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A NEW TRADE - THE THOUGHT PROCESS

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A NEW CPTI TRADE - THE THOUGHT PROCESS

It's been quite a week. We bought ourselves a little time and a few more points of cushion by rolling out our SPX position. Our remaining May positions look to be in pretty good shape, particularly our OEX 615/605 bull put spread. If you need maintenance dollars for other opportunities, you may have the opportunity to close out the OEX spread early for a nickel or a dime.

If you're planning to close the position, you can put the spread order out there using a GTC (Good Till Cancel) order. There is another way. You could simply try to buy back the short 615 put for a dime. If/when your order is filled, you can then put your order out to sell the remaining 605 puts for a nickel. If you only get filled on buying back the short put, you've at least saved a commission. But you'd be surprised how often those little long put orders will be sold - especially with two long weeks left till expiration. In the meantime, when you buy back the short put, you are releasing the maintenance on the entire spread.

A Potential New Position - The Thought Process
Let's do a little research and see if anything worthwhile rears its ugly head - like a new position. The RUT is trading at 832.88. One standard deviation comes to about 53 points. That means to many that an Iron Condor placed near 885 on the call side and 780 on the put side is thought to have about a 68% chance of success.

Actually, if one applied the Black Scholes formula, the probability that the RUT will finish over 780 is 89.9%. Also, the probability of the RUT settling below 890 is 90.3%. The success probability for the entire Iron Condor is 74.9%. Is that safe enough for us? Let's look at the option chain and see what premium is available. Maybe we can get a bit safer.

On the call side, we'll have to stick pretty close to the 890/900 bear call spread. It appears that we could get $.50-$.60. Looking at the 900/910 bear call spread tells us that there's not enough premium available to make it worthwhile. We could just put on the bull put spread and wait for the market to move up before putting on the topside - but that move up might not happen.

If we look a little further down the put side of the options chain, we find that the June 760/750 bull put spread might give us about $.50 in premium. The probability of success of the 760/750 bull put spread by itself is 96.3%. The 890/900-760/750 Iron Condor would have an increased probability of success of 80.6%. That's 20-points safer on the put side.

It's not going to get a whole lot better than that. As you know, I tend to take the safer approach so let's:


Sell 20 June RUT 760 puts - RUTRL
Buy 20 June RUT 750 puts - RUTRJ
Credit of about $.50 ($1,000)

Sell 14 June RUT 890 calls - RUZFR
Buy 14 June RUT 900 calls - RUZFT
Credit of about $.60 ($840)

 

Our net credit is about $1,840. Our maximum profit range is 760 to 890. That's 130 points. Maintenance is $20,000.

Notice that I reduced the number of contracts for the bear call spread. The market has been, and continues to be, a problem to the upside. It should top out in a few weeks, and almost 60 points should be enough of a cushion. In case the market keeps going, at this point it's prudent to reduce our risk. The maintenance is still $20,000. So, you have the flexibility to trade another six bear call spreads at some point - without an increase in maintenance.

Remember, the above figures are based on Friday's closing numbers. It could be very different on Monday morning. Adjust the number of contracts to your account size and make sure to double check the option symbols before you click the "trade" button. Also, keep some powder dry. This month is a prime example of why you need to have the flexibility that only comes from additional available margin.

BTW, we're going to use this trade for our Zero-Plus strategy, but we'll use 25 bull put spreads and 20 bear call spreads. Also, I realize that we already have a RUT bull put spread on for June. It's up to you whether you want to complete the Iron Condor at this point. I'm going to wait for a few days and see what the market is up to (or, preferably, down to).

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S&P 500 Support & Resistance -- 1505.62
Resistance:
The upper trend-line of the channel at 1513
1520 from the September 2000 peak
1528 close, 1553 intraday from March 2000 all-time index peak

Support:
1500 from April 2000 peak is breaking away
1496 is a peak from July 2000
The 10 day EMA at 1490
1485 is the late November to February up trend-line
The 18 day EMA at 1480
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
The 50 day EMA at 1453
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 28th & 29th
By special request, the largest number of CPTI students responded and want us to come back to the Windy City. So, clear your schedule and contact me to reserve your spot. 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 - RUT - Iron Condor - 832.88

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 #2 - OEX - Bull Put Spread - 690.95

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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CURRENT JUNE CPTI PORTFOLIO POSITIONS

CPTI June Position #1 - RUT - Bull Put Spread - 832.88

On 5/1, we sold 20 May RUT 720 puts and bought 20 May RUT 710 puts for a credit of $.50 ($1,000). Maintenance is $20,000. We will watch for an opportunity to add a bear call spread to this position to complete our Iron Condor.


CPTI June Position #2 - SPX - Iron Condor - 1505.62

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 was $1.40 ($1,680). Our maximum profit range is 1300 to 1505. Our total maintenance was $18,000.

On 5/3, with the SPX at about 1501, we rolled out our May position into June by buying back both spreads and establishing the 1535/1550 bear call spread and the 1410/1395 bull put spread for an additional credit of $380. We now have a profit potential of $2,060. Our maintenance is now $27,000. Our max profit range is now 1410 to 1535.

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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).

We 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). Our new cash total is $49,610 ($51,050 - $1,440).



See new RUT Iron Condor trade. We'll go into more details in the next column.

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

Chicago, IL - July 28th & 29th

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.



Orders to purchase or sell securities through your account with OptionsHouse, Inc., an independent registered broker-dealer ("OptionsHouse"), shall be accepted and executed solely by OptionsHouse, subject to the terms and conditions of your individual account agreement with OptionsHouse. OptionsHouse makes no investment recommendations and does not provide financial, tax or legal advice. All inquiries regarding your OptionsHouse account, including any disputes or trading errors, should be directed to OptionsHouse. Option Investor, Inc is not a registered broker-dealer and is not in the business of transacting trades. Furthermore, Option Investor, Inc is not a registered investment adviser, does not provide financial, tax or legal advice, and is not recommending that you buy or sell any particular security. OptionsHouse has made its services available to you via Option Investor, Inc as a courtesy. OptionsHouse and Option Investor, Inc are separate and unrelated entities. OptionsHouse is not affiliated with and does not endorse or warrant the products or services of Option Investor, Inc.

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