Option Investor
Updates

THOUGHTS ON INDEXES AND SPREAD SIZES

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It's been an interesting week thus far. Monday through Wednesday the RUT moved up over 21 points while the SPX increased only 9 points. Occasionally they move in tandem, but not this time. One of the reasons we use both the RUT and SPX in our trading is that it offers us some diversity.

I often receive questions about why we don't use other indexes - like the XAU, BBH, NDX, SOX, etc. Long time Couch Potato subscribers will remember that, at one time, we did use those indexes.

Why did we stop? A combination of factors. Indexes like the XAU, OSX, and BBH are sector indexes. When a sector catches fire, watch out. It can, and often does, move like an individual stock. There's no diversification there to pour water on that fire.

Indexes like SOX and NDX can move in huge chunks - 20+ points a day is not uncommon. The SOX is a semiconductor index. That's a sector as well. The NDX is the Nasdaq 100, but the strikes are 25 points apart. That's not a problem when the market cooperates. However, if a trade goes bad, the long option is 25 points away and it will not be much help when it comes to unwinding your credit spread. That makes for much larger potential losses.

The NDX has a midget version of itself called the MNX. It trades at one tenth the value of the NDX and the strike prices are in 2.50 increments. The charts of the NDX and MNX are obviously identical. It too trades in chunks. I just don't feel particularly safe using it.

Remember a few Novembers ago - when the market went straight up? Back then, we used larger spreads - 20 or 25 points. By using these larger spreads, we were able to generate more premium. Why? Because the long options are cheaper to buy if they're further away.

Many CPTI subscribers entered into these large spreads that I suggested in the newsletter in November 2004. That, in and of itself, shouldn't have been a problem - if the traders knew how and when to GTFO. A few did have the knowledge and self discipline to get out of the trade, but most didn't. Prior to November 2004, we had an impressive profit streak where we hadn't come close to a short strike. Most traders just assumed everything was OK and that the market would come back down and they'd live happily ever after. It turned into a nightmare for many. The market blew through the short strikes and continued on through the long strikes. Many traders took the maximum loss because they couldn't pull the trigger at the appropriate times. It was an expensive lesson for them - and for me too. This was before I started teaching my 2-day advanced CPTI seminars -- where we spend a lot of time discussing exit alternatives.

I have a responsibility to Couch Potato Trader subscribers. I know that now many may have the experience, self-discipline and skill to get out of trades. I also know that, regardless of what I may post, others are going to hang on.

That's why, since November 2004, I have suggested spreads with a maximum of 15 points between the strikes, preferring spreads with only 10 or five points between the strikes. The result is that premium is a lot tougher to find. The long options, being closer, were also more expensive. So, in order to get sufficient premium, we've been forced to enter the trades earlier - like five, six or seven weeks prior to expiration. That's the trade off - premium for additional exposure. The low volatility environment hasn't helped at all either.

Experienced traders, and CPTI seminar grads, have the flexibility and knowledge to adjust strikes and credit limits to their risk tolerance and comfort levels. At least less experienced traders are now getting into the 10 and 15 point spreads. If there's a bad month, even if they can't pull the trigger, their losses won't be as catastrophic.

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A Word About New Option Traders
I get emails regularly from new Couch Potato Trader subscribers asking questions like, "I'm new to option trading. How do I put on these trades?"

They see our track record and are justifiably impressed. They want to hitch their wagon to a star and have visions of retirement in six months. WRONG!! Then, they get upset when I refer them to Options 101 and to read the archives of my past columns.

What we do here isn't like Minute Rice. It takes knowledge, skill, creativity, decisiveness, common sense, and self-discipline. Those who have those qualities will likely survive. Others won't. Even though we have a great strategy to work with, the market can come back to bite you where you keep your wallet. It's like the rest of life. It's survival of the fittest. The more you're willing to make the effort and do your homework, the better your chances of success.

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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 - 1303.82
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 - 720.53
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 - 720.53
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 - 720.53
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 - 720.53
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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NEXT CPTI 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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