Option Investor
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KEEPING TRACK OF VOLATILITY -- AND BETTING ON IT

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A big deal is being made of the upcoming introduction of options on the VIX (Volatility Index). My thoughts are "BFD." I suppose if you're a market volatility trader it may, in some way, be appealing. However, for CPTI students, it's going to be just another chart. Will there be enough volatility in the volatility index to put on an Iron Condor trade? Highly unlikely.

Volatility, however, is important to us, being premium sellers. The problem is that there is none to speak of. Regardless, it's a good idea to keep abreast (I try to keep at least two - four if I get lucky) of what's going on. So, beginning on Friday, April 22, 2005, traders will have the opportunity to trade puts and calls on the VIX.

We are regular users of the S&P 500 options ($SPX). The VIX is a real-time index that derives its value from the options market. The VIX is calculated based on the anticipated volatility priced into S&P 500 Index options. You can generate a quote on the VIX by using the symbol - $VIX.

Here is how the VIX works. When traders get nervous, they go out and buy protective puts (at least the smart ones do). That means the traders expect volatility and that translates into a higher volatility number for the VIX. That's fear -- and fear is a good thing if it forces traders to protect, or hedge, their long position.

When you look up the options for the VIX, you will need to use the symbol $VXB -- which will be equal to ten times the value of the VIX. For example, today, the VIX closed at 13.42. The values of the $VXB options would be based on the figure: 134.20.

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APRIL POSITION NOTES
Our April positions are in pretty good shape. The markets have moved down over the last few days, but we still have comfortable cushions -- at least for now. The markets will be closed tomorrow -- and we like that. Why? Because that's one less day we're exposed to the possibility of a large market fluctuation. Over the three-day weekend our short positions should erode away a bit and we'll be that much closer to expiration.

APRIL "Sure Thing"
For those who are still in the April "Sure Thing" credit spread position, the "natural" to close out the position is $1.10. With a little negotiation, you could probably close it out for $.95.

Between now and the Sunday column, I'm going to explore the possibilities of closing out the 1215/1240 position and possibly putting on another "Sure Thing" credit spread for this month.

ZERO PLUS April Position
Today we put on an Iron Condor for our Zero-Plus strategy. Last month's Iron Condor expired worthless and I figured we should put on our April position before the three-day weekend. Actually, I should probably have established a position a few days ago, but, in all the excitement of calculating our March cycle profits (and a few other distractions), it got put on the back burner. You should have a dry erase board or a bulletin board to post all the trades you're in plus all the trades that you want to put on. Write them in big letters -- and refer to the board often.

We sold 20 of the SOX April 450 calls and bought 20 of the SOX April 460 calls for a credit of $.55 ($1,100). Then we sold 20 SOX April 380 puts and bought 20 of the SOX April 370 puts for $.30 ($600). Our total net credit was $.85 ($1,700). It's a nice wide range with support on the bottom and resistance on the top.

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THE PRICE OF POPCORN
For the first time in many years, a an old man traveled from his rural county to the city to attend a movie...

After buying his ticket, he stopped at the concession stand to purchase some popcorn. Handing the attendant $1.50, he couldn't help but comment, "You know, the last time I came to the movies, popcorn was only 15 cents."

"Well, sir," the attendant replied with a grin, "You're really going to enjoy yourself tonight! We have sound now."

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CPTI APRIL POSITIONS
April CPTI Position #1 -- MSH Iron Condor - 453.40
With MSH trading at about 471, we sold 15 MSH 510 April calls and bought 15 MSH 520 April calls for a credit of $.75. Then we sold 15 MSH 420 April puts and bought 15 MSH 410 April puts for a credit of $.45. Our total net credit is $1.20 with a potential profit of $1,800.

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 - $133.40
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.

April CPTI Position #3 - CME Iron Condor - 193.25
It's the Chicago Mercantile Exchange-you know, the exchange where people trade futures on grains, gasoline and pork bellies.

We sold 10 CME April 230 calls and bought 10 CME April 240 calls for a credit of about $.60 ($600). Then we sold 10 CME April 165 puts and bought 10 CME April 155 puts for a credit of about $.60 ($600). Our total net credit and profit potential is about $1.20 ($1,200). Our maximum profit range is 165 to 230. Maintenance is $10,000.

April CPTI Position #4 - SPX "Sure Thing" Credit Spread - 1171.42
The "sure thing" credit spread is used primarily with a trending market. The market appears to have changed direction and has no real reason to go up. With rising oil prices and other economic problems, it looks like the market may take a rest and may drift lower for awhile.

We sold 2 SPX April 1215 Calls and bought 2 SPX April 1240 Calls for a credit of about $7.00 ($1,400). This strategy is only for traders who have a very large account and have excess maintenance dollars handy. Our initial maintenance is only $5,000 (25 points x 2 contracts).

April CPTI Position #5 - SPX Iron Condor - 1189.65
We sold 15 SPX April 1125 puts and bought 15 SPX April 1115 puts for a credit of about $.50 ($750). Then we sold 15 SPX April 1250 calls and bought 15 SPX April 1260 calls for a credit of about $.50 ($750). Our total net credit is $1.00 ($1,500). Max profit range: 1125 to 1250. Maintenance: $15,000.

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ONGOING STRATEGIES
ZERO-PLUS Strategy - February Iron Condor Position - SPX - 1189.65
Profit: $1,800.

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 - Expired worthless -- Profit: $1,800.

New Cash Position: $26,000 + $1,800 = $27,800.
New April Zero Plus Position: (See Above)

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QQQ ITM Strangle - $36.51
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.

We put another $250 in our pockets in our QQQ ITM Strangle trade. We sold 10 of the March $37 puts. Earlier this week, we bought back the 10 March $36.625 puts for a dime and, on Thursday, sold the March $37 puts for $.35 ($350). Going into expiration week, our short positions are now the $37 puts and $38 calls. We now have accumulated a cash total of $1,600 ($1,100 + $250 + $250). A good start.

We rolled out our short positions to April. We bought back the March $37 puts and sold the April $36 puts for no credit or debit. It was an even exchange. Then we sold the April $37 calls for $.60 ($600). We had purchased back the March $38 puts last week for $.05. Our net credit for April (at least to begin with) is $550. Add that to our previous cash total of $1,600 and we now have generated a total of $2,100. Now, if the market cooperates . . .

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27 OUT OF 28 PROFITABLE MONTHS! -- WITH NO END IN SIGHT

I'm proud to announce the CHICAGO Mike Parnos CPTI seminar is now sold out. Twenty-five people have signed up. If you are still interested in joining us in Chicago, you can let me know and I'll put you on a waiting list in case there is a cancellation.

In the meantime, there are still spots left for the May Irvine, CA seminar. They probably won't last too long, so be proactive! Contact me and I'll reserve a spot for you. He who hesitates may be SOL.

LEARN TO ACHIEVE SUCCESS WITHOUT STRESS WITH CPTI WEALTH-BUILDING TECHNIQUES

Do you have a job and can't monitor your trades all day long? These "hands-off" trading strategies are for you.

Do you want to learn how to consistently pocket profits that are out there for the taking?
Do you want to define and minimize your risks?
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?

We've been profitable 27 out of the last 28 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:
April 16/17 - Chicago, IL - SOLD OUT!!!
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 fast. It'll be a weekend you'll never forget! Serious option traders only! Directional trader converts welcome!

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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, guess what? It isn't the fault of the strategies.

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