I need to avoid Bull Traps. So here are 5 things that must happen before a bull market can return. I will also highlight my 3 missed “red flags” from over the past four months. I don’t want to miss them again.

If there’s a river, we’ll dam it,
If there’s a tree, we’ll ram it,
‘cuz I’m talking progress here!,
Yes Sir!
I’m talking development!
For we shall suck and savor,
the sweet flavor of … dry land

The Deacon (Movie: Waterworld)

UnderWaterworld

I began this year as a one-trick pony. Smug in my easy successful 2021 Options Trading, lulled by three years of a bull market, comfortable with my Vertical Bull Put Credit Spread strategy, and as my mother would say, “fat and sassy to a fault!” My complacency blinded me to the warning signs of a falling market, and I ended this month in Underwaterworld.

Market prognostication is not for sissies. More than half of the so-call “click-me” economists will get it wrong. And I am not delusional enough to think I can do any better. But I can look back on my last 20 weekly journal entries and see glaring warning signs where my indicators were screaming for a strategy change – and I ignored them all.

In this week’s journal entry, I want to touch bases on these three topics:

Commentary Contents

  1. Get Prepared
  2. Don’t Miss Warning Signs
  3. 5 Things To Happen Before The Bull Markets Can Return

Get Prepared

As I said earlier, I began this year as a one-trick pony. I was way too comfortable selling Put Spreads and not psychologically prepared for any other Vertical Spread Strategies. And as such, I missed the timing when I should have moved to Iron Condors and avoided losing over $12,000 in the last four weeks alone.

Starting in this post, my “This Week’s Entry Rules” section will include wording to remind me that I have three different strategies that I can use, depending on market conditions. These strategies are the Vertical Bull Put Credit Spreads, Iron Condors, and Vertical Bear Call Credit Spreads.

  • I will modify my ThinkorSwim custom Excel Watch List to include all three strategies.
  • I will define when to use each strategy based on my DEFCON level.
  • I will incorporate a “Russell Watch.”

Don’t Miss Warning Signs

My complacency with a 3-year-long bull market made me colorblind to these three glaring “red flags.”

You know, I thought you were stupid, friend.
But I underestimated you;
you’re a total freakin’ retard!”

– The Deacon (Movie: Waterworld)

1. Russell 2000 Index

The Russell 2000 Index measures the performance of 2,000 smaller corporations not calculated in the S&P 500. And being small-caps, they are the most vulnerable to snafus in the U.S. economy. As a result, marketeers will usually shed their risky small-cap portfolio at the first sign of trouble.

On Dec 1, 2021, IWM lost 12% of its value in a little under two weeks. That was a good first sign.
On Jan 27, 2022, IWM lost another 15% in the same amount of time.

Without a V-shape rebound immediately after these drops (thus suggesting just a portfolio realignment), I should have lowered my DEFCON.

In the future, if I should see my IWM make consecutive growth of 10% to 20% over a couple of weeks, I should assume the Marketeers are buying back into the small-cap market, which may signal the bulls are coming.

2. DEFCON Levels

The year started with me being comfortable at DEFCON 4. I was market aware enough to change to DEFCON 3 on week 4, and I stayed at DEFCON 3 for the next 12 weeks. Then, in week 17, I moved to DEFCON 2. The point here was that I saw trouble as soon as the 4th week of 2022, but I chose not to believe it.

My impeccable hindsight suggests that after 2 or 3 weeks of DEFCON 3, I should not have considered rolling my Bull Put Spreads but instead moving to Iron Condors. And likewise, when I do return to DEFCON 3 for a couple of weeks, I should start building on Iron Condors as well.

3. Trading the Trend

The 4-month Trend Channel I follow went bearish in week 7. And at DEFCON 3 plus a Bearish 4-Month Trend Channel, I should have seen this as a flashing neon sign to unwind my Bull Put Spreads – BUT I DIDN’T. I was convinced that the market correction was a blip. If I had transitioned to Iron Condors at that time, my losses would be much less.

I now know the 4-month Trend Channel can be slow to react to a market change. And a 4-week trend could be too capricious. So when the 2-month Trend Channel rotates bullishly, I will start considering Iron Condors.

The bull markets have melted, covering my trading account with heavy losses.
If I’m to survive, I have to adapt – to a bear market.

– Damocles (Bastardizing Waterworld’s opening narration)

5 Things That Must Happen For A Bull Market

(Note: partially inspired by Jim Cramer.)

1. War in Ukraine has To end

Any shooting war in Europe or Asia will significantly debilitate a global supply chain. Since most of the world’s countries today are very much interwoven economically, a breach of trust, trade, or production will have a damaging cascading effect on our commerce. There is no place in a global economic hegemony for isolationism.

It is remarkable just how important Russia is to our economies. As the world’s largest exporter of wheat, oil, and other necessary commodities, we cannot return to a bull market as long as sanctions remain in place, and sanctions will remain as long as Putin remains Russia’s leader.

2. Inflation Has To Drop

Low inflation, no recession, and no stagflation are prerequisites to a bull market. And to achieve these levels, interest rates need to be at reasonable levels, and employment should be high (or moving in that direction). Unfortunately, the markets will continue to decline as long as the Feds remain aggressive in their tightening policies.

The Misery Index is also a good indicator of a Bull or Bear. Combining the unemployment and inflation rates can signal just how much pain the economy feels. I would think that the Misery Index needs to be below 10% for a bull to start charging.

3. China to Reboot Their Economy

A large segment of China’s international commerce has been closed as they aggressively battle an outbreak of COVID. Major industrial regions have been closed to imports and exports, and their production capacity has been shuttered.

Incredibly, the world’s production capabilities depend on China’s cheap labor and questionable human-rights safeguards to produce critical essential components. (Take note all you “living wage” advocates. Rising minimum wages in the U.S. will only push more manufacturing to China.) As a result, component shortages from China have significantly exasperated the global supply-chain tangles and contributed to rising inflation.

4. Oil Has To Drop

Regardless of what anyone thinks about the climate change evils of fossil fuels – oil, gas, and coal are the fundamentals of economic growth worldwide. The high cost of producing and distributing oil will marketably increase the cost of production.

Here’s the situation.  And when it comes to the gas prices, we’re going through an incredible transition that is taking place that, God willing, when it’s over, we’ll be stronger and the world will be stronger and less reliant on fossil fuels when this is over

– Joe Biden (Joint press conference with Japan Prime Minister Fumio Kishida on 5/23/22)

President Biden’s insinuation that high energy cost is the necessary evil to compel the U.S. to transition to Green Energy presumes that these high prices are deliberate (or deliberately allowed) and any effort to lower these costs will not happen. (The Deacon: “Let’s have an intelligent conversation here: I’ll talk, and you listen.”)

5. Consumer Sentiment

Marketeers are consumers too. If the Consumer Sentiment Index remains at a historic low, the Marketeers will hoard their cash for when times are better. I need to see the Consumer Sentiment Index grow to 80% before I believe we are in a new bull market.

Dry land is not just our destination,
it is our destiny.

– The Deacon (Movie: Waterworld)
Using Excel with ThinkorSwim
Walking through steps of installing thinkorswim on a new laptop and how to get Excel to pull live data …
Exit Rules: Vertical Credit Spreads – Pt 1
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How To Make Loss Resistant Vertical Spreads – Strike Width
In this week's journal entry, I want to look at what makes a Loss-Resistant Vertical Spread. Starting with a …

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 05/23/2022)

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 tweet.


Yikes – Yawns – Yays

  • Russia keeps up nuclear pressure – Yikes
  • A slew of retailers reporting earnings this week – Yikes
  • Tech stocks beating reminiscent of the dot-com bust – Yikes
  • A Monkeypox pandemic! – Yikes
  • China Zero-Covid lockdowns – Yikes
  • China’s provocation toward Taiwan – Yikes
  • Feds stand fast on aggressive interest rate hikes – Yikes
  • WTI (oil) jumps over $115/bbl – Yikes
  • Housing bubble – Yikes
  • Roe v Wade overturned – Yawn
  • Indo-Pacific Economic Framework – Yawn
  • Baby Formula Shortage – Waaa
  • Tech buying tech – Yay

Geopolitical

  • The brutality of the Russian army is on display, but the Ukrainian leadership is willing to risk it all. Major Ukrainian cities (like Mariupol, which had over 500,000 population) have been “wiped off the map.” But from the cynical and dark regions of my mind, I suspect that the Ukrainian leaders and (most Western leaders) know something that the rest of the world doesn’t – Putin’s days are numbered.
  • There seems to be a global concern about what an increasing desperate or increasing delusional Putin might do. General Mark Milley painted a bleak picture to the 2022 West Point graduates of a world on the brink of war – sighting Russia’s aggression in Europe (Ukraine). Mitt Romney gave his “all clear” to NATO to engage Russia should they use battlefield nukes in Ukraine. World War III could be afoot, depending on what Putin (and China) does.
  • What is monkeypox, and why do we care. We care because coming off COVID, the manic-media needs something to stoke fear and generate clicks. They also need a potential worldwide crisis that Biden can crush before the November election. (Yep- those cynical and dark regions again…)
  • Since Omicron has rolled into China, the government has inflicted harsh lockdowns and mass restrictions via their “Zero COVID” policy. China’s industrial production has fallen to its worst level since the pandemic. Their totalitarian approach has tangled up their supply chain, and there appears to be no end in sight. Export activities are at their lowest levels. We are now seeing just how much of our daily needs are coming from China (medical supplies, plumbing fixtures, installation, televisions, not to mention a very long list of everyday electronics). Our inflation is definitely being exacerbated due to a lack of base components made in China.
  • China’s war games and provocative rhetoric towards Taiwan, while President Biden is making his Asian rounds, is not phasing the U.S.’ commitment to defend the island nation if attacked militarily. But, with as many jitters as the Marketeers have right now, I’m not sure if Jian rattling will help much.

Socioeconomics 

  • Bad news may be coming this week as a large number of retailers are reporting earnings. I expect to hear from Macy’s, Best Buy, Costco, and others that their overall earnings took a beating, just like Walmart and Target last week. However, I hold optimism for Canopy Growth since getting stoned may be the only way to cope!
  • How will overturning Roe affect our economy – it won’t. The abortion lines have been drawn for over 50 years. Riots, murders, marches, and billions of dollars have been spent in legal battles over the last 50 years. Politicians have been running on their pro-or-no abortion credentials for 50 years. There is a hand full of loud whiners out there that are hoping for a big bang, but all they will get is a fizzle.
  • Rising oil prices are a pain at the pumps for me. But not only am I paying more for domestic energy, emerging markets around the world are also paying a high price to import the crude. Moreover, high oil prices affect prices for food, production, and economic development in all areas.
  • Over the past couple of years, the housing market (the price of houses) has exploded. Even my little abode has remarkably (and unbelievably) nearly doubled in value over the past four years. I contribute this to the great exodus from the apartment dwelling in dense, high-cost, high-crime, liberal urban areas (like New York City and Chicago) to homes across the country – quickly shrinking home inventories. Rising interest rates will put the kibosh on this migration eventually, and we will see the same property value crash as we saw in the early 2000s. (Note: the 2000 housing boom-and-bust is what led us to the 2007 Subprime Morgage Crisis.)
  • The Tech sector has suffered its worst financial meltdown since the dot-com bust. And with company values now at historic lows, I expect to see an increase in mergers and buyouts of tech companies.
  • The baby formula shortage is not funny to those who are in need. I receive desperate pleas from my Nextdoor.com neighborhood group looking for anything they can get. But I can’t help seeing this as a manufactured crisis (such as the 1980s school milk crisis or the day-care crisis). This has all the earmarks of creating a crisis to be solved as a mid-term election stunt for the DNC.

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) - 05/22/202
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ThinkorSwim Chart: CBOE Market Volatility Index (VIX) – 05/22/2022

The 4-week trajectory of the VIX Regression Channel leveled at an elevated volatility rate.

  • Last week the VIX ticked down to 29.3% from 29.7% the week before
  • The VIX spent most of the previous four weeks oscillating about the 30.0% line
  • 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 leveling

The VIX’s high volatility is good for collecting premiums or pushing the Short-Strike further out. This is also a confirmation that a bear trajectory is likely for the next few weeks.

VIX above 30% is my demarcation for a DEFCON 2, but at 29.43% (and the 9-Day SMA is at 29.94), I am technically and begrudgingly, DEFCON 3

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

VIX votes a dismal 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 rises, 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, 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 05/22/2022
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ThinkorSwim Chart: S&P 500 Put/Call Ratio – as of 05/22/2022
  • The S&P 500’s Put/Call Ratio continued in the “Feeling Nervous” region for the fourth week
  • The end of the week value of 0.9 is a frightful jump from 0.7 last week
  • The 9-Day SMA stayed in the nervous region for over three weeks, ending last week at 0.8, up from the week before of 0.75

The Marketeers appear to be padding their portfolios with insurance via Put Options. Peaking at 0.95 is a good indicator that the bears have legs.

Being blind to all other indicators and just reacting to the end-of-week Put/Call spike, I’ll vote for a DEFCON 2

Put/Call Ratio votes a DEFCON 2

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 05/22/2022
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Consumer Sentiment Index as of 05/22/2022

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%). Slightly down from 12.1% last month.
(Note: Ideally, the Misery Index should be below 10% and declining, to have a growing economy.)

The significant drop in Consumer Sentiment for the start of May is disappointing.

CSI votes a dismal DEFCON 2

Market Indexes:

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.

The Russell 2000 Index is commonly considered an indicator of the U.S. economic direction due to its focus on small-cap companies. The growth potential of small-cap stocks is attractive to Marketeers when economic expansion is expected. These same small-cap stocks are also the first to be jettisoned at the start of economic turmoil.

S&P 500 (SPX) = 3,901 – down 3.1% from 4,024 last week. (4 weeks deviation: 132.67 up from 162.34 last week)
Russell 2000 (RUT) = 1,774.09 – down 0.1% from 1,776.55 last week. (4 weeks deviation: 64.19 down from 93.75 last week)

ThinkorSwim Chart: Daily S&P 500 Index - Four/Two Months Trend (Updated 05/22/2022)
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ThinkorSwim Chart: Daily S&P 500 Index
Four/Two Months Trend (Updated 05/22/2022)
ThinkorSwim Chart: Daily Russell 200 Index Four/Two Months Trend (Updated 05/22/2022)
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ThinkorSwim Chart: Daily Russell 2000 Index
Four/Two Months Trend (Updated 05/22/2022)

Market Thrashing

4 Weeks Thrashing of SPX = +/- 132.67 points or 3.4% of the market’s volume is up from 3.1% last week.
4 Weeks Thrashing of RUT = +/- 64.19 points or 3.6% of the market’s volume is — from —% last week
(Market Thrashing below 1.0% might be a confirmation of the markets moving mostly sideways.)

  • All trends continue decisively bearish
  • RUT’s three trends continue to suggest a bear market
  • Thrashing is high

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 very near 30% – (reluctant) DEFCON 3
  • The P/C Ratio stood in the Feeling Nervous region – DEFCON 2
  • The CSI shows a consumer base not excited about our economic future – DEFCON 2
  • The market indexes are running 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

  1. Open two Vertical Bear Calls Spreads
  2. If four or more rules fail, consider Iron Condor

Entry Rules

Vertical Bear Call Credit Spread (DEFCON 1, 2):
  • Entry Rule 3: Prob-OTM >= 85% (for 20 SW, 1 contract)
  • Entry Rule 3: Prob-OTM >= 90% (for 10 SW, 2 contract)
  • Entry Rule 4: Call Short Strike >= 1 Standard Deviation
  • Entry Rule 13: Strike-Width >= 20 (sum of all contracts)
Iron Condors (DEFCON 2, 3, 4):
  • Entry Rule 3: Prob-OTM >= 90%
  • Entry Rule 4: Call Short Strike >= 1 Standard Deviation
  • Entry Rule 4: Put Short Strike <= 1 Standard Deviation
  • Entry Rule 13: Strike-Width >= 20 (sum of all legs and contracts)
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 bullish, or
    • Short Strike < 55% POTM and 1-week trajectory is bullish
    • 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. Therefore, it will be unwise to roll any Bull Spreads.)







Profit and Loss Statements

(As of 05/27/2022)

Cash Balance Sheet

Year
2022
Month
May
Week
#21
Beginning Account Balance$28,000.00$25,139.07$19,919.80
Deposits (Div. & Int.)$0.92$0.01$0.00
Withdraws (paycheck1)-$2,625.00-$525.00-$525.00
Premiums on Open$10,599.00$796.00$294.00
Premiums on Close-20,036.20-$9,509.20-$36.00
Fees Paid (total)-$58.28-$20.44-$6.14
Ending Account Balance$15,880.44$15,880.44$15,880.44
Total Gain/Loss-$12,119.56-$9,258.63-$273.14
ROR-36.8%-1.7%
ROC-43.3%
1 Paycheck = 22.5% of initial investment paid out monthly

Cash Flow Chart

YOD Vertical Credit Spreads Cash-Flow Chart - As of 05/27/2022 (Excel Chart)
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YOD Vertical Credit Spreads Cash-Flow Chart – As of 05/27/2022 (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$10,599.92
(Premiums)
0.41 shares
(Dividends Reinvested)
Funds Removed-$20,094.48
(Early Close & Fees)
$0
(Fractional Shares Sold)
Market Changes-$1,294.00
(Open Spreads’ Fair Market Value )
-$3,577.70
(Gain/Loss)
Ending Balance$17,211.44
(Mark-To-Market)
$24,422.30
(59.1706 shares * $411.43 CV)
ROI-38.5%-12.8%
As of 05/27/2022, 9:53 AM







Schedule for this Week

Goals for this week: (05/23/2022 – 05/27/2022) (Week #21)

  • 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 15, 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 this week’s 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 05/27/2022)

Spread Count Summary:

Year
2022
Month
May
Week
#21
Vertical Bull Put Credit Spreads2502
Vertical Bear Call Credit Spreads660
Iron Condors000
Total3162

Current Dollars at Risk:

Year
2022
Month
May
Week
#21
Vertical Bull Put Credit Spread$0.$0.$0.
Vertical Bear Call Credit Spread$7,326.$7,326.$3,706.
Iron Condor$0.$0.$0.
Total Dollar Risk$7,326.$7,326$3,706.
Max Risk Allowed$28,000.N/A$4,000.

Options Buying Power:

Unallocated dollars available to open new Vertical Credit Spreads:

Current Cash Balance$15,880.44
Set-Aside Dollars for Existing Spreads-$8,000
Cash Available for New Spreads$7,880.44
(Options Buying Power)







Vertical Spreads Opened This Week

(05/23/2022 – 05/27/2022)

QQQ:335c/345c  – Open 05/26/22 – Expires 07/15/22 – Max Gain = $142.00 – Open Price = 295.99
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 90.7%, Headroom= +13.5%, Max Loss= $1,858, AROR= 55.0%

ThinkorSwim Chart: Vertical Bear Call Credit Spread – QQQ – Short: 335 Call – Long: 345 Call
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ThinkorSwim Chart: Vertical Bear Call Credit Spread – QQQ – Short: 335 Call – Long: 345 Call

Vertical Bear Call Credit Spread Entry Rules for this week. 

YesNoSupportEntry RulesVertical Bear Call Credit Spreads
1X$7,326Current 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 ensure the Short-Stike is above the 2-month trend channel.
Do not open Spread if this rule fails
3X90.7%Prob-OTM >= 85% (20 SW, 1 contract)
Prob-OTM >= 90% (10 SW, 2 contract)
The Prob-OTM guidance parameter is set in the Market Sentiment Section. This may be adjusted due to market conditions.
SW = Strike Width
4X334.37Short-strike > 1 S.D. above the current price?Short Strike should be more than 1 Standard Deviation above the current underlying price. This may be adjusted due to market conditions.
5X$3,706Max 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.
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 = 1.4% &
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).
10X0.9 to 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. Conversely, 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. So I might want to lower the POTM to collect a little more premium.
13X10Strike Width minimum
(1 contract >= 20, 2 contract >=10 )?
Mainly determined via market conditions. If the conditions are good, open 2 Spreads at 20 Strike Width. If the conditions are not good, consider 1 Spread at 40 Strike Width. The Strike Width could be less if I try to stay under the week’s max dollar risk. (If multi-contracts, then 10 and 20.)

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

Of the 13 rules, 2 have failed:

  • Rule 8: This week’s QQQ was bullish throughout. But the 4-month, 2-month, and 2-week trends are strongly bearish. This was a take-it or leave-it decision.
  • Rule 11: Today’s decent run-up pushed the current QQQ value slightly above the 9-SMA. It was below the SMA for the majority of this week.

The QQQ and SPY index ETFs are currently experiencing very high volatility (currently both at 70% – 80% of their 52-week range), and both are offering outstanding premiums for their Options. My other ETFs are well below their 50% percentile.


QQQ:320c/330c  – Open 05/23/22 – Expires 06/17/22 – Max Gain = $162.00 – Open Price = 290.86
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 89.4%, Headroom= +10.0%, Max Loss= $1,848, AROR= 118.5%

ThinkorSwim Chart: Vertical Bear Call Credit Spread – QQQ – Short: 320 Call – Long: 320 Call
- Options trading for beginners
- OptionsTradesByDamocles.com
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$6,346Current 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
3X89.4%Prob-OTM >= 85% (20 SW, 1 contract)
Prob-OTM >= 90% (10 SW, 2 contract)
The Prob-OTM guidance parameter is set in the Market Sentiment Section. This may be adjusted due to market conditions.
SW = Strike Width
4X319.64Short-strike > 1 S.D. 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$1,848Max 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
6X25 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).
10X0.9 to 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 Bear Call Credit Spread below.

Of the 13 rules, 1 has failed:

  • Rule 3: This rule was not fully defined when I entered this position.

This Spread is a duplicate of the QQQ Vertical Bear Call Credit Spread I opened late last week. I wanted to spread the risk more evenly across the next 8 weeks.


Vertical Spreads Currently Cooking

(As of 05/27/2022)

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%
Now: Prob. OTM= 96.0%, Headroom= +17.4%

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 05/27/2022)

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%
At Close: Prob. OTM= 97.6%, Headroom= +14.5%, AROR= +227.7%

Income to open: $0.61 premium collected * 100 shares * 2 contracts = $122.00
Cost to close: $0.18 premium paid * 100 shares * 2 contracts = $36.00 (exit 38 days early)
Net Profit = $122.00 to open – $36.00 to close – $4.00 fees = $82.00
AROR = ($82.00 / 7 days in play) *365 / 1,878 = +227.7%

This Spread was closed 1 week after it opened via an 85% of max profit trade-trigger.

This early close puts $2,000 back in Options Buying Power. This point is important because the string of big losses has robbed my Options Buying Power of future trades.

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