So, let’s take a look at the current RUT(650.91 +0.15) trade.   Below is a snapshot that I took from the Analyze page in the thinkorswim platform for my current papermoney Russell 2000 position.

Here is what you are looking at.  The white line is Jan 10th 2008 theoretical value of the current position, the green is the 11th, blue the 12th and so on.  On the X axis is the price of the RUT index, on the Y axis is the profit or loss of the position, should it be sold on that day at that price.

What does all of this mean… Well, this is basically saying that as it stands right now, this position could be closed out for somewhere around $2,000 in profits, less commissions.  If the RUT index doesn’t move at all the position could be closed for approx $4,750 in profits on Monday (the dotted red vertical line).

What is interesting to look at is the decay from Friday to Monday.  You can see that we will be above the break-even point anywhere above 700 on Monday, but today we have to be above about 712 or so.  That is the time decay of options at work!

What I’m doing by looking at this chart is simply looking to see what the risk vs. reward pattern is for this trade.  If the RUT shows continued strength on Friday and shoots up towards the 725 range, does it make sense to cancel my buy order for $0.15 and simply let it ride over the weekend knowing that time is really working in my favor…

Looking at the chart, I would say it makes complete sense.  Why on earth would I want to leave profits on the table?  Time value is going to erode away over the weekend and I should be able to absorb a 15 or so point gap down in the morning and still get out on Monday for the closing value on Friday…

These charts will be watched during the day tomorrow to make my final decision.  Given the number of days to expiration and the rapid decay in the position, I may modify my closing order to be a buy back for $0.10 or so.  I do not think that I will let this position ride into expiration Friday.   I still haven’t made a final decision on this and may change my mind if it the position is still open and the market shows lots of strength in the coming week.

Anyhow, just some more food for thought.  Good luck, trade smart!

Thanks Ben!  So the fed chairmen had a quick chat today.  In his speech he indicated that there are risks to the marketplace and economy, however he said that the fed is prepared to take “substantive additional action.”  I read that as a nice big fat rate cut at the end of this month.

I’m really hoping that this is something along the lines of 50 basis points or more.  It is quite possible that they will only do 25 basis points; however, I think that would be a big, big mistake.  They are still concerned about rising commodity prices and inflation – both perfectly reasonable concerns.

This movement has sent the markets up, at the RUT(650.91 +0.15) has been moving right along with the other major indexes.  It is very, very possible that over the next two days or so I will get a fill on my $0.15 buy back.  If the markets continue to move higher today I will re-evaluate this order.

Given the extreme rate of time decay right now, there may be an opportunity to hedge against market movement in this position as a result of favorable decay.  Basically, this means that each and every day the position it in the market, it loses value.  Given that I am short that means that I am making move each day it sits out there.

Depending on market movements, I’ll open up my trusty tools from thinkorswim and head over to the analyze page.  From there, I’ll put in a little bit of special magic and be able to see the theoretical value  for each day as we move forward.  I’ll put up a little post about it so that you understand a pretty neat way to use these tools.

Anyhow, good luck and trade smart!

For those of you tracking the PaperMoney Russell 2000 RUT(650.91 +0.15) position, things are looking pretty darn good!

As they days continue to tick away the trade looks like it is going to hold up nicely. As I type this the RUT is making a run away from the session lows, pushing up above the 726 mark. It really looks to me like the index has hit a temporary bottom.

I pulled up a quick chart on prophet today in my thinkorswim tools, take a look.

You can see that the RUT has dropped below the lower acceleration band, however it has not continued its movement down. The RSI is still hovering around 25 indicating a very oversold situation. I expect that the RUT will rebound up back into the 730+ range today or over the next few days.

Heck, even Tim Knight is going long the RUT! (If you don’t read his blog Slope of Hope with Time Knight, you really should)

Given that we are just about a week and a half from expiration, time is on our side. The value of these options is going to start very rapid time decay and we should end up sitting pretty, walking to the bank. I do have this trade open in my personal account so I’ll be walking to the bank as well!

Anyhow, good luck out there. Things are looking pretty choppy and the VIX(23.76 -0.49) is going to be our friend for a while!

Update

Ouch… That turned around quickly. It looks like the bottom fell out for whatever reason on the RUT took a dive. The whole market actually took a bit of a dive so we’ll have to figure that one out. I’m still feeling pretty good about the whole situation as we still have a 35 point cushion. I will be watching closely this week and will have to determine the course of action as the days move ahead. Another 5% drop in the index seems too dramatic, however if the Bears really get a hold of things, it is possible.

Remember, the markets always drop faster than they rise!