Updates, Sunday, 01/30/2005 09:17:09 AM ET
HAVING TROUBLE PRINTING?
Are we back in a trading range? Could be. The volatility numbers indicate that we could be bouncing right along in a trading range for a while. Seems like an opportune time to put on a new QQQQ ITM Strangle position.
It's a solid, conservative cashflow generating strategy. Our last position showed a very nice percentage gain on our risk, but I should have done better. Obviously, it's ideal if the QQQQs stay in our trading range. However, equally as important to the success of this strategy is the rolling out from one month to the next. I could have done it better.
The New Position
Buy 10 QQQQ January 2007 $32 Calls@ $8.50 ($8,500)
Buy 10 QQQQ January 2007 $42 Puts @ $6.10 ($6,100)
Total cost for long LEAPS: $14.60 ($14,600)
Sell 10 QQQQ March 2005 $36 Put @ $.55 ($550)
Sell 10 QQQQ March 2005 $38 Call @ $.55 ($550)
Total premium received from short options: $1.10 ($1,100)
Long-time CPTI students know all about the ITM Strangle. A number of new students have enrolled, so I'm going to give a brief overview of the strategy to get them up to speed.
The QQQQ ITM strangle is essentially two calendar spreads going in opposite directions. When we buy the $32 call and the $42 put we have created a scenario in which we have a minimum of $10 of intrinsic value. Wherever the QQQQs trade, there will be at least $10 of value between the two LEAPS options. Notice that it cost us $14,600 for the LEAPS. $10,000 of the $14,600 is intrinsic value and will never be at risk. The remaining $4,600 is time value that will erode away very slowly over the next 23+ months. Therefore, it's only $4,600 that is at risk.
We're going to make money every month by selling near term calls against our long term LEAPS. After our initial sale of March options, we have 22 months left until the January 2007 expiration of the LEAPS options. If we can average $.50/month in premium from selling the near term options, we will have collected a total of $12,100. Some months we'll make more, some less.
If we hold the position through January 2007 expiration, our profit will be $7,500 ($12,100 - $4,600) on a risk of $4,600. That's a gain of 163%. Keep in mind that is the result if everything goes perfectly - and we know that isn't going to happen. We may have to make a range adjustment between now and January 2007 and it will cost us about $3,000 each time.
So, we'll take it one month at a time and roll out the best we can. If all goes reasonably well, we should generate a nice chunk of cash - even if we have to make a range adjustment or two. Whatever the gain, it will likely beat the hell out of any mutual fund, CD or the results of any directional trading.
Remember, this trade is for educational purposes. If you decide to put on a similar trade, you can personalize it. Some will use only an 8-point spread between the LEAPS to tie up less money. Others may use a 12 point spread between the LEAPS. It ties up a little more money, but there is less time value at risk.
Spring Seminar Updates
Spots are filling up fast. Make your reservation early.
March 19/20 - Jacksonville, FL
April 16/17 - Chicago, IL
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Check out Wednesday's (1/28) column for details. Contact me at Contact Support for further details on the seminars.
"Yesterday is a cancelled check.
Tomorrow is a promisary note.
Today is cash....spend it wisely."
February Position #1 - SPX Iron Condor - 1171.35
We sold 10 SPX Feb. 1255 calls and bought 10 SPX Feb. 1265 calls for a credit of about: $.50 ($500). Then we sold 10 SPX Feb. 1140 puts and bought 10 SPX Feb. 1130 puts for a credit of about: $1.00 ($1,000). Our total net credit was $1.50 ($1,500). Maintenance of $10,000. We've created a maximum profit range of 1140 to 1255 -- that's 115 points. If everything works out as planned, our return on risk will be 17.6%. We're still conservative and defensive minded. That's why we're limiting our spread size to 10 points or less.
February Position #2 - OEX Bull Put Spread - 560.95
We sold 15 OEX Feb 530 puts and bought 15 OEX Feb 520 puts for a credit of about $.50 ($750). Our net credit and potential profit is $750. Maintenance of $15,000. We're going to be content to put on the bull put spread for now. If/when the time is right, we'll put on the bear call spread to complete the Iron Condor.
February Position #3 - MSH Iron Condor - 466.98
We sold 10 MSH February 430 puts and bought 10 MSH February 420 puts for a credit of about $.60 ($600). Then we sold 10 MSH February 510 calls and bought 10 MSH February 520 calls for a credit of about $.55 ($550). We have a net credit and profit potential of about $1.15 ($1,150). Our maximum profit range is 430 to 510. 510 looks like solid resistance and 430 is comfortably below other support levels. Maintenance is $10,000.
February Position #4 - SPX Iron Condor - 1171.35
We sold 10 SPX February 1230 calls and bought 10 SPX February 1240 calls for a credit of about $.40 ($400). Then we sold 10 SPX February 1120 puts and bought 10 SPX February 1110 puts for a credit of about $.65 ($650). Our total credit and potential profit is$1.05 ($1,050.) We've created a maximum profit range of 1120 to 1230. Maintenance of $10,000.
In my Feb. 8, 2004 column, I outlined a strategy based on an initial investment of $100,000. $74,000 was spent on zero coupon bonds maturing in about seven years at a value of $100,000. The principal $100,000 investment is guaranteed. We're trading the remaining $26,000 to generate a "risk free" return on the original investment.
In last year's position, we used the $26,000 to buy 3 OEX December 2006 540 calls and then use the remainder for maintenance on some small credit spreads. We generated a total of $11,525 in cash from our little credit spreads.
For this year, we're going to use the entire $26,000 of extra cash as maintenance for some Iron Condors. That should enable us to generate substantially more profit on this "no risk" strategy.
February Zero Plus Iron Condor Position - SPX - 1171.35
We'll start with our February position #4. However, we're going to sell 20 contracts of the SPX 1120/1110 bull put spread and buy 20 contracts of the SPX 1230/1240 bear call spread for a net credit $1.05 -- giving us a potential profit of $2,100.
QQQ ITM Strangle
See new position description above.
Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them.
Mike Parnos, Your Options Therapist and CPTI Master Strategist
Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, it ain't the fault of the strategies.
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