Option Investor


Printer friendly version

Hope you're enjoying your Labor Day weekend. It's all sunshine here in the Detroit area. Couldn't be better. Some folks are having barbeque. I offer some food for thought.

While researching material for my book, I've been going through my past articles. Considering I've been writing this column for well over six years, and two columns per week, that's about 650 columns.

In a column I originally wrote in 2003, I discussed a strategy that seemed like a good idea at the time. The market environment changed and we put the strategy away for a rest. Well, with the markets being as volatile as they have been recently, it may be appropriate to pull it off the shelf and see how it would work today.

OK. Gentlemen (and gentlewomen), start your engines and follow . Basically, we going to use short-term in-the-money strangles to establish long put and/or call positions at little or no cost preparing for an inevitable big move.

Let's use the QQQQs. Why? Because of the $1.00 strike price increments and high liquidity. Those factors offer greater flexibility in putting on new and smaller spreads that, in turn, result in larger profits (or smaller losses). Couch Potato students learn to be penny pinchers. If you want to piss away money, be a directional trader. Remember, J. Paul Getty died with a payphone in his house for his guests to use.

The QQQQs have, along with the rest of the market, have been fluctuating up and down for quite some time. Some traders believe it will go to the sky. Those same people are still holding paper Enron shares and hoping it will come back.

Other traders believe the QQQQs will retest the recent lows. In either case, it's not unreasonable to anticipate a substantial move. We're basing this strategy on the fact that there has seldom been a two month period when the QQQQs have not moved at least three points in one direction or the other. Our risk will be about $250-300 per month for a year. Don't worry. It's likely we'll make it back with a pocketful of profits attached.

The Position

It's August 30 and the QQQQs are trading at $46.12

1. Buy Oct. $45 calls @ $2.37

2. Buy Oct. $47 puts @ $2.04

Total out of pocket: $4.41

There is $2.00 of intrinsic value in this position. The actual risk is only $2.41.

How It Works

We're waiting for the QQQQs to move about three points. Lately, it often takes less than a month. Let's say that, in three weeks, the QQQQs hit $49. The $45 calls will be worth approximately $4.35 ($4.00 intrinsic value + $.35 time value). Time to liquidate the calls and put the $4.35 back in your pocket - for the moment.

Now, where do we stand?

We have the Oct. $47 put at a cost of $.06 ($4.41 - $4.35).

If the QQQQs moves back down to $44, in the next 30 days, the value of the $47 put will be about $3.20. We just made about $3.04 ($3.20 - $.06).

We had only $2.41 at risk. With a profit of $3.04, we have a $126% return. What if the QQQQs only came back down to where it was, at $46? The value of our $47 put would be about $1.20. Our profit would be $1.14 ($1.20 - $.06). That is a 47% return.

The only way you can get hurt is if the QQQQs don't make a decent size move in a seven week period - and that is not very likely, especially in the current market environment.

See the pattern? What we're trying to accomplish is to have long puts (or calls) at little or no cost. Whenever we liquidate a long position on one side, we are left with a long position on the opposite side with virtually no cost. As some of the long positions expire, there will be at least one or two still live awaiting the major reversal or the continued move.

The Next Step

This is optional. With the market bouncing around, we never know how far, or in what direction it will go. While the market is moving, you can put on another bouncing strangle. When the QQQQs are up at $49, you might put on another bouncing strangle, buying the November $50 put and the November $48 call. Having multiple strangles on at the same time can make it fun - offering profit opportunities at many different levels.

As long as the volatility lasts, strategy has an excellent chance of success - and with a very nice percentage return on risk. Instead of the QQQQs, you might be able to use some of the many ETFs that now have one dollar strikes. Do some research and make sure they move enough to make the strategy work.

This is complicated stuff, but requires only minimal monitoring - maybe once a day. You can put in GTC orders and go to the beach, the bar or watch a Twilight Zone marathon - including the commercials. Remember, though, that if you put in GTC orders, when the price is hit, the orders become market orders and you will not be able to negotiate between the bid and ask prices.

Now that you've been enlightened, you can get back to the football games and what's left of the pizza. Re-read the strategy again and look at the possibilities. You know that what goes up must come down. If you don't believe me, ask Isaac Newton, Lenny Fibonacci, and buy and hold investors, and those who don't take Viagara. They'll tell you.

strategy looks good, but make sure you understand it thoroughly before you trade. Make sure there's water in the pool before you dive in. Your risk is defined. The results will depend on how you trade the position. Remember, in trading, it's not the hands you're dealt. It's how you play them.

SFO Magazine

I was interviewed by John Sarkett for his article published in the September (current) issue of SFO (Stocks, Futures & Options) Magazine. As usual, I tell it like it is. Check it out.

Seminar Update

With a little over a month to go, there are still spots left for the upcoming Dallas seminar. Where else can you go to thoroughly learn these strategies? Different traders choose to perfect different strategies. The more strategies you have in your arsenal, the more you have from which to choose. Come join us. Reserve your spot today. Contact Support

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

CPTI SEPTEMBER Position #1 - RUT Bull Put Spread - 739.50

On 7/31, with the RUT at about 720, we sold 20 RUT September 610 puts and bought 20 RUT September 600 puts for a credit of $.55 ($1,100). Maintenance is $20,000. I'll look to put on a bear call spread in the future - IF it makes sense.

CPTI SEPTEMBER Position #2 - SPX Bull Put Spread - 1282.83

On 8/7, with the SPX at about 1275, we sold 20 SPX September 1120 puts and bought 20 SPX September 1110 puts for a credit of $.55 ($1,100). Maintenance is $20,000. I'll look to put on a bear call spread in the future - IF it makes sense.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

CPTI OCTOBER Position #1 - RUT Bull Put Spread - 739.50

On 8/18, with the RUT at about 732, we sold 20 RUT October 600 puts and bought 20 RUT October 590 puts for a credit of $.55 ($1,100). Maintenance is $20,000. I'll look to put on a bear call spread in the future - IF it makes sense.

CPTI OCTOBER Position #2 - SPX Bull Put Spread - 1282.83

On 8/25, with the SPX at about 1267, we sold 20 SPX October 1110 puts and bought 20 SPX October 1100 puts for a credit of $.60 ($1,200). Maintenance is $20,000. I'll look to put on a bear call spread in the future - IF it makes sense.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

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).


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.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

SHORT & SWEET - RUT - 739.50

On 8/1, we opened a new hypothetical "Short & Sweet" position, selling 4 December RUT 560 puts and selling 4 RUT 850 calls for a total credit of $11.60.

Traders with less experience, smaller trading accounts or those without customer portfolio margining, might want to buy 4 of the September 570 puts and 4 of the September 850 calls to give you two months (August & September) where the short positions are covered for about $1.10. Their net credit would then be $10.50.

Our objective is to do exactly what we did with the previous Short & Sweet Strangle. We want to let time decay and reducing implied volatility do their thing, so we can close the position and lock in some nice profits.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -


DALLAS, TEXAS - October 3, 4 & 5

ORLANDO, FLORIDA - December 6, 7 & 8


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.

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?

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

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.

Couch Potato Trader Updates Archives