With the US deficit approaching $2 trillion this year, inflation at a gut-buster 17.5% above 2020’s consumer prices, interest rates at a stifling 5.25%, expanding military involvement in the Middle East, Europe, and Asia, a dangerously polarized population, a politically dysfunctional Congress, and the uncertainty of another scorching election-year rematch between Biden and Trump. Why bother selling Vertical Bull Put Credit Spreads?

Why Bother Selling Vertical Bull Put Credit Spreads?

In this month’s journal, I want to take a sobering look at the wisdom of opening new Vertical Spreads within the next few months.

COMMENTARY CONTENTS

• The Inevitable Market Shock
• Leaching High-Interest Rate
• Shades of Soviets
• Choak Hold on the US Economy
• Election 2024

• Last month’s, the dubious shutdown of the Federal Government was adverted in the eleventh hour. This ended a 30-day, hold-your-breath decline in the S&P 500 by nearly 5%. And the CR that was passed merely kicked this can 45 days down the road (Nov. 17) when we do this again.

• The intended decline in the interest-infected US economy is also kicking in as we hit the pinnacle of high interest plus high inflation. Corporate guidance for the next quarter and beyond will be revised downward.

• Is President Biden prepping the nation for war? We need to be prepared for expanded US military involvement from the Mediterranean to the Taiwan Straits.

• The 2024 Presidential election is promised to be another round of America bashing.

The clock is ticking for the next round of stock sell-offs.

The Inevitable Market Shock

Kevin McCarthy is out, and so is my expectation of a Federal budget deal before the end of this year. The razor-thin GOP majority in the House is so divided and so revolutionized that it is likely that just two or three Representatives will scuttle any deal. And if the budget deal is not partisan enough, could a few members jettison the new Speaker and look for another (The Matt Gaetz maneuver)?

I hold no delusions that 12 Appropriation Budges will be agreed upon and passed by the next government shutdown deadline (Nov. 17). The 2024 elections have started in full swing and each side is going to grandstand to make their case for economic/social nirvana. The budget uncertainty is going to keep the Marketeers depressed.

Leaching High-Interest Rate

Higher for longer –

Although the Feds may celebrate taming inflation, the early 2022 predictions of a painful recession now seem inevitable. The new mantra expected from Fed Chairman Jerome Powell’s mid-month policy speech is “Higher – Longer.”

It took 18 painful months of rising interest rates to roil through the economy fully (Jan 2022 to mid this year). The S&P 500 lost nearly 25% within the first nine months, ending 2022 over 18% in the hole.

When the Feds feel that the uncontrollable rise in inflation has been vaguely checked, they will start leaching, er, start an incremental reduction of interest rates, as they do not want to choke the corporate goose that lays the taxable golden eggs. I expect the trickle-down in interest rates will also take 12 to 18 months. (see: How To Make Loss Resistant Vertical Spreads – Market Force)

Shades of Soviets

Taking a page from the Ronald Reagan’s playbook, does the new Axis of Evil (Iran, China, and Russia) plan to bankrupt the US by forcing us to overextend our military expenditures to the deficit of the US economy? Ukraine, Israel, and (soon) Taiwan are consuming America’s money, time and attention. Being the policeman of the world at a time when our own house is in disarray is asking for danger.

The Soviet Union’s collapse was due to a combination of factors that we now seem to be following: economic instability (we’re there), political chaos (yep), chasing technological advancements (check), a population on the verge of revolution (uh-oh), and overextending military resources (big time). It kind of makes you think about who is actually inciting all these militaristic attitudes – racism, inclusion, reparations, and political vigilantism. And why do Social Media Editors prioritize puppets propagating discontent?

Choak Hold on the US Economy

With the US deficit approaching $2 trillion this year, inflation at a gut-buster 17.5% above 2020’s consumer prices, interest rates at a stifling 5.25%,  expanded military involvement in the Middle East, Europe, and Asia, a dangerously polarized population, a politically dysfunctional Congress, and the uncertainty of another scorching election-year rematch between Biden and Trump – the Biden administration has asked Congress to approve another $106 billion in supplemental military funding – on top of the already approved $100 billion.

Election 2024

Like all Presidential elections since George Washington, reported travesties, atrocities, and hypocrisies will be inflicted on the American public for a year. The political activists who steer our national conversations are just giddy about the prospects of sharpening their pens and scaring the crap out of all of us. There will be deliberate attempts to manipulate investor sentiment to either pump or dump our economy. Either way, Marketeers hates uncertainty, and I expected it to affect my Vertical Bull Put Credit Spreads over the next couple of months.

Be prepared for a couple of Mad Monkey Months.

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 Oct 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

• No McCarthy = No Budget Deal – Yikes
• Israel at war – Yikes
• Jobs, Jobs, Jobs – Yikes
• 2024 Election – Yikes
• Teeing up the Recession – Yikes
• Correction? – Yikes

• – Yawn

• Jobs, Jobs, Jobs – Yay
• 3rd Quarter GDP = 5.9% – Yay

Geopolitical

• With Kevin McCarthy booted from his high position as Speaker of the House, the chances of passing a budget deal through a recalcitrant and rebellious Republican coalition by November 17, 2023, seems implausible.
  • As of October 6, 2024, none of the 12 Appropriations Bills required to fund the government for the fiscal year (starting on October 1) have been passed by Congress.
  • The Senate Appropriations Committee has passed all 12 appropriations bills out of committee. Still, none of them have been passed by the full Senate. The House Appropriations Committee has passed 10 of the 12 appropriations bills, but the full House has only passed 4.
  • It seems inevitable that Congress won’t pass a full-year budget for the fiscal year 2024 before November 17. If they do not, another CR will be needed, and the Marketeers ain’t gonna like that. So far, it doesn’t look good for selling new Vertical Bull Put Credit Spreads this month.

• Israel has declared war on Hamas (for the first time since 1978) after a deadly Hamas incursion in southern Israel. Add to that are battles in northern Israel with Lebanon’s Hezbollah. This has all the earmarks of a broader escalation in the coming weeks. The question now is, will Israel launch a ground assault into Gaza (I’m betting so)? This will undoubtedly spike oil prices and market uncertainties.

• Political activists controlling our media are just giddy about the prospects of scaring the crap out of all America. The upcoming 2024 election will undoubtedly be all about the total collapse of democracy in America or the transition to an anarchist government. This will be purported to be the most significant election in the history of all mankind – just like every election in every community since Washington (Yawn). Freedom of speech is fundamental, but truth in reporting is nonexistent. Nevertheless, many of us Marketeers will be cajoled to unload some of our portfolios, which will keep feeding the bears.

Socioeconomics 

• The U.S. added more than 2.3 million jobs this year, keeping the unemployment rate below 4%. All this sounds like good news. But lots of people working (Yay), making lots of money (Yay), are buying more stuff (Yay) on top of historical inflation. This will only extend inflation (Yikes), prodding the Feds to keep raising interest rates (Yikes). There’s a tipping point somewhere here, and a painful recession seems more inevitable.

• It’s hard to have a recession if the economy is on fire. Even with higher interest rates and ongoing inflation pressures, we seem to be enjoying the tailwinds of a burgeoning economy. Third quarter GDP at 4.9% is bigtime better than the 2.1% in the second. Rising an unexpected 3% from the quarter before is remarkable – and head-scratching. With all the geopolitical pressures we have for the next year, I can’t imagine us maintaining this level of production. So I’ll expect the following two quarters to be a downward trend triggering a debilitating recession by this time next year.

• As of this writing, the S&P 500 has fallen from its 52-week of 4,588.96 on 7/31/23 to 4,142.02 as of now (10/26). That’s a 446.94 (9.739%) decline, only a sneeze away from a bonified “Correction.”

Ecopolitical Influencers: Cautious DEFCON = 3

This Month’s Guidance

For the long-term (one year out): An ominous next few months will put scary pressure on my Vertical Bull Put Credit Spread inventory. I should wait to enter new Spreads until next month.

A Sept ’24 expiration will carry the election effect.

For the short-term (Nov ’23): Oct was not very nice to my Vertical Bull Put Credit Spread inventory. The S&P 500 started the month at 4,514, which crept cautiously down as speculation of an interest rate hike was debated. But then took a nose dive the third week by 3% as the public speculation of a government shutdown ramped up.

I fully expect that the government will not shut down in Nov, but just passing a CR will keep the negativity.

I’m not confident that any new Vertical Bull Put Credit Spread I open this month should succeed.

Profit and Loss Statements

(As of 10/27/23)

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 ARORs (M2M AROR for all open assets + actual AROR for all closed positions).
² Unrealized Profit or Loss (M2M value of all open assets + actual dollars received)
³ Actual dollars received.

This Month’s Trade Activity

(As of 10/27/2023)

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

(10/02/2023 – 10/27/2023)

I restrained myself from opening any new Spreads this month due to the Marketeer’s concerns over the current geopolitical issues. I can always double up on positions in the future when the markets appear to have bottomed out.

Vertical Spreads Currently Cooking

(As of 10/27/2023)

Note: hysteria over a shutdown happens multiple times every year. Highly partisan politicians go on national interviews stating Armageddon if they don’t get their minuscule way, and the Chicken Little media loves exacerbating the historic catastrophe upon us. Nevertheless, the geopolitical events that are boiling over (as of this post) have tanked my open Spreads. I’m not worried about it (he said shakily), but it makes my Mark to Market numbers sucky.

Note: Because it comprises small-cap funds, the Russell 2000 is a reasonable indicator of coming booms or busts. I use it as one of my indicators of what the Marketeers are feeling. Still, maybe I should remove it from my active ETFs due to its oversized volatility.

QQQ:315p/310p/X4 – Open 09/13/23 – Expires 06/28/24 – Max Gain = $272.00 – Open Price = 372.24
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 78.3%, Headroom= -15.4%, Max Loss= $1,728, AROR= 19.6%
Currently: Prob. OTM= 68.1%, Headroom= -9.1%, AROR= -92.2%

IWM:160p/155p/X4 – Open 09/05/23 – Expires 06/28/24 – Max Gain = $269.00 – Open Price = 353.21
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 77.7%, Headroom= -14.6%, Max Loss= $1,744, AROR= 17.8%
Currently: Prob. OTM= 55.4%, Headroom= -1.9%, AROR= -166.4%

DIA:315pp/310p/X4 – Open 08/09/23 – Expires 06/28/24 – Max Gain = $260.00 – Open Price = 353.21
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 76.6%, Headroom= -10.8%, Max Loss= $1,740, AROR= 16.6%
Currently: Prob. OTM= 65.1%, Headroom= -3.7%, AROR= -52.7%

SPY:405p/400p/X4 – Open 07/19/23 – Expires 06/28/24 – Max Gain = $284.00 – Open Price = 452.13
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 74.5%, Headroom= -10.5%, Max Loss= $1,716, AROR= 17.2%
Currently: Prob. OTM= 58.0%, Headroom= -2.0%, AROR= -65.7%

QQQ:325p/320p/X4 – Open 07/12/23 – Expires 06/28/24 – Max Gain = $336.00 – Open Price = 371.09
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 73.9%, Headroom= -12.4%, Max Loss= $1,664, AROR= 20.7%
Currently: Prob. OTM= 63.4%, Headroom= -6.4%, AROR= -43.2%

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= 72.8%, Headroom= -12.2%, Max Loss= $1,704, AROR= -16.2%

(ITM) 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= 48.3%, Headroom= +1.2%, Max Loss= $1,674, AROR= -66.6%

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= 78.8%, Headroom= -13.6%, Max Loss= $1,734, AROR= 0.0%

Note:

Vertical Spreads Closed This Month

(As of 09/29/2023)

No Spreads closed this month. The following will be stubs for when I do close a position.

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%

Income to open: $1.42 premium collected * 100 shares * 2 contracts = $284.00
Cost to close: $0.65 premium paid * 100 shares * 2 contracts = $130.00 (closed 259 days early)
Net Profit = $284.00 to open – $130.00 to close – $4.00 fees = $150.00
AROR = ($150.00 / 55 days in play) * 365 / $1,716 = 58.0%

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.

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.”