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CATCHING THE BUTTERFLY

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When all is said and done, what was accomplished Thursday and Friday? The market went down and, not unexpectedly, came back up. That's pretty typical of the action we've seen lately. The only difference is that the volume on Friday was much lower. Some may interpret that as another sign of a tiring bullish attitude. Others may say that it's just plain bull. The bottom line is that we now have about a 20-point cushion to work with. Still too close for comfort.

When a market breaks out, it tends to steadily surge higher and then pull back to near term support before it begins to rise again. As it tries to rise again and again, it uses up buyers and eventually there aren't enough buyers to support the trend and the trend succumbs.

On Thursday afternoon, some prudent CPTI traders took advantage of the pullback to GTFO of all, or at least some, of our SPX bear call spreads. A wise move - possibly one move we should have made. Time will tell.

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The Butterfly Effect
To take our minds off our somewhat precarious SPX position, let's explore a variation of the well-known butterfly strategy. It's not unique by any means, but I'm going to call this concoction the "Butterfly Net." Why? Because, essentially, we're going to combine two butterfly positions in order to catch a profit with very little out of pocket expense.

Although we typically hang our hats on non-directional strategies, the Butterfly Net can be used by those who have an opinion. As you know, opinions are like butts - everyone has one. We try to keep both butts and opinions out of our trading - with varying degrees of success. Our butts belong on the couch and our opinions belong in bar - where great, and not-so-great minds meet to solve the world's problems while under the influence.

With the market as extended as it seems to be, many (including me) anticipate a pullback. So, we're going to cast out a net to try and snatch some profits - at very little risk to our accounts. Now, keep in mind, that the example below is just that - an example. It's not a recommended trade. It's presented here for you to grasp the concept and apply it, if you so choose, to the situation and index of your choice. It's based on Friday's closing prices - which will likely be different come Tuesday morning.

The SPX closed Friday at 1515. We expect a pullback, but we're not sure when or how far. We're going to use the XSP instead of the SPY because we want to avoid the possibility of early exercise of our options. We're also going to use 1 and 2 quantities in this example. We'll challenge your imagination to extend the quantities to calculate the number of contracts you choose to use.

Butterfly #1:
Buy 1 July XSP 150 put @ $2.05
Sell 2 July XSP 147 puts @ $1.30 (x 2 = $2.60)
Buy 1 July XSP 144 put @ $.90
Net Debit: $.35

Butterfly #2:
Buy 1 July XSP 148 put @ $1.55
Sell 2 July XSP 145 puts @ $1.00 (x 2 = $2.00)
Buy 1 July XSP 142 put @ $.70
Net Debit: $.25

Our total net debit for both butterfly spreads is $.60. Our profit zone is 142.60 (142 + .60) up to 149.40 (150 - .60). That translates to 1,426 to 1,494 on the SPX - a 68 point range.

So, let's see where our profits will come from. How do we calculate our profits? It's easy, and may be a bit tedious -- but it should be worth it. You need to go through and calculate the value of each option. For example, if XSP settles (as in Friday morning European settlement) at 146.25 . . .

Butterfly #1 Values:
Long 1 July XSP 150 put = 3.75
Short 2 July XSP 147 puts = .75 (x 2 = -1.50)
Long 1 July XSP 144 put = 0
Net Value: $2.25 (3.75 - 1.50)

Butterfly #2 Values:
Long 1 July XSP 148 put @ $1.75
Short 2 July XSP 145 puts = 0
Long 1 July XSP 142 put = 0
Net Value: $1.75

Our total net value of the two positions is $4.00 ($2.25 + $1.75). If we traded 10 contracts (20 on the short positions), our profit would be $3,600 ($4,000 - $600). Our total risk was only $.60 (x 10 = $600).

The "Butterfly Net" is a commission intensive trade, but the risk is still relatively small. On a 10-contract position, the commissions should never be more than $170.

The maximum profit would be achieved if XSP settled right on the one of the short strikes (147 or 145). The chances of that happening are only slightly greater than Jessica Alba wanting to bear my children. If XSP did settle at 147, the 150 put would have a value of $3.00 and the 148 put would be worth $1.00 (total of $4.00). If XSP settled at 145, the 150 put would be worth $5, the 147 puts worth -$4, the 148 puts worth $3 - also for a total of $4.00.

Go ahead and do the math for yourself using different scenarios. Try different strikes and perhaps you may want to use a different expiration. I would limit the underlyings to European style indexes to avoid the possibility of exercise of the in-the-money options. That could make it messy.

This is also a strategy that you might want to close early if you have the opportunity to lock in a nice profit. Have fun with it. Let it stimulate your mind. You can do it above the market if you feel the SPX will continue higher - or even at the market - if you believe the market will trade in a range.

I'll be going over the "Butterfly Net" and other variations at the upcoming Las Vegas seminar. In the meantime, I'll put in a call to Jessica Alba - just in case.

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S&P Support & Resistance - Closed at 1515.73
Resistance:
1520 from the September 2000 peak
The upper trendline of the channel at 1531
1528 close, 1553 intraday from March 2000 all-time index peak

Support:
1500 from April 2000 peak
The 18 day EMA at 1507
1501 is the late November to February up trendline
1496 is a peak from July 2000
The 50 day EMA at 1480
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
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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LAS VEGAS SEMINAR -- SOLD OUT!!
The June 2nd & 3rd Las Vegas seminar is now sold out. That's four consecutive seminars that we have sold out. It's always a great time in Vegas and a great learning experience - just like all the others. For Vegas I'll be adding new strategies and topics.

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CURRENT JUNE CPTI PORTFOLIO POSITIONS

CPTI June Position #1 - RUT - Bull Put Spread - 829.93

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 - 1515.73

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.

CPTI June Position #3 - RUT - Iron Condor - 829.93

On 5/7, we sold 20 June RUT 760 puts and bought 20 June RUT 750 puts for a credit of $.60 ($1,200). Then we sold 14 June 890 calls and bought 14 June 900 calls for a credit of $.50 ($700). Total potential profit is $1,900. Maximum profit range is 760 to 890. 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. Our new cash total is $49,610 ($51,050 - $1,440).

RUT Iron Condor - 829.93

On 5/7, we sold 25 June RUT 760 puts and bought 25 June RUT 750 puts for a credit of $.60 ($1,500). Then we sold 20 June 890 calls and bought 20 June 900 calls for a credit of $.50 ($1,000). Total potential profit is $2,500. Maximum profit range is 760 to 890. Maintenance is $25,000.

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

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.

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 personally 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 learning experience that you'll remember, and profit from, for a lifetime. I limit my CPTI seminars to ONLY 25 ATTENDEES. And, as a bonus, after you attend one of my CPTI seminars, you are entitled to RETAKE the seminar a SECOND TIME at NO CHARGE!

51 OUT OF 54 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 Trader 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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