On Christmas day, just three short days ago, I wrote about the great problem of having the market skyrocket up in one direction to make a position completely profitable.

Over the last three days, the RUT has dropped about 20 points or so thereby removing any possibility of buying myself out of the 670/660 vertical spread today for ~$0.10.

However, I’m not worried about it one bit. If you read the article on Christmas day and looked over the criteria I am using to make the decision, you should understand why. Even though the the RUT has dropped to right around 770 today, I still have a 100 point cushion on the trade. Furthermore, if I pull up my trusty tools from thinkorswim, the calculated probability of the RUT expiring below 670 on Jan 21, 2008 is about 1.5% today. Top top it all off, I originally entered the position when the RUT was at 750!

What does that mean? Well, first off all it means that I’m in a fairly safe trade. Secondly, it means that unless I really need the margin dollars, I’m buying the position back for quite a bit more than the risk associated with the position. With the RUT this far away from my strike prices, it is important to me to look at the percentages. And finally, I don’t think that the recent world events changed the market dynamics enough to cause panic, yet.

We’ll see over the next few weeks how it all plays out. I have the position open in my papermoney and personal account.

Properly exiting a position is a key part of a successful trading strategy. This week, I’ve got an interesting problem on my hands.

Last week, on the 20th of December I put on a killer papermoney trade. I was able to get a great price on a pull put spread. For a $0.69 credit, I was able to sell the 670/660 January vertical spread, with the sitting at about 750 or so. Over the past few days the index has shot up and is now sitting right around 795.

Last night, I did a quick check on the option chains and noticed that the price for this spread has dropped to a range of $0.20 – $0.05. That means that I could likely buy this spread back for about a nickel or so.

The question now becomes what to do? I sold 75 contracts that expire in January and now have a the option to unravel the position and take the risk off of the table. Here are the things that I’m considering as I make the decision…

1. Do I need the margin dollars?
2. What is the calculated risk that is still in play on the trade?
3. How much will it cost to take the trade off the table?
4. Has anything changed since I have put on the trade that makes me feel as though it needs to be closed?
5. Is there anything else to consider?

So, given those questions, lets run it down for the papermoney account…

1. For the papermoney account, nope. I don’t need the margin dollars at all. There is plenty of margin available in this account.
2. The calculated risk has dropped to almost nothing.
3. Very likely, I could buy this position back for about $0.10 without any issues. Of course, you need to take into account commissions as well.
4. There isn’t much that has changed in the marketplace since I put on the trade. The markets have moved up, but then again they had been moving down hard before I put it on.
5. The only thing else on the trade that I would consider during this time of the year is taxes. Since this is a fake account, I don’t really care. However, I would consider this for my personal account.

So where does this all leave me? Well, I think the best bet here is to just sit tight and watch what the market does. I am sitting on a massive 120 point or so cushion on this position and I don’t see any real reason to give away more 13% or so of the profit based upon the risk.

I will consider this further for my personal account and post an update if I chose to unwind my personal position. I feel pretty good about the entire position, I will look at the tax implications as the week progresses. I won’t go into all the details of this here – just talk to your accountant!

However, if the market turns the other way and begins to run hard down, I will not hesitate to take my money and run – in both accounts! Anyhow, I hope your Christmas is great and that your trading year has been profitable. While I haven’t made a lot of trades in the account this year, it has been another very good one!

Merry Christmas!

Well its the last week of the March option cycle, and I’ve got a couple of nice fat cushions on each of my positions. This morning the market opened up, as I write this is the SPX is up 5.53 and the RUT is up 7.43; currently they sit as 1287 and 733 respectively. And that’s just fine with me!

My two positions this month both have a nice 40+ point cushion on the top.

• The RUT position is a 660/670 780/790 Iron Condor
• The SPX position is an 1175/1190 1340/1355 Iron Condor

I’ve started to look for early exit points on each of these trades and will pull the trigger if the market continues to shoot up this week. The end of last week marks the beginning of a possible rally in the market, however I don’t think it quite has the steam it needs to be successful. While it was a nice 100 point pop for the DOW, volume was very light and there wasn’t any bad news.

Expiration week is always an exciting time, it’s a time to keep your eyes peeled and your ears to the ground. The settlements on Friday will determine the profitability of these trades, so the momentum going into those days will be critical.

Lately I’ve been spending a lot of time evaluating potential investments, both in the stock market and new businesses. As a part of this process, I’ve been struck with the importance of knowing when to get in, and when to get out. In my opinion it is critical to have a clear entry and exit strategy for any investment you choose to undertake, no matter how large or small.

For example, lets take an option trade… Heck, lets take my latest position on the Russell 2000. So the position is an Iron Condor and will expire in the month of March. The inside strike prices are 670 and 780, so it makes some sense that I would want to be out if the underlying gets to 670 or 780

For those that are not familiar with an Iron Condor, basically it is a complex option position consisting of 4 different options. For this particular Iron Condor the following options are used March 660 RUT Put, March 670 RUT Put, March 780 RUT Put and March 790 RUT Put. To setup Iron Condor I typically buy/sell two vertical spreads. In this case, the 660/670 Put spread was sold first, then the 780/790 Call spread. In the end you are long two options and short two options. When selling the condor, you are short the inside strikes and long the outside strikes.

If the position is held till expiration, you are only risking the difference in each vertical spreads strike price. In the RUT example, my risk is $10 (the difference between 660-670 or 780-790). The risk is not $20, because you can’t be wrong on both sides! If you have a good broker, you will only have margin held for your max risk ($1,000 per contract). Remember, options work in multiples of 100: 1 Contract = the right to buy or sell 100 shares

So if you want to be out no matter what when the position hits 670 or 780, then it stands to reason that you would want to get out at some defined time/price before you reach the get out now prices. To be honest, I don’t have a clear system defined for this yet. For me its more a feel thing on the position, suffice to say, if the position is moving quickly towards my get out now prices I get out! For this Russell position here is my criteria:

• If the Russell trades at or above 770 on or before March 10th, I’ll get out.

• If the Russell trades at or above 775 on or before Expiration, I’ll get out.

• Depending on the market during the week of Expiration, I’ll evaluate closing the call spread. Due to the small credit taken in to open the position, it may not be viable to close the spread. This particular position will likely not be closed unless it is in danger; I plan to just let this expire worthless

• If the Russell trades at or below 680 – I’m out. If the Russell can fall over 50 points in two weeks – I’ll run!

So now there is a defined exit strategy, but what was my entry criteria? In this particular trade, I was looking for a position that had a nice short term ROI while maintaining minimum risk. Given that there isn’t a lot of premium available in the markets lately, anything in the 5-10% for 3 weeks was good enough for me. If my money is going to be on the line much longer, the ROI will need to move much closer to the 10% range. For this Russell position, I defined minimum risk as at least a 90% change of success.

So there you have it, entry and exit criteria for a trade. Now the key is to simply follow the rules and let your emotions go by the wayside!

Later this week I’ll write about my thoughts on larger, longer term investments. Currently I’m evaluating the potential formation of a franchise business, so I’ll dive into what my thoughts are on this as well.