Tuesday, April 14, 2009

Stuck in a RUT

I've mentioned bull put spreads in past posts, one of which you can view here. Due to the recent bullishness in the market, I wanted to throw out a bull put trade example. To take advantage of the nice little uptrend in the RUT, I decided to sell some OTM put spreads a few days back. Here's a trade recap:The rationale for the put spread was to exploit the uptrend in the RUT. Since the March bottom, everytime the market has retraced 2 days, the bulls have returned in force, pushing the market back up to continue the uptrend. Not knowing whether or not the RUT would retrace a third day, I chose to sell the put spreads towards the end of the 2nd down day (april 7th). So far it's worked out rather well.

Trade Inception:
April 7th
May 350-340 put spread
Net Credit = $1
Max Reward = $1
Max Risk = $9

Rather than hold to expiry in an effort to realize the entire $1, My personal preference is to close the spread ASAP at $.20 or less. Currently the put spread is around $.40, so I'm still waiting for it to decay a bit more before closing the trade.



Rohit Agrawal said...

Hi Tyler,

Thanks for the post. A question pls: for credit spreads like this one (bull put or the bear call), you would want time decay to work in your favor. In that case, wouldn't it be better to put these spreads on about 2 weeks before expiration? this way the time decay is the fastest and you gain the most.

Am i thinking about this the right way? Thanks in advance.


Tyler Craig said...


I appreciate the question, as I'm sure this is a question in the minds of other option traders. I'll reply in detail as a new blog post, so watch for it later today or tomorrow