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SO YOU THINK YOU KNOW OPTIONS - II

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SO YOU THINK YOU KNOW OPTIONS - PART II?

A few weeks ago, I devoted a column to a quiz on some option basics. It was well received and I got a lot of emails requesting more. It seems that most CPTI students have a grasp of the fundamentals and wanted to test their knowledge a little further. I found some more questions to test your mettle. Again, this isn't brain surgery, but these are important concepts to understand - especially if you have hopes of being a consistently successful trader. Anyone can get lucky on a few trades. Even a blind squirrel finds an acorn once in awhile. It's the knowledgeable trader who has the best chance of continued success. The answers are later on in today's column. No cheating!! Good luck.

1. Determine the following:
a) Long 500 shares of XYZ @ $60?
Risk: ________________
Reward: _____________
Breakeven: ___________

b) Short 15 XYZ Dec. $45 puts @ $4.75
Risk:_________________
Reward: ______________
Breakeven: ____________

c) Short 21 XYZ March $45 calls @ $6.60
Risk:_________________
Reward: ______________
Breakeven: ____________

2. True or false? Implied volatility is a measure using real-time prices rather than historical price and applies to the options rather than the underlying.

3. True or false? Implied volatility is based on past market fluctuations.

4. True or false? Different put and call strikes, as well as different expirations, have their own volatilities.

5. True or false? Vega measures the sensitivity of the option premium to an expected change in the volatility of the underlying.

6. Do dividends work for or against you if you are short stock?

7. True or false? Calls and puts have positive deltas.

8. What does the trader anticipate when it is long volatility?

9. What does the trader anticipate when it is short volatility?

10. True or false? Different call and put strikes, as well as different expirations, have their own implied volatilities.

11. True or false? Vega measures the sensitivity of the option premium to an expected change in the volatility of the underlying.

12. What are the six inputs that are used in the Black-Scholes model to derive an option's price?

How did you do? Be honest. It's OK if you got a few wrong. It just let's you know that you have some catching up to do.

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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ONLY 1 WEEK TO ATLANTA - OUR SUPERBOWL SEMINAR
ONLY 3 WEEKS TO LAS VEGAS
That Extra Bit Of Knowledge Can Make A Huge Difference!!

Want to learn how to get those extra nickels and dimes on your spread trades? They really add up. Come join me in Atlanta for two days of information and fun. It seems like most people have signed up for Vegas. There are still spots open in Atlanta and only a few left in Vegas. Don't put it off!! It's an investment in your future. They say that money can't buy love. Wouldn't you like to see for yourself?

We won't miss a minute of the Super Bowl. We'll be having our own Super Bowl party!!

There are profits waiting for you out 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 daily. Don't wait too long! Only a FEW spots remain for LAS VEGAS

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 FEBRUARY POSITIONS
CPTI February Position #1 - SPX "Sure Thing" Credit Spread - 1273.83
We originally 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 was $5,000. Our profit potential was $1,480. When the market started back up, we reversed our position and put on four contracts of the 1280/1255 bull put spread. Our current adjusted profit potential is $1,420 and the new maintenance is $10,000. Now, we can root for the SPX to close above 1280.

CPTI February Position #2 - SPX Iron Condor - 1273.83
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).

CPTI February Position #3 - RUT Iron Condor - 728.48
We sold 15 February RUT 640 puts and bought 15 February RUT 630 puts for a credit of $.50 ($750). Then we sold 15 February RUT 750 calls and bought 15 February RUT 760 calls for a credit of $.50 ($750). Our total net credit and profit potential of $1.00 ($1,450). Maximum profit range is 640 to 750 = 110 points. Maintenance requirement is $15,000 (IF you have the right broker).

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CPTI March Position #1 - SPX Iron Condor - 1273.83
We sold 10 SPX March 1340 calls and bought 10 SPX March 1355 calls for a credit of $.85 ($850). Then we sold 10 contracts of SPX March 1190 puts and bought 10 contracts of SPX March 1175 puts for a credit of $.90 ($900)

Our total net credit and profit potential is $1.75 ($1,750). Our maximum profit range is 1190 all the way up to 1340 (150 Points!!). The maintenance is $15,000 (IF you have the right broker).

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ONGOING STRATEGIES
ZERO-PLUS Strategy - January RUT Iron Condor - 728/48
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.

With the successful RUT position generating $2,200, our new cash position is $38,450 ($36,250 + $2,200).

Current Zero Plus Position: March SPX Iron Condor.
On Friday, we entered the same SPX Iron Condor for our Zero Plus position that we put on in our first CPTI March portfolio position. However, we did an extra few contracts.

We sold 12 SPX March 1340 calls and bought 12 SPX March 1355 calls for a credit of $.85 ($1,020). Then we sold 12 contracts of SPX March 1190 puts and bought 12 contracts of SPX March 1175 puts for a credit of $.90 ($1,080)

Our total net credit and profit potential is $1.75 ($2,100). The maintenance is $18,000.

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QQQ ITM Strangle - $41.55
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 January expiration, with the QQQQs, we rolled our short January $37 calls to the short February $37 calls.

The total of generated premium (through the January cycle) is still $5,950.
We currently are short the February $37 calls. We have no short put position at this time.

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UPCOMING DATES FOR CPTI 2-DAY
ADVANCED SEMINARS -
February 4 & 5 - Atlanta, GA
February 18 & 19 - Las Vegas, NV

Our next CPTI seminar will be on Saturday & Sunday, February 4th & 5th in Atlanta and then on 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 - ONLY $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!

35 OUT OF 38 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) Unlimited to zero, Unlimited, 60; b) Unlimited to zero, $4.75, 40.25; c) Unlimited, $6.60, $51.60. 2) True; 3) False; 4) True; 5) True; 6) Against. If you are short stock, then you pay out the dividend; 7) False. Calls have positive deltas and puts have negative deltas' 8) That the market will move more than anticipated or that demand for options will increase, raising implied volatility; 9) That tha market will move less than anticipated and that the demand for options will decrease, lowering implied volatility; 10) True; 11) False. Vega measures the sensitivity to changes in implied volatility; 12) Price of underlying, strike price, time until expiration, volatility of underlying, interest rates, and dividends.

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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 (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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