RUT Calendar 7-14

Theta is really starting to kick in, but with expiration approaching we are looking for an opportunity to exit in the next couple of days. Here is my current thinking... If you look at the P&L chart you can see that my "stop" exit point for the current double-calendar (breakeven) bears risk of about $250. In other words, that's my loss if price moves all the way to the upper exit point compared to where I am now. There are several reasons that I like this position and am willing to risk the $250 to hang out for another day or two:

• Theta - We are collecting nearly $200/day in Theta now, so that offsets much of the risk.


• Upside - There is still quite a lot of upside in the position both with Theta and price movement. With nearly $800 of profit available, the risk reward is nearly 3:1.


• Odds - This is perhaps the most compelling reason to hang around a bit longer. The odds in favor of a down move are significant at this point. Here's what I mean... I ran a very quick and dirty backtest on the situation for the past 10 years. There have been 42 circumstances where RUT was overbought to the current degree in the past 10 years. In
  85.7% of the cases it was followed by a significant down move. Does that mean we'll get it this time? Nope. But the odds are in our favor.

Hopefully you get the point that this is a decent probability trade. If 80% of the time I won $800, and 20% of the time I lost $250, I would take that trade every day. Further, I think the market is telling me something through implied volatility. In spite of RUT being up big yesterday, and being up another 3 points today, RVX was UP nearly 1%. Hmmmm... someone out there is buying options. Overall, it's a small amount to risk and a good trade.

Good Trading.