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BOSTON STRANGLE - PART II

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BOSTON STRANGLE - PART II

After the Fed cut the interest rate by 25 basis points, the market didn't seem to care - which is good. I know that sometimes the market takes a day or two to react to the Fed announcements. But, I got the feeling that there weren't going to be any wild swings this time around. Well, based on today's big move up, I may have to re-evaluate the position I put on Wednesday. At the very least, I'll have to pay close attention.

That said, on Wednesday afternoon, I took the opportunity to put on one of our short straddle trades on the SPX at 1390. I took in about 43 points of premium. Those who follow this strategy know I have created a profit zone (at expiration) of 1347 to 1433. The closer the SPX settles to 1390, the more money we make.

Those who follow this strategy also know that I really have no intention of holding this trade through expiration. My best laid plan is to hold the trade for less than a week and then buy back the two short 1390 options and lock in a reasonable profit.

I'll follow this trade in the newsletter. Keep in mind, though, that this is not an official CPTI portfolio trade. Eventually, we may make these hypothetical non-directional premium selling strategy trades part of the primary portfolio, but not yet. Why? Because, if I put it out as an official position, readers who aren't ready to trade these types of strategies will jump in. Many traders aren't ready to swim in the deep end of the pool.

The folks who are comfortable with the strategy know who they are - CPTI seminar graduates and experienced traders. They will experiment with the short straddles, and long term naked puts, etc. Originally, the CPTI was established for ?hands off? style of trading and the CPT portfolio should be kept pure.

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Back To The Boston Strangle
Last Sunday (4/27) I outlined a strategy called The Boston Strangle The strategy has some very appealing components ? particularly the small amount of time value at risk.

Today's column isn't going to mean much to you if you haven't read Sunday's introduction to the Boston Strangle strategy. Basically, the "Boston Strangle" strategy is selling ITM (in-the-money) uncovered puts and calls on the XEO (European style OEX) options. Go back and read Sunday's column. I'll wait here.

OK, now that you're back, let's move ahead. In Sunday's column, we calculated that it would take about $16,700 of maintenance per contract for the uncovered example position. How can we get around that obstacle?

Gettin' Around The Maintenance & Uncovered Obstacles
Wow! $16,900 maintenance per contract is a chunk of money. And the "uncovered" approval level issue is also rather limiting. So, here's the plan. We turn the damn thing into an Iron Condor. We simply need to cover our two short positions. We buy the July XEO 600 call (@ $.30) and buy the July XEO 540 put (@ $.80). We have now covered our short options. The brokers will like that a lot better.

We will now have created 40-point credit spreads (calls 560/600 and puts 580/540). The result is that our broker will only require $4,000 per contract (IF you have the right broker). All we have sacrificed is the $1.10 ($110 per contract) we paid for the long options. That reduces our maximum potential profit to $6.40 ($6,400) and slightly reduces our profit range.

The Return
After buying the long puts and calls, if things go as planned and the XEO finishes in our maximum profit range of 560 to 580, we will keep the full $6,400 on an exposure of $40,000 -- or on an actual risk of $33,600. That's a return on risk of 19%.

What's The Appeal?
Compared to some of our other strategies, 19% is pretty exciting. The beauty of selling the puts so far in the money is if/when the trade goes bad, the exit points are clearly defined and the risk (if you GTFO when you're supposed to) is relatively small.

The Premium Is Working For You
It may not seem like a lot, but . . . OK, here's how it works with the premium. As you've probably noticed, in our Boston Strangle sample position, we have taken in $27,500 in premium. Remember that we have to give back $20,000 when the position is resolved - at expiration, or before. But, while that money is in our account, it's earning the money market interest. It's not a lot, but it should pay for a few Ponderosa salad bars.

The money being held as maintenance on the Boston Strangle will NOT be earning very much interest. But, the money will only be tied up for a short period of time. It would be wise to check with your broker as the policies vary.

This is an excellent strategy for those who have large accounts holding CDs, Treasury Bills, Zero Coupon Bonds, mutual funds, etc. Those assets can then provide the maintenance on your Boston Strangle position and still be working for you. You?d be wise to keep a little cash handy to cover the time value in closing out the position if it reached one of our exit parameters. Also, customer portfolio margining (if you qualify), will give you additional flexibility in establishing and managing your portfolio.

Can It Be Safer
Yes, the Boston Strangle strategy can be even safer. But, remember, when you opt for the extra measure of safety, you will likely have to make a compromise somewhere along the line. In this instance, it means you will be reducing your profit potential.

Instead of selling the 560 calls and 580 puts, you could sell the 550 calls and 590 puts. That would create a 40 point maximum profit range - which is very comfortable, especially on the XEO. However, adding up the short call and short put might total only about $44.00. Remember that we would be giving back the $40 - leaving a profit potential of only $4.00 ($400 per contract).

With the XEO (and OEX) trading in $5.00 strike price increments, you can find something that matches your comfort level. If you have a directional bias (which is dangerous), you can construct a position leaning a bit in one direction or the other.

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CPTI MAY POSITIONS

CPTI May Position #1 ? SPX Bull Put Spread ? 1409.34

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 ? 729.75

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 - 1409.34

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 - 729.75

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 - 1409.34

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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