Option Investor
Updates

KEEP MORE OF YOUR PROFITS

HAVING TROUBLE PRINTING?
Printer friendly version

With the year winding down, Couch Potato Trading Institute students will have some tough decisions to make. Pretty soon you'll be adding up your profits for the year -- which should be pretty substantial. Uncle Sam will want to get his hands in your pockets (without taking you out to dinner first).

Let's not get a reputation of being easy. I suggest we play a little hard-to-get. There is an additional benefit to trading indexes as we do. By trading broad based indexes, we qualify for the little known 60/40 tax rule (Section 1256). That means simply that 60% of the profits we make from trading options on these indexes are taxed at the 15% long term capital gains rate and only 40% of the gains are taxed at the short term capital gains (your personal tax rate).

Let's look at an example. If you made $100,000 trading these broad based indexes, here's how your tax responsibility would break down:

$60,000 (profits) X 15% (long term capital gains rate) = $9,000
$40,000 (profits) X 35% (short term capital gains rate) = $14,000
Total tax responsibility is $24,000

(This is based on an estimate of your personal short term tax rate being 35%. It will vary from trader to trader).

Compare the $23,000 figure to what you would owe if you paid all of your tax based on your short term capital gains rate of 35%. $100,000 X 35% = $35,000.

That's a savings of $12,000 by using the 60/40 rule. Gee, what could you do with an extra $12,000? 1,200 doses of Viagra (which gives a whole new meaning to the term "hard-to-get"), or 12,000 double-cheeseburgers. I'll leave the rest to your imagination.

In order to file taking advantage of the 60/40 rule, you will first have to elect the "mark-to-market" trader status. Mark-to-Market means that the options (non-equity) you still own on December 31st, will be calculated as if you sold them on December 31st. The form you would fill out for the trading of non-equity options is form #6781.

There are some restrictions you will need to know about when you have to declare your mark-to-market status. As in most tax-related topics, you should consult your tax professional. Now, recognize that your tax professional may not be familiar with trader tax rules. It's not something they come across every day. Plus, there are frequent changes to the rules. There are companies that specialize in doing taxes for traders. Simply, "google" the words "taxes for traders" and you'll find a number of companies that will be glad to answer specific questions on the subject. Plus, they will, for a fee, be glad to do your taxes for you.

Today's article was intended to give you an idea of the tax benefits of trading indexes. Make sure to consult a tax professional to clarify and confirm anything discussed above.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

WE'RE AT THE MONEY -- NAIL BITING TIME
Many CPTI students have already closed out their 1235/1245 SPX November bear call spread. The SPX had reached their bail out point and they got out of the position. Good for them. An individual's exit point is just that -- and individual choice, based on an individual's risk tolerance, account size and their view of where the market is headed.

I'm taking a calculated risk by holding the position. My risk tolerance is higher than most. I think the market is overbought. The market is trending higher, but we're due for a rest and/or a pullback. There is resistance right at the 1235 mark as well as 1240.

I suggest you search your soul and decide if you're willing to take the risk. What I may or may not do is not always what a typical trader should do. The decision is yours. Remember, the preservation of capital should be your primary concern.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

CPTI CURRENT NOVEMBER POSITIONS
CPTI November Position #1 - SPX Iron Condor - 1234.72
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 - 666.66
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 - 1234.72
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).

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

CPTI CURRENT DECEMBER POSITIONS
CPTI December Position #1 - SPX Iron Condor - 1234.72
With the SPX trading between 1217-1222, we sold 12 December SPX 1150 puts and bought 12 Dec. SPX 1135 puts for a credit of about $.80 ($960). Then we sold 12 December SPX 1285 calls and bought 12 Dec. SPX 1300 calls for a credit of about $.60 ($720). Total net credit and profit potential of about $1.40 ($1,680). Maximum profit range is 1150 to 1285. Maintenance is $18,000.

CPTI December Position #2 - RUT Iron Condor - 666.66
With the RUT trading at about 658, we sold 15 Dec. RUT 590 puts and bought 15 Dec. RUT 580 puts for a credit of about $.60 ($900). Then we sold 15 Dec. RUT 720 calls and bought 15 Dec. RUT 730 calls for a credit of about $.55 ($825). Our total credit and profit potential is $1.15 ($1,725). The maximum profit range is 590 to 720. Maintenance is $15,000.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

ONGOING STRATEGIES
ZERO-PLUS Strategy - September SPX Iron Condor - 1234.72
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.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

QQQ ITM Strangle - $40.671
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).

Our GTC order to buy back the November $37 puts for a nickel was filled. We are now only short the November $37 calls with about one week left in the November cycle.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

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

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

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

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

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.

Couch Potato Trader Updates Archives