Option Investor
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33 OUT OF 36 - PROFITS KEEP ROLLING IN

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The fourth year of tracking our CPTI portfolio is off to a good start. It could have been a disaster - IF we didn't handle our SPX position well. We did, fortunately. I hope you did, too. The index settlement numbers raised more than a few eyebrows (see below).

TRACKING CPTI PORTFOLIO RESULTS
Through the 12 months in tracking year number three (ending with the November option cycle), we showed total profits of $23,055. That's roughly a 50% return on our trading account. We didn't match the first two years, but still $23,055 is very impressive.

To start off CPTI tracking year number four, we had a positive November. Two out of three of our positions were 100% profitable. We made $1,830 in Novemmber. We've now been profitable for 33 OUT OF THE LAST 36 months -- something we can be VERY proud of.

RECAP OF NOVMBER POSITIONS
SPX Iron Condor - Profit: $1,680
RUT Iron Condor - Profit: $1,500
SPX Iron Condor - Loss: $1,350
TOTAL NOVEMBER PROFITS: $1,830

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DID YOU? OR DIDN'T YOU?
Cheers and moans were heard all around the world when the SPX went nuts and the Friday morning settlement price came in at 1254.85. The cheers came from Couch Potato Trading Institute students who had closed out their SPX bear call spreads ahead of time. Though it might have been tough to click the mouse and take a slight loss, those who did have an ear-to-ear smile today.

On the other hand, the moans were from those who chose to "roll the dice" on the option settlement numbers and watched as the settlement price ($SET) was posted on Friday.

I received emails asking, "How can it happen?" They were referring to the fact that the opening settlement price of 1254.85 was well above the daily high for the SPX. It's odd, for sure, and deserves another look.

As we know, there are 500 stocks in the S&P 500. In the Friday morning settlement price, only the very first trade of the day is used for the calculation. Now, you must know that all 500 stocks do not open up simultaneously. They vary by a minute or two one way or the other.

For example, when the futures are pumped up by after close and/or pre open events, the bottomless pit of emotional traders want to get in at any cost. So, XYZ stock's very first trade might be at an unrealistic 67.25 (up $1.75). Within a matter of 30 seconds, XYZ trades back down at $66.25 (up only $.75). That's a significant difference for our purposes. Remember, it's only the first trade that gets recorded for the settlement price. If this happens to enough stocks, it can create the disparity that we see.

SPX settlement number: ($SET) = 1254.85
RUT settlement number: ($RLS) = 673.36

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DECEMBER POSITIONS
It looks like the market still has a way to go on the upside. Many indexes broke out to new highs. I'm going to be on the lookout for additional positions. The focus will likely be on bull put spreads. At this point, I don't feel comfortable putting anything on the top side (bear call spreads) in the path of this seemingly rising market.

We are currently short the 1285 calls in our SPX Iron Condor. That's only a 38-point cushion. It may be something we have to deal with in the near future. In our RUT Iron Condor we're in better shape, being short the 720 calls, with a 48 point cushion. That should be enough - should be.

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TAKE A SHOT IN THE DARK - YOU MIGHT HIT SOMETHING
Want to have some fun? When volatility is so low, there may be some bargains out there. Look at the QQQQs. The premiums are so low, it's hard to resist taking buying a lottery ticket on this popular ETF.

With the QQQQs trading at $41.45, let's go to the options dollar store and buy a strangle. We'll retain our non-directional posture by buying 20 QQQQ December $40 puts for $.20 ($400) and then buy 20 QQQQ December $43 calls for $.15 ($350). We've spent a total of $750 - and that's all we have at risk.

If the QQQQs go nuts in one direction or the other, we could make a nice piece of change. What if the QQQQs trade to $44.50 in the next 30 days? Our $43 calls would have a value of at least $1.50. Our 20 $43 calls would have a value of at least $3,000. That would provide a net profit of about $2,250. The same numbers would apply if the QQQQs retreated to $40. Our puts would increase in value at the same rate.

This is not an official CPTI portfolio position, but it's one that has an interesting risk reward ratio. It will also pacify traders who have an uncontrollable urge to take a shot at a potential nice percentage profit.

This is not a position you would necessarily hold until expiration. You want to look for opportunities to get out and take your profits when they're there. Don't get greedy.

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QQQQ ITM STRANGLE ROLL
On Friday we rolled our short November $37 calls to December $37 calls for a wash - no credit. Essentially, we're just buying time for the market to regress to the mean area of the mid to high $30 range.

ZERO-PLUS STRATEGY
We currently don't have a position in this long term play. We took a small loss, but our strategy is still in very good shape. We'll be posting a new position soon.

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CPTI NOVEMBER POSITIONS REVIEW
CPTI November Position #1 - SPX Iron Condor - 1248.47
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. Profit: $1,680

CPTI November Position #2 - RUT Iron Condor - 672.22
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. Profit: $1,500

CPTI November Position #3 - SPX Iron Condor - 1248.27
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: $1,350.

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CPTI CURRENT DECEMBER POSITIONS
CPTI December Position #1 - SPX Iron Condor - 1248.27
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 - 672.22
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 - 1248.27
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
cash position as of October expiration 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.

As we did in our CPTI portfolio account, we closed our 1235/1245 Nov. bear call spreads for a loss of $1,350. We deduct the $1,350 from our previous cash position of $37,600 to establish our new cash position of $3,610. Watch for our new Zero-Plus position very soon.

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QQQ ITM Strangle - $41.45
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).

We currently are short the December $37 calls. We have no short put position at this time.

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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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