Option Investor
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A LITTLE ADDED PROTECTION

HAVING TROUBLE PRINTING?
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We have been putting on our Iron Condor positions the same way for a long time. With this annoying market run-up these last two months, we've found ourselves in a precarious situation. We managed to escape with a profit in our CPTI portfolio in the April cycle, but we did have to close one of our positions for a debit - no fun at all.

I'm always being asked about how we can create a scenario that may offer us a little help. This is an alternative. Is it better or worse than our current system? Let's explore it and you be the judge.

I'm going to use an example based on current (Friday's) closing numbers. This is NOT a trade recommendation - only an example. OK, here goes.

With our SPX trading at 1497, let's try a different approach for a May Iron Condor. There are three weeks left to expiration and the VIX is at 12.45 and let's say we're concerned about the risk to the downside. Although we're currently concerned about the market moving up, most of the concerns I'm asked about a violation of our downside. Basically, what we're going to do is to use some of our premium to buy two of our puts ABOVE our short strike price.

Normally, we might sell 10 contracts of the May 1450 puts and buy 10 contracts of the June 1435 puts for a credit of about $1.30. But, for our example, we're going to:

Buy 2 May 1460 puts @ $5.10 = ($1,050)
Sell 10 May 1450 puts @ $4.10 = $4,100
Buy 8 May 1435 puts @ $2.80 = ($2,240)
Credit limit of about $.45 - $810

Sell 10 May 1535 calls @ $1.75
Buy 10 May 1550 calls @ $.75
Credit limit of about $1.00 = $1,000

Total net credit of about $1,810. Our maximum profit range is 1450 to 1535 - 85 points with three weeks left to expiration. Is that sufficient? This is certainly not a cure-all, but it could come in handy and provide a little peace of mind.

What Have We Accomplished?
We've reduced the amount of premium in our pockets, but we now own two 10-point bear put spreads (1460/1450) that will help to cushion a loss if the SPX were to blow through our 1450 short strike price. The two debit spreads will have a total of 20 points ($2,000) of intrinsic value to help defray a potential loss below 1450.

If there was a catastrophic event, and the SPX gapped down to 1400, our exposure (in the above example) would be the 15-points of the 1450/1435 less the $2,000 from the debit spread and $1,810 of premium taken in. In other words, if we made no other adjustment, we would lose $11,190. We would, of course, make other adjustments. I just wanted to give you a little more perspective.

Now, going back to our example, there could be a silver lining to our cloud. By having the additional two 1460/1450 debit spreads, we are in a position to make some additional profit - if the SPX settled below 1460, but above 1450. If the SPX settled at 1455, we'd make an extra $5 x 2 contracts = $1,000. Don't hold your breath waiting for this to happen, but it's possible. Plus, if you're holding the long 1460 puts near expiration, you may be able to salvage an extra $.50 or $.60 (by closing the position) - even if the SPX is 20-30 points out of the money.

What other sacrifices have we made for this little extra "peace of mind?" We have narrowed the range of our maximum profit range. We needed to bring in sufficient premium to allow us to afford to buy the two 1460 puts. So, for our example, we used the 1450/1435 bull put spread. If we didn't buy those puts, how much greater of a cushion could we create?

Could the bear call spread be moved up a strike? Sure. You might get about $.60+ for the 1540/1555 bear call spread.

We might be able to get $.60 for the 1435/1420 bull put spread. The premium is smaller, but there is an extra 15 points of cushion and a wider maximum profit range. Which is better? Which is safer? That's a choice you have to make.

In Summary
The above example provides a bit of a hedge that can be used to lessen the risk of our Iron Condor (or individual credit spread) positions. There is always some give and take. You won't get this particular hedge unless you sacrifice some premium. You may also have to compromise on the strikes, thereby creating a somewhat smaller maximum profit range.

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The Week Ahead
We had a couple of days where the market has not done any further damage to our May SPX position. The volume over the last week has been lower than average. Is the market getting a bit tired? We're still holding the May 1505/1520 bear call spread - at least for the moment. I'm prepared to make an adjustment, if necessary. There are thee weeks left to expiration. A lot can happen. Again, if you need to get out, do it! Whether if it's a money issue or an emotional issue, don't torture yourself. You can probably exit the 1505/1520 for about $6.20, based on Friday's closing numbers.

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S&P Support & Resistance - Closed at 1494.07
Resistance:
1496 is a peak from July 2000
1500 from April 2000 peak
1520 from the September 2000 peak
1528 close, 1553 intraday from March 2000 all-time index peak

Support:
The 10 day EMA at 1480
1478 is the late November to February up trend-line
1475 from peaks in December 1999 and January 2000
The 18 day EMA at 1467
1461.57 is the February 2007 high.
The 50 day EMA at 1444
1440 is the mid-January high
1439 is the March high
1432 is the December 2006 high
1425 is an interim high from November 1999
1410 is the 'hump' high
1408 is the November high

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NEW CPTI SEMINAR DATE - CHICAGO, July 27th & 28th
By special request, the largest number of CPTI students responded and want us to come back to the Windy City. So, check your schedules and contact me to reserve your spots. Take advantage of the EARLY BIRD SPECIAL. You'll SAVE $100, f your reservation is completed by June 15th.

I'm arranging a tour of the Chicago Board Of Options Exchange (CBOE) for attendees on the Friday prior to the seminar for those who can make it. Have you ever wondered how our orders are processed? Where do they go? How does the system work? Here's your chance to find out first hand.

There are still two spots remaining for my June 2nd & 3rd Las Vegas seminar. It's always a great time in Vegas and a great learning experience. Don't wait too long. These spots will be gone soon.

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CURRENT MAY CPTI PORTFOLIO POSITIONS
CPTI May Position #1 - SPX - Iron Condor - 1494.07

On 3/28, with the SPX at about 1419, we sold 12 May SPX 1300 puts and bought 12 May SPX 1285 puts for a credit of $.70. Then we sold 12 May SPX 1505 calls and bought 12 May SPX 1520 calls for a credit of $.70. Our net credit and profit potential is $1.40 ($1,680). Our maximum profit range is 1300 to 1505. Our total maintenance is $18,000.

CPTI May Position #2 - RUT - Iron Condor - 829.70

We sold 20 May RUT 710 puts and bought 20 May RUT 700 puts for a credit of $.45 ($900). Then, we sold 20 May RUT 870 calls and bought 20 May 880 calls for a credit of $.60 ($1,200). Our potential profit is $2,100. Maintenance is $20,000.

CPTI May Position #3 - OEX - Bull Put Spread - 684.42

We sold 20 May OEX 615 puts and bought 20 May OEX 605 puts for a credit of $.45 ($900). Our potential profit is $900. Maintenance is $20,000.

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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. We have now generated $52,425 ($51,050 + $1,375).

PREVIOUS ZERO PLUS POSITION - SPX Iron Condor

We sold 12 April SPX 1315 puts and bought 12 April SPX 1300 puts for a credit of $.65. Then we sold 18 April SPX 1470 calls and bought 18 April SPX 1485 calls for a credit of $.65. Our net credit and profit potential is $1.30 ($2,340). Our total maintenance is $27,000.

Closed out above April zero-plus position for $2.10. We had taken in $1.30, so we had a loss of $80 per contract (x 18 = $1,440).

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CPTI SEMINAR SCHEDULE!
Las Vegas, NV - June 2nd & 3rd

Chicago, IL - July 27th & 28th

Take your trading from a "hobby" to a potentially profitable "business." You need 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 - one that can last a lifetime.

DO YOU HAVE PROFIT-ABILITY?
It's always a challenge (and a pleasure) for me to 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 personally call you with all the details.

If you're a SERIOUS options trader, 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. Send me your phone number. 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. You'll have a two-day experience that you'll remember, and profit from, for a lifetime. I limit our CPTI seminars to ONLY 25 ATTENDEES. And, as a bonus, if you attend one of my CPTI seminars, you are entitled to RETAKE the seminar a SECOND TIME at NO CHARGE!

50 OUT OF 53 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. 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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