Option Investor


Printer friendly version

Happy Sunday! I’m in good spirits. There’s a possibility that the market may have bottomed. What do I base this on? I believe I saw a double bottom. It wasn’t on a chart. It belonged to a waitress at Hooters here in Orlando. Actually, there were more than one. It must be an omen.

I spent the last two days with a very bright group of people at my Orlando seminar. We had fun and learned a lot. We thoroughly went over a variety of non-directional strategies. I could tell that the lights were on. It’s great to see. These folks are now prepared to explore the myriad of possibilities with a huge arsenal of strategies at their disposal.

Tomorrow (Monday), the attendees will be treated to a presentation by my broker, Mike Cavanaugh. He will impart substantial wisdom from his many years of trading experience. By the time he's done, they will know why he's been my broker for the last five years.

We went over many positions and we uncovered what might be a diamond in the rough – an Iron Condor on the SPX that has a damn good chance of being profitable – even in this chaotic trading environment.

These prices are based on Friday’s closing prices. Remember that Monday’s open may look very different. There’s news breaking all the time and the market typically overreacts to every bit of it. So, if the futures are out of whack before the open, you might consider adjusting the strike prices up or down a little.

Here’s a good starting point for what is our second January CPT portfolio. Notice that I’m not trading the full 20 contracts that we typically use for these positions. We’ll reduce our exposure by 25% and trade only 15 contracts per spread. The way the market has been the past few months is hardly a confidence builder. At this point, the less exposure we have, the safer we are.

If you’re not comfortable trading this market, stay out! Having NO positions is a position. The market will still be there when you’re ready. We strive to make informed decisions in our trading. Don’t be the Plaxico Burress of options.

New CPT Portfolio Position
With the S&P 500 at 876.07, let’s:
Sell 15 January SPX 680 puts – SYGMP
Buy 15 January SPX 670 puts – SYGMN
Credit of about $.80 ($1,200)

Sell 15 January SPX 1070 calls – SPQAN
Buy 15 January SPX 1080 calls – SPQAP
Credit of about $.70 ($1,050)

Net credit and profit potential is $1.50 ($2,250). Our maximum profit range is 390 points – from 680 to 1070. The maintenance is $15,000. Our out of pocket risk is $12,750 ($15,000 - $2,250). If the trade works out, we will have made a return of 17.6% for a six week play.

The above trade is a suggestion. The credit limit for the two spreads is reasonable. I encourage you to keep an open mind. If the futures aren’t looking ridiculous in one direction or the other, you might ask for an extra nickel or dime here and there. Stranger things have happened. Every extra dime represents another $150. Those dimes really add up.

The decision whether to put on the spreads separately or together is a personal one. Placing the trade as a single order is a no muss/no fuss way to take care of it. To try and generate a little extra premium, some traders like to wait for a move down before placing the bull put spread – and then wait for a bounce up to put on the bear call spread. There’s a risk involved in placing the spread trades separately. What if the bounce never comes? Different strokes for different folks.

Make sure you double-check your option symbols before placing your orders and don’t get too greedy. Also, make sure to adjust your number of contracts to your account size and/or your risk tolerance.

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


CPTI DECEMBER Position #1 - RUT Bull Put Spread – 461.09
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.

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


CPTI JANUARY Position #1 - RUT Bull Put Spread – 461.09
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.

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

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 – 461.09
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.

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

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