Trade & Market Update – RUT Russell 2000, SPY S&P 500 Index
Intel, JP Morgan, Linear Technology (chip company), Grainger, and CSX (railroad transportation) all came in with better than expected earnings, which is giving the markets a boost. It’s prudent for us to wait a little longer to let more companies announce earnings before jumping into our November spreads. It seems with how things are going so far, there is a good chance that more good earnings will come in over the next few weeks and this most likely will push the markets higher in the short term, giving us an opportunity to open our top bear call spreads.
For the RUT, 620 is the high before the recent pull back and it’s prudent to wait to see if the RUT pushes over this resistance level; if it does, the RUT will probably take out a new short term high giving us the opportunity to jump in with our top spreads.
Per the SPY, 108 is the high before the recent pull-back and the SPY is currently flirting with this level. If the SPY successfully pushes over 108 and stays above this level for a few days, there is a good chance the SPY will climb further and take out a new high….thus it’s prudent to wait a little longer before jumping into our November bear call spreads.
I have a OCT 630/640 Call spread, and the RUT is currently at 623.80. Should I roll this into NOV in the chance that the RUT will settle above 630 Friday am? I also have 600/590 Put spreads, so I am thinking these should be safe. I am concerned about a lack of liquidity tomorrow if things go against me. Please advise…
I would recommend not to roll it into November but make a clean break. This market could continue to climb and you don’t want a spread that is continuously under pressure. Let’s look at the upcoming events tomorrow and Friday that could move the markets:
Tues the 13th – CSX (railroad), Intel, Johnson & Johnson
Wed the 14th – Abbott Labs, JP Morgan Chase, Grainger
Thur the 15th – Citigroup, Goldman Sachs, Google, IBM (plus Philly Fed Index)
Fri the 16th – Bank of America, GE, Halliburton (plus Michigan Consumer Confidence index)
I don’t have a crystal ball, but here is my guess of what will happen:
Thursday – Goldman Sachs blows it out, and Google and IBM meet or beat earnings and guide upward for Q4. Additionally, the Philly Fed Index will meet expectations. As a result, I think we’ll have another UP day tomorrow.
Friday – GE is going to meet expectations and guide upward for Q4. But consumer confidence will come in lower than expected. We’ll have a sideways/consolidation day on Friday.
So, for your predicament: Because options on the RUT trade European style, the last day of trade is this Thursday the 15th, and then we go through settlement on Friday. For more on the settlement process please visit the MCTO Learning Center. And because the underlying RUT index is already getting too close to your short 630 call, you will need to close out all of your RUT Oct 630/640 bear call spreads by tomorrow, Thursday, no later than 3 hours prior to the cease of trade. By waiting any longer than this to close out your postion you bare the risk of not being able to close it out because liquidity starts to dry up around 3 hours prior to cease of trade. Here is my recommendation: You should watch the market from the open and not take your eyes off of it until you close out all of your RUT Oct 630/640 bear call spreads. As long as the RUT remains below 627, you should hold on until 3 hours prior to cease of trade and then pull the trigger and close them out. By following this procedure you will pay the least money to close them out. However, at any time if the RUT climbs up to 628.5, you will need to immediately close out all of your 630/640s…so have your close order built, saved and ready to go. This would also be a good time to visit the learning center at http://www.monthlycashthruoptions.com/LearningCenter.htm and read the entry “What if the underlying index climbs right up to our short call leg in the last few days before expiration?”. I show several risk/reward graphs and this will help you understand the risk/reward nature in the last few days before expiration.
Per your RUT Oct 590/600 bull put spread, you are probably ok on this trade, but you still need to close it out before cease of trade this Thursday to avoid settlement risk. If the RUT remains above 603 on Thursday, then wait until 3 hours prior to cease of trade and then close them all out. If at any time the RUT drops below 603, immediately close out the 590/600.
Why not open some Nov Bull Puts now?
One option is to open them now. Another option is to wait for the market to pull-back after it rallies from the earnings announcement catalyst. One nice thing about the bottom bull put spreads is that we can open them very late in the cycle and still bring in decent premium. (which is usually not the case for the top spreads) I’m going to look at the potential November bull put spreads in more detail over the day will send out my thoughts on this.