May 18, 2010 – Market Head-Fake, Then Down

 

MARKET HEAD-FAKE

 

Good Evening,

 

The day started well.  The market was up, Walmart had excellent earnings and all was right with the world — for a while.  Then, in the afternoon, rate-hike fears and talk of European debt was too much and the market headed down.  The DOW was down 116.  The SPX was off 16 and the RUT was down 13.

 

What lies ahead?  The indexes have breached a variety of support levels.  Right now it looks like a bit more downside, but we’ve been surprised before — and will be again at some point.

 

Our Quickie trades are looking better.  We had a downside bias and the market is cooperating.  There are two days and a Friday settlement left.  Let’s try to calculate their current value.

 

SPX Quickie 1120/1100/1080 Butterfly.

The prices below are approximate and are based on Tuesday’s closing prices and some negotiation between the bid and ask of each option.

 

You can sell the 1120 put for about $12.50, buy back the short 1100 puts for about 6.20 x 2 = 12.40, and sell the 1080 puts for about 3.10.  The net credit of this is about 3.20.  It cost 1.60 to put on the trade.  The profit is $1.60.  The return on risk is 100%.

 

SPX Quickie 1130/1115/1100 Butterfly.

The prices below are approximate and are based on Tuesday’s closing prices and some negotiation between the bid and ask of each option.

 

You can sell the 1130 put for about 17.85, buy back the short 1115 puts for about 10.75 x 2 = 21.50 and sell the 1100 put for about 6.00.  The net credit for this is about 2.35.  It cost 1.95 to put on the trade.  The profit, at this point, is .40.

 

When calculating the final numbers, don’t forget to include commissions. 

 

Experimental QQQQ Bouncing Strangle (Not A Quickie)

The QQQQs have moved down about a buck since we put on the June Q2 trade.  It’s a good start.  We need about another two point move and the position will be paid for.  Then, we can wait for a nice bounce in the opposite direction. 

 

At this juncture, if we closed the position, we would take in 5.36.  It cost about 5.18 to put on the position.  So, there’s a small profit.  We can probably thank the increase in volatility for the difference.  The delta of the 49 put is now a hefty .72.  The further the QQQQs go in the money, the more we participate.

 

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MAY CORE PORTFOLIO POSITIONS

May Position #1 – RUT Iron Condor – 682.75

On 4/7, with the RUT at about 701, we sold 10 May RUT 620 puts and bought 10 May RUT 610 puts for a credit of $.55 ($550).  We also sold 10 May RUT 760 calls and bought 10 May 770 calls for a credit of $.55 ($550).  Total net credit of $1.10 ($1,100).  Maintenance is $10,000.  On 4/23 we closed out the 760/770 bear call spread for $1.75.  Current net debit of $.65.

 

On 4/23, with the RUT at about 732, we sold 10 May RUT 670 puts and bought 10 May RUT 660 puts for a credit of $.60 ($600).  Maintenance is $10,000.  Closed 5/5 for debit of $1.70.  Current net debit of $1.10..

 

May Position #2 – CME Iron Condor – 308.24

On 4/7, with CME at about 314, we sold 10 May CME 270 puts and bought 10 May CME 260 puts for a credit of $.55 ($550).  We also sold 10 May CME 360 calls and bought 10 May CME 370 calls for a credit of $.55 ($550).  Total net credit of $1.10 ($1,100).  Maintenance is $10,000.  On 4/23, closed the 360/370 credit spread for a debit of $2.10.  Current net deficit of $1.00.

 

May Position #3 – SPX Bull Put Spread – 1120.80

On 4/23 with the SPX at about 1208, we sold 10 May SPX 1110 puts and bought 10 May SPX puts for 1100 for $.60 ($600).  Maintenance is $10,000.  Closed 5/6 for debit of $1.70.  Current net debit of $1.10.

 

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EDUCATIONAL POSITION PORTFOLIO

This portfolio highlights trades using alternative strategies – beyond our official Iron Condor and basic credit spreads. 

 

Educational Position #1 – GS Boston Strangle – 137.36

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 – 36.71

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 – QQQQ Bouncing Strangle – 46.43

On Friday, 5/14, with the QQQQs at 47.50, we bought 10 June Q2 49 puts and bought 10 June Q2 46 calls for a net debit of $5.18.  There are $3 of intrinsic value.  Actual risk is only $2.18.

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MAY QUICKIE TRADES

May Quickie #1 – RUT Bull Put Spread – 682.75

On Friday, 5/14 market gapped down and we adjusted our strikes to the May 650/640 and were filled on 10 contracts at $.50 ($500).  Maintenance is $10,000.

 

May Quickie #2 – SPX Butterfly – 1120.80

Position A = 2/4/2 Butterfly – 1130/1115/1100 for debit of $1.95 ($3.90)

Position B = 2/4/2 Butterfly – 1120/1100/1080 for debit of $1.60 ($3.20)

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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 recent profits, our cash total is $79,465 ($77,990 + $1,475).

 

ZERO PLUS POSITION -  RUT Bull Put Spread – 682.75

On 4/27, with the RUT at about 721, sold 20 June RUT 620 puts & bought  20 June RUT 610 puts for a credit of $.60.  Closed 5/18 at debit of $1.80. Net debit of $1.20.

 

 

 

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WHAT YOU WILL LEARN AT THE SEMINAR

In our seminar, we spend two days thoroughly going over our advanced trading strategies – Iron Condors, .  What makes a new seminar even more enticing is that, since 2008, we’ve added more excellent strategies to our arsenal.

 

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I limit the number of attendees to 25.  We’ll all get to know each other.  It’s a personal and interactive seminar where you will feel free to ask questions at any time.

 

Also discussed at the seminar are bid/ask spread negotiation, maintenance alternatives, portfolio construction, risk management, dealing with market makers, reading between the lines of an option chain, finding premium where there seems to be none, entities, taxes and a lot more.  Each subject is discussed at length.

 

A number of our subscribers have taken the seminar before and are entitled to their retake.  If you are entitled to a retake, send me your name and phone number, your location preference 1 & 2.  There are a limited number (5) of retakes for each seminar.  They will be assigned on a first come, first served basis.

 

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RENEWAL PROCESS

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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 only at Traders Press.  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’ 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.