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BULLISH BY KNIFE-POINT?

HAVING TROUBLE PRINTING?
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Friday's move up was on low volume. The same holds true for most of the last seven consecutive positive days for the S&P. The fact remains that the S&P is 109 points above the recent low (that we're trying to forget). The T & A types tell us that this is pretty rare. Typical market bottoms (and human ones too) are not "knife-point" bottoms - where the market goes straight back up. Most of the time, there is a bounce and then a retest of the lows.

Now we have to wonder. If the market decides to test the lows, how low will it go? Logic, and the famous market technician Isaac Newton, tells us that the higher the starting point, the more severe the downdraft will be - if it comes back down.

Directional traders, who caught some bargains down low, have done quite well. However, they should invest a few bucks to protect their gains. Gains have a habit of disappearing while the traders are left scratching their heads wondering "why me?"

Our Positions
For the moment, out current September positions are in good shape. We have four weeks left. It's kinda funny. In the pre-crazy-volatility era (not that long ago), we'd think our current cushions were a slam dunk for this option cycle. These days, who knows?

BEAR CALL SPREAD
Let's continue our education review with a look at the bear call spread - the other major component of our Iron Condor. The words "bear" and "call" and "spread", once again, tell us what we need to get started. "Bear" means that a bear call spread is a bearish position. "Call" simply means we're using calls and "spread" means we're using one or more options to create the position.

The Bear Call Spread is a "vertical" spread and one of the two basic components of the Iron Condor. A "vertical spread" simply means that the two options comprising the spread are both puts and they have the same expiration month.

The Bear Call Spread consists of the sale of one call option and the purchase of a second option at a higher strike price. The call option that is sold will bring in more money than the call option that is purchased - resulting in a net credit. It is thereby considered a "credit" spread. The net credit shows up in our account the very same business day.

There is a maintenance requirement on credit spreads. Your brokerage firm will hold, in your account, the difference between the strike prices multiplied by the number of contracts you're trading. For instance, if you sell the $150 call and buy the $155 call, the broker would hold $500 ($5.00 x 100 shares) per contract. A 10 contract position would require $5,000 of maintenance. The numbers, in the example below, do not include the expense of commissions.

For example: You have a short term bullish feeling about ABC Company that is trading at $145.00 with about four weeks remaining to expiration. You believe that, during this option cycle, ABC is going to remain at $145 or possibly move down in value. Below is an abbreviated option chain of the available options.

Strike Price Bid Ask
Sept. $145 call 3.50 3.80
Sept. $150 call 1.90 2.00
Sept. $155 call .90 1.00
Sept. $160 call .45 .55

Based on the above chain, let's explore a typical trade, using a 10 contract position. Remember, we're bearish. So, let's:

Sell 10 contracts of ABC Sept. 150 call @ $1.90 ($1,900)
Buy 10 contracts of ABC Sept. 155 call @ $1.00 ($1,000)
Net credit of $90 x 10 contracts = $900 ($1,900 - $1,000)
Maintenance = $500 ($5.00 difference between strikes) x 10 contracts = $5,000

We have chosen to sell the $150 call a very good reason. It's $5.00 above $145 (where ABC is currently trading). That means that ABC can actually close up $5.00 and we will still be 100% profitable. As much as stocks move around in a high volatility environment, that cushion is nice to have.

What is your break even number? ABC can close as high as $150.90 ($150 plus $.90) before you start losing money.

Even though it's possible to place this trade by first buying the $155 call and then selling the $150 call, it's much better to enter the trade as a single transaction with a net credit. The problem with trading the options separately is that the market is constantly moving. If you were to buy the $155 call for $1.00, it's very possible the market will move away in the time that it takes to learn about your fill and to send in the second order. It might move in a direction good for your cause or bad for your cause. Do you want to take that risk? I think not. Our whole trading philosophy is to avoid as much risk as possible. This is no exception.

Most good brokerage firms will have screens that allow you to input the specifics of both options and request a net credit. It's easier, cleaner and your chance of getting filled is greatly improved.

Now, let's assume that you were right. At expiration, ABC is somewhere below $150. We calculate the potential profit by dividing the profit ($900) by the amount of out of pocket risk ($4,100). The out of pocket risk is the amount being held as maintenance ($5,000) less the amount of premium taken in when the position was initiated ($900).

$900 divided by $4,100 = 21.9% return on your risk. Very acceptable for a month. But, that's if you were right. The object of the trade is for both options to expire worthless. That means you can keep the entire $900 of premium you brought in when you established the position.

What if you're wrong? You are exposed for $4,100. You're risk is defined and you'll never lose more than the $4,100. But, perhaps your analysis of the trade suggests that you should exit your position if ABC trades up to $148.50. You should check the charts to find realistic support and resistance levels before placing the trade. That will give you a bit of guidance and enable you to choose an exit point where you will close the position and minimize your loss.

When you put on a bull put spread, you are not obligated to hold the position through option expiration. You can close it at any time.

You would exit the trade the same way you enter it - trading both options in a single transaction for a net debit.

If, at some point during the option cycle, ABC moves far enough away from your bear call spread, you might be able to close the position and lock in a large percentage of the profit. If, with a week to go, ABC is trading at $135, the $150 call may only cost you a nickel or dime to buy it back. As soon as you buy it back, you are no longer exposed and your maintenance dollars (being held by the broker) are released back to you.

It doesn't make sense to be exposed to a possible catastrophic event for that last week for a nickel or dime. If you held on, you would be risking the other $.80 of premium to make that last nickel or dime. It doesn't make sense. Take the money and run.

When we trade our Iron Condors, we put on bull put spreads on indexes rather than stocks - and we try to put them on very far away OTM (out of the money). We use indexes because they are more diversified than individual stocks. If a single stock has a problem, there are hundreds of other stocks to soften the blow. An index is not as vulnerable as an individual stock.

Our objective, when trading the indexes, is to create as large a cushion as possible. Although the bear call spread is a bearish position, we want to give ourselves a lot of room to be wrong if the market is not bearish.

So, there you have it. The bear call spread and (from Thursday's column) the bull put spread. In an upcoming column we will put these two little devils together and form an Iron Condor. Stick around and see how the Iron Condor, if created properly, has a huge probability of success.

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S&P 500 Support & Resistance Levels - Closed at 1479.37
These levels are nice to look at and, under some circumstances, they actually may be meaningful. Keep these numbers in perspective. Remember that when the market moves in chunks, as it has been recently, the S&P goes through these levels like shit through a goose, without stopping to say "goodbye."

Resistance:
The 50 day EMA at 1481
1483 is the July 2006/March 2007 up trendline
1490.72 is the early June closing low
1534 is the early July high
1539 is the mid-June intraday high
1541 is the early June high.
1553 intraday high from March 2000 is the all-time index peak

Support:
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
The 200 day SMA at 1456
1440 is the mid-January high
1427 represents some interim peaks from December 2006 and the early August low
1406 - 1407 from March 2007 and November 2006 interim peaks
1389 from October 2006 interim peak
1375 - 70 from March 2007 low
1370 is the August intraday low

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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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CURRENT SEPTEMBER CPTI PORTFOLIO POSITION

CPTI September Position #1 - RUT - Bull Put Spread - 798.93

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 - 1479.37
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 - 798.93
(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 -

RUT - June Iron Condor - 100% PROFITABLE

On 6/21, with the RUT at 839.81, we sold 30 July RUT 770 puts and then bought 20 July RUT 760 puts for a credit of $.55 ($1,650). Then we sold 30 July RUT 900 calls and bought 30 July RUT 910 calls for a credit of about $.40 ($1,200). Total net credit and profit potential of about $.95 ($2,850). We were 100% profitable and pocketed $2,850.

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CPTI SEMINAR SCHEDULE!

SEPTEMBER 22nd & 23rd - CHARLOTTE, NC


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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