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SOMETHING OUT OF THE ORDINARY

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I Spied A Debit Condor -- Or A Calendar Strangle -- Or Some Damn Thing

About a week ago I posted an April CPTI MSH Iron Condor trade that consisted of a 420/410 bull put spread and a 510/520 bear call spread. I watched the volume steadily increase as the contracts traded at the specified strike prices.

Hundreds of contracts later, my eyes (during a commercial, of course) wandered over to the MSH ITM puts and the ITM calls. There, to my surprise, I noticed some unexpected volume at the following strikes:

MSH April 410 Calls @ $63.60 - 10 Contracts
MSH April 420 Calls @ $54.00 - 10 Contracts
Debit of $9.60 ($9,600)

MSH April 510 Puts @ $38.90 - 10 Contracts
MSH April 520 Puts @ $48.10 - 10 Contracts
Debit of $9.20 ($9,200)

It's a bass-ackwards Iron Condor. Interesting. This trader did not use credit spreads, and take in premium. Instead, he used debit spreads. Is that a good idea, or not?

1. The debit spreads described above will use up the trader's cash. He can't buy options using margin dollars, so he has to use cash. The dollars that were used are not earning interest in the account for the duration of the trade. If he had done the regular Iron Condor (with credit spreads), he could have used margin from other securities to cover his maintenance requirements. If he had used cash to cover the maintenance, it would still be earning interest. The interest being earned isn't a lot, but it's still a consideration.

2. The trader is tying up $18,800 of his money. If MSH is a good little index, and closes within the max-profit range, all four of his options will be automatically exercised. Then, $20,000 will magically show up in his brokerage account the Monday after expiration. However, there is a fee when an option is exercised and the fees for the four options will be deducted from his account.

When you use credit spreads, and the options expire worthless, there are no additional fees or commissions involved.

3. Using debit spreads, as the price of the index approaches a short strike price, the more time value appears in both the long and short option. But, that's not unlike credit spreads.

Actually, I'm going to have to do a little investigating to determine if there's any difference if we have to close out a position gone bad. I'll let you know what I find out.

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A LITTLE SCALPING CAN'T HURT . . .
Take a look at yesterday's and this morning's post (I can't bring myself to call my prose a "blog") regarding our QQQQ ITM Strangle position. The market fluctuated up and down a bit and gave alert traders an opportunity to buy back one of our short QQQQ positions for a dime and then, when the market moved again, sell another short position and take in an additional $250. Check it out and see what we did.

Now, with the new format, I can notify my loyal CPTI students right away when I see opportunities that may be interesting -- and potentially profitable.

Isn't it interesting what you can do when you know what to look for?

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DO YOU KNOW HOW TO TRADE WITHIN YOUR TRADES TO INCREASE YOUR RETURNS?

Do you know how:
. . . to negotiate with market makers?
. . . to read between the lines of an option chain?
. . . to capture premium where there seems to be none?

We've been profitable 26 out of the last 27 months and I can help you learn the secrets. Actually, they're really not secrets. But, until you learn what to look for, not knowing the methods is likely costing you money.

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 mparnos@optioninvestor.com and I'll forward you all the details. Don't be left out! The spots are filling up. I promise you a weekend you won't forget! Serious option traders only! Directional trader converts welcome!

BY THE WAY -- If you attend one of my seminars, it entitles you to re-take the seminar a second time at NO CHARGE! What a deal!

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MARCH CPTI POSITIONS
March CPTI Position #1 -- MSH Iron Condor - 472.73
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 - 1210.47
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 - 472.73
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 - 434.42
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.

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ONGOING STRATEGIES
ZERO-PLUS Strategy - February Iron Condor Position - SPX - 1210.47 - 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.

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QQQ ITM Strangle - $37.30
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.

On Wednesday we closed the March $36 put for $.10. and on Thursday (today) we sold the March $36.625 put for $.35 -- taking in an additional $250 on our 10 contract position.

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CPTI APRIL POSITIONS
CPTI April Position #1
-- MSH Iron Condor - 472.73
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.

April CPTI Position #2 - OSX Calendar Spread - $142.82
We bought 10 OSX September $150 calls @ $8.30 and sold 10 OSX April $150 calls @ $2.35. Our out of pocket cost is about $5.95 ($5,950).

Our price target for the next six weeks is about $150. 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 September is the furthest month out that OSX options are available.

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HAPPY TRADING!
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

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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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