Options 101, Sunday, 04/20/2003
Special Delivery From The Easter Bunny - A Basket of MONEY!!!
by Buzz Lynn
HAVING TROUBLE PRINTING?
How do we account for an incredibly profitable month for the CPTI? Hell! It's becoming S.O.P. Perhaps we're just damn good. Perhaps we're just damn lucky. Who cares? We've got money to count - lots of it.
We began tracking our CPTI portfolio in the November, 2002 option cycle. Through March we had accumulated $16,010 in profits. That's an average of about $3,200 per month for five months on a trading account of about $50,000.
This option cycle (April) we're proud to add a whopping $6,100 to our stack of dead presidents. It doesn't get much better than that. The new total is $22,110 (for six months). Ever notice how dead presidents always seem to function better than live presidents?
April CPTI Portfolio Results
Position #1 - OEX Iron Condor - closed Thursday at $453.71.
We created an Iron Condor with a 70-point range of 420 to 490 for April. The objective was for the OEX, at April expiration, to finish anywhere within the spread - and that's exactly what it did (bless its little heart). The total credit for the Iron Condor position is $2.35. Profit: $2,350.
Position #2 - BRCM Short Straddle - Closed at $16.60.
This month we sold 10 contracts of BRCM April $15 calls and sold 10 contracts of BRCM April $15 puts for a total credit of $2.60. Our safety range is from $12.40 to $17.60.
BRCM is schizophrenic. Personally, I didn't care for any of its personalities. It was like being married again. We were on a roller-coaster ride most of the month. A week ago Monday, we were presented with an opportunity. The market spiked up. BRCM traded as high as $13.90. To buy back the $15 put would have cost $1.60. When BRCM moved down to $13.80, we bought back the $15 put for $1.65. We had taken in $2.60. Our profit is $950.
Position #3 - MMM Iron Condor - Closed at $129.98.
We created an Iron Condor with a 15-point range $115 to $130 for April. We were able to take in $1,550 for our 10-contract position. The objective was for the underlying, to finish anywhere within the spread. The market has gone up too far and much to fast. Did calmer heads prevail and return MMM, to a more reasonable level? Did Fibonacci come through for us?
Sometimes it's better to be lucky than good. Well, I can't complain. It looked like we were going to get a spanking (and not the fun kind) on our MMM Iron Condor position. Then, Wednesday morning, the skies opened up, the sun shined and a very nice fellow at J.P. Morgan came to our rescue by downgrading MMM. The market reacted and sliced $5 off the price. Since stocks have a tendency to rebound the day after a big move, I closed the MMM bear call spread by buying back the $130 short call for $.45. We took in $1,550 when we initiated the position. It cost $450 to close the position. Our profit was a very hefty and very fortunate $1,100.
Position #4 -- QQQ ITM Strangle - $26.82.
This is a long-term position we created four months ago. We own the January 2005 $21 LEAPS calls and the January 2005 $29 LEAPS puts. We sold 10 contracts of the QQQ April $28 the QQQ April $22. Our cost basis for the position was $5.30. We closed this four-month position with a $400 profit.
Position #5 - OIH - Diagonal Calendar Spread - $55.63.
We felt there was a great deal of uncertainty built into the price of a barrel of oil. When, and if, the war is resolved, the price of oil would work its way down. We bought 10 contracts of the July OIH $55 puts and sold 10 contracts of the March OIH $50 put at a debit of $3.85. According to plan, the March $50 expired worthless. Our cost basis was now $3.15.
On Thursday morning, OIH traded down to $53.15. It was just too tempting. We had bought back the April $50 put for $.05 and today closed out the rest of our position by selling the OIH July $55 put for $4.50. The amount taken in was $4.45. From selling near term options over the last three months, our cost basis had been reduced to $3.15. Our profit was a delicious $1,300.
New CPTI Portfolio Positions for May
New Position #1 -- SMH Baby Condor.
SMH is the Semiconductor Holder Trust. It's basically an index of semiconductor stocks. It seems that semiconductor stocks have moved up a little too far and too fast. My crystal balls are telling me: a) people who live in glass houses shouldn't expose their crystal balls, and b) semiconductor stocks could very well pull back for awhile. With SMH trading at $26.43 lets:
Sell 10 contracts of SMH May $25 puts for $.70
Buy 10 contracts of SMH May $22.50 puts for $.25
Sell 10 contracts of SMH May $27.50 calls for $.80
Buy 10 contracts of SMH May $30 calls for $.20
Total credit of $1.05
Our maximum profit range is $25 to $27.50. Our safety range is $23.95 to $28.55. We're only exposed for the 2 1/2 point difference between the strikes ($25/$22.50 or $27.50/$30) less what we've taken in ($1.05) = $1.45. Our potential return on risk is 72.4%. Maximum potential profit is $1,050.
New Position #2 - BRCM Short Strangle
I guess I'm just a glutton for punishment. BRCM took us for quite a ride last month. It ended up profitable, but wasn't without a little concern. BRCM had a monster day on Thursday due to earnings and upgrades. With BRCM trading at $16.62 lets:
Sell 10 contracts of BRCM May $15.00 puts for $.50
Sell 10 contracts of BRCM May $17.50 calls for $.75
Total credit of $1.25
Our maximum profit range is $15 to $17.50. Our safety range is $13.75 to $18.75. Both of the sold options are naked, so it's imperative that you be attentive to the position. It's a nice wide range, but there is still significant risk. Maximum potential profit is $1,250.
New Position #3 - SPX Iron Condor
The S&P 500 closed at 893.58. Since I believe the market is a little ahead of itself, we're going to put our money where our mouth is. Lets:
Sell 5 contracts of May SPX 825 puts for $3.60
Buy 5 contracts of May SPX 800 puts for $2.10
Sell 5 contracts of May SPX 950 calls for $2.35
Buy 5 contracts of May SPX 975 calls for $.90
Total credit of $2.95
Our maximum profit range is 825 to 950. Our profit range is 822.05 to 952.95. This is a huge range and the market would have to really go nuts to violate this range. But our exposure is substantial - 25 points less the $2.95 we took in = $22.05. That's why we're only doing five contracts. 500 X $22.05 = $11,025. Our maximum potential profit is $1,475.
In entering the position, my calculations include stealing an extra $.20 out of the posted spread for the 950/975 call spread.
New Position #4 - MSFT Menage-A-Qua.
Microsoft just came out with respectable earnings and unenthusiastic guidance. There's no reason to believe it's going anywhere for awhile. So let's have some fun and try an experiment. With MSFT at $25.50
Sell 10 contracts of MSFT May $25 calls for $1.15
Buy 10 contracts of MSFT May $27.50 calls for $.25
Sell 10 contracts of MSFT May $25 puts for $.65
Buy 10 contracts of MSFT May $22.50 puts for $.20
Total credit of $1.35
Our maximum profit occurs if MSFT closes right at $25. Our profit range is from $23.65 to $26.35. Our risk is only $1.15 with the potential to make $1.35. Maximum potential profit is $1,350.
Are You A Believer?
Like good Easter Bunnies, we're going to be trying to reproduce (profits, etc.) this month. And since April showers bring May flowers, it's possible we'll have to deflower May along the way. We're on a roll and there's no end in sight (but we're keeping our eyes open for a shapely one). Some months will be better than others, but I don't recommend you bet against the CPTI. It's something you can believe in.
Are you a new Couch Potato Trading Institute student? Do you have questions about our plays or our strategies? Feel free to email me your questions. An excellent source for new students is the OptionInvestor archives where we've been discussing strategies and answering questions since last July. To find past CPTI articles, look under "Education" and then click "Traders Corner." They're waiting for you 24/7.
Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them.