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ARE THERE ANY "FREE TRADES?"

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ARE THERE ANY "FREE" TRADES?

In response to emails from some rather new option students, I'm devoting today's column to a somewhat less sophisticated strategy. There are forever traders out there searching for the holy grail - a risk free trade. Are there such things as totally free trades? What do you believe? Of course not. Except, however, for those of you who still believe in Santa Claus, the Easter Bunny or that Ken Lay was innocent and had a heart attack. Then, anything is possible.

But there are ways to reduce your out of pocket risk to almost zero. It's not complicated. Actually, it's pretty easy - and it will also give you a chance to put some real money to work out there in that big casino we call the market.

People who are supposed to know suggest that you should "virtual" trade or "paper" trade before trading with real negotiable dead presidents. It's actually a good idea. Virtual trading will give you a chance to learn the mechanics of the trading process, and even get a "feel" for managing a trade.

There are some quality online brokers out there who have excellent virtual trading platforms. These platforms can actually simulate the actual fills at current market prices -- as though it was a real order. It's great practice. But it's not the real thing.

For all the positives about "virtual" trading, there is one undeniable fact. It will never be the same as risking your green, spendable hard-earned dollars. "Virtual" trading is like using Monopoly money. You start out thinking it's real. That's all well and good - until it's time to make an important trading decision. With Monopoly money, that little voice inside of you says, "what the hell, let's hold on. It'll come back." Or, "there's more profit in this trade. I just know it." The problem is, you listen to the little voice - and hold the trade too long. The Monopoly money disappears and you tell yourself that you will act differently when you're trading with real money. It's the kiss of death.

That's the worst trading habit to develop. It will cost you - big time. Maybe not on the first trade, or even the second trade. But, take my word for it. You're your luck will run out. You're cruisin' for a financial brusin' - and it won't be pretty. It's the first step toward shopping for your next wardrobe at garage sales.

The one hard and fast trading rule is that you need to know your exit points -- even before you put on the trade. And, more than just knowing the exit points, you have to have the self-discipline to make the trade at the appropriate time. It's not like the 10 commandments where you can pick and choose which ones you want to follow and just confess about the other ones. We're talking real money here. This is serious.

We got off on a bit of a tangent here, but those of you who have attended my seminars know that these tangents often take us to some very interesting places. Virtual (or paper) trading plays an important role in the learning curve for new option traders. Now, let's get back to setting up the "free" trade.

a) Simply buy a bank guaranteed CD. Since interest rates have been rising, at this writing 90-day bank CDs for 5% are pretty common. Another alternative is to use 90-day US Treasury Bills, currently yielding about 4.8%.

b) Then, you use the interest from these assets to pay for some inexpensive out of the money options on the asset you have chosen. To make the best use of your money, you may need to use an option "spread." A spread consists of buying one option and selling another. It can substantially reduce the amount you have at risk. In brief, the premium you receive from the option you sell lowers your out-of-pocket expense. In exchange for the lower costs, using a spread limits your upside. But, there's still plenty of room for profit.

For example, XYZ company is trading at $42. For whatever reason, you believe it will move significantly higher in three months. A speculative spread might consist of buying a $50 call for $1.50 and then sell the $55 call for $.35 - a net debit of $1.15. You might be able to afford a 2-3 contract position (depending on how much you put into the CD). At today's rates, you'll need about $30,000 in 90-day CDs to cover the cost of 3-month OTM spread.

Your profit potential for this spread is over 350%. XYZ will have to close over $55 to achieve that kind of profit. That's a huge move. Is it likely? No. Is it possible? Yes.

Ideally, you would put on this kind of position when implied volatility is low. Low volatility translates into lower costs. Lower costs equals more room for profit.

So, you now have an option position - a real one. It's likely pretty far out of the money. Look at it like a lottery ticket. If you guessed right on the direction, you may walk away with a nice chunk of change. And, what did it cost you? Nothing.

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CPTI CURRENT JULY POSITIONS
CPTI July Position #1 - SPX - Bull Put Spread - 1265.48
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 - 709.30
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 - 1265.48
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 - 709.30
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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CPTI CURRENT AUGUST POSITIONS
CPTI August Position #1 - SPX - Bull Put Spread - 1265.48
On Thursday morning, 7/6, with the SPX at about 1273, we put on our first position for August - 12 contracts of a bull put spread 1175/1160 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. At this writing, we have a nice fat 90 point cushion.

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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.

Our June RUT 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 $42,650 ($40,550 + $2,100).

New Zero Plus Position: SPX Iron Condor - 1265.48
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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NEW CPTI SUMMER SEMINAR DATE!!
AUGUST 12/13 - CHICAGO

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

DO YOU HAVE PROFIT-ABILITY?
It's always a challenge (and a pleasure) for me when I have a roomful of bright people who have a passion for, and are excited about, 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 Chicago. Contact me and I'll call you with all the details.

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 San Francisco 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 make one of my seminars, if you can. When you apply what you'll learn, you'll see a substantial improvement 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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