Option Investor


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Last week was impressive, but don’t get to excited. To see if the move up was the real thing, the market will have to have a follow through session. The market has had five up days in a row and could use a pause. A two or three session rest would do just fine.

We’ve been pretty quiet lately. If the market does come down, I’ll be looking to put on additional Couch Potato portfolio positions. Our lone December position, the 330/320 RUT bull put spread, is in pretty good shape for now. Things change quickly, so I won’t be taking anything for granted.

Bouncing Strangle Idea
Based on the emails I’ve received, the Bouncing Strangle strategy has become quite popular – especially in these volatile times. The VIX has come down a bit over the last week, but there’s still plenty of volatility left. The Bouncing Strangle looks for a decent size move in either direction and then a move in the opposite direction.

One nice feature of the Bouncing Strangle is that it is a debit strategy and can be easily used by traders who do not have a large account.

As a quick review of the strategy, we are buying slightly ITM (in-the-money) puts and calls. Then, when the QQQQs move about three points, we will sell the deep ITM option. In many cases, the ITM option will cover most, or all, of the cost of the position.

This leaves us with a long option at little, or no cost. We will wait for the QQQQs to bounce back in the opposite direction and be able to profit from this option. If, for some reason, the QQQQs don’t bounce back, then very little, or nothing, has been lost.

In this strategy, we don’t want to hold the position to expiration. We will look for an opportunity to close the position early and lock in some profits.

With the QQQQs at 29.12, let’s:
Buy 10 January QQQQ 30 puts - QAVMD
Buy 10 January QQQQ 28 calls - QAVAB
Debit of about $5.54 ($5,540)

This is not an official Couch Potato portfolio trade. I will, however, follow the progress of this trade in the newsletter. There is an intrinsic value of $2 in the position. So, the actual risk is only $3.54. Adjust the number of contracts to your risk tolerance and/or account size.

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S&P 500 Support & Resistance: Closed at 896.24 Resistance:
899 is the early October closing low
965 is the 2003 consolidation low
The 50 day EMA at 967
995 from June 2003 consolidation peak
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.
1075 from August 2004.
The 90 day SMA at 1105
1106 is the late September low
1133.50 is the mid-September 2008 low
1200 is the July 2008 intraday low
1244 is an August 2005 peak

889 is an interim 2002 peak
The 18 day EMA at 876
866 is the second October 2008 low
The 10 day EMA at 862
853 is the July 2002 low
848 is the October 2008 closing low
839 is the early October 2008 low
818 is the November 2008 low
800 is the March 2003 post bottom low
768 is the 2002 bear market low
741 is the November 2008 low
650 on the top and 625 on the bottom of a 7 month range in 1996 475 from 1994 where the market moved laterally for the entire year.

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CPTI DECEMBER Position #1 - RUT Bull Put Spread – 473.14
On 11/6, with the RUT at about 510, we sold 20 RUT December 330 puts and bought 20 RUT December 320 puts for a credit of $.55 ($1,100). Maintenance is $20,000.

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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 November profits, our new cash total is $68,840 ($66,440 + $2,400).

ZERO PLUS POSITION – New Position To Be Announced Soon

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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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