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THE CPTI LOW RISK STRADDLE

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The term "low risk straddle" is often associated with a woman in high heels and a Victoria Secret outfit who takes Visa, MasterCard and cash -- but not today.

Though this may be familiar territory for many CPTI students, let's review a sample of our own CPTI "Low Risk Straddle" strategy. A straddle is the purchase of a put and a call at the same price for the same expiration cycle. With a straddle position, you are anticipating a large movement of the underlying. A typical straddle would be put on for the front month, but we're anything but typical, aren't we? That's why our Low Risk Straddle is really "low risk."

First, we must find a situation that is anticipating a large move. Some traders will like to play earnings announcements. I prefer to look at biotech stocks. When the FDA accepts or rejects a company's drug test results, you can count on a large move -- one way or the other. The challenge is finding out in advance when the FDA announcements are scheduled. It takes some research. Earnings announcement are not quite as dependable stock movers.

Let's say, hypothetically, that you have learned that GILD (Gilead Sciences) is going to have an FDA announcement at some time in the next 30 days. A typical reaction to one of these announcements is 10 points. We're going to position ourselves to take advantage of a 10-point reaction to this announcement.

With the GILD trading at $35.33, we'll:
1. Buy the August GILD $35 call for $3.20
2. Buy the August GILD $35 put for $2.55
Total out of pocket: $5.75

What Is Our Risk?
These puts and calls have a five-month life. As you know, options are wasting assets. Their erosion of time premium takes place on a curve. Only a small amount of erosion takes place during the early part of the option. Most of the value is lost rapidly during the option's last month.

Since we're only going to be in our CPTI straddle for 30 days (or less), we're only risking about 10% of the total cost ($5.75) of the straddle, or about $.60.

How Do We Make Money?
In a straddle we're long both the put and the call. When a straddle is placed ATM (at-the-money), the deltas of both the puts and the calls are about 50%. When GILD moves up $1, the August $35 call will go up $.50. As GILD continues to move up further, the delta increases as well. However, the delta of the GILD $35 put decreases more slowly than the delta of the GILD $35 call goes up. For example: As GILD moves up to $37, the $35 call might now have a delta of about 63% while the $35 put may have a delta of 37%.

Also in our favor would be volatility. When a large move is made, volatility is increased. When volatility increases, so does time premium - on both the puts and the calls. So, when the move happens, the value of the options will likely increase - which will help offset some of the value that has eroded away while waiting for the move.

We're not dealing with huge dollars here. But, then again, we're not risking much either. As you can see, it would require a substantial move to be very profitable. But a $.50 profit on an $.80 risk is a huge percentage.

The Approximate Values
Let's assume the FDA announcement comes in two weeks and was positive. GILD opens the next morning at $45.
Value of the August GILD $35 call would be approx. $10.80
Value of the August GILD $35 put would be approx. $.30
Total value: $11.10

It originally cost us $5.75 to get into the trade. Our profit would be $5.35. But, how much did we actually risk? Not $5.75. Remember, because we were going to stay in the trade only 30 days or less, our risk was only about $.60. The return on our $.60 risk is about 890%. Not too shabby.

Ways Of Exiting The Straddle
There are a few different ways to exit the straddle.
1. When we get the expected large move in one direction or the other, we can liquidate both the puts and calls and take our profits. It's pretty cut and dried.

2. Once again, for example, let's assume we get the large move up. The $35 call is now worth $10.80 and the $35 put is worth $.30 with two weeks left until our 30-day exit limit. We can sell the $35 call for $10.80 - that pays for the entire trade.

Instead of also selling the $35 put and taking the extra $.30 profit, we can hold the $35 put in anticipation of a reverse in the GILD. There is usually an over-reaction to news and there is s strong likelihood that GILD will give back a chunk of it's gain -- at least temporarily. It's a free trade, but keep in mind that you are risking your ($.30) profit -- and picking a direction, which is something we're reluctant to do. If profits aren't taken, they tend to disappear faster than a pint of Haagen Daze from my freezer.

3. If we don't get a major move within our 30-day time limit, we MUST unwind the position and take our small loss - hopefully near the projected $.80. That's where our self-discipline comes into play. It's risk management. It's money management. And it keeps us in the game.

Further details, regarding the entry into, and exit from, the Low Risk Straddle are covered in depth at my seminars.

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May CPTI CME Trade
When CME opened down, we made a minor adjustment in our strikes. Initially, we put on the 230/240 bear call strike and took in only $.40 and waited to see how far down CME would trade before we put on the bull put spread. CME continued down and we were faced with a decision. If we put on the 160/150 bull put spread, we could take in about $.80-$.85. However, if we put on the 155/145 bull put spread, we could take in $.65.

Well, knowing that safety is more important to me, you can figure out which spread we chose -- the 155/145. Let's hope it doesn't come into play, but it's nice to know the extra five points of cushion are there in case we need them.

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CPTI APRIL POSITIONS
April CPTI Position #1 -- MSH Iron Condor - 452.24
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 - $142.28
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 - 183.50
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 - 1172.92
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 - 1172.92
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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MAY CPTI NEW POSITIONS
May CPTI Position #1 - SPX Iron Condor - 1172.92
We sold 15 SPX May 1100 puts and bought 15 SPX May 1090 puts for a credit of $.60. Then we sold 15 SPX May 1235 calls and bought 15 SPX May 1245 calls for a credit of $.75. Our total net credit is $1.35 ($2,025). We have a maximum profit range of 1100 to 1235. The bigger the better!! Maintenance is $15,000.

May CPTI Position #2 - CME Iron Condor - 183.50
We sold 15 CME May 155 puts and bought 15 CME May 145 puts for a credit of $.65. Then we sold 15 CME May 230 calls and bought 15 CME May 240 calls for a credit of $.40. Our total net credit and profit potential is $1.05 ($1,575). Our maximum profit range is 155 to 230. The maintenance is $15,000.

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ONGOING STRATEGIES
ZERO-PLUS Strategy - April Iron Condor Position - SOX - 411.22
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 - $36.20
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.

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 . . .

Just a reminder . . . we currently have GTC orders out there to buy back the short 36 puts and the short 37 calls for $.05 each.

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WE'VE HAD 27 OUT OF 28 PROFITABLE MONTHS -- WITH NO END IN SIGHT.

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

The CHICAGO Mike Parnos CPTI seminar is sold out. However, there are still spots left for the May IRVINE, CA seminar. They probably won't last long, so be proactive! That means GOYA. Contact me at mparnos@optioninvestor.com and I'll reserve a spot for you. He who hesitates may be SOL.

The dates and locations are:
April 16/17 - Chicago, IL - SOLD OUT!!!
May 14/15 - Irvine, CA
Summer 2005 Schedule - To Be Announced

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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