A Weak Rally Rolls Over....Again

Another trading day, another day down for the markets. The bounce this morning was very thin which ultimately rolled over as expected. There was a 2 minute rally as the Fed released its statement but there was nothing new and markets quickly turned back to selling. Markets closed down, again, posting -0.25% to -0.50% losses across the 4 major indexes.

We took advantage of the weak rally this morning to unload an SPX Bull Put Credit Spread that was getting a little too close for comfort due to the selling lately. We bailed on the position as an adjustment would have had to taken place by rolling to June options but would not have given us enough safety to the downside to roll out an additional 30 days. We opportunistically closed the positions to result in a small -$1.10 loss equating to -11.7% for the position.

Keeping losses small is crucial to effective trading. Closing this trade was definitely the right decision as by the end of the day the S&P rolled over, as anticipated, and the spread we closed was trading for a much higher amount. We saved ourselves from losing much, much more by the end of the day; the loss could have been as high as -30% (or more) if we had not pulled the trigger. The S&P may turnaround and rally tomorrow (the last day the SPX index options trade before settling at Friday's open) but adhering to risk management is a better plan than gambling (aka: hoping) for a rally. The S&P closed the day within 5 points of our short spread. The average daily trading range for the S&P is almost 16 points. Bailing for a marginal and manageable loss while adhering to risk management is always the right move.

We "went fishing" for a new SPX spread in the afternoon to replace the morning's closed spread but no triggers occurred. We are not willing to chase trades in this environment and the trade was canceled after the close due to lack of executions. Oh well, we'll move on to the next one.

Now on to better news: Our remaining RUT & QQQ spreads are in good shape heading into expiration. The RUT has one more trading day (tomorrow) and lies almost 20 points above our short spreads providing ample room for further declines before our spreads are in trouble. The QQQ has 2 full trading days before expiration and also lies comfortably above our short strikes. Most importantly, the values of the both spreads are approximately equal to what we collected for selling them. Therefore, we are not reflecting any losses on the trades as the volatility's and probabilities of the spreads point to a successful expiration. Thus, we are comfortable holding them as is for now. For contrast, this was/is not the case for the S&P spread which is why we closed it today.

We will continue to manage the our positions conservatively through May Expiration and into June as the selling is not over. However, a short term tradeable bounce is probably in the cards next week.

Thanks to everyone and have a great day!

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