Option Investor
Updates

IS IT TIME TO CIRCLE THE WAGONS?

HAVING TROUBLE PRINTING?
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The last week has seen the market undergo a rather severe makeover - like the TV show "The Swan." It was really ugly and is now looking pretty good - at least for the bulls. And, as on the TV show, the improvement is probably just temporary. You never see those women six months later to see if the liposuction, plastic surgery and dental work is still intact.

As we know, the market will eventually regress back to normal (into a range), but will it be before our November expiration. I've been getting emails asking, "what should we do?" "When do we get out?"

First, let's look at the numbers. Our position is an SPX 1235/1245 bear call spread. The SPX is at about 1220 - 15 points away from our short 1235 call. We took in $1.40 ($1,680) of premium.

If we were to exit the position at this level (based on Thursday's closing prices), it would cost us about $4.50 to buy back the 1235 and we'd get about $1.85 when we sell the 1245 call. The debit would be about $2.65. Now, subtract the $1.40 of premium we took in initially and we're looking at a loss of about $1.25 - times 12 contracts = $1,500.

What is your risk tolerance? What is your pain threshold? These are the questions you have to ask yourself when deciding when to exit a trade. There are about 10 trading days left. Is 15 points a decent cushion?

Earlier this month, the ugly market brought the RUT down to about 615. We are short the November 610 puts. Well, support held and the RUT returned to the middle of its range. Does that happen often? Surprisingly yes, but we can't count on it. Can we expect it to happen on this upward move of the SPX? That's the question of the day.

Personally, I think the market is due for a rest. It's moved up far and fast - flying in the face of high oil prices and the aftermath of the hurricanes. For the most part, earning reports have come in strong despite the hurricanes. Something doesn't smell right, but we don't have a lot of control over it. We're at the mercy of the markets, the irrational directional traders and the short coverers. Trying to make sense of it is like whizzing in the wind. Plus, the axiom that the market climbs a wall of worry . . . yada, yada, yada.

For those of us who will admit it, we were fans of "The Karate Kid." Daniel-son asked Mr. Myogi "what is the best defense when backed into a corner?" Myogi responded, "Daniel-son, best defense is no be there." In CPTI lingo, that means GTFO -- Get The F(unds) Out!

There are those who will roll up, roll out, put on more bull put spreads, etc. I prefer a clean break. But, ultimately, the decision is up to you. There is no one solution that is right for everyone. We want to preserve capitol, but, at the same time, we want to give support and/or resistance levels a chance to work.

Check out some of the SPX support and resistance levels (below). Will they hold, or not? Who the hell knows? Not me. Exciting, isn't it?

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QQQQ ITM Strangle Update
Just a note. Our GTC order to buy back the November $37 puts for $.05 was filled. We are now in a position to take advantage of any pullback in the QQQQs over the next few weeks - and it costs us no more than if we had waited until expiration. We may not have the opportunity, but we are prepared.

Remember, whenever we roll out our positions, we should automatically put our GTC orders to buy back our short options for a nickel.

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S&P 500 SUPPORT & RESISTANCE. Closed at 1219.94

Resistance:
December 2004 high at 1219 and June high at 1220
March 2005 closing high at 1225 and intraday high at 1229.11
The September high at 1243 and the recent August high at 1246

Support:
1210 held in late September on the close.
The 50 day SMA at 1209
The 50 day EMA at 1205
1200 was solid price support at one time
The 200 day SMA at 1199.72
1190 from prior prices
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high
way back in July 1998
1185 is the August 2003/August 2004 up trendline is in trouble
The October intraday low at 1168 is a key point to watch
1165 - 1155 from late 2001/early 2002 double top
1140 from the April low

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NEW CPTI DEC. PORTFOLIO POSITION
There are six weeks to go before December expiration. Let's get the ball rolling with a new SPX Iron Condor portfolio position.

Sell 12 Dec. SPX 1150 puts
Buy 12 Dec. SPX 1135 puts
Credit of about $.80 ($960)

Sell 12 Dec. SPX 1285 calls
Buy 12 Dec. SPX 1300 calls
Credit of about $.60 ($720)

Total net credit and profit potential of about $1.40 ($1,680). Maximum profit range of 1150 to 1285. Maintenance is $18,000.

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CPTI CURRENT NOVEMBER POSITIONS
CPTI November Position #1 - SPX Iron Condor - 1219.94
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 - 658.77
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.

CPTI November Position #3 - SPX Iron Condor - 1219.94
With the SPX trading at about 1180 on expiration Friday, we sold 15 November SPX 1120 puts and bought 15 November SPX 1110 puts for a credit of $.70 ($1,050). Then, we sold 15 SPX November 1235 calls and sold 15 SPX November 1245 calls for $.55 ($825). Our total credit and profit potential is $1.25 ($1,875). Maintenance is $15,000 (IF you have the right broker).

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ONGOING STRATEGIES
ZERO-PLUS Strategy - September SPX Iron Condor - 1219.94
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: $34,700 + $2,900 (October Profit) = $37,600

For November we put on the same SPX Iron Condor as we did in the CPTI portfolio. With the SPX trading at about 1180 on expiration Friday, we sold 15 November SPX 1120 puts and bought 15 November SPX 1110 puts for a credit of $.70 ($1,050). Then, we sold 15 SPX November 1235 calls and sold 15 SPX November 1245 calls for $.55 ($825). Our total credit and profit potential is $1.25 ($1,875). Maintenance is $15,000.

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QQQ ITM Strangle - $39.94
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.

Near October expiration, with the QQQQs trading near $38, we rolled our short October $37 puts and calls to the short November $37 puts and calls.

Based on these figures, the new total of generated premium (through the November cycle) is $5,950 ($5,350 plus the $600).

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CPTI 2-DAY ADVANCED SEMINARS -
WATCH THIS SPACE FOR NEW DATES --
TO BE ANNOUNCED SOON!

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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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