Option Investor
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MISSED IT BY ONE DAMN DAY

HAVING TROUBLE PRINTING?
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Close only counts in hand grenades and horseshoes. I'm still pissed about the reversal. Then, to add insult to injury, Friday morning Bernake jump-starts the market with the announcement of a 50 basis-point cut in the Fed discount rate prior to our Friday morning settlement number. The one day delay in making that announcement cost our CPTI portfolio about $16,000. It cost many CPTI traders (and one particular column writer) a hell-of-a-lot more than that.

An Outrageous Settlement
Then, there were those who were clipped by the settlement backlash. As the market was plummeting, some traders were trying to salvage a few bucks by putting on last minute bear call spreads. With the SPX at 1370 on Thursday, the 1435/1450 bear call spread looked pretty safe - with a 65 point cushion. Notice that I use the past tense.

As most of you know by now, as a result of the Fed announcement, the SPX settled at $1450.11 - 38.84 points above Thursday's closing price of 1411.27. A 1435/1450 bear call spread would have expired totally in the money - incurring a complete loss. There were many such instances

In the past, we thought of a settlement 15 points away from Thursday's close as ridiculous. Well, we're in a whole different area now, aren't we?

Similar settlement scenarios played out in both the RUT and MID -- all a product of the tremendous volatility. The RUT settlement popped 38.83 points. Look at what that represented percentage-wise compared to the SPX - which trades at about twice the price. Amazing.

Problem Freeing Up Maintenance
The huge volatility presented another problem that was experienced by many traders.

Mike - I was holding the MID 850/860 calls. I put in an order to sell the calls at a nickel to free up the maintenance to roll out my puts. The order sat there all day. The bid was .05, but the ask was .50, and never got lower than .25.... on a position that was 150 points out of the money all day!! What the hell is going on here? I was really beginning to panic when the MID got down to 797. Luckily, I didn't get burned.

As for Thursday, I also experienced having to buy back calls at an inflated rate. Do the market makers take advantage of the situation? People ended up having to pay $.15 or $.20 for something that they believe is only worth a nickel. I think, this month, I bought a Mercedes for some market makers -- and don't feel the least bit appreciated. :-)

Here is how it was explained to me. When you see the market maker on both the bid and ask price on an option chain (check the bid size and ask size), their software is telling them that the theoretical value is near the middle.

Bid Ask Appx. Theo. Value
0.00 .25 .125
0.00 .50 .25

The market makers have been described as robots. We call them a lot of things, but they are supposed to be completely neutral. They will not fill an order if they cannot lay it off somehow to neutralize their position. They are supposed to make their money only on the bid/ask spreads. They do NOT take a position because along with that position comes risk. If they take risk, that makes them no different than traders. They will either be fired (by their boss) or blow up their own accounts in a relatively short period of time.

There are situations in which nickel orders ARE filled, but it's not likely due to any market maker generosity. For example, imagine you are trying to buy back a 900 call - and you are bidding a nickel because it's way out of the money. The ask price is $.25. Therefore, the theoretical value is likely $.125.

If you get filled, it's likely that another trader has seen the nickel bid, on the option chain, and has entered an order to sell their options at a nickel. The market makers are obligated to fill those orders.

Perhaps it was someone who originally had the 910/900 bear call spread and had bought back the 910 call, leaving him long the 900 call. So, when he saw your nickel bid, he thinks, "hey, here's my chance to get a nickel back from something that was essentially worthless." Pennies (or nickels) from heaven.

Another possibility is that the market may have moved sufficiently that the theoretical value of the option changed enough that the market maker could justify filling the order.

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Mike - Seems like lots of regular people doing spreads these days.... most things I have read, or supposed professionals that I have talked to, say spreads are too dangerous for the risk/reward offered and don't touch them... Could the market makers be pushing the market around on us little guys.....knowing the amount of contracts that have traded and who was buying/selling, since the MM are holding all of the more profitable short puts/calls they stand to make a huge profit. -- Rich

Hi Rich -- As I understand it, the market makers have a little influence, but not as much as you may think. They make their money on the bid/ask spread in every transaction. It's in their best interest to generate as many transactions as possible. That's why, in the last few days prior to expiration, you often see stocks move toward strike prices that have high open interest. Why? There are a lot of people in short positions at those strikes and the closer the stock gets to it, the more likely they are to close out their short position and possibly roll them out to the following month -- thereby generating even more transactions. More transactions = more money for the market makers.

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It's All In The Wording
"Calling an illegal alien an "undocumented immigrant" is like calling a drug dealer an "unlicensed pharmacist".

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TRACKING CPTI PORTFOLIO RESULTS
We've just completed the ninth month (August) of CPTI tracking year number five. The market went nuts - not the kind of month good for our strategies. Unfortunately, we ended up with our fifth non-profitable month out of 57. Our loss for the ninth month of our fifth year was $15,960. Thus far, in our fifth tracking year, we've accumulated a profit of $3,010 ($18,070 - $15,060).

RECAP OF AUGUST POSITIONS
(See Position Details in August Summary Below)

MID Iron Condor - LOSS: $10,500
SPX Iron Condor - LOSS: $5,460
RUT Iron Condor - PROFIT: 900

TOTAL AUGUST LOSS: $15,060

August Settlement Numbers:
S&P 500: $SET - 1450.11
Russell: $RLS - 802.72
S&P 100: OEX - 674.53
MID: $MIV - 844.99

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SEMINAR DATE

Charlotte (Sept. 22nd & 23rd)
Don't wait to make your reservation. The seats go quickly.

There are two "retake" spots remaining for the Charlotte seminar. These retake spots are free for those who have paid to attend one of my previous seminars and who want to retake the seminar a second time. They're reserved on a first come first serve basis.

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SUMMARY OF AUGUST CPTI PORTFOLIO POSITIONS

CPTI August Position #1 - SPX - Iron Condor - 1445.94

On 7/3, with the SPX at about 1524.50, we sold 12 August SPX 1400 puts and bought 12 August SPX 1385 puts for a credit of $.65 ($780). Then we sold 12 August 1615 calls and bought 12 August 1630 calls for a credit of $.80 (960). The total net credit of $1.45 and profit potential is $1,740. Closed for loss of $10,500.

CPTI August Position #2 - RUT -- Iron Condor - 786.03

On 7/19, with the RUT at about 851, we sold 20 August RUT 770 puts and bought 20 August RUT 760 puts for a credit of $.45. The credit so far is $.45 ($900). Our maintenance is $20,000. We'll see if it's prudent to put a bear call spread on the topside to complete our Iron Condor.

Adjustment: On 7/26, we closed the original 20-contract bull put spread position and established a 30-contract Iron Condor consisting of the 730/720 bull put spread and the 850/860 bear call spread. The profit potential of $900 remains the same. Profit of $900.

CPTI August Position #3 - MID - Iron Condor - 838.30

On 7/23, with the MID at 916, we sold 20 August MID 850 puts and bought 20 MID August puts for a credit of $.50 ($1,000). The credit so far is $.50 ($1,000). Our maintenance is $20,000.

Adjustment: On 7/27, we closed the original 20-contract bull put spread position and established a 30-contract Iron Condor consisting of the 820/810 bull put spread and the 920/930 bear call spread. Maintenance is now $30,000 and the new maximum profit range is 820 to 920. The profit potential is now about $600.

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CURRENT SEPTEMBER CPTI PORTFOLIO POSITION

CPTI September Position #1 - RUT - Bull Put Spread - 786.03

On 7/24, with the RUT at 822.70, we sold 20 September RUT 700 puts and bought 20 September RUT 690 puts for a credit of $.70 ($1,400). Total net credit and profit potential (so far) of about $.70 ($1.40). Our maintenance is $20,000. We'll look for opportunities to complete our Iron Condor if/when the market pops up.

CPTI September Position #2 - SPX - Bull Put Spread - 1445.94
On 8/3, with the SPX at about 1463, we sold 20 September SPX 1260 puts and bought 20 September 1250 puts for a credit of $.50 ($1,000). Our maintenance is $20,000. We'll look for opportunities to complete the Iron Condor if/when the market bounces.

CPTI September Position #3 - RUT - Iron Condor - 786.03
(Formerly August Position) On 6/29, with the RUT at 844, we sold 20 August RUT 740 puts and then bought 20 August RUT 730 puts for a credit of $.45 ($900). Total net credit and profit potential of about $.45 ($900).

Adjustment: On 7/26, we closed the original 20-contract bull put spread position and established a 30-contract Iron Condor consisting of the 670/660 bull put spread and the 840/850 bear call spread. Maintenance is now $30,000 and the new maximum profit range is 670 to 840. The profit potential of $900 remains the same.


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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. With the July profits, our new cash total is $55,060 ($52,210 + $2,850).

ZERO PLUS POSITION -

We'll be looking to put on a new Zero Plus position soon.

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CPTI SEMINAR SCHEDULE!

SEPTEMBER 22nd & 23rd - CHARLOTTE, NC

OCTOBER 20TH & 21ST - SEATTLE, WA


Take your trading from a "hobby" to a 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 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. Take advantage of the "early bird special" and save $100. You'll have a two-day experience that you'll remember, and profit from, for a lifetime. I limit my 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!

52 OUT OF 57 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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