Answer:   You could if you wish, but I don’t recommend it.  In order to buy back the short leg it will be really expensive.  And, I’m not convinced that the market will climb any more.  On the other hand, if I thought the market was going to continue to rally for the next week, this would be a good strategy.  Let’s look at the numbers as of March 11, 2010:

 To close out the RUT Mar 680/690 bear call spread it would cost a debit of $2.55

To BTC the 680 leg it would cost a debit of $3.85

To STC the 690 leg we would collect $1.30 credit

3.85-1.30=$2.55

 You can see that if we just hold onto the long 690 call, it will cost us $1.30 and the RUT would need to continue to rally in order for this long 690 call to pay off.

Response:   Absolutely.  I think we should pick up some premium within 2 hours from when the unemployment numbers are released this Friday.   If the market rallies, let’s open some bear call spreads, and  if the market sells off, let’s open some bull put spreads.  Once the market moves, it’s my guess that the market will stabilize rather quickly as investors/traders/money mangers await Q4 earnings that start to come out next week.   I’ll send out an advisory tomorrow, Thursday, with my thoughts on strike price placement.

Response:   I think I’m going to wait for the unemployment number to come out on Friday.  I believe there is a reasonable chance the number will be good, possibly showing the first positive jobs growth in 23 months, and the market could have a strong UP day giving us one last opportunity to bring in some premium on the top spread.   I’m hesitating to bring in more RUT 670/680s and would prefer to click-up and bring in some 680/690s.

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.

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.

Per economic data, factory orders, the ISM index and pending home sales all came in better than expected.  As a result, we believe that the the major indexes will hold above either their 100 day or 200 day lines.  (for specific moving averages and support levels for each index please refer to Sunday’s advisory)

Let’s take advantage of this recent spike in volatility and pull back of the RUT and SPY and continue to bring in premium on our Nov bull put spreads this week, per the trade recomendations in Sunday’s advisory.

We’ll watch the market daily to see if we still might have the opportunity to open our November bear call spreads.  If we do, we’ll send out new strike prices since our current  strike prices are no longer valid.   Unfortunately, because of how the market is behaving we might not have an opportunity to open our bear call spreads this month.  We’ll keep you posted.

back to just below its upward sloping channel and its 50 day SMA, and with today’s rally it’s back above the 50 day line and has moved back inside the channel.  This also is bullish and is demonstrating strength.    The RUT, on the other hand, overreacted and dropped below its upward sloping channel and its 50 day SMA, but it did, so far, hold above its 100 day SMA near 565.   With the DOW showing considerable strength, and the S&P 500 index successfully back inside its channel and above its 50 day line, there is a good chance that the small cap investors will want to “catch up” and possibly take this big pull-back in the RUT as a buying opportunity.   We believe that the RUT will meander upward over the next few days giving us a better opportunity to open our top November bear call spreads.   Therefore, let’s be patient and wait a few more days.  The bear call spread strike prices that we show in Sunday’s advisory are no longer valid and we’ll have to reset them in the next few days.   And per the bottom bull put spread, we most likely will wait until after the employment numbers come out next Friday.

Here are the events over the next week that could move the markets and that we need to monitor:

1) Earnings  -  However, half of the S&P 500 earnings are already in, 80% have met or exceeded expectations, about 60% exceeded top-line revenue growth expectations, which is good, but investors are not impressed.  Therefore, earnings information is already priced into the market and investors are back to watching, and reacting to, economic data.

2) Chicago PMI comes out tomorrow, Friday.  So as long as this is OK, the DOW and SPY should continue to hold steady or gently climb and the RUT might climb a little faster.   Refer to Sunday’s advisory for details on the economic calendar.

3) The ISM manufacturing index comes out on Monday the 2nd and if it’s OK the market should hold steady or climb, and the RUT might/should climb a little faster to catch up to the strength that is exhibited by the DOW.

4) Unemployment comes out on Friday the 6th and most likely this number will be bad, economists are expecting the unemployment rate to hit 9.9%, and most likely it will.  When this happens, this will put a damper on the overall market and our short lived bounce rally will be over for a few weeks.  Thus, we need to open our top bear call spreads before the unemployment number comes out on Friday the 6th.  Right after this number comes out, and if we have a strong DOWN day as we are expecting, this is when we’ll start to open our bottom November bull put spreads.

As soon as we set our new options strike prices we’ll send out an email advisory to all MCTO subscribers.