My CND compels me to measure my Options income to gauge whether I’m making money or wasting my time. After a year of ill-reporting my P&L, I made one minor D’oh correction. I’m now relieved to see that my Vertical Bull Put Credit Spreads ARE outperforming the S&P 500.

A Change in my P&L Report

What a difference a little change makes.

In a Homer Simpson moment, it occurred to me that when I was measuring my Vertical Bull Put Credit Spread’s performance by comparing it to the S&P 500, I was comparing apples to oranges. I made one minor change to my Profit and Loss Statement, and Woo-Hoo – I feel much better about my project.

I am not a professional trader and have no special knowledge in the field. And like almost everyone in the Optionsverse, I am just trying to feel my way through.

But my CND (Compulsive Nerdy Disorder) requires me to measure my Options Spread income to gauge whether I’m making money or wasting my time. So, about a year ago, I started comparing my Options Spreads Trading Account performance to a hypothetical investment in the S&P 500. I was pitting my total allocated dollars for Spreads, $20,000, to the same dollar investment in SPY. Despite doing my best in Vertical Spread management, my cumulated results were less than stellar.

My D’Oh! Moment

For 2023, I invested $20,000 in my Options trading account for selling Vertical Bull Put Credit Spreads for income. But not all my invested dollars are at risk at all times. Therefore, my Return on Investment (ROI) will differ from my Return on Risk (ROR).

But when comparing my performance with the S&P 500, all my hypothetical $20,000 investments in SPY are hypothetically at risk. Thus, the ROI and ROR for this conjectural investment are the same

My D’Oh revelation is that I’ve been analogizing my trading account’s ROI with my imaginary SPY’s ROR.

This month’s task is to calculate the average ROR from all my past and present Vertical Spread positions and then juxtapose that with SPY.

Comparing my total cash allocated for Monthlys Spreads – to a year-long investment in an ETF was like comparing apples to bowling balls. So, this year I made three significant changes:

1 – Entry Strategy Changes

After I made these two changes this year, I saw a marketable improvement in my recorded performance:

Change Monthlys to Yearlys:

Volatility in a Monthly Vertical Bull Put Credit Spread is enormous compared to a year-long investment in a bull-bias ETF. A short-term knee-jerk reaction by the Marketeers can cost me unretrievable thousands when trading Monthlys. But those knee-jerk reactions can be quickly recovered in a buy/hold investment.

So, earlier this year, I changed my Spread strategy from Monthlys to Yearlys (see: “ASKING THE BING AI – 1 MONTH VS. 1 YEAR VERTICAL BULL PUT CREDIT SPREADS“.

Focus on AROR:

• Opening Minimum:
  The 10-year growth average of the S&P 500 is 16%. Therefore, I will only enter a new Yearly Vertical Bull Put Credit Spread with an AROR greater than 16% (amongst other criteria).
• Greed Limit:
  I created a Greed Limit of 22%. Any AROR above this limit is considered greedy and an unnecessary risk.

2 – Exit Strategy Changes

In my last post, “EXIT RULES – YEARLYS VERTICAL BULL PUT CREDIT SPREADS,” I lowered the bar for what I would consider a winning/exitable Vertical Spread. I also improved my Vertical Spread Watch List, which will help flag me when it’s time to exit.

Like my change in my Entry Rules (above), my new exit rules are designed to focus on AROR and help me combat greed.

3 – Reporting Changes

Calculate Average AROR

I need to modify my log sheet to add two new columns:

AH: Days opened (Calculate and record the number of days this position was (will be) opened.
AH: =IF(W75=””,S75,W75)-R75

AJ: Risk (Calculate and record the total dollar risk for this position)
AJ: =IF(AI75<>”Spread”,””,IF(P75=”Credit”,Q75*100*T75-X75,ABS(U75)*100*T75))

AK: AROR (Calculate and record the AROR for this position)
AK: =IF(AJ75=””,””,IF(AF75=””,AE75,AF75)/AH75*365/AJ75)

Finally, I need to calculate the average AROR for all positions:

AK28: =AVERAGE(AK39:AK144) (for the entire list)

AK28 is what I believe to be my factual performance for my Vertical Spread efforts.

(Note: A copy of my Excel Log sheet can be downloaded for review. See my post “CUSTOM OPTIONS WATCHLIST USING THINKORSWIM IN EXCEL – PT 1“)

Compare P&L Changes

A thousand dollars invested and at risk will have a different performance curve than risking only one hundred dollars out of a thousand invested. So even though I have $20,000 allocated for Vertical Credit Spreads, I only have a fraction of that at-risk. Yet, I was comparing that to $20,000 at risk invested in SPY. – D’Oh!

Compare at-risk dollars:

As of this month, I am now comparing my at-risk dollars selling Yearlys to an equal amount in a SPY investment.

The “Now” table above shows a 40.7% ROR compared to only the measly 6.0% ROI via how I have been reporting.  Now I need to see if this holds out for the year.

(Note: for comparison, I will continue to record the ROI for my initial investments. I do this because I want to track my actual dollars earned vis-a-vis both investment strategies.)

I Never invest in anything
that you don’t understand.

Homer Simpson

Other Posts from Options Trades By Damocles

This Month’s Market Sentiment

This Market Sentiment Section is typically completed the first week of the month. By the time this journal is published, it will be mostly old news.

(As of July 2023)

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

• War over Taiwan – Yikes
• Another Crypto crisis – Yikes

• Trump indicted, yet again – Yawn
• 2024 Presidential election – Yawn
• Russian Revolution – Yawn

• Feds to pause Interest Rate hiking – Yay
• AI – Yay
• Market Fear lowest in 3.5 years – Yay

Geopolitical

• Is the US ready to fight two proxy wars? China seems to be testing the war waters with Taiwan and, by extension, the US. High alerts and scrambling jets are happening more often in Taiwan. There is a substantial increase in direct provocations with the US in the Taiwan Straits, with China playing chicken with US Navy destroyers and Airforce jets. The US and China have a long history of military cooperation, but recent incidents have strained relations. The US is China’s largest trading partner, and China is the second largest holder of US debt. A collapse of US/China cooperation will send the global markets into a tailspin. Now is NOT a good time for high-risk, short-term investments.

• Trump was indicted in the US District Court in Miami over the mishandling of classified documents. I have no divine knowledge to know if this is a political abuse by the Justice Department or the noble application of justice. But coming off the 2016 Russia Collusion disaster, I cannot blame Trump for being cynical of the Justice Department. I may have to wait for the historians to know for sure.
  
  But Trump’s venomous public excoriation of the US justice system is not very MAGA-like. If he convinces a significant percentage of American citizens that we cannot depend on US justice or our election system, then expect an escalation of “personal justice.”
  
  (Personal note. I agree with every presidential policy Trump enacted, and I like the judges he installed. But Trump’s bombastic personality is dividing the nation. If he genuinely wants to make America great again, he would take his legal conflict behind closed doors and work on reforming the Justice Department. I currently suffer from Trump fatigue and would not mind seeing him bow out of the 2024 race. Other candidates can carry his torch.)

• The 2024 Presidential election cycle has started, and this month’s expiration dates (June ’24) are starting to butt up against the final stretch. I don’t expect any campaigning negativity to have an effect on any Spreads I entered this month.

• The fledgling AI technology will have a positive, long-term effect on all sectors as new developments and investments are required to reboot fundamental business processes.

• The ostensible coup attempt in Russia by a pissed-off Yevgeny Prigozhin, the Dr. Evil of the Wagner mercenary group, perked the ears of every military, politician, and marketeer around the world. But Russia is no stranger to coups. And in the modern world, coups are rarely deleterious to regional or global economic systems. In 2014, Thailand had a military coup and the world barely blinked. It would be just deserts for Putin to fall in a coup, but I won’t moderate my Vertical Spread portfolio.

Socioeconomics 

• May’s inflation report showed a smaller-than-expected year-over-year growth of 4%. And as inflation wanes, the Marketeers are signaling a strong belief that the Feds will pause interest rate hikes this month. But the Feds have assured us that the hikes are not over. I believe that we have seen the bottom of the bear market, but critical staple products are still brutally high. On the Inflation Front, I see long-term Vertical Spreads succeeding.

• The market’s fear index (VIX) touched 12.91, the lowest since pre-COVID 12/6/19.

This Week’s Guidance

For the long-term (one year out): Over the balance of this year, I don’t expect any kind of 2022-like inflation/interest rates crisis. There is still a lot of growth potential as the Marketeers continue to transition back into the small-caps markets. A June ’24 expiration is too early to have an election effect.

For the short-term (June ’23): The phenomenal market run-up over the last 6 weeks is proving too good to continue, as Marketeers have started to take their well-earned profits. I’ll expect a well-earned pullback this month, so I may want to wait until late to enter new Spreads.

As long as I follow my Entry Rules and Exit Rules, I’m confident that any new Vertical Bull Put Credit Spread I open this month should be successful.

Profit and Loss Statements

(As of 06/30/23)

My Performance vs. SPY

Hypothetically, instead of depositing $20,000 in my Options Trading Account, could I have done better if I bought $20,000 of the ETF/SPY instead?

¹ Calculated separately by averaging each position’s individual ROR.

This Month’s Trade Activity

(As of 06/30/2023)

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

(05/29/2023 – 06/30/2023)

The first three of these new Vertical Bull But Credit Spreads are considered replacements for the three Spreads I this month.

QQQ:305p/300p/X4 – Open 06/27/23 – Expires 06/21/24 – Max Gain = $296.00 – Open Price = 363.60
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 76.7%, Headroom= -16.1%, Max Loss= $1,704, AROR= 17.4%
Currently: Prob. OTM= 78.5%, Headroom= -17.3%, Max Loss= $1,664, AROR= 85.7%

I delayed opening this position as QQQ spent most of the month pulling back from the monstrous gains last month. I sense that the pullback has bottomed, but I’m not sure. So I raised the threshold for my Entry Rules to be more conservative.

IWM:165p/155p/X2 – Open 06/16/23 – Expires 05/17/24 – Max Gain = $326.00 – Open Price = 186.96
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 71.8%, Headroom= -11.7%, Max Loss= $1,674, AROR= 21.0%
Currently: Prob. OTM= 73.5%, Headroom= -12.0%, Max Loss= $1,674, AROR= 43.6%

I’m billing this a the replacement position for SPY:365p/345p/X1 – Open 04/04/23 – Expires 03/15/24 – Closed 6/14/23.

The 50-Day SMA is quickly gaining on the 200-Day.

I went with this because:

1. Inflation has slowed, making the prospects for future interest rate hikes less scary.
2. We have officially entered a Bull Market, and small Caps should fair well.
3. I don’t have any other IWM, so I’m thinking of a little diversification.

QQQ:300p/290p/X2 – Open 06/08/23 – Expires 03/28/24 – Max Gain = $292.00 – Open Price = 355.66
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 77.4%, Headroom= -15.7%, Max Loss= $1,734, AROR= 19.0%
Currently: Prob. OTM= 82.6%, Headroom= -18.8%, Max Loss= $1,734, AROR= 69.2%

This is a replacement position for the QQQ:270p/260pX2 I closed yesterday.

On the last day of July (7/30), this position exceeded my Exit Rules and flashed a “SELL” flag in my Watch List. It is now > 50% max gain and is more than 200% for the opening AROR. If this holds into next week, I will close it to lock profit, then open a replacement.

Vertical Spreads Currently Cooking

(As of 06/30/2023)

SPY:365p/355p/X2 – Open 05/19/23 – Expires 03/28/24 – Max Gain = $284.00 – Open Price = 419.11
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 74.7%, Headroom= -12.9%, Max Loss= $1,716, AROR= 19.1%
Currently: Prob. OTM= 84.7%, Headroom= -17.5%, Max Loss= $1,716, AROR= 75.5%

Note:

Vertical Spreads Closed This Month

(As of 06/30/2023)

QQQ:270p/260p/X2 – Open 05/09/23 – Expires 03/28/24 – Closed 06/14/23 – Max Gain = $322.00 – Open Price = 321.36
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 73.9%, Headroom= -16.0%, Max Loss= $1,678, AROR= 21.5%
At Close: Prob. OTM= 87.0%, Headroom= -26.0%, Max Loss= $1,655, AROR= 106.3%

Income at open: $1.61 premium collected * 100 shares * 2 contracts = $322.00
Cost to close: 0.71 premium paid * 100 shares * 2 contracts = $142.00 (closed after 36 days)
Net Profit = $322.00 to open – $142.00 to close – $4.00 fees = $176.00
AROR = ($176.00 / 36 days in play) * 365 / $1,678 = 106.3%

SPY:365p/345p/X1 – Open 04/04/23 – Expires 03/15/24 – Closed 6/14/23 – Max Gain = $345.00 – Open Price = 411.13
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 70.2%, Headroom= -11.2%, Max Loss= $1,655, AROR= 21.9%
At Close: Prob. OTM= 82.5%, Headroom= -16.5%, Max Loss= $1,655, AROR= 56.1%

Income at open: $3.45 premium collected * 100 shares * 1 contracts = $345.00
Cost to close: $1.62 premium paid * 100 shares * 1 contracts = $162.00 (closed after 71 days)
Net Profit = $345.00 to open – $162.00 to close – $4.00 fees = $179.00
AROR = ($179.00 / 71 days in play) * 365 / $1,655 = 55.6%

QQQ:255p/245p/X2 – Open 03/23/23 – Expires 03/15/24 – Closed 06/08/23 – Max Gain = $332.00 – Open Price = 311,39
(Vertical Bear Call Credit Spread)
At Open: Prob. OTM= 73.9%, Headroom= -18.3%, Max Loss= $1,668, AROR= 20.2%
At Close: Prob. OTM= 87.8%, Headroom= -27.5%, Max Loss= $1,668, AROR= 56.3%

Income at open: $1.66 premium collected * 100 shares * 2 contracts = $332.00
Cost to close: $0.65 premium paid * 100 shares * 2 contracts = $130.00 (closed after 77 days)
Net Profit = $332.00 to open – $130.00 to close – $4.00 fees = $198.00
AROR = ($198.00 / 77 days in play) * 365 / $1,668= 56.3%

Note: the ROI on this transaction was 56.3% on the $1,668 risk. This more than triples the S&P 500 average.

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.

My Options Trading activities include cover calls, cash-secure puts, Vertical Spreads, and other options strategies. Cover calls and cash puts assume that I already have a sizable portfolio and accumulated cash to generate a meaningful income. But short-term Vertical Spreads do not require a substantial cash investment to make some fun money. – This blog’s sole focus is short-term Vertical Spreads.

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 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.”