Option Investor
Updates

THE HUNT FOR NEW POSITIONS

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If you wanted to look for potential trades, where would you look? What's the thought process that goes into search for new trades? This is something we spend hours on at the CPTI two-day advanced seminars. Let's take a look at a few of the basics.

First, you need to decide on the strategy you want to use. Our primary strategy at the CPTI is the Iron Condor. Basically, the Iron Condor consists of a bull put spread placed far out of the money below supports levels and a bear call spread, also placed far out of the money above resistance levels. Both the bear call spread and the bull put spread are credit spreads. When we put on these positions, we take money into our account. The objective is for the underlying (usually an index) to remain within the range established (between the short put and the short call). We want all the options to expire worthless. If they do, we get to keep the premium we took in when we initiated the position. The wider the maximum profit range, the safer the trade.

The complete Iron Condor is not always available. If the market is moving in one direction or the other, we may only put on one of the spreads and wait for the market to reverse to look for opportunities to put on the other side. Those opportunities do not always present themselves. So, on occasion, we only end up with just a bull put spread, or just a bear call spread. And that's OK. It's not optimal, but we would rather not put on a spread if the circumstances aren't favorable. We don't want to force anything - or accept too little premium. The reward has to be worth the risk.

Next, we have to decide how long we want to be exposed to the market. Right now, there are four weeks left in the October cycle and eight weeks left until the expiration of the November option cycle. Which do we choose? That's another discussion that takes an hour to go over the different alternatives.

There is still some premium left in October - if we're willing to slightly narrow our profit range. If we're willing to wait the additional four weeks, we can create an incredibly wide maximum profit range using November options.

For example - if you are inclined to look at the November SPX option chain, here are a few possibilities (based on Friday's closing numbers). The 1140/1130 bull put spread might yield $.70 and the 1280/1290 bear call spread might yield another $.70. That's a total of $1.40 on a 10-point spread or a possible return on risk of 16.3%.

Widening the spreads to 15 points might create the following Iron Condor. The 1140/1125 bull put spread might yield about $1.10 and the 1285/1300 bear call spread might yield about $.95. That's a total of $2.05 on a 15 point spread or a possible return on risk of 15.83%. Which is better? Good question. Is it more important to have the extra five points of cushion on the bear call spread? How much maintenance can you afford to use on any one position? Maybe the 15-point spread will require more than you care to tie up. But, then again, isn't a 10 point spread actually safer than the 15-point spreads - even though it's five points closer to where the SPX is trading? Lots of questions. The answers take a lot of discussion.

Look at the October chain. If we narrowed the profit range for an Iron Condor we could put on a 1160/1145 bull put spread that might yield $.70 and a 1260/1275 bear call spread that might yield $.70. That's a total of about $1.40. But notice that the profit range is 1160 to 1260 - 100 points. The November positions (above) have a profit range of about 145 points. Which is the better trade? Lots of questions.

What we need to learn to be an effective and efficient trader is the thought process - what goes into the decision making. What elements of the decision are etched in stone? In which areas are there room for compromise? How does your account size affect your decisions? How does your personality fit into the scheme of things?

Lots of questions. Those are just some of the things we talk about at the CPTI two-day advanced seminars. Do you want these questions answered? Do you really want to become better, more profitable, traders? Answers to a multitude of questions are waiting for you in Denver on October 15th & 16th. Interested? Contact me. (see below)

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October Position Update
A quick review of our October positions shows that the indexes are trading comfortably in the middle of our huge ranges. One week, of the five weeks in the October cycle, is over -- and we're in good shape. But, let's not get complacent. The market is sneaky and takes no prisoners -- as we have learned. We still need to keep an eye on our positions.

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CPTI CURRENT OCTOBER POSITIONS
CPTI October Position #1 - SPX Iron Condor - 1215.29
We sold 15 SPX October 1280 calls and bought 15 SPX October 1290 calls for a credit of about $.60 ($900). On Friday we sold 15 SPX October 1160 puts and bought 15 SPX October 1150 puts for a credit of about $.60 ($900). We have a complete Iron Condor with a trading range of 1160 to 1280. Our total potential profit is $1,800. Our maintenance requirement is $15,000.

CPTI October Position #2 - OEX Iron Condor - 562.28
With the OEX at about 559, we sold 15 OEX October 590 calls and bought 15 OEX October 600 calls for a credit of about $.55 ($825). Then we sold 15 OEX October 525 puts and bought 15 OEX October 515 puts for a credit of about $.75 ($1,125). Our credit and potential profit is $1,950. Maximum profit range is 525 to 590. Maintenance is $15,000.

CPTI October Position #3 - SPX Iron Condor - 1215.29
With the SPX at about 1230, we sold 12 October SPX 1285 calls and bought 12 October SPX 1300 calls and received a credit of $.80 ($960). We had asked for $.75, but, our broker came back with an $.80 fill (bless his heart). Then, we sold 12 October SPX 1155 puts and bought 12 October SPX 1140 puts for a credit of $.65 ($780). Our total profit potential is $1,740. We have a maximum profit range of 1155 to 1285. Maintenance is $18,000.

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ONGOING STRATEGIES
ZERO-PLUS Strategy - September SPX Iron Condor - 1215.29
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.

Our new cash position is: $31,500 + $1,500 (July Profit) = $33,000

Earlier this week we sold 20 SPX 1165 puts and bought 20 1150 puts for a credit of $.65 ($1,300). We also put on the bear call spread for our September Iron Condor. We sold 20 Sept. 1265 calls and bought 20 Sept. 1280 calls for a credit of $.85 ($1,700). No additional maintenance was required. Our maximum profit range is now 1165 to 1265.

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QQQ ITM Strangle - $38.75
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).

Normally, if I had been able to access the internet, our rollout might have been a little different, but probably not much. But, looking at the closing quotes of Friday, you should have bought back the August $37 calls for about $1.90 and rolled them to the September $37 calls for about $2.00 (a credit of $.10 or $100). The August $37 puts would have expired worthless and you can simply sell the $37 September puts for another $.10 or $100).

So, for the September expiration cycle, we're only going to take in about $200 while we patiently wait for the QQQQs to come back down. Remember, this strategy requires a belief that the QQQQs will regress to the "mean" area of about $36 to $38. The success of this strategy is an average of premium taken in over an long period of time.

Based on these figures, the new total of generated premium is about $5,100 ($4,900 plus the $200).

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COUNTDOWN TO DENVER CPTI SEMINAR

A FEW SPOTS LEFT --

CPTI SEMINAR DATE -- DENVER, CO - OCT. 15/16
I have received an enthusiastic response from the good people in the Denver area. Our next CPTI seminar will be on Saturday & Sunday, October 15th & 16th in Denver, Colorado.

Our CPTI seminars are limited to ONLY 25 ATTENDEES. If you're a serious options trader and you want to learn the nuances of our advanced non-directional trading strategies and hone your trading skills, contact me ASAP at mparnos@optioninvestor.com. I'll send you all the pertinent information. The price is right -- $995.00 -- about half of one profitable Iron Condor trade -- and you'll have a two-day experience that you'll remember, and profit from, for a lifetime.

Our latest Philadelphia CPTI Seminar was a great success (actually, they all are). There are now 25 more enlightened minds, with smiles attached, ready to generate a healthy annual return using our CPTI strategies. Remember, if you attend one of my CPTI seminars, you are entitled to retake the seminar a second time at NO CHARGE!

31 OUT OF 34 PROFITABLE MONTHS!

WANT TO ACHIEVE SUCCESS WITHOUT STRESS? OF COURSE YOU DO!!

USE OUR CPTI WEALTH-BUILDING TECHNIQUES!

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. Contact me at mparnos@optioninvestor.com. 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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