Selling Vertical Put Spreads

This month I have switched from trading credit spreads and iron condors on the SPX, a cash based index that mirrors the S&P 500, to trading similar positions on the RUT, also a cash based index but one that mirrors the Russel 2000 Small Cap Index.

The reason for this change is that the SPX is only traded in one pit on the CBOE, and my sense is that it is getting increasingly more difficult to get good fills especially when things get busy. In contrast, the RUT is traded on multiple exchanges including several electronic exchanges. Hopefully, this provides for a more efficient market and better overall value for me...the retail trader.

This morning we saw the markets quickly shed a fair bit of their value, but after about 45 minutes of trading they seemed to find their footing although I still see red on the ticker. Nonetheless, I saw this as an opportunity to sell some puts since they were in increasingly high demand.

A word of caution here...

I do not sell naked puts, especially on cash based indexes. This is a dangerous game and not one suitable for most, if not all, traders such as you and me. The reason is because puts act as insurance contracts for the market. If you're selling them, you're acting as a defacto insurance carrier and had better have the capital to pay the losses. Let's just say a bad month could be real trouble.

However, it is very easy to limit your risk of loss by simultaneously purchasing a put contract with each one you sell. You simply buy a put a relatively cheaper put than the one you sell and the difference in price is credited to your account.

This strategy is commonly referred to as a vertical credit spread or, in the case of put options, a bull put spread. So, I have sold some vertical put credit spreads this morning and with a little luck this market sell-off will be short lived.

Good trading!

Christopher Smith
TheOptionClub.com