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THE BOSTON STRANGLE - PART I

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THE BOSTON STRANGLE - PART I

It's been awhile since we talked about a strategy. I have called today's strategy "The Boston Strangle." For a long time, I thought that it might be a bit aggressive for many CPTI traders. However, since meeting hundreds of CPTI students at my seminars over the past few years, I now believe CPTI seminar grads, and other sophisticated Couch Potato students, are up to the challenge. We shall see.

I wrote about this strategy before, calling it Short Guts. However, I figure The Boston Strangle is a better name - with a little extra flare. Over the past two years, it has become a very popular strategy. Many seminar grads trade The Boston Strangle regularly with good results. The article below is a reprint. The strikes and prices are not current, but the strategy is valid and is one that can be consistently profitable for you - IF you?re up to it.

The Boston Strangle has a few similarities to our Siamese Condor. But if you have what it takes - available maintenance dollars, trading approval level, and self-discipline - this can be a nicely profitable strategy with a limited risk -- and it will fit comfortably into your trading arsenal. Our discussion of "The Boston Strangle" will be broken up into two columns (today & Thursday).

As is our preference, The Boston Strangle is a non-directional strategy that is best used in a non-trending market. Some of you will be able to use this strategy, but others may not. It requires "uncovered" trading approval level. However, if you encounter that problem, we may have a solution. Read on.

Introducing "The Boston Strangle"
At this writing, XEO is trading at about 570 (569.47) and about four weeks to go until July expiration. The XEO is the OEX S&P 100 index for dyslexic traders. Seriously, though, the XEO is the European style option for the OEX. Why do we use the XEO? We'll discuss it later. Keep reading.

Index Strike P/C Bid Ask
XEO 560 Call 15.30 16.30
XEO 565 Call 11.60 12.60
XEO 570 Call 8.40 9.10

XEO 570 Put 7.00 7.70
XEO 575 Put 9.10 9.80
XEO 580 Put 11.60 12.60

We're basically going to sell in-the-money calls and a similar number of in-the-money puts for the front month. For our example, we'll use a 10-contract position. We'll also include a negotiation between the bid/ask spread in our figures.

The Position
Sell 10 XEO July 560 calls @ $15.60 ($15.30 .30) = $15,600
Sell 10 XEO July 580 puts @ $11.90 ($11.60 .30) = $11,900
Total net premium taken in: $27,500

Well, don't get too excited. It's a bit of an illusion. Our pockets may be flush with cash, but it's a temporary condition. We don't get to keep most of it, although our potential profit is $7,500 -- which has a nice cash register ring to it.

Profit Range
We calculate the maximum potential profit by subtracting our 560 (short call) from our 580 (short put) = $20.00. If the market cooperates, and the XEO closes anywhere between 560 and 580, we get to keep the entire $7,500. Note that, regardless of where the XEO finishes, we're going to have to give back $20. It felt good when it was in our pocket though, didn't it? Actually, while the money was in our account it was earning interest.

We have essentially established a profit range of 552.50 (560 - 7.50) to 587.50 (580 7.50). That's a 35-point range. If the XEO finishes anywhere within that range, we will make SOME profit. As we discussed above, the MAXIMUM profit of $7.50 ($7,500) occurs if the XEO closes between 560 and 580.

If the XEO closes beyond the maximum profit range (560 to 580) in either direction, our profit is reduced (penny for penny) by the amount the XEO is outside the max profit range.

What If . . .
To get a clearer understanding of The Boston Strangle, let's create a few "what if" scenarios. What if . . .

a) XEO is at 572.20 at expiration?
The 560 call is worth $12.20 and our 580 put is worth $7.80. The total of the two ($20.00) will be deducted from our account and our profit is the entire $7.50 ($27,500 - $20,000).

b) XEO is at 558.80 at expiration?
The 560 call will expire worthless, but the 580 put has a value of $21.20. This $21.20 ($2,120) will be deducted from our account on Monday. But, we took in $27,500 -- so, our profit is $5,380 ($27,500 - $20,000 - $2,120).

When To GTFO
One of the major benefits of The Boston Strangle strategy is the fact that, if the trade moves against us, the amount at risk is substantially less than our regular Iron Condor. Plus, the exit points are more easily defined. The exit parameters are the same as the profit range -- 587.50 on the upside and 552.50 on the downside. If you have the appropriate self-discipline and get out at these levels, you will limit our loss to a very manageable amount.

Many traders currently using The Boston Strangle have no intention of holding the strategy through expiration. They're not being greedy. They are looking for an opportunity to close out the trade early and lock in a nice profit.

Remember Our Friend "Delta"
The "delta" is working for us. Remember, the further an option is ITM (in-the-money), the less time value there is in the option. So, when XEO reaches the 587.50 exit point, we will have to give back the entire $27.50 of intrinsic value. But, being so deep in the money, there should only be less than $1.50 of time value in addition to the intrinsic value. It's only the time value that's at risk. Plus, the later the move happens in the option cycle, the less time value we'll have to deal with.

Why the XEO?
As an extra measure of caution, we chose the XEO because it's a European style cash settled option. There is no concern about early exercise. Early exercise of the OEX is rare, but the difference in premiums between the XEO and OEX is not that dramatic. The word "exercise" seems to scare traders (and I'm not talking about jogging). It's better to be safe than sorry.

Maintenance
The reason that some traders will not be able to use this strategy is that both the put and the call are "uncovered." As a result, your broker will want to hold a lot of maintenance because, technically, the risk is unlimited. I know that we all have the self-discipline to exit our trade when the exit points are reached, but the brokers aren't that gullible. The maintenance on "The Boston Strangle" strategy is calculated as follows. The maintenance requirement may vary from broker to broker.

25% of the underlying index (XEO): 570 x 25% = $14,250/contract
Plus, call premium received: $15.60 x 100 = $1,560
Plus, put premium received: $11.90 x 100 = $1,190
Total margin (per contract) is: $16,970 per contract. $169,700 for 10 contracts.

On the other hand, traders who are with brokers that offer the customer portfolio margining method of calculating maintenance will not be faced with a maintenance problem - as long as they don't abuse it.

On Thursday
In our next column, we?ll discuss possible ways to get around the "uncovered" aspect to "The Boston Strangle." We'll also describe "safer" versions of the strategy and we'll calculate the return, show the similarities to our Siamese Condor and explore more reasons why this is an appealing strategy.

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CPTI MAY POSITIONS

CPTI May Position #1 - SPX Bull Put Spread - 1397.84

On 3/31, with the SPX at about 1316, we sold 20 SPX May 1130 puts and bought 20 SPX May 1120 puts for a credit of $.55 ($1,100). Maintenance is $20,000. We will look to put on a bear call spread in the future ? IF it makes sense.

CPTI May Position #2 - RUT Bull Put Spread - 721.88

On 4/11, with the RUT at about 700, we sold 20 RUT May 600 puts and bought 20 RUT May 590 puts for a credit of $.55 ($1,100). 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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CPTI JUNE POSITIONS

CPTI June Position #1 - SPX Bull Put Spread - 1397.84

On 4/18, with the SPX at about 1392, we sold 20 SPX June 1235 puts and bought 20 SPX June 1225 puts for a credit of $.70 ($1,400). Maintenance is $20,000. We will look to put on a bear call spread in the future ? IF it makes sense.

CPTI JUNE Position #2 - RUT Bull Put Spread - 721.88

On 4/22, with the RUT at about 709, we sold 20 RUT June 590 puts and bought 20 RUT June 580 puts for a credit of $.55 ($1,100). 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 March profits, our new cash total is $60,460 ($58,660 $1,800).

ZERO PLUS POSITION - SPX - Bull Put Spread - 1397.84

On 3/31, with the SPX at 1316, we sold 30 SPX May 1130 puts and bought 30 SPX May 1120 puts for a credit of $.55 ($1,650). Maintenance is $30,000. We have plenty of time to find a bear call spread. Let?s hope the market cooperates.

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SEMINAR DATES -

WASHINGTON D.C. - Aug. 9th & 10th

LAS VEGAS - June 21st & 22nd

60 OUT OF 65 PROFITABLE MONTHS!!
WANT TO ACHIEVE SUCCESS WITHOUT STRESS?
OF COURSE YOU DO!!
LEARN OUR CPTI WEALTH-BUILDING TECHNIQUES!

I will be presenting our two-day advanced CPTI seminars in Las Vegas on June 21st & 22nd (Saturday & Sunday) and in Washington D.C. on August 9th & 10th (Saturday & Sunday). Come on down! As of today, only six spots remain for the Las Vegas seminar.

I've also negotiated an unbelievably low room rate for the weekend. Vegas is great for a getaway as well as for attending a seminar. Check your calendar and contact me as soon as possible. Send me your phone number at - Contact Support. I will personally call you to go over the details and to answer any questions you may have.

Also attending (and speaking) at the Las Vegas seminar will be Mike Cavanaugh, my personal broker and option strategist extraordinaire. Actually, he knows this stuff better than I do. I guarantee you?ll be impressed.

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!

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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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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