Trade Update – We need to watch the RUT closely
We have the RUT Sep 620/630 bear call spread and we need to watch the RUT closely over the next two days. We have the remainder of today and a full day of trade tomorrow left on our September contracts and we still might be ok with the 620/630. If at any time the RUT climbs to 616 it’s recommended to close out all of your 620/630s. Then immediately open the RUT Sep 630/640 if it’s paying at least 17 cents credit to bring in some additional premium to cover some of the loss. If the RUT Sep 630/640 bear call spread is not paying at least 17 cents credit, then it’s probably not worth opening them. We must make a clean break from our September bear call spreads; it’s not recommended to roll anything out into future months. Most likely we’ll close out our RUT Sept 620/630 bear call spread early to eliminate settlement risk and we’ll keep you posted on this. If we do close these out early we’ll be closing them out 4 hours before cease of trade tomorrow, Thursday.
Brad, why wouldn’t we roll out to Oct09 (640)650 and bring in $.65?
On Friday the RUT and SPY options do not trade, but each index will.
On Friday, will the value of the RUT and SPY options vary with the price with their corresponding index?
Or will the value of the RUT and SPY options remain at the closing price on Thursday?
Opions on the SPY do trade until Friday close. Options on the SPY trade American style meaning that the options trade through Friday. For options on the RUT, they trade European style where the options cease to trade on Thursday after the bell, and then all options will be deemed ITM or OTM by the settlement price on Friday…usually released at 2pm ET. For more on the settlement process for the RUT please visit the FAQ page.
Because the underlying index(s) could continue to trend upward, and most likely the long-term trend is UP since the economy will probably continue to recover over the next 12 months, we should try to make a clean break from our top bear call spreads each month. The last thing we want is to end up with an ongoing bear call spread that is continually under pressure as the underlying indexes continue to climb.
Thanks Brad.
I did read the FAQ about RUT settlement and saw that the settlement price is determined on Friday, based on the first trade for each stock in the index. So, the Friday morning settlement price could be lower or higher than the Thursday close.
Yes, that is correct. And for the folks that have decided to hold onto some of their RUT Sep 620/630 bear call spreads, because the RUT is so close to our short 620 call leg, we will need to close out this spread 4 hours prior to cease of trade tomorrow, Thursday, to avoid this settlement risk. (assuming that the RUT stays at 616 or below Friday morning) If the RUT climbs above 617 or so anytime on Friday, we then need to immediately close out the spread.