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.

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expire, the credit spread on the RUT and SPX (classified as broad based indexes) are cash settled, so cash would be withdrawn from our account.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%.

Answer:    So far we’ve placed 4 options trades in the auto trade accounts for the January cycle.  Three, 2 point wide SPY credit spreads and one, 10 point wide SPX credit spread options.   We  send a maximum of 5 trade alerts each month that uses 100% of your cash, and so far we’ve sent four.  (at least our goal is to send 5 auto-trade trade alerts, but sometimes we’re not able to invest all of your cash for a particular month….like in the last 3 months due to how the market has been behaving)

The reason we’re focusing on the S&P 500 index this month is that we’re a little concerned that the RUT might spike-up to play “catch-up”….so we’re under weighting on the RUT and over weighting on the big-cap S&P 500 index this month.  Because the US dollar is strengthening, this also will put a little downward pressure on the big-cap stocks that reside in the S&P 500 index, which gives us a higher probability that our top January bear call spreads will expire profitable.

Per the topic of diversification, because these are indexes, they are already diversified since each is composed of hundreds, if not thousands of stocks.   The big cap index does move a little differently as compared to how the mid-cap and small-cap indexes move, so this does provide a small amount of diversification, but we don’t want to use all of these indexes just for the sake of trying to diversify.  We  look at each index as a independent trading vehicle and if the technicals, strike price placement and levels of premium look good offering us a decent risk/reward profile, we’ll open the trade.    In the process,  if we’re able to open credit spreads on multiple indexes giving us a little bit of added diversification, all the better.

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.

Answer:   Periodically, we’ll have a short term spike or sell-off in the underlying index in the last two weeks of trade before expiration giving us a final chance to open some additional spreads.  So in the last few weeks of trade, I continue to show the currently recommended strike prices and price ranges, even though there is a low probability that we’ll have another opportunity to open more spreads.  In general, when we are down to the last 2 weeks of trade before expiration, premium usually dries up and we won’t have the opportunity to open additional credit spreads.  (especially for the top spreads)    We do monitor the recommended strike prices and credit price range daily and we’ll move them up or down, or remove them completely when the risk/reward characteristics of the trade no longer make sense.    

Per opening credit spreads that are 5 weeks in duration, yes, it usually works and you can bring in excellent levels of premium.  However, just due to how the market has been behaving in the last 4 months, I’ve shied away from 5 week trades and have focused on 2 to 4 week trades to reduce the time exposure risk.  We are also able to open shorter duration, 2 to 4 week credit spreads because volatility, VIX, is elevated making them more expensive and allowing us to bring in higher levels of premium.

Answer:   As long as the recommended spread is filling for between 45 and 70 cents, we open the recommended spreads using the price that it’s currently filling at on that particular day, and we use about 20% of the available cash for that day.  We then pause and wait for the next day when it’s filling again betwen 45 and 70 cents.  (i.e. we collect premium over time, which helps reduce risk)    If at any time it starts to fill for 71 cents or more, the spread no longer has a 90% probability of expiring OTM and profitable, but it has an 83% (just a guess…but probably close)  probability of expiring profitable.   Because we have the goal of opening 90% probability credit spread options, we then would move our strike prices away from the underlying index ”one-click” so we can bring the probability back to the 90% level.

Answer:   Yes, you can use our analysis and signals on the RUT (Russell 2000 Index) to trade the IWM (and ETF that tracks at 1/10th the value of the Russell 2000 index – RUT).     Just make sure you select the same short leg.    For example, if we issue a signal to trade the RUT Dec 650/660 bear call spread, you could also trade the IWM Dec 65/67 bear call spread and the risk/reward profile for both trades is very similar.   It’s best to stick with 2 point or 3 point spreads on the IWM.   (i.e. either a 65/67 or 65/68 bear call spread….per this example)    For more on why we use 2 point or 3 point spreads on the ETFs, please go to the Monthly Cash Thru Options Learning Center at  http://www.monthlycashthruoptions.com/LearningCenter.htm   and read the entry  “why we usually open 3 point spreads on the SPY”

Question:  Which one do you prefer to write credit spread and iron condor options against….the SPY or IWM?

Answer:    Both have similar risk/reward profiles.   Sometimes, however, we can get better placement for our strike prices on the IWM, but it does vary from month to month.  That’s why we have to analyze the trades on each underlying ETF each month to see which underlying offers the best placement of our strike prices.

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.

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.