Option Investor


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On Monday we took our first January portfolio position – the RUT January 290/280. I put the order out at $.70 and got filled at $.75 as the market turned down only moments after the suggestion was sent out.

I received notice of the fill and the market was continuing down – way down. I took advantage of the further move down to throw out an order for our Zero Plus Strategy. I put out an order for 30 contracts of the 280/270 and was filled at $.80. As the market continued down, I probably could have sold the 270/260 bull put spread, but one never knows.

I think both the portfolio position and the Zero Plus position have an excellent chance of being profitable. For what it’s worth, from looking at the delta of the 290 put, there is a 97% mathematical probability of profitability. The January 280 put has a 98% chance. It doesn’t get much better than that. But, in this market, nothing is for certain. Anything can happen.

Those looking to put on a January bear call spread might focus on the 570/580 and 580/590 areas. The prognosis is that we’re going to be in this recession for quite some time – certainly beyond January. The only issue is that the Deltas of the 570 call is 16 and the Delta of the 580 call is 15 – giving those short positions an 84% and 85% probability of success respectively. That’s a little chancy for my tastes, but I know there are aggressive traders out there that might find one of those positions appealing.

The market has been bouncing around in big chunks. We can live with that, as long as it doesn’t go too far without changing direction. Our positions have decent cushions at this point, but, as usual, we’ll be keeping a close eye on them all.

Bouncing Strangle
Some folks put on the Bouncing Strangle position I tossed out for consideration in the Sunday newsletter. We almost got a gift the very first day (Monday) as the QQQQs tanked, along with the rest of the market. It came to less than a dollar from our three point target (on the down side). As it is, the market rebounded and at 27.81.we’re about $1.70 from our signal. We’ll be patient.

In the meantime, the volatility has picked back up and the value of the options has increased – which is a good thing in this case.

An Oldie But A Goodie
Two old salesmen are pushing their carts around Wal-Mart when they collide. The first old guy says to the second guy, "Sorry about that. I'm looking for my wife, and I guess I wasn't paying attention to where I was going." The second old guy says, "That's OK, It's a coincidence. I'm looking for my wife, too. I can't find her and I'm getting a little desperate." The first old guy says, "Well, maybe I can help you find her. What does she look like?" The second old guy says, "Well, she is 27 yrs old, tall, with blonde hair, blue eyes, long legs, big busted, and is wearing short shorts. What does your wife look like?” to which the first old guy says, "Doesn't matter, let’s look for yours."

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S&P 500 Support & Resistance - Closed at 845.22
889 is an interim 2002 peak
899 is the early October closing low
The 50 day EMA at 953
965 is the 2003 consolidation low
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.

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 – 439.53
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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CPTI JANUARY Position #1 - RUT Bull Put Spread – 439.53
On 12/1, with the RUT at about 455, we sold 20 RUT January 290 puts and bought 20 RUT December 280 puts for a credit of $.75 ($1,500). 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 – RUT Bull Put Spread – 439.53

On Monday, 12/1, we sold 30 January 280/270 RUT bull put spreads for a credit of $.80 ($2,400). We will look for a possible bear call spread to complete the Iron Condor if an attractive situation presents itself.

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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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