Option Investor


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The market is a mess and there is blood in the streets. Someone yelled "fire" in the theater and everyone is trying to get out of the one exit. It's ugly, to say the least, and the volatility (VIX) is out of sight (36.22).

So far, however, we've been safe with our September portfolio positions, but with a day left, we face the possibility of having to make an adjustment on one of our positions.

Our September RUT 610/600 spread is fine. We have a 36 point cushion on the 1120/1110 SPX. Obviously, we can't withstand another 50-point down day. So, it appears that, at this level (based on Thursday's closing prices), it would cost about $1.50 to close the position. The optimistic point of view says the market is likely to take a breather and bounce. No guarantee, though. When the market does come back, many think it will come back with a vengence. Jim Cramer says there's still more downside to go, but he didn't say it was necessarily going to be today. For our September positions, we only have to weather today's (Thursday) trading and the Friday morning settlement. This is where you have to examine your risk tolerance. Some will hang in there and others are already making adjustments on their October positions. As I write this (6 a.m. ET), the futures are up over 14 points. Don't get too excited, 14 points can disappear in 10 minutes. Investors often look for these bounces to sell into - especially in this kind of chaos. Be careful out there today. There's nothing wrong with taking a loss to preserve our trading capital and to live to trade another day. Some of the best trades you'll ever make are taking a prudent loss.

Hopefully, we won't have to with our September positions, but be ready. I'll send out an email if/when I decide to GTFO of our SPX spread. However, let your account size and risk tolerance be your personal guide. Everyone has his own exit point. Take care and good luck. I'll be back in touch later. Mike

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