Option Investor
Updates

FRESH START FOR YEAR #7

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We had a difficult October, no doubt about it. We have two choices. We can dwell on it, or we can put it behind us and concentrate on making the next 12 months profitable.

To keep it all in perspective, in spite of our unfortunate October, we have made well over $150,000 since we started tracking the portfolio. If you take a macro view, we've been doing well. If you take a micro view, a word to the wise - stay away from sharp objects. If you're a glutton for punishment, the details of our October trades are below.

We're survivors here. We're going to get back on the profit train and ride it off into the sunset. I urge you come along. I'm going to focus and work diligently on positive projects - to make Couch Potatoes a nice income and to complete my book.

One of the important lessons to be learned from last month is controlling the number of contracts per position - and the percentage of your account that is at risk at any one time. Just because I typically use 20 contracts for a position, it doesn't mean you should. Those who kept their positions reasonable still have a tradable account and have the opportunity to get back on the horse and master this beast we call a market.

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A BOUNCING STRANGLE OPPORTUNITY?

There's a ton of volatility in the market. Too much, actually. The other day, the VIX hit 81.17 before retreating down to close at 70.33 on Friday. It's been predicted that the volatility will continue. If so, that means we may revisit 81 again. How can we put this volatility to good use?

The Bouncing Strangle, that has been well received and profitable for some Couch Potatoes in the last few weeks, is a possible strategy. The market's dramatic swings are perfect. Maintaining the volatility is the big question mark.

Let's look at a hypothetical Bouncing Strangle, based on Friday's closing prices. With the QQQQ at 32.30:

Buy 3 December QQQQ 31 calls @ 3.65

Buy 3 December QQQQ 34 puts @ 3.82

Debit of about $7.47. ($2,241)

Remember, from our earlier educational article, that only $4.47 is at risk. There is $3 of intrinsic value in the position (the difference between the 31 & 34 strikes).

Our objective is to take advantage of the next major swing (typically about three points) to make enough money on one of the options to almost cover the cost ($7.47) of the entire Bouncing Strangle. Then, when the opposite swing takes place, we are riding a long option that has cost us little or no money. We are playing with the house's money at that point.

We're using December options to give us two months for all this good stuff to happen. Ideally, we'd be in a normal market environment, with much lower volatility (thereby less time value at risk). But, here we are - and we work with what we have for this example.

Some of these swings take place during a single trading day. If you're going to trade the Bouncing Strangle, it's wise to be available to make the trade adjustment. What if you can't babysit the trade? Another alternative is that, once you put on the initial position, you place an OCO (One Cancels the Other) order to sell the 31 call or the 34 put at about 7.25.

There are just a few negatives to using contingent orders to manage your positions. First, to achieve your sell point, the market has to move a little further in that particular direction because it will be filled at the market price. You won't have the advantage of negotiating between the bid/ask spreads.

Also, if the market is moving hard in a single direction, you may not want to cut your profit possibilities on the first leg off at a 3-point QQQQ move at 7.25. You may want to hold on to that first leg (keeping a close trailing stop), giving yourself the possibility of more profits. You can really only do it effectively if you are watching the market.

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TRACKING CPTI PORTFOLIO RESULTS
Welcome to our tracking of CPTI portfolio's year number six! We've just completed the twelfth month (October) of CPTI tracking year number six. We had a very difficult month to close out this sixth year. Our loss for the twelfth month of our sixth year was $37,150. In our sixth tracking year, we posted a loss of $21,665 (37,150 - $15,585).

RECAP OF OCTOBER POSITIONS
SPX Bull Put Spread - Loss: $18,900
RUT Bull Put Spread - Loss: $18,800

SPX Bear Call Spread - Profit: $550
OCTOBER LOSS: $37,150

September Settlement Numbers
S&P 500: $SET - 922.71
Russell 2000: $RLS - 517.79
S&P 100: OEX - 448.99
MID 400: $MIV - 541.98

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SUMMARY OF OCTOBER POSITIONS

CPTI OCTOBER Position #1 - RUT Bull Put Spread - 526.55

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). Loss: $18,900.

CPTI OCTOBER Position #2 - SPX Bull Put Spread - 940.55

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). Loss: $18,800.

CPTI OCTOBER Position #3 - SPX Bear Call Spread - 940.55

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). Profit: $550.

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NOVEMBER PORTFOLIO POSITIONS

CPTI NOVEMBER Position #1 - RUT Bull Put Spread - 526.43

On 10/15, with the RUT at about 436, we sold 20 RUT November 390 puts and bought 20 RUT November 380 puts for a credit of $.80 ($1,600). Maintenance is $20,000.

NOVEMBER PORTFOLIO POSITIONS

CPTI NOVEMBER Position #2 - RUT Bull Put Spread - 526.43

On 10/16, with the RUT at about 480, we sold 20 RUT November 360 puts and bought 20 RUT November 350 puts for a credit of $.80 ($1,600). Maintenance is $20,000.

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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 - RUT Bull Put Spread - 526.43

On 10/16. we sold 30 of the November 360 bull put spreads and bought 30 of the November RUT 350 spreads for a credit of $.80 ($2,400).

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SHORT & SWEET - RUT - 526.43

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.

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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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