Comments for MCTO Blog

Comment on Question about why we recommend two accounts when trading 10 point wide credit spreads on the RUT by bradrr

bradrr — Fri, 03 Dec 2010 02:05:26 +0000

Hi Wayne. Yes, we do need to be aware and careful with settlement risk. European options, like the options that trade on the RUT, MID and SPX, cease to trade on the last Thursday before expiration and then settle on the last Friday before expiration. Once the options cease to trade on Thur, we can no longer trade our options and are at the mercy of the settlement price that is calculated Friday AM, which is usually published by Friday afternoon on the CBEO website. In general, we need to keep reasonable buffer between our short option strike price and the underlying index, and if we are within 15 points or less, we usually close our spreads out early before cease of trade on Thursday. If the market has high volatility we might want even more buffer, possibly as much as 20 points on Thursday, and if we don’t have this much buffer we would close the trade early on Thursday.

Comment on Question about why we recommend two accounts when trading 10 point wide credit spreads on the RUT by Wayne Lung

Wayne Lung — Mon, 22 Nov 2010 18:41:09 +0000

I am a new subscriber to this advisory system. In the past, I only used SPY or IWM in my credit spreads or iron condors. Recently, I am seeing more positives in using index, specifically the RUT. But, I still have one problem with RUT. There is settlement risk with RUT that you don’t have with IWM. How do you respond to this? To be sure you’re understanding what risk I am talking about, I mean that the price of RUT that is used to determine whether my strike is ITM or OTM is the opening price of this index on Friday when I can no longer trade out of it, as it expires Thursday. So, there can really be surprises when I see that my strike seems to be doing fine Thursday but then, say, Friday is a strong UP day and my short call goes ITM and I have no way of closing it then.

Comment on Why not open credit spreads and iron condors on the SPX, the S&P 500 index, instead of the SPY an ETF? by Bob Wilber

Bob Wilber — Wed, 06 Oct 2010 18:12:41 +0000

That’s a fair answer to my question. But the game may be changing:

http://www.chicagobusiness.com/article/20101005/NEWS01/101009956/cboe-to-launch-second-exchange-later-this-month

SPX options may make more sense after they’re trading electronically a month from now. Hopefully we’ll see more volume and smaller spreads.

Comment on Question about January auto-trade trades and diversification of the trades by bradrr

bradrr — Sun, 03 Oct 2010 05:53:07 +0000

Trading credit spreads on the SPX, the S&P 500 index, is like Hotel California….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 ajustment, such as rolling it into the same month or into the following month. In other words, we won’t have many chances to roll our spread if it gets in 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 could 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.

Comment on Question about opening credit spreads on the Russell 2000 index, RUT, and needing 2 accounts by bradrr

bradrr — Sun, 03 Oct 2010 05:05:47 +0000

Yes, the risk reward for the credit spread is the same whether the spread is 10 points wide or 20 points wide. However, we strongly recommend that our subscribers have two accounts when trading the RUT because we want to maintain maximum flexibility allowing us to open the other side of the spread to complete the iron condor. In order to complete an iron condor where maintenance is only held for one of the spreads, both the top bear call spread and the bottom bull put spread need to have the same point width between the sell leg and the buy leg. It is true that if we end up creating a 20 point wide spread on the bottom that we can easily open a 20 point wide spread on the top to complete the iron condor…and this will work. However, for most months we are alternating between opening the top spreads and the bottom spreads, so it’s better to keep all of our spreads 10 points wide giving us maximum flexibility to complete the iron condors.

Comment on Question about January auto-trade trades and diversification of the trades by Bob Wilber

Bob Wilber — Fri, 01 Oct 2010 04:14:48 +0000

Given that SPY is essentially 1/10 of SPX what is the point of having spreads on both? You need to buy and sell 10 times as many options on SPY to have a trade equivalent to a SPX credit spread so the commissions are worse. The tax treatment is worse. And the options are American, so there is at least the possibility of being stuck with early assignment on the short options.

Comment on Question about opening credit spreads on the Russell 2000 index, RUT, and needing 2 accounts by Bob Wilber

Bob Wilber — Thu, 30 Sep 2010 21:18:52 +0000

Having a May RUT 550/560 bear call spread in one account and a May RUT 560/570 bear call spread in another account is exactly the same as having a single May RUT 550/570 bear call spread. The P&L is exactly the same. The net Greeks are the same. The margin required is the same as the total margin required for the two separate accounts. So it makes no sense to have two accounts. Just keep the net position in one account.

Comment on Trade Update – Let’s pick up some premium when the unemployment number is released this Friday by bradrr

bradrr — Thu, 07 Jan 2010 20:31:55 +0000

Hi Ed,

Yes, I agree that we should bring in some modest levels of premium for tighter SPY and RUT Jan bull put spreads, per the advisory that I sent out this morning to MCTO subscribers. Unfortunately, as most of us saw, the DOW was down 60 at the open where we did have some opportunity to open some SPY and RUT Jan bull put spreads, and then the market quickly climbed back to neutral and the premium dried up in less than an hour. The market most likely will move tomorrow, Friday, when the jobs number is released so we’ll probably have another oppotunity to bring in some more premium.

Comment on Trade Update – Let’s pick up some premium when the unemployment number is released this Friday by Ed Evans

Ed Evans — Thu, 07 Jan 2010 14:56:34 +0000

Hi Brad,

Given the postive tone of the news and the probability that tomorrow’s unemployment number will be acceptable, shouldn’t we be addressing the RUT puts today since, at this point, the market is down?

If we wait for Friday’s pre market unemployment news and an update coming from you Thursday night (?) we might not get much for the puts this cycle. As of 9:55am Thursday the 570/580 put mark is $.15 and the 590/600 put mark is $.475 (if that’s a -safe- and valid possibility given the comments/response on the last trade update).

Thanks.

Comment on Index Credit Spread Options Trading Tip by Phil E

Phil E — Wed, 16 Dec 2009 04:07:38 +0000

Brad:
Since there is a lot of liquidity in single leg spreads, what do you say about opening the opposite side, long leg early at a very low price, and then wait for the oscillation to occur and open the short leg later for higher premiium?