Option Investor


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Obviously, the passage of the handout (rescue) bill by the Senate didn?t impress anyone. The market tanked again and we're in a precarious spot. Our S&P 500 bull put spread is dangerously close to our short strike (about four points away). Our Russell 2000 bull put spread has a cushion of 37.67 points. Neither position, in this environment, is safe.

From the emails I received, it's about 50-50. Half of the readers have closed out the SPX and half are hanging on - for dear life. Count me among the gunslingers. We're looking for the handout plan to be passed by the House of Representatives tomorrow morning. Then, there's a fighting chance that the Fed might surprise us with a 50 basis point cut.

We have two weeks to expiration. It's going to be tense - and hopefully not too painful. The VIX at 45.26 is not making things any easier.

Position Closeout Math

With the SPX at 114.28 you can probably close out the October 1110/1100 bull put spread for about $4.80-$4.90. If you absolutely can't stand the heat, then I suggest you get out of the kitchen, take the hit and then decide on what you want to do next.

Don't want to wait? Want to get out of the RUT 600/590 bull put spread? It might cost $2.50 or less based on Thursday's prices. There's still a cushion, but that could disappear in a few hours - especially if the House rejects the handout bill.

You don't have to take action immediately. With the market in turmoil, it probably makes more sense to wait a bit in the hope that the market will perhaps find a bottom or at least settle down. Taking these losses is tough. We have a tendency to look at a loss as a personal failure. In fact, it's only a part of doing business and is only a temporary condition.

The money may be gone from our account, but the probabilities are that it will be back in our account in a few short months. That's why it's important to take a macro view and look at the results over a 12 or 24 month period. It's easy to say, but not so easy to do.

Even though the loss (cost of doing business) hurts, there is a huge emotional albatross that will be lifted from your shoulders. The position is gone. You don't have to worry about it any longer. You can take a period for grieving, but you will soon be able to focus on your next action.

Also, keep in mind that you don't have to make a move. Doing nothing, under certain circumstances, is also a strategy - and a good one. Unfortunately, many traders believe that you have to be in the market at all times. That is totally false. You have to be in the right mindset to make intelligent decisions. You don't want to trade just for the sake of trading.

My mind is consumed with what is going on in the market right now. I assume your minds are focused on the current situation as well. Have you noticed that I haven't put out any November positions yet? Actually, this is the perfect time. Volatility is ridiculously high and we should be able to find positions both far below and reasonably far above the market.

On the RUT, the November 500/490 looks pretty good right now. We might be able to take in $.70 on that bull put spread. It's a good area to start your research. The November RUT 770/780 bear call spread looks reasonable. You might be able to get another $.70-$80 for that spread.

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CPTI OCTOBER Position #1 - RUT Bull Put Spread - 637.67

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 - 1114.28

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 - 1128.28

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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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 September profits, our new cash total is $66,440 ($64,220 + $2,100).


We will be watching for an opportunity to put on a new position for our Zero Plus strategy.

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SHORT & SWEET - RUT - 637.67

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. Having no long options after September expiration, we are now uncovered.

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. However, with the huge spike in volatility, that scenario is not likely to happen. We may be stuck having to hold the position to expiration - unless the volatility disappears. It's not the end of the world. A lot of things can happen.

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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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