TESTIMONIALS . . .
Mike – There is not a day that goes by that we do not think of you and are thankful for the introduction to this world of non directional trading. I urge all traders to take your course and then begin to think and trade for themselves – and use the creative license you allowed us to receive. – Ron
Mike – You should be very proud of your performance, and I just wanted to thank you for teaching me your strategies. – Lee
Mike – I fully value and appreciate your candor, strategies and insight. You simplify what others try to complicate. I have gleaned a wealth (full pun intended) of information from both your newsletter and class. – Gene
July 25, 2010 – Market Heating Up Again
MARKET IS HEATING UP
Happy Sunday!
The market started Friday out slow, but got its footing by the afternoon and finished up again. The DOW was up triple digits again. The RUT was up over 15 points, and the S&P 500 was up 9 points. Again, the volume wasn’t anything special, but that doesn’t seem to make much difference anymore.
The VIX is back down to 23.47. Some folks are still waiting for the VIX to break 20. That may or may not happen. The VIX being in the 20s may be the new normal. We spent more than a few years (2005-) in the 10-15 range. However, since 2008 the VIX has pretty much remained above 20.
Forgive me, but I have a habit of expressing the obvious. The market seems to want to move higher. There I said it. Now, if my skill of being a contrarian indicator kicks, the market will pull back down to where it belongs.
At least we know that it won’t go up in a straight line, hopefully. After an up move, the market will usually want to come back down to test the move. We’ll keep watching and be ready to act if necessary.
Another Trading Idea
It seems there are a number of sources (TV, newsletters, internet, etc.) of interesting trade ideas. I know that my subscriber family is very option oriented. But, I also know that some of you have a portion of your portfolios dedicated to speculative trades. That’s why I thought I’d share another trade that some of you might like.
Lately, DOW component Caterpillar (CAT) has been moving up nicely and is in a long term uptrend. The stock just broke through some overhead resistance and closed near the daily high – at 69,31. Earnings are scheduled soon and are expected to be good. Hence, a further move up is anticipated.
How do you play it? They suggested using our SRS (Stock Replacement Strategy) to put you in a position to benefit from a further upward move.
1. Sell one CAT November $60 put for a credit of $2.40.
2. Put on a bull call spread – Buy one CAT November $70 call and sell one CAT November $75 call – for a debit of about $2.20.
3. Net position is a credit of about $.20.
The short $60 put means you would have to be willing to buy 100 shares of CAT at $60. That’s a 15% discount from where it is currently trading.
Right now, with CAT at 69.31, it is only $.69 out of the money. If CAT does move up, it will be nicely profitable.
Plan B
If you are reluctant to sell the put ($60) so close to where CAT is trading, you can turn it into a ratio spread. You could sell two of the November $52.50 puts for a credit of about $2.30. There would be a net debit of about $.10.
The exposure of having two short puts (instead of one) would be greater, but there would be an additional $7.50 of cushion – all the way down to $52.50, which represents a 25% discount to where CAT is currently trading.
Again, this position is something I came across this weekend. Do your own due diligence. Pay attention to the strategy – both variations. They are good ways of taking advantage of a bullish bias with minimal risk. They’re not non-directional, however they both allow for one to be wrong about the bias without causing any major damage to your account.
Have a great weekend!
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CORE PORTFOLIO POSITION
Core Portfolio August Position #1 – RUT Batman Iron Condor – 650.65
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.
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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 – 39.08
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 – AAPL Beat The Bank – 259.94
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. Beats the hell out of the bank.
Educational Portfolio #3 – BP SRS July Position – 36.86
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.
Educational Portfolio #4 – RIMM Ratio SRS Strategy – 55.70
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 #5 – C Covered Call – 4.02
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.
Educational Portfolio #6 – SPX Short & Sweet Weekly – 1102.66
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.
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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 -
We are currently looking for a new Zero Plus Position. ______________________________________________________________
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.
