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CPTI READER Q & A

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CPTI READER Q & A

Let's see. Where were we? Oh yes, last week I was writing about the monthly European option settlement numbers. My column prompted more questions.

In your blog this morning, you discussed a couple of traders getting assigned on their RUT positions in April. My question is how are the settlement numbers determined? If you look at a RUT chart, it has never exceeded 780 on any trading day so how can it settle at 783? Same with the SPX. It never traded at or near its April settlement number on settlement day or the day before. What gives?

This is an anomaly. It doesn't happen often, but occasionally you'll find a settlement higher than where the index traded on that expiration Friday. To understand it, you have to understand a few simple facts.

1. The settlement is a calculation of the opening prices of all 2,000 stocks in the index.
2. Not all stocks open at exactly the same time. It may vary by minutes from stock to stock.
3. The first quotes in the morning do not represent all 2000 stocks.

So, let's say the futures are higher pre-market. XYZ closed the previous day at $42.10. It then opens at 9:30 exactly at $43.25 - up $1.15. But, within 15 seconds it is back down trading at $42.40. It's the $42.10 that is recorded as the open settlement number.

ABC opens at 9:30:15 at $77.55 and, as happened with XYZ, within a few seconds is back down to $76.75. It's the $77.55 that is recorded for settlement calculation purposes. Then, JKL stock opens at 9:30:30, up $1.50 and comes back down within seconds.

Your data provider records the up open of JKL, but by that time, ABC and XYZ are already back down well below their inflated opening price. The quotes as of 9:30:30 won't reflect the inflated openings of ABC and XYZ, only the JKL opening and the reduced ABC and XYZ prices. Take that and multiply it by a potential of 2,000 stocks and the settlement number can be substantially higher than the highest daily quote reported by the data providers.

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New Subscriber Question
Mike -- I just subscribed the Couch Potato a few days ago but couldn't really understand how I could fully utilize all the resources contained in it. As it appeared that it does not provide specific "Buy" proposals for any shares / options, can you please advise me how I could optimize the use of the resources contained in it. Perhaps you can provide some form of instruction on how to navigate within Couch Potato.-- Lawrence

Lawrence, Welcome to the CPTI. Glad to have you aboard. Let me address your questions one at a time.

As a subscriber, you now have access to the Couch Potato Trader postings within Option Investor site. Position suggested positions are posted on the site and emailed to you within just a few minutes of the posting. There will NEVER be any recommendations to buy stocks. We focus exclusively on index options (after learning some expensive lessons trading stock options).

You are also able to scroll back through the Couch Potato Trader archives all the way back to January of 2005. There is some good reading there, educational, motivational, and even entertaining. So, you have some homework to do.

The Thursday and Sunday columns will have commentary and a summary of all the current positions, how they were entered, etc. The trade recommendations may appear in the Sunday and/or Thursday columns, plus they may also be sent out individually. Let me also suggest that you don't start trading until you know what you're doing.

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Countdown To San Francisco - June 17/18
It's always a challenge for me when I have a roomful of bright people who are excited about learning and who have a great sense of humor. We go over everything imaginable - from the non-directional strategies to the psychology of trading. We cover a lot more than the mechanics of putting on a trade. Inquiring minds want to know the whens and the whys. That way, they're prepared for the best and the worst - and know how to handle either situation. There are still spots open for San Francisco. Don't be shy. Contact me and I'll call you with all the details.

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CPTI CURRENT MAY POSITIONS
CPTI May Position #1 - RUT Iron Condor - 774.72
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 - 1312.25
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 - 1312.25
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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CPTI CURRENT JUNE POSITIONS
CPTI June Position #1 - RUT Iron Condor - 774.72
On 5/1, we sold 15 June RUT 690 puts and bought 15 June RUT 680 puts for a credit of $.55 ($825). Then, we sold 15 June RUT 830 calls and bought 15 June RUT 840 calls for a credit of $.55 ($825). Our total credit and profit potential is $1.10 ($1,650). Maximum profit range is 690 to 840 (140 points!). We'll be exposed for about seven weeks. Maintenance is $15,000 - IF you have the right broker.

CPTI June Position #2 - SPX Bull Put Spread - 1312.25
On 5/3, we sold 12 June SPX 1230 puts and bought 15 June SPX 1215 puts for a credit of $.60 ($720). We'll be exposed for 6+ weeks. Maintenance is $18,000.

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ONGOING STRATEGY
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 - 774.72
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 call you with all the pertinent information. The price is a bargain - 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 Newark CPTI Seminar was a great success (no surprise, they all are). There are now 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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