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Archive for the ‘SPY’ Category

Calendar Spreads Tweak #4

Wednesday, September 21st, 2016

Today I would like to discuss how you can use calendar spreads for a short-term strategy based around the date when a stock goes ex-dividend. I will tell you exactly how I used this strategy a week ago when SPY paid its quarterly dividend.


Calendar Spreads Tweak #4

Four times a year, SPY pays a dividend to owners of record on the third Friday of March, June, September, and December. The current dividend is about $1.09. Each of these events presents a unique opportunity to make some money by buying calendar spreads using puts to take advantage of the huge time premium in the puts in the days leading up to the dividend day.

Since the stock goes down by the amount of the dividend on the ex-dividend day, the option market prices the amount of the dividend into the option prices. Check out the situation for SPY on Wednesday, September 14, 2016, two days before an expected $1.09 dividend would be payable. At the time of these prices, SPY was trading just about $213.70.

Facebook Bid Ask Puts Calls Sept 2016

Facebook Bid Ask Puts Calls Sept 2016

Note that the close-to-the-money options at the 213.5 strike show a bid of $1.11 for calls and $1.84 for puts. The slightly out-of-the-money put options are trading for nearly double the prices for those same distance-out calls. The market has priced in the fact that the stock will fall by the amount of the dividend on the ex-dividend day. In this case, that day is Friday.

SPY closed at $215.28 on Thursday. Friday’s closing price was $213.37, which is $1.91 lower. However, the change for the day was indicated as -$.82. The difference ($1.09) was the size of the dividend.

On Wednesday and Thursday, I decided to sell some of those puts that had such large premiums in them to see if there might be some opportunity there. While SPY was trading in the $213 to $216 range, I bought put calendar spreads at the 214.5, 214, 213.5, and 213 strikes, buying 21Oct16 puts at the even-strike numbers and 19Oct16 puts for the strikes ending in .5 (only even-number strikes are offered in the regular Friday 21Oct16 options). Obviously, I sold the 16Sep16 puts in each calendar spread.

Note: On August 30th, the CBOE offered a new series of SPY options that expire on Wednesday rather than Friday. The obvious reason for this offering involves the dividend situation. Investors who write calls against their SPY stock are in a real bind when they sell calls that expire on an ex-dividend Friday. First, there is very little time premium in those calls. Second, there is a serious risk that the call will be exercised by the holder to take the stock and capture the dividend. If the owner of SPY sold the series that expired on Wednesday rather than Friday, the potential problem would be avoided.

I paid an average of $2.49 including commissions for the four calendar spreads and sold them on Friday for an average of $2.88 after commissions. I sold every spread for more money that it cost (including commissions). My net gain for the two days of trading was just over 15% after commissions.

The stock fell $.82 (after accounting for the $1.09 dividend). If it had gone up by that amount, I expect that my 15% gain would also have been there. It is unclear if the gains would have been there if SPY had made a big move, say $2 or more in either direction on Friday. My rough calculations showed that there would still be a profit, but it would be less than 15%. Single-day moves of more than $2 are a little unusual, however, so it might not be much to be concerned about.

Bottom line, I am delighted with the 15% gain, and will probably try it again in three months (at the December expiration). In this world of near-zero interest rates, many investors would be happy with 15% for an entire year. I collected mine in just two days.

Trading SPY options is particularly easy because of the extreme liquidity of those options. In most cases, I was able to get an execution at the mid-point price of the calendar spread bid-ask range. I never paid $.01 more or received more than $.01 less than the mid-point price when trading these calendar spreads.

While liquidity is not as great in most options markets, it might be interesting to try this same strategy with other dividend-payers such as JNJ where the dividend is also over $1.00. I regularly share these kinds of trading opportunities with Terry’s Tips Insiders so that they can follow along in their own accounts if they wish.

Happy trading.

How To Protect Yourself Against a Market Crash With Options

Monday, May 23rd, 2016

Today’s idea is a little complicated, but it involves an important part of any prudent investment strategy. Market crashes do come along every once in a while, and we are eight years away from the last one in 2008. What will happen to your nest egg if it happens again this year?

Options can be a good form of market crash insurance, and it is possible to set up a strategy that might even make a small gain if the crash doesn’t come along. That possibility sets it apart from most forms of insurance which cost you out-of-pocket money if the calamity you insure against doesn’t occur.


How To Protect Yourself Against a Market Crash With Options

There are some strong indications that the old adage “Sell in May and Go Away” might be the appropriate move right now. Goldman Sachs has downgraded its outlook on equities to “neutral” over the next 12 months, saying there’s no particular reason to own them. “Until we see sustained signals of growth recovery, we do not feel comfortable taking equity risk, particularly as valuations are near peak levels,” the firm said in a research note.

For several months, Robert Shiller has been warning that the market is seriously overvalued by his unique method of measuring prices against long-term average p/e’s. George Soros is keeping the bears happy as well, doubling his wager against the S&P 500. The billionaire investor, who has been warning that the 2008 financial crisis could be repeated due to China’s economic slowdown, bought 2.1M-share “put” options in SPY during Q1. The magnitude of his bet against SPY is phenomenal, essentially 200 million shares short. Of course, he almost always deals in stratospheric numbers, but the size of this bet indicates that he feels pretty strongly about this one. He didn’t become a billionaire by being on the wrong side of market bets.

So what can you do to protect yourself against a big tumble in the market? We are setting up a bearish portfolio for Terry’s Tips subscribers, and this is what it will look like. It is based on the well-known fact that when the market crashes, volatility soars, and when volatility soars, the Exchange Traded Product (ETP) called VXX soars along with it.

Some people buy VXX as market crash insurance (or its steroid-like cousin, UVXY). Over the long run, VXX has been a horrible investment, however, possibly the worst thing you could have done with your money over the past six years. It has fallen from a split-adjusted $4000 to its present price of about $15. It has engineered 1-for-4 reverse splits three times to make the price worth bothering to trade. The split usually occurs when it gets down to about $12, so you can expect another reverse split soon.
An option strategy can be set up that allows you to own the equivalent of VXX while not subjecting you to the long-run inevitable downward trend. When volatility does pick up, VXX soars. In fact, it doubled once and went up 50% another time, both temporarily, in the last year alone. While it is a bad long-term investment, if your timing is right, you might pick up a windfall. Our options strategy is designed to achieve the potential upside windfall while avoiding the long-term prospects you face by merely buying the ETP.

Our new portfolio will buy VXX 20Jan17 15 calls and sell fewer contracts in short-term calls. Sufficient short-term premium will be collected from selling the short term calls to cover the decay on the long calls (and a little bit more).

This portfolio will start with $3000. The entire amount will not be used at the outset, but rather be held in cash in case it might be needed to cover a maintenance call in case the market moves higher.

These might be the starting positions:

BTO 3 VXX 20Jan17 15 calls (VXX170120C15)
STO 3 VXX 17Jun16 15 calls (VXX160617C15) for a debit of $2.40 (buying a diagonal)

BTO 3 VXX 20Jan17 15 calls (VXX170120C15)
STO 3 VXX 24Jun16 16 calls (VXX160624C16) for a debit of $2.45 (buying a diagonal)

BTO 4 VXX 20Jan17 16 calls (VXX170120C16) for $3.30

Here is what the risk profile graph looks like with those positions as of June 18th after the short calls expire:
VXX Better Bear Risk Profile Graph May 2016

VXX Better Bear Risk Profile Graph May 2016
You can see that the portfolio will make gains no matter how high VXX might go. It will make a small gain (about 8% for the month) if the stock stays flat, and starts losing if VXX moves below $14.50. If it falls that far, we might sell call or two at the 14 strike and incur a maintenance requirement which would be partially offset by the amount we collected from selling the call(s). A trade like this would reduce or eliminate a loss if the ETP continues to fall, and it might have to be repeated if VXX continues even lower. At some point, some long calls might need to be rolled down to a lower strike to eliminate maintenance requirements that come along when you sell a call at a lower strike than the long call that covers it.

The above positions could be put on for about $2800. There would be about $200 in cash remaining for the possible maintenance requirement in case one might be necessary.

You probably should not attempt to set up and carry out this strategy unless you are familiar with options trading as it is admittedly a little complicated. A better idea might be to become a Terry’s Tips Insider and open an account at thinkorswim so that these trades could automatically be made for you through their Auto-Trade program.

Every investment portfolio should have a little downside insurance protection. We believe that options offer the best form for that kind of insurance because it might be possible to make a profit at the same time as providing market crash insurance.

As with all forms of investing, you should not be committing money that you truly cannot afford to lose.

If the market knocks you down, try laughing instead of crying – Some Market Definitions

Wednesday, February 17th, 2016

First, an update on the Facebook (FB) trade I told you about a week ago – it was trading about $98 and the spread I suggested would make 66% if the stock was any higher than $97.50 in one month. FB is now at almost $105 and that is looking like a sure winner. It’s a good feeling to make 66% while lots of people are anguishing over recent losses. Now for a few chuckles today…


If the market knocks you down, try laughing instead of crying –  Some Market Definitions:

CEO –Chief Embezzlement Officer.

CFO– Corporate Fraud Officer.

BULL MARKET — A random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET — A 6 to 18 month period when the kids get no allowance, the wife gets no jewellery, and the husband gets no sex.

VALUE INVESTING — The art of buying low and selling lower.

P/E RATIO — The percentage of investors wetting their pants as the market keeps crashing.

STANDARD & POOR — Your life in a nutshell.

STOCK ANALYST — Idiot who just downgraded your stock.

STOCK SPLIT — When your ex-wife and her lawyer split your assets equally between themselves.

FINANCIAL PLANNER — A guy whose phone has been disconnected.

MARKET CORRECTION — The day after you buy stocks.

OUT OF THE MONEY — When your checking account’s overdraft hits bottom.

CASH FLOW– The movement your money makes as it disappears down the toilet.

YAHOO — What you yell after selling it to some poor sucker for $240 per share.

WINDOWS — What you jump out of when you’re the sucker who bought Yahoo @ $240 per share.

INSTITUTIONAL INVESTOR — Past year investor who’s now locked up in a nuthouse.

PROFIT — An archaic word no longer in use.


Portfolios Gain an Average of 10% for the Month

Monday, December 7th, 2015

This week we are reporting the results for the actual portfolios we carry out at Terry’s Tips. Many of our subscribers mirror our trades in their own accounts or have thinkorswim execute trades automatically for them through their free Auto-Trade program. In addition, we are showing the actual positions we currently hold in one of these portfolios so you can get a better idea of how we carry out the 10K Strategy.

Enjoy the full report.


Portfolios Gain an Average of 10% for the Month

The market (SPY) edged up 0.8% in November. In spite of mid-month relatively high volatility, things ended up just about where they started. The 6 actual portfolios carried out at Terry’s Tips outperformed the market by a factor of 12, gaining an average of 10.0%.

This 10% was less than October’s 14.2% average gain for the portfolios. The big reason why November lagged behind October was that we had one big losing portfolio this month (more on that later). Here are the results for each portfolio:

First Saturday Report Chart November 2015

First Saturday Report Chart November 2015
 * After doubling in value, portfolio had 2-for-1 split in October 2015

** After doubling in value, portfolio had 2-for-1 split in September 2015.
***Portfolio started with $4000 and $5600 withdrawn in December 2014.

S&P 500 Price Change for November = +0.8%
Average Portfolio Company Price Change for November = +1.8%
Average Portfolio Value Change for November = +10.0%

Further Comments: We have now recorded a 24.2% gain for the first two months of our First Saturday Reports. This is surely a remarkable result, 4 times better than the 5.4% that the market gained over those two months. Our results work out to an annualized rate of 145%, a level that we are surely not going to be able to maintain forever. But is has been fun so far.

All of the underlying stock prices did not gain in November. SBUX fell 1.3%, yet the Java Jive portfolio picked up 13.6%, proving once again that a lower stock price can still yield good gains, just as long as the drop is not too great.

Only one of our underlying stocks had an earnings announcement this month. Facebook (FB) announced and the stock edged higher, causing our Foxy Facebook to be our greatest gainer (up 22.1%) for November. We will have two earnings announcements in December – COST on the 8th and NKE which reports on the 20th or 21st. NKE also will have a 2-for-1 stock split on December 23rd. History shows that stocks which have a split tend to move higher after the split is announced, but then they move lower after the split has taken place. We will keep that in mind when we establish option positions later this month.

New Portfolio JNJ Jamboree Starts off With a Nice Gain: In its first month of operation, our newest portfolio gained 14.3% while the stock closely mirrored the market’s gain, picking up 0.9% compared to the market’s 0.8% gain. JNJ pays a healthy dividend which reduces volatility a bit, but the portfolio’s early performance demonstrates that the 10K Strategy can make good gains even when the options carry a low Implied Volatility (IV).

What Happened in Vista Valley, our big Loser This Month? NKE experienced extreme volatility, first dropping when Dick’s had a dismal earnings announcement, and then recovering when reports indicated that NKE was doing much better than most of the retailers. In the second week of November, NKE crashed $9.92 (7.5%). This is a truly unusual drop, and immediately forced us to make a decision. Do we lower the strike prices of our options to protect ourselves against a further drop, or do we hang on and wait for a recovery?

We were a little concerned by some analyst reports which argued that while NKE was a great company, its current valuation was extremely high (and probably unsustainable). So we lowered the strike prices from the 130–135 range to the 120-125 range. This ended up being a big mistake, because in the subsequent week, the stock rose $10.79, totally reversing the week-earlier drop. This forced us to sell off the lower-strike spreads and start over again with the higher strikes we had at the beginning of the month. If we had done nothing, the portfolio would have made a large gain for the month. Since we have selected underlyings that we believe are headed higher, in the future we should be slow to adjust to the downside unless there is strong evidence to refute our initial positive take on the company. This experience is another reminder that high volatility is the Darth Vader of the 10K Strategy world.

Here are the actual positions we held in one of the 6 Terry’s Tips portfolios. This portfolio uses the S&P 500 tracking stock (SPY) as the underlying. We have been running this portfolio for only two months. These positions are typical of how we carry out the 10K Strategy for all the portfolios.
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Summary of Spy 10K Classic Portfolio. This $5000 portfolio was set up on October 6, 2015. It uses the 10K Strategy with short calls in several weekly series, some of which expire each week and is counted as one of our stock-based portfolios (even though it is not technically a stock, but an ETP).

First Saturday Report November 2015 10K Spy Positions

First Saturday Report November 2015 10K Spy Positions
 Results for the week: With SPY up $1.69 (0.8%) for the 5-week month, the portfolio gained $491 or 8.6%. This is about what we should expect when the market is ultimately flat, but with high volatility inside the month. We dodged a bullet by refraining from adjusting last week when the stock tanked on Thursday because it recovered that entire loss on Friday.

Our positions right now are a little unusual for us because we only have short calls in the next two weekly option series. Usually, we have 3 or 4 short series in place. The reason we ended up where we are right now is that when we buy back expiring calls each Friday, if the market that week has been flat or down, we sell next-week at-the-money calls. If the market has moved higher, we go to further-out series and sell at strikes which are higher than the stock price. Most weeks in November were flat or down, so we did not move out to further-out option series.

Looking forward to next week, the risk profile graph shows that our break-even range extends from about $2 on the downside to $3 on the upside. An absolutely flat market should result in a much greater weekly gain than we experienced last month because we have an unusually high number of near-the-money calls expiring next week.

First Saturday Report November 2015 10K Spy Risk Profile
First Saturday Report November 2015 10K Spy Risk Profile

As we approach the regular monthly option series for December (they expire on the third Friday, the 18th), we need to remember that a dividend is payable to holders of SPY on December 17. If we have short in-the-money calls on that date, we risk having them exercised and leaving us with the obligation to pay that dividend. For that reason, we will roll out of any in-the-money short calls a day earlier than usual to avoid this possibility.

How to Make Extraordinary Returns with Semi-Long Option Plays

Friday, November 27th, 2015

One of my favorite stock option plays is to make a bet that sometime in the future, a particular stock will be no lower than it is today. If you are right, you can make 50% – 100% without doing anything other than making a single option trade and waiting out the time period. Ten weeks ago, I made two specific recommendations (see my September 8, 2015 blog) for making this kind of bet, one which would make 62% in 4 months and the other 100% in that same time period. Today I would like to update those suggestions and discuss a little about how you set up the option trade if you know of a company you feel good about.

If you missed them, be sure to check out the short videos which explains why I like calendar spreads, and How to Make Adjustments to Calendar and Diagonal Spreads.


How to Make Extraordinary Returns with Semi-Long Option Plays

What is a long-term bet in the options world? A month? A week? I spend most of my time selling options that have only a week of remaining life. Sometimes they only have a day of life before they expire (hopefully worthless). So I don’t deal with long-term options, at least most of the time.

Most options plays are short-term plays. People who trade options tend to have short-term time horizons. Maybe they have ADHD and can’t handle long waits to learn whether they made a gain or not. But there are all sorts of different ways you can structure options plays. While most of my activity involves extremely short-term bets, I also have quite a bit of money devoted to longer-term bets which take 4 months to a year before the pay-day comes along.

One of my favorite semi-long (if there is such a word) option plays involves picking a stock which I particularly like for the long run, or one which has been beaten down for some reason which doesn’t seem quite right. When I find such a stock, I place a bet that sometime in the future, it will be at least as high as it is now. If I am right, I can usually make 50% – 100% on the bet, and I know in advance exactly what the maximum possible gain or loss will be, right to the penny.

Ten weeks ago, I liked where the price of SVXY was. This ETP is inversely correlated with option volatility. When volatility moves higher, SVXY falls, and vice versa. At the time, fears of a world-wide slowdown were emerging. Markets fell and volatility soared. VIX, the so-called “fear index” rose from the 12 – 14 range it had maintained for a couple of years to over 20. SVXY tanked to $45, and had edged up to $47 when I recommended placing a bet that in 4 months (on January 15, 2016), SVXY would be $40 or higher.

This trade would make the maximum gain even if SVXY fell by $7 and remained above $40 on that date:

Buy to Open 1 SVXY Jan-16 35 put (SVXY160115P35)
Sell to Open 1 SVXY Jan-16 40 put (SVXY160115P40) for a credit of $1.95 (selling a vertical)

Quoting from my September 8th blog, “When this trade was executed, $192.50 (after a $2.50 commission) went into my account. If on January 15, 2016, SVXY is at any price higher than $40, both of these puts will expire worthless, and for every vertical spread I sold, I won’t have to make a closing trade, and I will make a profit of exactly $192.50.

So how much do I have to put up to place this trade? The broker looks at these positions and calculates that the maximum loss that could occur on them would be $500 ($100 for every dollar of stock price below $40). For that to happen, SVXY would have to close below $35 on January 15th. Since I am quite certain that it is headed higher, not lower, a drop of this magnitude seems highly unlikely to me.

The broker will place a $500 maintenance requirement on my account. This is not a loan where interest is charged, but merely cash I can’t use to buy shares of stock. However, since I have collected $192.50, I can’t lose the entire $500. My maximum loss is the difference between the maintenance requirement and what I collected, or $307.50.

If SVXY closes at any price above $40 on January 15, both puts will expire worthless and the maintenance requirement disappears. I don’t have to do anything except think of how I will spend my profit of $192.50. I will have made 62% on my investment. Where else can you make this kind of return for as little risk as this trade entails?

Of course, as with all investments, you should only risk what you can afford to lose. But I believe the likelihood of losing on this investment is extremely low. The stock is destined to move higher, not lower, as soon as the current turbulent market settles down.

If you wanted to take a little more risk, you might buy the 45 put and sell a 50 put in the Jan-15 series. You would be betting that the stock manages to move a little higher over the next 4 months. You could collect about $260 per spread and your risk would be $240. If SVXY closed any higher than $50 (which history says that it should), your profit would be greater than 100%. I have also placed this spread trade in my personal account (and my charitable trust account as well).”

It is now 10 weeks later. SVXY is trading at $58 ½. I could buy back the first spread for $.45 ($47.50 after commissions). That would give me a $145 profit on my maximum risk of $307.50. That works out to a 47% gain for 10 weeks. That was easy money for me.

The other spread I suggested, raising the strikes of both the long and short sides by $10, could have been sold for $260. You could buy back the spread for $102.50 including commissions, giving you a profit of $157.50 on a maximum risk of $240, or 65%. Or you could just wait it out and enjoy the full 108% gain if SVXY closes no lower than $50 on the third Friday in January. I am hanging on to both my original bets and not selling now unless something better comes along.

In some Terry’s Tips, we make similar investments like this each January, betting that one year later, stocks we like will be at least where they were at the time. The portfolio we set up this year made those kinds of bets on GOOG, AAPL, and SPY. It will make 92% on the maximum amount at risk in 6 weeks if these three stocks are where they are today or any higher when the January 2016 puts expire. In fact, GOOG could fall by $155 and we would still make over 100% on that spread we had sold in January 2015. We could close out all three spreads today and make a gain of 68% on our maximum risk.

These are just some examples of how you can make longer-term bets on your favorite stocks with options, and making extraordinary gains even if the stock doesn’t do much of anything.


How to Set Up a Pre-Earnings Announcement Options Strategy

Monday, November 9th, 2015

One of the best times to set up an options strategy is just before a company announces earnings.  Today I would like to share our experience doing this last month with Facebook (FB) last month.  I hope you will read all the way through – there is some important information there.If you missed them, be sure to check out the short videos which explains why I like calendar spreads , and  How to Make Adjustments to Calendar and Diagonal Spreads.


How to Set Up a Pre-Earnings Announcement Options Strategy

When a company reports results each quarter, the stock price often fluctuates far more than usual, depending on how well the company performs compared both to past performance and to the market’s collective level of expectations.  Anticipating a big move one way or another, just prior to the announcement, option prices skyrocket, both puts and calls.

At Terry’s Tips, our basic strategy involves selling short-term options to others (using longer-term options as collateral for making those sales).  One of the absolute best times for us is the period just before an upcoming earnings announcement. That is when we can collect the most premium.

An at-the-money call (stock price and strike price are the same) for a call with a month of remaining life onFacebook (FB) trades for about $3 ($300 per call).  If that call expires shortly after an earnings announcement, it will trade for about $4.80.  That is a significant difference. In options parlance, option prices are “high” or “low” depending on their implied volatility (IV).  IV is much higher for all options series in the weeks before the announcement.  IV is at its absolute highest in the series that expires just after the announcement.  Usually that is a weekly option series.

Here are IV numbers for FB at-the-money calls before and after the November 4th earnings announcement:

One week option life before, IV = 57  One week option life after, IV = 25
Two week option life before, IV = 47  Two week option life after, IV = 26
One month option life before, IV =38  One month option life after, IV = 26
Four month option life before, IV = 35  Four month option life after, IV = 31

These numbers clearly show that when you are buying a 4-month-out call (March, IV=35) and selling a one-week out call (IV=57), before an announcement, you are buying less expensive options (lower IV) than those which you are selling. After the announcement, this gets reversed.  The short-term options you are selling are relatively less expensive than the ones you are buying.  Bottom line, before the announcement, you are buying low and selling high, and after the announcement, you are buying high and selling low.

You can make a lot of money buying a series of longer-term call options and selling short-term calls at several strike prices in the series that expires shortly after the announcement.  If the long and short sides of your spread are at the same strike price, you call it a calendar spread, and if the strikes are at different prices, it is called a diagonal spread.

Calendar and diagonal spreads essentially work the same, with the important point being the strike price of the short option that you have sold.  The maximum gain for your spread will come if the stock price ends up exactly at that strike price when the option expires.  If you can correctly guess the price of the stock after the announcement, you can make a ton of money.

But as we all know, guessing the short-term price of a stock is a really tough thing to do, especially when you are trying to guess where it might end up shortly after the announcement.  You never know how well the company has done, or more importantly, how the market will react to how the company has performed.  For that reason, we recommend selecting selling short-term options at several different strike prices.  This increases your chances of having one short strike which gains you the maximum amount possible.

Here are the positions held in our actual FB portfolio at Terry’s Tips on Friday, October 30th, one week before the Nov-1 15 calls would expire just after FB announced earnings on November 4th:

Foxy Face Book Positions Nov 2015

Foxy Face Book Positions Nov 2015

We owned calls which expired in March 2016 at 3 different strikes (97.5, 100, and 105) and we were short calls with one week of remaining life at 4 different strikes (103, 105, 106, and 107). There was one calendar spread at the 105 strike and all the others were diagonal spreads.  We owned 2 more calls than we were short.  This is often part of our strategy just before announcement day.  A fairly large percent of the time, the stock moves higher in the day or two before the announcement as anticipation of a positive report kicks in.  We planned to sell another call before the announcement, hopefully getting a higher price than we would have received earlier.  (We sold a Nov1-15 204 call for $2.42 on Monday).  We were feeling pretty positive about the stock, and maintained a more bullish (higher net delta position) than we normally do.

Here is the risk profile graph for the above positions.  It shows our expected gain or loss one week later (after the announcement) when the Nov1-15 calls expired:

Foxy Face Book Rick Profile Graph Nov 2015

Foxy Face Book Rick Profile Graph Nov 2015

When we produced this graph, we instructed the software to assume that IV for the Mar-16 calls would fall from 35 to 30 after the announcement.  If we hadn’t done that, the graph would have displayed unrealistically high possible returns.  You can see with this assumption, a flat stock price should result in a $300 gain, and if the stock rose $2 or higher, the gain would be in the $1000 range (maybe a bit higher if the stock was up just moderately because of the additional $242 we collected from selling another call).

So what happened?  FB announced earnings that the market liked.  The stock soared from about $102 to about $109 after the announcement (but then fell back a bit on Friday, closing at $107.10).  We bought back the expiring Nov1-15 calls (all of which were in the money on Thursday or Friday) and sold further-out calls at several strike prices to get set up for the next week.   The portfolio gained $1301 in value, rising from $7046 to $8347, up 18.5% for the week.  This is just a little better than our graph predicted.  The reason for the small difference is that IV for the March calls fell only to 31, and we had estimated that it would fall to 30.

You can see why we like earnings announcement time, especially when we are right about the direction the stock moves.  In this case, we would have made a good gain no matter how high the stock might go (because we had one uncovered long call).  Most of the time, we select short strikes which yield a risk profile graph with more downside protection and limited upside potential (a huge price rise would yield a lower gain, and possibly a loss).

One week earlier, in our Starbucks (SBUX) portfolio, we had another earnings week.  SBUX had a positive earnings report, but the market was apparently disappointed with guidance and the level of sales in China, and the stock was pushed down a little after the announcement.  Our portfolio managed to gain 18% for the week.

Many people would be happy with 18% a year on their invested capital, and we have done it in a single week in which an earnings announcement took place.  We look forward to having three more such weeks when reporting season comes around once again over the course of a year, both for these two underlyings and the 4 others we also trade (COST, NKE, JNJ, and SPY).
“I have confidence in your system…I have seen it work very well…currently I have had a first 100% gain, and am now working to diversify into more portfolios.  Goldman/Sachs is also doing well – up about 40%…

Why I Like Calendar Spreads

Wednesday, October 21st, 2015

I have created a short video which explains why I like calendar spreads.  It also shows the exact positions we hold in 3 Terry’s Tips actual portfolios so you can get a better idea of how we use calendar spreads.


I hope you will enjoy the video, and I welcome your comments.




Why I Like Calendar Spreads


The basic reason I like calendar spreads (aka time spreads) is that they allow you to make extraordinary gains compared to owning the stock if you are lucky enough to trade in a stock that stays flat or moves moderately higher.


I get a real kick out of making serious gains when the stock just sits there and doesn’t do anything.  Calendar spreads almost always do extremely well when nothing much happens in the market.


While I call them calendar spreads, if you look at the actual positions that we hold in our portfolios, you will see that the long calls we own are not always at the same strike prices as the short calls we have sold to someone else.  That makes them diagonal spreads rather than calendar spreads, but they operate exactly the same as calendar spreads.


With both calendar and diagonal spreads, the long calls you own decay at a slower rate than the short calls that you have sold to someone else, and you benefit from the differences in decay rates.  Both spreads do best when the stock ends up precisely at the strike price of an expiring option.  At that point, the short options expire worthless and new options can be sold at a further-out time series at the maximum time premium of any option in that series.


If you have sold short options at a variety of strike prices you can make gains over a wider range of possible stock prices.  We use the analyze tab on the free thinkorswim software to select calendar and diagonal spreads which create a risk profile graph which provides a break-even range that lets us sleep at night and will yield a profit if the stock ends up within that range.  I encourage you to try that software and create your own risk profile for your favorite stock, and create a break-even range which you are comfortable with.

How to Fine-Tune Market Risk With Weekly Options

Monday, August 17th, 2015

This week I would like to share an article word-for-word which I sent to Insiders this week.  It is a mega-view commentary on the basic options strategy we conduct at Terry’s Tips.  The report includes two tactics that we have been using quite successfully to adjust our risk level each week using weekly options.

If you are already trading options, these tactic ideas might make a huge difference to your results.  If you are not currently trading options, the ideas will probably not make much sense, but you might enjoy seeing the results we are having with the actual portfolios we are carrying out for our subscribers.


How to Fine-Tune Market Risk With Weekly Options

“Bernie Madoff attracted hundreds of millions of dollars by promising investors 12% a year (consistently, year after year). Most of our portfolios achieve triple that number and hardly anyone knows about us.  Even more significant, our returns are actual – Madoff never delivered gains of any sort. There seems to be something wrong here.

Our Capstone Cascade portfolio is designed to spin off (in cash) 36% a year, and it has done so for 10 consecutive months and is looking more and more likely that we will be able to do that for the long run (as long as we care to carry it out).  Actually, at today’s buy-in value (about $8300), the $3600 we withdraw each year works out to be 43%.  Theta in this portfolio has consistently added up to double what we need to make the monthly withdrawal, and we gain even more from delta when SVXY moves higher.

Other portfolios are doing even better.  Rising Tide has gained 140% in just over two years while the underlying Costco has moved up 23.8% (about what Madoff promised).   Black Gold appears to be doing even better than that (having gained an average of 3% a week since it was started).

A key part of our current strategy, and a big change from how we operated in the past, is having short options in each of several weekly series, with some rolling over (usually about a month out) each week.  This enables us to tweak the risk profile every Friday without making big adjustments that involve selling some of the long positions.  If the stock falls during a week, we will find ourselves with previously-sold short options that  are at higher strikes than the stock price, and we will collect the  maximum time premium in a month-out series by selling an at-the-money (usually call) option.

If the stock rises during the week, we may find that we have more in-the-money calls than we would normally carry, so we will sell new month-out calls which are out of the money.  Usually, we can buy back in-the-money calls and replace them with out-of-the-money calls and do it at a credit, again avoiding adjustment trades which might cause losses when the underlying displays whip-saw price action.

For the past several weeks, we have not suffered through a huge drop in our underlyings, but earlier this year, we incurred one in SVXY.  We now have a way of contending with that kind of price action when it comes along.  If a big drop occurs, we can buy a vertical call spread in our long calls and sell a one-month-out at-the-money call for enough cash to cover the cost of rolling the long side down to a lower strike.  As long as we don’t have to come up with extra cash to make the adjustment, we can keep the same number of long calls in place and continue to sell at-the-money calls each week when we replace expiring short call positions.  This tactic avoids the inevitable losses involved in closing out an out-of-the-money call calendar spread and replacing it with an at-the-money calendar spread which always costs more than the spread we sold.

Another change we have added is to make some long-term credit put spreads as a small part of an overall 10K Strategy portfolio, betting that the underlying will at least be flat in a year or so from when we placed the spread.  These bets can return exceptional returns while in many respects being less risky than our basic calendar and diagonal spread strategies.  The longer time period allows for a big drop in stock price to take place as long as it is offset by a price gain in another part of the long-term time frame.  Our Better Odds Than Vegas II portfolio trades these types of spreads exclusively, and is on target to gain 91% this year, while the Retirement Trip Fund II portfolio is on target to gain 52% this year (and the stock can fall a full 50% and that gain will still come about).

The trick to having portfolios with these kinds of extraordinary gains is to select underlying stocks or ETPs which you feel strongly will move higher.  We have managed to do this with our selections of COST, NKE, SVXY, SBUX, and more recently, FB, while we have  failed to do it (and faced huge losses) in our single failing portfolio, BABA Black Sheep where Alibaba has plummeted to an all-time low since we started the portfolio when it was near its all-time high.  Our one Asian diversification effort has served to remind us that it is far more important to find an underlying that you can count on moving higher, or at least staying flat (when we usually do even better than when it moves higher).

Bottom line, I think we are on to something big in the way we are managing our investments these days.  Once you have discovered something that is working, it is important to stick with it rather than trying to improve your strategy even more.  Of course, if the market lets us know that the strategy is no longer working, changes would be in order.  So far, that has not been the case.  The recent past has included a great many weeks when we enjoyed 10 of our 11 portfolios gaining in value, while only BABA lost money as the stock continued to tumble. We will soon find another underlying to replace BABA (or conduct a different strategy in that single losing portfolio).”

3 Options Strategies for a Flat Market

Thursday, August 6th, 2015

Before I delve into this week’s option idea I would like to tell you a little bit about the actual option portfolios that are carried out for Insiders at Terry’s Tips.  We have 11 different portfolios which use a variety of underlying stocks or ETPs (Exchange Traded Products).  Eight of the 11 portfolios can be traded through Auto-Trade at thinkorswim (so you can follow a portfolio and never have to make a trade on your own).  The 3 portfolios that cannot be Auto-Traded are simple to do on your own (usually only one trade needs to be made for an entire year).

Ten of our 11 portfolios are ahead of their starting investment, some dramatically ahead.  The only losing portfolio is based on Alibaba (BABA) – it was a bet on the Chinese market and the stock is down over 30% since we started the portfolio at the beginning of this year (our loss is much greater).  The best portfolio for 2015 is up 55% so far and will make exactly 91% if the three underlyings (AAPL, SPY, and GOOG) remain where they presently are (or move higher).  GOOG could fall by $150 and that spread would still make 100% for the year.

Another portfolio is up 44% for 2015 and is guaranteed to make 52% for the year even if the underlying (SVXY) falls by 50% between now and the end of the year.  A portfolio based on Costco (COST) was started 25 months ago and is ahead more than 100% while the stock rose 23% – our portfolio outperformed the stock by better than 4 times.  This is a typical ratio –  portfolios based on Nike (NKE) and Starbucks (SBUX) have performed similarly.

We are proud of our portfolio performance and hope you will consider taking a look at how they are set up and perform in the future.


3 Options Strategies for a Flat Market

“Thinking is the hardest work there is, which is probably the reason why so few engage in it.” – Henry Ford

If you think the market will be flat for the next month, there are several options strategies you might employ.  In each of the following three strategies, I will show how you could invest $1000 and what the risk/reward ratio would be with each strategy.  As a proxy for “the market,” we will use SPY as the underlying (this is the tracking stock for the S&P 500 index).  Today, SPY is trading at $210 and we will be trading options that expire in just about a month (30 days from when I wrote this).

Strategy #1 – Calendar Spread.  With SPY trading at $210, we will buy calls which expire on the third Friday in October and we will sell calls which expire in 30 days (on September 4, 2015).  Both options will be at the 210 strike.  We will have to spend $156 per spread (plus $2.50 commissions at the thinkorswim rate for Terry’s Tips subscribers).  We will be able to buy 6 spreads for our $1000 budget. The total investment will be $951.   Here is what the risk profile graph looks like when the short options expire on September 4th:

SPY Calendar Spread Risk Profile Graph August 2015

SPY Calendar Spread Risk Profile Graph August 2015

On these graphs, the column under P/L Day shows the gain (or loss) when the short options expire at the stock price in the left-hand column.  You can see that if you are absolutely right and the market is absolutely flat ($210), you will double your money in 30 days.  The 210 calls you sold will expire worthless (or nearly so) and you will own October 210 calls which will be worth about $325 each since they have 5 weeks of remaining life.

The stock can fluctuate by $4 in either direction and you will make a profit of some sort.  However, if it fluctuates by much more than $4 you will incur a loss.  One interesting thing about calendar spreads (in contrast to the other 2 strategies we discuss below) is that no matter how much the stock deviates in either direction, you will never lose absolutely all of your investment.  Since your long positions have an additional 35 days of life, you will always have some value over and above the options you have.  That is one of the important reasons that I prefer calendar spreads to the other strategies.

Strategy #2 – Butterfly Spread:  A typical butterfly spread in involves selling 2 options at the strike where you expect the stock to end up when the options expire (either puts or calls will do – the strike price is the important thing) and buying one option an equidistant number of strikes above and below the strike price of the 2 options you sold.  You make these trades all at the same time as part of a butterfly spread.

You can toy around with different strike prices to create a risk profile graph which will provide you with a break-even range which you will be comfortable with.  In order to keep the 3 spread strategies similar, I set up strikes which would yield a break-even range which extended about $4 above and below the $210 current strike.  This ended up involving selling 2 Sept-1 2015 calls at the 210 strike, and buying a call in the same series at the 202.5 strike and the 217.5 strike.  The cost per spread would be $319 plus $5 commission per spread, or $324 per spread.  We could buy 3 butterfly spreads with our $1000 budget, shelling out $972.

Here is the risk profile graph for that butterfly spread when all the options expire on September 4, 2015:

SPY Butterfly Spread Risk Profile Graph August 2015

SPY Butterfly Spread Risk Profile Graph August 2015

You can see that the total gain if the stock ends up precisely at the $210 price is even greater ($1287) than it is with the butterfly spread above ($1038).  However, if the stock moves either higher or lower by $8, you will lose 100% of your investment.  That’s a pretty scary alternative, but this is a strategy that does best when the market is flat, and you would only buy a butterfly spread if you had a strong feeling of where you think the price of the underlying stock will be on the day when all the options expire.

Strategy #3 – Short Iron Condor Spread.  This spread is a little more complicated (and is explained more fully in my White Paper).  It involves buying (and selling) both puts and calls all in the same expiration series (as above, that series will be the Sept1-15 options expiring on September 4, 2015).  In order to create a risk profile graph which showed a break-even range which extended $4 in both directions from $210, we bought calls at the 214 strike, sold calls at the 217 strike and bought puts at the 203 strike while selling puts at the 206 strike.  A short iron condor spread is sold at a credit (you collect money by selling it).  In this case, each spread would collect $121 less $5 commission, or $116.  Since there is a $3 difference between each of the strikes, it is possible to lose $300 per spread if the stock ends up higher than $217 or lower than $203.  We can’t lose the entire $300, however, because we collected $116 per spread at the outset.  The broker will put a hold on $300 per spread (it’s called a maintenance requirement and does not accrue interest like a margin loan does), less the $116 we collected.  That works out to a total net investment of $184 per spread (which is the maximum loss we could possibly incur).  With our $1000 budget, you could sell 5 spreads, risking $920.

Here is the risk profile graph for this short iron condor spread:

SPY Short Iron Condor Spread Risk Profile Graph August 2015

SPY Short Iron Condor Spread Risk Profile Graph August 2015

You can see the total potential gain for the short iron condor spread is about half what it was for either of the earlier spreads, but it has the wonderful feature of coming your way at any possible ending stock price between $206 and $214.  Both the calendar spread and the butterfly spread required the stock to be extremely near $210 to make the maximum gain, and the potential gains dropped quickly as the stock moved in any direction from that single important stock price.  The short iron condor spread has a lower maximum gain but it comes your way over a much larger range of possible ending stock prices.

Another advantage of the short iron condor is that if the stock ends up at any price in the profit range, all the options expire worthless, and you don’t have to execute a trade to close out the positions.  Both the other strategies require closing trades.

This is clearly not a complete discussion of these option strategies.  Instead, it is just a graphic display of the risk/reward possibilities when you expect a flat market.  Maybe this short report will pique your interest so that you will consider subscribing to our service where I think you will get a thorough understanding of these, and other, options strategies that might generate far greater returns than conventional investments can offer.

Long-Term Options Strategies For Companies You Like

Thursday, July 30th, 2015

Today I would like to share an article I sent to paying subscribers two months ago.  It describes an 8-month options play on Facebook (FB), a company that seems to be doing quite well these days.  The spread is a vertical credit put spread which I like because once you place it, you don’t have to make any closing trades (both options hopefully expire worthless, all automatically) as long as the stock is any higher than a pre-determined price.  It is actually quite simple to do, so please don’t tune out because its name sounds so confusing.Terry

Here is the exact article sent out on April 24, 2015:

“A Long-Term Play on Facebook (FB):  Last week in my charitable trust account I made a long-term bet that FB would not fall dramatically from here during the balance of 2015.  It seems to be a good company that is figuring out how to monetize its traffic.  I checked out the 5-year chart:

Face Book Chart July 2015

Face Book Chart July 2015

While there were times when the stock made serious drops, if you check full-year time periods, there do not seem to be any that show a cumulative loss.  Selling long-term
vertical put credit spreads allows you to tolerate short-term losses if your time period is long enough for a recovery to take place.

In my charitable trust account, I give away most of donations in December, so I like to have some positions expire in that month.  Last week, with FB trading about $82, I was willing to bet that it would end up no lower than $75 on the third Friday in December.  I sold Dec-15 75 puts and bought Dec-15 70 puts and collected $130 per spread.  My risk (and the total possible loss) would be $370 per contract if the stock fell over $12 (15%) over those 9 months.  If the 5-year chart is indicative of how things are going for FB, there should be no concern about a possible loss.  If the company manages to end up over $75 at the December expiration, the spread would gain 35% on the investment.  Where else can you make those kind of returns and still sleep comfortably?” (End of article.)

Fast forward two months until today and we see that FB has gained about $14 and is trading about $94.  Now I am in a position where the stock can fall $19, a full 20%, and I will still gain 35% for the 8-month period. That works out to over 50% a year on my investment with an extremely high likelihood of making it.

I could buy back the spread today for $58 per contract (including commissions) and make 19% for the two months I have owned it, but I intend to wait it out until December and take the full 35%.

In one of our actual portfolios at Terry’s Tips, in January we made full-year similar trades to this FB trade using GOOG, AAPL, and SPY as underlyings, and the portfolio is on target to gain 91% for the year.  It could be closed out today for a 63% gain for the first seven months (thanks to GOOG’s big up move after announcing earnings last week).

Vertical credit put spreads are just one way you can use options to maximize gains for a company you feel positive about, and the potential gains can be several times as great as the percentage gains in the underlying stock.














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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.

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