Trade Update – RUT and SPY bull put credit spread options

The stock market is pulling back where the DOW is down 155, the SPY is down 1.97 and the RUT is down 17.6.   The Philly Fed Index came in higher than expected (manufacturing output) and the Conference Board’s Leading Economic Indicator also rose, which is great news for the economy.  However, one of the semiconductor analysts cut his rating on the chip industry and this is what spooked the markets.  (the market was also overextended and investors were looking for any reason to sell and take  some profits)    

Today is the last day for our November RUT bull put credit spreads where they cease to trade today after the close and they settle tomorrow, Friday.   No action is required, assuming you have the RUT Nov 530/540 bull put spread, or lower.   Let’s let them settle tomorrow and expire worthless.

Per the SPY option trades, they will continue to trade through tomorrow, Friday, and we’ll keep you posted.  So far they are safe and no action is required, assuming you have the SPY Nov 100/102 bull put spread, or lower.

And of course all of our top Nov bear call spreads are safe.  Let’s hold onto everything and let them expire worthless.

Comments (4)

Earl McHughNovember 19th, 2009 at 11:33 am

Do the RUT spreads settle on the basis of the price at the open tomorrow or the close today?

bradrrNovember 19th, 2009 at 12:12 pm

Here is an explanation that I have in the Monthly Cash Thru Options FAQ page that talks more about European style options on the broad-based indexes like the RUT, MID and SPX.

The MID, RUT and SPX indexes are classified as broad-based, cash settled indexes, and option contracts on these indexes are classified as European style and AM settled. The RUT is the symbol for the Russell 2000 small-cap index, the MID is the symbol for the S&P400 mid-cap index, and the SPX represents the S&P 500 big-cap index. Broad-based means that the index comprises 100s or even thousands of stocks. The RUT index comprises 2000 small-cap stocks, the MID index comprises 400 mid-cap stocks, and the SPX comprises 500 large cap stocks. Cash-settled means that when an option contract on the index expires or is exercised in-the-money (ITM), cash will be either deposited or withdrawn from your account. European-style means that option contracts on these indexes cease to trade on the 3rd Thursday of each month, and they can only be exercised on the last business day prior to expiration, which is the 3rd Friday of each month. AM settled means that the index’s final price will be calculated on the 3rd Friday of each month in the morning. The settlement price is calculated by recording the first opening sale price for each stock in the index, and then using these prices to calculate the settlement price. The settlement price is the final price of the index that is used to determine if option contracts on the index closed in or out-of-the-money. One can find the settlement prices at http://www.cboe.com/data/settlement.aspx. The settlement symbol for the RUT index is RLS, and the settlement symbol for the MID index is MIV.

MikePNovember 19th, 2009 at 12:51 pm

Brad- What is to keep someone from Selling the 590/600 Bear Call currently RUT trading @ 584.93 with the 590/600 spread bid 1.10 / 1.30 Expiring in 2 hours?

If RUT closes < 590 by 1600 today or 1615 today doesnt that go out worthless ??

bradrrNovember 19th, 2009 at 1:17 pm

You could if you wish….but it’s equivalent to going to Las Vegas and putting a lot of money on “black”. Options on the RUT will cease to trade after the close today, Thursday. Then the RUT will settle tomorrow, Friday, (symbol RLS) and this dictates if all November options on the RUT expire ITM or OTM. To get the RLS, go to http://www.cboe.com/data/settlement.aspx and for the RUT it’s usually available after 4pm ET on Friday.

As an example, let’s say you open 1 RUT 590/600 bear call spreads rfor $1.10 credit, or for $110, and your risk capital is $1000 – $110 = $890. Let’s look at a few scenarios:

1) The RLS settlement number settles at 589; in this case you keep 100% of the premium that you collected, or $110. In general, if RLS comes in below 590, you keep 100% of the premium that you collected.

2) The RLS settles at 593; in this case your short 590 call expired 3 points ITM, so $300 will be debited (cash settled) out of your account over the weekend. However, you brought in $110 of credit, so your loss is $300 – $110 = $190

3) The RLS settles at 597; in this case your short 590 call expired 7 points ITM, so $700 will be debited (cash settled) out of your account over the weekend. Your loss is then $700 – $110 = $590

4) The RLS settles at 600 or higher; in this case your short 590 call expired 10 or more points ITM, and your long 600 call kicks in as protection capping your loss at $1000. As a result, $1000 will be debited (cash settled) out of your account over the weekend. Your loss is then $1000 – $110 = $890

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