Option Investor
Updates

BREATHING EASIER

HAVING TROUBLE PRINTING?
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On Tuesday and Wednesday, the market went through the roof. Not a problem, because we weren't standing on the roof. We're safely in the basement. Our cushion for the SPX bull put spread is back to about 150 points. The cushion for the RUT bull put spread is about 76 points. Those are good sleeping cushions.

Today, the market surprisingly held Tuesday and Wednesday's gains. After two substantially up days, it's reasonable to expect that we'll give back a chunk. After hours, DELL disappointed and is trading down more than $2.50. That should bring things down a bit. We'll see if the market has the strength to work its way through some bad news and continue its move back up. As it stands now, the market still appears to be in a downtrend.

I just heard a talking head say the chance of a December rate cut is 100% for 25 basis points - and 60% for a 50-point rate cut. How they figure this stuff out I'll never know. I think the same guys that screw around with our Friday morning settlements are the ones who come up with these arbitrary percentages. But, the TV audience and the markets seem to buy into it, no questions asked.

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A Common Question Of Interest
Question: What happens if you buy a deep-in-the-money LEAPS call, and you sell a short-term out-of-the money call against it? For example, ABC is trading at 55, and I buy a January 2009 30 call for $22, and I sell an October 60 call for $5.50. What happens if at December expiration the stock is above $60 or below $30?

Answer: The above example is a version of a covered call strategy - except, instead of owning a stock, you own the LESP. It's also considered a diagonal calendar spread. You can substitute a LEAPS call purchase for the purchase of the actual shares of the underlying stock. It's a little trickier than owning the shares of stock. You have to pay closer attention to the position. Remember, covered calls are appropriate for investors who are neutral to mildly bullish on the underlying equity.

First, let's take a closer look at your example. Some of the numbers are off. The January 2009 $30 call on ABC will cost a lot more than $22. An in-the-money option has both intrinsic and time values. The intrinsic value is the amount that the option is in the money, and the time value is derived by subtracting the intrinsic value from the current premium. In your example, the January 2009 30 call would have an intrinsic value of 25 (ABC stock price of 55 minus the strike price of the call). Because it's a LEAPS, it would also have substantial time value. So, let's adjust the purchase price of the LEAPS call in your example to 35, which gives the option a time value of 10 (price of option minus intrinsic value). By the same token, out-of-the-money options have only time value. Since the October 60 has only one month left until expiration, a premium of $5.50 is too high. It's more likely that you receive a premium of about $2.

The revised example now involves stock ABC, which is trading at 55. The January 2009 30 call is purchased for 35, and the December 60 call is sold for 2, which results in a net cost of $3,300 ($3,500 purchase cost of LEAPS less $200 received for the sale of the call).

If ABC rallies and closes above 60 at expiration, in all likelihood you will be assigned the shares. This is where the quasi-covered call differs significantly from the covered call. In a covered call strategy, you would simply hand over the shares that you already own. With your strategy, you have choices -- you can exercise the LEAPS and acquire the shares at less than half of the current market price, or you can sell the LEAPS, which will have appreciated nicely, and use the proceeds for the purchase of the stock in the open market.

Typically, you'll be better off selling the LEAPS because you will capture both the intrinsic and time values of the option. For example, let's assume ABC rallied and closed at 64 at December expiration. You could exercise the LEAPS call, which will result in a $3,400 discount on the current market price of ABC. However, the January 2009 30 call could be worth around 43.50 at December expiration. You could sell the call and use the $4,350 to offset the cost of acquiring XYZ.

Another choice, and perhaps the best one, requires you to monitor your position and take action when necessary. This is the major difference between the LEAPS strategy vs. the stock owning scenario. You need to pay close attention to the deltas of both the LEAPS and the sold December call. As long as the delta of the LEAPS is higher than the delta of the short call, you're just fine. However, once the delta of the December call begins to exceed the delta of the LEAPS, you are losing money. It's time to buy back the short December call. You then have a few more choices. You can roll out your short call to a higher strike price in a later month, or you can simply sell the LEAPS and sit back and count your profits. It all depends on your outlook for ABC, your risk tolerance, and your investment objectives.

If ABC falls and closes significantly below 50 at December expiration, your action will depend on your outlook for the stock. If you think ABC still has some downside, you may decide to sell back the LEAPS and close the position entirely. The loss you take on the LEAPS position will be slightly offset by the $200 premium you received for the sale of the December 60 call.

If you think ABC will rally substantially over the next year or so, you may want to hold on to the LEAPS in order to have exposure to that potential upside. You can even choose to write another call against the January 2009 30 call in order to collect additional premium to further offset your losses on the LEAPS position. In fact, if you wrote a covered call at 2 every month until January 2009, you could conceivably collect a total of $1,600 if all the options expired worthless. This would defray a large percent of the original cost of the LEAPS.

Those of you who have been reading me for awhile, know I'm not a fan of covered calls. They're dangerous, unless you turn the position into a Collar. Calendar spreads can work out nicely - IF you monitor the position and know when to GTFO.

Calendar Spreads, including examples similar to the one above, are discussed at length at the seminar.


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December Los Angeles Seminar - It's Not Too Late!

There is about a week left until the L.A. seminar (Dec. 8 & 9). It's not too late to make your reservation to attend. There are still a few spots remaining. Considering the market movement lately, I'm sure we're going to have a lot of interesting strategies to discuss. Come be part of it. Contact me right away at mparnos@optioninvestor.com.

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SEMINAR DATES -
LOS ANGELES - DECEMBER 8 & 9
CHICAGO - JANUARY 26 & 27

Chicago is both centrally located and easily accessible. We've been there twice before and filled the room. I've chosen a hotel convenient to the airport - eliminating the need to rent a car. You take the airport shuttle right to the hotel, convenient and easy. Take advantage of the early bird special and save $100. See the details below.

Join us as we discuss, trade selection, entry points, exist strategies and alternatives, premium negotiation, maintenance alternatives, taxes, and much more - all subjects necessary to enlighten and to maximize your trading business. As you know by now, the seminars typically sell out. As in trading, opportunities aren't there for long. Reserve your spot as soon as possible.

No more retake spots are available for the Los Angeles seminar. There is now a waiting list for possible cancellations. Contact me if you would like to be on the waiting list. Thus far, there are two people on the waiting list.

SAVE $100 - EARLY BIRD SPECIAL
Chicago - If you complete your registration for the upcoming Chicago seminar prior to December 14th, you will save $100 -- only $895. If you've been paying attention to my column, by now you know that every $100 you save is $150 you don't have to make. Plus, it's likely deductible for you.

There is now only one retake spot available for the Chicago seminar. These spots go quickly. Contact me as soon as possible if you would like to join us.

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CPTI DECEMBER POSITIONS
CPTI December Position #1 - RUT Bull Put Spread - 766.06

On 11/1, with the RUT at 806, we sold 20 December RUT 690 puts and bought 20 December RUT 680 puts for a credit of $.70 ($1,400). Maintenance is $20,000. We may put on a bear call spread in the future - IF it makes sense.

CPTI December Position #2 - SPX Iron Condor - 1469.72
On 11/16, with the SPX at about 1450, we sold 20 December SPX 1320 puts and bought 20 December SPX 1310 puts for a credit of $.90 ($1,800). Then we sold 20 December 1570 calls and bought 20 December 1580 calls for a credit of $.70 ($1,400). Total net credit and profit potential of $1.60 ($3,200). 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. With the July profits, our new cash total is $56,560 ($55,060 + $1,500).

ZERO PLUS POSITION - Watch for new position to be announced.

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CPTI SEMINAR SCHEDULE!

LOS ANGELES, CA - DECEMBER 8 & 9

CHICAGO, IL - JANUARY 26 & 27


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 will 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!

55 OUT OF 60 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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