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A COUPLE OF STRANGLES

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Thanks for the emails regarding the Bouncing Strangle strategy - originally discussed last Sunday. Apparently, I've hit upon a strategy that appeals to many subscribers. Actually, it's one of the few strategies that we can use that does not require a ton of maintenance. So, those with smaller trading accounts can participate.

Friday was the perfect day for those who indulged in the Bouncing Strangle strategy. As I mentioned on Thursday, the futures foretold a down opening on Friday. I said, "let there be light, and there was light."

Combine Friday's lower morning trading with Thursday's down move, and the Bouncing Strangle trader was able to buy back the $47 put for $4.25 when the QQQQs hit $43. Actually, the QQQQs went further down (to $42.18).

Selling the October $47 put, left us with the $45 call at a cost of only $.16 - a nice position to be in. During the course of the trading day, the QQQQs traded all the way back up to $43.78. The $45 call was worth just under $1.00.

If profit takers chose to get out, even at $.95, the profit would have been $.79 ($.95 - $.16). A $.79 profit on a $2.41 risk is a 32.8% return on the risk - for only THREE TRADING DAYS!

Those who still own the $45 call are in a position to make a lot more - if the market continues its bounce. But, they should also recognize, that the profit that is still on the table is at risk. We've become a directional trader, but the most we can ever lose now is the remaining $.16.

Before you get too excited, recognize that this couldn't have worked out any better if I had written the script myself. Enjoy it when it happens. It's not usually this easy. Sometimes, you're the dog and sometimes you are the hydrant. Last week, break out the Alpo, we were the dog.

A Boston Strangle

With two weeks left to September expiration, I was looking around for an opportunity to use either the Boston Strangle or Siamese Condor. I found an interesting possibility on the SPX - a Boston Strangle. This is not an official Couch Potato position. Think of it as an early quickie idea. Keep in mind that, both the Boston Strangle and Siamese Condor strategies are for non-trending markets.

The SPX closed Friday at 1242.31

Sell 4 September SPX 1200 calls - SZQIT

Sell 4 September SPX 1280 puts - SZPUP

Credit of about $89.70 ($35,880)

Remember, we always have to give back the difference between the strikes (80 points x 400 = $32,000)

Potential Maximum Profit: $9.70 ($3,880)

With this position, we've created a maximum profit range of 1200 to 1280. Our breakeven points, at expiration, are 1190.30 and 1289.70. For those who are planning to hold the position to expiration, those parameters should also be considered your exit points.

However, with the VIX over 23 (23.06), a tamer week, along with rapid time decay, might provide us with an opportunity to exit the trade with an early profit. The less time we?re exposed to the market, the better off we are.

If you can close out the short options for $84.70, that would represent a profit of $2,000.

For those of you who do not have customer portfolio margining (CPM), and who want to participate in this exercise, you'll have to buy some long options to cover the two short option positions. Looking at the option chain, if you go 150 points out of the money, you could buy the 1130 put for about $1.15 and buy the 1350 call for about $.35 - a total of $1.50.

That reduces the maximum profit from $9.70 to $8.20 ($9.70 - $1.50) per contract and slightly reduces your breakeven points. It also requires maintenance of $15,000 per contract (150 points x 100). Total maintenance for a four contract position is $60,000. That's a pretty good reason to see if you qualify for the customer portfolio margining. Ask your broker. If they don't offer CPM, you have the wrong broker!


These strategies are fun and will work out quite often. But don't be greedy and make sure you know what you're going to do -- IF the trade goes bad. If you're still unsure about how you decide on your exit points and exit strategy, come join us in Dallas or Orlando. It could save you having to learn some expensive lessons.

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CPTI SEPTEMBER Position #1 - RUT Bull Put Spread - 718.85

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.

CPTI SEPTEMBER Position #2 - SPX Bull Put Spread - 1242.31

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.

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CPTI OCTOBER Position #1 - RUT Bull Put Spread - 718.85

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 - 1242.31

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.

CPTI OCTOBER Position #3 - SPX Bear Call Spread - 1242.31

On 9/2 with the SPX at about 1294, we sold 10 October 1415 calls and bought 10 SPX October 1425 calls for a credit of $.55 ($550). No additional maintenance is required since we already have the SPX October bull put spreads.

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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 - 718.85

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 - 718.85

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.

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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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