Option Investor
Updates

UNDERSTANDING THE DIFFERENCE

HAVING TROUBLE PRINTING?
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It's time to go over some familiar territory. Why? I received two emails earlier this week from, who I hope are, new CPTI students. It's a little eerie. These showed up within a half hour of each other.

Email 1: I had an April RUT spread. I was long 10 April 790 calls and short 10 780 calls. The RUT closed Friday at 772.12. Today I found out through the computer, that I was assigned 10 contracts that I was short the 780 calls. Why was I assigned when it closed 8 points below my 780 calls, and what would you advise for Monday morning? Margin or cash is not a problem. Thank you.

Email 2: How do you keep daily track of the above daily prices? I sold the APR 780 RUT, it closed at 772.12 and I thought I was safe. However I was assigned for $3080. Please explain, and how to track future positions. Thank you.

The RUT closed Thursday, April 20th at 774.87. The Friday morning settlement number was 783.08.

Now, I understand the human condition pretty well. When people look on a website and see an incredible track record, it's natural for them to want to jump in and get started making money too. It's tempting, for sure. Not only is it tempting, but other emotions come into play - none of them productive.

OK. Let's spend a few minutes going over the European style options. The major difference between American style options and European style options is how the settlement number is derived. Why do these apply to our style of trading? Because we rarely, if ever, trade stocks (American style options). We exclusively trade indexes, and most indexes are European.

American Style: This is pretty cut and dried. American style options stop trading on the third Friday of the month. The last trade on Friday is the settlement number. Also, your option can be exercised at any time prior to expiration.

European Style: European style options actually stop trading at 4:15 pm on Thursday, prior to expiration Friday. Now, here's the tricky part that some find confusing. The last trade on Thursday is NOT the final settlement number for the index. The final settlement number is calculated based on the Friday morning opening price of all the stocks in the index.

Keep in mind that all stocks in an index do not open at the same moment. That means that the first print from your quote data provider is not the settlement number. It usually takes until noon, sometimes longer, for the number to be posted. Each index has a specific symbol for it's settlement number. S&P 500 symbol is $SET. The Russell 2000 symbol is $RLS.

These European options are cash settled. So, if you don't adjust or get out of your position by Thursday's close, you will see the result reflected in your brokerage account on Monday morning. If your short position is $3.20 in the money, your brokerage account will be debited $320 per contract come Monday morning.

One of the frustrating parts of trading European style options is Thursday night after the market closes and Friday morning before the market opens. Good news can come out. Bad news can come out. Upgrades, downgrades, earnings, foreign market news, and a lot more potentially market moving news. The one thing you know for sure - the index will not open up right where it closed on Thursday night. Another thing you know for sure is that, if you are holding your short position over Thursday night, there's not a damn thing you can do about it.

We've seen Friday morning settlement numbers open a dozen points up or down. It's a calculated risk. It's with those large Friday morning settlement numbers in mind that we try and create as large a cushion as possible when initiating our position.

While we're on the topic of cushions, let's take another look at those two emails. Did you notice that they put on the RUT 780/790 bear call spread? Where did that come from? Our suggested April CPTI position was the 800/810 bear call spread. Putting on the 780/790 bear call spread was just looking for trouble.

I know that sometimes when I send out suggested trades not everyone is able to get into the position. They may not get the email until the market has already moved. Now, I appreciate creativity as much as the next guy, but coming down 20 points on the bear call spread is like laying down in front of a steam roller. The one thing a trader, especially in our non-directional style of trading, doesn't want to do is to compromise safety for the sake of some premium.

Also, just because you have a strategy, it doesn't mean there is a reasonable trade available to use that strategy. You don't have to trade every month - especially if there are no reasonable trades available. Don't force it. Be patient. Don't put your hard earned money at risk unless you have the best chance possible for profit. If you are new to the CPTI, do your homework. Go back through my past columns. They're archived all the way back to January, 2005. You'll learn some important things and maybe even smile once in awhile.

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Countdown To Newark
On Saturday, the traveling CPTI two-day advanced seminar will begin in Newark, NJ for a weekend of learning, sharing and laughs. Afterwards, there will be another class of CPTI students will be ready to turn up their trading a notch which will result in more premium and, hence, more profits. If you couldn't make Newark, San Francisco still has open spots.

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CPTI CURRENT MAY POSITIONS
CPTI May Position #1 - RUT Iron Condor - 761.40
On 3/22, with the RUT trading from 733 to 745, we sold 15 May RUT 650 puts and bought 15 May 640 puts for a credit of $.55 ($825). Then, RUT moved up and we sold 15 May RUT 810 calls and bought 15 May RUT 820 calls for a credit of $.55 ($825). Total net credit and profit potential of $1.10 ($1,650). Maximum profit range is 650 to 810. Maintenance is $15,000 (IF you have the right broker).

CPTI May Position #2 - SPX Iron Condor - 1309.72
On 3/23, with the SPX trading from 1298 to 1304, we sold 12 May SPX 1225 puts and bought 12 May SPX 1210 puts for a credit of $.70 ($840). Then we sold 12 May SPX 1375 calls and bough 12 May SPX 1390 calls for a credit of $.75 ($900). Our total net credit is $1.45 ($1,740). Our maximum profit range is 1225 to 1375 - 150 points!! Maintenance is $18,000 (IF you have the right broker).

CPTI May Position #3 - SPX Bull Put Spread - 1309.72
On 4/17, with the SPX trading at about 1290, we sold 12 SPX May 1215 puts and bought 12 SPX May 1200 puts for a credit of about $.55 ($660). Maintenance is $18,000.

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ONGOING STRATEGIES
ZERO-PLUS Strategy -
A few years ago$, 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. We are not compounding our profits by dramatically increasing the number of contracts we trade. Just think of how well we would be doing if we had increased the number of contracts, even a little.

Our March SPX Iron Condor position expired worthless - according to plan. We can now officially add the $2,100 of premium to our cash stash - to take us well over the $40,000 mark. We have now generated $40,550 ($38,450 + $2,100).

Current Zero Plus Position: RUT Iron Condor - 761.40
When we put on the RUT Iron Condor as a CPTI position a few days ago (see May CPTI Position #1), we put on the same position for our Zero Plus Strategy, with one exception. Instead of 15 contracts, we put on 20 contracts. Our total net credit was $1.10 and our potential profit is $2,100.

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QQQ ITM Strangle - Closed Out Previous QQQ ITM Strangle Position
It originally cost us $14,600 to initiate the position. We collected, over the life of the trade, $5,950 in premium. We had $9,500 plus the $5,950 premium for a total of $15,450. Subtracting our initial cost of $14,600 leaves us with a profit of $850. It's not that much considering all the effort we put forth, but a profit is still a profit. Now, the funds that were tied up are free for use in a better opportunity. Our return on the $4,600 risk was about 18.5%.

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CPTI SPRING SEMINAR DATE:
JUNE 17 & 18 - SAN FRANCISCO, CA


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 Las Vegas CPTI Seminar was sold out and 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!

38 OUT OF 41 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 my 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 (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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