Option Investor
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AHHH SAFETY -- IT'S A BEAUTIFUL THING

HAVING TROUBLE PRINTING?
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Tomorrow (Friday) morning's settlement numbers are going to be exciting -- but not for us. Why? Because we GTFO (F=funds) when the gettin' was good. Let those who were sitting there like proverbial deer in the headlights drown in Pepto Bismal tonight in anticipation of tomorrow's SPX settlement number. I've been there and done that. Believe me, it ain't no fun! Not only do you likely lose money, but you lose a night's sleep as well.

That's why the management of these positions is so important. Occasionally, the Index trends a bit and threatens our short strike prices. What we do at crunch time can often determine our profit and loss for the month.

Yesterday (Thursday), we closed our SPX 1235/1245 bear call spread and took a reasonable loss of $1,350 on the Iron Condor position. At the time, the SPX was trading about 1230 with two trading days and a settlement opening remaining. We had better than a 50-50 chance of everything expiring worthless (our objective). However, we've seen, in months past, that the indexes can be full of surprises -- both good and bad. Those who waited a little later in the day on Thursday to close the position may have gotten out at as much as $500 less as the market dipped further.

You have to ask yourself if you want to flip the coin. It's not an even flip, though. If the SPX behaves itself and the bear call spread expires worthless, all is right with the world and we keep the $1.25 of premium we initially took in. However, if the SPX gets a little excited and spikes up, we are exposed for $8.75 ($10.00 - $1.25) of potential losses. Is it worth the risk? I think not.

Here's where we distinguish between the traders who think with their little head instead of their big head. Remember, our objective is the preservation of capital. Why? Because our trading capital is the inventory of our trading business. Without it, we have no potential to make money. With capital, it allows us to stay in the (trading) game -- and live to trade another day, or week, or month.

We were a bit fortunate that the move happened close to expiration -- because the bulk of the time value had eroded away. When the potential violation happens early in the life of the trade, it makes these decisions even more difficult.

So, it's possible (but not likely) that tomorrow's opening will be to the downside. Usually, after a big day like today, the market has some momentum and opens higher -- and then fades a bit later in the morning. However, we're only concerned with the open. For those who are still in the 1235/1245 bear call spread, your break even is 1235 + 1.25 (premium) = 1236.25. You will lose money on any settlement above that. Your protection kicks in at 1245.

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QUICKIES LOOKING GOOD
For those who dared, it looks like our quickie trades have a pretty good chance of working out. Again, these are also subject to tomorrow's opening settlement price on the RUT and the SPX.

We established a 1215/1245 Iron Condor and took in about $1.50. With the SPX at 1242.80, anyone who held on it taking a chance on tomorrow's settlement price. However, it one was a good trader, he would have closed the position yesterday for $.50 and kept the $1.00 profit.

We also established a 660/670 Iron Condor on the RUT and took in a nice chunk of premium - $7.20. Some traders may have bailed when the RUT dropped to about 650. However, I know some who hung on. Those who hung around will likely be rewarded -- depending on tomorrow's settlement number or if they closed the position. The RUT settlement number can often be a real adventure. The wise trader would have closed the short positions for a total of about $.70 today -- leaving a healthy profit of about $6.50.

Remember, when in a risky situation, if you can lock in 75% of your profit, DO IT!! Why risk 75% of your profit (or possibly more) for the last 25%? It doesn't make sense.

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FOOD FOR THOUGHT
Figuring an average of 160,000 troops in the Iraq Theater of operations for the last 22 months, that gives a firearm death rate of 60 per 100,000.

The firearm death rate in Washington DC is 80.6 per 100,000.

So, you are 25% more likely to be shot and killed in DC -- which has some of the strictest gun control laws in America -- than you are in Iraq.

Conclusion: The US should immediately pull out of Washington, DC.

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CPTI CURRENT NOVEMBER POSITIONS
CPTI November Position #1 - SPX Iron Condor - 1242.80
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 - 667.14
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 - 1242.80
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).

Closed for loss

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CPTI CURRENT DECEMBER POSITIONS
CPTI December Position #1 - SPX Iron Condor - 1242.80
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 - 667.14

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.

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ONGOING STRATEGIES
ZERO-PLUS Strategy - September SPX Iron Condor - 1242.80
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 - $41.30
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.

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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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