Where Directional Traders Come to be Cured

July 4, 2010 – Celebrate & Protect Your Independence

CELEBRATE YOUR INDEPENDENCE

Happy Independence Day,

I hope you’re all enjoying the holiday weekend.  The good taste of some BBQ ribs and burgers will replace the bad taste left in our mouths by the market.  Today we should be celebrating our freedom.  This is the best country in the world to live.  If we take the necessary steps, it will continue to be the best country in the world.

Recently, we have seen some of our freedoms threatened.  The bigger our government becomes, the more rapidly our freedoms erode — until finally . . . well, I don’t even want to speculate.

We have choices and can become part of the process to turn around the process.  It comes with our right to vote — which, fortunately, we still have.   It’s a slow process, but a civilized one.  There is a “tea party” movement in America right now.  They aren’t rebelling symbolically by throwing “tea” in the river.  They are rebelling in an attempt to keep our rights and freedoms from being washed away. 

The upcoming fall elections can be the first step.  If you like to make your own choices, here’s an opportunity to make sure you get to continue to make your own choices.

The Market

The jobs report was no big deal.  The loss of jobs continues, but it was apparently already built into the market prices.  However, not to skip a beat, the indexes continued down.  Our RUT was down 5.79, the DOW was off 46, the NASDAW DOWN 9.57, the S&P was down about 5.  It could have been a lot worse.

The selling will likely continue, but there will also likely be a bounce.  There aren’t many reasons for traders to be optimistic, but when stocks are so oversold, bounces are not unusual.

Another Trade Idea

Here’s another idea that originated from the tube.  Ideas from this kind of tube have a lot in common with toothpaste.  Once, out of the tube, you have a hell-of-a time getting it back in the tube.  So, since it’s already out there, let’s explore it a bit.

The market is trending down and it looks like it may continue for awhile.  The banks have been weak, along with most everything else.  The banking index ETF is the XLF.  It contains all the major banks.  If you believe the banks will continue to move down for the next month or two, here’s an inexpensive way to play it.

The XLF is trading at 13.52.  Let’s hypothetically put on a 1-by-2 ratio spread.

Buy 1 XLF September $13 put @ about $.75

Sell 2 XLF September $11 puts @ about $.25 (x 2 = $.50)

Net debit of $.25.

This is one of those strategies in which you are short the underlying.  You have to be willing to buy 100 shares of the XLF ETF at $11.  There is good support at $11.  The Risk/Reward is quite attractive here.  You are risking $.25 with a maximum profit potential of $1.75.

Look at the possibilities.  If the XLF moves down to $11, you will have $2 of profit in your pocket.  Subtract the initial $.25 debit and there is still a $1.75 profit remaining.  If you were to be put the 100 shares of XLF stock at $11, your actual cost basis would be $9.25 ($11 – $1.75). 

If the market does come down, it’s likely the volatility will continue to move up with it.  That means there will likely be no good opportunity to take advantage of profits prior to expiration.  Plan to hold this trade to expiration.  It’s not a bad idea – IF you have a downside bias.

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The Cowboy

A cowboy appeared before St. Peter at the Pearly Gates.

‘Have you ever done anything of particular merit?’  St. Peter asked.

‘Well, I can think of one thing,’ the cowboy offered.

‘On a trip to the Black Hills out in South Dakota , I came upon a gang of bikers, who were threatening a young woman.  I directed them to leave her alone, but they wouldn’t listen.  So, I approached the largest and most tattooed biker and smacked him in the face … Kicked his bike over, ripped out his nose ring, and threw it on the ground.  I yelled, ‘Now, back off or I’ll kick the shit out of all of you!’

St. Peter was impressed, ‘When did this happen?’
‘Couple of minutes ago.‘

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CORE PORTFOLIO POSITION
Core Portfolio Position #1 – RUT Batman Bull Put Spread – 598.97
With the RUT at about 663, we sold 10 July RUT 530 puts, bought 11 July RUT 520 puts and sold 1 July RUT 500 put.  Net credit and profit potential is $540.  On 6/11, we sold 10 July RUT 730 calls and bought 10 July RUT 740 calls for a credit of $.60 ($600).  We then bought one July RUT 750 call to hedge for $.60. Net credit is $540 and total net credit for the whole position is $1,080.  Our maximum profit range is 530 to 730. The maintenance is $10,000.
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EDUCATIONAL POSITION PORTFOLIO
This portfolio highlights trades using alternative strategies – beyond our standard Iron Condor and basic credit spreads.  
 
Educational Position #1 – GS Boston Strangle – 131.08
On Monday, 4/19, with GS at 160.70, we sold 5 GS October 120 calls and also sold 5 GS October 200 puts for a credit of $88.70.  This is an uncovered position.  Maximum potential profit is $8.70 x 500 = $4,350.  Maintenance is about $12,000 – if you do not have CPM (Customer Portfolio Margining).  Hopefully, we can lock in a $3 – $5 profit prior to expiration.
 
Educational Portfolio #2 – QCOM SRS October Position – 32.37
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 #3 – AAPL Beat The Bank – 246.94

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 #4 – BP SRS July Position – 29.35
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).  You needed to be willing to own BP at $40 – and it looks like that will be the case.
 
Educational Portfolio #5 – RIMM Ratio SRS Strategy – 48.14
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 #6 – C Covered Call – 3.79

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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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 first time loss of $2,400, our new cash total is $77,065 ($79,465 – $2,400).
 
ZERO PLUS POSITION - RUT Batman Condor – 598.97
We sold 20 July RUT 470 puts, bought 22 July RUT 460 puts, and sold 2 July RUT 440 puts for a net credit of $,50 ($1,000).  On Friday, we put on the call side, selling 20 July RUT 730 calls, buying 20 July RUT 740 calls, and buying two July RUT 750 calls for a net credit of $540 x 2 = $1,040.  Total net credit for the entire position is $2,040. Maximum profit range is 470 to 730.  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.