Option Investor
Updates

THE IRON CONDOR - PART II

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On Sunday we began a multi-part article on the Iron Condor, our favorite strategy. Today, in Part II, we will look at the maintenance requirements, our actual risk on the trade and some choices for adjusting the trade if it goes bad.

Refer to part one in Sunday's (10/9/05) column where we discuss the mechanics of the Iron Condor and the placing of the trade. If you don't still have the email, the article is up on the OI website from which you can print it out.

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Iron Condor Maintenance Requirements

Your brokerage firm will want to hold $10,000 per spread in your account as collateral to cover catastrophic situations (each brokerage house calculates this somewhat differently, so check the rules where you are). A progressive options broker will require a total of $10,000 (for a 10 contract position) for the two spreads. A non-progressive broker will want to hold $10,000 in maintenance on each of the two credit spreads (totaling $20,000). The maintenance requirement can be in the form of cash or marginable securities. If you are using cash to handle the maintenance requirement, it should continue to earn money-market interest while it's resting comfortably in your account. Again, check your brokerage to confirm their policy.

Our Exposure - Cash at Risk & Maximum Loss

The nice part about the Iron Condor is that you can't be wrong in both directions. Technically it's possible, but the likelihood of it happening is infinitesimal.

Our exposure is only the difference between the strike prices of the bull-put spread -- 10 points. Now, remember that we've already taken in $1.70 in credit when we put on the Iron Condor. Therefore our actual out-or-pocket risk is only $8.30 ($10 - 1.70).

Breakeven Points

We have breakeven points (at expiration) of 1261.70 (1260 plus 1.70) on the upside and 1133.30 (1135 minus 1130) on the bottom side. These are breakeven points -- at expiration. Prior to expiration, there is time value to be considered. If you choose to close out the trade prior to expiration, you have to carefully calculate the prices prior to the trade to be accurate in assessing the cost of closing the trade and your profit or loss situation.

Adjustments

There are a few different ways to deal with a potential violation of a short strike price. In our SPX example, let's assume that SPX is trading at 1140, just outside of the desired 1135/1125 range.

A) You can roll up and/or out. You can close out the bear call spread and roll it up and out -- trading an increased number of contracts on the rollout to replenish what it cost to close out the original bear call spread.

B) You can wait and see what happens. As you know (hopefully), the market fluctuates. There's still a reasonable chance that the market will come back down and finish comfortably below the short call strike. This is a judgment call, just remember that you are still at risk for the maximum loss here.

C) When a trend becomes apparent, you can close out the bull put spread and establish a bear call spread above the strike and trade a sufficient number of contracts so the credit taken in will replenish the cost to close out the original bear call spread.

D) You can buy back the short put of the bull put spread and, if you anticipate a continued upward move, ride the remaining long put (1125) down. If you're right, and the stock moves to 1115, your long 1125 put will now have an intrinsic value of at least 10 points. But that's IF YOU"RE RIGHT! If it's early in the option cycle, and you believe the stock will continue, you can hold onto the long.

I wouldn't necessarily close out the near worthless spread (i.e., the spread on the opposite end of the trading range) unless you need to close the spread to free up maintenance dollars for another purpose, or unless you can do it inexpensively -- a nickel or dime. If SPX is threatening the lower bull put spread, bear call spread will likely expire worthless. Why spend the money on commissions if you don't have to?

E) If, or when, a stock moves up (or down) through the short strike, we can simply buy (or short) 1,000 shares of the stock to cover the short position. When the returns back below the short strike, we simply sell the stock or cover our short shares. You may incur a few commissions and a little slippage, but it's a good way to cover your positions. Notice that this possibility applies to Iron Condors placed on stocks. It does not apply to indexes.

In the upcoming Sunday column, we will answer a few questions about Iron Condors. I'm sure you must have plenty. Send them along and I'll address them as soon as I can.

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CPTI CURRENT OCTOBER POSITIONS
CPTI October Position #1 - SPX Iron Condor - 1176.84
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 - 547.42
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 - 1176.84
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 -- 1176.84
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.

CPTI November Position #2 - RUT Iron Condor -- 623.28
With the RUT trading at about 665, we sold 12 November RUT 610 puts and bought 12 November 600 RUT puts for a credit of about $.60 ($720). Then, we sold 12 RUT November 720 calls and bought 12 RUT November 730 calls for a credit of $.65 ($780). Our total credit and profit potential is $1.25 ($1,500). Maintenance is $12,000 (IF you have the right broker). Maximum profit range is 610 to 720.

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ONGOING STRATEGIES
ZERO-PLUS Strategy - September SPX Iron Condor - 1176.84
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 - $37.78
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 -- TWO DAYS TO GO

CPTI SEMINAR DATE -- DENVER, CO - OCT. 15/16
Our CPTI seminar will be on Saturday & Sunday, October 15th & 16th in Denver, Colorado and there is still room for YOU!!

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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