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:  Any time prior to Thursday, Feb 17^th when the RUT ceases to trade after the close of the market, if the RUT climbs over 840 the short 840 Call has gone ITM, and we never want to get to this point.  We would adjust the RUT Feb 840/850 bear call spread when the RUT touches 837 or so.  

Specifically answering your question, if the RUT settles at 839 on Friday, your short 840 call expired OTM and you keep 100% of the premium that you collected when you first opened the RUT Feb 840/850 bear call spread.  If the RUT settles at 843 on expiration Friday, your short 840 call expired $3 ITM and $300 per spread that you are holding would be debited from of your account.  If the RUT settles at 847 on expiration Friday, your short 840 call expired $7 ITM and $700 per spread that you are holding would be debited from of your account.  Using a final example, if the RUT settles at 856 on expiration Friday, your short 840 call expired $16 ITM, but only $1000 per spread that you are holding would be debited from of your account because the long 850 Call helped to limit your loss to $1000.  The settlement value is different from the “opening value of the RUT” on Friday morning of expiration.  It’s important to understand how the settlement value is calculated.  For more on the settlement process please visit the FAQ page at http://www.monthlycashthruoptions.com/FAQ.htm and read entries #24 and #25.

Answer:  We rarely open a complete iron condor at the same time as it’s best to open one side at a time, based on what the underlying is doing.   When we have a strong UP day, it’s best to focus on the top bear call spreads and “sell calls” to the bullish speculators because they are getting excited that the market is rallying, they’ve been thinking that the market is ready to rally, and they are willing to pay more for the Calls.  Since we are a seller of the Calls, we will be able to bring in more premium on the UP days.   It also allows us to select strike prices that are farther out-of-the-money (OTM) and safer where we can still bring in a reasonable level of credit.

On the other hand, when we have a strong DOWN day, it’s good to only focus on the bottom bull put spreads;  the bearish speculators are getting excited, they’ve been thinking that the market is ready to correct so they buy more Puts, and they are willing to pay more for them since the market is DOWN that day.   Since we are the sellers of these Puts, we’ll be able to click farther down in strike price to a safer level, and still be able to bring in a reasonable premium.

Our goal each month is to ultimately complete the iron condor, but we are opening one side at a time.

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:   It depends on how much cash you plan to invest in credit spreads for the month.   It’s good not to put all of your eggs in one basket, so it’s probably not wise to invest more than 50% of your portfolio in a single, non-directional strategy such as credit spreads.  Let’s say you have a $100k portfolio and decide to allocate 45% of your portfolio to credit spreads for the next 30 days.  In this case you would open qty 45 of the RUT bull put spreads.   If you want to further diversify, which would be good idea, you would open a mix of RUT, OEX and SPY spreads, the underlying vehicles that we primarily focus on in the monthlycashthruoptions advisory service,  using the $45k.  Each RUT spread, which is a 10 point spread because we open RUT spreads with 10 points between the sell leg and buy leg, requires $1000 of maintenance to open 1 spread.  Each OEX spread, which is a 5 point spread because we open OEX spreads that have 5 points between the sell leg and buy leg, requires $500 of maintenance to open 1 spread.  Each SPY spread, which is a 2 point spread because we open SPY spreads that have 2 points between the sell leg and buy leg, requires $200 of maintenance to open 1 spread.   Back to our $45k, we would allocate $15k to the RUT spreads, $15k to the OEX spreads and $15k to the SPY spreads.   Thus, we would open 15 of the RUT spreads, 30 of the OEX spreads, and 75 of the SPY spreads.   One negative of opening 2 point wide spreads is that we open many more spreads for a given dollar amount, so commissions become a problem.  Thus, we do our best to open more 10 point wide spreads, and fewer 2 point wide spreads.

Answer:   The required cash (risk capital) to open a 3 point wide credit spread is the $300 of maintenance required by the broker, minus the premium that we collected when we first opened the spread.  For the SPY Dec 108/111 bull put spread, we brought in about $25 of premium per spread.  Thus, the actual risk capital per spread for this case is $300 – $25 = $275.  To calculate the number of spreads that would be opened in your autotrade account, you would divide your $4000 cash allocated per trade by $275, which equals 14 spreads.

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:   Yes, the risk reward for the credit spread is the same whether the spread is 10 points wide or 20 points wide.  However, we recommend that our subscribers have two accounts when trading 10 point wide credit spreads on the RUT because we want to maintain maximum flexibility to allow 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.  (i.e. if we have a 10 point wide bull put spread, we have to open a 10 point wide bear call spread to complete the iron condor)    It is true that if we end up creating a 20 point wide spread on the bottom 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 it’s not that simple and we are alternating between opening the top spreads and the bottom spreads, and we are moving our strike prices around as the underlying index is moving, so it’s better to keep all of our spreads 10 points wide giving us maximum flexibility and the best chance to complete the iron condors on all of our trades.

Answer:   The RUT provides the best strike price placement, usually above past resistance levels and below past support levels, while paying a nice premium when opening a bear call or bull put credit spread options.  It also has good liquidity, i.e. a high number of options contracts are traded daily on the RUT, which allows us to easily get into and out of our trades. 

The next best underlying index to trade credit spread and iron condor options is the SPY, (and ETF that tracks at 1/10th of the value of the  S&P 500 index – SPX) but in order to get the best return we need to open 2 point wide spreads, which has a drawback.  (a 2 point wide spread has two points between the leg that we sell and the leg that we buy)  The negative of a 2 point wide spread, as compared to a 10 point wide spread that we would open on the RUT, is that we have to open 5x the number of spreads to allocate the same amount of cash and this has higher commissions.  Also, the liquidity is very high on the SPY….i.e. a million or more options contracts change hands every day – and this is both good and bad.   The good part is that we can easily get in and out of trades….even during volatile times when the market is moving a lot.   The bad is that when the market is bouncing…and let’s say we need to make an adjustment or roll the spread, because there is so much liquidity we have to pay what the market is asking (between the bid and ask prices)  and we rarely can get a special low price that is outside the bidask price range.   On the other hand, if the market is moving a lot and we need to make an adjustment on the RUT, many times we’ll be able to get a cheap price that is outside of the bid/ask prices.

For a case study that compares and contrasts 2, 3, 4, 5 , 7 and 10 point wide credit spreads on the SPY please go to the Learning Center at http://www.monthlycashthruoptions.com/LearningCenter.htm  and read entry #6 – “why we usually open 2 and 3 point wide spreads on the SPY and IWM”.  

Regarding the SPX, you have to be super careful in trading credit spreads and iron condors on this underlying index.  I liken it to Hotel California….it’s really easy and everyone is friendly when you check in, but when things get ugly and you need to get out of your trade, you’ll usually get your head handed to you. (i.e. it will cost a lot to close out your spread and you’ll probably take at least a 25% loss)    Overall, do your best to avoid trading credit spreads on the SPX.

Answer:  I’m not sure I agree that Iron condors are good for uptrending markets.  Iron condors have both a short put and a short call and we want the underlying stock or index to stay above the short Put and below the short Call through expiration.   In general, with the 90% probability type of credit spreads that we open, we can handle the underlying index moving around 9%, but that’s about it….so it could be trending UP or DOWN, up to 9%,  but after this we’ll have to make an adjustment.

Right now, we’re not feeling comfortable in opening the June bear call spread since the market recently corrected 15% and it could rally hard if some good news comes in.  We just don’t know, but when a market pulls back so hard, it could also rally hard.  This is where I’m using more of the volume based indicators to help me gauge the prevailing trend and to predict trend reversals.  I’m feeling more comfortable in opening the June bull put spreads right now on the Russell 2000 index, RUT, as long as they are down several strike prices below the 200 day SMA and below the Feb low.

Answering your questions specifically, when sentiment/fear makes a market correct, like it just did where it recently pulled-back 15%, this is when we make some of our best returns;  and we primarily focus on one side, the bottom bull put spread.  If the volume based indicators continue to show choppiness over the next week, where it’s not showing a “go long” signal, we might consider opening the top spread….but not sure yet.