Response:   I would wait a touch longer before jumping into the bear call spreads, if at all.   For the RUT, it would be wise to set our short call at 650 or higher, which is the Jan high.  It’s pretty easy to get burned on the top spreads…so we need to be careful. 

Question:  But it’s interesting to notice with today’s market that even though the DOW is up almost 200 points, NASDAQ 30+ point, and S&P 500 is up 16+, the Call options on these indexes aren’t moving up much.   Why isn’t there much premium on these call options?

Response:    A lot of it comes down to supply and demand and currently there are few speculators that want to buy calls on the major indexes, and rightly so since we might still be in a correction, so the premiums that they are willing to pay are low.   Premiums are low anyway for OTM calls, especially when we’re down to the last 10 days of trade or less before expiration.    We know that  it’s difficult to push a boulder uphill and if we ‘re able to move it, it will move slowly;  however, if we let go it will start to roll down the hill quickly and momentum will build as gravity takes over.   Because the stock market is similar to a boulder on a hill,  we can charge the speculators more for Puts because there is more potential to make money on them if the market has a correction, versus the lower premiums that we are able to charge for the Calls.

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expire, the credit spread on the RUT and SPX (classified as broad based indexes) are cash settled, so cash would be withdrawn from our account.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

Response:   Regarding liquidity.…yes, if too many folks start trading index credit spreads, for example on the S&P 500 and Russell 2000 indexes and ETFs, the risk/reward characteristics of our credit spreads will become less attractive.  So far, however,  there seems to be plenty of  liquidity and the placement of the strike prices are still good.   Luckily, credit spreads are a lot harder than they look, so a certain % of participants get hit every month, scaring them and washing them out..…so it’s my guess that there will be plenty of liquidity for a long time to come.

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:   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.

Response:     I understand your concern.  In general, because we open very far out-of-the-money (OTM) 90% probability credit spreads, we tend to have enough time to close out our bull put spreads and/or make adjustments to cut our losses in the case of a market meltdown.   99% of the time, even when the market pulls back hard, we have time to get out and cut our losses, and we have a 5 year track record of keeping our losses below 10%, which is pretty good.

However, the October 2008 crash was different where we unfortunately ended up riding a few of our spreads down to where they went in-the-money (ITM).  This happened because in addition to the major indexes violently selling-off 3% to 5% per day, volatility also rapidly spiked up to record levels making it very expensive to get out of our spreads. We therefore decided to hold-on hoping for a short lived bounce so we could get out, but unfortunately that never happened as we all know.   So during the Oct ‘08 crash, we actually made very few adjustments to our bull put spreads, thus they they went ITM, and we were able to eventually get back 65% of our original risk capital purely by rolling our ITM spreads month-to-month, rolling down the strike prices of our spreads lower and lower each month, and waiting for the market to rebound a little.   This Oct ‘08 crash gave the MCTO team a good case study on what it takes to roll spreads and to recover a large % of risk capital after a massive crash.  It was painful to go through, but I’m somewhat happy that it forced me and my partner to become experts on rolling in order to preserve capital during a crash.

So per your concern of a one day, 15% or greater stock market crash where our bull put spreads immediately go ITM, we have a lot of experience with what it takes to roll spreads and we are confident that we can get back at least 60% of our risk capital, and possibly as high as 80% of our risk capital, depending on how fast the markets recover.  (An example of an event that would cause a one-day 15% crash is something similar to 9/11, or worse, the detonation of a  nuclear device in a US city by terrorists, which is the type of event that could take the markets down 15% or more in a single day)

Please keep this in mind as you interview other credit spread advisory publishers. Very few, if any, credit spread newsletter editors have experience in rolling.  Most don’t bother with rolling and just throw in the towel and let their subscribers lose 100% of their risk capital.  For us, that’s unacceptable and we fight to the end to preserve our capital using advanced rolling techniques that we practiced and refined during the Oct ‘08 crash.

Answer:   Rolling-up by taking the profit of a spread that already generated profit and rolling the profit into a new spread that has strike prices closer to the underlying index can be a good strategy.  However, the new spread is a separate trade and it has to make sense per all of the analysis that we do.  So when you ask the question -  “Does rolling our profitable spread into a new spread that is closer to the underlying index increases risk?”, as long as the new spread stands on its own per fresh analysis, the risk/reward will be balanced and acceptable.

For me personally, when I feel confident that the underlying index will hold above, or below, my short strike prices of my spreads, and if I have reasonable buffer between the short leg and the underlying index, and if I don’t need to free up the cash, I’ll just let the credit spreads expire worthless.   But if I have any hesitation at all, I’ll close them out early to take the profit and to reduce risk.   Therefore on this trade, I’m probably going to hold onto my SPY Nov 92/94 bull put spreads, and I’ll start bringing in additional premium with the new SPY Nov bull put spread that we recommended in the November 6th advisory