Know when to hold ’em, know when to fold ’em – and never count your money before the trade is done. The Kenny Roger’s Strategy for selling Vertical Spreads gives me some cues to reading the room and avoid being the easy mark.

Selling Vertical Spread – The Kenny Rogers Strategy

Drunk on my successes in 2021, I swaggered into 2022 cocky and vainglorious. With a goofy grin and clutching $28,000, I sat at a table and began dealing Vertical Credit Spreads as if I had good sense. By mid-year, I’d been played for over $4,500. I’m such an easy mark! I need to adopt the Kenny Rogers Strategy for selling Options Spreads.

The purpose of this post is to remind me that if my Entry Rules are not fully met, it is best not to open any new Spreads. When there is turmoil in the game room, the best winning strategy may be to just not play.

Commentary Contents

• Know When to Hold ’em
  • Trade the Trend
  • Seek Minimum Volatility
  • Seek Minimum Put/Call Ratio
  • Sit at Friendly Tables
• Know When to Fold ’em
  • Beware of Rustlers
  • Pumping the Pot With High Volatility
  • Avoid Bar Room Brawls
• Know When to Walk Away
• Know When to Run
  • The Short Strike ITM Bluff
  • Rolling losing Spreads
  • Allow the Assignment
  • Time-Value Discounted Close
• Keep Focused

Each week I play Four Card Vertical Bull Put Credit Poker with the house (tdAmeritrade). And each week, I will draw four Vertical Spread cards from my deck of ETFs (DIA, SPY, IWM, QQQ). Using my Excel/ThinkorSwim custom watchlist, I will order my hand into various winning scenarios and then carefully read the table for an opening.

Know When to Hold ’em

I need to read the room and focus on a market condition that will have the best chance of winning. I should only hold (open) Vertical Bull Put Credit Spreads when the cards on the table are in my favor. Here are some cues that I should look for:

Trade the Trend

A bullish market, by definition, is a rising market. I know I’m in a bullish market if the current asset value is consistently trading above the 200-Day SMA. See my post, Trend Trading Using TOS Regression Channel.

Since I am dealing with Vertical Bull Put Credit Spread cards, having the 7-day, 14-day, and 60-day trajectories bullish as well is like having a three-of-a-kind in my hand. It’s a good signal that I should hold.

And if I have a strong two-of-a-kind (two of the three trajectories are bullish), I may be “inclined” to hold as well.

But there could be some shifty characters at the table that I may need to be keen on.

Seek Minimum Volatility

From the standpoint of collecting premiums, low volatility basically means there is not much money in the pot. The other Marketeers are passing at their turn to bet as they are convinced their hands are weak and the current market trajectory won’t change much. (Low volatility implies a lowered expectation of a market change in the near term. So I should always look at both volatility AND trajectory at the same time.)

If the VIX is consistently below 20% (even better, 15%) and the IV% (Implied Volatility Percentile) of my underlying is well below 20%, I should assume that the current trajectories of my underlying will have some staying power. If those trajectories are collectively bullish, I may want to consider holding my cards for the next 6-8 weeks.

But beware of those buying insurance.

Seek Minimum Put/Call Ratio

The higher the Put/Call Ratio, the more likely my opponents could be bluffing. If they are buying more protective Puts as insurance against a rising market, then I should be wary of a Bull Trap.

A Put/Call Ratio that is below 1.0 sends the signal that most of the Marketeers are not bluffing (most are not fearing that the markets will fall). The further down the ratio, the fewer the bluffs.

So, if the Put/Call Ratio for my underlying cards is below 1.0 (or even better, below 0.75) as the markets rise, then I may feel my Vertical Bull Put Credit Spread could be a winning hand – I should hold.

Sit At Friendly Tables

If the room is peaceful and all beer mugs are full, then everyone is happy. If there is no ominous Federal Reserve news, no shooting war in Europe, no systemic supply-change tangles, no pandemics, no Trump tweets, and no imminent political catastrophes, then it is less likely that someone will upset my table.

Hold ’em

So, if the trajectory of my Vertical Bull Put Credit Spread’s underlying card is bullish, volatility is 15% or lower, the Put/Call Ratio for the underlying is below 1, and there is no ecopolitical crisis afoot, then I should feel my Vertical Bull Put Credit hand is likely a winner.

Know When to Fold ’em

As I have found in 2022, it is better not to open a Vertical Bull Put Credit Spread if I don’t have a winning hand.

I need to be keenly aware of my opponent’s body language:

Beware of Rustlers

The Russel 2000 (RUT) is a bellwether index that measures the performance of the 2,000 smallest companies in the Russel 3000 Index. Small-Cap companies are high-risk and tend to be the first to be dumped when the Marketeers believe hard market times are ahead. If the RUT is moving bearish, be prepared to fold.

Pumping the Pot With High Volatility

Rising volatility is great for maximizing the table’s pot (the higher the volatility, the higher the premiums I can collect). But it also means there is a lot of uncertainty about the staying power of the underlying’s current trend.

If the value of the underlying is rising and my Marketeer opponents are bidding up the pot (meaning its IV% is well above 25% with a Put/Call Ratio above 1), then I need to be wary that my opponents are running up the pot only to suck me into a Bull Trap.

Conversely, if the underlying’s trajectory is bearish, the IV% is well below 25%, and my underlying Put/Call Ratio is above 1, then I should read in the eyes of my shifty opponents that my underlying cards are not going to get better.

Avoid Bar Room Brawls

Geopolitical and Socioeconomics (Ecopolitical) events have the greatest tendency to flip over tables, regardless of how good of a hand anyone has. When Black Bart (aka Federal Reserve Chairman Jerome Powell) enters the room, his very presence can change every hand at the table.

Fold ‘Em

Therefore, when the anxiety in the room becomes palpable (lots of Ecopolitcal events), when my Marketeer opponents are running up the pot, and the bullish trajectory seems unsustainable, then I should be inclined to fold all my cards for the week.

Know When to Walk Away

There are times when it is obvious that the cards are stacked against me, and I should just walk away from the table for the week.

• If the 60-day, 14-day, and 7-day trajectories are all moving bearish, then I’m playing against the trend.
• If the room’s volatility and Put/Call Ratios are at fever-pitch (running high), then I may be playing with a cold deck.
• If bar fights are breaking out around the room (rising inflation/interest rates, escalating conflicts in sensitive economic regions, an outbreak of a new COVID variant, or a whole host of other Ecopolitical happenings), then there can be abrupt changes in my luck regardless of what I am holding in my hand.

Walk Away

By walking away from this table, I have two choices.

1. I can find a table that is playing a friendly game of Vertical Bear Call Credit Spreads, Iron Condors – or better yet –
2. I can head back to the bar and enjoy the fellowship of others.

Know When to Run

Sudden turns in my luck can happen at the drop of a hat. Those hands that I am already holding (open Spreads in my inventory) can change from sure-thing winners to max loss faster than I can duck for cover.

On Sept 13, 2022, the Dow Jones fell 1,276 points. This makes it the 7th largest single-day point drop in the Dow’s history (the largest being 2,991 at the start of the COVID pandemic on March 16, 2020). But to keep my perspective, Tuesday’s drop represents a 3.9% plop in market value for the day compared to a 22.6% crash on Black Monday (1987).

But regardless of how relatively tumultuous Tuesday will be in history, rapid drops in stock prices can automatically trigger Stop-Loss orders, which in turn can trigger a feedback loop of rapid computerized selling. And like any movie-esk bar brawl, chaos in the game room is a quick way to lose.

The Short Strike ITM Bluff

If the Vertical Spread cards that I am holding (open position in my inventory) include a Short-Strike that is ITM, then any of the Marketeers at the table can call my bluff before my hand can be played. A Short-Strike Option that is ITM can be assigned at any time prior to the Option’s expiration (see my post “Vertical Spread Assignments – The Good The Bad and the Ugly/#h-assignments-what-happens“). I should be ready to close a losing ITM Spreads early to avoid holding the bag.

Rolling losing Spreads

I need to be careful about rolling losing spreads. Rolling losing Spreads in a correction-bound market is a good way to compound the loss. I should only consider rolling when the Entry Rules firmly agrees with the rolled position. See my post “How To Roll A Vertical Spread In ThinkorSwim.”

Allow the Assignment

Short Strike assignments are always an administrative pain and should be avoided. But there is a narrow scenario where the pain may save me money.

If the losing underlying’s trajectory turns decisively towards OTM during the week it expires, I may want to consider letting it be assigned and hope the trajectory continues through the weekend. See my post “Vertical Spread Assignments – The Good The Bad and the Ugly/#h-what-happens-call-options-assignment” for an example of a “Good” assignment.

Time Value Discounted Close

An ITM Spread set on a decisively ITM trajectory during expiration week could be exited with a Time Value discount.

The Intrinsic Value of an ITM Spread is the dollar difference between the Spread’s Short-Strike and the current value of the underlying ETF times 100 shares. Spreads that are OTM have no Intrinsic Value.

The Extrinsic Value (or Time Value) of any open Vertical Spread is the current premium offered for the Spread minus the Intrinsic Value (if any).

So, if the current premiums offered to close my ITM spread = $10.23 * 100 shares = $1,023, and my current Intrinsic Value = (Short Strike – current value) = $1,289, then the Time-Value Discount = $1,023 – $1,289 = -$266.00 (I can exit at $266 less than the Intrinsic Value).

Conversely, if the current premiums offered = $5.35 * 100 shares = $535 to close my ITM Spread, and my current Intrinsic Value = $333, then I will be paying an extra Time Value premium of $535 – $333 = $202.00 (I will exit paying $202 more than the asset value of the Spread).

Note: Time Value is a function of (amongst other things) the underlying ETF’s current Implied Volatility. If the IV increases, so will the Time Value. So, if the volatility of my underlying (ITM) ETF increases as it approaches expiration, then it may cost me more to close the Spread, even though the ETF is moving towards OTM.

Run!

Recovering after an abrupt market brawl will draw in card mechanics and hand muckers to take the money away from the easy marks – like me. See Why Avoid ThinkorSwim Stop-Loss Strategies for Vertical Spreads.

To avoid getting into a losing feedback loop, I need to revisit these posts on “How to Make Loss Resistance Vertical Spreads”:

• How To Make Loss Resistant Vertical Spreads – Strike Width,
• How To Make Loss Resistant Vertical Spreads – Short Strikes,
• How To Make Loss Resistant Vertical Spreads – Market Force,
• How To Make Loss Resistant Vertical Spreads – Expiration Dates,
• How To Make Loss Resistant Vertical Spreads – Underlying Assets

Keep Focused

My goal is to play the Vertical Spread game for the long term. I have to be content with not scoring that once-in-a-lifetime win because the odds are always in favor of the house (see the super important post: Law of Large Numbers). It’s going to be best to only play in a “steady” market, and learn when it is best to just be a bystander and watch.

Other Posts from Options Trades By Damocles

This Week’s Market Sentiment

This Market Sentiment Section is typically completed by midday Monday morning. By the time this journal is published, it will be mostly old news.

(As of 08/30/2022)

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 Influencers

Ecopolitical (Sociopolitical-Economics) Influencers (EPIs) 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.

EPIs are 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 EPIs can significantly disrupt all the other indicators at the drop of a tweet.

Yikes – Yawns – Yays

• Playing with nukes – Yikes
• Misery Index and Unemployment up – Yikes
• August’s payroll jumps – Yikes
• The run up to mid-term elections – Yikes
• China’s property implosion continues – Yikes
• Europe plowing into recession – Yikes
• Aug Inflation higher than expected – Yikes
• Sept Federal Reserve Meeting hikes rates by 0.75% – Yikes
• Paul Volcker 2.0 – Yikes

Geopolitical

• I find it highly disturbing that the US media needs to report nuclear deterrent missions as a prelude to global thermonuclear war in response to Russia’s nuclear provocations. I know that many tests are required every year to keep us ready, but they have mostly been done without fanfare. Now three significant reports within two days. 1) Monday (9/5/22), the US flew a pair of nuclear-capable B-52 long-distance bombers over the Middle East in a show of force. 2) Wednesday (9/7/22). US Air Force launched an unarmed Minuteman III intercontinental ballistic missile as a test in California in a show of nuclear readiness. 3) The Air Force said it had conducted over 300 intercontinental ballistic missile tests in August. This is unnerving to the skittish Marketeers.

• Long lines and rising costs are still affecting our inflation. After Russia’s invasion of Ukraine, embargos and sanctions have placed a huge strain on life in eastern Europe. Even with some trade restarting (Ukraine grains), the protracted conflict continues to take its toll. Moreover, Moscow’s retaliation by shutting down all gas supplies to Europe that run through Ukraine (Nord Steam 1) has left a dozen countries scrambling to cope with the upcoming winter. Diverting global resources to affected countries will continue to exacerbate the cost of living and shove Europe headlong into a recession. (Note, we are already in a global recession. The formal declaration of a recession only happens months after it has started.)

• China’s highly leveraged property value is about a quarter of its GDP. But the COVID lockdowns beginning in 2020 (and continue today) have crushed developers and forced defaults. I suspect that China’s Housing Bubble popping will rival the US 2006-2007 subprime mortgage lending scheme – which led to the 2008-2011 financial meltdown.

There is a historical pattern showing the stock market’s pre-midterm weakness and post-midterm strength. I suspect the political media’s hysteria and histrionics over the next month will keep a lid on market growth. But once the Marketeers are less concerned about who will control Congress, I believe we are prime for a longer-term growth pattern.

Socioeconomics 

• COVID is still shutting down parts of the economy around the world. There are still kinks in the supply chain, the protracted war in Ukraine is keeping oil prices high, and a hike-hungry Federal Reserve is making buying stuff even more expensive. As the interest rate increases, fewer stuff will be bought, which will translate into fewer people employed. And after the 8/26 Jackson Hole Fed meeting, when Jerome Powell reiterated his pledge to forcefully fight inflation (aka keep hiking interest rates), the DOW sagged over 1,000 points. Powell stated that the Fed is not in a place to stop or pause hikes – so gird up your loins!

• August’s unemployment rate expectedly edged up and brought the Misery Index with it. This is a mixed message to the nervous Marketeers because it signals to the Feds to do another jumbo rate hike in September. The August Jobs Report showed that we added 315,000 jobs to the national payroll, and national wage averages are going up. But with the goal of slowing consumption so the supply chain can catch up, the increase in the labor force will continue to over-tax supplies.

• August’s inflation rate ticked down from 8.5% in July to 8.3%. I would have thought this would be good news. But the expectation for August was 8.1%, so the actual was up from expected. This report caused the largest 1-day DOW loss this year. And as a result, the odds of the Feds hiking the Interest Rate during their 9/20-9/21 meeting a full 1.0% has gone up.

• One destructive side effect of the Fed’s raising the Discount Rate is making our national debt more expensive. The rush to borrow during the COVID crisis added trillions to our national debt when borrowing rates were near zero. Now, interest payments on that national debt are projected to be the fastest-growing part of the federal budget in FY 2022. Payments are expected to triple from nearly $400 billion in 2022 to a staggering $1.2 trillion in 2032 – a total of $8.1 trillion over the next decade.

• Jerome Powell is starting to look a lot like Volcker. Being laser-focused on inflation over economic growth, Volcker came in at the end of the Carter Administration to take on the out-of-control inflation of that time. When Volcker took the Federal Reserve’s reigns, he quickly pumped interest rates by 6% over his first three years. During that time, Volcker oversaw two market crashes.

The lack of any optimistic Yays or even Yawns does not bode well for this wee’s ETS

ETS votes a DEFCON 2

Market Sustainability

This is a revamped section inspired by the “Kenny Rogers” strategy.

The Put/Call Ratio above 1.0 and the VIX about to breach 30% does not bode well for the short term economy. Bear mentality seems to be griping the Marketeers.

Market Sustainability votes a DEFCON 2

Investors’ Sentiment

Marketeers are consumers too. And when the economy is humming, investments are smoking. Conversely, when the economy is threatening their portfolios, they tend to run for cover.

Consumer Sentiment Index

A low Consumer Sentiment 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)

September’s preliminary results show a slight improvement over last month’s. Although the indexes are still at a dismally low number, there appears to be a trend towards improvement.

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: unexpectantly rose 0.1% in Aug. Now up to 8.3% from a year ago ¹.
• Unemployment Rate: Aug rate = 3.7%. Up from 3.5% in July.
• Misery Index = 12.0% (8.3% + 3.7%). Down from 12.3% last month.
  • (Note: Ideally, the Misery Index should be well below 10% for a growing economy.)

¹ A year ago (Aug 2021), inflation was already sky-high at 5.3%. So being at 8.3% now means that we are actually up by 13.6% over the past two years (Biden’s Administration).

The Misery Index continues to be high as nearly half of all consumers believe our economy is moving in the wrong direction.

CSI votes a dismal DEFCON 2

Market Trajectories

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 in 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) = 3,693 – down 12.7% from 4,228 last month.
Russell 2000 (RUT) = 1,680 – down 14.2% from 1,957 last month.

Market Performance

• Both indexes tumbled +12% in the last month
• Short and medium-term trajectories are decisively bearish
• 9-Day bearish while the 50-Day SMA flattens
• 9-Day SMA is well below the 50-Day SMA

The 4-month Trend Channel for SPX is changing its trajectory downward. even though it is still a long-term bullish,

The RUT 4-month Trend Channel also switched to a bearish rotation as Marketeers are definitely pulling out of the higher-risk small caps stocks.

The 120, 60, and 14-day trends for both indexes are now bearish. I’ll go with an optimistic DEFCON 2.

Market Index votes a DEFCON 2

My sentiment for this coming week:

Of the five indicators:

• Ecopolitical Influencers hardening – DEFCON 2
• Market Sustainability suggests continuing bearish – DEFCON 2
• Investors’ Sentiment shows a consumer base not excited about our economic future – dismal DEFCON 2
• The market indexes are bearish – DEFCON 2

All my technical indicators are showing a significant decline in the Markets’ direction.

Trading Readiness Level for this week

DEFCON 2

This Week’s Guidance

The general trends of the technical indicators are deteriorating, as well as the eco-political events. This may be a sign that the markets will continue to fall.

• Pass on opening new Spreads
• Cautiously consider a Vertical Bear Credit Spread

Entry Rules

Vertical Bear Call Credit Spread (DEFCON 1, 2):

• Entry Rule 3: Prob-OTM >= 90%
• Entry Rule 5: 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: Call Prob-OTM >= 85%
• Entry Rule 3: Put Prob-OTM >= 85%
• Entry Rule 5: Call Short Strike >= 1 Standard Deviation
• Entry Rule 5: 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:
  • If IV% < 15%: Prob-OTM <= 80.0%
  • If IV% 15% – 20%: Prob-OTM = 82.5%
  • If IV% 20% – 25%: Prob-OTM = 85%
  • IF IV% > 25%: Prob-OTM = 90%

• 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 09/30/2022)

Note: I’m no longer posting a “Cash Balance Sheet” or the “Cash flow Chart.” In reality – it has no value. My transferring out $525 each month as my “paycheck” is a bit dopey and counterintuitive. The best measure of my performance is to simply compare my Trading Account to an equivalent investment in SPY.

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?

Schedule for this Week

Goals for this week: (09/25/2022 – 09/30/2022) (Week #37)

• Document lessons learned or new thoughts in Commentary Section
• Open one or two Vertical Options Spreads
• Update Trading Log as trades occurs

Monday:

• Determine/update this week’s market sentiment section
• Review/tweak Trend-Channels for all stocks on the watch list
• Set target expiration dates for all Options as follows:
  • Bull Credit Spreads: Nov 18, 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).
• 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.)

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.
• Watch one Webcast or take one online mini-course to be completed by Friday.

This Week’s Trade Activity

(As of 09/30/2022)

Spread Count Summary:

Current Dollars at Risk:

Note: no new Spreads this week.

Options Buying Power:

Unallocated dollars available to open new Vertical Credit Spreads:

Vertical Spreads Opened This Month

(08/29/2022 – 09/30/2022)

QQQ:306c/326c/X1 – Open 09/27/2022 – Expires 10/21/22 – Max Gain = $102.00 – Open Price = 277.97
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 89.7%, Headroom= 10.1%, Max Loss= $1,920, AROR=80.9%

Of my 13 Entry Rules & This Week’s Rules Guidance, 1 Rules Failed:

Rule 3 was above 90% when I entered the Spread in ThinkorSwim. By the time I could record the transaction, the probability had dropped to 89.7.

I entered this position because the P/C Ratio was above 1, the IV% was above 20%, and all trajectories were bearish. Also, the headroom was > 10% which was the highest percentage of the 4 ETFs.

SPY:405c/425c/X1 – Open 09/22/2022 – Expires 10/14/22 – Max Gain = $80.00 – Open Price = 374.83
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 91.7%, Headroom= 8.1%, Max Loss= $1,920, AROR=68.3%

Of my 13 Entry Rules & This Week’s Rules Guidance, 0 Rules Failed:

I entered this Spread because the P/C Ratio is above 1.0, and the IV% is way above 20%. All trajectories are bearish, and the ETS is at DEFCON 2. It appears this bear market has some legs.

Vertical Spreads Currently Cooking

(As of 09/30/2022)

ITM SPY:380pp/360p/X1 – Open 08/25/2022 – Expires 10/07/22 – Max Gain = $145.00 – Open Price = 416.80
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 84.1%, Headroom= -8.8%, Max Loss= $1,855, AROR=65.9%
Now: Prob. OTM= 19.9%p, Headroom= 4.6%

Vertical Spreads Closed This Month

(As of 09/30/2022)

ITM QQQ:280pp/260p/X1 – Open 08/25/2022 – Expires 09/30/22 – Max Gain = $128.00 – Open Price = 316.05
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 86.0%, Headroom= -11.5%, Max Loss= $1,872, AROR=68.8%
At Close: Prob. OTM=8.7%, Headroom= 3.4%

Income to open: $1.28 premium collected * 100 shares * 1 contracts = $128.00
Cost to close: $9.00 premium paid * 100 shares * 1 contracts = $900.00 (closed closed worthlessly)
Net Profit = $128.00 to open – $900.00 to close – $2.00 fees = -$774.00
AROR = (-$774.00 / 49 days in play) * 365 / $1,872= -307.8%

Bull Trap! Looking back, the rules for opening these two position suggested that I should not have played my hand that week at all. The 7 & 14-day trajectories were bearish, and the then value of the ETFs were already well below the 9-Day SMA. These two Spreads are the primary reason I wrote this month’s post.

QQQ, over the last 45 days, fell 18.4%.

ITM SPY:375pp/355p/X1 – Open 08/11/2022 – Expires 09/30/22 – Max Gain = $115.00 – Open Price = 421.37
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 86.8%, Headroom= 11.0%, Max Loss= $1,885, AROR=44.1%
At Close: Prob. OTM= 5.0%, Headroom= 3.3%

Income to open: $1.15 premium collected * 100 shares * 1 contracts = $115.00
Cost to close: $12.00 premium paid * 100 shares * 1 contracts = -$1,200.00 (closed closed worthlessly)
Net Profit = $115.00 to open – $1,200.00 to close – $2.00 fees = -$1,087.00
AROR = (-$1,087.00 / 35 days in play) * 365 / $1,885= -601.5%

SPY, over the last 17 days, fell 11.8%.

QQQ:280p/270p/X2 – Open 08/3/2022 – Expires 09/16/22 – Max Gain = $174.00 – Open Price = 318.18
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 84.8%, Headroom= 11.9%, Max Loss= $1,826, AROR=78.1%
At Close: Prob. OTM= 99.9%, Headroom= -2.4%

Income to open: $0.87 premium collected * 100 shares * 1 contracts = $87.00
Cost to close: $0.00 premium paid * 100 shares * 1 contracts = $0.00 (closed closed worthlessly)
Net Profit = $87.00 to open – $0.00 to close – $2.00 fees = $85.00
AROR = ($85.00 / 44 days in play) * 365 / $1,826= 78.1%

SPY:425c/435c/330p/320p/X1 – Open 07/26/2022 – Expires 09/16/22 – Max Gain = $148.00 – Open Price = 391.36
(Iron Condor)
At Open: Prob. OTM= 88.1%c/91.2%p, Headroom= +8.7%c/-15.6%p, Max Loss= $852, AROR= 120.3%
At Close: Prob. OTM= 99.9%c/99.9%p, Headroom= +10.8%c/-14.0%p

Income to open: $1.48 premium collected * 100 shares * 1 contracts = $148.00
Cost to close: $0.00 premium paid * 100 shares * 1 contracts = $0.00 (closed closed worthlessly)
Net Profit = $148.00 to open – $0.00 to close – $2.00 fees = $146.00
AROR = ($146.00 / 52 days in play) *365 / $852= 120.3%

QQQ:340c/350c/270p/260p/X1 – Open 07/28/2022 – Expires 09/09/22 – Max Gain = $150.00 – Open Price = 307.57
(Iron Condor)
At Open: Prob. OTM= 90.0%c/86.1%p, Headroom= +10.5%c/-12.3%p, Max Loss= $850, AROR= 147.8%
At Close: Prob. OTM= xx.x%c/xx.x%p, Headroom= +x.x%c/-x.x%p

Income to open: $1.50 premium collected * 100 shares * 1 contracts = $150.00
Cost to close: $0.00 premium paid * 100 shares * 1 contracts = $0.00 (closed closed worthlessly)
Net Profit = $150.00 to open – $0.00 to close – $2.00 fees = $148.00
AROR = ($148.00 / 43 days in play) * 365 / $850= 147.9%

QQQ:340c/350c/260p/250p/X1 – Open 07/22/2022 – Expires 09/02/22 – Max Gain = $124.00 – Open Price = 306.92
(Iron Condor)
At Open: Prob. OTM= 90.3%c/90.0%p, Headroom= +10.8%c/-15.2%p, Max Loss= $876, AROR= 121.0%
At Close: Prob. OTM= 99.9%c/99.9%p, Headroom= +x.x%c/-x.x%p

Income to open: $1.24 premium collected * 100 shares * 1 contracts = $124.00
Cost to close: $0.00 premium paid * 100 shares * 1 contracts = $0.00 (closed closed worthlessly)
Net Profit = $124.00 to open – $0.00 to close – $2.00 fees = $122.00
AROR = ($122.00 / 42 days in play) * 365 / $876 = 121.0%

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 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. I will record my weekly Option Contracts 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 is 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.”