Follow-Up on Last Week’s 10K Bear Portfolio

Last week I discussed our 10K Bear portfolio, the one that is designed to do best when the market falls.  Today I would like to expand that discussion and report on how well the portfolio did last week when there was extreme volatility (SPY fell over 4% on Wednesday but managed a gain of about 1% for the week).

Once again, I hope you will spend a few minutes studying the graph below.  If you can see what will happen in the next few days (ending Friday, November 18th), you will have a much better understanding of why I believe that options offer more potential than just about any other investment you can make.

I hope you will make a 5-minute investment in yourself and study the graph carefully.

Follow-Up on Last Week’s 10K Bear Portfolio: 

Most people own stocks or mutual funds that do best when the market moves higher.  How do they make out when the market moves lower?  Presumably, their portfolio value goes down.  Maybe they don’t feel so badly because all of their friends have also suffered a loss as well.

But if you’re anything like me, you hate to lose money, even if all my friends are losing at the same time.

Doesn’t it make sense that some of your money should be invested in something that does best when the market moves lower?  It’s called hedging.  Hedge funds do it all the time.  They even have named themselves after the idea.

We have set up a portfolio that is designed to do to just that.  We call it the 10K Bear portfolio.  Many Terry’s Tips subscribers (myself included) duplicate the trades made in this portfolio in their own account through the Auto-Trade program at TD Ameritrade’s thinkorswim.  Others copy the trades on their own in their account.

The neat thing about this portfolio is that it can make gains even if the stock goes up.  How many investments make gains when the stock moves in the opposite direction that you are betting on?  Therein lies the magic of options trading.

Two weeks ago, the S&P 500 (“the market”), SPY, fell 2.4%.  Our 10K Bear portfolio gained a whopping 24% for the week.  Last week, SPY rose $1.18, about 1%, and our portfolio gained 5.8%.  I call that having your cake and eating it too. 

Obviously, this portfolio does not make money every single week, regardless of what the market does.  But it almost always makes gains if the market stays flat or falls moderately, and also can make smaller gains if the market moves just slightly higher.  At the beginning of each week, we create a risk profile graph like the one below so we know exactly how the portfolio will perform at the various stock prices where it might end up on Friday.

The 10K Bear is a portfolio currently worth about $4200.  We own puts at several different strike prices (between $124 and $128).  These puts will expire on the third Friday in January of 2012.  Against these long puts we have sold Weekly puts which will expire on November 18, 2011.  These Weekly puts are at lower strike prices (from $122 to $126).

The Weekly puts that we have sold have higher decay rates than the January puts that we own (all options fall in value, or decay, every day the underlying stock remains flat).  This means that every day that the market does not fluctuate, our portfolio value grows larger.   That is the neat thing about a properly-designed options portfolio.  You can make gains even if you are wrong.  When you buy stock, the only way you make money is if the stock moves higher.  With options, you can make substantial gains even if the market stays absolutely flat (or moves moderately either up or down).

Here is the risk profile graph for our 10K Bear portfolio.  It shows how much the portfolio will gain or lose at the possible ending stock prices this Friday.

The second column from the right (under P/L Day) gives the dollar loss or gain at the three selected prices in the first column (Stk Price), and you can estimate the losses or gains from the graph curve at other possible stock prices.  At last Friday’s close, SPY was trading at $126.66.

You can see that if the stock is absolutely the same at the close next Friday, the portfolio will gain $470, or just over 10%.  If the stock falls moderately, by $2, and ends up at $124.66, the gain should be $970, or about 20%.  (Both these numbers will be reduced slightly from commissions and trading costs when the Weeklys are bought back next Friday and replaced with Weeklys that expire on November 25th.)

The stock can go up as high as $128 before a loss should result.  In other words, the portfolio makes excellent money if the stock stays flat, even more money if the market falls moderately, and it also can gain if the market goes up (as long as the rise is not too great).

Where else can you invest your money and expect these kinds of returns?  If you know of anything that can offer even remotely as great as these gains, please send the details along to me.  If you like, I would share them with my subscribers so we all could benefit.

Why are you waiting any longer before you learn the details of how you can start making money using the 10K Strategy that is the basis of the 8 actual portfolios that we carry out (and you can easily duplicate in your own account, either on your own or through the Auto-Trade program at thinkorswim)?

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