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SNATCHING PROFITS - THE QQQQ ITM STRANGLE

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There has been a huge increase in the subscribership of our Couch Potato Trader column. Welcome one and all. Even more gratifying is the fact that many of the new subscribers actually want to learn and understand the strategies we use.

I've received a number of emails requesting an explanation of our QQQQ ITM Strangle strategy. Below is an explanation of the structure and mechanics of the position. However, let me say that I would not initiate a new QQQQ ITM Strangle position at this point in time. The market volatility is very low, and as s result, there is very little premium available. Add that to the fact that the market seems to be trending, and a new position isn't a good idea right now.

In the example below I'll be using current market prices. Don't mistake that for a suggestion to enter a new position.

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The QQQ ITM STRANGLE
Friday, the QQQQs finished at $42.11. Basically, we're going to buy some QQQ 2008 in-the-money LEAPS put and call options and then sell near term near or at-the-money options against the long LEAPS positions. It sounds simple. It ain't brain surgery, but it will require some focus and understanding.

Before entering this position, you have to believe that the QQQQs may trade up and down, but will, for the most part, stay near the $41 to $44 area for an indefinite period of time.

The Position - Part One
Buy 10 QQQ Jan. 05 $47 puts @ $6.10 = $6,100
Buy 10 QQQ Jan 05 $37 calls @ $9.80 = $9,800
Total out of pocket = $15,900

Sounds like a lot of money, but only $5.90 ($5,900) is really at risk. There are 10 points of intrinsic value in this position. Wherever the QQQQs trade, the very least the position can be worth is $10. That leaves the rest as time value - for the 26 months until expiration in January of 2008.

The Position - Part Two

I bet you're wondering where the profit will come from. With the QQQQs at $42.11 let's:
Sell 10 QQQQ January 2006 $43 calls @ $.45= $450
Sell 10 QQQQ January 2006 $42 puts @ $.70 = $700
Total premium credit = $1,150

Now, don't get too excited. You probably won't be able to keep the entire $1,150. We sold the $42 puts and $43 calls and the likelihood of the QQQs finishing at between $42 & $43 is not great. The likelihood is pretty darn good, however, that the QQQQs will remain within our $37-$47 range of the long 2008 LEAPS. As we near January 2006 expiration, we're going to have to roll our position out to February. The time value of our short options will have eroded away, and, during the last week (Wednesday - Friday), we should be able to close out the short positions and roll them out to the next month - with the same, or new, strikes - depending where the QQQQs are trading.

How Do You Choose The Near Term Strikes?

This QQQQ strategy works best in a stagnant market - one that remains in a tight trading range. That's not what the market is currently doing. It's making big moves - and we anticipate that may continue for the near future.

The near term short strikes to sell are a matter of personal preference. We could have sold both the $42 puts and $42 calls and taken in a total of $1.60 ($1,600). But then we have no cushion for the QQQQs We only make money on selling time premium. It's a delta thing. By using an ITM (in the money) option, we're essentially reducing the amount of time premium available to sell.

Do The Math

If we average $.50 per month ($500) for the next 25 months, we would generate $12,500 of premium. Subtract the $5,900 that will erode away, and you are left with a potential profit of $6,600. How much was at risk? $5,900. $6,600 is a nice chunk of change in your pocket. You will have doubled your money in two years -- with very limited risk.

It's A Bit Confusing

In the past, this strategy has worked well - generating an average of 8% a month on the initial investment in the long LEAPS positions. But, in the past, the market has not trended much. Sometimes, adjustments of the long LEAPS may be necessary. There are some basic guidelines, but there is a lot of flexibility and your decisions can be made on your personal view of the market and your interpretation of the charts.

Other Indexes

The ITM Strangle can have many variations and can be used on other indexes as well. CPTI students have, in the past, been successful using the DJX options. If you're going to explore other indexes, make sure they have one point strike price increments. It gives you a lot more flexibility.

Again, now is not the best time to initiate a new position. However, now is a good time to learn about the ITM Strangle -- and there's no better place than at one of the upcoming CPTI 2 day advanced seminars. It's just one of the conservative non-directional strategies we'll be covering -- in depth!!

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GIVE YOURSELF THE GIFT OF KNOWLEDGE!!

TWO NEW CPTI 2-DAY ADVANCED SEMINAR DATES ANNOUNCED
It's that time of year. Don't give yourself a wallet. Give yourself the gift that will teach you how to fill up your wallet. It's a gift that will last a lifetime. Strategies that work -- over and over and over again!! I'll teach you how making money can be boring -- and profitable.

Email me for information -- but only if you're a SERIOUS trader who wants to learn. I'm here for you. I'll be glad to send you all the details and call you to go over your questions. The seminars are both fun and informative. Contact me: mparnos@optioninvestor.com.

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CPTI CURRENT DECEMBER POSITIONS
CPTI December Position #1 - SPX Iron Condor - 1265.08
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 - 690.57
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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CPTI CURRENT JANUARY POSITIONS
CPTI January Position #1 - RUT Bull Put Spread - 690.57
With the RUT trading at about 685, we sold 15 Jan. RUT 620 puts and bought 15 Jan. RUT 610 puts for a credit of about $.65 ($900). Our maintenance is $15,000.

We're going to be waiting for a good opportunity to put on the bear call spread to complete the Iron Condor. If we get the opportunity, great! If not, we'll be satisfied with just holding the bull put spread.

CPTI January Position #2 - OEX Bull Put Spread - 579.61
With the OEX trading at about 577.75, we sold 15 OEX January 545 puts and bought 15 OEX January 535 puts for a credit of $.50 ($750). Maintenance is $15,000.

We're going to be waiting for an opportunity to put on the bear call spread to complete the Iron Condor. If we get the opportunity, great! If not, we'll be satisfied with just holding the bull put spread.

CPTI January Position #3 - SPX Bull Put Spread - 1265.08
On Friday, we sold 15 SPX January 1200 puts and bought 15 SPX January 1190 puts for a credit of $.60 ($900). Maintenance is $15,000.

We're going to be waiting for an opportunity to put on the bear call spread to complete the Iron Condor. If we get the opportunity, great! If not, we'll be satisfied with just holding the bull put spread.

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ONGOING STRATEGIES
ZERO-PLUS Strategy - January RUT Iron Condor - 690.57
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.

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 $36,250.

Zero Plus Position:
With the RUT trading at about 685, we sold 20 Jan. RUT 620 puts and bought 20 Jan. RUT 610 puts for a credit of about $.65 ($1,300). Then we sold 20 Jan. RUT 750 calls and bought 20 of the Jan. RUT 760 calls for $.45 ($900). Our maintenance is $15,000. Our maximum profit range is 620 to 750. Our net credit and profit potential is $1.10 = $2,200.

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QQQ ITM Strangle - $42.11
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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NEW DATES FOR CPTI 2-DAY ADVANCED SEMINARS -
February 4 & 5 - Atlanta, GA
February 18 & 19 - Las Vegas, NV

Our next CPTI seminars will be on Saturday & Sunday, February 4th & 5th in Atlanta and February 18th & 19th in Las Vegas.

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 -- less than the profit from one Iron Condor trade -- and you'll have a two-day experience that you'll remember, and profit from, for a lifetime.

Our latest Denver CPTI Seminar was a great success (no surprise, 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!

33 OUT OF 36 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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