Correction to recession to stagnation. Inevitable you say? I’m thinking so. I’m starting a deep dive into Vertical Bear Call Option Spreads as I believe we are already caught in the mauls of a Bear Market.

Bear Markets ahead

Feeling a bit marooned on Loser Island, I need to start innovating ways to turn my situation around. And one way is to recognize that I am facing a bear market ahead.

Reading a slew of Economist prognosticators, I find it amusing that everyone is looking at the same market trends and data and yet, are coming up will widely different projections. It seems to me that most of these predictions are just based on wishful thinking.

Commentary Contents

Struggling Through a Correction

What I know:

  • First Quarter GDP -1.4% from the previous quarter
  • Markets collapsing: SPX 500 -18%, DOW -14%, Russell 2000 -30%, NASDAQ -29%
  • Inflation = 8.5% (until the Feds can beat it down with high-interest rates)
  • High volume retailers (Walmart, Target, etc.) are lowering 2022’s estimates

While retailers of “consumer packaged goods” are lowering profit estimates for the rest of the year, specialty retailers like Home Depot and Lowe’s have reported stellar sales. Why the difference? I believe that there is a substantial queue in new home contracts in place – by buyers knowing that historically low mortgage interest rates are about to disappear. But as mortgage interest rises, like the price of lumber, pipe fittings, and refrigerators, new home contracts are going to fall to historic lows, and these retailers will suffer profit losses just like the rest.

Pushed into a Recession

A recession is when there is a widespread drop in spending, causing a pullback in economic activity and a deceleration in economic growth – but this is NOT what is happening today. Our problem now is that we have a booming economy, but a massive shortage of warehoused stuff caused by the COVID shut down.

Our factories are pumping out products, but we can’t get them onto the shelves fast enough (or too fast) to avoid the perception of widespread shortages. (Many of us are still panic-buying with yesterday’s memories of the COVID shutterings on our minds.) And with empty shelves and high product demands, inflation has skyrocketed.

The Federal Reserve’s go-to tactic for tackling rising inflation is to raise the price of stuff enough to discourage us from buying. If the Feds can slow down our consumption, then excessive stuff will accumulate on the shelves, and the overflow of that stuff will start to build up in the warehouses. Finally, when the surplus of stuff starts to cost money by just sitting on the shelves, the prices will fall to encourage us to buy more.

But to start the process of lowering the cost of stuff (reversing high inflation), the Feds have to make stuff cost even more than it is now. So they raise the interbank interest rates (discount rates) to make the cost of production more expensive, the cost of housing more expensive, the cost of my summer vacation more expensive, and the cost of buying toilet paper more expensive – then I will be forced to do with less. If I can’t afford to buy stuff, our economic growth will start to slow. Then, after all the additional pain, prices will fall, and inflation will get back to normal.

We are not in a recession now, but we will be pushed into one before the year is up.

The ‘Wizard of Wall Street’ strikes again!

Thurston Howell III: (Gilligan’s Island)

Trajectory Towards Stagflation

We are still a ways off from stagflation – but solidly on the trajectory.

What I know:

  • Interest Rates will rise 0.5% every other month until inflation is reversed
  • Unemployment is good at 3.6% (for now)

Stagflation (recession + inflation) is a situation in which the inflation rate is high (now), and the economic growth rate slows (about to be).

How do we know if rising interest rates are inflicting the desired slowing of our economy? Wait for the unemployment rates to skyrocket.

The intended consequence of the Federal Reserve raising the discount rates is to slow down the economy, force businesses to cut back, and, by extension, slow down job creation. This will deliberately increase unemployment at a time when high-interest rates are compounding inflation. Stagflation – 1970’s style.

What a Bear!

We are technically in a bear market when the market undergoes prolonged declines (like 4+ months), slips by 20% (see stats above), and there is ongoing economic distress (recession, inflation, low consumer confidence, wars, etc.). The S&P 500 is only 2% away from that magical number, but other indexes have already fallen well below 20%. As for the rest of the economic doldrums, we have those in spades!

Be a Bear to Beat a bear

I anticipate we will remain in a Bear Market for the majority of this year and maybe the next. Expecting stutter-starts and Bull-Traps along the way but seeing new all-time highs are not foretold.

For the foreseeable future, I’m going to sell Bear Call Credit Spreads. If I suspect a bull trap – Iron Condors.

But anything can happen:

  • The Feds can call for a pause in rate hikes
  • The popping of the undervalued bubble

If inflation shows signs of a turnaround (which eventually it will), the Federal Reserve could call for a pause in the interest rate hikes.

The S&P’s PE (price to earnings) is at a 10-year low. There is a long list of stocks that are considered undervalued and primed to be gobbled up by sagacious Marketeers. Eventually, the undervalue bubble will pop, and there will be a rush to get back into cheap equities.

The moment that there is a hint that the Feds are getting a bit more dovish on interest rates, I expect the stockpile of cash will flood back into the market, and discounted assets will be snatched up. I wonder if I will be able to see that coming soon enough to unwind my inventory of Bear Spreads.

(Note to my “Buy-n-Hold” self. Even though it seems that any new money I invest in my long-term portfolio today will lose value, this loss won’t compare to the gains I will see when we get past this.)

Gilligan: Hiya, Professor. What are you doing?
Professor: I’m making notes for a book.
It’s to be a chronicle of our adventures on the island…
I think it’s a book people will want to buy, don’t you?
Gilligan: Sure, I’ll buy one.
I’m dying to find out what happens to us.

Gilligan’s Island
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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 05/16/2022)

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

  • Russia ramps up nuclear intimidation – Yikes
  • Biden cancels oil and gas lease sales – Yikes
  • Finland to join NATO – Yikes
  • India bans wheat exports – Yikes
  • Shortage of baby formula – Waaaa
  • May’s preliminary Consumer’s Sentiment drops – Yikes
  • Markets on biggest losing streak since 2001 – Yikes
  • Expecting rising unemployment rates – Yikes
  • Mid-Term rhetoric (fearmongering) ramping up – Yawn
  • Say “NAY” to a 0.75 interest rate rise – Yay
  • China COVID lockdowns set to ease – Yay

Geopolitical

  • Russian State Media is exacerbating global tension by spuing some eerie propaganda. Trying to intimidate the West, State TV pundits are estimating (with colorful graphics) how long a ballistic missile will take to reach London, Berlin, and Paris. Although it is HIGHLY UNLIKELY Putin will push “the button,” this type of militant reporting is extending the global fear of ongoing supply shortages.
  • Like many developed countries around the world, several have donated significant parts of their food stockpiles during the COVID pandemic to help feed those under-developed regions. Now with depleted stores and the continued supply-chain tangles, India has banned all wheat exports due to its high inflation cost. (Russia is (was) the world’s largest exporter of wheat, with Ukraine being the primary supplier to Russia. But the war in Ukraine and the sanctions on Russia, there is now a severe shortage of wheat on the global market. The regional consumers are looking to India to fill that need, but that demand is taking wheat off the shelves for their own people.)
  • 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 

  • A leaked memo from the last Federal Reserve meeting suggested that a 0.75 interest rate hike was on the table. This suggestion added market pressure on the Marketeers who have been bailing on their portfolios for the past 5 months. But Jerome Powell put that notion to rest by saying “nay” to the higher rate in a speech last Thursday.
  • Shades of the Keystone XL Pipeline shutdown, the Biden administration canceled new leases for oil and gas in Alaska and the Gulf of Mexico. I guess it is more important to make the symbolic gesture to the progressive than it is to lower the cost of gasoline.
  • Show me the milk! There is now a baby formula shortage on top of the highest gas prices and debilitating inflation. The FDA shut down Abbott Nutrition (one of the largest manufacturers of baby formula in the US) and recalled several major brands after the FDA found a bacterium known as Cronobacter that “may” have contributed to the death of two babies. The FDA then said it would “take additional time” to confirm if the bacterium actually existed in the formula.
  • Liberal media’s election fearmongering is going to backfire on the Democratic party. Sighting our intolerable state of our Union as a Republican caused calamity (bye-bye Roe, high inflation caused by not passing the $5T Build Back Better bill, tolerating high crime and homelessness because Republicans won’t pack the Supreme Court with political liberals, etc.).

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) - 05/15/2022
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ThinkorSwim Chart: CBOE Market Volatility Index (VIX) – 05/15/2022

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

  • Last week the VIX was adjusted down to 2.90% from 30.19 % the week before
  • The VIX spent most of last week above 30%
  • 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 VIX stated last week at near 35% and took a week-long downward trajectory to end at 29%.

The high volatility is good for collecting premiums or pushing the Short-Strike further out, but this is not good for the currently 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 05/15/2022
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ThinkorSwim Chart: S&P 500 Put/Call Ratio – as of 05/15/2022
  • The S&P 500’s Put/Call Ratio continued in the “Feeling Nervous” region for the third week
  • The end of the week value of 0.7 is a slight improvement from 0.8 last week
  • The 9-Day SMA stayed in the nervous region for over two weeks, ending last week at 0.75, flat from last week’s 0.75

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 cautious 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

May’s preliminary sentiment drooped to 59.1, down 9.4% from last month. As a trajectory, these levels are showcasing the doldrums of Biden/Progressive financial 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 significant drop in Consumer Sentiment for the start of May is disappointing.

CSI votes a dismal DEFCON 2

Market Indexes:

DOW (DJX) = 32,197 – down 2.1% from 32,899 last week. (4 weeks deviation: 1,003 up from 712 last week)
S&P 500 (SPX) = 4,024- down 2.5% from 4,123 last week. (4 weeks deviation: 162.34 up from 123.59last 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 05/15/2022)
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ThinkorSwim Chart: Daily S&P 500 Index – Four/two Months Trend (Updated 05/15/2022)

Market Thrashing

4 Weeks Thrashing of DJX = +/- 1,003 points or 3.1% of the market’s volume is up from 2.2% last week.
4 Weeks Thrashing of SPX = +/- 123.59 points or 3.1% 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

All three major indexes booked big losses this week. According to the DJX data, the DOW has now declined for seven straight weeks. This is the biggest losing streak since 2001.

Each of the past 4 weeks, I can see a mid to end-of-week bump that adds to the significant thrashing. But each of these weeks was a major selloff. These bumps appear to be technical over-sold rebalancing.

These matrices are NOT looking good for short-term Bull Put 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 – DEFCON 2
  • The Market Indexes run with the bears – 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

Note: For several weeks, I was “emotionally” convinced that the Market Correction was only short-term. Many of my Bull Put Spreads I opened had a high percentage of failed Entry Rules that I should have seen as warning signs. And three years of a stellar Bull run made me very single-minded. Going forward, I need to be more apathetic to my market intuition and less forgiving towards my Entry Rules.

  1. Open two Vertical Bear Calls Spreads
  2. Exit early ITMs expiring this week
  3. Review ITMs expiring next week and exit if judicious
  4. If 4 or more rules fail, consider Iron Condor

Entry Rules

Vertical Bear Call Credit Spread (DEFCON 1, 2):
  • Options 1:
    • Entry Rule 3: Prob-OTM >= 82.5%
    • Entry Rule 4: Call Short Strike >= 1 Standard Deviation
    • Entry Rule 13: Strike-Width >= 20, # contracts =1
  • Options 2:
    • Entry Rule 3: Prob-OTM >= 85%
    • Entry Rule 4: Call Short Strike >= 1 Standard Deviation
    • Entry Rule 13: Strike-Width >= 10, # contracts = 2
Iron Condors (DEFCON 2, 3, 4):
Vertical Bull Put Credit Spreads (DEFCON 4, 5):
  • Entry Rule 3: Prob-OTM >= 100% (No Bull Spreads)
  • Entry Rule 4: Put Short Strike <= 1 Standard Deviation
  • 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, or
    • Short Strike < 1.0% below the current price and 1-week trajectory is bearish, and
    • Short Strike < 55% POTM and 1-week trajectory is bearish
    • In a Bull Market, do not roll Bear Spreads
    • In a Bear Market, do not roll Bull Spreads
  • Allow NO leg to expired ITM and be assigned!

(Note: The markets have been collapsing for over four months, and I do not think we are toying with the bottom yet. It will be unwise to roll any Bull Spreads.)







Profit and Loss Statements

(As of 05/20/2022)

(Note: This week, I was forced to close three DEEP ITM Vertical Bull Put Spreads for a debit of $2,465. In a fit of resignation, I also chose to close my remaining three Bull Put Spreads set to expire next Friday (all three were also DEEP ITM) for another debit of $1,575. This has set my Options Trading account back $4,040 for this week (20) alone. The decision to close next week’s Spreads was predicated on the assumption that we are in a Bear Market, and waiting a week will only cost more.)

This week’s great resignation has now purged my Spread inventory of all Bull Put Spreads. Next week will be the beginning of rebuilding my Option Spreads for a Bear Market.

Cash Balance Sheet

Year
2022
Month
May
Week
#20
Beginning Account Balance$28,000.00$25,139.07$19,919.80
Deposits (Div. & Int.)$0.92$0.01$0.00
Withdraws (paycheck1)-$2,100.00-$0.00-$0.00
Premiums on Open$10,305.00$502.00$284.00
Premiums on Close-20,000.20-$9,473.20-$4,040.00
Fees Paid (total)-$52.14-$14.30-$10.22
Ending Account Balance$16,153.58$16,153.58$16,153.58
Total Gain/Loss-$11,846.42-$8,985.49-$3,766.22
ROR-35.7%-18.6%
ROC-42.3%
1 Paycheck = 22.5% of initial investment paid out monthly

Cash Flow Chart

YOD Vertical Credit Spreads Cash-Flow Chart - As of 05/20/2022 (Excel Chart)
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YOD Vertical Credit Spreads Cash-Flow Chart – As of 05/20/2022 (Excel Chart)

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$10,305.92
(Premiums)
0.41 shares
(Dividends Reinvested)
Funds Removed-$20,052.34
(Early Close & Fees)
$0
(Fractional Shares Sold)
Market Changes-$95.50
(Open Spreads’ Fair Market Value )
-$4,789.82
(Gain/Loss)
Ending Balance$18,163.08
(Mark-To-Market)
$23,210.18
(59.1706 shares * $391.01CV)
ROI-35.1%-17.1%
As of 05/20/2022, 9:19 AM







Schedule for this Week

Goals for this week: (05/16/2022 – 05/20/2022) (Week #20)

  • 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 08, 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 05/20/2022)

Spread Count Summary:

Year
2022
Month
May
Week
#20
Vertical Bull Put Credit Spreads2500
Vertical Bear Call Credit Spreads442
Iron Condors000
Total2942

Current Dollars at Risk:

Year
2022
Month
May
Week
#20
Vertical Bull Put Credit Spread$0.$0.$0.
Vertical Bear Call Credit Spread$4,498.$4,498.$3,716.
Iron Condor$0.$0.$0.
Total Dollar Risk$4,498.4,498$3,716.
Max Risk Allowed$28,000.N/A$4,000.

Options Buying Power:

Unallocated dollars available to open new Vertical Credit Spreads:

Current Cash Balance$16,153/58
Set-Aside Dollars for Existing Spreads-$6,000
Cash Available for New Spreads$10,153.58
(Options Buying Power)







Vertical Spreads Opened This Week

(05/16/2022 – 05/20/2022)

QQQ:320c/330c  – Open 05/20/22 – Expires 07/17/22 – Max Gain = $162.00 – Open Price = 292.14
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 88.8%, Headroom= +9.6%, Max Loss= $1,838, AROR= 113.5%

ThinkorSwim Chart: Vertical Bear Call Credit Spread – QQQ – Short: 320 Call – Long: 320 Call
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ThinkorSwim Chart: Vertical Bear Call Credit Spread – QQQ – Short: 320 Call – Long: 320 Call

Vertical Bear Call Credit Spread Entry Rules for this week. 

YesNoSupportEntry RulesVertical Bear Call Credit Spreads
1X$4,498Current maximum dollars at risk < $28,000? Maximum Trading Account dollars I am willing to risk.
Do not open Spread if this rule fails
2XSee 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
3X88.8%Is the Short-Strikes Prob-OTM >= 85%? The Prob-OTM guidance parameter is set in the Market Sentiment Section. This may be adjusted due to market conditions.
4X321.11Short-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$3,716Max 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
6X28 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.
8XSee ChartIs 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 = 2.1% &
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).
10X1.1 to 0.8Is 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 the 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
(1 contract >= 20, 2 contract >=10 )?
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 multi-contracts, then 10 and 20.)

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 have failed:

  • Rule 4: Short Strike is slightly < 1SD. I accepted this to get a Prob-OTM closer to guidance
  • Rule 10: This may be Temporary due to the last minute gains

SPY:445c/455c  – Open 05/17/22 – Expires 07/01/22 – Max Gain = $122.00 – Open Price = 405.43
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 92.6%, Headroom= +9.7%, Max Loss= $1,878, AROR= 51.8%

ThinkorSwim Chart: Vertical Bear Call Credit Spread – SPY – Short: 445 Call – Long: 455 Call
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ThinkorSwim Chart: Vertical Bear Call Credit Spread – SPY – Short: 445 Call – Long: 455 Call

Vertical Bear Call Credit Spread Entry Rules for this week. 

YesNoSupportEntry RulesVertical Bear Call Credit Spreads
1X$14,044Current maximum dollars at risk < $28,000? Maximum Trading Account dollars I am willing to risk.
Do not open Spread if this rule fails
2XSee 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
3X92.6%Is the Short-Strikes Prob-OTM >= 90.0%? The Prob-OTM guidance parameter is set in the Market Sentiment Section. This may be adjusted due to market conditions.
4X444.15Short-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$1,878Max 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
6X45 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.
8XSee ChartIs 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 = 2.6% &
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).
10X1.5 up from 1.1Is 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 the 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
(1 contract >= 20, 2 contract >=10 )?
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 multi-contracts, then 10 and 20.)

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 have failed:

  • Rule 8: This week started with a decent market bump that made the short-term trajectory bullish.
  • Rule 13: This is the second Vertical Bear Call Credit Spread. I’m just testing the waters.

Vertical Spreads Currently Cooking

(As of 05/20/2022)

QQQ:340c/360c  – 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%
Now: Prob. OTM= 96.0%, Headroom= +17.4%

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%
Now: Prob. OTM= 97.7%, Headroom= +11.7%







Vertical Spreads Closed This Week

(As of 05/20/2022)

This week began with a bounce Monday that I thought would save these ITM Spreads. This Bull Trap was quite alluring as I lusted over a few dollars more. But starting Tuesday morning, the markets plunged another 4%, sending most of the losing spreads even lower.

Strongly believing that my current Bull Put Spreads are in continuing danger of greater loss (while in the bear market), I elected to close next week’s Spreads this week as well.

(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%
At Close: Prob. OTM= 36.1%, Headroom= +1.4%, AROR= -255.9%

Cost to open: $1.15 premium collected * 100 shares = $115.00
Cost to close: $6.00 premium paid * 100 shares = -$600.00 (exit 8 days early)
Net Loss = $115.00 to open – $600.00 to close – $2.00 fees = -$487.00
AROR = (-$487.00 / 37 days in play) * 365 / 1,885 = -255.9%

(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%
At Close: Prob. OTM= 40.8%, Headroom= +2.0%, AROR= -254.2%

Cost to open: $0.93 premium collected * 100 shares = $93.00
Cost to close: $4.75 premium paid * 100 shares = -$475.00 (exit 8 days early)
Net Loss = $93.00 to open – $475.00 to close – $2.00 fees = -$384.00
AROR = (-$385.00 / 29 days in play) * 365 / 1907.00 = -254.2%

(ITM) 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%, Max Loss= $1,899, AROR= 44.7%
At Close: Prob. OTM= 45.1%, Headroom= +0.8%, AROR= -262.5%

Cost to open: $1.01 premium collected * 100 shares = $101.00
Cost to close: $5.00 premium paid * 100 shares = -$500.00 (exit 8 days early)
Net Loss = $101.00 to open – $500.00 to close – $2.00 fees = -$401.00
AROR = (-$401.00 / 35 days in play) * 365 / 1,899 = -220.2%

(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%
At Close: Prob. OTM= 24.0%, Headroom= +2.4%, AROR= -262.5%

Cost to open: $1.01 premium collected * 100 shares = $101.00
Cost to close: $7.00 premium paid * 100 shares = -$700.00 (exit 1 days early)
Net Loss = $101.00 to open – $700.00 to close – $2.00 fees = -$601.00
AROR = (-$601.00 / 44 days in play) * 365 / 1,899 = -262.5%

(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%
At Close: Prob. OTM= 42.4%, Headroom= +2.0%, AROR= -9.1%

Cost to open: $0.94 premium collected * 100 shares = $94.00
Cost to close: -$2.15 premium paid * 100 shares = -$215.00 (exit 2 days early)
Net Loss = $94.00 to open – $215.00 to close – $2.00 fees = -$123.00
AROR = (-$123.00 / 48 days in play) * 365 / 1,905 = -49.1%

With two days left, this exit follows the Exit Rules I set for this week.

(ITM) 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%
At Close: Prob. OTM= 1.7%, Headroom= +5.7%, AROR= -545.9%

Cost to open: $1.12 premium collected * 100 shares = $112.00
Cost to close: $15.50 premium paid * 100 shares = -$1,550.00 (exit 1 days early)
Net Loss = $112.00 to open – $1,550.00 to close – $2.00 fees = -$1,440.00
AROR = (-$1,440.00 / 51 days in play) * 365 / 1,888= -545.9%

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.”







OptionTradesByDamocles.com
OptionsTradesByDamocles.com