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Archive for August, 2012

An Interesting Statistic for Apple (AAPL)

Monday, August 27th, 2012

Today I would like to share with you one startling fact about Apple stock and a relatively low-risk way to earn over 50% in one year with a simple options trade. 

In a world when most people are complaining that it is really difficult to make a nickel in this market, options still offer alternatives that you are unlikely to find anywhere else.

An Interesting Statistic for Apple (AAPL)

AAPL has fluctuated all over the place for the past several years.  Most of the movement has been to the upside, but there have been serious downdrafts as well.  Following last April’s earnings announcement, for example, the stock rose to a new high of about $644 and then proceeded to fall about $100 over the next two months.

One thing has been constant, however, and knowing about it could be the most profitable idea you will encounter this year.  Here it is – ever since the market meltdown in late 2008 – there is not a single six-month period of time when the price of AAPL was less at the end of the six-month period than it was at the beginning of that period.  True, the stock tumbled about $100 from its high reached just after the April 2012 earnings announcement, but it has now more than recovered that entire loss and moved much higher (and we have not reached the six-month mark yet).

For the past 3 ½ years, there has never been a six-month period when AAPL was lower at the end of the six months than at the beginning of that stretch.  Think about that.  If you could count on that pattern continuing, it would be possible to make a single option trade, wait six months, and expect a significant gain at that time.

In June of this year when AAPL was trading about $575, I told my paying subscribers about a spread that I had personally placed (using large amounts of cash, in fact) in my family charitable trust account.  I placed what is called a vertical call spread on AAPL.  I bought AAPL 550 calls which would expire on January 18, 2013 (about 7 months away) and sold AAPL 660 calls with the same expiration date.

I paid just under $24 for the vertical spread ($2400 per contract).  If, seven months later, AAPL was at any price above $600, I would be able to sell the spread at exactly $50 ($5000 per contract).  If AAPL had not gone up, and was only at the current price ($575), the spread would be worth $25, and I would still make a small gain.

Of course, since that time, AAPL has moved much higher.  Now I am in a position where the stock could fall by $65 a share between now and January 18, 2013 and I will still double my money.

The spread I purchased for $24 is now trading for about $40.  I am still recommending to my risk-averse subscribers that it still might be a good investment, even at this price.  If you were to purchase the same spread for $40 or less, you would make 20% on your investment in January even if the stock were to fall by $65 during that time.

Meanwhile, my charitable trust account is prospering.  In two short months, its value has increased by 60%.  There will be a lot of happy Vermont charities when I send out donations at the end of this year.

Next week, I will discuss my latest thoughts on exactly which vertical spreads I would buy right now on AAPL to take advantage of the unusual pattern that is the subject of this week’s Idea of the Week.

There are many other ways that you can use options to make extraordinary gains when you feel fairly certain that a stock is headed higher.  One of our 8 portfolios is a bullish bet on AAPL.  Over the past five weeks, the stock has moved 13.3% higher, and this actual portfolio (mirrored by a large number of Terry’s Tips subscribers) has gained 360%.  Our portfolio has gained 27 times as much as the stock has gone up.

To celebrate the re-establishment of Auto-Trade at TD Ameritrade/thinkorswim, we are offering our Premium service at the lowest price in the history of our company.  We have never before offered such a large discount.  If you ever considered becoming a Terry’s Tips Insider, this would be the absolute best time to do it.

And now for the Special Offer – If you make this investment in yourself by midnight, September 4, 2012, this is what happens:

1)    For a one-time fee of only $75.95, you receive the White Paper  (which normally costs $79.95 by itself), which explains my favorite option strategies in detail, 20 “Lazy Way” companies with a minimum 100% gain in 2 years, mathematically guaranteed, if the stock stays flat or goes up, plus the following services:
 
2)    Two free months of the Terry’s Tips Stock Options Tutorial Program, (a $49.90 value).  This consists of 14 individual electronic tutorials delivered one each day for two weeks, and weekly Saturday Reports which provide timely Market Reports, discussion of option strategies, updates and commentaries on 8 different actual option portfolios, and much more.  

3)    Emailed Trade Alerts.  I will email you with any trades I make before I make them so you can mirror them yourself or have them executed for you by TD Ameritrade/thinkorswim through their Auto-Trade program. These Trade Alerts cover all 8 portfolios we conduct.

4)    Access to the Insider’s Section of Terry’s Tips, where you will find many valuable articles about option trading, and several months of recent Saturday Reports and Trade Alerts.

5)    A FREE special report  “How We Made 100% on Apple in 2010-11 While AAPL Rose Only 25%”.

6)    A free copy of my e-book, Making 36%: Duffer’s Guide to Breaking Par in the Market Every Year, In Good Years and Bad (2012 Updated Version).

With this one-time offer, you will receive all of these Premium Service benefits for only $75.95, (normal price $119.95). I have never made an offer anything like this in the eleven years I have published Terry’s Tips.  But you must order by midnight on September 4, 2012. Click here, and enter Special Code Auto12 in the box on the right side of the screen.

I feel confident that this offer could be the best investment you ever make in yourself.  Celebrate the resumption of Auto-Trade at TD Ameritrade/thinkorswim with us.  But do it before the day after Labor Day, as this offer will not be available after that day.

I look forward to prospering with you. 

Terry

P.S.  If you would have any questions about this offer or Terry’s Tips, please call Seth Allen, our Senior Vice President at 800-803-4595.  Or make this investment in yourself at the lowest price ever offered in our 11 years of publication – only $75.95 for our entire package (regular price $119.95) using Special Code Auto12.

How To Bet On Volatility Rising

Monday, August 20th, 2012

VIX, the so-called “fear index” hit a 5-year low last week.  What does that mean for investors, and how can they capitalize on this new development?

How To Bet On Volatility Rising

The most popular measure of options prices is the average implied volatility of puts and calls of the S&P 500 tracking stock (SPY).  (Only monthly options are included in this measure, and the increasingly-popular Weekly options are excluded, a serious mistake in my opinion.)

The mean average of VIX is 20.54.  When VIX is below 15, options prices are considered to be extremely low and when VIX is above 35, option prices are considered to be unusually high.  In the crash of 2008, VIX rose to 80 briefly and then fell all the way back to the mean average in about a year.  More recently, about a year ago, VIX rose to 40 when the possibility of a European economic meltdown was making headlines.

When fear is high, option prices as measured by VIX are high, and vice versa. Last week, VIX fell to 13.30, a low number not seen for five years.   Investors seem to have little fear.  By historical standards, they are complacent. After all, the market has moved higher for six consecutive weeks.

But the market is driven by sentiment.  And sentiment changes.  One interesting thing about VIX is that it ultimately moves toward its mean average.  Reversion to the mean is just about the most powerful thing that we know about VIX.

At this point in time, a single news story that Greece or Spain or Italy might encounter difficulties refinancing their debt, or China is slowing down, or Israel bombs Iranian nuclear plants, and VIX will soar through the roof.

So how do you make money when VIX rises (as it inevitably will)?  You could buy calls on VIX, but they are expensive (since everyone knows that VIX is bound to rise sometime), and you lose money if VIX stays flat (or only moves slightly higher, not enough to cover the cost of your call).

One serious problem with options on VIX is that you cannot place spreads (such as calendars or diagonals) with long and short options in different months without posting extremely high cash margin requirements (and you can’t do it at all in an IRA).

There is a better alternative out there, and it is a proxy for VIX.  It is an ETN (Exchange Traded Note) called VXX.  It is based on the futures of VIX and is highly correlated to VIX.  Last Friday, VIX closed at 13.45 and VXX closed at $11.20.  Last fall, both numbers were about at the 40 level, and in 2008, they both got as high as 80.

Of course, you might just buy VXX and hope that VIX rises, but there is a problem with owning VXX for the long run, and that is a thing called contango.  We can’t discuss contango at this time, but essentially, it pushes down the price of VXX about 8% a month at today’s futures prices, all other things being equal (i.e., VIX and VIX futures remain flat).

Our preference for betting that VIX (and VXX) will rise when VIX is at unprecedented low levels is to buy calls on VXX (right now, one of our 8 portfolios owns VXX calls expiring on September 21, 2012).  We sell at-the-money Weekly calls against these long positions, but we only sell enough calls to cover the premium decay on our long call positions.  We have 50% more long calls than we have short calls.

If VIX stays flat, our portfolio should break even (compare this to buying calls on VXX which would lose 100% of their value if VIX remains flat, or falls).  If VIX moves slightly lower (unlikely, in our opinion), we should lose a little.  If VIX moves slightly higher, we should make a small gain.  If VIX moves significantly higher, we should make a windfall gain, maybe five or ten times our total investment.

We believe that our portfolio (we call it the Honey Badger portfolio) provides exceptional protection against a 1987-like market meltdown.  Last week, one writer, Todd Feldman, saw similarities between today’s market and the market in 1987, just before the crash – see it here if you are interested.  

If the market crashes for any reason whatsoever, or if VIX moves significantly higher for any reason (or for no reason other than reverting to its mean), our Honey Badger portfolio should yield huge returns.

You can mirror our Honey Badger portfolio, or any of our other seven portfolios, and not have to make a single trade on your own, through the Auto-Trade service offered by TD Ameritrade/thinkorswim.

To celebrate the re-establishment of Auto-Trade at TD Ameritrade/thinkorswim, we are offering our Premium service at the lowest price in the history of our company.  We have never before offered such a large discount.  If you ever considered becoming a Terry’s Tips Insider, this would be the absolute best time to do it.

And now for the Special Offer – If you make this investment in yourself by midnight, September 4, 2012, this is what happens:

1)    For a one-time fee of only $75.95, you receive the White Paper  (which normally costs $79.95 by itself), which explains my favorite option strategies in detail, 20 “Lazy Way” companies with a minimum 100% gain in 2 years, mathematically guaranteed, if the stock stays flat or goes up, plus the following services:
 
2)    Two free months of the Terry’s Tips Stock Options Tutorial Program, (a $49.90 value).  This consists of 14 individual electronic tutorials delivered one each day for two weeks, and weekly Saturday Reports which provide timely Market Reports, discussion of option strategies, updates and commentaries on 8 different actual option portfolios, and much more.  

3)    Emailed Trade Alerts.  I will email you with any trades I make before I make them so you can mirror them yourself or have them executed for you by TD Ameritrade/thinkorswim through their Auto-Trade program. These Trade Alerts cover all 8 portfolios we conduct.

4)    Access to the Insider’s Section of Terry’s Tips, where you will find many valuable articles about option trading, and several months of recent Saturday Reports and Trade Alerts.

5)    A FREE special report  “How We Made 100% on Apple in 2010-11 While AAPL Rose Only 25%”.

6)    A free copy of my e-book, Making 36%: Duffer’s Guide to Breaking Par in the Market Every Year, In Good Years and Bad (2012 Updated Version).

With this one-time offer, you will receive all of these Premium Service benefits for only $75.95, (normal price $119.95). I have never made an offer anything like this in the eleven years I have published Terry’s Tips.  But you must order by midnight on September 4, 2012. Click here, and enter Special Code Auto12 in the box on the right side of the screen.

I feel confident that this offer could be the best investment you ever make in yourself.  Celebrate the resumption of Auto-Trade at TD Ameritrade/thinkorswim with us.  But do it before the day after Labor Day, as this offer will not be available after that day.

I look forward to prospering with you. 

Terry

P.S.  If you would have any questions about this offer or Terry’s Tips, please call Seth Allen, our Senior Vice President at 800-803-4595.  Or make this investment in yourself at the lowest price ever offered in our 11 years of publication – only $75.95 for our entire package using Special Code Auto12.

Another Interesting Time to Buy Options

Monday, August 6th, 2012

For the past several weeks we have been discussing how to make money buying options.  For those of you who have been following us for any extended time, you understand that this is a total departure from our long-standing belief that the best way to make maximum returns is to sell short-term options to someone else.

A combination of low option prices and high actual volatility has recently caused us to reverse our strategy.  Now seems to be a good time to be buying either or both puts or calls.  Rather than blindly buying an option and hoping for the best, we are continually on the look-out for something that will give us an edge in making this buying decision.

Last week we couldn’t find an edge we were comfortable with.  We considered buying a straddle on Thursday in advance of the jobs report but the market had been quiet all week and we sat on the sidelines.  Unfortunately, as it worked out.  SPY rose almost 2% on Friday and we would have easily doubled our money if we had pulled the trigger.

Today we will talk about one of those possible edges.

Another Interesting Time to Buy Options

It seems to happen every summer.  While the overall market doesn’t seem to do much of anything (that’s why they call it the summer doldrums I suppose), on many days, the market just seems to jump all over the place.  It could be that so many traders are on vacation that the few who are working are able to move the market with very few trades.

A more likely explanation is the computer-generated program trading that has taken over the market lately.  The average holding period for a stock in our country is now less than two seconds according to one study.  When the computers sense unusual buying or selling coming into the market, they place trades in advance of the orders getting to the exchanges.  This adds to the momentum and pushes the market sharply in one direction or the other.

At some point, the momentum shifts, and the market moves sharply in the other direction.

Check out the price action of SPY on Fridays for the past ten weeks:

June 1        -3.30
June 8        +1.05
June 15    +1.30  Monthly X dividend
June 22    +1.05
June 29     +3.31
July 6        -1.30
July 13        +2.20
July 20        -1.30    Monthly X dividend
July 27        +2.51
Aug 3        +2.70

If you had bought a slightly out-of-the-money put and call (or an at-the-money straddle) on essentially any one of the Thursdays preceding these Fridays, you would have surely made money when the stock moved well over a dollar the next day.  These puts and calls with only one day of remaining life are quite cheap, and could easily double or triple in value if the market moves by over $2 which it has on half of the Fridays this summer.

This edge probably does not extend to other months of the year, however.  In April and May, the stock did not move over $.75 on any Friday.  So it seems to be a summer phenomenon.

Buying options is risky business because you can lose 100% of your investment.  But doing it with small amounts when you see an edge like this Friday action (or before jobs reports, or on the Monday following the monthly option expiration), the odds may shift in your favor.

Be careful, and good luck.  Never invest money that you can’t afford to lose.

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I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.

~ John Collins