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Tuesday, December 18, 2012

RUT Vertical Spread adjustment idea

Quick note to touch base on the RUT 870/875 Bear Call Spread.

As I won't be able to blog from December 20 to December 27, I thought it was necessary to specify what my actions will be in case the market keeps going up.

RUT closed today at 847.69. The short strike of the position (870) is still almost 3% away, but that distance can be advanced. I don't think it will happen before December 27, but everything is possible.

If RUT hits 868 I will close the existing position, basically adjusting it. That is opening a new one where I will sell another Call Credit Spread at higher strike prices.

Which strike prices?

Well, the answer is: the first Call Credit spread (5 points wide) that yields a 0.75 credit or higher.
It looks like the 895/900 Vertical spread will be priced around 0.75 if RUT hits 868 by December 27. But if the 900/905 is priced at 0.75 or higher then that's the one that should be used. Essentially, I would like the farthest out of the money Call Credit spread that is able to give me a 0.75 credit or better.

If we hit 868 before December 27, we will be extremely overbought. And adjusting to a RUT value of 895/900 or 900/905 would imply something like SPX 1520.

I've drawn a yellow line on the chart so that we have an idea what it would take RUT to hit 900 by January expiration.

(Click on image to enlarge)

It certainly looks unlikely.
No time to panic folks. We've been through this before.

Good luck and Happy Holidays.


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2 comments:

  1. We are already extremely overbought... Please stop :-(

    Merry X'mas!

    ReplyDelete
  2. Thanks for the comment pal. Yes we are overbought but breadth indicators such as Advancers and Decliners still show some room for upside. A little, but some. Which you can see on the McClellan oscillator for example. No indicator is all based on probabilities. I think we wont hit 870 by December 27 when I'm back. I think it is a bit too much. But anything can happen.

    Thanks

    ReplyDelete