Updates, Sunday, 02/27/2005 08:14:34 AM ET
HAVING TROUBLE PRINTING?
On Friday morning we took a leap. We didn't trade a LEAP, but we took one. We posted our first April CPTI position. There are seven weeks until April expiration. That's a long time to be exposed to the market, but to take in reasonable premium, we find ourselves having to compromise a bit. With premium getting more difficult to find, we're going to have to make a few concessions to this low volatility market.
What Are Our Choices?
a) Do we sacrifice safety by moving short strikes closer to where the underlying is trading?
b) Do we hold firm with the short strikes at (hopefully) solid support and resistance levels and expose ourselves to the market a few weeks longer?I went with choice "B."
April CPTI Position #1 - MSH Iron Condor - 473.35
With MSH trading at about 471, we sold 15 MSH 510 April calls and bought 15 MSH 520 April calls for a credit of about $.75. Then we sold 15 MSH 420 April puts and bought 15 MSH 410 April puts for a credit of about $.45. Our total net credit is about $1.20 with a potential profit of $1,800.
Note that I took advantage of the time factor (and a little extra premium) to lower the bull put spread to 420/410 rather than the 430/420 that we have on as a March position. Does that balance out the additional time exposure? Not entirely, but it is a little safer. Maximum profit range is 420 to 510 and the maintenance is $15,000.
On Monday, most of the premium should still be there. Be careful and remember to adjust the number of contracts for the size of your trading account.
We're Not Done Yet -- Another April Position
Oil's Well That Ends Well
It seems like, as a nation, we're using more oil every year. Considering the demand and the continuing chaos in the Middle East, there's no reason to believe that oil will be coming down in price anytime soon. So, what's the best way to play a situation where you have a market bias? A conservative approach would be to use a calendar spread. That allows us to take advantage of leverage, but reduce our cost basis each month as we wait for the anticipated gradual move to the upside.
April CPTI Position #2 - OSX Calendar Spread - $142.74
We're going to:
Buy 10 OSX September $150 calls @ $8.30
Sell 10 OSX April $150 calls @ $2.35
Our out of pocket cost is about $5.95 ($5,950)
Our price target is about $150 in the next seven weeks. If we're right, we should make a nice chunk of change. Even if OSX goes nowhere, we will not have risked a great deal. The $2.25 we took in from the short April call will erode away and will help to offset any premium erosion from our long Sept. $150 calls.
We may hold this position only until April expiration, or we may roll it out further. It depends on how it all unfolds. It may evolve into an ongoing position. Why did I select the Sept. $150 calls? Because Sept. is the furthest month out that OSX options are available.
In a calendar spread, we have to pay close attention to the deltas of the options involved. If OSX moves up too fast, we'll need to make an adjustment. Calendar spreads can be fun and profitable -- if they move a little in the right direction. A large movement is not required -- but the stock can't be totally constipated either. I don't think that will be a problem with OSX. Calendar spreads are pretty much a hands-off trade. If OSX moves in the wrong direction, we'll get out -- having risked only a buck or two.
We just created a "horizontal" calendar spread. That means we bought and sold the same strike prices -- in different months. Some may want to create a "diagonal" calendar spread by buying the September $145 call (instead of the $150). It costs a little more (therefore your risk is greater), but you will have more of an advantage in delta if OSX actually moves up as we expect.
The "Calendar Spread" is just one of the strategies that I address thoroughly at my seminars. Want to learn more? Are you ready for the big time? See below.
Did You Make $4,450 Last Month? Why Not?
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?
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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:
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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 - 473.35
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 - 1211.37
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 - 473.35
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 be an Iron Condor position. We'll have to wait for MSH to pop back up before there is any premium in the 510/520 bear call spread
March CPTI Position #4 - SOX Iron Condor - 443.70
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 - 1211.37 - 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.
New 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 - $37.62
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.
CPTI APRIL POSITIONS
CPTI April Position #1 -- MSH Iron Condor - 473.35
CPTI April Position #2 -- OSX Calendar Spread - $142.74
See 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.