Option Investor
Updates

THE TIME HAS COME, MY FRIENDS

HAVING TROUBLE PRINTING?
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I'm not looking forward to this. It's frustrating on many levels. We've given the market every opportunity to behave. But it's not happening. There's no point going into the reasons. There are plenty. There's not a lot of positive news on the horizon. There aren't many more rabbits to pull out of the government's hat.

About all that's left is for the Fed cut rates by 50 basis points to try and stem the tide. Even if they did cut, no pop in the market has been able to withstand the incessant selling. There's no reason to believe this one would. Plus, earnings season is upon us and nobody is expecting many positive surprises.

So, what are we going to do about our two positions? Prudent traders might have already GTFO. As you know, I'm a little more stubborn than most, but the time has come. And it ain't gonna be pretty. Don't panic. We're going to get through this - together. One step at a time.

As official Couch Potato portfolio recommendations, I want us to exit the October SPX 1110/1100 bull put spread on Monday's open. At this weekend's Dallas seminar, we calculated the cost of closing the spread at about $5.00. lf we get filled at that level, we'll be looking at taking a loss of $8,230 ($10,000 - $1,770).

Also, I want us to exit our October RUT 600/590 bull put spread. Again, Friday's closing prices suggested that we'd have a good chance at closing the position for $3.40. If we get filled at $3.40, our loss on the position would be $5,700 ($6,800 - $1,100).

That's a total loss of just under $13,930. Before you get too depressed, let's try and put it all into perspective. We're in the 11th month of our sixth year tracking our Couch Potato portfolio. This year has been particularly difficult, to put it mildly. On Nov. 23, 2007, the beginning of our tracking year, the benchmark S&P 500 opened at 1456.70. Friday, the S&P closed at 1099.23. That's a loss of 24.5%. That's huge - and it's anticipated that it will go lower.

As of September's expiration, our Couch Potato portfolio has recorded an accumulated profit of $15,585. Granted, it's usually more, but we've had a few tough months this year. But, all things considered, $15,585 ain't too shabby.

The point of all this is that, even if we have to absorb a $13,930 loss this month, we will still be a few dollars (about $1,600) to the positive for the year. We beat the hell out of the S&P in a year in which many people (not us) have lost fortunes, their houses, their pensions, and their sanity, I know the losses hurt, but we can be proud of what we have achieved.

Note

If the market futures are substantially lower prior to Monday's opening, you may have to adjust your debit limits higher. Some folks will choose to stand aside for the first half hour to let the smoke clear. Others will act.

The Contrarian Indicator - Me

In previous months, when we've suffered losses, there has been a strange phenomenon. Less than two hours after I sent out the suggestion to exit the trades, the market reverses dramatically. It seems like somewhere, the market gods are waiting for me to personally capitulate. He's thinking, "Parnos is finally bailing out, it's OK to go back up now."

In the past weeks, we've had huge reversals. But, they haven't lasted. I think this time around it might prove to be a very wise move to exit this month's positions.

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November Position Idea

For those of you who want to roll the dice in November, here is a trade for you to consider. The figures below are based on Friday's closing prices. If the market opens lower, you may be able to go out further and/or take in additional premium. You know my preference -- to have the extra 10 or 20 points of cushion than a little more premium.

With the RUT trading at 620, let's

Sell 20 RUT November 480 puts - RUWWC

Buy 20 RUT November 470 puts - RUWWM

Credit of about $.70 ($1,400)

Profit potential is $1,400. Maintenance is $20,000. It's a 139-point cushion from Friday?s RUT closing price of 619+, This is NOT an official Couch Potato portfolio position suggestion.

Market Chaos

With the market in turmoil, I'm not thrilled about the idea of putting on official Couch Potato positions for the November cycle. There is plenty of time. I'm a big gun-shy right now. The market will always be there. It might be a good idea to watch for awhile.

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OCTOBER PORTFOLIO POSITIONS

CPTI OCTOBER Position #1 - RUT Bull Put Spread - 619.40

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.

CPTI OCTOBER Position #2 - SPX Bull Put Spread - 1099.23

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.

CPTI OCTOBER Position #3 - SPX Bear Call Spread - 1099.23

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

ZERO PLUS POSITION ? COMING SOON

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 - 619.40

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. 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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