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Staying Covered for a Nickel or Less


Since conditions are abnormal, put spreads are unusually cheap.

I sense complacency in this marketplace.

I know that's not saying much because implied volatility, as measured by the CBOE Volatility Index (VIX) has been creeping lower and lower -- and lower VIX has generally been accepted as a sign of complacency for almost as long as the VIX has been in existence (since 1988). When the markets are rising, investors with short memories lose all fear.

When investors aren't in any hurry to own options for protection, there's nothing to drive option prices higher. And as a consequence, implied volatility -- and option prices -- trend lower.

When markets tumble, when insurance is costly, that's when investors everywhere outbid each other to buy puts as protection for their investment portfolios -- or as an outright speculation that the markets will continue lower.

What feels different this time is that I'm able to close positions by buying put spreads (these represent half of my iron-condor positions) at very low prices. I admit that these FOTM spreads aren't worth all that much, but under normal conditions (whatever that means these days), no one is willing to sell cheap put spreads.

With RUT near 550, yesterday I was able to cover RUT August 410/420 put spreads for $0.03 and $0.04. In a different account, I covered the August 420/430 spreads by paying $0.05. I know these are far OTM, but there are still 4 weeks remaining before August options expire. Any of you who have tried to buy put spreads to exit a position probably remember that the prices for put spreads are always higher than we really want to pay. Not this time. That's unusual.

I'm not predicting anything, but 4 weeks is a long time -- even if we're experiencing the summer doldrums. I'm not staying short any spreads for a nickel. That's prudent risk management.

Although the call portions of the iron condors haven't done as well, there are more than enough naked long call options to cover the risk.
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