Economically, we are a Socialistically Regulated Capitalistic Economy – and we have been since the 1800s. The 14th Amendment, passed in 1868, set the stage for using Federal Regulations to implement Socialistic reforms. And, every two years, the legal citizens of this country can trim how far the social-economic pendulum swings. This November, I expect the pendulum to swing red.

Hunt for Red November

The 2022 mid-term election is just a week away, and I am expecting a Red Wave. I will be glad to see the crazy Progressive Experiment reined in. The McCarthyismistic tactics of the past two years have done more damage to the unity of our country than any social-economic crusade of the past 50. Their haphazard approach to throwing a motley of social reforms against the Constitution to see what sticks, then viciously defaming everyone who disagrees, was painful.

We are not the dangerously divided nation that the click-crazy media and narcissistic politicians want us to believe. All (but the most extreme) of us want our country to be safe, prosperous, and fair for everyone. When we drill down through the issues, we agree nearly 90% of the time on the most important social and economic precepts. And that leftover 10% is why we have a democratically elected form of government.

Socialistically Regulated Capitalistic Economy

Economically, we are a Socialistically Regulated Capitalistic Economy – and we have been since the 1800s. The 14th Amendment, passed in 1868, set the stage for Federal Regulations to hegemonize States Laws. From then, a long list of regulations was passed that required social-centric behavior for all businesses in the U.S. For example, The Fair Labor Standards Act that passed in 1938 established a federal minimum wage; in 1940, the 40-hour work week became a U.S. Law; and the Occupational Safety and Health Act of 1970 created OSHA setting healthful workplace standards.

These and a long list of other Federal Regulations are all Socialistic, yet it was done without requiring Political Officers assigned to corporate leadership (central planners determining output, corporate policies, and pricing levels). Instead, we require businesses to self-monitor, subject to inspections and heavy fines for non-compliance.

Socialism, as defined at the beginning of the Industrial Revolution by Friedrich Engels’ book, “The Condition of the Working Class in <1845> England”, advocated a Communistic form of government to achieve. And while almost every socialist’s demand was slowly achieved in the US, it was done so without encroaching on our liberties. But with the U.S. just recently exiting the Cold War, where we spent 45 years vehemently vilifying Communism and, by extension, Socialism, the word Socialism still carries a stigma of conflicts past.

The U.S. implementation of a Socialistically Regulated Capitalistic Economy has worked very well for us over the past 150 years. And our process of regulating the balance between the two has also morphed well. Every two years, the legal citizens of this country can trim how far the social-economic pendulum swings – the swing between the Republicans championing economic growth with Democrats’ advocacy for social prosperity. Both must be successful, but a free market system and personal liberty must be predominant.

Stormy Spreads Ahead

This month’s Trading Journal – lacks trades! It also lacks anything Options relevant in my commentary. But it does set my Market Sentiment for the coming weeks.

I have closed all Spreads in my inventory in preparation to weather the stormy economy ahead (better late than never). With the inevitable changes in economic policies coming with the red wave over Congress next month, volatility is going to remain very high, and market directions will stay unpredictable. So, I decided to ride out the stormy spreads season until we can fix our broken Federal economic policies.

I will not enter into new Spreads until the markets reestablish a stable Bull trajectory: VIX < 20%, S&P 500’s Put/Call Ratio steadily below 0.75, and the 50-Day SMA is above the 200-Day SMA (120/60-day trajectories are bullish).

Until then, I need to keep the focus on the prospect of a changing economic environment.

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 10/28/2022)

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

• Russia annexed eastern Ukraine – Yikes
• Misery Index = 11.8% – Yikes
• Threats for a Nuclear showdown rising – Yikes
• PPI was up 0.4% in September – Yikes
• CPI rises to 8.2% (+0.4% in Sept) – Yikes
• Unemployment falls in Sept – Yikes (surprisingly)
• Xi enters his third term – Yikes
• Recession deepens – Yikes
• Biden’s mental health – Yikes
• GDP jumps to 2.6% – Yikes (surprisingly)
• Hopes for a Fed pivot fades – Yikes

• Johnson-Truss-Sunak – Yay-Yikes-Yawn

• China easing COVID restrictions – Yay
• Mid-term election soon to be history – Yay

Geopolitical

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.

• Dabbing a little lemon in the geopolitical wounds, Biden insinuated that we are closer to a nuclear exchange with Russia than we have been since the Cuban Missile Crisis (1963). Using adjectives like “Armageddon” and “brink” crushes any market certainties.
• UK Prime Minister Liz Truss’ budget debacle cost set the markets aflame and cost her her job. Even though the new Minister of Finance was promptly replaced and policies reversed, there still remains fragile support for London’s ability to navigate through the coming stormy economic weather.
• Chinese stocks are taking a hit with the reelection of Xi Jinping’s third term as China’s “President” and the reconstruction of the Central Committees with Xi loyalists. Market uncertainty will be exacerbated by increased censorship, territorial aggression, and governmental isolation. Continuing regulations on technology companies will make most of China’s economy “uninvestable.
• The Mid-Term elections will be over within days – Yay! And the likelihood that the progressive experiment will have fallen flat, as both chambers look to swing toward reasonability.- double Yay! I look forward to not hearing about how the US will no longer be a democracy, how election deniers are demented (except for Stacy Abrams), how republicans will blow up the economy, how the Supreme Court is illegitimate, how unamerican the Senate filibuster is, how our inflation was caused by the GOP, how I am racist, nativists, a denier of everything (climate, elections, justice, democracy, etc.). DUDES – GIVE IT A REST!

Socioeconomics 

• August’s Jobs Report showed a greater-than-expected decrease if current jobs openings nationwide. The Labor Department stated that there were 10.1 million job openings in August, down from 11.17 in July. But this is still above the 7.7 million pre-pandemic. This may help send a message to the Feds that the labor market is tightening (which is good for combating inflation).
• The Reserve Bank of Australia made a surprising interest rate hike of only 0.25%. This was the first of the Central Banks to move away from the jumbo-sized 0.75% jump. By doing this, the RBS created a hopeful expectation the US Feds would follow suit.
• The Producer Price Index (PPI) and Consumer Price Index (SPI) continued to rise in September more than expected. The PPI is now 8.5%, and the CPI is up to 8.2% (both an unexpected increase of 0.4% from August’s level). This pretty much cements another 0.75% interest rate increase (if not a full 1.0%) this month.
• Third Quarter GDP jumped 2.5%, which is its first positive growth for 2022. This is great news for the US economy but horrid for the Federal reserve’s inflation tactics. With this great news, expect the Feds to continue jumbo rate hikes for next month.

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 above 30% signals that any trajectory I can see may not have any staying power. Most Marketeers are shoring up their investments with protective Puts. False bottoms and Bull Traps seem likely.

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)

October’s 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 toward 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 another 0.4% in Sept. Now up to 8.2% from a year ago ¹.
• Unemployment Rate: Sept rate = 3.5%, down from 3.7% in Aug.
• Misery Index = 11.7% (8.2% + 3.5%), down from 12.0% last month.
  • (Note: Ideally, the Misery Index should be well below 10% for a growing economy.)

¹ A year ago (Sept 2021), inflation was already sky-high at 5.4%. So being at 8.2% 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) = 3,780 – down 10.6% from 4,228 last month.
Russell 2000 (RUT) = 1,740 – down 11.1% from 1,957 last month.

Market Performance

• Both indexes tumbled +10% in the last month
• Short and medium-term trajectories are decisively bearish
• Short Term bearish with the 9-Day SMA below the 50-Day
• Long Term bearish with the 50-Day SMA below the 200-Day

The 4-month Trend Channel has flattened slightly but is still decisively bearish,

The RUT 4-month Trend Channel remains bearish as Marketeers are definitely pulling out of the higher-risk small caps stocks.

The 200 and 50-Day SMA for both indexes continue bearish. Even though the 9-Day SMA has risen over the past two weeks, it is not enough to change my sentiment. 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

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 the 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 expire 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 10/28/2022)

Note: I’m no longer posting a “Cash Balance Sheet” or the “Cash flow Chart.” In reality – it has no value. 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: (10/24/2022 – 10/28/2022) (Week #43)

• 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: Dec 16, 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 Month’s Trade Activity

(As of 10/28/2022)

Volatility was too high, and the ETSs were too intense to feel comfortable if the markets could sustain any one direction for the length of time. I should have come to this position back in March.

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

(10/03/2022 – 10/28/2022)

The market’s predictability is pretty much shot for the rest of the trading year, so I will not enter any trades until the Feds can fix our broken economy.

I am leaving the last trade snippet recorded below to be a template for when I open my next Spread.

QQQ:300c/320c/X1 – Open 10/07/2022 – Expires 10/28/22 – Max Gain = $95.00 – Open Price = 273.23
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 90.2%, Headroom= 9.8%, Max Loss= $1,907, AROR=82.9%

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

Vertical Spreads Currently Cooking

(As of 10/28/2022)

With all the market turmoil, I held back from entering any new spreads this past month.

Vertical Spreads Closed This Month

(As of 10/28/2022)

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%
At Close: Prob. OTM=94.9%, Headroom= 12.3%

Income to open: $1.02 premium collected * 100 shares * 1 contracts = $102.00
Cost to close: $0.00 premium paid * 100 shares * 1 contracts = $0.00 (closed worthlessly)
Net Profit = $102.00 to open – $0.00 to close – $1.00 fees = $101.00
AROR = ($101.00 / 24 days in play) * 365 / $1,898 = 80.9%

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%
At Close: Prob. OTM=98.8%, Headroom= 11.6%

Income to open: $0.80 premium collected * 100 shares * 1 contracts = $80.00
Cost to close: $0.00 premium paid * 100 shares * 1 contracts = $0.00 (closed worthlessly)
Net Profit = $80.00 to open – $0.00 to close – $1.00 fees = $79.00
AROR = ($79.00 / 22 days in play) * 365 / $1,920 = 68.3%

I entered this Spread because it passed all the entry rules and conformed to the Kenny Rogers strategy. The premiums are lower than usual, but I think this is where my mind needs to be.

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%
At Close: Prob. OTM=19.2%, Headroom= 1.8%

Income to open: $1.45 premium collected * 100 shares * 1 contracts = $145.00
Cost to close: $12.88 premium paid * 100 shares * 1 contracts = $1,288.00 (closed early)
Net Profit = $145.00 to open – $1,288.00 to close – $2.00 fees = -$1,143.00
AROR = (-$1,143.00 / 43 days in play) * 365 / $1,855 = -523.0%

Bull Trap! Looking back, I ignored four rules when opening this position. The 7 & 14-day trajectories were bearish, and the value of the ETFs was already well below the 9-Day SMA. I did not follow my rules on IV% and others. I was more interested in opening a new spread at what I thought was the bottom. This Spread was the primary reason why I wrote last month’s post – Selling Vertical Spreads – The Kenny Rogers Strategy

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.”