Option Investor
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SO YOU THINK YOU KNOW OPTIONS?

HAVING TROUBLE PRINTING?
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If you're reading this, it's a good bet that you survived New Years. Congratulations!! Every where I turn I read about people making New Year's resolutions to start this or lose that. Who are we kidding? You can't wash the spots off a leopard. Chances are, the person you're going to be in 2006 will strongly resemble the person who was staring back at you in the mirror throughout 2005.

What might be different in 2006? What might motivate real change? Some see consistent trading losses as a good reason to change, while others refuse to change regardless of the expense (directional traders are a good example). It's actually funny (and a little sad at the same time) to hear people tell stories about how the markets, the market makers or the trading gods have conspired against them resulting in loss after loss after loss. These are the same folks, unfortunately a huge segment of our society, that rarely accept responsibility for their own actions. It's so much easier to cast blame - and they actually believe it.

That's why so many people like to be handed trades on a silver platter. If the trades work, they're a genius. If they don't, there's a convenient ready-made scapegoat. They blame the losses on the guy who came up with the trade in the first place.

There's a segment at my seminar called Traders Anonymous in which each attendee stands up and reveals a trade that went wrong. We analyze the trade from top to bottom. It's an excellent learning tool. But, like AA, one first has to admit a problem and a willingness to change. Also, like AA, some make it and some don't.

Well, we all know that definition of insanity is doing the same thing over and over and expecting a different result. Maybe we're all a little nuts, but there's no room for this kind of insanity in your trading life - or your trading life will be short lived. How can you change what is a history of consistently unsuccessful trades? Knowledge will certainly help. Knowledge is powerful. It can move mountains and even help people who want to change, to change.

Take The Test
Many people think they know about options. A few actually do, though others are convinced they do after a couple of successful trades. I recently came across a quiz. It's pretty basic, but I challenge you to take it and see how solid is your knowledge of some option fundamentals. The answers are later on in the column. No cheating!!

1. You are short one October 460 put you sold for $70 with the underlying at 390. Explain your profit or loss if any, at expiration, with the underlying at: a) 350; b) 290; or c) 265.

2. True or false? An out-of-the-money (OTM) option has no intrinsic value.

3. True or false? The entire premium of an OTM option consists of extrinsic value.

4. Determine if each option is ITM, OTM, or ATM if XYZ stock is trading at $55.25.
a) Oct $50 call @ $5.00
b) November $60 call @ $3.00
c) December $55 put @ $6.00

5. If a put expires in-the-money, is the underlying above or below the strike price?

6. If a put expires out-of-the-money, is the underlying above or below the strike price?

7. If a call expires in-the-money, is the underlying above or below the strike price?

8. If a call expires out-of-the-money, is the underlying above or below the strike price?

9. If a call expires in-the-money,
a) the call buyer will _______
b) their resulting underlying position is _______
c) the call seller will _______

10. If a put expires in-the-money,
a) the put buyer will _______
b) their resulting underlying position is _______
c) the put seller will _______

11. Immediately after expiration, what is the value of an out-of-the-money option?

12. When an option expires in-the-money, at what price is the underlying instrument exchanged?

13. Immediately after expiration, what is the value of an in-the-money option?

14. A position that is long the underlying has:
a) a bullish or bearish directional bias?
b) limited or unlimited profit potential?
c) limited or unlimited loss exposure?

15. A position that is short the underlying has:
a) a bullish or bearish directional bias?
b) limited or unlimited profit potential?
c) limited or unlimited loss exposure?

16. A position that is long a call has:
a) a bullish or bearish directional bias?
b) limited or unlimited profit potential?
c) limited or unlimited loss exposure?
d) positive or negative time decay? Does time work for or against you?

17. A position that is short a put has:
a) a bullish or bearish directional bias?
b) limited or unlimited profit potential?
c) limited or unlimited loss exposure?
d) positive or negative time decay? Does time work for or against you?

18. A position that is short a call has:
a) a bullish or bearish directional bias?
b) limited or unlimited profit potential?
c) limited or unlimited loss exposure?
d) positive or negative time decay? Does time work for or against you?

19. A position that is long a put has:
a) a bullish or bearish directional bias?
b) limited or unlimited profit potential?
c) limited or unlimited loss exposure?
d) positive or negative time decay? Does time work for or against you?

If you get all the answers correct, you have the beginnings of a good knowledge of option fundamentals. You need these before you can fully appreciate and learn the value of our CPTI non-directional strategies.

Did you get some answers wrong? How many? If you don't understand these basic concepts, you should not be trading options - at least not without adult supervision or your psychiatrist handy. Take up basket weaving or - or some other line of work where you can hurt yourself physically or fiscally.

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DO YOU HAVE WHAT IT TAKES TO PROFIT IN 2006?
That Extra Bit Of Knowledge Can Make A Huge Difference!!
TWO NEW CPTI 2-DAY ADVANCED SEMINAR DATES ANNOUNCED

Did you get a new shirt for Christmas? Was it a welcome gift because you've lost yours trading directionally? It's nothing to be embarassed about. All successful CPTI students once were directional traders -- traders who finally saw the error of their ways. Now, using our non-directional strategies and the wisdom they acquired from our CPTI seminars, CPTI students now position themselves for profit -- every month.

It's the start of a new year. Time to turn over a new leaf. There are profits waiting for you there. But you have to make the effort. Give yourself the gift that will teach you how to fill your wallet. It's a gift that will last a lifetime. Attend a CPTI seminar and learn strategies that work -- over and over and over again!! I'll teach you how making money can be boring -- and profitable. I'm booking reservations every day. Don't wait too long! Vegas spots are going fast!

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 contact you to go over your questions. The seminars are both fun and informative. Contact me today: Contact Support.

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CPTI CURRENT JANUARY POSITIONS
CPTI January Position #1 - RUT Iron Condor - 673.22
We sold 15 Jan. RUT 620 puts and bought 15 Jan. RUT 610 puts for a credit of $.65 ($900). Then we sold 15 January RUT 740 calls and bought 15 RUT January 750 calls for a credit of $.55 ($825). Total premium and profit potential is $1,725. Our maintenance is $15,000.

CPTI January Position #2 - OEX Bull Put Spread - 570.00
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 waited for an opportunity to put on a bear call spread to complete the Iron Condor, but nothing looked great. So, we are settling for just holding the bull put spread.

CPTI January Position #3 -- SPX Iron Condor - 1248.29
We sold 15 SPX January 1200 puts and bought 15 SPX January 1190 puts for a credit of $.60 ($900). Then we sold 15 SPX January 1320 calls and bought 15 SPX January 1330 calls for $.65 ($975). Total premium and profit potential of $1,875. Maintenance is $15,000.

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CPTI CURRENT FEBRUARY POSITIONS
CPTI February Position #1 - SPX "Sure Thing" Credit Spread - 1248.29
We sold 2 February SPX 1275 calls and bought 2 February 1300 calls for a net credit of about $7.40 ($1,480). The initial maintenance requirement is $5,000. But, later on, if the market reverses, the maintenance requirement can get hefty. Our profit potential is $1,480.

CPTI February Position #2 - SPX Iron Condor - 1248.29
We sold 10 February SPX 1175 puts and bought 10 February SPX 1160 puts for a credit of $.80 ($800). Then we sold 10 February SPX 1325 calls and bought 10 February SPX 1340 calls for a credit of about $.65 ($650). Our total net credit and profit potential of about $1.45 ($1,450). Maximum profit range is 1175 to 1320 = 150 points. Maintenance requirement is $15,000 (IF you have the right broker).

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ONGOING STRATEGIES
ZERO-PLUS Strategy - January RUT Iron Condor - 673.22
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.

Current 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 - $40.41
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 December expiration, with the QQQQs, we rolled our short December $37 calls to the short January $37 calls.

The total of generated premium (through the January cycle) is still $5,950.

We currently are short the January $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 Saturday & Sunday, 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.

The recent 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!

34 OUT OF 37 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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QUIZ ANSWERS
1 a) 40 x 100 = 4,000 loss; b) 100 x 100 = 10,000 loss; c) 125 x 100 = 12,500 loss. 2. True. 3. True. 4. a) ITM; b) OTM; c) ATM. 5. Below. 6. Above. 7. Above. 8. Below. 9. a) exercise the call; b) long underlying; c) be assigned on the call. 10. a) exercise the put; b) short underlying; c) be assigned on the put. 11. Zero. 12. At the exercise price. 13. Its intrinsic value. 14. a) Bullish; b) Unlimited; c) Unlimited to zero. 15. a) Bearish; b) unlimited to zero; c) Unlimited. 16. a) Bullish; b) Unlimited; c) Limited; d) Negative/Against. 17. a) Bullish/Neutral; b) Limited; c) Unlimited to zero; d. Positive/For. 18. Bearish/Neutral; b) Limited; c) Unlimited; d) Positive/For. 19. a) Bearish; b) Unlimited to zero; c) Limited d) Negative/Against

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 (though many often do) 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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