Option Investor


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Good Morning Gang,

At 7 a.m. (ET) we got word that the Fed is lowering rates by .5 points. It's encouraging, but not as much as many were hoping for.

The futures were up initially, but has given it all back.

Here is an alternative for our positions. Our positions do not have a great deal of value left at this point. The government has been doing a variety of things to try to pump up the system. However, the effects of these moves will require some time to kick in. As they begin to work, confidence will slowly return and money will come back into the market.

If this morning's rally doesn't hold, I will be looking for a way to buy some time for our positions. That would involve rolling our positions out to a future expiration cycle.

Based on yesterday's closing prices, you might be able to close out our October 600/590 RUT spread for about $7.50. That would salvage over $2 of our $10. If you believe that, in the next two months, the market will bounce back, you might roll your position to the December 600/590 bull put spread and take in a credit of about $5.30.

That would result in a debit of about $2.20. We originally took in $.55. That would leave us with a net debit of $1.65. It would take some time, but it's a reasonable alternative. One aspect that you need to be aware of is that, in the new December spread, you will again be exposed for $10. You are, in effect, increasing your exposure by $2.20 - the amount of the debit.

If you raise your December rollout strikes to 610/600, you will reduce your debit. Instead of $2.20, it might only be $1.90.

It's your call. When the market opens in an hour, it's going to be chaos again. Prices will be moving fast.

If you decide to roll out, you should do it in a single transaction. Close the current position and open the new position for a net debit. That way, your maintenance requirements won't change and you'll only need to have cash in your account to cover the debit ($2.20 in the example above)

Most good brokers will have the ability for you to generate such an order. If you can't place the order online, call your broker and put him to work. Be very specific in your instructions.

You can do a similar calculation with the SPX bull put spread.

In the time that it has taken to write this article, the futures are down 20 points. This is going to be ugly. But, hopefully, I've given you an alternative. Perhaps today will be the capitulation day. Perhaps.

Good luck,


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