Where Directional Traders Come to be Cured

August 15, 2010 – Expiration Week Approaches

EXPIRATION WEEK APPROACHES

Happy Sunday, 

It was a relatively quiet Friday.  The market was essentially flat most of the day and then drifted a bit lower by the close.  The DOW was off 17 points. The S&P fell four points to 1079 and the NASDAQ lost 17 points. Our RUT was off 7.49 to 609.49.

Subscribers managed to get on our Quickie trades (see details below) relatively close to the suggested premiums.  The one that I’m most interested in watching is the Siamese Condor on the XEO.  If we can get a day or two of mild market activity, we have a good chance of locking in some short term profits. 

A few experienced subscribers just put on the XEO 490 short straddle without adding the long options.  The margin requirement is increased, but if one has Customer Portfolio Margining, it still doesn’t amount to that much.

Speaking of margin calculations.  When I toss out approximate maintenance requirements, they are just that – approximate.  If you would like to be closer, or a bit more exact, the CBOE has a margin calculator that is easy to use and may come in handy.  The link is: http://www.cboe.com/tradtool/mCalc/default.aspx.

The trading platform of your broker will also likely have a “margin calculator.”  If you can’t locate it, give them a call.  While you have them on the phone, you should also ask them if their maintenance requirements coincide with the CBOE.

For example, a one contract short straddle of the August  XEO 490 strikes would require about $11,160.   Two contracts would be just double that – $22,320.  Putting on the long protective calls, and completing the Siamese Condor, would significantly reduce the maintenance.  The distance between the long and short strikes is 40 points.  Therefore, each contract would have a $4,000 maintenance requirement.  Two contracts would require $8,000 – a lot less than the $22,320.

Since you would be keeping a close eye on this position either way, the amount of maintenance is not significant – because you will GTFO before it becomes an issue.   But, there are those who like to calculate their ROR – Return on Risk.

If we are able to buy back the uncovered short straddle in a few days and lock in $4 ($400 per contract), the ROR is about 3.7% ($400 / $10,760).  The same $400 profit on the Siamese Condor would be over 11% (400 / $3,600).

Just as a reminder, the GTFO trigger points for the Siamese Condor are $477.60 on the put side and $512.40 on the call side.  That is calculated by taking the short strike price (490) and adding the $12.40 credit on the call side and subtracting the same $12.40 credit for the put side.

It’s important that this trade be monitored.  If you’re not available to monitor the trade, it would be wise to put out contingent orders to close the trade.  Ask your broker how to do that,  Each broker has different software capabilities. 

Also, if you’re not going to be around, figure out how much profit you are looking for in this trade.  If you want to lock in $4, put out an order to buy back the short straddle portion of the Siamese Condor for $8.40.  The long options will not likely have much, if any value.  If one of the long options does have some value, closing it may or may not over the commission costs.  You’ll have to make that major decision when the time comes.

Good luck this week and be careful.  Pay attention and be.  If we get a big move in either direction, perhaps one of our “strategically” placed Quickie butterflies may become profitable

Another Trade Idea

I saw another TV trade that might be interesting.  It’s a bearish trade on the FXI, the China ETF. It’s one of our SRS Ratio 1×2 put spreads. The FXI is trading at $40.05. 

Buy one September $38 put and sell two September $36 puts for a debit of about a nickel.  That is in anticipation of the FXI moving down and give you the opportunity to participate for very little. 

You would have to be willing to be put 100 FXI shares at $36.  However, the trade only becomes a loser after FXI reaches $34.  That means, the FXI would have to come down over 15% in the next month, which is not likely.

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CORE POROLIO POSITIONS
Core Portfolio August Position #1 – RUT Batman Iron Condor – 609.49
On 7/9, with the RUT at about 620, we sold 10 August RUT 500 puts, bought 11 August RUT 490 puts and sold 1 August RUT 470 put.  Net credit is $500.  We also sold 10 August RUT 700 calls, bought 11 August RUT 710 calls and sold one August RUT 730 call for a net credit of $515.  Total net credit and profit potential is $1,015.  Maintenance is $10,000. Maximum profit range is 500 to 700.  On 7/27, closed 700/710 bear call spread for debit of $1.80.  We closed the single 710/730 bull call spread for $1.80 ($180).
 
Core Portfolio August Position #2 – SPX Bull Put Spread – 1079.25
On 7/28, with the SPX at about 1109, we sold 10 August SPX 1015 puts and bought 10 August SPX 1005 puts for a net credit of $.65 ($650).  Maintenance is $10,000.
 
Core Portfolio September Position #1 – SPX Batman Condor – 1079.25
On 8/5, with the SPX at about 1122, we sold 10 SPX Sept 995 puts, bought 11 SPX Sept. 985 puts and sold 1 Sept. SPX 970 put for a credit of $585. We also sold 10 SPX Sept. 1225 calls, bought 11 SPX 1235 calls and sold 1 Sept. SPX 1250 call for a net credit of $510.  Total net credit of $1,095.  Maintenance is $10,000. Max profit range is 995 to 1225.
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EDUCATIONAL POSITION PORTFOLIO
This portfolio highlights trades using alternative strategies – beyond our standard Iron Condor and basic credit spreads.  
  
Educational Portfolio #1 – QCOM SRS October Position – 37.95
On Monday, 3/15, with QCOM at 38.95, we sold 10 Oct. QCOM 33 puts, bought 10 Oct. QCOM 39, and sold 10 Oct. QCOM 44 calls for a debit of $.50 ($500).
 
Educational Portfolio #2 – RIMM Ratio SRS Strategy – 53.40
With RIMM at $59.11, we bought 5 December RIMM $57.50 calls and sold 5 December RIMM $67.50 calls for a cost of $4.40.  To pay for this bull call spread we sold 10 December $42.50 puts for a credit of $4.10 ($2.05 x 2). Net debit for the entire position is $.30 = $150.
 
Educational Portfolio #3 – C Covered Call – 3.88
On 6/30, bought 1,000 shares of Citigroup at $3.81 and sold 10 January 2011 $4 calls bringing in $.53 ($530).  Long term conservative play.
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AUGUST QUICKIE TRADES

August Quickie #1 – RUT Butterflies.  With the RUT at 609.25, let’s:

For traders with a downside bias, we bought 10 RUT August 580 puts, sold 20 RUT August 570 puts, and bought 10 RUT August 560 puts for a net debit of about $.48 ($480).

For traders with an upside bias, we bought 10 RUT August 650 calls, sold 20 RUT August 660 calls, and bought 10 RUT August 670 calls for a debit of about $.50 ($500).

August Quickie #2 – XEO Siamese Condor ­ 490.25

This trade is for those who may not be expecting a big move in either direction.

We sold 2 August XEO 490 puts and sold 2 August XEO 490 calls for a credit of about $13.10.  Then we bought 2 August 450 puts and buy 2 August 530 calls for a debit of about $.70.  The net credit is $12.40 ($13.10 – $.70) or a potential $2,480 for two contracts ($1,240 x 2).

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RECENTLY CLOSED EXPERIMENTAL POSITIONS
Educational Portfolio – AAPL Beat The Bank
On 5/24, with Apple at about 240, we sold 50 January 2011 120 puts and bought 50 January 2011 110 puts for a credit of $.70.  This is a hands-off position that will generate a return of about $3,500 on a $50,000 investment.  Closed on 8/3 for $.14, locking in a $.56 profit.  PROFIT: $.56 ($2,800)
 
Educational Portfolio #3 – BP SRS July Position
On 5/17, with BP we sold two BP July 40 puts.  We then bought 1 BP July 45 call and sold 1 BP July 49 call – all for a credit of .01 ($10).  We now own 200 shares of BP with a cost basis of $40.  On 8/3, sold 200 shares at $40. RESULT:  Break even.
 
Educational Portfolio – SPX Short & Sweet Weekly
On 7/23 we sold one SPX July (7/29) weekly 1050 put and bought one SPX July (7/29) weekly 1025 for a net credit of $1.90.  We also placed an order to close the position for a debit of $.40.  We’ll let time decay do the work for us.  On 7/26, closed spread for $.35.  PROFIT: $1.55 ($150 per contract).
 
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ONGOING LONG-TERM PORTFOLIO
This portfolio highlights long-term positions that we monitor for conservative traders. 
 
A few years ago, I outlined a Zero-Plus 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’ve been 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 this month’s profit of $2,040, our new cash total is $79,105 ($77,065 + $2,040).
 
ZERO PLUS POSITION - RUT September Batman Condor – 609.49
On 8/10, with the RUT at about 645.75, we sold 20 Sept. RUT 530 puts, bought 22 Sept. 520 puts and sold 2 Sept. RUT 500 puts for a net credit of $930.  Then we sold 20 Sept. RUT 720 calls, bought 22 Sept. RUT 730 calls and sold 2 Sept. RUT 750 calls for a credit of $1,145.  Total net credit of $2,075.  Max profit range is 530 to 720.  Maintenance is $20,000.

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Renewal Process
The renewal process is pretty simple.  We’ve done quite well this past year.   More than likely, you will want to continue to receive our thoughts, insights, ideas and trade suggestions.  We had a successful 2009 and are doing well in 2010.
When your renewal date is hit, your subscription will automatically be renewed based on the information you provided when you originally subscribed.  The rate has not changed.  It’s still less than half the profit of a single trade.  You will continue to receive all the subscriber benefits for the same low bargain price ($495) as last year.  Thanks to all of you who make this job a labor of love.
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OPTION PROFITS: The Naked Truth
My book “Option Profits: The Naked Truth” are now available at Traders Press and Amazon.com.  The link to Traders Press to order the book is:

http://www.traderspress.com/detail.php?PKey=628
 
View the table of contents, a preface and actual reviews of the book (I’ll give you a hint: – they like it – a lot).  Check it out.
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Disclaimer   
Opinions and information in this newsletter are provided for educational purposes only.  No statement in the newsletter should be construed as a recommendation to buy or sell a security or to provide investment advice. It is possible at this or some subsequent time, the editors or staff of Mike Parnos’ Options Newsletter may own, buy or sell securities discussed.  All investors should consult a qualified professional before trading in any security. Stock and option trading involves risk and are not suitable for all investors. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy and completeness.