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BACK BY POPULAR DEMAND “ ZERO PLUS STRATEGY

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BACK BY POPULAR DEMAND - ZERO PLUS STRATEGY

As a result of email requests, today I'm publishing the original column on our Zero Plus strategy originally published in OptionInvestor in February of 2004. However, the interest rates have changed a bit, so I've updated the numbers to reflect the current rates.

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How's your performance been lately? Would you like a dose of trading Viagara to lengthen your time horizon and firm your resolve? Remember, the longer your horizon is, the better chance you have of satisfying your wife, your brokerage account, and your beneficiaries.

Do you suffer from premature execution, and have little or no stamina? The impulse to over-trade can, indeed, be tough to conquer. It's the itch that yearns to be scratched. When you're about to lose control, if you think about baseball, it may give you the strength to persevere. At the CPTI, we normally focus on monthly returns, but, as conservative as we try to be, there is some risk inherent in all of our strategies.

Well, today's trading concept might help you to reduce your risk to zero, IF you don't soften your stance on your position. We'll help you extend your trading life, using protection the entire time. We're going to fill that void to the satisfaction of all concerned and do CPTI students a "solid." You're going to like this one.

The "Guaranteed" Investment
I'm sure many of you have heard ads for those "guaranteed" investment products. They claim you can invest $10,000, have your principal guaranteed and also participate in the appreciation in the stock market over the next seven years.

How can they do that? Who, in their right mind, would guarantee someone's investment? Well, recently I was listening to one of Larry McMillan's CDs (he sure is boring, but the information is good) and I learned how it can be done. Actually, it's pretty clever.

First, a major financial institution decides to create a new product. They establish a cap limit of, for example, $1,000,000. They assign a share value of $10 to 100,000 shares. Their sales force (representatives) contacts their clients and attempt to sell the concept to generate the $1,000,000.

It's a pretty easy concept to sell. Everyone wants security as well as the opportunity to make money. Here it is - all wrapped up in a nice neat little package.

What's Inside The Package?
Now, the institution has $1,000,000. They then go out and purchase $1,000,000 worth of zero coupon bonds that will come due in seven years. With zero coupon Treasury bonds (also called "strips"), the investor buys the bonds at a discount. At maturity, they receive the full face value of the bond. The prevailing interest rate at the time the bonds are purchased determines the price of the bond. The higher the interest rate, the less paid up front for the bond. At current rates, a $1,000 seven-year zero coupon bond will cost about $710.

The institution has now spent $710,000 of the million it raised. With the $290,000 that remains, the institution buys far out calls on the S&P 500 (SPX). The strike price, from which profits will be measured, is where the S&P is trading the date the calls are purchased. This measuring point will remain the same for the entire seven-year duration.

Institutions have their own rules regarding the products they offer. Some offer 100% participation in the S&P gains. Others may only offer 80%. Some products may not be structured on the S&P 500. They may use the QQQQs or the Russell 200 Index - the choices are endless - whatever is written into the charter of the financial instrument.

Some institutions will just sit back and let the S&P do its thing, while other products may allow, or encourage, active trading within specified parameters.

Once the product is created, shares can be bought and/or sold on the open market at any time during the seven years. Of course, you're only guaranteed your investment back in full if you hold until maturity. There are complex formulas created to determine the value of the shares along the way - taking into consideration the time remaining until maturity and the trading profits accumulated to that point.

Risk Vs. Rewards
By participating in such a program, technically, the upside is unlimited - limited only by the market movement and the trading skills of those trading the extra dollars. Where's the risk? It's more of an "opportunity" risk than anything else. If the market tanks and no income is generated, you're still guaranteed the return of your initial investment. However, if you put your money in CDs for seven years, you would have more to show for the experience - not a lot more, but more.

It was Will Rogers who said "I'm not so much concerned about the return ON my investment as I am about the return OF my investment." Maybe this is a way to get the best of both worlds.

So What's Stopping Us?

Can this be done by individuals? Sure! Most CPTI students have modest trading accounts, but I know there are some heavy hitters out there. Plus, some CPTI traders only use a small portion of their assets for option trading because they don't want to risk the bulk of their assets - and justifiably so.

This may potentially, be a solution for conservative traders, who have a longer time horizon and who, for safety reasons, have been reluctant to put their money to work.

Getting Hypothetical
Let's create a hypothetical hedge fund that used the same criteria as I described above. I like round numbers. We'll use the $100,000 figure. But, we're going to have the flexibility to trade the extra $29,000 however we want. We won't get carried away, though. We're going to use conservative, money generating strategies.

We'll start our calculations (which will be "educational," or 'hypothetical," or "imaginary" - to keep the lawyers happy) using the closing prices as of Friday. We'll keep track of dollars generated and will update monthly - or as needed. We'll call it the "Zero-Plus" strategy (unless you have a better idea).

Putting It To Work
So, how are we going to put $29,000 to work? What vehicle should we choose to make our money? Gee, take a wild guess. Of course we'll use the strategy that made us famous - and makes us money every month - the Iron Condor.

Numbers are fun. They're like men. If a woman massages a man just right, she can make him say almost anything she wants. We can take numbers, rub them here and there and make it look like we'll be millionaires in 20 minutes. It will take a little longer than that, but if we do a couple of Iron Condors a month, we can bring in 5-8% a month. Then, set aside half of the profits in something safe. Use the other half to slowly increase the number of contracts in the condors. Believe me, it adds up in a hurry - even if we have one of those rare bad months on occasion.

How Aggressive Should We Be?
Good question. It's certainly a matter of personal preference. Keep in mind that we have $100,000 in Zero Coupon bonds sitting in our account and, guess what? They're, at the very least, 70% marginable. That means we can use those dollars to satisfy maintenance requirements on credit spreads.

Some people will use this guaranteed return of principal as a license to get greedy. It's tempting, but be careful. The wisest approach is to stick with the discipline that has been proven to be successful.

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NEW SEMINAR DATE - Nov. 11/12 - Ft. Lauderdale
The Couch Potato Trader has a great following in Florida. We had an excellent seminar in Jacksonville last year and now I have finalized the arrangements for another visit to the Sunshine State - this time to Ft. Lauderdale. So, adjust your schedules and plan to attend. Contact me. I will personally call you to go over the details and answer all of your questions.

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SEPTEMBER CPTI PORTFOLIO POSITIONS
CPTI September Position #1 - SPX - Bull Put Spread - 1295.09
On Monday, August 7th, with the SPX at about 1280, we sold 12 SPX September 1190 puts and bought 12 SPX September 1175 puts for a credit of $.70 ($840). Maintenance is $18,000. I'll be looking for an opportunity to put on a bear call spread to complete the Iron Condor.

CPTI September Position #2 - RUT - Iron Condor - 699.24
On Thursday, August 10th, with the RUT at about 686, we sold 15 RUT September 590 puts and bought 15 RUT September 580 puts for a credit of $.55 ($825). Then we sold 15 September RUT 750 calls and bought 15 September 760 calls for a credit of $.50 ($750). Net credit and profit potential of $1.05 ($1,575). Maximum profit range is 590 to 750. Maintenance is $15,000.

CPTI September Position #3 - RUT - Iron Condor - 699.24
On Thursday, August 17th, with the RUT at about 708, we sold 15 September RUT 640 puts and bought 15 September RUT 630 puts for a credit of $.45 ($675). Then we sold 15 September RUT 760 calls and bought 15 September RUT calls for a credit limit of $.80 ($1,200). Net credit and profit potential of $1.25 ($1,875). Maximum profit range is 640 to 760. Maintenance is $15,000.

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CPTI October Position #1 - RUT - Iron Condor - 699.24
With the RUT at about 708, we sold 20 October RUT 610 puts and bought 20 October RUT 600 puts for a credit of about $.50 ($1,000). Then we sold 15 October RUT 790 calls and bought 15 October RUT 800 calls for a credit of about $.60 ($900). Our total net credit and profit potential is $1.10 ($1,900). Maximum profit range of 610 to 790 -- 180 points!! Maintenance is $20,000 -- 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.

Our August RUT Iron Condor position expired worthless - according to plan. We can now officially add another $2,300 of premium to our cash stash. We have now generated $47,250 ($44,950 + $2,300).

October Zero Plus Position: RUT Iron Condor - 699.24
With the RUT at about 708, we sold 40 October RUT 610 puts and bought 40 October RUT 600 puts for a credit of about $.50 ($2,000). Then we sold 30 October RUT 790 calls and bought 30 October RUT 800 calls for a credit of about $.60 ($1,800). Our total net credit and profit potential is $1.10 ($3,800). Maximum profit range of 610 to 790 -- 180 points!! Maintenance is $40,000 -- IF you have the right broker.


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CPTI SUMMER SEMINAR!
NOVEMBER 11/12 - FT. LAUDERDALE

Don't put off making your reservation. Airline tickets get more costly the closer you get to the event. If you really want to take your trading from a "hobby" to a potentially profitable "business," you'll want the information you'll learn at my CPTI seminar. You'll learn more than the "how to's" of trading our strategies. You'll learn a new lifestyle - and a nice lifestyle - one that can last a lifetime.

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 Ft. Lauderdale. 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. Remember, if you attend one of my CPTI seminars, you are entitled to RETAKE the seminar a SECOND TIME at NO CHARGE!

42 OUT OF 45 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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