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THE MASTER'S HEDGE

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Friday was a pleasant surprise. The market moved up a bit on some positive economic data. On lower volume, it wasn't a particularly impressive upside move. Most thought the market would follow through with Thursday?s huge down day. It didn't happen on Friday. That doesn't mean it won't happen next week, but at least we got to enjoy the weekend and little more.

While we're waiting for life to happen, let's look at another hands-off strategy that might provide a method of getting a healthy return on excess cash. We'll call this strategy The Master?s Hedge.

First, we find a stock that has been beaten down and that has high implied volatility. There are a number of them out there. For our example, we'll use FNM (Federal National Mortgage Association). Friday's closing price is $11.55.

Buy 1,000 shares of FNM at $11.55 ($11,550)
Sell Jan. 09 $12.50 call for $4.60 ($4,600)
Buy Jan. 09 $7.50 put for $2.95 ($2,950)
Sell Jan. 09 $5 put for $1.70 ($1,700)

Now, what have we accomplished?

a) When we bought the stock and sold the January call, we essentially established a covered call position. But, as we all should know by now, a covered call has the same risk as a naked put - which is not appropriate for most traders. Contrary to popular belief, covered calls, by themselves, are foolish and will, more often than not, result in losing money.

b) Then, we buy the January $7.50 put, thereby protecting the downside and creating a collar-type situation. The problem is that the January $7.50 put is pretty expensive. How can we reduce the cost of this protection while maintaining a large portion of the protection offered by the $7.50 put?

c) To reduce the cost of protection, let's sell the January 09 $5 put and bring in $1.70. That reduces the cost of our protection to $1.25 ($2.95 - $1.70). However, by selling the $5 put, we?ve capped our protection at $5. But, the 52-week low, is $6.68. FNM would have to violate the 52-week low by $1.68 before we would be in trouble.

What is our risk?
Let?s determine the risk before we look at the potential profits. Our initial investment was $11.55 per share. We took in $4.60 of premium. If we hadn?t purchased the $7.50/5.00 bear put spread, our break-even point would have been $6.95 ($11.55 - $4.60).

When we buy the $7.50/$5.00 bear put spread for $1.25, we are protecting ourselves from $7.50 down to $5. However, we are using $1.25 of our $4.60 premium for the purchase. That opens up a window of risk. Here?s how we calculate it.

Cost of stock: $11.55
Remaining Premium: $ 3.35 ($4.60 - $1.25)
Protected To: $ 8.20

Protected again at: $ 7.50 (from Bear Put spread)
Risk is: $ .70

Then, of course, we?re exposed below $5 down to zero.

The Good Stuff
Now that we have defined the downside, let's see where our profit will come from. First, exactly how much of our money is at risk in this strategy - taking into consideration all the positions? $5.70. See where that comes from? The $.70 between $8.20 and $7.50, plus the $5 below the sold $5 put.

The best case scenario is if FNM closes above $12.50. Then, the profit would come from two places: a) the $3.35 of premium taken in, and b) the $.95 in the appreciation of the stock from $11.55 to $12.50. That's a total of $4.30.

There are a few different ways to calculate the return. If you calculate it on the basis of return on "risk," you divide the $5.70 that's at risk into the $4.30 profit. The result is 75.4%.

If you figure it on the basis on return on out-of-pocket "investment," you simply divide the remaining investment of $8.20 into the $4.30. The result is 52.4%.

You can do the math on other possible outcomes. If FNM closes right where it started, at $11.55 (with no stock appreciation), the return would be $8.20 into $3.35 for a 40.8% return.

Be prepared for this position to be volatile. If it wasn't going to be volatile, we wouldn't be getting such a high premium for an at-the-money call. But, it's another basically hands-off trading strategy that can produce some nice returns.

The above example is based on Friday's closing prices. The numbers will be different on Monday morning. You can construct a similar position using other stocks and figure out the potential returns. Good luck and be careful.

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ZERO-PLUS STRATEGY UPDATE
On Friday, I put out an order to sell 30 September 1080/1070 bull put spreads for $.70. It was filled when the SPX dipped to 1251. That's $2,100 of premium. It's going to be a long wait, but I'm in no hurry. Maintenance is $30,000.

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NEW SEMINAR DATES ANNOUNCED!

After another sold out Las Vegas seminar, I've put together two new seminar dates along with Early Bird Special dates.

OCTOBER 4 & 5 - DALLAS, TEXAS

DECEMBER 6 & 7 - ORLANDO, FLORIDA

You will save $100 if you complete your reservation for the DALLAS seminar by August 17th. Your two days of education and enlightenment will cost only $895.00.

You will save $100 if you complete your reservation (including payment) for the ORLANDO seminar by October 1st, your two days of education and enlightenment will cost only $895.00.

If you can, plan to stay a third day. Mike Cavanaugh, my esteemed broker, will be giving a comprehensive presentation on the Monday following each of the two seminars. You are invited to attend - at NO CHARGE. Don't miss it.

Contact me as soon as possible. Send me your phone number (Contact Support) and I?ll personally call you to reserve your spot and to answer any questions you may have. Both locations are great vacation destinations. The earlier you get your airline tickets, the cheaper they?ll be.

RETAKES
Seminar grads who want to schedule their free retakes should contact me immediately (mparnos@optioninvestor). There are only five retakes per seminar and are first come first served. They go quickly. He who hesitates stays home.

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CPTI AUGUST POSITION

CPTI July Position #1 - SPX Bull Put Spread - 1257.76

On 6/19, with the SPX at about 1342, we sold 20 SPX August 1170 puts and bought 20 SPX August 1160 puts for a credit of $.65 ($1,300). Maintenance is $20,000. I'll look to put on a bear call spread in the future - IF it makes sense.

CPTI AUGUST Position #2 - RUT Bull Put Spread - 710.34

On 5/23, with the RUT at about 735, we sold 20 RUT July 620 puts and bought 20 RUT July 610 puts for a credit of $.65 ($1,300). 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 $64,220 ($62,110 $2,100).

SEPTEMBER ZERO PLUS POSITION

On Friday 7/25, I put out an order to sell 30 September 1080/1070 bull put spreads for $.70. It was filled when the SPX dipped to 1251. That?s $2,100 of premium. It's going to be a long wait, but I'm in no hurry.

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SHORT & SWEET - RUT - 710.34

On 5/18, we opened a new hypothetical "Short & Sweet" position, selling 4 December RUT 530 puts and selling 4 RUT 930 calls for a total credit of $10.30. We bought 4 of the July 550 puts and 4 of the July 890 calls to give us two months (June & July) of protection for $.60. Our net credit, thus far, is $9.70. Currently we have no long positions.

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SEMINAR DATES -

DALLAS, TEXAS - October 3, 4 & 5

ORLANDO, FLORIDA - December 6, 7 & 8


62 OUT OF 68 PROFITABLE MONTHS!!
WANT TO ACHIEVE SUCCESS WITHOUT STRESS?
OF COURSE YOU DO!!
LEARN OUR CPTI WEALTH-BUILDING TECHNIQUES!

I?ve negotiated excellent low room rates for both seminars. 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) in Dallas and Orlando 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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