Option Investor


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TIME TO GO! Today there was too much heat and it was time to get out of the kitchen. Unfortunately, Thursday's bounce didn't hold and the market broke down. We were forced to close the position for a $3,000 loss earlier in the day.

Here is how we closed out our 690/680 RUT bull put spread today. After some calculations based our our account size and our risk tolerance, we determined that the maximum pain we were willing to accept would be a loss of $3,000 on the RUT trade. If we divide the $3,000 by the 15 contracts, we get $200 per contract (or $2.00 per share).

We originally took in $110 per contract (or $1.10 per share). Add the $1.10 to the $2.00 and we have $3.10. That means, if we close out the bull put spread at $3.10, we will have a loss in that 15-contract position of $3,000 (figuring in the premium taken in originally).

I had other committments today, so I may have paid a bit more to close it out than I might have had I been around to negotiate. But, that's part of the game. Earlier, a contingency order was placed to close the bull put spread once it reached a cost of $3.10 ($4,650). It was filled shortly after the market opened. Taking these losses is painful, but it's a cost of doing business. I know that's easy to say, but tough to do. It's actually a relief. It cleans the slate.

With the SPX currently threatening our bull put spread position, we may be facing our fourth monthly loss in the last 3 1/2 years. Mierde happens -- and it may be happening this month. Be prepared. Be strong and be decisive!

Take care and trade smart.


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