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!

There it is… so far it looks as though we finally got the bounce I had been waiting for. The Russell flew up about 17 points this morning at the opening and the overall markets look like they will continue to move forward as we get a slight relief bounce. Barring any bad news today, it looks as though all of the trades closed this week would have held up just fine.

So what does this tell me? First off it tells me that the analysis was correct, but it also is a very clear (and expensive) reminder that there are other factors that need to be analyzed in the market at all times. It’s important to look at the big picture, and in these past few weeks I under estimated the level of FUD out there. I am still surprised by the severity of the correction we experienced and now it’s time move forward to the next month.

I’m going to do some quick analysis today, and depending on how things look, I may open a new directional July position. I will be looking for some additional confirmation of the short term upward bias before committing capital, and will post updates as they present themselves.

I’ll put up a what if this weekend showing what might have happened based upon Friday’s settlement numbers in both accounts. Enjoy your week!

Update
I did put on a papermoney trade today. I bought 50 SPY July 127 Calls for $1.45 ($7,250 + $85.95 in Commisions). That takes the cash balance in the papermoney account down to $82,281.00, it looks like I can sell them for $1.65 right at the close of the market today. Futures are up, so I’ll likely unload them tomorrow for a quick profit. I don’t want to try and ride a rally too long… I’d rather take a quick profit, feel good about it and move onto July long term positions…