Option Investor
Updates

LEARNING TO FISH VS. BEING HANDED A FISH

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I get emails on a regular basis from folks who say, "I have a $4,000 brokerage account and I'm an aggressive investor. How can I use your trades to make money?" Now, I'm flattered that they have found the column and gone to the trouble to hunt and peck out an email to me. On the other hand, there are some inherent problems with this reader's approach.

In the CPTI world, "aggressive" is a four-letter word. We don't do "aggressive." As a matter of fact, we feed off of "aggressive" traders. If you trade aggressively, there's a high likelihood that your $4,000 will soon be in our pockets. If you were to see the error of your ways and abandon your "aggressive" stance, a $4,000 account would allow you to put your toe in the water and see if you can swim in the non-directional trading pool. The road to wealth begins with baby steps. Actually, it begins with education.

When I post a trade, I often use a 10-contract position. That usually requires an account with about $10,000 of maintenance. I also remind readers to adjust the number of contracts to their account size. With only $4,000, Bubba, you should do about three contracts. However, I suspect that you've probably been saving for a while to accumulate this $4,000. I suggest you don't put it at risk until you understand the strategy thoroughly.

There is no substitute for trading real money, but, while you are in learning mode, you should also consider using the "virtual trading" feature at your online brokerage site. It's excellent practice for order entry and money management. If your broker doesn't have a "virtual trading" feature, you have the wrong broker.

I also get frequent emails asking if my positions can be auto-traded. The answer is "NO." In this column I post trades based on real time prices. If I can, I will send out a real time post about the trade. Also, note that I include the reasons that I am posting that particular trade. Those prices may be available for a few minutes or a few hours or a few days - depending on ever-changing market conditions. I'm trying to teach readers the "hows" and "whys" of trading our non-directional strategies. I'm trying to teach you what to look for and how to recognize similar opportunities on your own.

As most of you know, I've been presenting seminars at which I teach my strategies. I go into great detail explaining methods of entry, adjustments, and exits. There has been one common denominator among those who have attended my seminars. Never once has anyone asked if they can "auto-trade" my trades. They are there to learn. They are independent thinkers who know the value of education. They want to develop kills that will remain with them long after I'm just a memory.

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What's Coming Up . . .
With the market selling off rather sharply this week, it seems likely that there will be a sharp, but probably short-lived rally. For our purposes, all we want the rally to do is to buy us time and a little additional cushion to the downside until the market goes down to test the January lows.

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APRIL POSITION NOTES
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.

If you believe that the market is going to continue down, you could close out the existing "sure thing" position for $.95 and establish a new one. Look at the option chain. You could sell the April 1180 calls and buy the April 1205 calls for a net credit of about $7.00.

You might want to wait until you see if the market is indeed going to bounce before putting on this trade. The bounce is likely going to be temporary and it would be better to put on this new "sure thing" at the higher level. Be careful and remember that this strategy is for those with large accounts to deal with the potential maintenance requirements.

Also, remember that, when the market opens on Monday, the prices will be different. The premiums will be lower because we just had a three day weekend and some premium will have eroded away. It doesn't mean that a trade won't be there, you just might have to settle for a little less.

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Start Looking At May
As we all know, being premium sellers, we have had to put on positions earlier and earlier to get a reasonable return on our risk. Well, this week we can start looking at some potential May positions. If you see anything you believe is worthwhile -- and safe -- let me know. In recent months, readers have come up with some excellent trades, a few of which have found their way into our CPTI portfolio. Don't be shy. Send them along. Remember that this is an educational process. The objective is for you to learn to come up with trades using our strategies. This is just a small part of what we do at my seminars. Students come up with trades and we dissect them, analyze them and discuss the entry strategies, potential adjustments and exit strategies. It's a great exercise.

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Reality Vs. Potential
A young boy went up to his father and asked him,
"What is the difference between potentially and realistically?"
The father thought for a moment, then answered,
"Go ask your mother if she would sleep with Robert Redford for a million dollars. Then ask your sister if she would sleep with Brad Pitt for a million dollars. Come back and tell me what you learn from that."
So the boy went to his mother and asked,
"Would you sleep with Robert Redford for a million dollars?"
The mother replied, "Of course I would! I wouldn't pass up an opportunity like that."
The boy then went to his sister and asked,
"Would you sleep with Brad Pitt for a million dollars?"
The girl replied, "Oh my God! I would just love to do that! I would be nuts to pass up that opportunity!"
The boy pondered that for a few days, then went back to his dad. His father asked him,
"Did you find out the difference between potential and realistic?"
The boy replied, "Yes, sir. Potentially, we're sitting on two million dollars, but realistically, we're living with two sluts."

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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:
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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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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