Option Investor
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UNSETTLING SETTLEMENT

HAVING TROUBLE PRINTING?
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There are enough folks who are still unclear about the settlement calculation of the European style options. It is, certainly, a confusing concept without a lot of rhyme or reason to it. But it is what it is.

QUESTION: Mike, I want to tell you something which I hope you and your readers find interesting. I learned something which could have been disastrous.

I've been trading options since 1973 so I thought I knew most everything that could expose me to losing money. Boy did I get a surprise... I had an iron condor in the Russell 2000 - the RUT. Details are not important here. One part of the call leg was a short position in the October 770 - RUTJN. This position closed Thursday at 4:15 and settled Friday afternoon when all the "opening" prices for all of the component parts of Russell 2000 are known. To my utter amazement I was "assigned" the contract because supposedly the RUT, the RLS, RUC, and the RSS (all Russell 2000 components) showed that the "opening" was 770.06. So I got hit for $6 per contract. Thank God I wasonly short 20 contracts and it was only $6. On Thursday at the close, the price for my option was about $1.15X$1.40. I was scratching my head because the RUT closed at about 762 plus - about 8 full points below my strike price. I couldn't figure out why there was so much premium left in an option that was theoretically "worthless".

I write to you because this situation completely baffles me. In the limited research I can find, the RUT never traded as high as 770. And yet I was assigned. I've had it explained to me by my broker, but I am still so completely confused. I thought that an option was inexorably linked to the underlying index or equity. Apparently that is simply NOT the case. I think it would be helpful if your readers were to know more about this... that their RUT options are NOT linked to the RUT on the last or following day of options. We who think we are in a comfort zone with a nice profit can get screwed.

I can also remember you making the comments in the newsletter that those who trade the RUT can sometimes get their brokers to release funds for other trades on Friday of expiration. Now, after my situation, I can fully understand why they might NOT release funds. There can be a lot of funny business that goes on over which we traders have absolutely no control; and what seemed to be a profitable trade turns into a loser.

I think this bears a serious change in the Exchange rules. Any comments? -- Gary

RESPONSE: Hi Gary, I have, a number of times in my column, discussed how this is all possible. But it bears repeating. I don't know why this "settlement" method exists, but it does and we have to live with it if we want to play their game.

The settlement number is based on the opening price of each stock. The fact is that all the stocks don't open simultaneously. Some open at 9:30, some at 9:30:20, some at 9:30: 40 and some at 9:31 etc. You know there is volatility at the open. The market makers are juggling their bids and asks to make a market in each stock. There will always be a few traders (less than geniuses to say the least) will have a market order in to "buy at the open" when there is positive news after Thursday's close or prior to Friday's opening.

Let's say the first trade of stock A at 9:30 is 56.20 (up .40). That 56.20 is the figure that is used in the settlement calculation. However, in the next 15 seconds, that same stock trades back at 55.95. Then, the same thing happens in stock B that opens 20 seconds later. It's first trade might be 31.80. Within seconds, it's next trade is 31.50. Multiply that times many hundreds of stocks.

It's a matter of timing. The print that you see on your data feed, only includes the stocks that are open - not all 2000 stocks (for the RUT). The first print, which comes out maybe 10 seconds after the market opens, may reflect the second price (not the original opening price) of the stocks that are open at that moment. So, considering how many stocks are involved, it's very possible that something like this can happen.

It's frustrating and it gives you a helpless feeling, but that's the way it is. The SPX settled over 1371, but the high for the day was about 1368+. Same thing happened there. A lot of folks who thought they were safe being short the 1370s weren't happy.

At the Thursday close, there is still premium because uncertainty still exists. What uncertainty? The chance that the market will react to news after Thursday's close or prior to Friday's open and open either up or down from Thursday's closing prices.

On the other issue, about the releasing of funds, the (good) brokers will only release the funds AFTER the settlement numbers are announced. Nobody would expect them to release funds prior to the announcement.

I agree that it would be nice to see a change, but I don't think we shouldn't hold our breath waiting for the exchanges to change how they settle these European style options. We'll be a bright shade of blue and pushing up daisies before they change anything that's been around for such a long time.

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This Trend Is Annoying
The market just keeps moving up. Where are all the profit takers when we need them?

We're only 24 points away from the short call in our RUT 800/810 bear call spread. I'm already getting emails from the concerned conservative CPTIers. At this point, it would cost about $2.00 to unwind the spread. We took in $1.10. You do the math.

I've had people ask if they should roll up the 620/610 to a higher bull put spread in an attempt to take in some additional premium. The question is: What premium?

Even IF we could buy back the 620s for a nickel, how high should you go to put on another bull put spread to take in more premium? You'd have to go all the way up to 730/720 before it would look interesting. That's only a 46 point cushion. Too close for my tastes. Besides, we will get a pullback, and probably a big one, eventually. When? Who knows. All we need is a little bit of negative news and traders will start rushing for the exits - we hope.

Meanwhile, in our profitable MID trade (690/680 bull put spread), we are in a position to unwind the bull put spread and release funds for other use. The problem is that the VIX is 10.56 and premium is very hard to find. I would have liked to have 3-4 trades on for November, but I find nothing that's even tempting.

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GO TIGERS!!

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Only 1 Spot Left
There is only one spot left for Ft. Lauderdale. What are you waiting for? Contact me and come experience a weekend you'll never forget. Then, go home with wisdom that will last you a lifetime. Spots are still available for our L.A. December seminar is La-La Land.

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NOVEMBER CPTI PORTFOLIO POSITIONS
CPTI November Position #1 - RUT - Iron Condor - 776.04
With the RUT at about 722, we sold 20 November RUT 620 puts and bought 20 November RUT 610 puts for a credit of about $.50 ($1,000). Then we sold 20 October RUT 800 calls and bought 20 October RUT 810 calls for a credit of about $.60 ($1,200). Our total net credit and profit potential is $1.10 ($2,200). Maximum profit range of 620 to 800 -- 180 points!! Maintenance is $20,000 -- IF you have the right broker.

CPTI November Position #2 - MID - Bull Put Spread - 796.53
With the MID at about 755, we sold 20 November MID 690 puts and bought 20 November 680 puts for a credit of $.75. Our potential profit is $1,500. Maintenance is $20,000. I'll keep on the lookout for a safe bear call spread to complete our Iron Condor. However, if I don't find an appropriate bear call spread, I'm perfectly content to sit with this bull put spread to expiration.

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ONGOING STRATEGY - THE ZERO-PLUS Strategy
In the past, I outlined a strategy based on an initial investment of $100,000. At that time, $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 dramatically increased the number of contracts, even a little.

Our October RUT Iron Condor position expired worthless - according to plan. We can now officially add another $3,800 of premium to our cash stash. We have now generated $51,050 ($47,250 + $3,800).

October Zero Plus Position: RUT Iron Condor - 762.13 - PROFIT: $3,800

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 was 610 to 790 -- 180 points!!

Watch for a new Zero Plus position - COMING SOON!!

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CPTI SEMINAR SCHEDULE!
November 11/12 - Ft. Lauderdale
(1 Spot Left!)
December 2/3 - Los Angeles

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. 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!

44 OUT OF 47 PROFITABLE MONTHS!!
WANT TO ACHIEVE SUCCESS WITHOUT STRESS?
OF COURSE YOU DO!!
USE OUR CPTI WEALTH-BUILDING TECHNIQUES!

You should definitely attend 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: 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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