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:   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%.