Volatile Friday Aug 5, 2011

Better than expected, but still not so good, employment numbers apparently moved the markets higher this morning. Perhaps the rally was the result of unhappy bulls taking another plunge. I have no idea what really moves the markets, but all I know is that I took a 10-minute break and came back to find that RUT was down 16 points.

There is no doubt that this is a volatile market.

Protect Yourself

We all hate to give up profit opportunities, but the number one concern for premium sellers must be to stay in the game. The good news is that when IV is high, there are opportunities that are not present when IV is much lower.

Yesterday and today, I have been buying back RUT October calls spreads at 25 cents each,and now am short none of the call spreads sold originally. They are all closed.

I am also moving my short put spreads lower. Sometimes I roll one for one, sometimes I sell a few extra. Please understand that the rationale for selling extra put spreads is NOT to bring in extra money. It is merely my adding to positions when I am still under-invested.

For example, right now I have an order in (I doubt it will get filed) to buy back 4 RUT Oct 690/700P spreads and sell 8 Oct 590/600 spreads. I am willing to pay a small debit (70 cents, or $280 total) to move this position to a much better strike price. It is that fact that IV is so high that makes it possible to have a chance to sell that 590/600 spread.

A more conservative choice is to buy the 4 spreads and sell only six 620/630 spreads, or perhaps only four (in other words, one for one) 630/640s or 640/650s. The point is that we can make much better portfolios if we are not in panic mode and have a chance to consider our actions.

As I finish this short piece, I see that RUT is back to zero, rallying almost as quickly as it fell.
This is a volatile market indeed.

Please be careful.

Update, 10 minutes later

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