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Archive for the ‘Terry’s Tips Portfolios’ Category

Halloween Special – Lowest Subscription Price Ever

Tuesday, October 18th, 2016

Halloween Special – Lowest Subscription Price Ever

Why must Halloween be only for the kids? You got them all dressed up in cute little costumes and trekked around the neighborhood in hopes of bringing home a full basket of cavity-inducing treats and smiles all around.

But how about a treat for yourself? You may soon have some big dental bills to pay. What if you wanted to learn how to dramatically improve your investment results? Don’t you deserve a little something to help make that possible?

What better Halloween treat for yourself than a subscription to Terry’s Tips at the lowest price ever? You will learn exactly how we have set up and carried out an options strategy that doubled the starting portfolio value (usually $5000) of five individual investment accounts which traded Costco (COST), Apple (AAPL), Nike (NKE), Starbucks (SBUX), and Johnson & Johnson (JNJ), including all commissions. These portfolios took between 7 and 17 months to double their starting value, and every single portfolio managed to accomplish that goal.

One year and one week ago, we set up another portfolio to trade Facebook (FB) options, this time starting with $6000. It has now gained over 97% in value. We expect that in the next week or two, it will surge above $12,000 and accomplish the same milestone that the other five portfolios did.

Many subscribers to Terry’s Tips have followed along with these portfolios since the beginning, having all their trades made for them through the Auto-Trade program at thinkorswim. Others have followed our trades on their own at another broker. Regardless of where they traded, they are all happy campers right now.

We have made these gains with what we call the 10K Strategy. It involves selling short-term options on individual stocks and using longer-term (or LEAPS) as collateral. It is sort of like writing calls, except that you don’t have to put up all that cash to buy 100 or 1000 shares of the stock. The 10K Strategy is sort of like writing calls on steroids. It is an amazingly simple strategy that really works with the one proviso that you select a stock that stays flat or moves higher over time.

How else in today’s investment world of near-zero dividend yields can you expect to make these kinds of returns? Find out exactly how to do it by buying yourself a Halloween treat for yourself and your family. They will love you for it.

Lowest Subscription Price Ever

As a Halloween special, we are offering the lowest subscription price than we have ever offered – our full package, including all the free reports, my White Paper, which explains my favorite option strategies in detail, and shows you exactly how to carry them out on your own, a 14-day options tutorial program which will give you a solid background on option trading, and two months of our weekly newsletter full of tradable option ideas. All this for a one-time fee of $39.95, less than half the cost of the White Paper alone ($79.95).

For this lowest-price-ever $39.95 offer, click here, enter Special Code HWN16 (or HWN16P for Premium Service – $79.95).

If you are ready to commit for a longer time period, you can save even more with our half-price offer on our Premium service for an entire year. This special offer includes everything in our basic service, and in addition, real-time trade alerts and full access to all 9 of our current actual portfolios so that you can Auto-Trade or follow any or all of them. We have several levels of our Premium service, but this is the maximum level since it includes full access to all nine portfolios. A year’s subscription to this maximum level would cost $1080. With this half-price offer, the cost for a full year would be only $540. Use the Special Code MAX16P.

This is a time-limited offer. You must order by Monday, October 31, 2016. That’s when the half-price offer expires, and you will have to go back to the same old investment strategy that you have had limited success with for so long (if you are like most investors).

This is the perfect time to give you and your family the perfect Halloween treat that is designed to deliver higher financial returns for the rest of your investing life.

I look forward to helping you get the school year started off right by sharing this valuable investment information with you at the lowest price ever. It may take you a little homework, but I am sure you will end up thinking it was well worth the investment.

Happy trading.


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 15 years of publication – only $39.95 for our entire package. Get it here using Special Code HWN16 (or HWN16P for Premium Service – $79.95). Do it today, before you forget and lose out. This offer expires on Monday, October 31, 2016.


How to Make 40% With a Single Options Trade on a Blue Chip Stock

Tuesday, October 11th, 2016

Bernie Madoff got billions of dollars from investors by offering 12% a year. Today I would like to share an investment which should deliver more than triple that return. I doubt if it gets Madoff-like money flowing into it, but maybe some of you will try it along with me. Nothing is 100% guaranteed, but the historical price action for this conservative stock shows that this options spread would make over 40% a whopping 98% of the time.


How to Make 40% With a Single Options Trade on a Blue Chip Stock

Johnson & Johnson (JNJ) is a $70 billion multinational medical devices, pharmaceutical and consumer packaged goods manufacturer founded in 1886. It is truly a “blue chip” stock which pays a 2.7% dividend and raises it almost every year.

JNJ has been a favorite underlying stock for us at Terry’s Tips. Early in November 2015 we started what we call the JNJ Jamboree portfolio with $5000 to trade our 10K Strategy using JNJ as the underlying. JNJ was trading at $102. Nine months later, the stock had climbed to $125, a 22.5% gain. Our JNJ Jamboree portfolio did more than four times better, making 100%. We declared a 2-for-1 portfolio split and removed $5000 from the portfolio so subscribers who were following it could either be fully playing with profits or have double the number of units that they started with.

Terry’s Tips subscribers can either follow our actual portfolios on their own or have trades executed automatically for them through the Auto-Trade service offered by thinkorswim.

This week, with JNJ trading just over $120, we made a trade using JNJ options that would expire on January 19, 2018, a full 15 months from now. This trade would make a guaranteed profit of over 40% if JNJ closed at any price higher than $115 on that date. In order to check what history might tell us about this stock, we took a look at the 10-year graph of JNJ to see how many times the stock fell by more than $5 per share in any 15-month period. Here is that graph:

JNJ Historical Pricing Chart Oct 2016

JNJ Historical Pricing Chart Oct 2016

You can see that that there is one spot on the graph where the stock was lower 15 months later than it was at the beginning, and that was the time period starting just before the crash in August 2008. Over the ten years, you would have theoretically had 120 opportunities to make a similar 15-month bet to the one we are suggesting, and you would have only lost money in 3 of those months. You would have had a winner with 98% of these hypothetical trades.

This week, with JNJ trading at just over $120, we bought the following spread:

Buy to Open 10 JNJ 19Jan18 115 puts (JNJ180119P115)
Sell to Open 10 JNJ 19Jan18 120 puts (JNJ180119P120) for a credit of $1.80 (selling a vertical)

This spread put $1800 in our account ($1775 after commissions) and a maintenance requirement of $5000 would be established (no interest payable on this amount, but it would be cash set aside that could not be used for buying other equities). After deducting the $1775 we received from the $5000, we ended up with a net investment of $3225. This is the maximum loss that would result if the stock ended up below $115 in 15 months.

If the stock were at any price above $120 on January 19, 2018, both options would expire worthless and we would keep the entire $1775, making a 55% profit on our original investment. Annualized, that works out to be 44% a year after commissions, and the historical information says you would earn this 98% of the time. If you make this amount 98 times and lose 100% twice, your average annualized gain would be 41%.

Admittedly, this is a pretty unexciting investment because you have to sit and wait for more than a year for it to be over with. But where else in this world of near-zero interest rates are you going to find something that has a 98% chance of making 44% a year? It seems to me that at least some of your investment portfolio should contain at least a little money that might secure such an extraordinary high return.

We should take a look at the magnitude of these possible gains and compare them with expectations of a traditional investment. To think that you could make 41% a year on your money is truly bizarre. It really sounds too good to be true. But that is what the spread would have earned if you had been able to place it every month for the past 120 months.

We made a similar investment in a Terry’s Tips portfolio early this year. We placed the following trade on JNJ on January 4, 2016. JNJ was trading just over $102 at the time:

Buy to Open 10 JNJ Jan-17 95 puts (JNJ170120P95)
Sell to Open 10 JNJ Jan-17 100 puts (JNJ170120P100) for a credit of $2.13 (selling a vertical)

With this trade we were betting that in one year. JNJ would be trading at some price over $100. If this happened, both put options would expire worthless on January 20, 2017 and we could keep the $2130 we collected from the spread ($2105 after commissions). This trade involved a maintenance requirement of $2895 which if the maximum loss that could result (if JNJ closed below $95 on that date) and also the amount of the money invested. This works out to a 73% gain for the year. With three months to go before these options expire, JNJ is now trading around $120. Our bet looks awfully good right now. We could buy back the spread for $170 which would result in a gain of $1935 after commissions, or 66%.

This spread was quite similar to the one we are suggesting today, but it was a little more risky because it did not allow for the stock to drop at all to make the maximum gain. Taking that extra risk allowed for the maximum profit to be much higher.

Options trading involves risk, just like all investments, and should be only undertaken with money you can truly afford to lose. But sometimes, options investments can offer superior potential gains while involving a lower degree of risk. In the spread we outlined today, the stock can fall by as much as $5 over a 15-month time span, and a 55% gain will still materialize. If you had just bought the stock instead and it went down, you would lose money. Sometimes, option trading gets a bad reputation for being too risky. Hopefully, you can see why it doesn’t necessarily work out that way all of the time.

Calendar Spreads Tweak #5 (Like Writing Calls on Steroids)

Thursday, October 6th, 2016

Lots of people like the idea of writing calls. They buy stock and then sell someone else the right to repurchase their shares (usually at a higher price) by selling a call against their shares. If the stock does not go up by the time that the call expires, they keep the proceeds from the sale of the call. It is sort of like a recurring dividend.

If writing calls appeals to you, today’s discussion of an option strategy is right up your alley. This strategy is like writing calls on steroids.


Calendar Spreads Tweak #5 (Like Writing Calls on Steroids)

When you set up a calendar spread, you buy an option (usually a call) which has a longer life than the same-strike call that you sell to someone else. Your expected profit comes from the well-known fact that the longer-term call decays at a lower rate than the shorter-term call you sell to someone else. As long as the stock does not fluctuate a whole lot, you are guaranteed to make a gain as time unfolds.

If you are dealing with a stock you think is headed higher, you might write an out-of-the-money call (where the strike price is higher than the current price of the stock). If you are right and the stock moves up to that strike price or above, you might lose your stock through exercise of the call, but you would be selling it at that higher price and also keeping the proceeds of your call sale.

With options, you can approximate this risk profile by buying a calendar spread at a strike which is higher than the current price of the stock. If the stock moves up to that strike price as you wait out the time for the call you sold to expire, the value of the call you own will rise and you will also keep the proceeds from the call you sold. Your long call will not go up as much as your stock would have gone up (perhaps only 60% or 70% as much), but this is a small concern considering that you have to put up such a small amount of money to buy the call compared to buying 100 shares of stock. Most of the time, you can expect that your return on investment with the calendar spread to be considerably greater than the return you would enjoy from writing calls against shares of stock.

The tweak we are discussing today concerns what you do when the call you have sold expires. On that (expiration) day, if the call is out of the money (at a strike which is higher than the price of the stock), it will expire worthless and you get to keep the money you originally sold the call for, just like it would be if you owned the stock and wrote a call against it. You would then be in a position where you could sell another call with a further-out expiration date and collect money for it, or sell your original call and no longer own a calendar spread.

If the call on expiration day is in the money (i.e., at a strike price which is lower than the price of the stock), the owner of that call will likely exercise his option and ask for your stock. However, right up until the last few minutes of trading on expiration day, there is usually a small time premium remaining in the call he or she owns, and it would be more profitable for him or her to sell the call on the market rather than exercising it.

As the owner of an in-the-money calendar spread on expiration day, you could merely sell the spread (buying back the call you originally sold and selling the call you bought), making the trade as a sale of a calendar spread. As an alternative, you could buy back the expiring call and sell another call which has a longer lifetime. This would be selling a calendar spread as well, but the date of the call you sold would probably be not as far out in the distance as the call you originally bought. At the end of the day, you would still own that original call and you would be short a call which has some remaining life before it expires.

You can see that this tweak is much like what you could do if you were in the business of writing calls. Another similarity is that you might want to sell a new call which is at a higher (or lower) strike. You could do this with either the call-writing strategy or the calendar-spread (call-writing on steroids) strategy. If you replace an expiring call with a new short call at a different strike price, you would be selling what is called a diagonal spread and you would end up owning a diagonal spread as well. A diagonal spread is exactly the same as a calendar spread except that the strike price of the long call you own is different from the call that you sold to someone else.

One limitation of the options strategy is that if you want to sell a lower-strike call than you originally did, your broker would charge you with a maintenance requirement of $100 for every dollar difference between the strike of your long call and the strike of the call you sold. There is no interest charged on this amount (like a margin loan would involve), but that amount is set aside in your account and can’t be used to buy other shares or options. If you sold a call at a strike which was $2 lower than the strike price of your long call (creating a maintenance requirement of $200), and you were able to sell that call for $2.50 ($250), you would collect more cash than the amount of the maintenance requirement, so you would still end up with more cash than what you started with before selling the new call.

This all may seem a little complicated, but once you do it a few times, it will seem quite simple and easy. And from my experience, profitable most of the time as well, far more profitable than writing calls against stock you own.

Happy trading.

IBM Pre-Announcement Play

Friday, September 30th, 2016

IBM announces earnings on October 17, less than three weeks from now. I would like to share with you a strategy I used today to take advantage of the extremely high option prices which exist for the option series that expires on October 21, four days after the announcement. I feel fairly confident I will eventually make over 100% on one or both of these trades before the long side expires in six months.


IBM Pre-Announcement Play

One of my favorite option strategies is to buy one or more calendar spreads on a company that will be announcing earnings in a few weeks. The option series which expires directly after the announcement experiences an elevated Implied Volatility (IV) relative to all the other option series. A high IV means that those options are relatively expensive compared to all the other options that are trading on that stock.

IV for the post-announcement series soars because of the well-known tendency for stock prices to fluctuate far more than usual once the announcement is made. It may go up if investors are pleased with the company’s earnings, sales, or outlook, or it may tumble because investors were expecting more. While there is some historical evidence that the stock usually moves in the opposite direction that it did in the week or two leading up to the announcement, it is not compelling enough to always bet that way.

IBM has risen about $5 over the last week, but it is trading about equal to where it was two weeks ago, so there is no indication right now as to what might happen after the announcement.

IBM has fluctuated by just under 4% on average over the last few announcement events. That would make an average of $6 either way. I really have no idea which way it might go after this announcement, but it has been hanging out around it/s current level (just under $160) for a while, so I am planning to place my bet around that number

In the week leading up to the announcement, IV for the post-announcement series almost always soars, and the stock often moves higher as well, pushed higher by investors who are expecting good news to be forthcoming. For that reason, I like to buy calendar spreads at a strike slightly above the current price of the stock in hopes that the stock will move toward that strike as we wait for the announcement day. Remember, calendar spreads make the greatest gain when the stock is exactly at the strike price on the day when the short side of the spread expires.

This is the trade I placed today when IBM was at $159 (of course, you may choose any quantity you are comfortable with, but this is what each spread cost me):

Buy To Open 1 IBM 21Apr17 160 call (IBM170421C160)
Sell To Open 1 IBM 21Oct16 160 call (IBM161021C160) for a debit of $4.71 (buying a calendar)
Each spread cost me $471 plus $2.50 (the commission rate charged to Terry’s Tips subscribers at thinkorswim), for a total of $473.50. I sold the 21Oct16 160 call for $354. In order to get all my $473.50 back once October 21st rolls around, I will have 25 opportunities to sell a one-week call (if I wish). Right now, a 160 call with one week of remaining life could be sold for about $.90. If I were to sell one of these weeklies on 6 occasions, I would get my entire investment back and still have 19 more opportunities to sell a weekly call.

Another way of moving forward would to sell new calls with a month of remaining life when the 21Oct16 calls expire. If IBM is around $160 at that time, a one-month call could be sold for about $2.00. It would take three such sales to get all of my initial investment back, and I would have three more opportunities to sell a one-month call with all the proceeds being pure profit.

Before the 21Apr17 calls expire, another earnings announcement will come around (about 3 ½ months from now). If IBM is trading anywhere near $160 at that time, I should be able to sell a 160 call with 3 weeks of remaining life for about $354, just like I sold one today. That alone would get about 75% of my initial investment back.

In any event, over the six-months that I might own the 21Apr17 calls, I will have many chances to sell new calls and hopefully collect much more time premium than I initially shelled out for the calendar spread. There may be times when I have to buy back expiring calls because they are in the money, but I should be able to sell further-out short-term calls at the same strike for a nice credit and whittle down my initial investment.
I also made this trade today:

Buy To Open 1 IBM 21Apr17 160 call (IBM170421C160)
Sell To Open 1 IBM 14Oct16 160 call (IBM161014C160) for a debit of $6.65 (buying a calendar)

This is the same calendar spread as the first one, but the sell side is the 14Oct16 series which expires a week before the announcement date week. If IV for the 21Oct16 series does escalate from its present 25 (as it should), I might be able to sell calls with a week of remaining life for a higher price than is available right now. I might end up with paying less than $473.50 for the original spread which sold the post-announcement 21Oct16 calls.

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.

Calendar Spreads Tweak #2

Wednesday, September 7th, 2016

This week we will continue our discussion of a popular option spread – the calendar spread which is also called a time spread or horizontal spread. We will compare the expected costs and potential returns if you select different time periods for the long and short sides of the calendar spread.


Calendar Spreads Tweak #2

First, let’s look at a typical calendar spread on Facebook (FB). Today, the stock is trading just over $130, and you might buy an at-the-money calendar spread by placing this order:

Buy To Open 1 FB 16Dec16 130 call (FB161216C130)
Sell To Open 1 FB 14Oct16 130 call (FB161014C130) for a debit of $3.75 (buying a calendar)

This spread would cost about $3.75 ($375) to buy, plus $2.50 in commissions at the rate Terry’s Tips’ subscribers pay at thinkorswim, for a total of $377.50.

When the 14Oct16 call expires on October 14, 37 days from now, this is what the risk profile graph indicates the profit or loss would be at the various possible stock prices that might exist at that time:


Face Book Risk Profile #1 September 2016

Face Book Risk Profile #1 September 2016

Note that the break-even range extends from about $3.50 in both directions. The loss or gain when the short call expires on October 14th is indicated in the column on the lower right titled “P/L Day.” The maximum gain is precisely at the $130 price, and it is about $150 which would result in almost a 40% gain for the month.

When this calendar spread expires on October 14th, there will be 3 months of remaining life to the 16Dec16 call that you would hold. This call will always have some value that is greater than the 16Dec16 call that is expiring on that day, no matter where FB is trading at that time. This means you can’t lose the entire $377.50 that you have invested. The closer to $130 FB is at that time, the more valuable your 16Dec16 call will be in terms of remaining time premium.

Let’s check out what the situation might be if we went further out in time and bought a calendar spread that had both sides two months later. The difference between the long and short sides of the spread will remain at three months but you will have to wait three months rather than just one month to have the spread expire and you take your losses or gains. This would be the spread that you would buy:

Buy To Open 1 FB 17Mar17 130 call (FB170317C130)
Sell To Open 1 FB 16Dec16 130 call (FB161014C130) for a debit of $3.25 (buying a calendar)

This spread would cost about $3.25 ($325) to buy, plus $2.50 in commissions at the rate Terry’s Tips’ subscribers pay at thinkorswim, for a total of $327.50. (Buy the way, the regular commission on this spread at thinkorswim would be $7.80, and for this reason, many people choose to become Terry’s Tips subscribers because this low rate will extend to all the trades they make in their account, regardless of whether or not they are following one of our portfolios. The commission savings could be greater than the low monthly cost of being a subscriber).

When this spread expires on December 16th, this is what the risk profile graph would look like:

Face Book Risk Profile #2 September 2016

Face Book Risk Profile #2 September 2016

Note that the break-even range has more than doubled so that the stock can fluctuate about $8 in either direction before the spread starts losing money. Of course, you have to wait three months for December 16th to come around, and this gives the stock lots of time to make a big move in either direction. Again, the further it moves away from $130, the less money it makes. If the stock remains unchanged, and ends up at about $130 on that day in December, the expected gain is over $350, or more than 100% of the original cost of the calendar spread.

Presumably, you are trading calendars on a stock you believe is headed higher. If you believe that FB is likely to be trading about $5 higher three months from now, you might buy the same calendar at the 135 strike instead of the 130 strike. It would cost a little less, about $315, and this is what the risk profile graph looks like for December 16th:

Face Book Risk Profile #3 September 2016

Face Book Risk Profile #3 September 2016

If the stock stays flat, the spread will make about $150, or about 45% on your investment, but if it goes up $5 and ends up near $135, you could gain over $370, or well over 100% on your investment. The break-even range extends less than $5 to the downside and about $16 on the upside, so you will be rooting for FB to move higher over the three months.

The key point to selecting the strike price of calendar spreads is to make your best guess as to where the stock might be at the future date when the calls you have sold expire. If you are right, you could enjoy some extraordinary gains.

As usual, there are no easy ways to make sure gains in this world. You inevitably must make some sort of guess as to what the underlying stock will do. The neat thing about calendar spreads is that you don’t have to be precisely right. There is a fairly large range of possible stock prices withing which gains could come your way. The further out in time you go to select dates for a calendar spread, the greater the break-even range will be, and the maximum gain will always come if the stock ends up precisely at the strike price you select when you buy the spread.

As with all investments, you should only plunk down money that you can truly afford to lose. Option spreads can make excellent gains, but large movements in the stock price in either direction could cause losses with calendar spreads (unless you anticipated that direction and selected the right strike price at the outset).

Happy trading.

All About, or at Least an Introduction to Calendar Spreads

Thursday, August 25th, 2016

This week I would like start an ongoing discussion about one of my favorite option plays. It is called a calendar spread. It is also known as a time spread or a horizontal spread. But most people call it a calendar because that’s where you focus much of your attention while you hold this kind of a spread. On a specific date on the calendar, you discover whether you made or lost money since you first bought the calendar spread. In the next few blogs, I will discuss all sorts of variations and permutations you can make with calendar spreads, but today, we will focus on a bare bones explanation of the basic spread investment.


All About, or at Least an Introduction to Calendar Spreads

A calendar spread consists of the simultaneous purchase of one option (either a put or a call) and the sale of another option (either a put or call), with both the purchase and the sale at the same strike price, and the life span of the option you bought is greater than the option you sold. You can trade either puts or calls in this kind of spread, but not both in the same spread. You have to choose to use either puts or calls, but as we will see at a later time, it doesn’t make a whole lot of difference which choice you make.

Some things that we all know about options: 1) they all have a limited life span, and 2) if the underlying stock does not change in price, all options fall in value every day. This is called decay. In option parlance, it is called theta. Theta is the amount that the option will decay in value in a single day if the underlying stock remains flat.

The basic appeal of a calendar spread is that the decay (or theta) of the option that has been sold is greater than the decay (or theta) of the stock that was bought. Every day that the stock remains flat, the value of the spread should become slightly greater. For this reason, most buyers of calendar spreads are hoping that the stock does not move in either direction very much (but we will see that is not always the case with all calendar spreads).

Here is a typical calendar spread purchase on Nike (NKE) on August 24, 2016 when NKE was trading just about $60:

Buy to Open 5 NKE 20Jan17 60 calls (NKE170120C60)
Sell to Open 5 NKE 23Sep16 60 calls (NKE160923C60) for a debit of $2.20 (buying a calendar)

The options that are being bought will expire on January 21, 2017 (about 5 months from now) and the options being sold will expire on September 23, 2016, one month from now. You don’t really care what the prices are for the calls you bought or the calls you sold, just as long as the difference between the two prices is $2.20 ($220 per spread, plus a commission of about $2.50 per spread). That’s how much money you will have to come up with to buy the spread. This spread order will cost $1100 plus $12.50 in commissions, or $1112.50.

The all-important date of this spread is September 23, 2016. That is the day on which the short options (the ones you sold) will expire. If the stock is trading on that day at any price below $60, the calls that you sold will expire worthless, and you will be the owner of 5 NKE 60 calls which have about 4 months of remaining life. If NKE is trading at exactly $60 on that day, those 20Jan17 60 calls will be worth about $3.05 and you could sell them for about $1525, netting yourself a profit of about $400 after commissions. That works out to a 35% gain for a single month, not a bad return at all, especially if you can manage to do it every month for the entire year (but now, we’re dreaming). That is, alas, the maximum you could make on the original spread, and that would come only if the stock were trading at exactly $60 on the day when the short calls expired.

Here is the risk profile graph which shows the loss or gain on the original spread at various prices where the stock might be trading on September 23rd:

2016 NKE Risk Profile Graph September Expiration

2016 NKE Risk Profile Graph September Expiration

In the lower right-hand corner under P/L Day, the profit or loss on the spread is listed for each possible stock price between $58 and $62. Those numbers should be compared to the investment of just over $1100. The graph shows the maximum gain takes place if the stock ends up right about $60, and about half that gain would result if the stock has moved a dollar higher or lower from $60. If it rises or falls by $2, a loss would result, but this loss would be much lower than the potential gains if the stock fluctuated by less than $2. If the stock moves by a much greater amount than $2, even greater losses would occur.

One good thing about calendar spreads is that the value of the options you bought will always be greater than the ones you sold, so you can never lose the entire amount of money you invested when you bought the spread. If you just buy a call option with the hopes that the stock will rise, or buy a put option with hopes that the stock will fall, you risk losing 100% of your investment if you are wrong. Even worse, in most cases, you would lose the entire investment if the stock stays flat rather than moving in the direction you were hoping.

With calendar spreads, you should never lose everything that you invested and you don’t have to be exactly right about the direction the stock needs to move. There is a range of possible prices where your spread will be profitable, and if you enter your proposed spread in a software program like the (free) Analyze Tab at thinkorswim, you can tell in advance what the break-even range will be for your investment.

There are ways that you can expand the break-even range so that a greater stock price fluctuation could be tolerated, and that will be the subject of our next blog.

The Difference Between Buying Stock and Trading Options

Monday, August 15th, 2016

This week I would like discuss a little about the differences between buying stock and trading options. I would also like to tell you a little about a specific recommendation I made to paying Terry’s Tips subscribers this weekend in my weekly Saturday Report.


The Difference Between Buying Stock and Trading Options

If the truth be known, investing in stocks is pretty much like playing checkers. Any 12-year-old can do it. You really don’t need much experience or understanding. If you can read, you can buy stock. And you probably will do just about as well as anyone else because it’s basically a roulette wheel choice. Most people reject that idea, of course. Like the residents of Lake Wobegone, stock buyers believe that they are all above average – they can reliably pick the right ones just about every time.

Trading options is harder, and many people recognize that they probably aren’t above average in that arena. Buying and selling options is more like playing chess. It can be (and is, for anyone who is serious about it) a life-time learning experience.

You don’t see columns in the newspaper about interesting checker strategies, but you see a ton of pundits telling you why you should buy particular stocks. People with little understanding or experience buy stocks every day, and most of their transactions involve buying from professionals with far more resources and brains. Most stock buyers never figure out that when they make their purchase, about 90% of the time, they are buying from those professionals. Those smart guys with all the resources are the ones who are selling the stock while you are buying it at that price.

Option investing takes study and understanding and discipline that the purchase of stock does not require. Every investor must decide for himself or herself if they are willing to make the time and study commitment necessary to be successful at option trading. Most people are too lazy.

It is a whole lot easier to play a decent game of checkers than it is to play a decent game of chess. But for some of us, options investing is a whole lot more challenging, and ultimately more rewarding.

Last week I told you about three stock-based Terry’s Tips option portfolios which had doubled in value and a fourth portfolio that was almost there (and it is only 10 months old). I didn’t tell you about two other portfolios that we also carry out which are not available for Auto-Trade at thinkorswim but which are quite easy to trade on your own because they only involve one trade for an entire year (and with luck, options on both side of the spread will expire worthless so no closing trade is necessary).

We have two of these portfolios, and they are set up each January. So far in 2016, while the market (SPY) has gained 4.6%, these two option portfolios have gained 43.9%, and 56.2% without a single adjusting trade having been made. We could close either portfolio right now and take those gains off the table after paying a small commission on one or two spreads. If you buy stock rather than trading options, you will probably never see gains like this, even if you are lucky enough to pick one of the best stocks in the entire market.

This weekend, I recommended another similar spread trade that we are setting up in a new portfolio so we can watch it evolve over time. Like the above two portfolios, it cannot be Auto-Traded but is easy to set up yourself (you can call it in to your broker if you are not familiar with placing option spread trades). This spread will expire on January 20, 2017, about six months from now.

The underlying is a sort of weird derivative of a derivative of a derivative that doesn’t make much sense to anyone (even the Nobel Prize winning managers of Long Term Capital didn’t fully understand the implications of this kind of instrument). The long-term price action of this equity can be measured, however, and it showed that if this spread had been placed every month for the last 50 months, the spread would have made a profit 44 times and it would have lost money 6 times. The average gain for all the trades worked out to 38% for six months (including all the losses in those 6 losing instances). The annualized gain would rise to 90% if you re-invested your money and the average profit at the end of the first six months. Of course, historical price action doesn’t always repeat itself in future months, but if you see how this instrument is engineered, you can see that the pattern should be expected to continue.

This spread idea is so good that I feel I must restrict sharing it with only paying subscribers to the Terry’s Tips newsletter. If you come on board, you can see the full report where I show the profit from this trade for each of the last 50 months and the exact spread that should be placed. I bought more of the exact same spread in my personal account today at the same price I indicated it could be bought in the last Saturday Report.

Historical Performance of 10K Strategy Stock-Based Portfolios

Monday, August 8th, 2016

This week I would like to outline the basic stock option strategy we use at Terry’s Tips where we have created eight portfolios each of which is traded in an actual separate account and is available for Auto-Trade at TDAmeritrade/thinkorswim. Terry’s Tips subscribers can have every trade in these portfolios placed automatically for them in their own thinkorswim accounts through their free Auto-Trade service.

Enjoy the full report.


Historical Performance of 10K Strategy Stock-Based Portfolios: At Terry’s Tips, we call our options strategy the 10K Strategy. We like to think of it as shorter than a marathon but longer than a sprint. Most people who trade options seem to prefer sprints, i.e., short-term speedy wins (or losses). The basic underlying idea of our 10K Strategy is to do the opposite of what most options traders do. Instead of buying short-term calls in hopes of a quick windfall gain, we primarily sell those calls to option speculators. Since something like 80% of all options expire worthless, we like our odds of selling those options rather than buying them. We like to think that we are sort of in the business of selling lottery tickets.

We buy longer-term options to use as collateral for selling short-term options. All options go down in value every day that the underlying stock remains unchanged. This daily decay in value is called theta in options parlance. Theta for short-term options is much greater than theta for longer-term options at the same strike price, and this difference in decay rates is what makes our strategy a successful one (most of the time).

At Terry’s Tips, we currently have 4 stock-based portfolios. Other portfolios are based on Exchange Traded Products (ETPs). ETPs include Exchange Trade Funds (ETFs) such as the S&P 500 tracking stock (SPY or the Dow Jones Industrial Average tracking stock (DIA), and Exchange Traded Notes (ETNs) such as volatility-based XIV, SVXY, VXX, and UVXY. We also have a portfolio based on options of USO where we are betting that the long term price of oil will be higher than it is today.

Three out of 4 of our stock-based portfolios have doubled in value at some point in their lifetime, and the 4th, Foxy Facebook is up 71% since we started it 10 months ago. The prospects look excellent for it to double before its first year has been completed. The record:

2016 HIstorical 10K Portfolios

2016 HIstorical 10K Portfolios

In a world of record low interest rates and anemic investment returns for most equities (even hedge funds lost money in 2015), these results offer a strong vindication of the 10K Strategy. Admittedly, NKE has tumbled steadily over the past 8 months and much of the gains have been eroded away, but a basic assumption of the strategy is that you select underlying stocks which you think will remain flat or rise over time. If you are wrong and the stock doesn’t do one of those things, you should expect to lose money on that investment. So far, we have been fortunate enough to pick winners.

I invite you to become a subscriber to Terry’s Tips so that you can learn the important details of carrying out the 10K Strategy on your favorite stock (assuming that options are available for it). If you are lucky enough to pick a winner, you would have an excellent chance to make many times as much as you would make just buying the stock. It doesn’t have to go up to be a winner – just remaining flat is almost always profitable with this strategy.

Many years ago, someone wrote a book that I bought – it was entitled “Happiness is a Stock That Doubles in a Year.” If you can find a stock that will stay flat or move higher, you might very well enjoy this kind of happiness once you learn how to execute the 10K Strategy.

As with all investments, you should only use money that you can truly afford to lose. Options are leveraged investments, and unless you totally understand the risks, you can easily and quickly lose more money than you could with the equivalent investment in the purchase of stock. I think it is worth a little work to educate yourself about the risks (and potential rewards) of trading options.

Update on Facebook Earnings Announcement Play

Monday, August 1st, 2016

Last week, Facebook (FB) announced earnings which were triple the year-earlier results and were 88% higher than analyst expectations, but the stock barely budged from where it was the day before the announcement. Option players could celebrate, however. The actual portfolio at Terry’s Tips where we trade FB options gained 45.8% for the week. We have a lot of happy subscribers who follow this portfolio either on their own or through the Auto-Trade service at thinkorswim.

As good as 45% for a single week might be, you could have done even better if you had followed a trade I told you about 2 ½ months ago. That is the story I would like to share with you today.

Happy trading.


Update on Facebook Earnings Announcement Play

On May 11, 2016, I told you about two trades I was making in my personal account. You can see the entire blog which explains my thinking on our blog page. Here they are:

Today, I bought these calendar spreads on FB when the stock was trading just about $120:

Buy To Open 2 FB 16Sep16 120 calls (FB160916C120)
Sell To Open 2 FB 15Jul16 120 calls (FB160715C120) for a debit of $3.26 (buying a calendar)

Buy To Open 2 FB 16Sep16 125 calls (FB160916C125)
Sell To Open 2 FB 15Jul16 125 calls (FB160715C125) for a debit of $3.11 (buying a calendar)

My total investment for these two spreads was $1274 plus $10 commission (at the rate charged to Terry’s Tips subscribers at thinkorswim), for a total of $1284.

When these short calls expired on July 15th, FB was trading at about $122.50, just about the perfect place for me since it was right in the middle of the two strike prices of my spreads. On that day, I bought back the expiring 120 calls and sold 29Jul16 120 calls and collected $2.50 (selling a calendar spread). I sold this series because it would expire just after the July 27 earnings announcement.

I also sold the same calendar spread at the 125 strike price and collected $2.35. The net effect of these two trades (I collected $960 after commissions) reduced my net investment from $1284 to $324.

After Wednesday’s announcement, FB soared to $130 in after-hours trading, but opened at $127.52, and by late Friday when my short options were about to expire, it had fallen to about $124. I then closed out my positions by buying back the 29Jul16 calls and selling the 16Sep16 calls I still owned, collecting $2.10 per contract for the 120 strike calls and $3.10 for the 125 strike calls. After commissions, this worked out to a total of $1030, so I netted a profit of $706 on an original investment of $1284. Bottom line, I made 55% on my original investment for the 10 weeks I traded FB options.

Over this same time period, investors who owned FB stock made $4 per share on their money. If they invested $1284 like I did, they could have bought only 10 shares for $120 per share. Their gains for the 10 weeks would have been $40. My option trading made 17 times more money than the stock buyers would have made. Once again, I don’t understand why people would waste their money buying stock when they could spend a little time studying how to trade options, and make a multiple of what they could make by the simple buying of stock.

As with all investments, you should only use money that you can truly afford to lose. Options are leveraged investments, and unless you totally understand the risks, you can easily and quickly lose more money than you could with the equivalent investment in the purchase of stock. I think it is worth a little work to educate yourself about the risks (and potential rewards) of trading options.

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

~ John Collins