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January 3, 2013 / redman59

Why I Initiated a Short Position on the Russell 2000 w/Options

It was hard not to get caught up in the euphoria of the market yesterday and the day before if you were long positions already   There were many comments on the stream yesterday and today about chasing and I would agree.  That comment can also be broken down into size as well.  Sure it is unwise to put on a full long position at these levels but if you were to initiate a 33% or 25% position (depending on your scale model) then you may have a great trade.  As for me I have no long positions at this moment but initiated a 1/2 size short position yesterday on the Russell 2000 (RUT).  I believed things became a bit overextended and I was watching two metrics I like to pay attention to:

  • percent above the 10 EMA (1st indicator pane) looking for a 3% extension 
  • points above the 20 SMA (2nd indicator pane) looking at the 30pt mark for warning and 40pt mark for an extreme

I like to look at these two indicators for times like this when the chase is on.  Also when they breach the points it is a warning and a possible time to initiate a position for a trade in the opposite direction.  We all know that overbought or oversold can become overbought-er or oversold-er (please appreciate the humor) so the time in where I will add to the trade is when the RUT trades back under those points.  Below is a 1 year chart with blue highlighted boxes of where the RUT first breached these points and then traded back under (notes on chart):


The option trade that I chose was the Feb/Jan1 850 Put Calendar for a 13.08 debit.  First here is a chart of the RVX (Russell 2000 VIX) with notes:


With that I was looking for a pullback option strategy that took advantage of a pop in volatility and the strategy that came to mind was the Put Calendar as this took advantage of a pullback and was positive vega.  I did screw up in putting this position on in that I sold the Jan1 option (not much time or benefit) instead of selling the next week Jan2 option.  I only collected 0.15c on that Jan1 option instead of the near 2.00 I could have collected for the Jan2 option.  A mistake on my part.  I do believe that it can be recoverable and I do not have a full position on either so the dent to my account is manageable.  But this is a good lesson in taking the time to slow down and actually confirm the order when that pop-up window asks you.


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