Option Investor
Updates

GETTING A HEAD START FOR NOVEMBER

HAVING TROUBLE PRINTING?
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We took a bit of a leap by entering our first November position this week (see below). The 140-point maximum profit range was tough to resist. Many CPTI students got fills at or near our estimated prices. Others believe it's a little too early to begin putting on November positions. They remember the nightmare of last November -- when the market went straight up before and after the election.

Some CPTIers have account sizes that allow them to keep powder dry to take advantage of early trade opportunities and potential adjustments. Other CPTI students are still building their accounts and they have used up most of their available maintenance dollars on the October cycle. There are still many traders who still use brokers who hold maintenance on both spreads of our Iron Condors. That's a no-no -- an inefficient use of trading capital.

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You Never Get Anything Unless You Ask For It
Placing option orders is an inexact science. Why? Because we're dealing with human beings (if market makers can be considered human). CPTI strategies bring premium into our accounts. How much premium? That depends on many factors -- where the market is trading in relation to the strike price, the amount of volatility in the market, the volume of contracts traded that day, the amount of time left in the option cycle, and the ability of the market makers themselves.

Look at an SPX option chain. Currently, with the SPX trading at about 1227, you will notice that the put and call strike prices that are nearest 1227 will have the widest bid/ask spreads. The 1220 calls are 17.20/18.40 -- a $1.20 bid ask spread. Ideally, that $1.20 is what the market maker would like to put into his pocket. We're not that stupid -- at least most of us aren't. You never want to use market orders when trading these options, unless absolutely necessary -- or you will be dramatically overpaying for the option (or taking in substantially less). You'll notice that the bid/ask spreads are down to $.40, $.50 or $.60 by the time we look at the strikes where we typically trade the SPX -- 50 to 60 points away.

On a $1.20 bid/ask spread, it's realistic to ask for a $.40 or $.50 cent discount from the market maker. Some traders try to split the difference and ask for $.60 (the mid-point of the $1.20 bid/ask spread). Do they get filled at $.60 -- rarely. But, they wouldn't get it unless they asked for it. What are they risking? -- the market going in the wrong direction and that $.60 credit turning into a $.30 credit.

What time during the trading day should you place orders? Many warn not to trade between 9:30 and 10:30 (often called "amateur hour"). But, if you're going to trade aggressively (be greedy), the market open and the first half hour might offer you the best chance to get filled. That first half-hour (and sometimes longer) is chaos -- full of fluctuations. The option prices are fluctuating as well and, in the confusion, it's not unheard of to get filled at higher levels.

On the SPX, you can normally begin by asking for about a third or 40% of the market maker's bid ask spread. You can "ask" for it. It doesn't mean you're going to get it. Other indexes are not necessarily as negotiation friendly.

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A QQQQ Reminder
With today's upward market move, I want to remind those in the QQQQ ITM Strangle position that they should have a GTC (good till cancel) order out there to buy back the $37 puts and $37 calls for a nickel. Today's closing ask for the October $37 put was only $.10.

If the market pops up, our order to buy the $37 put for a nickel might get filled. If it does, what have we accomplished? We would be in a position to take advantage of any pullback that might happen -- at which time we could conceivably sell the $37 put again and take in additional premium. That's a good position to be in.

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GW Meet GW
One night, George W. Bush is tossing restlessly in his White House bed. He awakens to see George Washington standing by him. Bush asks him, "George, what's the best thing I can do to help the country?"

"Set an honest and honorable example, just as I did," Washington advises, then fades away.

The next night, Bush is astir again, and sees the ghost of Thomas Jefferson moving through the darkened bedroom. Bush calls out, "Tom, please! What is the best thing I could do to help the country?"

"Respect the Constitution, as I did," Jefferson advises, and dims from sight.

The third night sleep is still not in the cards for Bush. He awakens to see the ghost of F. D. R. hovering over his bed. Bush whispers, "Franklin, What is the best thing I could do to help the country?"

"Help the less fortunate, just as I did," FDR replies and fades into the mists.

Bush isn't sleeping well the fourth night when he sees another figure moving in the shadows. It is Abraham Lincoln's ghost. "Abe, what is the best thing I can do right now, to help the country?" Bush pleads.

Abe replies, "Go see a play."

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CPTI CURRENT OCTOBER POSITIONS
CPTI October Position #1 - SPX Iron Condor - 1227.68
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 - 566.79
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 - 1227.68
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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CPTI CURRENT NOVEMBER POSITIONS
CPTI November Position #1 - SPX Iron Condor -- 1227.68
With the SPX trading at about 1215, we sold 12 SPX November 1140 puts and bought 12 SPX November 1130 puts for a credit of about $.80 ($960). Then, we sold 12 SPX November 1280 calls and bought 12 SPX November 1290 calls for a credit of about $60 ($720). Our total credit and profit potential is $1.40 ($1,680). Maintenance is $12,000 (if you have the right broker). Maximum profit range is 1140 to 1280.

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ONGOING STRATEGIES
ZERO-PLUS Strategy - September SPX Iron Condor - 1227.68
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: $33,000 + $1,700 (September Profit) = $34,700

For October we duplicated the CPTI portfolio position by selling 20 October SPX 1155 puts and bought 20 1140 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. 1285 calls and bought 20 Sept. 1300 calls for a credit of $.80 ($1,600). Our total potential profit is $2,900. Our maximum profit range is now 1155 to 1285. Our maintenance is $30,000 (15-point spread X 20 contracts).


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QQQ ITM Strangle - $39.20
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).

On September's expiration Friday we rolled out our short September positions. October is going to be another low premium month, while we wait for the QQQQs to come back down to earth. We sold the October $37 puts for $.15. Earlier in the month we had purchased back our September $37 put for $.05. We ended with a credit of only $.05 for the put side.

Near Friday's close, we bought back the September $37 calls for $2.40 and sold the October $37 calls for $2.60 -- giving us a $.20 credit. Our total net credit for the October rollout is $.25 or $250


Based on these figures, the new total of generated premium (through the October cycle) is $5,350 ($5,100 plus the $250).

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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 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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