Answer:  Yes, the Monthly Cash Thru Options autotrade option trading service would only roll 8 contracts of the RUT Dec 670/680 bull put spread into January, if we needed to roll it.  The new cash level per trade that you select for autotrading will not affect the existing spreads and adjustments that we make to them.  You can change your autotrade cash amount per trade at anytime, even mid-stream during the month,  and not impact existing trades.

Alternative investments; credit spread; iron condor; how to trade options; option trading

Answer:  Options on the RUT trade European style where they cease to trade on Thursday, in the week of expiration, and then the RUT settles on Friday.   For more on how European style options settle and expire please visit the FAQ Page at http://www.monthlycashthruoptions.com/FAQ.htm  and read entries #24 and #25.   If the underlying RUT index gets too close to our short Call on Thursday, in the week of expiration, we need to be careful since we don’t have any control over what value the RUT will settle at on Friday.  So we need to make sure that the RUT index stays a certain number points away from our short Call on Thursday, and if not we need to close it early to avoid settlement risk.   In this situation where we have the RUT Feb 840/850 bear call spread, the settlement value, RLS, needs to settle at 840 or less for us to keep 100% of the premium that we collected when we first opened the spread.

Answer:  You would open the recommended RUT bull put spread when it’s filling for between our recommended price range, let’s say between 48 and 95 cents credit, and then you would hold onto the spread through expiration.  You then would watch the underlying RUT index to make sure it stays above the short 690 put that you sold.   If the RUT starts to pull back and if it gets within 15 points of your short 690 put, you will need to start preparing to roll the spread either down into the same month, or out into the following month.  Right now it’s not necessary to worry about this scenario since there is a very low probability that this will happen.   If you are curious about rolling, please visit the Learning Center at http://www.monthlycashthruoptions.com/LearningCenter.htm  and you’ll see a bunch of case studies on how to do a roll.  In the case that we need to do a roll, we send out detailed instructions to our subscribers on what/when/how to do the roll.

 Question:   My confusion comes from where you say to click down a strike to keep your credit between 48 and 95 cents for people who are writing more than one spread.  At the point where it is necessary to click down to open another spread should I close the existing spread that I have and click down to sell again or just keep the original spread open?

Answer:   You would hold onto all of your existing spreads if you are forced to click down.   Let’s say you are holding the RUT Feb 680/690 bull put spread.   A week later the RUT starts to drop and the RUT Feb 680/690 bull put spread starts to fill for more than our recommended maximum price of 95 cents.  In this case you would click down to the RUT Feb 670/680 bull put spread.  You would also need to put this spread in a different account as the 680 strikes will overlap.  (we do our best to maintain 10 point spreads in our accounts when using the RUT as it provides flexibility when we open the top bear call spreads to complete the iron condors)   In parallel, we would be watching the original RUT Feb 680/690 bull put spread and will need to adjust it if the RUT pulls back too far.

Answer:   Trading credit spreads on the SPX, the S&P 500 index, is like the Roach Hotel….you can check in, but you can’t check out.  Opening credit spreads on the SPX seems to be just fine and it feels great to bring in a solid 9% premium on a 90% probability spread that has less than 30 days to expiration.   However, even though there is a lot of liquidity on the SPX options, it doesn’t act like it where if our trade gets into trouble, it will cost 20% to 30% of our risk capital to make an adjustment, such as rolling it into the same month or rolling it into the following month.   In other words, we won’t have many chances to roll our spread if it gets into trouble and we’ll pretty much be taking a 50% to 60% loss after rolling it just 2 times, which is not good.  When trading credit spreads on the RUT, for example, if our spreads unexpectedly go in-the-money, it’s quite possible to roll it for 6 to 9 months, if required, and we can still get back at least 50% of our maintenance, and sometimes as high as 70% of the original maintenance.   One possible reason that it’s difficult and expensive to make adjustments on SPX credit spreads is that it’s only traded on one exchange, the CBOE, and not on the other 7 exchanges.   In contrast, options on the RUT are traded on 6 exchanges, and options on the SPY are traded on all 8 exchanges.  It seems that the more exchanges the options are traded on, the more competition there is and thus the cheaper it is to make adjustments on the trade if necessary.

Answer:   In a very rare occasion that we get stuck with ITM credit spreads, we will usually roll them and keep them alive….and eventually get 50% to 70% of our money back.   Unfortunately, and fortunately, I’ve become an expert on rolling because some of my spreads went ITM during the Oct 2008 crash, and after rolling them I got back 65% of my maintenance.   Not bad for a total melt-down.  (Just as a side note, most credit spread traders, including editor-in–chief’s from other credit spread newsletters don’t have experience in rolling because most just throw in the towel and let their subscribers take a total loss.  I personally hate to lose money and will fight to the end to get back at least some of my money) 

Answering your question specifically, if some of our spreads went ITM and we didn’t want to roll them but just let them expire, the credit spread on the RUT and SPX (classified as broad based indexes) are cash settled, so cash would be withdrawn from our account.   If the spread went completely ITM and we let it expire, we would lose all of our risk capital, which is the required maintenance less the premium collected.

Per options on the SPY and IWM (which are ETFs that track at 1/10^th the value of the S&P 500 and Russell 2000 indexes, respectively) the ETF shares would be PUT to us where we have to buy the shares at the strike price and the shares would be deposited into our account.

Again, in general with this situation, and this is only for the emergency case where the stock market crashes 12% or more in just a few days and we get stuck with ITM bull put spreads, we will roll our spreads month to month and there is a very good chance we’ll get back at least half of our money, and more like 60% to 70%.