Option Investor
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A STRATEGY REMEMBERED

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I was going through some old cassettes and CDs and stumbled across something you might find interesting. Remember Wade Cook? Many of you do. He's the one who is largely responsible for most of us being involved in option trading.

Back in the early-to-mid 1990s, Wade introduced us to the world of options. Options had existed since the late 1970s, but weren't commonly used by traders - simply because many would-be traders weren't exposed to the "get-rich-quick" possibilities. In the early days, options were used primarily for hedging purposes.

He began by publishing a series of books, the first one being the "Wall Street Money Machine." Then, he inundated the country with cassette tapes promoting his cab driver methods of taking small meter drop profits. He appeared all over the country, giving three-hour free introductory seminars, and enticing attendees into attending $2,000 - $3,000 two-day seminars. People came to his seminars in droves, looking for that ever elusive Holy Grail.

It continued to grow as he kept selling, upselling, and upselling some more - more books, more seminars, software, beepers, Internet website subscriptions, etc. Wade was the first using these promotional methods. Today the options and trading world is awash in similar companies - Teach Me To Trade, Optionetics, Wizetrade, Spread Trading to Win, Better Trades, Investools, Star Trader, to name a few.

Wade, though, was one of a kind -- one of the most incredible promoters I've ever seen. I'm talking about Wade in the past tense, not because he's dead (I don't think he is), but because he was introduced to the world of bankruptcy and the possibility of prison. His downfall was misrepresentation and being too aggressive and getting caught.

Wade, if not in prison, is surely hustling something or somebody somewhere. He left behind a legion of option traders - if they have any money left after paying ridiculous amounts for education. He did have a few good trading ideas, but many of his strategies were fine in theory, but not so fine in the real world. Let's look at Wade's long term covered call strategy.

Regular column readers know I'm not a fan of covered calls. They're dangerous - with the same risk graph of selling naked puts. If a covered call is turned into a collar, then risk is controlled to a degree. So, keeping that in mind, let's look at what Wade called LOCC (Large Option Covered Calls).

The Large Option Covered Call
The "Large Option Covered Call" strategy is best used with highly volatile stocks, but still stocks that are leaders in their respective industries. Back when Wade was doing his hocus pocus, there was a lot more volatility thus plenty of candidates.

For our example, we'll use First Solar (FSLR). It is currently trading at about $220 with an implied volatility of over 90. The first step is to buy 100 shares of the stock. Remember, we buy in increments of 100 shares because one option contract is the equivalent of 100 shares. That will cost $22,000.

We're going to implement the same basic covered call strategy. We will sell someone the right to buy our stock at a specific price (strike price) on or before a specific date (option expiration). For this, we will receive a premium.

In typical (and dangerous) covered calls, one sells covered calls each month to hopefully generate a monthly return. This time around, instead of looking to sell the option one month away, let's to go out about five months. Because we're using a very volatile stock, the option premiums are larger. If six month options are available on a stock of your choosing, the premium would be even more enticing.

The June $230 calls (at this writing) are selling for about $42.50. That's about 19.2% of the value of the stock - a hefty premium.

When you buy the stock for $220, according to the rules, you have three business days before the money leaves your brokerage account. Remember, when you sell an option, the money is credited to your account the very next day. When you sell the FSLR June $230 call, you will receive $4,250.00. You will be using this option premium to pay for part of the stock purchase.

Purchase of 100 shares of FSLR @ $220: $22,000

Proceeds of 1 contract of $230 June calls @ $42.50 - 4,250

Amount deducted from your account: $17,750

Your out of pocket investment is $17,850. You received $4,250.00 for selling the FSLR November $230 call. Your return is now 23.8% for five months ($4,250 divided by $17,850).

If FSLR finishes above $230 (which is a distinct possibility), your 100 shares will be called away at $230. The stock has appreciated by $10 and you now have an additional gain of $1,000.

Add the $1,000 to the $4,250.00 and you have taken in $5,250. Your adjusted return is now about 30%. Not bad for five months. That's an annualized return of over 43.5%.

We're not done. It gets better. If you purchase the 100 shares on margin, your out of pocket will be calculated as follows:

100 Shares of FSLRS @ $220 (at 50% margin): $ 11,000
Less premium received for June call: $ 4,250
Initial out of pocket: $ 6,750

Even after you pay a little margin interest on the borrowed $11,000.00, you're return is over 60% - and that's not considering the potential added return if FSLR finishes above $220 by June expiration.

Should FSLR decline, the $42.50 premium you receive protects you all the way down to $177.50.

If that's still a little too aggressive you can take a bit of the premium and buy some out-of-the-money puts. If it goes below $177.50, you're SOL and you better GTFO before you get seriously hurt.

This "Large Option Covered Call" is a conservative strategy to take advantage of the market's volatility and, at the same time, have decent downside protection, and a little potential upside.

Read this strategy over again until you understand it. It's something to consider - especially when we have the occasional violent downward moves and the VIX spikes - as it did last August. It's certainly not for everyone. However, if you absolutely MUST own stocks . . .

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Only Two Weeks To Chicago - Spots Still Available

Join Us in New Jersey, March 15th & 16th

I will be presenting a two-day advanced CPTI seminar in New Jersey (Newark) on Saturday & Sunday, March 15th & 16th. Contact me (Contact Support) to reserve your spot - and save $100! (See below for early bird special information).

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 - 704.65

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 - 1401.02
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 - 1401.02
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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CPTI FEBRUARY POSITION

CPTI February Position #1 - SPX Bull Put Spread - 1401.02
On 12/31, with the SPX at 1472, we sold 20 February SPX 1300 puts and bought 20 February SPX 1290 puts for a credit of $.60 ($1,200). Maintenance is $20,000. We will look to 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 - 1401.02

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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