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CALENDAR SPREAD EXAMPLE

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In Thursday's (12/27) column we took a close look at Calendar Spreads - a strategy using a directional bias, but taking advantage of time decay. Let's take what you learned and apply it to real life situations.

We'll start with a bullish scenario. The stock AAPL recently hit an all-time high of slightly over $200 per share. There are those who believe it will continue higher. If one believes that AAPL will gradually move up over the next three weeks (to January expiration), here's a trade to think about. We're going to create a hypothetical horizontal calendar spread. (Based on Friday's closing prices - AAPL closed at $199.83).

Buy 10 February AAPL 210 calls @ $10.90 (Delta: 35 - Theta: .153)
Sell 10 January AAPL 210 calls @ $4.95 (Delta: 43.0 - Theta: .224)
Debit of $5.95

Let's now look at how we can profit from this situation. First, let's project that AAPL, at January expiration, closes below $210. That's $4.95 in our pockets. Here's where the option's Theta comes into play. Theta measures the amount of an option's time decays each day. It's certainly not an exact science, but it's close enough to give us a good idea of what's going on. Jan. 210 option is decaying faster - at .224. The Feb. 210 option is decaying at .153. That means the Feb. 210 option will retain a much higher percent of its value.

All things being equal - meaning no price movement in the AAPL stock - the Feb. 210 call would have a value of about $7.70 at January expiration. Since it cost $5.95 to establish the position, the projected profit would be $1.75 ($7.70 - $5.95)

What If AAPL Moves Up?
What happens if you guessed right? Let's continue our projection - this time based on AAPL moving up towards the 210 strike price. The Delta (and Gamma) will help us calculate potential profits. Note the deltas above. To simplify our math, let's round off AAPL's current rate to $200.

Here's how we can approximate the value of the Feb. 210 option with each $1.00 increase in the AAPL stock. We'll base this on the projected $7.70 value at January expiration.

Stock Price Delta Gamma Option Value
$201 .35 .012 $8.05 ($7.70 + $.35)
$202 .362 .018 $8.41 ($8.05 + $.36)
$203 .38 .025 $8.79 ($8.41 + $.38)

As you can see, the rate of the Delta increases as AAPL moves up. Eventually, if/when AAPL arrives at $210 (the strike price) the Delta will be about .50. It will increase incrementally with each $1 increase towards that point - as the above chart indicates.

So, if AAPL closes (at Jan. expiration) at $203, the value of the Feb. $210 option will be about $8.80. Now, remembering that it cost $5.95 to enter the position, the profit would be about $2.85. That's a nice 48% return on the initial risk of $5.95.

In a perfect world (don't hold your breath), AAPL would close at $209.95 - just below $210. A guess at the value of the Feb. $210 put would be about $12.20 - a too-good-to-be-true profit of $6.25.

Lock In A Profit
Like most of our strategies, as expiration approaches, if you have an opportunity to close out the position and lock in a nice profit - take it! There's no point in risking that profit at the off chance the market will move in your favor the last few days. Remember, this is a numbers game. We have to stick with the probabilities. It's bad enough that we're guessing at a direction. Let's not compound it by further picking the direction with a nice profit at risk.

When To GTFO!
What if we're right, but AAPL moves up a little faster than anticipated? Here is where the Delta helps us determine when to GTFO. Once the Delta of the short January 210 option begins to go into the money and increase at a faster rate than the February 210 option, it's time to get out of Dodge. At that point, you will be starting to lose money - and that's not what we're here for.

Should that happen, don't worry. When you close out both the long and short option, you'll be sitting on a very nice profit. If you still believe that AAPL will continue up, you can re-establish another horizontal calendar at the $220 level and start the process all over again.

If AAPL reverses and moves down prior to January expiration, you have to have an exit point. Look at the chart for a support level. If it breaks that level, say goodbye. If you're no longer bullish on AAPL, there's no point in being there. You have $5.95 at risk. In your trading business, your money is your inventory. Don't piss it away being stubborn or on wishful thinking.

What If You're Bearish?
If you think AAPL has peaked and will gradually head down, you can use the same strategy on the down side. You might:

Buy 10 February $190 puts @ $9.50 (Delta: .34 - Theta: .011)
Sell 10 January $190 puts @ $4.55 (Delta: .29 - Theta: (.017)
Debit of $4.95

Do the math. The structure is the same. Be careful and be prepared. These trades are not quite as "hands off" as our Iron Condor and OTM credit spreads. It might need some TLC.

This is just one of the strategies we cover, in depth, at my 2-day seminar - and that's just the tip of the iceberg. Knowledge is power. Why trade without it?

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My Point Exactly!

An 86-year-old man went to his doctor for his quarterly check-up...

The doctor asked him how he was feeling, and the 86-year-old said, 'Things are great and I've never felt better.'

I now have a 20 year-old bride who is pregnant with my child.

"So what do you think about that Doc?"

The doctor considered his question for a minute and then began to tell a story.

"I have an older friend, much like you, who is an avid hunter and never misses a season."

One day he was setting off to go hunting.

In a bit of a hurry, he accidentally picked up his walking cane instead of his gun."

"As he neared a lake, he came across a very large male beaver sitting at the water's edge.

He realized he'd left his gun at home and so he couldn't shoot the magnificent creature.

Out of habit he raised his cane, aimed it at the animal as if it were his favorite hunting rifle and went 'bang, bang'."

"Miraculously, two shots rang out and the beaver fell over dead.

Now, what do you think of that?" asked the doctor.

The 86-year-old said, "Logic would strongly suggest that somebody else pumped a couple of rounds into that beaver."

The doctor replied , "My point exactly!!"

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NEW SEMINAR DATE - MARCH 15/16 - NEWARK, NEW JERSEY
Based on your input, I will be presenting a two-day advanced CPTI seminar in New Jersey (Newark) on Friday & Saturday, March 15th & 16th. Contact me (Contact Support) and get your spot reserved - and save $100! (See below for early bird special information). There are still spots left for Chicago (Jan 26 & 27)!!

Join us as we discuss non-directional strategies, trade selection, entry points, exit 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 usually sell out.

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CPTI JANUARY POSITIONS
CPTI January Position #1 - RUT Bull Put Spread - 771.76

On 12/4, with the RUT at 752, we sold 20 January RUT 620 puts and bought 20 January RUT 610 puts for a credit of $.60 ($1,200). Maintenance is $20,000. We may put on a bear call spread in the future - IF it makes sense.

CPTI January Position #2 - SPX Iron Condor - 1478.49
On 12/10, with the SPX fluctuating, we sold 20 January SPX 1340 puts and bought 20 January SPX 1330 puts for a credit of $.60 ($1,200). Then, we sold 20 January SPX 1630 calls and bought 20 January SPX 1640 calls for a credit of $.55 ($1,100). Net potential profit is $2,300. Maintenance is $20,000.

CPTI January Position #3 - SPX Bull Put Spread - 1478.49
On 12/13, with the SPX at 1472, we sold 20 January SPX 1330 puts and bought 20 January SPX 1320 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.

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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 - SPX Bull Put Spread - 1478.49
On 12/13, with the SPX at 1472, we sold 30 January SPX 1330 puts and bought 30 January SPX 1320 puts for a credit of $.70 ($2,100). Maintenance is $30,000. We may put on a bear call spread in the future - IF it makes sense.

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SEMINAR DATES -

CHICAGO, IL - JANUARY 26 & 27

NEWARK, NJ - MARCH 15 & 16 (NEW)

The Chicago seminar is filling up nicely. We filled the room twice before in Chicago. I've chosen a hotel convenient to the airport - eliminating the need to rent a car. You simply take the free airport shuttle to and from the hotel -- convenient and easy. The same is true for the newly announced Newark seminar.

Newark Early Bird Special

Take advantage of the early bird special for the New Jersey seminar and save $100. If you complete your reservation by January 31st, you will save $100. My seminar will then cost only $895 (instead of $995).

There are no more retake spots available for the Chicago seminar. If you want to be on the retake waiting list for Chicago, contact me as soon as possible (mparnos@optioninvestor.com).

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!

56 OUT OF 61 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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