Message-ID: <11463295.1075840993635.JavaMail.evans@thyme> Date: Tue, 8 Jan 2002 17:46:04 -0800 (PST) From: updates@libertytradinggroup.com To: trader@mailman.enron.com Subject: High Percentage Trading on the S&P Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Liberty Trading Group X-To: Trader@mailman.enron.com X-cc: X-bcc: X-Folder: \ExMerge - Lewis, Andrew H.\Deleted Items X-Origin: LEWIS-A X-FileName: andy lewis 6-25-02.PST (After reading this article, for a detailed discussion of writing options on the S&P, listen to Michael Pinson's interview of James Cordier on the Market Mavens Radio Show from January 2, 2002.) Click here: http://www.marketmavens.com/marketmavensradio020102.rm High Percentage Trading on the S&P By: James Cordier, Michael Gross, Liberty Trading Group From: MarketMavens.com, January 8, 2002 With the volatility and higher option premiums, the S&P can be an ideal market for the properly capitalized trader to write option premium for increased returns. As we all know, this is the king of the futures markets, and thus deserves the respect of the option writer. For this reason, we only participate in the most conservative of trades when dealing with this contract. Option sellers (as well as their brokers) like to sleep at night. That being said, the rewards can still be very attractive. While we do not pretend to know what the stock market is going to do, we cannot help but get caught up in the positive outlook for 2002. Barring another catastrophic terrorist attack, we find it hard to imagine any reason the stock market would go below the lows set back in September. For that reason, we recommend the following simple, high probability strategy which, if successful, will yield about a 50% return within 6 months. Instead of trying to pick individual stocks, or trying to guess what the S&P will do tomorrow or next week, a trader takes an "alternate" way out. At the time of this writing, the June S&P is trading at about 1169. A trader can SELL a June S&P 825 put option and collect about $1,200 for every option sold. The margin to do this is around $2,400 per option at this time. For the option to go in the money, the June S&P would have to fall over 343 points before June. (That is a full 125 points below the low established in the wake of September 11th.) If the market moves higher from here, it should be an easy ride as the option deteriorates and expires worthless, and the option seller keeps the money. If the market stays steady, the option expires worthless, the option seller keeps the money. If the market falls but stays above 825, the option expires worthless, the option seller keeps the money. Only if the market is Below 825 at expiration, does the seller have a loss. However, before you run out and liquidate the retirement account, lets take a look at the downside possibilities of the trade. First of all, this trade is only recommended for the comfortably capitalized account. A drop of 100, 200, or even 300 points in the S&P would still not put your option in the money. But it may temporarily increase the value of your option and thus also your margin requirement. A trader should have adequate back up capital in his account if he intends to "ride out" such an occurrence. The other risk, of course, would be the futures being below 825 at option expiration, which makes the trader long the June S&P at 825, not necessarily a bad thing. However, if the market continues to fall down past 825 and the trader continues to hold his position, losses could be substantial. Stock traders considering this strategy should ask themselves the following question: What type of return do I hope to make on my stock portfolio by June of this year? Is it close to 50%? What type of losses would I incur in my stock portfolio if the S&P fell to 825? In the option trade, you still make 50%. In a move below 825, the odds are good for a lot of traders that the losses they would incur in their stock portfolio would be much greater than being short the S&P at 825. In other words, we think this is a good way to trade the stock market. As we said in the beginning, we don't know what the stock market is going to do. But from a risk standpoint, we like being long from 825. If you would like to discuss trading this way for your account, please feel free to give us a call at 800-346-1949 and I will be glad to discuss this strategy with you. For a more detailed discussion of this trading strategy on the S&P, please listen to James Cordier's interview by Michael Pinson of Pinson Communications on the Market Mavens Radio show from January 2, 2002. The recorded version of this interview is available free to you on the Market Mavens website. To listen to the interview now, go to http://www.marketmavens.com/marketmavensradio020102.rm James Cordier Michael Gross Liberty Trading Group 800-346-1949 To get additional commentary on Coffee, Soybeans, Orange Juice and other commodities, request your free issue of the Option Seller newsletter or to get account opening information, feel free to visit our website at http://www.optionsellers.com * To be removed from this list, please reply with "Unsubscribe" as the subject and you will be removed. ***The information contained herein has been carefully compiled from sources believed to be reliable, but it's accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read the "The Option Disclosure Statement" before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. Nor representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.