Option Investor
Updates

TWO WEEKS DOWN, THREE WEEKS TO GO

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October is a long option cycle -- five weeks long. Well, we're 40% of the way home and our October positions are in good shape. With slightly less than three weeks left, the SPX and OEX are comfortably within our maximum profit ranges.

At the end of the quarter, there is always a lot of reshuffling by the mutual funds and other institutions -- which likely accounted of at least part of the recent upward move. There may be a little more to go before the market hits resistance and takes a rest.

Earnings announcements will begin soon. It will be interesting to see how the economy fares. The results will reflect at least a portion of the effects of hurricanes Katrina and Rita For months to come, the economic indicators will be distorted by Katrina. It will be hard to get an accurate read on the economy for quite some time. But, that won't stop the market from an emotional reaction to each and every indicator -- from varying degrees of euphoria to outright panic. That's what makes the markets so interesting -- the unpredictability of it all. If it was predictable, then we'd all be directional traders -- and rich!!

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S & R on S & P with no S & M - In Other Words, the SOS or SSDD
We spend a lot of time watching and trading the SPX (S&P 500 Index).
For those of us who are heavily invested in the SPX, I thought it might
be interesting to keep track of the various support and resistance levels.
So, based on Friday's closing price, here are some numbers for you to digest
-- with a tequila chaser, of course.

S&P 500: Closed Friday (9/30) at 1228.81
Resistance:
March 2005 closing high at 1225 and intra-day high at 1229.11
The September high at 1243
The April/July up trend line at 1245
The recent August high at 1246
Price tops at 1265 from 1-28-99 and 2-99 & price bottoms from 12-20-00
Price top at 1-6-99 at 1272
Price tops at 1290 from 5-23-00
Price tops at 1364 from 1-29-01
Support:
The 50-day SMA (simple moving average) at 1226
The 50-day EMA (exponential moving average) at 1221.59
December 2004 high at 1219 and June high at 1220
1210 is some support.
1200 is some support
The 200-day SMA at 1199.89
1196 - the mid-January high and the early December peak in the left shoulder.
1183 - 1184 from November 2004 highs and July 2005 intra-day low.

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Question On Spread Size
Gday Mike -- Been with you for quite a few months now and love your work. Quick question regarding spread size. Assuming you risk the same amount on the trade, and also assuming that you can increase premium received in the same proportion as the increase in your spread size, (i.e. if you get 60c for a $10 spread then you can get 90c for a $15 spread or $1.20 for a $20 spread) aren't you better off with the bigger spread?

The way I see it, you will receive the same premium in dollar terms relative to the amount you are risking. Yet, if things go pear shaped, your cost to close the short position is far less as you have fewer options to buy back. Granted, your long option will not be able to be sold for as much, but in most cases the delta for all long options will be pretty low anyway. Anyway, just wanted to get my head around that. Thanks, Justin.

Hi Justin -- Glad you enjoy the column. The problem with larger spreads comes into play if/when a position goes bad. As the underlying approaches the short strike price, the short strike price increases in value. It will cost a chunk to buy back the short strike to close the position. Then, we want to sell the long option to help defray the cost of buying back the short option. At that point, the long option will have also increased in value. If the long option is part of a 15-point spread, it will have substantially less value than a long option that is part of a 10 point spread -- especially if the move takes place relatively early in the option cycle.

So, the moral of the story is to, if possible, trade the 10-point (smaller) spreads. If you can get the same percentage return as you can trading a 15-point spread, you can just trade some additional additional contracts if you want to match the total amount of premium.

If, as in your example, you trade 10 contracts of a 10-point spread and take in $.60, you've taken in $600. If you trade 10 contracts of a 15-point spread and take in $.90, you've taken in $900. If you prefer the $900 in premium, you can trade 15 contracts of the 10-point spread at $.60, for a total of $900.

Remember to pay close attention to the spread size. Before you make your decision, you should check out and see what strike prices are available for the other credit spread -- assuming you're objective is a complete Iron Condor. In order to make the most efficient use of your trading capitol in maintenance requirements, you need to match the spread sizes on the bull put spread and the bear call spread.

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QQQQ Quick Thought
Our good till cancel order to buy back our October $37 put was filled at $.05. Now, if the QQQQ pulls back, we'll have a chance to resell the option -- or, per chance, to roll our option earlier and capture a little extra premium.

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CPTI CURRENT OCTOBER POSITIONS
CPTI October Position #1 - SPX Iron Condor - 1228.81
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 - 566.80
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 - 1228.81
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 -- 1228.81
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 - 1228.81
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 - $39.46
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 -- 13 DAYS -- 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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