Question about the desire to open more RUT and SPY bull put spread options in December

Question:  I’ve had a difficult time opening the recommended December RUT (Russell 2000 index) and SPY (S&P 500 index) credit spread options and would like to bring in more premium in December if possible.  Please give me your thoughts about possible December strike prices that I could consider opening.

Answer:  It’s been frustrating this month, and really over the last 4 months, to easily bring in “safe” premium because every time our recommended credit spreads are filling the window of opportunity is short lived;  three hours here….2 hours there…etc..   (“safe” means credit spreads with a comfortable risk/reward profile as a function of strike price placement and time to expiration)   We were able to open some of the recommended Dec bull put spread options earlier this month, but the market only gave us a few short lived opportunities to do it.   I personally brought in a good level of premium on the RUT 500/510 and SPY 99/101 bull put spreads, but again the opportunities to get the fills were short and sporadic.   Another issue that has made it difficult for us to open more Dec bull put spreads is that all of the recent economic data has been good, which is fortunate for the US economy as a whole, but unfortunate for us looking to open more Dec bull put spreads.  We were hoping that retail sales would come in weak today, Friday, giving us a solid DOWN day, but again we had good results keeping the market steady and trading in a tight range.  The problem we now have is that we’re down to the last week before our December contracts expire, and because the market has been holding steady, it’s almost impossible to open more relatively safe Dec bull put spreads.

For those of you who are anxious to open more Dec bull put spreads, here are some ideas.  Referring to the charts in the Wed, Dec 9th advisory, we show support levels that we should keep our short put strike prices below to play it safe.  None of these trades are sanctioned MCTO trades.

For the RUT, it would be prudent to keep our short put leg below 550;  the RUT Dec 530/540 bull put spread is paying nothing, unfortunately, and the more risky 540/550 is only filling for 20 cents, which is not enough.  When we are down to the last week, unless we have a very strong movement in the index, we usually are done bringing in premium for the cycle.  You’ll notice that speculators have bought a lot of the RUT Dec 580 puts hoping that the RUT will pull back in the next week.   For those who like to gamble, you could open some of the RUT Dec 570/580 bull put spread for about a 75 cents credit, but this is more like going to Las Vegas.  You can see that the 580 level is one of the support levels drawn on the RUT chart in the Dec 9th advisory, and if the RUT has a quick, violent pull back, 580 is its first target.   Just to be clear, this is not a sanctioned MCTO trade. 

For the IWM, just divide the above numbers by 10, and it’s best to open a 2 point wide spread since we are late in the cycle and usually it gives the best returns per unit of risk capital.   (for more on the topic of comparing returns for 2, 3, 4, 5, 7 and 10 point wide credit spreads, please go to the Monthly Cash Thru Options Learning Center at  http://www.monthlycashthruoptions.com/LearningCenter.htm   and read the entry entitled “why we usually open 2 and 3 point wide credit spreads”.   These are not sanctioned MCTO trades.

For the SPY, and referring to the charts in the Dec 9th advisory, it would be wise to keep the short put leg one-click below the 108 level, which represents the 50 day SMA.  Because most economic data have been good in the last few weeks, because there is still fear of a sliding US dollar, and next week it’s a relatively quiet week for economic announcements, the big cap stocks should maintain their strength in the short run.  As of close of the market on Friday, the SPY Dec 105/107 bull put spreads is filling for 7 cents credit, which is not enough.   If it fills early next week for at least 10 cents, this would represent a 10/190= 5.3% return, which is an acceptable return in 5 trading days.  (assuming the SPY remains above 107 through the end of next week)  Remember, options on the SPY trade American Style and will be active through the close of Friday.  Again, these are not sanctioned MCTO trades.

 

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