Option Investor
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NO GUTS, NO GLORY - PART I

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It's been awhile since we talked about a new strategy. I was going through columns from years ago and came across an interesting strategy called "Short Guts." At the time, I thought it had merit, but that it might be a bit aggressive for most CPTI traders. However, since meeting hundreds of CPTI students at my seminars over the past few years, I now believe CPTI seminar grads, and many other sophisticated CPTI students, are up to the challenge.

Short Guts has a few similarities to our Siamese Condor. But if you have what it takes - margin dollars, trading approval level, and self-discipline - this can be a nicely profitable strategy with a limited risk -- and it will fit comfortably into your trading arsenal. Our discussion of "Short Guts" will be broken up into two columns (today & Thursday).

As is our preference, it's a non-directional strategy that is best used in a non-trending market. Some of you will be able to use this strategy, but others may not. It requires "uncovered" trading approval level. However, if you encounter that problem, we may have a solution. Read on.

Introducing "Short Guts"
At this writing, XEO is trading at about 570 (569.47) and about four weeks to go until July expiration. The XEO is the OEX S&P 100 index for dyslexic traders. Seriously, though, the XEO is the European style option for the OEX. Why do we use the XEO? We'll discuss it later. Keep reading.

Month Index Strike Bid Ask
July XEO 560 Call 15.30 16.30
July XEO 565 Call 11.60 12.60
July XEO 570 Call 8.40 9.10

July XEO 570 Put 7.00 7.70
July XEO 575 Put 9.10 9.80
July XEO 580 Put 11.60 12.60

We're basically going to sell in-the-money calls and a similar number of in-the-money puts for the front month. For our example, we'll use a 10-contract position. We'll also include a negotiation between the bid/ask spread in our figures.

The Position
Sell 10 XEO July 560 calls @ $15.60 ($15.30 + .30) = $15,600
Sell 10 XEO July 580 puts @ $11.90 ($11.60 + .30) = $11,900
Total net premium taken in: $27,500

Well, don't get too excited. It's a bit of an illusion. Our pockets may be flush with cash, but it's a temporary condition. We don't get to keep most of it, although our potential profit is $7,500 -- which has a nice cash register ring to it.

Profit Range
We calculate the maximum potential profit by subtracting our 560 (short call) from our 580 (short put) = $20.00. If the market cooperates, and the XEO closes anywhere between 560 and 580, we get to keep the entire $7,500. Note that, regardless of where the XEO finishes, we're going to have to give back $20. It felt good when it was in our pocket though, didn't it?

We have essentially established a profit range of 552.50 (560 - 7.50) to 587.50 (580 + 7.50). That's a 35 point range. If the XEO finishes anywhere within that range, we will make SOME profit. As we discussed above, the MAXIMUM profit of $7.50 ($7,500) occurs if the XEO closes between 560 and 580.

If the XEO closes beyond the maximum profit range (560 to 580) in either direction, our profit is reduced (penny for penny) by the amount the XEO is outside the max profit range.

What If . . .
To get a clearer understanding of the strategy, let's create a few "what if" scenarios. What if . . .
a) XEO is at 572.20 at expiration?
The 560 call is worth $12.20 and our 580 put is worth $7.80. The total of the two ($20.00) will be deducted from our account and our profit is the entire $7.50 ($27,500 - $20,000).

b) XEO is at 558.80 at expiration?
The 560 call will expire worthless, but the 580 put has a value of $21.20. This $21.20 ($2,120) will be deducted from our account on Monday. But, we took in $27,500 -- so, our profit is $5,380 ($27,500 - $20,000 - $2,120).

When To GTFO
One of the major benefits of the Short Guts strategy is the fact that, if the trade moves against us, the amount at risk is substantially less than our regular Iron Condor. Plus, the exit points are more easily defined. The exit parameters are the same as the profit range -- 587.50 on the upside and 552.50 on the downside. If we (you) have the appropriate self-discipline and get out at these levels, we will limit our loss to a very manageable amount.

Remember Our Friend "Delta"
The "delta" is working for us. Remember, the further an option is ITM (in-the-money), the less time value there is in the option. So, when XEO reaches the 587.50 exit point, we will have to give back the entire $27.50 of intrinsic value. But, being so deep in the money, there should only be less than $1.50 of time value in addition to the intrinsic value. It's only the time value that's at risk. Plus, the later the move happens in the option cycle, the less time value we'll have to deal with.

Why The XEO?
As an extra measure of caution, we chose the XEO because it's a European style cash settled option. There is no concern about early exercise. Early exercise of the OEX is rare, but the difference in premiums between the XEO and OEX is not that dramatic. The word "exercise" seems to scare traders (and I'm not talking about jogging). It's better to be safe than sorry.

Maintenance
The reason that many traders will not be able to use this strategy is that both the put and the call are "uncovered." As a result, your broker will want to hold a lot of maintenance because, technically, the risk is unlimited. I know that we all have the self-discipline to exit our trade when the exit points are reached, but the brokers aren't that gullible. The maintenance on the "Short Guts" strategy is calculated as follows. The maintenance requirement may vary from broker to broker.

25% of the underlying index (XEO): 570 x 25% = $14,250/contract
Plus, call premium received: $15.30 x 100 = $1,530
Plus, put premium received: $11.90 x 100 = $1,190
Total margin (per contract) is: $16,970 per contract. $169,700 for 10 contracts.

On Thursday
In our next column, we'll discuss possible ways to get around the "uncovered" aspect to "Short Guts." We'll also describe "safer" versions of the strategy and we'll calculate the return, show the similarities to our Siamese Condor and explore more reasons why this is an appealing strategy.

Other Matters
I recently put on a Short Guts trade in my personal account that is similar in many respects to the trade we've outlined above. This strategy will also be added to the list of non-directional strategies discussed in great detail at the upcoming Chicago seminar.

Note: For those attending the Chicago seminar, I'm trying to arrange a tour of the CBOE pits to get a feel and a first hand look at the chaos that goes on there every trading day.

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CHICAGO - HERE WE COME -- AGAIN!!
NEW SUMMER CPTI SEMINAR DATE!!
AUGUST 12/13 - CHICAGO, ILLINOIS

If you missed the CPTI Chicago seminar in April 2005, we're coming back - with even more strategies and a boasting an even better track record than last year.

DO YOU HAVE PROFIT-ABILITY?
There are a lot more where these came from. It's always a challenge for me when I have a roomful of bright people who are excited and have a passion for learning. We go over everything imaginable - from the non-directional strategies to the psychology of trading. We cover a lot more than the mechanics. Inquiring minds want to know the whens and the whys, not just the hows. That way, they're prepared for the best and the worst - and know the best way to handle either situation. There are still spots open for San Francisco. Contact me and I'll call you with all the details.

TESTA-MONEY-ALS
Mike -- Just wanted to let you know that one of the things I got the most value out of from your class was how to negotiate with the market makers. Based on the extra premium I made on a couple condors this past month, I made almost enough to pay for the class. J.R.

Hey Mike -- I almost always laugh when I read your newsletters. I have learned a lot since I sat - so very green - in your class, and learned so much. I have been making a living these last 2 1/2 months trading. Thanks for your continued coaching. I plan to retake your class sometime this summer. Doug B.

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CPTI CURRENT JULY POSITIONS
CPTI July Position #1 - SPX - Bull Put Spread - 1244.50
On Friday, 5/26, we put on our first position for July - a bull put spread 1165/1150 for a credit of $.60. I watched as hundreds and hundreds of the 1165/1150 spreads were filled throughout the day at that credit limit.

CPTI July Position 2 - RUT - Iron Condor - 690.14
On Thursday, 6/1, with the RUT at about 730, we sold 15 RUT July 630 puts and bought 15 RUT July 620 puts for a credit of about $.55 ($825). Then we sold 12 RUT July 800 calls and bought 12 RUT July 810 calls for a credit of about $.55 ($660). Our maximum profit range is 630 to 800 -- that's 170 points!! Maintenance is 15,000 -- IF you have the right broker.

CPTI July Position #3 - SPX Iron Condor - 1244.50
On Friday 6/16, we sold 12 July SPX 1165 puts and bought 12 July SPX 1150 puts for a credit of about $.60 ($720). Then we sold 12 July SPX 1320 calls and bought 12 July SPX 1335 calls for a credit of about $.55 ($660).

Total net credit and profit potential of $1.15 ($1,380). The maximum profit range is 1165 to 1320 - 155 points. Maintenance is $18,000 - IF you have the right broker.

CPTI July Position #4 - RUT Iron Condor - 690.14
On Friday 6/16, we sold 15 July RUT 610 puts and bought 15 July RUT 600 puts for a credit of about $.50 ($750). Then we sold 15 July RUT 770 calls and bought 15 July RUT 780 calls for a credit of about $.55 ($825).

Total net credit and profit potential of $1.15 ($1,575). The maximum profit range is 610 to 770 - 160 points. Maintenance is $15,000 - IF you have the right broker.

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ONGOING STRATEGIES
ZERO-PLUS Strategy -
In the past, 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.

New Zero Plus Position: SPX Iron Condor - 1244.50
On Friday 6/16, we sold 20 July SPX 1165 puts and bought 12 July SPX 1150 puts for a credit of about $.60 ($1,200). Then we sold 20 July SPX 1320 calls and bought 12 July SPX 1335 calls for a credit of about $.55 ($1,100).

Total net credit and profit potential of $1.15 ($2,300). The maximum profit range is 1165 to 1320 - 155 points. Maintenance is $30,000 - IF you have the right broker.

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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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NEW CPTI SUMMER SEMINAR DATE!!
AUGUST 12/13 - CHICAGO

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. Our CPTI seminars are limited to ONLY 25 ATTENDEES.

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!

40 OUT OF 43 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 should 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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