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Archive for February, 2017

Using Investors Business Daily to Create an Options Strategy

Monday, February 20th, 2017

Today I would like to share an idea that we are using in one of our Terry’s Tips’  portfolios.  We started this portfolio on January 4, 2017, and in its first six weeks, the portfolio has gained 30% after commissions.  That works out to about 250% for the whole year if we can maintain that average gain (we probably can’t keep it up, but it sure is a good start, and a positive endorsement for the basic idea).

Terry

 Using Investors Business Daily to Create an Options Strategy

 IBD publishes a list which it calls its Top 50. It consists of companies which have a positive momentum.  Our idea is to check this list for companies that we particularly like for fundamental reasons besides the momentum factor.  Once we have picked a few favorites, we make a bet using options that will make a nice gain if the stock stays at least flat for the next 45 – 60 days.  In most cases, the stock can actually fall a little bit and we will still make our maximum gain.

The first 4 companies we selected from IBD’s Top50 list were Nvidia (NVDA), Goldman Sachs (GS), IDCC (IDCC), and HealthEquity (HQY).  For each of these companies, we sold a vertical put credit spread which involves selling a put at a strike just below the current stock price and buying a put which is usually $5 lower.  When expiration day comes along, we hope the stock will be trading at some price higher than the strike of the puts we sold so that both our long and short puts will expire worthless, and we will be able to keep the cash we collected when we made the sale.

Let’s look at one of the four spreads we placed at the beginning of the year. It involves NVDA, and the options expire this Friday.  You can’t sell this spread for this price today, but you could have back on January 4.

With NVDA trading at $99, we placed this trade:

Buy to Open 2 NVDA 17Feb17 95 puts (NVDA170217P95)

Sell to Open 2 NVDA 17Feb17 100 puts (NVDA170217P100) for a credit of $2.00

$400 was placed in our account, less $5 in commissions, or $395.  The broker placed a $500 per contract maintenance requirement on the trade ($1000).  There is no interest charged on this amount (like there would be on a margin loan), but it is just money that needs to be set aside and can’t be used to buy other stock or options).   Subtracting the cash we received from the requirement yields our net investment of $605.  This would be our maximum loss if the stock were to fall below $95 when the options expired on February 17, 2017.

NVDA is trading today at $108.50.  It looks pretty likely to be above $100 on Friday.  If it does, we will not have to make a closing trade, and both options will expire worthless.  We will be able to keep the $395 that we collected six weeks ago, and that represents a  65% gain on our investment over 6 weeks (390% annualized).  Next Monday, we will go back to the IBD Top 50 list, pick another stock (or maybe NVDA once again – it is their #1 pick), and place a similar trade for an options series that expires about 45 days from then.

We have four stocks in this portfolio, and each week, we sell a new similar spread once we have picked a stock from the Top 50 list.  So far, it has been a very profitable strategy.

As with all investments, these kinds of trade should only be made with money that you can afford to lose.

Happy trading.

Terry

An Update on Our Last Trade and a New One on AAPL

Sunday, February 5th, 2017

About a month ago, I suggested an options spread on Aetna (AET) that made a profit of 23% after commissions in two weeks. It worked out as we had hoped. Then, two weeks ago, I suggested another play on AET which would make 40% in two weeks (ending last Friday) if AET ended up at any price between $113 and $131. The stock ended up at $122.50 on Friday, and those of us who made this trade are celebrating out 40% victory. (See the last blog post for the details on this trade.)

Today, I am suggesting a similar trade on Apple (AAPL). It offers a lower potential gain, but the stock can fall in price by about $9 and the gain will still come your way.

Terry

An Update on Our Last Trade and a New One on AAPL

This trade on APPL will only yield about 30% after commissions, and you have to wait six months to get it, but the stock can fall over $8 during that time, and you would still make your 30%. Annualized, 30% every six months works out to 60% for the year. Where else are you going to find that kind of return on your investment dollars even if the stock goes down?

This is an actual trade we made today in one of our Terry’s Tips’ portfolios last Friday. It replaced an earlier trade we made on AAPL which gained over 20% in less than a month. We closed it out early because we had made nearly 90% of the possible maximum gain, and clearing up the maintenance requirement allowed us to make the following trade with AAPL trading about $129:

Buy To Open 3 AAPL 21Jul17 115 put (AAPL170721P115)
Sell To Open 3 AAPL 21Jul17 120 put (AAPL170721P120) for a credit of $1.17 (selling a vertical)

This is called a vertical put credit spread. $117 per spread less $2.50 commissions, or $114.50 x 3 = $343.50 was put into our account. The broker charges a maintenance requirement of $500 per spread, or $1500. Subtracting out the $343.50 we received from $1500 makes our net investment $1156.50..

If AAPL is trading at any price above $120 on July 21, 2017, both of the puts will expire worthless, and we will be able to keep the $343.50 we were paid on Friday. In this case, no commissions will be charged on the closing end of the trade. You don’t have to do anything except wait for the big day to come.

If AAPL is trading at any price below $120 on July 21, you will have to buy back the 120 put for $100 for every dollar it ends up below $120. If this happens in our Terry’s Tips portfolio, we will probably roll the spread out to a further-out month, hopefully at a credit.
This trade is most appropriate for people who believe in AAPL, and feel confident that if it does fall a little, it will end up being less than $9 lower in 6 months. We like our chances here.

As with all investments, this trade should only be made with money that you can afford to lose.

Happy trading.

Terry

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