from the desk of Dr. Terry F Allen

Skip navigation

Member Login  |  Contact Us  |  Sign Up

1-800-803-4595

Six-Month Review of Our Options Strategies – Part 1

We have just finished the first half of 2014.  It has been a good year for the market.  It’s up about 6.7%.  Everyone should be fairly happy.  The composite portfolios conducted at Terry’s Tips have gained 16% over these months, almost 2 ½ times as much as the market rose.  Our subscribers are even happier than most investors.

Our results would have been even better except for our one big losing portfolio which has lost nearly 80% because we tried something which was exactly the opposite to the basic strategy used in all the other portfolios (we essentially bought options rather than selling short-term options as our basic strategy does).  In one month, we bought a 5-week straddle on Oracle because in was so cheap, and the stock did not fluctuate more than a dollar for the entire period. We lost about 80% of our investment.  If we had bought a calendar spread instead (like we usually do), it would have been a big winner.

Today I would like to discuss the six-month results of a special strategy that we set up in January which was designed to make 100% in one year with very little (actually none) trades after the first ones were placed.

Terry

Six-Month Review of Our Options Strategies:

We have a portfolio we call Better Odds Than Vegas.  In January, we picked three companies which we felt confident would be higher at the end of the year than they were at the beginning of the year.  If we were right, we would make 100% on our money.  We believed our odds were better than plunking the money down on red or black at the roulette table.

Today we will discuss the first company we chose – Google (GOOG).  This company had gone public 10 years earlier, and in 9 of those 10 years, it was higher at the end of the calendar year than it was at the outset.  Only in the market melt-down of 2007 did it fail to grow at least a little bit over the year.  Clearly, 9 out of 10 were much better odds than the 5 out of 10 at the roulette table (actually the odds are a little worse than this because of the two white or yellow possibilities on the wheel).

In January 2014 when we placed these trades, GOOG was trading just about $1120.  We put on what is called a vertical credit spread using puts.  We bought 5 January 2015 1100 puts and with the same trade sold 5 Jan-15 1120 puts for a credit spread of $5.03.  That put a little more than $2500 in our account after commissions.  The broker would charge us a maintenance requirement of $5000 on these spreads.  A maintenance requirement is not a loan, and no interest is charged on it – you just can’t spend that money buying other stocks or options.

If you subtract the $2500 we received in cash from the $5000 maintenance requirement you would end up with an investment of $2500 which represented the maximum loss you could get (and in this case, it was the maximum gain as well).  If GOOG ended up the year (actually on the third Friday in January 2015) at any price higher than where it started ($1120), both put options would expire worthless, the maintenance requirement would disappear, and we would get to keep the $2500 we got at the beginning.

Then GOOG declared a 2 – 1 stock split (first time ever) and we ended up with 10 put contracts at the 560 and 550 strike prices.  Usually, when a company announces that a split is coming, people buy the stock and the price moves higher.  Once the split has taken place, many people sell half their shares and the stock usually goes down a bit.  That is exactly what happened to GOOG.  Before the split, it rose to over $1228.  We were happy because it could then fall by over $100 and we would still double our money with our original put spreads.  But then, after the split, following the pattern that so many companies do, it fell back to a split-adjusted $1020, a level at which we would lose our entire investment.

Fortunately, today GOOG is trading at about $576, a number which is above our break-even post-split price of $560.  All it has to do now for the rest of the year is to go up by any amount or fall by less than $16 and we will double our money.  We still like our chances. If we were not so confident, we could buy the spread back today and pay only $4.25 for it and that would give us a profit of about 15% for the six months we have held it.

Next week we will discuss the two other vertical put spreads we sold in January.  After you read about all 3 of our plays, you will have a better idea on how to use these kinds of spreads on companies you like, and return a far greater percentage gain than the stock goes up (in fact, it doesn’t have to go up a penny to earn the maximum amount).

Tags: , , , , , , , , , , , ,

Making 36%

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

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

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

Order Now

Success Stories

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

~ John Collins