from the desk of Dr. Terry F Allen

Skip navigation

Member Login  |  Contact Us  |  Sign Up

1-800-803-4595

Archive for the ‘10K Strategies’ Category

Legging Into a Short Iron Condor Spread

Monday, March 3rd, 2014

Today I would like share with you the results of an actual trade recommendations I made for my paying subscribers on January 4th of this year and how subsequent price changes have opened up option possibilities that can further improve possibilities for a first investment.

Please don’t get turned off by what this new spread is called.

Terry

Legging Into a Short Iron Condor Spread

In my weekly Saturday Report that I send to paying subscribers, on January 4, 2014 I set up an actual demonstration portfolio in a separate trading account at thinkorswim in which I made long-term bets that three underlying stocks (GOOG, SPY, and GMCR) would be higher than they currently were at some distant point in the future.  The entire portfolio would make exactly 93% with the three spreads I chose if I were right about the stock prices.

Almost two months later, things are looking pretty good for all three spreads, but that is not as important as what we can learn about option possibilities.

If you recall, early this year I was quite bullish on Green Mountain Coffee Roasters (GMCR) which has recently changed their name to Keurig Green Mountain.  The major reason was that three insiders who had never bought shares before had recently made huge purchases (two of a million dollars each).  I Googled these men and learned that they were mid-level executives who were clearly not high rollers.  I figured that if they were committing this kind of money, they must have had some very good reason(s),  Also, for four solid months, not a single director had sold a single share, something that was an unusual pattern for the company.

My feelings about the company were also boosted when a company writing for Seeking Alpha published an article in which they had selected GMCR as the absolute best company from a fundamental standpoint in a database of some 6000 companies.

This is what I wrote in that Saturday Report – “The third spread, on Green Mountain Coffee Roasters (GMCR), is a stronger bullish bet than either of the first two, for two reasons.  The stock is trading about in the middle of the long and short put prices (70 and 80), and the time period is only six months (expiring in June 2014) rather than 11 or 12 months.  I paid $540 for the Jun-14 80 – Jun-14 70 vertical put credit spread.  My maximum loss is $460 per spread if the stock closes below $70, and I will make 115% after commissions in six months if it closes above $80.”

This vertical put credit spread involved selling the Jun-14 80 puts for $13.06 and buying the Jun-70 puts for $7.66, collecting $540 for each spread.  I sold 5 of these spreads, collecting a total of $2700.  There would be a maintenance requirement of $5000 for the spreads (not a margin loan which would have interest charged on it, but an amount that I couldn’t use to buy other stocks or options).  Subtracting what I received in cash from the maintenance requirement, my real cost (and maximum loss) would be $2300.  If GMCR closed at any price above $80 on June 21, 2014, both puts would expire worthless and I could keep my $2700 and make 115% after commissions (there would be no commissions to pay if both puts expired worthless).

An interesting side note to the $2700 cash I received in this transaction.  In the same account, I also owned shares of my favorite underlying stock.  I am so bullish on this other company (which is really not a company at all, but an Exchange Traded Product (ETP)) that I owned some on margin, paying 9% on a margin loan.  The cash I received from the credit spread was applied to my margin loan and reduced the total on which I was paying interest.  In other words, I was enjoying a 9% gain on the spread proceeds while I waited out the six months for the options to expire.

In case you hadn’t heard, GMCR announced on February 5th that they had executed a 10-year contract with Coke to sell individual cups on an exclusive basis.  The stock soared some 50%, from $80 to over $120.  In addition, Coke bought 10% of GMCR for $1.25 billion, and gained over $600 million on their purchase in a single day.  Obviously, those insiders knew what they were doing when they made their big investments last November.

Now I am in an interesting position with this spread.  It looks quite certain that I will make the 115% if I just sit and wait another 4 months.  The stock is highly unlikely to fall back below $80 at this point.  I could but back the spread today for $.64, ($320 for the 5 spreads) and be content with a $2380 gain now rather than $2700 in June.

But instead, I decided to wait it out, and add a twist to my investment.  Since the deal with Coke will not reach the market until at least 2015, it seems to me that we are in for a period of waiting until the chances of success for single servings of Coke are better known.  The stock is probably not going to move by a large amount in either direction between now and June.

With that in mind, I sold another vertical credit spread with June options, this time using calls.  I bought Jun-14 160 calls and sold Jun-14 150 calls and collected $1.45 ($725 less $12.50 commissions).  These options will expire worthless if GMCR is at any price below $150 on June 21, 2014, something that I believe is highly likely.  I think it has already taken the big upward move that it will take this year.

If the stock ends up at any price between $80 and $150, I will make money on both spreads that I sold.  Now the total I can gain is $3400 (after commissions) and my net investment has now been reduced to $1600 and my maximum gain is 212% on my money at risk.

This new spread will not have any maintenance requirement because the broker understands that I can’t lose money on both vertical spreads I have sold.  He will look at the two spreads and notice that the difference between the long and short strike prices is 10 for both spreads.  As long as he is setting aside $5000 in a maintenance requirement on the account, he knows that I can lose that maximum amount on only one of the two spreads.

What I have done is to leg into what is called a short iron condor spread (legging in means you buy one side of a spread to start, and then add the other side at a later time – the normal way to execute a spread is to execute both sides at the same time).  You don’t have to know any more about it than know its name at this time, but I invite you to become a Terry’s Tips Insider and learn all about short iron condors as well as many other interesting options strategies.

Another Interesting Options Bet on Google

Monday, February 24th, 2014

Just over two months ago, shortly before Christmas, I suggested that you might consider making a bet that Google (GOOG) would be higher in one year than it was then.   I figured the chances were pretty good that it might move higher because it had done just that in 9 of its 10 years in existence.

I made this bet in my personal account and also in a real account for Insiders at Terry’s Tips to follow, or mirror in their own accounts.  The stock has moved up by about $90 since then and the bet is looking like it might pay off.

Today I would like to discuss either taking a profit early or doing something else with Google if you feel good about the company as I do.

Terry

Another Interesting Options Bet on Google

In my January 4, 2014 Saturday Report sent to Terry’s Tips Insiders, I set up a new demonstration actual portfolio that made long-term bets on three underlying stocks that I believe would be higher well out in the future than they were then.  This is what I said about one of them – “The most interesting one, on Google, will make just over 100% on the money at risk if Google is trading at $1120 or higher on January 17, 2015, a full year and two weeks from now.  It was trading at $1118 when we placed the spread, buying Jan-15 1100 puts and selling Jan-15 1120 puts for a credit of $10.06.  The stock fell to $1105 after we bought the spreads, so you may be able to get a better price if you do this on your own next week.

GOOG has gained in 9 of the 10 years of its existence, only falling in the market-meltdown of 2007.  If you were to make 100% in 9 years and loss 100% in the tenth year, your average gain for the ten-year period would be 80%.  That’s what you would have made over the past 10 years.  If the next 10 years shows the same pattern, you would beat Las Vegas odds by quite a bit, surely better odds than plunking your money down on red or black at the roulette table.

I have told many friends about this bet on Google, and most of them said they would not do it, even if they had faith in the company.  The fear of losing 100% of their investment seemed to be greater than the joy of possibly making an average of 80% a year.  I told them that the trick would be to make the bet every year with the same amount, and not to double down if you won in the first year.  But that did not seem to sway their thinking.  I find their attitude most interesting.  I am looking forward to 10 years of fun with the spread.  It is a shame that it will take so long for the wheel to stop spinning, however.

It is now almost two months later and Google’s latest earnings announcement has suggested that the company has continued to be able to monetize its Internet traffic better than anyone else, especially the social media companies who are drawing most of the market’s attention.  GOOG (at $1204) is trading almost $100 higher than it was when I wrote that report and sold that vertical put credit spread.

In the demonstration portfolio account, I had sold 5 of those vertical put spreads, collecting $10.06 ($5030 for 5 spreads) and there was a $10,000 maintenance requirement charged (no interest like a margin loan, just a claim on cash that can’t be used to buy other stocks or options).  My net investment (and maximum loss would be the maintenance requirement less the amount I received in cash, or $4970).

With the stock trading so much higher, I could now buy the spread back for $7.20 and pick up a gain of $1430.  It is tempting to take a 28% profit after only two months, but I like the idea of hanging on for another 10 months and making the full 100% that is possible.  Now I am in the comfortable position of knowing I can make that 100% even if the stock falls by $84 over that time.

Rather than taking the gain at this time, I am more tempted to buy more of these spreads.  If I could sell them for $7.20 my net investment would be $12.80 and I could make 39% on my money as long as GOOG doesn’t fall by more than $84 in 10 months.  This kind of return is astronomical compared to most investments out there, especially when your stock can fall by so much and you still make that high percentage gain.

Even better, since I continue to like the company, I am planning to sell another vertical put credit spread for the Jan-15 option series.  Today, I will buy Jan-15 1110 puts and sell Jan-15 1140 puts, expecting to receive about $11 ($1100) per spread.  My maximum loss and net investment will be $1900 and if GOOG manages to close above $1140 ($64 below its current level) on January 21, 2015, I will make 57% on my investment after commissions.

I like my odds here, just as I did when I made the earlier investment on Google.  I believe that many investors should put a small amount of their portfolio in an option investment like this, just so they can enjoy an extraordinary percentage gain on some of their money.  And it is sort of fun to own such an investment, especially when it seems to be going your way, or if not exactly going your way, at least not too much in the other direction.

An Earnings Play on Green Mountain Coffee Roasters

Wednesday, January 22nd, 2014

Today I would like to tell you about an actual trade I made today in my personal account  as well as two Terry’s Tips portfolios.  The underlying is Green Mountain Coffee Roasters (GMCR) which is located in my home state of Vermont and is one of my favorite companies.This trade will make a nice gain if the stock stays flat or moves higher by any amount between now and 17 days from now, just after earnings are announced.

If the company disappoints in any way and the stock falls, I will have plenty of time to recover by selling new calls against my long positions over the next five months.

I believe this spread has an excellent chance of making a nice gain and there seems to be almost no chance that I will lose money on it even though it might take a little time to at least break even.

An Earnings Play on Green Mountain Coffee Roasters

GMCR announces earnings after the close on February 5, 2013.  The weekly options that expire a couple of days later, on February 7 are trading at extremely high valuations (implied volatility (IV) is 65).  I would like to sell some of that premium.

I am bullish on this company.  Two insider directors recently bought over a million dollars each of the stock (and they aren’t billionaires).  The company is buying back shares every quarter, so they must believe it is a good purchase.

One company wrote a Seeking Alpha article in which they picked GMCR as the absolute best company out of their database of over 7000 companies. Only a handful of other companies have met this criterion in the past, and on average, their stock has outperformed the S&P 500 by a factor of three. Check it out – Green Mountain Coffee Roasters: The Fundamental King.

I bought a diagonal call spread, buying GMCR Jun-14 70 calls and selling Feb1-14 80 calls.  The spread cost me $9.80 at a time when the stock was trading at just below $80.  If the stock moves higher, no matter how high it goes, this spread will be worth at least $10 plus the value of the time premium for the 70 call with about 5 months of remaining value, no matter how much IV might fall for the June options. The higher the stock might soar, the less I would make, but I expect I should make at least 20% on my money (if the stock moves a lot higher) in 17 days.

This is what the risk profile graph looked like at the end of the day today.  (In this portfolio, one of the 10 we conduct for Terry’s Tips subscribers to  follow), I bought 6 spreads which just under $6000.  Commissions were $15.  It shows the expected loss or gain on the investment on February 7th when the short calls expire:

gmcr risk profile graph jan 2014

gmcr risk profile graph jan 2014

If it stays flat I should make about 40% (the graph shows more, but IV for the June calls will most likely fall).  If it falls more than $5, I will be looking at a paper loss, but will still own 70 calls with 5 months of remaining life.  I should be able to sell weekly calls against these June 70 calls and recoup any paper losses that might come my way if the company disappoints on announcement day.

I believe this is a very safe bet that is highly unlikely to result in a loss, although I may have some money tied up for a while if the stock does tank after announcing.   But as usual, I hope that no one will take the risk with money that they can’t afford to lose.

 

 

 

 

How to Use Options to Invest in Nike

Tuesday, September 24th, 2013

Today I would like to share an options strategy that we are carrying out in an actual portfolio at Terry’s Tips. It is based on the underlying stock Nike (NKE), and is set up to show how an options portfolio can make far greater gains than you could expect if you bought shares of the stock instead.The options portfolio should make a double-digit gain in the next four weeks even if the stock falls by $3 or so. If you like Nike, you will have to like this options portfolio even more.

Read to the bottom of this letter to learn how you can become a Terry’s Tips Insider for absolutely no cost.

Terry 

How to Use Options to Invest in Nike: Please spend a few minutes studying this risk profile graph carefully. It shows the expected return you would make on an investment of about $4000 in NKE call options in the next 25 days:

NKE Risk Profile Graph

NKE Risk Profile Graph

If the stock ends up at about where it is right now ($69) when the October call options expire on Friday, October 19, 2013, the graph shows that you could expect to make almost $1000 on your $4000 investment. That is almost 25% and the stock doesn’t have to go up one nickel.

People who buy shares of NKE instead of setting up a simple options portfolio like this one will not make any gains at all while we make over 20% in a single month. Of course, stockholders get to keep the 1.5% dividend that the company pays (regardless of which way the stock price might move). We have to give up that reward in exchange for the possibility of making over 20% in the next month, and presumably, in every subsequent month as well.

Admittedly, this sounds a little too good to be true. But the graph does not lie. Those are the numbers.

The graph shows that if the stock manages to move higher by about $3 over the next 25 days, less money would come our way. Only about 13% (after commissions) on our $4000 investment. But that is still a whole lot better than the stockholders would gain. They would pick up about 4.3% (a $3 gain on a $69 stock), less than half of what we expect.

The biggest advantage to our options portfolio actually comes about in the event that the stock falls moderately over the next month. If it should fall about $3 to the $66 area, the graph shows that we would make a profit of about 11% on our investment. Of course, if that happens, the owners of the stock would all lose money while we are re-investing some nice gains, or taking a little vacation in Provence, or whatever we want to do with those winnings.

It’s particularly pleasing to rack up a nice gain for the month when the stock we picked actually fell in value. We call it the “options kicker” and we really get a kick out of it.

So what does this portfolio consist of, and why can we expect to make money if the stock stays flat or moves moderately either up or down? It all comes about from the decay rate of the options that we own and the options that we have sold to someone else.

This portfolio owns call options with strike prices of 62.5 and 65, and most of these calls are LEAPS expiring in January, 2015. All options fall in value every day (assuming that the stock stays flat), but the rate of decay is much lower for longer-term options like the ones we own. Every day, our call LEAPS fall in value by about $1 each (in the options world, this is called theta). Since we own 7 LEAPS, we lose about $7 a day in decay.

Using these LEAPS as collateral, we have sold October, 2013 calls at the 70 and 72.5 strikes to someone else. These calls decay at the rate of $4 a day, and the 7 we have sold short collectively go down in value by $28 every day. Since our long positions are decaying by $7 a day and the ones we sold to someone else are falling by $28, the portfolio is gaining $21 every day that the stock is flat. This number will grow larger as the October 19th expiration is approached. In the last few days, those options will fall by $15 or so (each) while our LEAPS will continue to fall by only about $1 each.

When the October expiration day comes around, we will buy back the expiring short calls if they are in the money (i.e., the strike price is lower than the stock price) and we will sell November calls in their place. If our short calls are out of the money (i.e., the strike price is higher than the current stock price), they will expire worthless and we will be able to keep 100% of what we sold those calls for. At that point we will sell new calls expiring in November.

This is a simplistic explanation of the strategy. It gets a little more complicated when you have to decide which strike prices to sell calls at each month. Since we are bullish on NKE, we usually sell calls that are mostly at out-of-the-money strike prices so that we will gain both from the increase in the stock price and the decay of the calls that we have sold. The above risk profile graph is typical of what we normally have in place because a bigger gain will come our way if the stock gains $3 compared to what we would make if it fell by $3.

You can use this same strategy on just about any stock. It doesn’t have to be Nike. We also have a portfolio that uses the same strategy with one of my favorite companies, Costco. While the strategy may look a little confusing to someone who is not familiar with stock options, it is actually quite simple. I invite you to become a Terry’s Tips Insider and watch how this strategy (and others) are carried out over time.

Once you learn how to do it, you won’t need us any longer. My goal is for every person who subscribes to my service to learn enough in a few months to be able to quit and do it on their own. But first you need to come on board. It only costs a total of $79.95, or you can get it free if you open an account with our link at thinkorswim.

A Useful Way to Think About Delta

Monday, September 9th, 2013

This week we will start a discussion about the “Greeks” – the measures designed to predict how option prices will change when underlying stock prices change or time elapses. It is important to have a basic understanding of some of these measures before embarking on trading options.

I hope you enjoy this short discussion.

Terry 

A Useful Way to Think About Delta: The first “Greek” that most people learn about when they get involved in options is Delta. This important measure tells us how much the price of the option will change if the underlying stock or ETF changes by $1.00.

If you own a call option that carries a delta of 50, that means that if the stock goes up by $1.00, your option will increase in value by $.50 (if the stock falls by $1.00, your option will fall by a little less than $.50).

The useful way to think about delta is to consider it the probability of that option finishing up (on expiration day) in the money. If you own a call option at a strike price of 60 and the underlying stock is selling at $60, you have an at-the-money option, and the delta will likely be about 50. In other words, the market is saying that your option has a 50-50 chance of expiring in the money (i.e., the stock is above $60 so your option would have some intrinsic value).

If your option were at the 55 strike, it would have a much higher delta value because the likelihood of its finishing up in the money (i.e., higher than $55) would be much higher. The stock could fall by $4.90 or go up by any amount and it would end up being in the money, so the delta value would be quite high, maybe 70 or 75. The market would be saying that there is a 70% or 75% chance of the stock ending up above $55 at expiration.

On the other hand, if your call option were at the 65 strike while the stock was selling at $60, it would carry a much lower delta because there would be a much lower likelihood of the stock going up $5 so that your option would expire in the money.

Of course, the amount of remaining life also has an effect on the delta value of an option. We will talk about that phenomenon next week.

Using Puts vs. Calls for Calendar Spreads

Tuesday, March 12th, 2013

A lot of our discussion lately has focused on pre-earnings-announcement strategies (we call them PEA Plays).  This has been brought about by lower option prices (VIX) than we have seen since 2007, a full six years ago.  With option prices this low it has been difficult to depend on collecting premium as our primary source of income with our basic option strategies. 

But the earnings season has now quieted down and will not start up again for several weeks, so we will return to discussing more conventional option issues. 

Terry 

Using Puts vs. Calls for Calendar Spreads 

 It is important to understand that the risk profile of a calendar spread is identical regardless of whether puts or calls are used.  The strike price (rather than the choice of puts or calls) determines whether a spread is bearish or bullish.  A calendar spread at a strike price below the stock price is a bearish because the maximum gain is made if the stock falls exactly to the strike price, and a calendar spread at a strike price above the stock price is bullish. 

When people are generally optimistic about the market, call calendar spreads tend to cost more than put calendar spreads.  For most of 2012 and into 2013, in spite of a consistently rising market, option buyers have been particularly pessimistic.  They have traded many more puts than calls, and put calendar prices have been more expensive. 

Right now, at-the-money put calendar spreads cost more than at-the-money call calendar spreads.  As long as the underlying pessimism continues, they extra cost of the put spreads might be worth the money because when the about-to-expire short options are bought back and rolled over to the next short-term time period, a larger premium can be collected on that sale.  This assumes, of course, that the current pessimism will continue into the future.

If you have a portfolio of exclusively calendar spreads (you don’t anticipate moving to diagonal spreads), it is best to use puts at strikes below the stock price and calls for spreads at strikes which are higher than the stock price.  If you do the reverse, you will own a bunch of well in-the-money short options, and rolling them over to the next week or month is expensive (in-the-money bid-asked spreads are greater than out-of-the-money bid asked spreads so you can collect more cash when rolling over out-of-the-money short options). 

The choice of using puts or calls for a calendar spread is most relevant when considering at-the-money spreads.  When buying at-the-money calendar spreads, the least expensive choice (puts or calls) should usually be made. An exception to this rule comes when one of the quarterly SPY dividends is about to come due.  On the day the dividend is payable (always on expiration Friday), the stock is expected to fall by the amount of the dividend (usually about $.60).  Since the market anticipates this drop in the stock (and knowing the specific day that the stock will fall), put prices are generally bid higher in the weeks before that dividend date. 

The bottom line is that put calendar spreads are preferable to call calendar spreads for at-the-money strikes (or even at strikes slightly higher than the stock price) coming into a SPY dividend date.   Even though the put spreads cost more, the Weekly options that can be sold for enough extra to cover the higher cost.  You do not want to own SPY call calendar spreads which might become in the money on the third Friday of March, June, September, or December because you will have to buy them back on Thursday to avoid paying the dividend, and you may not want to make that purchase to keep your entire portfolio balanced.

How the Dog of Dogs Portfolio Made 124% Last Week

Monday, January 7th, 2013

Two messages  again today – first, a reminder that in celebration of the New Year, I am making the best offer to come on board that I have ever offered.  The offer expires in three days.  Don’t miss out.

 

Second, one of our portfolios gained an astonishing 124% last week.  I want to tell you about this portfolio, reveal the exact positions we hold, and show how it should unfold next week (and thereafter).

How the Dog of Dogs Portfolio Made 124% Last Week

This portfolio is based on the expectation that the volatility ETN VXX will continue its downward slope in the future.  The following is an excerpt from the weekly newsletter I send to my paying subscribers:

Summary of Dog of Dogs Portfolio

This $5000 portfolio is designed to take advantage of the long-term inevitable price pattern of VXX.. Because of contango, the way it is constructed, and the management fee, the stock is destined to fall over the long term.  Twice in the last three years, 1 – 4 reverse splits had to be made so there would be some reasonable price to trade.  We use calendar spreads at strikes below the underlying price.
As a reminder why we call this the Dog of Dogs portfolio, here is the 4-year graph of this ETN since it was formed:

VIX Futures January 2013

The stock never really traded for $2800 as the graph suggests – adjusting for the two reverse splits made it seem that way.  This surely is the worst-performing “stock” in the entire universe over the past four years.

Here are the current positions we hold in this portfolio:

 

     

Dog Of Dogs

 
 

Price:

 

$27.55

Portfolio Gain since 12/04/12 =

+14.5%

   
                   
 

Option

 

Strike

Symbol

Price

Total

Delta

Gamma

Theta

-3

Jan2-13

P

27

VXX130111P27

$0.42

($126)

     

-6

Jan2-13

P

28

VXX130111P28

$0.97

($579)

     

-4

Jan2-13

P

28.5

VXX130111P28.5

$1.32

($528)

     

-3

Jan-13

P

28

VXX130119P28

$1.46

($437)

     

6

Feb-13

P

28

VXX130216P28

$2.59

$1,551

     

6

Feb-13

P

29

VXX130216P29

$3.23

$1,935

     

7

Feb-13

P

30

VXX130216P30

$4.03

$2,818

     

3

Mar-13

P

28

VXX130316P28

$3.45

$1,035

     
         

Cash

$57

-303

-167

$9

  Total Account Value  

$5,726

-5.3%

   

6

        Annualized ROI at today’s net Theta:

57%

 

Results for the week: With VXX down $7.88 (22.2%) for the week, the portfolio gained $3,361 or 142.1%. We were patient while VXX headed higher due to fiscal cliff uncertainties, and this week our patience was rewarded as VXX fell big-time. Next week looks potentially great even if VXX does not continue to fall. A flat or lower price for VXX should result in a double-digit gain for the week.

The risk profile graph shows that if the stock is at the same level ($27.55) next Friday, the premium we collect from having sold puts at the 27, 28, and 28.5 strikes will decay sufficiently to return a gain of $740 (about 12%) even if the stock does not fall as history suggests it will. The graph also shows that a double-digit gain for the week can be expected at almost any lower price for the stock as well (this is possible because we hold six extra uncovered long puts).

Note: Most Terry’s Tips paying subscribers mirror this portfolio (and/or others of our 8 total portfolio offerings) through the Auto-Trade program at thinkorswim rather than making the trades on their own.  We invite you to join us as a paying subscriber at the lowest price we have ever offered.

 

Invest in Yourself in 2013 (at the Lowest Rate Ever)

Monday, December 31st, 2012

To celebrate the coming of the New Year I am making the best offer to come on board that I have ever offered.  It is time limited.  Don’t miss out.

Invest in Yourself in 2013 (at the Lowest Rate Ever)

The presents are unwrapped.  The New Year is upon us.  Start it out right by doing something really good for yourself, and your loved ones. 

The beginning of the year is a traditional time for resolutions and goal-setting.  It is a perfect time to do some serious thinking about your financial future.

I believe that the best investment you can ever make is to invest in yourself, no matter what your financial situation might be.  Learning a stock option investment strategy is a low-cost way to do just that.

As our New Year’s gift to you, we are offering our service at the lowest price in the history of our company.      If you ever considered becoming a Terry’s Tips Insider, this would be the absolutely best time to do it.  Read on…

Don’t you owe it to yourself to learn a system that carries a very low risk and could gain 36% a year as many of our portfolios have done?

So what’s the investment?  I’m suggesting that you spend a small amount to get a copy of my 70-page (electronic) White Paper, and devote some serious early-2013 hours studying the material. 

And now for the Special Offer – If you make this investment in yourself by midnight, January 9, 2013, this is what happens:

For a one-time fee of only $39.95, you receive the White Paper (which normally costs $79.95 by itself), which explains my two 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 :

1) 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. 

2) Emailed Trade Alerts.  I will email you with any trades I make at the end of each trading day, so you can mirror them if you wish (or with our Premium Service, you will receive real-time Trade Alerts as they are made for even faster order placement or Auto-Trading with a broker).  These Trade Alerts cover all 8 portfolios we conduct.

3) If you choose to continue after two free months of the Options Tutorial Program, do nothing, and you’ll be billed at our discounted rate of $19.95 per month (rather than the regular $24.95 rate).

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%”. This report is a good example of how our Shoot Strategy works for individual companies that you believe are headed higher.

With this one-time offer, you will receive all of these benefits for only $39.95, less than the price of the White Paper alone. I have never made an offer better than this in the twelve years I have published Terry’s Tips.  But you must order by midnight on January 9, 2013.  Click here, choose “White Paper with Insider Membership”, and enter Special Code 2013 (or 2013P for Premium Service – $79.95).

Investing in yourself is the most responsible New Year’s Resolution you could make for 2013.  I feel confident that this offer could be the best investment you ever make in yourself.

Happy New Year!  I hope 2013 is your most prosperous ever.  I look forward to helping you get 2013 started right by sharing this valuable investment information 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 8 years of publication – only $39.95 for our entire package - using Special Code 2013 (or 2013P for Premium Service – $79.95).

Back-Testing the 10K Classic Options Strategy

Monday, June 25th, 2012

This week I would like to share a report I sent to paying subscribers this week.  It is a back test of a portfolio we set up just a month ago to carry out the precise strategy outlined in my book, Making 36%: Duffer’s Guide to Breaking Par in the Market Every Year in Good Years and Bad (the revised 2012 edition is the 5th printing).  I believe it gives a definitive answer to the question “Do calendar spreads really work?”

Back-Testing the 10K Classic Options Strategy

The originally-stated goal of the 10K Classic portfolio was to deliver consistent 3% monthly gains and never have a losing month.  This portfolio uses S&P 500 tracking stock (SPY) as the underlying, and uses true deep in-the-money LEAPS as the long side (a full 19 months out to start) and Weekly short calls at several strikes both above the stock price (usually 2 out of 5 to start the week) and below the stock price (usually 3 out of 5 to start the week).  We generally do not make any adjustment trades until Thursday when some calls might be rolled to the next Weekly series at a different strike to make the portfolio more neutral net delta.

I wanted to see what would happen if we made absolutely no adjustments to the 10K Classic during the week based on the risk profile graph of the $9800 portfolio on June 15, 2012 and the weekly price changes for SPY that had taken place over the past 100 weeks.  Here are the results:

This table groups the weekly price changes in dollars into 19 groups and multiplies the number of occurrences in each group by the loss or gain that would have occurred with that price change according to the risk profile graph displayed with the thinkorswim software.  I reduced the indicated gain or loss by $50 each week to account for commission costs and transaction costs (we typically buy back out-of-the-money expiring calls for $3 or so, or pay a small premium when rolling over in-the-money calls).  Of course, VIX was relatively high on this date (about 22), so the gains might be less if VIX were appreciably lower.

In 76% of the weeks, a gain would have been made and in 24% of the weeks, a loss would have resulted. In the gaining weeks, the average gain was $284 and the in the losing weeks, the average loss was $445.   On an average of once a year (1 week out of each 50), a greater-than-15% loss would have occurred if no adjustments were made.

The bottom line is most encouraging.  It says that the portfolio would earn 100% over two years if those positions were in place and no adjustments were made during the week.  In order to carry out a strategy of making no adjustments, however, we would have to be willing to tolerate a weekly loss of about $1400 once every year.  

Since about two weeks a year, very large weekly losses might occur (averaging about $1000), it seems best to slightly alter our goal of never having a losing month.  When we encounter one of these weeks, the other 3 weeks of the month might not always do well enough to cover that large a loss.  Our new goal will to never have a losing month as long as the stock does not fluctuate more than $7 in one week during the month.  The more important 3%-a-month goal will continue to be in place. 

The first month for the portfolio (up 5.1%) is certainly an encouraging start, especially with the volatility that we experienced during that time period. 

The originally-stated goal of the 10K Classic portfolio was to deliver consistent 3% monthly gains and never have a losing month.  This portfolio uses S&P 500 tracking stock (SPY) as the underlying, and uses true deep in-the-money LEAPS as the long side (a full 19 months out to start) and Weekly short calls at several strikes both above the stock price (usually 2 out of 5 to start the week) and below the stock price (usually 3 out of 5 to start the week).  We generally do not make any adjustment trades until Thursday when some calls might be rolled to the next Weekly series at a different strike to make the portfolio more neutral net delta.

I wanted to see what would happen if we made absolutely no adjustments to the 10K Classic during the week based on the risk profile graph of the $9800 portfolio on June 15, 2012 and the weekly price changes for SPY that had taken place over the past 100 weeks.  Here are the results:

This table groups the weekly price changes in dollars into 19 groups and multiplies the number of occurrences in each group by the loss or gain that would have occurred with that price change according to the risk profile graph displayed with the thinkorswim software.  I reduced the indicated gain or loss by $50 each week to account for commission costs and transaction costs (we typically buy back out-of-the-money expiring calls for $3 or so, or pay a small premium when rolling over in-the-money calls).  Of course, VIX was relatively high on this date (about 22), so the gains might be less if VIX were appreciably lower.

In 76% of the weeks, a gain would have been made and in 24% of the weeks, a loss would have resulted. In the gaining weeks, the average gain was $284 and the in the losing weeks, the average loss was $445.   On an average of once a year (1 week out of each 50), a greater-than-15% loss would have occurred if no adjustments were made.

The bottom line is most encouraging.  It says that the portfolio would earn 100% over two years if those positions were in place and no adjustments were made during the week.  In order to carry out a strategy of making no adjustments, however, we would have to be willing to tolerate a weekly loss of about $1400 once every year.  

Since about two weeks a year, very large weekly losses might occur (averaging about $1000), it seems best to slightly alter our goal of never having a losing month.  When we encounter one of these weeks, the other 3 weeks of the month might not always do well enough to cover that large a loss.  Our new goal will to never have a losing month as long as the stock does not fluctuate more than $7 in one week during the month.  The more important 3%-a-month goal will continue to be in place. 

The first month for the portfolio (up 5.1%) is certainly an encouraging start, especially with the volatility that we experienced during that time period.

Using Puts vs. Calls for Calendar Spreads

Monday, April 16th, 2012

Over the last two weeks, the market (SPY) has fallen about 3%, the first two down weeks of 2012.  At Terry’s Tips, we carry out a bearish portfolio called 10K Bear which subscribers mirror if they want some protection against these kinds of weeks.  They were rewarded this time, as usual, when the market turned south.  They gained 45% on their money while SPY fell 3%.

10K Bear is down slightly for all of 2012 because up until the last two weeks, the market has been quite strong.  If someone invested in all eight of our portfolios, however, their net gain so far in 2012 would be greater than 50%.  How many investments out there do you suppose are doing that well?

10K Bear predominantly uses calendar spreads (puts) at strike prices which are lower than the current price of the stock.  Today I would like to discuss a little about the choice of using puts or calls for calendar spreads.

Using Puts vs. Calls for Calendar Spreads

It is important to understand that the risk profile of a calendar spread is identical regardless of whether puts or calls are used. The strike price (rather than the choice of puts or calls) determines whether a spread is bearish or bullish.  A calendar spread at a strike price below the stock price is a bearish because the maximum gain is made if the stock falls exactly to the strike price, and a calendar spread at a strike price above the stock price is bullish.

When people are generally optimistic about the market, call calendar spreads tend to cost more than put calendar spreads.  For most of 2012, in spite of a consistently rising market, option buyers have been particularly pessimistic.  They have traded many more puts than calls, and put calendar prices have been more expensive.

Right now, at-the-money put calendar spreads cost more than at-the-money call calendar spreads.  As long as the underlying pessimism continues, they extra cost of the put spreads might be worth the money because when the about-to-expire short options are bought back and rolled over to the next short-term time period, a larger premium can be collected on that sale.  This assumes, of course, that the current pessimism will continue into the future.

If you have a portfolio of exclusively calendar spreads (you don’t anticipate moving to diagonal spreads), it is best to use puts at strikes below the stock price and calls for spreads at strikes which are higher than the stock price.  If you do the reverse, you will own a bunch of well in-the-money short options, and rolling them over to the next week or month is expensive (in-the-money bid-asked spreads are greater than out-of-the-money bid asked spreads so you can collect more cash when rolling over out-of-the-money short options).

The choice of using puts or calls for a calendar spread is most relevant when considering at-the-money spreads.  When buying at-the-money calendar spreads, the least expensive choice (puts or calls) should usually be made. An exception to this rule comes when one of the quarterly SPY dividends is about to come due.  On the day the dividend is payable (always on expiration Friday), the stock is expected to fall by the amount of the dividend (usually about $.60).  Since the market anticipates this drop in the stock (and knowing the specific day that the stock will fall), put prices are generally bid higher in the weeks before that dividend date.

This bottom line is that put calendar spreads are preferable to call calendar spreads for at-the-money strikes (or even at strikes slightly higher than the stock price) coming into a SPY dividend date. Even though the put spreads cost more, the Weekly options that can be sold for enough extra to cover the higher cost.  You do not want to own SPY call calendar spreads which might become in the money on the third Friday of March, June, September, or December because you will have to buy them back on Thursday to avoid paying the dividend, and you may not want to make that purchase to keep your entire portfolio balanced.

Making 36%

Making 36% — A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad

This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).

Learn why Dr. Allen believes that the 10K Strategy is less risky than owning stocks or mutual funds, and why it is especially appropriate for your IRA.

Order Now

Success Stories

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