Option Investor
Updates

DEAD CAT BOUNCE? OR IS THERE LIFE?

HAVING TROUBLE PRINTING?
Printer friendly version

A DEAD-CAT BOUNCE? OR IS THERE LIFE?

We got our bounce. It took a while. Thought it might not come at all. But, towards the end of the day, we saw a glimpse of what a reversal bounce can be like. Actually, it was exciting. Love to watch those big green candles appear, one on top of the other. You begin to feel like it could go to the sky.

Then, that bleeping reality sets in. The sellers, who are still out there, took advantage of the spike up to unload shares. The averages pulled back a bit - except for our RUT, which held its gains pretty well.

It looked like the market reverse was going to take place in the morning. The DOW, which had bottomed at 7882, came all the way back positive to 8687 - over 800 points. Impressive, right? You bet. It wasn't in the cards, though. The market wasn't ready.

Another contributing factor was George W. With his credibility at an all time low, Bush decided to go on the air to reassure the nation that everything was going to be alright. Bad idea. Someone needs to put a muzzle on that man. He opened his mouth and everything turned to shit. Wasn't the first time and probably won't be the last. Doesn't he realize the affect he has on things, and people? He still thinks he's in charge of something.

A decline of 400 points later, the market struggled to regain its footing until about 3 p.m. when it started its next attempt at the reversal. This time it took and the move began.

I don't want to get your expectations up. However, if the reversal is the real thing, it's been estimated we could pop over 200 points on the S&P and another 100 on the RUT. That would be sweet, but don't hold your breath. As I write this (9 p.m. on Sunday evening), the S&P futures are up over 30 points. Makes you think that, just maybe. . .

One thing I would definitely warn against. Avoid selling call spreads (or uncovered calls). If the markets do go crazy to the upside (possible, but unlikely), you would be in big trouble all over again. You don't need more grief.

A New Couch Potato Position. Do We Dare?

Even though you may be staring at a potential substantial loss for October, if you have managed your account well, you still have trading capital. Some of you are in no frame of mind to trade in this chaotic environment. Others will want to take advantage of this incredible market spike down and the accompanying volatility.

I'm going to suggest our first Couch Potato portfolio November position. Why? It's what I get paid to do. So, here goes. You make the decision on whether to participate.

With the RUT at 522.48 (based on Friday's closing prices), let's:

Sell 20 November RUT 360 puts - RURWL

Buy 20 November RUT 350 puts - RURWJ

Credit of about $.80 ($1,600)

The net credit and profit potential is $.80 ($1,600). From current levels, the cushion is about 162 points and the maintenance requirement is $20,000. Based on the -10 delta, the mathematical probability that the RUT will settle above 360 is 90%.

There's a distinct possibility that the market will open up tomorrow morning. It should be exciting, to say the least. The numbers will be totally different. You can use your discretion and perhaps up the strikes a bit. Be creative.

Remember to double check your option symbols before placing your trade. Also, adjust the number of contracts to your risk tolerance. If you are gun-shy because of the current market conditions, you may want to trade only 10, or even less. Just be careful.

I plan to use this position for our ongoing strategy Zero Plus position. I will likely be trading 30 contracts for the new position.

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

New Toaster

I bought a new toaster today and they gave me a bank as a free gift.

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

OCTOBER PORTFOLIO POSITIONS

CPTI OCTOBER Position #1 - RUT Bull Put Spread - 522.48

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 - 899.22

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 - 899.22

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.

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

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.

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

SHORT & SWEET - RUT - 522.48

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.

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


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