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NO GUTS, NO GLORY “ PART II

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NO GUTS, NO GLORY - PART II

As I was saying . . . .

Last Sunday (6/25) I outlined a strategy called "Short Guts." The name isn't too exciting, but the strategy has some very appealing components - particularly the small amount of time value at risk.

Today's column isn't going to mean much to you if you haven't read Sunday's introduction to the "Short Guts" strategy. Basically, the "Short Guts" strategy is selling ITM (in-the-money) uncovered puts and calls on the XEO (European style OEX) options. Go ahead and read (or review) Sunday's column. I'll wait here.

OK, now that you're back, let's move ahead. In Sunday's column, we calculated that it would take about $16,700 of maintenance per contract for the uncovered example position. How can we get around that obstacle?

Gettin' Around The Maintenance & Uncovered Obstacles
Wow! $16,900 maintenance per contract is a chunk of money. And the "uncovered" approval level issue is also rather limiting. So, here's the plan. We turn the damn thing into an Iron Condor. We simply need to cover our two short positions. We buy the July XEO 600 call (@ $.30) and buy the July XEO 540 put (@ $.80). We have now covered our short options. The brokers will like that a lot better.

We will now have created 40-point credit spreads (calls 560/600 and puts 580/540). The result is that our broker will only require $4,000 per contract (IF you have the right broker). All we have sacrificed is the $1.10 ($110 per contract) we paid for the long options. That reduces our maximum potential profit to $6.40 ($6,400) and slightly reduces our profit range.

The Return
After buying the long puts and calls, if things go as planned and the XEO finishes in our maximum profit range of 560 to 580, we will keep the full $6,400 on an exposure of $40,000 -- or on an actual risk of $33,600. That's a return on risk of 19%. Pretty damn good!

What's The Appeal?
Compared to some of our other strategies, 19% is pretty exciting. The beauty of selling the puts so far in the money is if/when the trade goes bad, the exit points are clearly defined and the risk (if you GTFO when you're supposed to) is relatively small.

The Premium Is Working For You
It may not seem like a lot, but . . . OK, here's how it works with the premium. As you've probably noticed, in our Short Guts sample position, we have taken in $27,500 in premium. Remember that we have to give back $20,000 when the position is resolved - at expiration, or before. But, while that money is in our account, it's earning the money market interest. It's not a lot, but it should pay for a few Ponderosa salad bars.

The money being held as maintenance on the Short Guts will NOT be earning any interest. But, the money will only be tied up for a short period of time. It would be wise to check with your broker as the policies may vary.

This is an excellent strategy for those who have large accounts holding CDs, Treasury Bills, Zero Coupon Bonds, mutual funds, etc. Those assets can then provide the maintenance on your Short Guts position and still be working for you. You'd be wise to keep a little cash handy to cover the time value in closing out the position if it reached one of our exit parameters.

Can It Be Safer
Yes, the Short Guts strategy can be even safer. But, remember, when you opt for the extra measure of safety, you will likely have to make a compromise somewhere along the line. In this instance, it means you will be reducing your profit potential.

Instead of selling the 560 calls and 580 puts, you could sell the 550 calls and 590 puts. That would create a 40 point maximum profit range - which is very comfortable, especially on the XEO. However, adding up the short call and short put might total only about $44.00. Remember that we would be giving back the $40 - leaving a profit potential of only $4.00 ($400 per contract).

With the XEO (and OEX) trading in $5.00 strike price increments, you can find something that matches your comfort level. If you have a directional bias (which is dangerous), you can construct a position leaning a bit in one direction or the other.

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Today's Market Action
WOW! What a day!! Kinda exciting, wasn't it? My guess is it was a bit of euphoria combined with a hell of a lot of short covering. But, I don't make my money guessing. You shouldn't either. Let's just be glad that that none of our positions are in any danger - with three weeks to go. A lot can happen in three weeks, though.

If the SPX continues up, we might be on the lookout for an opportunity to put on a bear call spread to complete

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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 boasting an even better track record than last year.

DO YOU HAVE PROFIT-ABILITY?
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 - 1272.87
On Friday, 5/26, we put on our first position for July - 12 contracts of a bull put spread 1165/1150 for a credit of $.60 ($720). 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 - 714.32
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 - 1272.87
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 - 714.32
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 - 1272.87
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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