Why the Short Put Spread on the Russell was a good idea

by SP Joe

Last week one of our traders decided to go short on some March RUT Put Spreads.  He saw the 200 day moving average acting as good support so selling a put below that would be ideal.  If memory serves, I believe we were looking at the 750/740 put spread.  That is selling the 750s and buying the 740s.  Luckily the selling occured on a downward move securing a premium of .68 ($68), or a 7.29% return on margin.

Return on margin can be figured as the premiums divideded by spread minus the premium, or

68 / (750 - 740 - 68) = 68 / 932 = 7.29%

I told him his line in the should be the 50 day moving average.  Losing that major support we could see push all the way down  to the 200 day moving average.  Looking back on 3/6 we see the RUT break below the 50 day moving average.  We went ahead and kept the position on because the RUT moved completely out of the bollinger bands.  When the index moves out like it did we can expect a bit of a snap back to happen.  Closing the RUT spread would have been closing at the bottom.  With 5 days left to expiration the position looks good to take home the full premium

Here is what we saw on the RUT: