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READER Q & A

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READER Q & A

On Friday, we took advantage of the market fall to put on an RUT bull put spread for the October cycle. We're way out of the money at 630/620. The VIX shot up and I heard that some CPTIers were filled at 620/610 while others opted for the 640/630 bull put spread. We have a 145-point cushion - and seven weeks to sweat it out.

I'll be looking for other October positions as this next week unfolds. Seems that the pullback means the Fed will likely cut rates. We won't hold our breath waiting for that to happen, but we have to be ready for what happens if the Fed DOESN'T cut rates.

Questions
We're getting down to the last two weeks of this never-ending five-week option cycle. As time value supposedly erodes away, we're always looking to close existing positions for a nickel or dime to free up maintenance dollars for other opportunities.

However, with the recent more than doubling of volatility (VIX), it's getting tougher and tougher to close the positions early - unless, of course, we're incredibly far OTM. Even our September SPX 1260/1250 bull put spread, which is almost 200 points OTM, would take $.10 to $.20 to close (based on Friday's closing prices). Now, we're lucky to be able to close positions three days prior to expiration.

Below are a few questions I received about market makers and their practices. You might find them interesting. At the very least, you'll get a little insight as to their methods.

Mike - I was holding the 790/780 MID puts. This was well below the "official" CPTI strikes, but I still wanted to roll it out; however I was holding the 850/860 calls. I put in an order to sell the calls at a nickel to free up the maintenance to roll out the 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 on expiration 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 and will probably fair much better than I deserve, but what is one supposed to do under these circumstances?

As for yesterday, I also experienced having to buy back a call at an inflated rate. The market makers, I feel, take advantage of the situation. People end up having to pay them $.15 or $.20 for something that's only worth a nickel. I think, this month, I bought a Mercedes for some market makers -- and don't feel appreciated. - B.J.

Hi B.J. -- 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, their software is telling them that the theoretical value is right in the middle.

Bid Ask Theo. Value
3.20 4.00 3.60
0.00 .25 .125
0.00 .50 .25

The market makers have been described as robots (We often have other, less flattering, words for them). They are completely neutral. They will not fill an order if they cannot lay it off somehow to neutralize their position. They do NOT take a directional position because along with that position comes risk. Market makers may be a lot of things, but they're not stupid. If they take risk, that makes them no different than retail directional traders. They will either be fired or blow up their own accounts in a relatively short period of time.

That's why, if you try (in the above example) to buy back a short option for a nickel, you may not get filled immediately. It's likely that your order will be represented on the bid.

Bid: .05 Ask: .25

Now, if your order is filled, it can be for one of two reasons. First, it's likely that, when your order appeared on the option chain, another trader (who owned that option) saw it and put in an order to sell that option for $.05. The market maker had no choice but to fill the order.

The other possibility is that the market may have moved sufficiently that the hypothetical 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.

Remember, the market makers are not holding the opposite positions to ours. When they fill one of our orders, they lay it off (one way or the other) to become neutral. 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 week 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.

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SEMINAR DATE - Countdown To Charlotte

Charlotte (Sept. 22nd & 23rd)

Don't wait to make your reservation. The seats go quickly.

There is one "retake" spot 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 POSITIONS

CPTI September Position #1 - RUT - Bull Put Spread - 775.79

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 - 1453.55
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 - 775.79
(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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NO SPEAKAH DE ENGLISH
A bus stops and 2 men get on. They sit down and engage in an animated conversation.
The lady sitting next to them ignores them at first, but her attention is galvanized when she hears one of them say the following:

"Emma come first.
Den I come.
Den two asses come together.
I come once-a-more!
Two asses, they come together again.
I come again and pee twice.
Then I come one lasta time."
The lady can't take this any more,
"You foul-mouthed sex obsessed pig," she retorted indignantly. "In this country. we don't speak aloud in Public places about our sex lives.

"Hey, coola down lady," said the man. "Who talkin' abouta sex?

I'm a justa tellin' my frienda how to spell 'Mississippi'."

$5.00 says you're gonna read this again!

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CURRENT OCTOBER CPTI PORTFOLIO POSITION
CPTI October Position #1 - RUT - Bull Put Spread - 775.79

On 9/7, with the RUT at 775.53, we sold 20 October RUT 630 puts and bought 20 October RUT 620 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.

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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 - New Position To Be Announced Soon

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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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