RUT Credit Spread Variation

To say markets have had a pretty decent run lately would be a bit of an understatement. The RUT has rallied 10.7% in the last 19 trading days. Truly amazing.

Friday was options expiry for stocks and ETF’s and I got the feeling that market makers were really trying to punish the shorts and inflict the maximum amount of pain. Quite a lot of shorts will have been stopped out now, so you have to wonder who is left to buy (or cover shorts). Shorts have been totally fried over the last two week.

That being said, stocks could continue their slow and steady grind higher over the next few weeks. With that in mind, the following trade looks very attractive to me. It’s basically a credit spread with protection which also creates a profit zone above the current market.

Buy 3 June 20th 1030 Calls
Sell 15 June 20th 1040 Calls
Buy 12 June 20th 1060 Calls

RUT Trade 1


The trade is risking about $19,300 and has a potential profit of $1,700 or slightly more if RUT expires in the profit zone. 1030 is 3.4% above where RUT closed on Friday and the short strikes at 1040 is 4.4% above, so you have a little bit of margin for error.

Another way to structure the trade would be to create a larger profit zone, such as this

Buy 3 June 20th 1020 Calls
Sell 3 June 20th 1030 Calls
Sell 15 June 20th 1040 Calls
Buy 15 June 20th 1060 Calls

RUT Trade 2

You can see that the greeks are fairly similar as is the capital at risk and profit potential, however there is a really nice profit zone that RUT could potentially rally into over the next 4-5 weeks.

Get a Free Copy Of All My Trading Tools and Resources

 

Leave A Reply (8 comments So Far)

  • Marci

    Yes, broken wing butterfly and condor is a good vehicle. I like it. But this position is negativ vega and delta. If price continue rally? hm…. If break even is far, than vega and delta is positiv… hm….. no risk, no reward :-)

    • http://www.optionstradingiq.com/ Options Trading IQ

      Hi Marci,

      Yes, this one was a bit of a directional play. Thankfully things worked out well!

  • Theo

    Your 1/5/4 (skipped) ratio BWB looks like it may be on some serious steroids!!! lol. Very commission intensive too. I’m a huge fan of (1/3/2) BWB. So i love the concept on how u are using this BWB with no downside risk & plenty of elbow room for RUT to continue it’s ascent. Your Unbalanced Condor is more interesting for me. . I’ve never seened a condor constructed like that. Does your site provide instruction on Unbalanced Condors? Hard to find any substantive info on Unb. Condors on the net. What puzzles me about this condor – u are risking over $55K margin – for a little over $2400 credit. Very low risk/reward ratio – under 5% ROI if trade expires worthless. If u bail out early – your ROI is even less. . Is it worth it?

    • http://www.optionstradingiq.com/ Options Trading IQ

      Hi Theo,

      There was a typo above, I was long 15 of the 1060 calls, not 12. I’ve fixed this now. Total capital at risk on the trade was only $19,000.

  • http://twitter.com/LenS04604802 LenS

    Gav I surrendered weeks ago. Up another 50 points this morning :-( Yes you are
    crazy for making a bearish trade :-)

    • http://www.optionstradingiq.com/ Options Trading IQ

      Hi LenS,

      Looks like things worked out ok, 60% of potential profit has been made within 1 week, so I take profits on this now and wait for the next opportunity.

  • ARCHER

    HOW WOULD YOU DEFEND THIS TRADE TO THE UPSIDE? I HAVE ALLWAYS BEEN INTRIGED BY BWB, WHICH MARGINS ARE MUCH HIGER THAN UNBALANCED BWB.THANKS

    • http://www.optionstradingiq.com/ Options Trading IQ

      I would roll up the credit spread and hold on to the debit spread. I could also add some put credit spreads to reduce the short delta.

How To Trade