Option Investor

It's Profit Time Again

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It’s option expiration eve and we find ourselves in a pretty good position. It’s not often we have a 140 point cushion the night before settlement. It appears like we’ll be recording out 66th profitable month out of 73 tracking months. Hooray for the good guys (us!).

If you’re using a progressive broker, the $20,000 being held for our 20-contract RUT position should be available for you to use Friday. An interesting trade may turn up, or you may need those funds for something else. It’s better to have the $20,000 available to you than resting with a Neanderthal brokerage firm for three days.

We only put on one December position. Why? Because, honestly, I was still recovering emotionally from the difficult October cycle. It takes a while to absorb a financial and, more importantly, an emotional hit. It takes time. You have to take a few deep breaths and look to the future rather than dwelling on the past. You have to put things into perspective. I’m not saying to disregard what happened. However, we have to recognize that the strategies are sound. It’s the implementation (both mine and yours) that may leave something to be desired at times.

In the months to come, we’ll become more and more confident – enough to work our way back to generating the consistent cash flows that we are accustomed to. In the meantime, we have to be cautious.

One of the big problems of dealing with a difficult month is not only in the actual trading of the options. The problem started much earlier when the trades were established. For many traders, it’s the number of contracts traders use.

I devote an entire chapter in my soon to be published book about the problems of greed and compounding – that is, dramatically increasing the number of contracts after an extended successful run of profitable trades. If you’re relatively consistent with the number of contracts you use, your risk is limited.

If you followed our trades for a period of years, you may have made almost $200,000. A $30,000 loss, although painful, is only a 15% hit. However, if you were trading 50, 75 or 100 contracts, both the dollar and percentages becomes significant. Remember, it’s tough enough to swallow a little frog. It will be real tough to swallow the big ones.

I often say, this is a business. You never want to risk so much that a loss can put you out of business. Your money is your inventory. Without inventory, you’ll find yourself making 49-cent Tacos to pay the mortgage.

Quickies Looking Good
It’s been a volatile cycle, to say the least. However, those daring traders with the itchy mouse fingers might have made out pretty well on the December Quickie trades. A week ago, I put out two short term Iron Condor ideas and it looks like we have a pretty good chance of success.

Our RUT Iron Condor consists of the 390/380 bull put spread and the 500/510 bear call spread. We took in $3,000 of premium for a 20-contract position. The RUT closed Thursday at 479.17. Barring a huge opening settlement number, it looks like that $3,000 will stay where it belongs – in our pockets.

Our SPX Iron condor consists of the 790/780 bull put spread and the 950/960 bear call spread. We also took in $3,000 on this 20-contract position. The S&P (SPX) closed at 885.28 on Thursday, which is close to the middle of our maximum profit range. That spells – P-R-O-F-I-T.

It’s nice to have positions start to work in our favor again.

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For two years a man was having an affair with an Italian woman.

One night, she confided in him that she was pregnant. Not wanting to ruin his reputation or his marriage, he paid her a large sum of money if she would go to Italy to secretly have the child. If she stayed in Italy to raise the child, he would also provide child support until the child turned 18.

She agreed, but asked how he would know when the baby was born.

To keep it discrete, he told her to simply mail him a postcard, and write "Spaghetti" on the back. He would then arrange for the child support payments to begin.

One day, about NINE months later, he came home to his confused wife.

“Honey!” she said, "you received a very strange post card today."

"Oh, just give it to me and I'll explain it later,” he said. The wife obeyed and watched as her husband read the card, turned white, and fainted.

On the card was written: “Spaghetti, Spaghetti, Spaghetti, Spaghetti, Spaghetti Three with meatballs, two without. SEND EXTRA SAUCE!!!!!!”

(Thanks to Couch Potato reader Hank for this joke)

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CPTI DECEMBER Position #1 - RUT Bull Put Spread – 479.17
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 – 479.17
On 12/1, with the RUT at about 455, we sold 20 RUT January 290 puts and bought 20 RUT January 280 puts for a credit of $.75 ($1,500). Maintenance is $20,000.

CPTI JANUARY Position #2 - SPX Iron Condor – 885.28
On 12/8, with the SPX at about 877, we sold 15 RUT January 680 puts and bought 15 SPX January 670 puts for a credit of $.80 ($1,600). Then, when the market moved up, we sold 15 January SPX 1090 calls and bought 15 January SPX 1100 calls for a credit of $.70 ($1,050). The total net credit is $1.50 ($2,250). Maintenance is $15,000.

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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 – 479.17

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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