Some Additional Analysis on the RUT Trade

by Ryan Barr on January 11, 2008

in Options Trading, Papermoney

So, let’s take a look at the current RUT(650.29 -0.47) trade.   Below is a snapshot that I took from the Analyze page in the thinkorswim platform for my current papermoney Russell 2000 position.

The Analyze Page

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!

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  • Good luck man! I'd really look at other options if they are out there. I don't know what your portfolio looks like over all, but if you can roll out into some IWM verticals that may workout better. Because the strikes are so close, you might be able to do a larger number of contracts at a smaller credit to cover the trade. Anyhow, good luck!

    -rb
  • Tom Childs
    Ryan,

    Thanks for taking the time to give me your input. I think I am going to have to kick the can and roll out to Feb 730/720, and like you said, wait for a bounce and possibly buy out at that point.

    Thanks Again,

    Tom
  • That doesn't seem like a fun position to be in at all. 720/710 is a little ugly right now.

    So as it stands right now your out $1,000 less your credit per contract. Time is really working against you right now.

    If you feel comfortable making a call on the market, you could try to hold off and hope the market goes up this week, you would also be taking expiration risk. You'd really need the RUT to head upwards of 712 buy back on Thursday for more than you could today. If the RUT slips, you're going to feel the pain - potentially a lot of pain.

    I don't know that I'd vertically roll out to 730/720. That means that you are going to go short in the money puts and hope that the market rises. If it doesn't go up, you're really going to be just giving away commissions.

    Personally, I'd view the 730/720 put spread as a directional position and I don't know that I'd want to go directionally long right now. I'm sure that the market will bounce up and down, if you wanted to go short that spread, then close it for a smallish debit when the market bounces that may be a good idea.

    Another one that I'd look at right now is to put on short PUT spread on the IWM or SPY. These are the futures for the RUT and SPX respectively. With the VIX up were it is right now, you can put on some really nice spreads for really solid credits in these guys.

    I hope that helps, good luck!

    -rb
  • Tom Childs
    Hello Ryan,

    I enjoyed reading several of your blog posts. I am also a TOS user and actively trade
    RUT iron condors. I have only been doing it for about six months now. I am in a bit of
    a quandry right now that I thought you might be able to give me your take on. Before
    I give you the details, who ever would have predicted a 9% correction to bring in the
    new year. Here it is - I am short the 720/710 RUT Put spread. I sold an entire iron
    condor on 12/21 for $1.60 but have since closed out the worthless call side, so I am now left
    with this disastrous put spread. With only 4 trading days left, the actions I can take, or not take, are very expensive at this point. The way
    I see it, if I want to bail out now, the best thing to do is to do a vertical roll into Feb,
    and raise the spread to 730/720 to minimize my debit to only $.65. This obviously is
    in hopes of a rebound out of the money by then. I would greatly appreciate your
    thoughts. Thank You - Tom
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