying: IWM at $174.95
1-SD from current price = +/- 20.22
Short Put Strike = 174.95 + 20.22 = 195.17 (round up to the nearest available Strike Price = 200)
Long Put Strike = 205 or higher depending on market conditions

Suggested Entry Rules

YesNoActualsEntry RulesVertical Bear Call Credit Spreads
1X$12,229Current maximum dollars at risk < $28,000? Maximum Trading Account dollars I am willing to risk.
Do not open Spread if this rule fails
2X89.7%Is the Short-Strikes Prob-OTM >= 80.0%? The Prob-OTM guidance parameter is set in the Market Sentiment Section.
Do not open Spread if this rule fails
3XSee ChartIs the Short-Strike price above the trend channel at expiration? Part of the Trade the Trend Strategy is always to make sure the Short-Stike is above the 2-month trend channel.
Do not open Spread if this rule fails
4X194.27Short-strike > 1 SD above the current price?Short Strike should not be less than 1 Standard Deviation above the current underlying price. This may be adjusted due to market conditions.
5X$845Max dollar at risk this week < $4,000?Maximum dollar risk set for this week. If I go over this amount, then I may be short of available cash in later weeks
6X50 daysIs the max time to have any dollars at risk is <= 8 weeks (<56 days)?Do not open a new spread with an expiration date of more than 8 weeks out (the longer, the better); otherwise, I will be earmarking my available dollars for too long. If 8 weeks is not available, then seek shorter times. Avoid having more than three Vertical Spreads expiring in one week.
7XSee ChartIs the long-term trend (two months) Bearish?Trade the Two-Month Trend. A longer trend will not react fast enough for a 6-8 week Spread, and a shorter trend may be too capricious.
8XIs the short-term trajectory of the underlying bearish?A 1-week trajectory may be a reasonable indicator if I should open a new Spread early in the week or should I wait. If the early trajectory is bullish, wait. If bearish, don’t wait.
9XIs the 2-week Thrashing > 1% & Bearish?If the 2-week trend is bearish and the 2-week thrashing is above 1.0%, then this is a good sign that the trajectory will continue. To collect a little more premium, I might want to lower the Probability of Out-of-the-Money (POTM).
10X2.1 up from 2.0Is the Put/Call Ratio > 1, (or rising if it is < 1)?If the Put/Call Ratio is > 1 (regardless of trajectory), then the sentiment of the Marketeers of the underlying is bearish, and this rule passes. If the ratio is < 1, then the sentiment is bullish, and this rule fails.
11XSee ChartIs the current asset price below 9-Day SMA?If the underlying price is less than the 9-Day SMA, I should be reasonably confident that the short-term trend should continue to be bearish.
12XSee ChartIs the 9-Day SMA below 50-Day SMA?If the 9-Day SMA is less than the 50-Day, then the bearish trend of the underlying has a degree of confirmation. I might want to lower the POTM to collect a little more premium.
13X10Is the Strike Width minimum(>= 20)?Mainly determined via market conditions. If the conditions are good, then open 2 Spreads at 20 Strike Width. If the conditions are not good, then consider 1 Spread at 40 Strike Width. The Strike Width could be less if I’m trying to stay under the week’s max dollar risk.

My Rookie Mistake for This Year

The stated task of my OptionsTradesByDamocles.com effort is to see if I can make a steady income selling Vertical Spreads. And to test this, I need to open new Vertical Spreads every week (when possible). But this year, I failed to be agile enough to change strategies based on market conditions.

This year (18 weeks prior to this week), I was at DEFCON 4 three times. These were the first three weeks of the year. I was at DEFCON 3 starting Week 4 and stayed there through Week 16. Starting Week 17, I’ve been in DEFCON 2. These numbers mean that for 12 weeks, I knew (at DEFCON 3) the markets were tittering between bull and bear. During these 12 weeks, I should have been selling Iron Condors (playing both sides). If I had, then my losses would only be half of what it is now (and what they will be until I purge my inventory of Bull Spreads).

Strategy per DEFCON Level

Going forward, I’m making a new rule based on the DEFCON level I set for each week:

  • If I am at DEFCON 4 or 5, I am definitely in a Bull market. My Entry Rules should follow the strategy for Vertical Bull Put Credit Spreads.
  • If I’m at DEFCON 3, there are issues brewing, and future direction may be undefined. I should focus on Iron Condors with high Probabilities of OTMs for each leg.
  • If DEFCON 1 or 2, I’m definitely in a Bear Market. My Entry Rules should follow the Vertical Bear Call Credit Spreads.

About Bear Markets

One reality about Bear Markets is that no one likes them. Marketers don’t like them because they are not making money. The Feds don’t like them because there is not much to tax. Corporations don’t like them because we common folks are not buying stuff. So, fortunately, Bear Markets don’t last long.

But they are the inevitable feedback loop that happens every once and a while when the balance of supply and demand gets too wound up.

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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 05/09/2022)

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

  • April’s CPI to be released Wednesday (May 11) – Yikes
  • Consumer’s Sentiment publish May 13 – Yikes
  • Student Loan cancelation – Yikes
  • 2022 recession/Bear markets – Yikes
  • Interest rate hikes for the rest of the year – Yikes
  • China’s COVID Lockdowns – Yikes
  • Oil/gas is economically debilitating – Yikes
  • 10-Year Treasuries above 3% – Yikes
  • Does Finnland join NATO? – Yikes
  • Mid-Term rhetoric (fearmongering) ramping up – Yawn
  • Signs Russia/Ukraine war is winding down – Yay

Geopolitical

  • Russia’s war in Ukraine is not going well – for Russia. The Donbas region was not the easy pickings that the military planners were expecting. The Russian forces appear to be ill-equipped, ill-trained, and ill-motivated. Now there is a possibility of an embarrassing backfire as Finnland is on the verge of joining NATO. There is a growing fear that Putin may resort to something insane to turn the situation around. This continuing dread is feeding the global recession fears and is turning this year’s market into a real bear.
  • China continues a ZERO-COVID containment policy by completely locking down large sections of major cities. This is a destructive disruption of production, supply chain, and other economic resources. This friction affects China the most but does have broad global ramifications.

Socioeconomics 

  • Are we already in a recession? Advanced estimates of 2022’s 1st quarter GDP were down 1.4% from the last quarter – technically, a recession is recognized when the GDP declines. Unemployment is not rising, but this may change quickly with rising interest rates designed to slow economic growth.
  • Are we in a bear market for the rest of the year? It’s beginning to look a lot like Jellystone Park. Lots of bear sightings with several of my Vertical Spreads getting mauled.
  • Inflation continues to eat my lunch. With the Consumer Price Index coming out this Wednesday, I suspect it will continue to be above 8% year-over-year, but hopefully, the rate of increase will show signs of easing. Marketeers are fighting inflation by transitioning from Stocks to bonds.
  • The Housing Market is set to get stung by soaring mortgage interests. When the Housing Market starts to tank, so will the home consumption industry.
  • “Investment banks, former Fed officials, billionaire investors, and even my neighbors are all predicting economic doom ahead.” – Will Daniel.
  • The jinglistic political mainstream media is cranking up their fear machines for November’s mid-term elections. And what is being freshly served up is the anticipated reversal of Roe v Wade. I find it both comical and intellectually depressing that the same leading national political opinionators (those who dominate the national headlines) can accuse the Republicans of wanting to destroy democracy by pushing a stolen 2020 election, won’t support the 2021 “Freedom to Vote Act,” and don’t want blacks to vote – are now demanding that out democratic process should not decide abortion. – So many people, so much kool-aid!

Scrutinizing the Intenet, I can’t find many “Yays” to hang my hat on this week. An aggressive Federal Reserve is not signaling to me that the broader markets will be healing anytime soon. And since it appears we are starting a bear run, I need to be smarter than the average bear when 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.

ThinkorSwim Chart: CBOE Market Volatility Index (VIX) - 05/08/2022
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ThinkorSwim Chart: CBOE Market Volatility Index (VIX) – 05/08/2022

The 4-week trajectory of the VIX Regression Channel continued an aggressive clime to higher volatility.

  • Last week the VIX was adjusted down to 30.19 % from 33.4% the week before
  • The VIX spent most of last week below 30% before popping on Thursday
  • The current VIX is below the 9-Day but well above 120-Day SMA
  • The 9-Day SMA is well above the 120-Day SMA, and climbing

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 Bull Spreads as they all rush closer to ITM.

Being blind to all other indicators, I will vote for a cautious DEFCON level 3

VIX votes a cautious 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.

ThinkorSwim Chart: S&P 500 Put/Call Ratio - as of 05/08/2022
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ThinkorSwim Chart: S&P 500 Put/Call Ratio – as of 05/08/2022
  • 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)

Consumer Sentiment Index as of 05/01/2022
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Consumer Sentiment Index as of 05/08/2022

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 it still shows the doldrums of Biden/Progressive financial policies for the current sentiment.

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 0.3% in April. Now up to 8.3% from a year ago.
  • Unemployment Rate: April rate = 3.6%. Unchanged from 3.6% in March.

Misery Index = 11.9% (8.3% + 3.6%). Sighly down from 12.1% last month.

The month-over-month rate of 0.3% was good news when considering last month was 1.2% pop. But the year-over-year is still at a 40-year high and not good news for consumers.

CSI votes a dismal DEFCON 3

Market Indexes:

DOW (DJX) = 32,899 – down 0.2% from 32,977 last week. (4 weeks deviation: 712 up from 585 last week)
S&P 500 (SPX) = 4,123 – down 0.2% from 4,132 last week. (4 weeks deviation: 123.59 up from 124.97 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.

ThinkorSwim Chart: Daily S&P 500 Index - Four/two Months Trend (Updated 05/08/2022)
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ThinkorSwim Chart: Daily S&P 500 Index – Four/two Months Trend (Updated 05/08/2022)

Market Thrashing

4 Weeks Thrashing of DJX = +/- 712 points or 2.2% of the market’s volume is up from 1.8% last week.
4 Weeks Thrashing of SPX = +/- 123.59 points or 3.0% of the market’s volume is flat from 3.0% last week.
(Market Thrashing above 1.0% might indicate indecision from the Marketeers.)

  • The 4-month trend continues decisively bearish
  • The 2-month Trend is now decisively bearish
  • 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 8% of its value, pushing this year’s Correction into its fifth month. The market thrashing remains high as the Marketeers try desperately to figure out what will be next.

Last week, I saw the S&P 500 had a massive rebound of 3.9% then immediately giving up 4.1%. Similarly, the DOW sank over 1,000 on Thursday and Friday of last week, making it the third week in a row where the DOW had a +1,000 point drop.

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

DEFCON = 2

This Week’s Rules

Entering this week, I have two expiring Vertical Bull Put Credit Spreads that are deep ITM. At DEFCON 2, I do not have confidence that any of these positions will benefit from a roll (where the new Short Strike will still be ITM in a falling market). I will close these and take the loss.

This week, I will also enter my first Bear Call Spreads.
This week, no Bull Put Spreads.

Future strategy consideration: if Short Strike is > 90% Prob-OTM, consider 2 contracts instead of wide Strike-Width.

Entry Rules

Vertical Bear Call Credit Spread (DEFCON 1, 2):
  • Entry Rule 2: Prob-OTM >= 83%
  • Entry Rule 4: Call Short Strike >= current price
  • Entry Rule 13: Strike-Width >= 20
Iron Condors (DEFCON 2, 3, 4):
  • Entry Rule 2: Prob-OTM >= 90%
  • Entry Rule 4: Call Short Strike >= current price
  • Entry Rule 4: Put Short Strike <= 1-SD of current price
  • Entry Rule 13: Strike-Width >= 10 (per leg)
Vertical Bull Put Credit Spreads (DEFCON 4, 5):
  • Entry Rule 2: Prob-OTM >= 100%
  • Entry Rule 4: Put Short Strike <= 1-SD current price
  • Entry Rule 13: Strike-Width >= 20 (per leg)

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 or Close 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
    • Allow NO leg to expired ITM and be assigned!







Profit and Loss Statements

(As of 05/13/2022)

Cash Balance Sheet

Year
2022
Month
May
Week
#19
Beginning Account Balance$28,000.00$25,139.07$22,355.87
Deposits (Div. & Int.)$0.92$0.01$0.01
Withdraws (paycheck1)-$2,100.00-$0.00-$0.00
Premiums on Open$10,021.00$218.00$218.00
Premiums on Close-15,950.20-$5,433.20-$2,650.00
Fees Paid (total)-$41.92-$4.08-$4.08
Ending Account Balance$19,919.80$19,919.80$19,919.80
Total Gain/Loss-$8,080.20-$5,219.27-$2,436.07
ROR-20.8%-10.9%
ROC-28.9%
1 Paycheck = 22.5% of initial investment paid out monthly

Cash Flow Chart

YOD Vertical Credit Spreads Cash-Flow Chart - As of 05/13/2022 (Excel Chart)
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YOD Vertical Credit Spreads Cash-Flow Chart – As of 05/13/2022 (Excel 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
Account
SPY
(Fictional)
Initial Investment
(As of Jan 4, 2021)
$28,000.00
(Cash)
$28,000.00
(58.9523 shares @ $474.96)
Funds Added$10,021.92
(Premiums)
0.41 shares
(Dividends Reinvested)
Funds Removed-$16,002.12
(Early Close & Fees)
$0
(Fractional Shares Sold)
Market Changes-$3,218.00
(Open Spreads’ Fair Market Value )
-$4,398.02
(Gain/Loss)
Ending Balance$18,801.8
(Mark-To-Market)
$23,601.98
(59.1706 shares * $398.88 CV)
ROI-32.9%-15.7%
As of 05/13/2022, 9:55 AM







Schedule for this Week

Goals for this week: (05/09/2022 – 05/13/2022) (Week #19)

  • 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: July 01, 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 05/13/2022)

Spread Count Summary:

Year
2022
Month
May
Week
#19
Vertical Bull Put Credit Spreads2500
Vertical Bear Call Credit Spreads222
Iron Condors000
Total2722

No Vertical Spreads were opened this week.

Current Dollars at Risk:

Year
2022
Month
May
Week
#19
Vertical Bull Put Credit Spread$11,384.$0.$0.
Vertical Bear Call Credit Spread$782.$782.$782.
Vertical Bull Put Debit Spread$0.$0.$0.
Vertical Bull Call Debit Spread$0.$0.$0.
Iron Condor$0.$0.$0.
Total Dollar Risk$12,166.$782.$782.
Max Risk Allowed$28,000.N/A$4,000.

Options Buying Power:

Unallocated dollars available to open new Vertical Credit Spreads:

Current Cash Balance$19,919.80
Set-Aside Dollars for Existing Spreads-$14,000
Cash Available for New Spreads$5,919.80
(Options Buying Power)







Vertical Spreads Opened This Week

(05/09/2022 – 05/13/2022)

QQQ:340c/350c  – Open 05/13/22 – Expires 07/01/22 – Max Gain = $85.00 – Open Price = $294.94
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 93.7%, Headroom= +16.7%, Max Loss= $937, AROR= 49.3%

ThinkorSwim Chart: Vertical Bear Call Credit Spread – QQQ – Short: 340 Call – Long: 350 Call
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ThinkorSwim Chart: Vertical Bear Call Credit Spread – QQQ – Short: 340 Call – Long: 350 Call

Vertical Bear Call Credit Spread Entry Rules for this week. 

YesNoSupportEntry RulesVertical Bear Call Credit Spreads
1X$12,166Current maximum dollars at risk < $28,000? Maximum Trading Account dollars I am willing to risk.
Do not open Spread if this rule fails
2X93.7%Is the Short-Strikes Prob-OTM >= 83.0%? The Prob-OTM guidance parameter is set in the Market Sentiment Section.
Do not open Spread if this rule fails
3XSee ChartIs the Short-Strike price above the trend channel at expiration? Part of the Trade the Trend Strategy is always to make sure the Short-Stike is above the 2-month trend channel.
Do not open Spread if this rule fails
4X341.16Short-strike > 1 SD above the current price?Short Strike should not be less than 1 Standard Deviation above the current underlying price. This may be adjusted due to market conditions.
5X$782.00Max dollar at risk this week < $4,000?Maximum dollar risk set for this week. If I go over this amount, then I may be short of available cash in later weeks
6X49 daysIs the max time to have any dollars at risk is <= 8 weeks (<56 days)?Do not open a new spread with an expiration date of more than 8 weeks out (the longer, the better); otherwise, I will be earmarking my available dollars for too long. If 8 weeks is not available, then seek shorter times. Avoid having more than three Vertical Spreads expiring in one week.
7XSee ChartIs the long-term trend (two months) Bearish?Trade the Two-Month Trend. A longer trend will not react fast enough for a 6-8 week Spread, and a shorter trend may be too capricious.
8XIs the short-term trajectory of the underlying bearish?A 1-week trajectory may be a reasonable indicator if I should open a new Spread early in the week or should I wait. If the early trajectory is bullish, wait. If bearish, don’t wait.
9XThrash = 4%
Bearish
Is the 2-week Thrashing > 1% & Bearish?If the 2-week trend is bearish and the 2-week thrashing is above 1.0%, then this is a good sign that the trajectory will continue. To collect a little more premium, I might want to lower the Probability of Out-of-the-Money (POTM).
10X1.0 up from 0.9Is the Put/Call Ratio > 1, (or rising if it is < 1)?If the Put/Call Ratio is > 1 (regardless of trajectory), then the sentiment of the Marketeers of the underlying is bearish, and this rule passes. If the ratio is < 1, then the sentiment is bullish, and this rule fails.
11XSee ChartIs the current asset price below 9-Day SMA?If the underlying price is less than the 9-Day SMA, I should be reasonably confident that the short-term trend should continue to be bearish.
12XSee ChartIs the 9-Day SMA below 50-Day SMA?If the 9-Day SMA is less than the 50-Day, then the bearish trend of the underlying has a degree of confirmation. I might want to lower the POTM to collect a little more premium.
13X10Is the Strike Width minimum(>= 20)?Mainly determined via market conditions. If the conditions are good, then open 2 Spreads at 20 Strike Width. If the conditions are not good, then consider 1 Spread at 40 Strike Width. The Strike Width could be less if I’m trying to stay under the week’s max dollar risk.

If any of my Entry Rulesfails, then I need to explain why I still opened this Vertical Bull Put Credit Spread below.

Of the 13 rules, 2 has failed:

  • Rule 4: Actually, when this Spread was opened, the Short-Strike was above 1-SD. But by the time I could record the transaction, the 1-SD fell below the Short.
  • Rule 13: This is the second Vertical Bear Call Credit Spread. I’m just testing the waters.

SPY:435c/445c  – Open 05/09/22 – Expires 06/24/22 – Max Gain = $155.00 – Open Price = $401.38
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 84.3%, Headroom= +8.3%, Max Loss= $845, AROR= 144.6%

ThinkorSwim Chart: Vertical Bear Call Credit Spread – SPY– Short: 435 Call – Long: 445 Call
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ThinkorSwim Chart: Vertical Bear Call Credit Spread – SPY– Short: 435 Call – Long: 445 Call

Vertical Bear Call Credit Spread Entry Rules for this week. 

Entry RulesComments
1Current maximum dollars at risk < $28,000?
Yes ($16,014)
Maximum Trading Account dollars I am willing to risk.
Do not open Spread if this rule fails
2Is the Short-Strikes Prob-OTM >= 80.0%?
Yes (84.3%)
The guidance parameter is set in the Market Sentiment Section (above).
Do not open Spread if this rule fails
3Is the Short-Strike price above the trend channel at expiration?
Yes (see chart)
Part of the Trade the Trend Strategy is always to make sure the Short-Stike is below the 2-month trend channel.
Do not open Spread if this rule fails
4Short-strike > 1 SD above the current price?
No (1SD=$447.76)
Short Strike should never be above the 1 Standard Deviation below the current underlying price.
Do not open Spread if this rule fails
5Max dollar at risk this week < $4,000?
Yes ($845)
Maximum dollar risk set for this week. If I go over this amount for this week, then I may be short of available cash in later weeks
6Is the max time to have any dollars at risk is <= 8 weeks (<56 days)?
Yes (46 days)
Do not open a new spread with an expiration date of more than 8 weeks out (the longer, the better); otherwise, I will be earmarking my available dollars for too long. If 8 weeks is not available, then seek shorter times. Avoid having more than three Vertical Spreads expiring in one week.
7Is the long-term trend (two months) bullish?
Yes (see chart)
Trade the Two-Month Trend. A longer trend will not react fast enough for a 6-8 week Spread, and a shorter trend may be too capricious.
8Is the short-term trajectory of the underlying bearish?
Yes (see chart)
A 1-week trajectory may be a reasonable indicator if I should open a new Spread early in the week or should I wait. If the early trajectory is bullish, wait. If the early trajectory is bearish, don’t wait.
9Is the 2-week Thrashing > 1% & Bearish:
Yes (2-week Thrashing = 2.0% / Bearish)
If the 2-week trend is bearish and the 2-week thrashing is above 1.0%, then this is a good sign that the trajectory will continue. To collect a little more premium, I might want to lower the Probability of Out-of-the-Money (POTM).
10Is the Put/Call Ratio > 1, (or rising if it is < 1)?
Yes (1.3 up from 1.1)
If the Put/Call Ratio is > 1 (regardless of trajectory), then the sentiment of the Marketeers of the underlying is bearish, and this rule passes. If the ratio is < 1 but > 2 and is falling, then the trajectory is bullish, and this rule fails. But if the ratio is > 2, then this asset is bearish, and the rule passes.
11Is the current asset price below 9-Day SMA?:
Yes (see chart)
If the underlying price is less than the 9-Day SMA, I should be reasonably confident that the short-term trend should continue bearish.
12Is the 9-Day SMA below 50-Day SMA?:
Yes (see chart)
If the 9-Day SMA is less than the 50-Day, then the bearish trend of the underlying has a degree of confirmation. I might want to lower the POTM to collect a little more premium.
13Is the Strike Width minimum(>= 20)?
No (10 strike width)
Mainly determined via market conditions. If the conditions are good, then open 2 Spreads at 20 Strike Width. If the conditions are not so good, then consider 1 Spread at 40 Strike Width. Strike Width. The Strike Width could be less if I’m trying to stay under the week’s max dollar risk.

If any of my Entry Rules fails, then I need to explain why I still opened this Vertical Bull Put Credit Spread below.

Of the 13 rules, 1 has failed:

  • Rule 3: The Short Strike is below the current underlying + 1 SD. The Prob-OTM was above 95%, and there were no available premiums when it was above.
  • Rule 13: This is the first Vertical Bear Call Credit Spread. I’m just testing the waters.

Vertical Spreads Currently Cooking

(As of 05/13/2022)

Currently rolled Spreads: 0
Spreads currently in ITM: 4

(ITM) 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= 37.9%, Headroom= +4.3%

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= 58.3%, Headroom= -0.8%

(ITM) 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= 52.2%, Headroom= +0.7%

(ITM) 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= 50.9%, Headroom= +0.7%

(ITM) 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= 36.8%, Headroom= +4.3%

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= 33.9%, Headroom= +4.5%







Vertical Spreads Closed This Week

(As of 05/13/2022)

(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%
At Close: Prob. OTM= 15.1%, Headroom= +3.2%, AROR= -868.9%

Cost to open: $0.95 premium collected * 100 shares = $95.00
Cost to close: $10.00 premium paid * 100 shares = -$1,000.00 (exit 2 days early)
Net Loss = $95.00 to open – $1,000.00 to close – $2.00 fees = -$907.00
AROR = (-$907.00 / 20 days in play) *365 / 1,905 = -868.9%

Market trajectory is expected to thrash mostly negative for the foreseeable future. In stead of rolling, I will exit deep ITM Spreads early.

(ITM) 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%
At Close: Prob. OTM= 3.2%, Headroom= +7.7%, AROR= -1,416%

Cost to open: $1.20 premium collected * 100 shares = $120.00
Cost to close: $16.50 premium paid * 100 shares = -$1,500.00 (closed 1 day early)
Net Loss = $120.00 to open – $1,650.00 to close – $2.00 fees = -$1,532.00
AROR = (-$1,532.00 / 21 days in play) *365 / 1,880 = -1,416%

Market trajectory is expected to thrash mostly negative for the foreseeable future. In stead of rolling, I will exit deep ITM Spreads early.

At the market opening on Thursday, QQQ continued a steep decline to below 288. This drop through the Long Strike in ITM, and I was at max-loss. But the Time Value provided an incentive bonus of $350, so I cashed out.

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.”







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