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BookingAlpha Option Trading Advisory

Monday, February 3, 2014

RUT Credit Put spread adjustment

Life is I had to adjust the RUT 1040/1050 Credit Put spread as it hit 30 deltas or 30% probability of being in the money by expiration. The trade was as follows:

BUY 2 March RUT 1050 Put @20.00
SELL 2 March RUT 1040 Put @17.70
Net Debit: 2.30 ($460 for 2 contracts per leg)

The spread was originally entered for 0.60 credit. Closing it for 2.30 represents a 1.70 loss or $340 for 2 contracts per leg. I redeployed capital in the 950 zone adding one more contract as follows:

SELL 3 March RUT 950 Put @6.20
BUY 3 March RUT 940 Put @5.60
Net Credit: 0.60 ($180 for 3 contracts per leg)

RUT closed today at 1094. I think the 950 area is pretty safe.

To sum up, this is the whole picture of the initial 1040/1050/1250/1260 Iron Condor:
The 1250/1260 Call side was closed for a locked in $120 profit on January 27.
The 1040/1050 Put side was closed today for a $340 loss.
A new 950/940 spread was opened for a credit of $180.

If the 950/940 Put spread ends up being a winner, the final balance would be $120 - $340 + $180 = $40
A loss of $40 dollars (plus commissions of course). That's not bad at all for an Iron Condor that went wrong. As a credit spread / Iron Condor seller, it's in these trades where much of the year end result is defined. These type of positions have an unfavorable risk/reward and to me, controlling your losses on them is vital. If it takes you 10 winners to recover 1 loss, the progress of your equity growth may be severely affected. Yes, you can wait, and adjust when you feel more threatened, but the loss is going to be larger at that point. By waiting longer you give yourself more time to be right and you are bound to have more winners in the year, but the few losses will be more serious losers.

I also have the SPY 159/161 Bull Put spread in March, so I'm still confident that the March expiration cycle will end up in positive territory overall.

Finally a chart of RUT at market close for future reference:
(Click on image to enlarge)

Check out 2014 Track Record

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Weekend Portfolio Analysis (February 8, 2014)
Weekend Portfolio Analysis (February 23, 2014)
Weekend Portfolio Analysis (March 1, 2014)
Weekend Portfolio Analysis (March 8, 2014) 
Weekend Portfolio Analysis (March 15, 2014)

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  1. You have a typo at the beginning when you say:

    SELL 2 March RUT 140 Put @17.70

    I like your plan. I think your rules will get you out of big trouble one of these days. While I don't think the market will correct 20% in the next few weeks, we can expect this to happen every few years. The analogy I like to use is just because you did not get into a car accident today doesn't mean you should not have car insurance.

    Today I sold some spreads at 950/940 on RUT for .65 credit. I think we have not stopped going down but the 1050 will be the 200 dma and some investors will look to buy in this area.

    I also have a similar position on Spy.I have the 162/160 that I added to today. I see Spy stopping at 165 in worse case scenario.

    At this point, I will look to see if RUT can go down to 1075 or lower. This will represent a 9% drop from 1182. If it does, I will be selling some more spreads around the 930/920 area.

    My third time to sell more spreads is if RUT goes to 1000. If it drops to 1000, it represents a 15% drop from 1182. If we drop to 1000, VIX will be extremely high and I can probably sell 850/840 for good credit. The chance of this happening is slim, but anything can happen in the next few weeks.

    1. Yes, I should have said RUT 1040 Put instead of 140. I just fixed it. Thanks.

      I think we're short term oversold now with only 18.89% of the stocks above their 20 DMA. And breath indicators such as the McClellan oscillator close to -200 right now.

      With the bar made today, it is hard to believe the downside is over. That solid bar closing near the lows of the day. But at the same time I feel that short term, we won't go much further. Who the hell knows.

      I think your positions are save and your plan is a good one.


    2. Jonathan,
      What rules do you follow for closing? For example, when would you close 950/940 spread if RUT keeps going down?

  2. Hi LT,

    This looks like a great move. I was wondering however, if you are able to make this adjustment as a single trade or if you had to enter 2 separate trades using TOS?

  3. Hey my friend,

    In TOS it can be done as a single trade. And that's how I do it. I just reflected them separately in the article for clarity and for readers to know exactly what I'm doing.


  4. Do you always adjust your positions when the short reaches a 30% delta? why?

  5. Hi JP,

    I adjust at that point to prevent price action from penetrating my short strikes. If I choose a lower delta, then I will have more small losses. 30% is a number that allows me to keep my losses small while at the same time giving myself time and opportunity for the trade to turn around in my favor. Higher than 30% would cause less losses in the long term but larger ones.