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Monday, January 27, 2014

March 2014, SPY Credit Put Spread and management of the RUT Iron Condor

Today I opened an SPY Bull Put spread using March expiration options.
At a point where only 28% of stocks were above their 20 SMA and the McClellan Oscillator was below -170, I figured we were near a Bearish extreme. This is the trade:

Buy 11 March SPY 159 Put @0.77
Sell 11 March SPY 161 Put @0.90
Credit received: 0.13 ($143)
Max Risk: 1.87 ($2057)
Days to expiration: 53
Current IV Percentile is 69% and the VIX is 17.42.

SPY closed at 178.01 today. This position is 10% bellow that.

An SPY chart after market close for future reference.
(Click on image to enlarge)

Moving on to the RUT 1040/1050/1250/1260 Iron Condor
A few minutes after the SPY trade I placed an order to close the Call side (1250/1260) of the RUT Iron Condor. This Iron Condor was initiated just four days ago and the Call side was showing a nice profit (75% of the maximum potential profit). I thought, with 53 days to go until March expiration, it only made sense to close that spread and reload down the road once the market rebounds. Chances of a rebound increase the more oversold the market gets, and in 53 days, it is very likely that we will see some kind of rebound. I was dragged into a meeting, and couldn't tweet this trade or anything live. Only when I came back I realized I'd gotten the fill.

Buy to close 2 RUT 1250 March Call @0.75
Sell to close 2 RUT 1260 March Call @0.55
Net Debit: 0.20 ($40)

This Call spread was open for 0.80 credit. Closing it for 0.20 debit represents a 0.60 profit ($120) in just four days.

After today's two transactions the portfolio looks like this:
February RUT 1040/1045 Bull Put Spread $120 credit
March RUT 1040/1050 Bull Put Spread $120 credit
March SPY 159/161 Bull Put Spread $143 credit.

Plenty of downside exposure. Not a fan of that, but decent distance so I don't feel threatened by now. The market's reaching short term oversold conditions, so I believe the downside is starting to look limited in the short term.

Check out 2014 Track Record

Related Articles:
Weekend Portfolio Analysis (February 1, 2014)
Weekend Portfolio Analysis (February 8, 2014)
Weekend Portfolio Analysis (March 1, 2014)
Weekend Portfolio Analysis (March 8, 2014) 
Weekend Portfolio Analysis (March 15, 2014)

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  1. I will be looking to add to my March SPY 162/160 if we go lower this week. I am looking for a credit around .16 to .18 for be to sell more. I sold March RUT 1000/990 for .70 credit this morning.

    You did great by closing the RUT bear put spread early since chances are good we will get a rebound. One guy I follow things we will reach 1810-1812 on SPX before we get more downside. I am going to looking to iron condor some of my credit put spreads this week by selling bear call spreads cuz I am more concern about downside than upside and want to hedge them. I will look to unwind some of my bull put spreads that are most likely to be in danger if we get more selling later this week or next.

  2. That's a good plan. I would say,dont hurry in adding the Call side. Snap back rallies can be violent specially the first couple days.

  3. You are right Henrick about being slow to add the the bear call side. I told you about my 4% rule on RUT. When RUT goes down 4% or more from its 10-day high, I am selling a bull put spread at least 10% away from current price. My other rule is, if RUT goes up 8% or more from its 20-day low, I want to sell a bear call spread at least 7% or more away from current price.

    But this guy is convinced that we will go down more before rebounding to new highs. He is right more often than he is wrong. So while I like my rule, I need to be flexible too.

  4. Interesting. Thanks for sharing your system.Have you been trading it for long? Does it give you good results?

  5. Henrick,

    I have been trading this system for a few months now with excellent results. I have done extensive back testing based on my 4% and 8% rule on RUT going back to year 2000 using Yahoo Finance's historical data. It has proven to be a real winner. There will be times when I will still need to adjust as RUT did go through some extreme periods during the last 13 years. Overall, I am very pleased and will be using my system. It is simple and easy for anyone to implement.

    As we know, RUT can go down 20% in a short amount of time. So I will have multiple positions on a 20% downturn. First position would be initiated when it is down 4% or more from the 10-day high. Then I wait to see if it can go down another 5% or more. If it does, I will sell another spread that is over 10% away from current price. Then I wait to see if it goes down another 6% or more. If it does, we are probably close to a bear market and VIX will be through the roof. I will look to sell another spread 15% or more away from price. At most, I will have 3 or 4 RUT bull put spread positions at any given time. But under normal markets, I can expect to have 1 or 2 positions.

    I will send you a spreadsheet this weekend of my back testing. It will amaze you.

  6. I rely on VIX to determine if I should wait for a 4%, 5%, or 6% pullback. If VIX between 10-20, I will wait for at least a 4% pullback. If VIX between 20-30, I will wait for at least a 5% pullback, if VIX between 30-40, I will wait for at least a 6% pullback. That is because when VIX is high, markets tend to be very volatile. When VIX is calm, like last year, we can expect an orderly pullback. That is how I use VIX to make my trades. I also use it to determine how far away from the market I can sell a spread. My strategy also requires me to sell 30-70 days from expiration. I usually cannot sell less than 30 days and expect to be 10% or more from the market unless VIX is extremely high.

  7. Wow! That is really really interesting Jonathan. Thanks for sharing man! Create a site, and share your track record and sell a video course. No, seriously, this looks really interesting. I havent gotten to the point of a mechanical methodology.

  8. Thanks Lazy. The trade I took yesterday on RUT (March 1000/990) was based on my mechanical methodology. I sold the 1000/990 yesterday when price was at 1127. It triggered at 1133 because the 10-day high was 1182. 1182 to 1133 represents a 4% drop.

    The next time I will sell another spread for March expiration is if it falls 5% from 1127 to 1070. Ideally, I want to sell March 950/940 for .70 credit or more.I need to see this happen in the next 3 weeks to establish a March 950/940 position and get decent credit. Otherwise, the window of opportunity is gone and I will need to look at April expiration.

    Assuming we bounce from here and the window of opportunity to sell another March position is gone, I will revert back to the 4% rule. In other words, I will see if RUT falls 4% from its 10-day high to sell an April spread.

    I would like to create a website to discuss my methodology. I am currently running 2 websites so creating a new one will not be a big deal. I want to give it one more year before I hang out my shingles.

    Thanks for reading.