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Tuesday, October 28, 2014

November 2014, RUT Credit Call Spread adjustment

Today I had to make an adjustment to my infamous RUT 1150/1160 Credit Call spread.

I made the adjustment when the 1150 Call reached the 30 deltas, and RUT was trading around 1124. I deployed new capital using the 1180/1185 Calls.

Buy to Close 2 RUT November 1150 Call @9.80
Sell to Close 2 RUT November 1160 Call @6.50
Debit: 3.30  ($660 in 2 contracts per leg). Originally received 1.00 credit, so this is a $460 loss.

My new Credit Call spread right after that
Sell to Open 4 RUT November 1180 Call @2.49
Buy to Open 4 RUT November 1185 Call @1.94
Credit: 0.55 ($220 in 4 contracts per leg)
Max Risk: 4.45 ($1780 in 4 contracts per leg)

Notice that even though I'm playing twice the number of contracts, I didn't increase my position size because I cut the width of the strikes in half. My maximum risk is $1780, whereas the maximum risk on the original position was $1800. I played the 5 point wide version because the 1180/1190 was giving me $200 credit (a little less).

I was relieved. I thought I was over with this mess that the November expiration cycle  has been but RUT just kept fucking us all, rallying 25 more points the rest of the day. To the point that my 1180 short Calls are close to reaching the 30% probability tomorrow if we hit 1155 - 1157. If that were to happen, yes, you guessed it, I will adjust without hesitation selling the 1210/1220 Credit Call spread. RUT has rallied 10.5% in 13 days. This is historical, this is out of this world and I'm really really eager to see how other option sellers have done this month once they post their returns. If only more of them did :(  (sigh)

RUT chart after market close:
(Click on image to enlarge)

November RUT 970/980 Credit Put Spread
$120 credit. 23 days to expiration. Not a problem.

November SPX 1685/1690 Credit Put Spread
$120 credit. 23 days to expiration. Not a problem.

November RUT 1180/1185 Credit Call spread
$220 credit. 23 days to expiration. May need to adjust tomorrow in what would be the third adjustment of the month. Sad but true.

December SPX 1750/1760/2070/2080 Iron Condor
$340 credit. 51 days to expiration. Still very young and far from being threatened.

If you're getting burned, go have good sex tonight. Life is more than losing money selling options.

Check out 2014 Track Record

Related Articles:
RUT 1180/1185 Call spread closed for a loss. Adjusted with new SPX 2050/2060

Go to the bottom of this page in order to see the Legal Stuff


  1. You are a funny guy. I love how you put things in perspective. This v-shaped rally is rare but has happened in the past few years. Last year RUT ran up 12% and SPX 9% in a few weeks before topping out.

    I am also in hot water with my Nov IWM 118/120 ccs and Nov SPX 2025/2030 ccs positions. They are small positions because I have learned to short this market with small positions only.

    I made 3 big mistakes during this 2-week run-up:

    Mistake #1: I shorted SPX too soon via Nov 2025/2030 ccs when it was at 1948. I should have waited until at least 1975 but I wanted to hedge against a portfolio full of long positions.

    Mistake #2: I should not have closed the Nov IWM 116/118 debit call spread at all this morning. My original plan coming into this week was to use that position to protect a Nov IWM 120/122 credit call spread that I was going to sell if the credit becomes .10 or more. Instead, like a total rookie doing his first credit spread trade, I closed the IWM 116/118 this morning for a nice profit and I shorted IWM via Nov 118/120 credit call spread. I was too eager to book some good profits and sell some credit call spreads to bring in more income. I messed up badly with this trade. I had a near perfect setup. Now this position is in trouble.

    Mistake #3: Not waiting until the end of the day to sell spreads. Had I waited until the last hour to make my trades, I would have been much smarter and more strategic instead of just trading on impulse, gut and greed.

    My game plan is wait for IWM to rise above 116 this week before adjusting the Nov 118/120 ccs. I will wait for SPX to break 2000 before adjusting the Nov 2025/2030 ccs. I know it is cutting it very close but I think it will be shocking if we bust through 116 and 2000 this week.

    If by some miracle I don’t need to adjust my November trades, I will gladly close the IWM 118/120 and SPX 2025/2030 for breakeven when I can. This will teach me to sell calls too early in the future.

    You can follow me on Twitter @lienjonathan where I tweet my 90% probability credit spread trades in real-time for free.

    1. The good thing is to rationalize our mistakes to make it better next time. Your plan sounds good to me. I know you wait longer to adjust but I also know your positions are smaller as percentage of your portfolio.

      I hope you minimize the losses. Today might be a traumatic day with the Fed coming.

    2. Hi LT,

      I took a bullish stance this morning.

      I closed the troubled Nov IWM 118/120 credit call spread for .38 debit. I initially collected .11 credit yesterday morning. I took a loss of .27 cents. Then I sold the Dec5 IWM 105/103 credit put spread for .25 credit. The .25 and .11 credit gives me a .02 loss if this position expires for max profits at the end of the year.

      I plan to iron condor this trade with a Dec5 IWM 125/127 credit call spread when the credit is high enough to justify the risk. I am looking for around .15 credit.

  2. LT and Johnathan - i still have a lot to learn. Thanks for the info you provide here.
    I have a Nov SPX CCS of 1990/1980 (2 contracts) for a total credit of $100.. I should have adjusted few days back but .... How would you recommend to adjust it now. Thanks.

    1. Well, unfortunately you waited too long. I would simply go long some out of the money SPY Calls to mitigate possible losses. But the situation you are in is complicated. Only with a significant sell off you will be relieved.


  3. Hi LT,

    My short DEC20 2050 call in my SPX IC got to a delta of .21 yesterday so I chickened out and bought
    the call spread back. Time to go and get laid ;-)

    1. Well done. Fed in just 97 minutes. You could reload on higher Calls.
      But sure, go get laid for the time being.

  4. Hi LT,

    Got some typo error?

    "Buy to Close 2 RUT November 1160 Call @6.50
    Sell to Close 2 RUT November 1150 Call @9.80"

    You meant SELL to close 1160 Call and BUY to close the Short 1150 Call right?

    What was the delta of the 1180 Call when you adjust to 1180 Call? What is your delta consideration when adjustment? Same as entry criteria?

    I find 1180 (30 points away) too near when RUT is at ~1150. In fact, I find my Short 1190 Call too near for comfort. But I already have that position. Just have to manage from there.

    1. Thanks Tony. You were right. It was Buy to close 1150 and Sell to close 1160. I just fixed it. Thanks.

      The adjustment. Same criteria that I use for a normal entry. I go with the option that is closest to 10% prob. in the money at the time of the adjustment.


  5. How do you calculate delta and the probability?

    Market is overbought but have a feeling it's going higher another 5% form here.

    1. I don't calculate it. The platform gives you those numbers.
      As for the "feeling" yes that's always the case. When it's falling we always feel it will fall more, when it's going up, we always feel it will keep doing so.
      Thanks for the comment Jj.