Option Investor
Updates

MARKET KEEPS BOUNCING

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The market did its thing today - dramatic swings. The Dow was up a few hundred points, down a few hundred points. It's enough to make you seasick. But, can it make you money?

Let's continue on with our hypothetical example of the Bouncing Strangle we began on Sunday.

With the QQQQ at $32.30, we bought 3 December $31 calls and 3 December $34 puts for a debit of $7.47. Our maximum out of pocket risk is only $4.47 (x 3 = $1,341)

The plan is to wait for a roughly three point move in the QQQQs. Then we close out that in-the-money option and now have a cheap long option to ride when the market moves back in the other direction.

Today, the market cooperated. This morning, the QQQQs moved down to 28.90. The $34 put could have been sold for about $6.15. Subtract the $6.15 from our initial debit of $7.47 and you have $1.68 remaining. That $1.68 is the new net cost of the remaining $31 call.

The idea is to wait for the reversal and make a nice profit on the $31 call. We didn?t have to wait long for the reversal. The market took off towards the close and hit about $30.60 near 4 p.m. The December $31 call could have been sold for about $2.70.

So, when the smoke clears, there was a little over a dollar of profit in the deal. The risk was $4.47. The profit was $1.02. That was a 22.8% return in four days. Ain?t too shabby!

Some traders may prefer to wait for the market to go higher and watch the value of the $31 call increase. After all, we bought the December options. There's plenty of time. These volatility levels look like they're going to be with us for awhile. It's always nice to close the position early. The less exposure we have to the market, the better. Plus, in our example, if we closed it soon, we'd still be able to perhaps put on another similar position using December options.

The Market

The RUT keeps moving down in chunks. We have two RUT positions in our Couch Potato portfolio. Our closest position, the 390/380 bull put spread, still has about a 100 point cushion. We took in $.80. Based on Thursday's closing prices, if you're concerned, you might be able to close the position for $.60.

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NOVEMBER PORTFOLIO POSITIONS

CPTI NOVEMBER Position #1 - RUT Bull Put Spread - 489.92

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 - 489.92

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 - 489.92

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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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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