Updates, Thursday, 02/24/2005 11:15:15 PM ET
HAVING TROUBLE PRINTING?
How would you like to trade an option that never expires? "Is there an option that never expires?" you ask. Well, sort of. It's actually just a stock that is so cheap that it's not worth buying options on it -- stocks some people can't bear to part with.
Actually, I'm going to dedicate this column to the hordes of investors who actually took the "buy and hold" philosophy seriously. These are the people who still own a portfolio of beaten down stocks and they're "sure" will come back -- someday -- hopefully in their lifetime. In many areas of life, the "never-give-up" attitude is admired and encouraged. In trading, it's just plain stupid.
Yesterday's High Flyers And The Depths To Which They've Sunk
So, this is for those who own "has been" stocks like these:
2,000 shares of Lucent (LU), current value $7,360. Previous value -- $160,000.
2,000 shares of SunMicrosystems (SUNW), current value $8,540. Previous value -- $128,000.
2,000 shares of Nortel (NT), current value $5,680. Previous value -- $166,000.
2,000 shares of Atmel (ATML), current value $6,340. Previous value -- $60,000.
There are many, many more.
This same strategy can be applied to the not-so-high-flyer stocks like:
Sirius (SIRI), trading at $5.58.
Asianfo Holdings (ASIA), trading at $4.23.
TiVo (TIVO), trading at $4.48.
BEA Systems (BEAS), trading at $8.32.
How It Works
You own 1,000 shares of SUNW @ $4.27.
Buy 10 contracts of the January 2007 SUNW $5.00 LEAPS puts @ $1.30 (which is $.73 ITM).
Your entire risk for the next 22 months is $.57/share ($1.30 - $.73). No matter where SUNW trades in the next 22 months, it will have a value (to you) of at least $5.00.
You own 1,000 shares of SIRI @5.58.
Buy 10 contracts of the January 2007 SIRI $7.50 LEAPS puts @ $2.95 (which is $1.92 ITM).
Your entire risk for the next 22 months is $1.08/share ($2.95 - $1.92). No matter where SIRI trades in the next 22 months, it will have a value (to you) of at least $7.50.
You own 1,000 shares of BEAS @ $8.32.
Buy 10 contracts of the January 2007 BEAS $10 LEAPS puts @ $2.55 (which is $1.68 ITM).
Your entire risk for the next 22 months is $.77/share ($2.55 - $1.68). No matter where BEAS trades in the next 22 months, it will have a value (to you) of at least $10.00.
What If . . .
If one of these little stocks, like SUNW, is taken over for $7.00 per share, you would then show a $2.73 profit on the stock, less the $.57 you paid for the put. You could make $2.16 per share. That's pretty damn good considering you risked only $.57 for 22 months. Depending on when the upside move happens, there will still be a little value remaining in the $5 LEAPS put. You might be able to salvage $.15 from the sale of the put -- that you can put right into your pocket, adding to your profits.
Unlimited Upside Potential
With this little strategy, the sky is the limit. In reality, we know that these stocks will never get close to their highs again. A few might attain 10% - 15% of their highs. If one out of three little stocks doubles, considering how little is being risked, one could generate a nice return.
But, like anything else, and regardless of the seemingly small amount being risked, when all is said and done, these are still directional trades. The likelihood of you making money is not great. Can a $4 stock go to $3? Can it go to $2? Hell, yes. There's a better chance that it will go to $3 than it will go to $5. However, I know that some people are more attached to these little chicken-shit stocks than they are to their spleens. That's why I'm just trying to help these poor misguided souls minimize their risks. ___________________________________________________________________________
March Position Update
It's been an interesting week. Just when it looked like the market was circling the bowl, it seems to have escaped before the flush finished. Sometimes support levels actually work. Who'd have thunk? Don't get too comfortable, though. The volume was lower than last week and the upside breadth of the market was weaker today. If it continues, we may be looking at some more downside. For the moment, we're in pretty good shape -- near the center of our various trading ranges. Keep the faith. May the force and the market internals be with us. We're on our way to another profitable month.
A 75-year old man went to his doctor to get a sperm count. The doctor gave the man a jar and said, "Take this jar home and bring me back a semen sample tomorrow."
The next day, the old geezer returned to the doctor's office and gave him the jar, which was as clean and empty as on the previous day. The doctor asked what happened, and the man explained, "Well, doc, it's like this. First, I tried with my right hand, but nothing. Then I tried with my left hand, but still nothing. Then, I asked my wife for help. She tried with her right hand, then her left, still nothing. She even tried with her mouth, first with the teeth in, and then with her teeth out -- and still nothing. We even called up Arlene, the lady next door, and she tried too, first with both hands, then an armpit, and she even tried squeezin' it between her knees, but still nothing.
The doctor was shocked! "You asked your neighbor?"
The old man replied, "Yep, but no matter what we tried, with our arthritis, we still couldn't get the damn jar open."
Did You Make $4,450 Last Month?
Do you know how to negotiate with market makers?
Do you know how to read between the lines of an option chain?
Do you know how to capture premium where there seems to be none?
Those are just a few of the valuable skills I teach and can help you develop when you attend my seminar. If you're a serious trader, why limit yourself?
Learn how to position yourself to take advantage of those silly directional traders who lose their money betting on whims or the recommendations of others? It's relatively easy pickins -- if you have what it takes to harvest the crop. It's not brain surgery -- IF you know what to do.
Options are marvelous tools -- but you have to know how to use them. There's more to consistently making money than a coin flip and a mouse click. For less than the profit on one Iron Condor trade, you can learn how to put the percentages in your favor. It's knowledge that will last you a lifetime. Join me at one of my CPTI seminars. The dates and locations are:
March 19/20 - Jacksonville, FL
April 16/17 - Chicago, IL
May 14/15 - Irvine, CA
Send me an email at firstname.lastname@example.org and I'll forward you all the details. The spots are filling up fast. Don't be left out! It'll be a weekend you'll never forget! Serious option traders only! Directional trader converts welcome!
_______________________________________________________________________MARCH CPTI POSITIONS
March CPTI Position #1 -- MSH Iron Condor - 468.55
The Morgan Stanley High Tech Index has bounced around a bit, but it has some pretty well defined support and resistance levels. The market seems to have settled back into a trading range. Let's hope it behaves.
We sold 10 March MSH 430 puts and bought 10 March MSH 420 puts for a credit of about: $.90 ($900). Then we sold 10 March MSH 510 calls and bought 10 March MSH 520 calls for a credit of about $.35 ($350). Our total approximate credit and potential gain of $1.25 ($1,250). Maximum profit range is 430 to 510. The maintenance is $10,000. The actual exposure is $8,750 ($10,000 less the $1,250 premium received).
March CPTI Position #2 -- SPX Iron Condor - 1200.20
We sold 15 March SPX 1120 puts and bought 15 March SPX 1110 puts for a credit of about: $.50 ($750). Then, we sold 15 March SPX 1240 calls and bought 15 March SPX 1250 calls for a credit of about: $.70 ($1,050). Our total approximate credit and potential gain is $1.20 ($1,200). We've established a maximum profit range of 1120 to 1240. The maintenance is $15,000. The actual exposure is $13,200 ($15,000 less the $1,800 premium received).
March CPTI Position #3 - MSH Bull Put Spread - 468.55
It also gave us the opportunity to add to our MSH bull put spread position. We already put on 15 contracts of the 430/420 bull put spread. The support level is still valid -- plus, there isn't much premium to be found elsewhere. We sold 10 March MSH 430 puts and bought 10 March MSH 420 puts for a credit of $.50 ($500).
This is the bull put spread of what we hope will eventually be an Iron Condor position. We'll have to wait for MSH to pop back up before there can be any premium in the 510/520 bear call spread
March CPTI Position #4 - SOX Iron Condor - 434.13
The SOX is an old friend we haven't visited for awhile. There are some pretty well defined support and resistance levels and there is still a little premium left for us.
We sold 10 March SOX 380 puts and bought 10 March SOX 370 puts for a credit of about: $.55 ($550). Then we sold 10 March SOX 470 calls and bought 10 March SOX 480 calls for a credit of about: $70 ($700). Our total net credit and potential profit is about $1.25 ($1,250). Our maximum profit range is 380 to 470. The maintenance is $10,000.
ZERO-PLUS Strategy - February Iron Condor Position - SPX - 1200.20 - Profit: $2,100.
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.
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.
March Zero Plus Position:
March SPX Iron Condor - 20 contracts of 1150/1140 bull put spread @ $.45 ($900) & 20 contracts of 1240/1250 bear call spread @ $.45 ($900). Total = $.90 ($1,800). Maximum profit range is 1150 to 1240. Maintenance is $20,000.
QQQ ITM Strangle - $37.41
We own 10 January 2007 $42 puts and 10 January 2007 $32 calls at a total cost of $14,600. Only $4,600 is at risk as the other $10,000 of intrinsic value will always be there. We then sold the March $36 puts and $38 calls, taking in a total of $1.10 ($1,100). If all goes well, the QQQQs will close somewhere between $36 and $38. We will then sell the April near term options, etc. etc. The objective is to sell premium every month for the next 22 months. When all is said and done, we should be able to show a very nice profit.
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.