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WHEN YOU CAN'T SAY "NO"

HAVING TROUBLE PRINTING?
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Some people are obsessed, which is hardly breaking news. Controlling one's obsessions is easier said than done. But they say that, if you can admit the problem, it's half the battle.

People say "no" to drugs. They may say "no" to alcohol and hot fudge sundaes, but they can't bring themselves to say "no" to owning stock - a potentially fatal character flaw that may result in the untimely death of your portfolio. It's a disease that not even a 12-step program will help because you'll be broke before you get to step #6.

It's the Couch Potato Trading Institute to the rescue -- where the path of least resistance and the path to profits are one in the same. At the CPTI there's not much that can't be remedied with a little appropriate knowledge and a few mouse-clicks.

In one sense, I applaud an investor's utopian "glass is one-third full" optimistic approach to managing money. Optimism is a good quality. But it has absolutely nothing to do with reality. We know that individual stock owners take the chance of being sucked into that vortex -- where directional traders go, never to be heard from again. We know they're out there somewhere, dining on Ritz crackers and government cheese.

I can help, but to do so I'll have to put you on a short leash. At the end of that leash is a "collar." In essence, what we're going to do is to put a collar on your stocks that won't let them stray too far.

For Example:
You own 1,000 shares of widely held MRK. Maybe you bought it two weeks ago or two years ago. It doesn't really matter. Early this week MRK was trading at $35.15 per share. Will it continue to move up? Will it reverse and give back its recent gains? We don't know. Can we be sure? We can't -- unless you're still hearing those little voices or had a recent consultation with Miss Cleo.

You've seen what can happen when a company gets a bad FDA decision, or there are accounting irregularities or if news comes out that the CEO is a crossdresser. Owning a stock is a lot like sex. It can be anywhere from terrible to great, but regardless, you don't want to experience it without the proper protection. That's what the "collar" is for.

Inexpensive Insurance
The "Collar" consists of two steps. The first is to buy inexpensive insurance to protect your shares. The January 2007 $35 LEAPS can be purchased for $4.50. There are over 20 months left until the January 2007 expiration. To figure out how much this insurance will cost you per month, divide 20 months into the $4.50. It comes to about 22.5 cents per month per share.

For this low pro-rated price, you will be protected if Merck reverses direction and go back down. Keep in mind that Merck is only an earnings warning away from $25. The $35 put LEAPS will protect you on any transgression below $35 through January 2007.

The Deductible
Since Merck is trading at $35.15, you will be accepting a potential loss of $.15. As in most insurance policies, there is a deductible. In this instance, it's only $.15/share -- peanuts. If you wanted to pay less for your insurance, you could explore purchasing the January 2007 $32.50 put for $3.40. Your pro-rated insurance would then be only $.17/share per month. However, your deductible would then be $2.65 ($35.15 - $32.50). Your call.

Paying For Your Insurance
The "collar" limits what could be a catastrophic loss to an acceptable $.15. Step two of putting on a "collar" involves selling a near term covered call at a strike price above where Merck is trading. With Merck at $35.15, the next logical strike price is the $37.50 call. The June $37.50 call is currently selling for $.25.

If you were to sell the June $37.50 call for $.25/share, you would, in effect, be paying for your insurance with 2 1/2 cents/share left over to cover incidentals. Recognize that, when you sell the covered call, you are putting a cap on the upward movement of Merck. For those who are neutral to bullish on Merck, you have given Merck room to move up another $2.35 (from $35.15 to $37.50). Meanwhile, you are protected from $35 down to zero.

You can repeat the call-selling process month after month until your stock gets called away - which is a good thing! It means you made money, which, if I'm not mistaken, is the object of this exercise.

Some people do, however, become attached to their stocks. They think that if they lost money on a particular stock, they have to make it up in the same stock. When you buy a stock, where does it say "till death do you part?" Remember, it's only a stock. Don't become emotionally involved. If it goes, it goes. Add up your profits, smile and get on with your life.

There are no monogamy laws or divorce penalties in the stock market. You can play the field. There are thousands of other stocks out there. Just make sure you use "protection." Sound vaguely familiar?

There is no law that says you have to sell a call to pay for your insurance. If you are really bullish on Merck, you can absorb the 22 1/2 cents per month and not cap your potential profits. The downside insurance is the main objective.

Please Don't Take My Stock
In certain instances, investors do not want to give up their shares because they have a very low cost basis. Selling their stock would mean having to pay substantial short term capital gains taxes. There is a solution. You can go out into the open market and buy additional shares of Merck. You can then designate these shares as the ones that will be called away when the $37.50 option is exercised. In this instance, you will still own your original Merck shares with a low cost basis. It may cost a few bucks, but only for a few days.

If Merck continues to move up to $41, you can protect a large portion of your gains by selling the January 2007 $35 LEAPS put and buying the January 2007 $40 LEAPS put. It will cost you some out of pocket, but you will lock in a big chunk of the $5.85 in profit you have earned (from $35.15 to $41).

What If Merck Tanks?
If Merck goes down to the point where you are no longer neutral to bullish, you should take action to GTFO and find a better place for your money. The unwinding of your position must be done in the proper sequence. 1. Buy back the short near term call -- which will free up the Merck shares to be sold. 2. Sell the shares of Merck. 3. Sell your LEAPS put.

What If You're Long-Term Bearish?
By the same token, if you're bearish, you can construct the same scenario by shorting a stock, selling an out-of-the-money put and buying an out-of-the-money call to protect your short stock position.

NOTE: If you have a progressive broker you're allowed to sell covered calls in your IRA as well as buying the protective put. If you don't have a progressive broker, get one!

In Summary
You can have your cake and eat it too. The "collar" enables you to own a stock, have room for profit, possibly pocket a few dollars, and be protected on the downside. You'll find that having your cake and eating it beats the hell out of the prospects of digesting government cheese.

We're not going to cure the "directional stock ownership" disease with the "collar," but we can bandage the wound and stop the bleeding - at least temporarily. However, don't be surprised if, before long, the obsessive-compulsive stock-buyer is back out there still trying to catch those falling knives with bare hands. Go figure.

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ONLY 2 SPOTS LEFT FOR MAY 14th & 15th ADVANCED CPTI SEMINAR IN IRVINE!!!

DON'T MISS OUT!! (See Below)

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MAY CPTI POSITIONS
May CPTI Position #1 - SPX Iron Condor - 1172.63
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 - 197.92
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.

May CPTI Position #3 - MID Iron Condor - Closed For $2,280 Loss
We sold 12 May MID 620 puts and bought 12 May MID 610 puts for a credit of $.65 ($780). Then we sold 12 May MID 700 calls and bought 12 May MID 710 calls for a credit of about $.45 ($540). Our total net credit and profit potential of $1.10 ($1,320). Closed for $2,280 loss.

May CPTI Position #4 - SPX Iron Condor - 1172.63
We sold 20 SPX May 1210 calls and bought 20 SPX May 1220 calls for a credit of about $.45 ($900). Then we sold 20 SPX May 1105 puts and bought 20 SPX May 1095 puts for a credit of about $.60 ($1,200). Our total net credit and profit potential is $1.05 ($2,100). Maximum profit range is 1105 to 1210. Maintenance: $20,000.

June CPTI Position #1 - GOOG Iron Condor - $226.98 (Formerly May Position)
We sold 12 GOOG May 160 puts and bought 12 GOOG May 150 puts. We also sold 12 GOOG May 220 calls and bought 12 GOOG May 230 calls. Our total net credit and profit potential is $1.40 ($1,680). Our maximum profit range is $160 to $220. Maintenance is $12,000.

We bought back the May bear call spread and rolled out to the June $220/$230 bear call spread. We also bought back the May $160 put for a nickel. Our new credit and profit potential is now $2,260 (see Wednesday's post for details).

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ONGOING STRATEGIES
ZERO-PLUS Strategy - May Iron Condor Position - SPX - 1172.63
Profit: $2,000.

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.

In April, we placed a SOX 450/460 and 380/370 Iron with a total net credit was $.85 ($1,700). It expired worthless and our profit was the entire $1,700. Our new cash position is: $27,800 + $1,700 = $29,500.

New May Zero Plus Position: SPX Iron Condor - 1156.85Sold 20 SPX May 1210 calls and bought 20 SPX May 1220 calls for a credit of $.45 ($900). Then sold 20 SPX May 1090 puts and bought 20 SPX May 1080 puts for $.55 ($1,100). Our total net credit is $1.00 ($2,000).

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QQQ ITM Strangle - $35.76
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 April options to the May $36 puts and $37 calls and took in another $950. Add that to our previous cash total of $2,100 and we now have generated a total of $3,050.

We took advantage of the downdraft of the market to buy back our $37 calls for $.05. The order was there as a GTC (good till cancel) order since the original May rollout. The market spiked down and it got filled. Now, we will look for an opportunity, on a bounce, to sell another May option and take in an extra bit of premium.

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WANT TO ACHIEVE SUCCESS WITHOUT STRESS WITH CPTI WEALTH-BUILDING TECHNIQUES? OF COURSE YOU DO!!

ONLY 2 SPOTS LEFT FOR MAY SEMINAR IN IRVINE!!!

NEW SUMMER SEMINAR DATE: JULY 16 & 17 -- PHILADELPHIA, PA

WE'VE HAD 28 OUT OF 29 PROFITABLE MONTHS -- WITH NO END IN SIGHT.
There are only four spots left for the May IRVINE, CA seminar. They probably won't last long, so be proactive! That means GOYA (Do you know what tht means?). 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:
May 14/15 - Irvine, CA (Only 2 Spots Left!)
July 16/17 - Philadelphia, PA

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!

You should really try and make one of these seminars, if you can. With what you learn, you'll see a substantial increase in your trading results. If you've already signed up, I'll see you there. If you haven't signed up, what are you waiting for?

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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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