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Posts Tagged ‘10K Bear’

A Bearish Option Portfolio That Can Gain Even if the Market Doesn’t Fall

Monday, November 7th, 2011

Where should you place your investment dollars in this time of uncertainty?  There are no easy answers. 

The stock market is not an comfortable place to be.  Through the first ten months of 2011 (in what many have considered to be a good year for the market), it has gained about 2%.  It is lower today than it was three years ago.  Bonds do not yield enough to make much of a difference, and CD rates are pathetic.  Foreign stocks have not done appreciably better than domestic stocks.  And real estate has been a great way to lose money big time.

I believe that our SPY portfolios offer greater potential for monetary returns than any investment alternative out there.  (SPY is the tracking stock for the S&P 500 stock index, so you are trading on the entire market rather than an individual stock.)

Today I would like to share with you the risk profile graph of one of our SPY portfolios – this one is called the 10K Bear.  It is positioned to do best if the market falls.  It can serve as a hedge against your other investments which presumably do best if the market moves higher.

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 11th), 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.

A Bearish Option Portfolio That Can Gain Even if the Market Doesn’t Fall:

 
The 10K Bear is a portfolio currently worth about $4000.  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 11, 2011.  These Weekly puts are at lower strike prices (from $121 to $125).

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 $125.75.

You can see that if the stock is absolutely the same at the close next Friday, the portfolio will gain $901, or about 22% on the $4000 portfolio value.  If the stock falls moderately, by $2, and ends up at $123.75, the gain should be $1,337, or about 33%.  (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 18th.)

The stock can go up as high as $129 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.

Last week, the market was weak.  SPY fell $3.12.  Our 10K Bear portfolio gained 24% (after commissions and roll-over costs).  That is more than most stock investments make in several years.  We did it in a single week.

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)?

Give yourself (and your loved ones) an early Christmas gift, and increase your earning potential exponentially by subscribing today.  Do it right here.

Using Options to Prosper in Down Markets

Monday, September 26th, 2011

Last week was the worst week for the market for almost three years.  The S&P 500 fell by a whopping 6.6%.  Investors seem to be dumping everything.  Usually, when stock markets crash, gold moves higher, but last week, gold fell $100 in a single day, the worst one-day drop in its history.  Silver and other commodities were crushed as well.  Billions of dollars are going into treasuries even though over half the S&P 500 companies have higher yields. 

What do you in times like these?  Would you be surprised if I said that a well-designed options portfolio might be the perfect solution?

Using Options to Prosper in Down Markets

At Terry’s Tips, we conduct an actual portfolio which we call the 10K Bear.  We believe that this portfolio offers a better alternative than any other as a downside hedge vehicle.  Even better, the market does not have to go down for you to make a gain.  A flat or slightly higher market also makes weekly gains most of the time

Here is the current risk profile graph for our 10K Bear portfolio.  It shows the loss or gain that should result from a $5200 investment in SPY put options on September 30 when the Weeklys expire in a few days.  Last Friday, SPY closed at $113.54  (This graph assumes that today’s option prices – VIX – will remain unchanged – if VIX falls significantly over the next 4 days, the gains would be less than the graph indicates.)

The graph shows that about an 18% gain would be made if the stock stays flat, and a higher gain would result if SPY fell up to $3 (if it fell that far, we would make an adjustment to extend the downside potential).  Commissions would reduce results somewhat as well. The stock could go up as high as $116.50 before a loss would occur on the upside.  Clearly, this is an excellent hedge against a market drop, and it has the added advantage of also making gains if the market is flat or slightly higher.

How do we create an options portfolio like this?  It is the strategy we use when we want to bet on the direction of the market.  Most of the portfolios at Terry’s Tips make the assumption that we have no idea of which direction the market will take in the short run.

The 10K Bear portfolio involves buying put options with several months of remaining life and selling short-term (Weekly) puts to someone else.  The puts we sell are mostly at lower strikes than those we own.  Rather than trying to sell short-term puts which maximize the amount of short-term decay we could collect, we aim to sell just enough short-term decay to cover the decay of the longer-term puts we own.

In Greek terms (pardon me for using Greeks if you are not familiar with them), we seek to maximize the negative net delta of the portfolio while maintaining a positive theta.  As the stock fluctuates during the month, adjustments are often required to maintain these two goals.  (Adjustments we made in the August expiration month enabled the 10K Bear  portfolio to gain 55% while the original positions at the beginning of the month projected a gain of less than half that amount).

While this may seem to be a little complicated right now, if you become a Terry’s Tips subscriber, it should all become quite clear.  You can follow how the 10K Bear operates over time (as well as several other bullish-leaning portfolios) so that you can do it on your own if you wish.  (Most of our subscribers don’t do it on their own, but sign up for the Auto-Trade program at thinkorswim and have them execute the trades automatically for them).

Using Options to Hedge Market Risk

Monday, September 12th, 2011

Another crazy week in the market.  Investors vacillated from panic to manic and back to panic.  The net change for the week was not so significant, but the fluctuations were huge.  How can you cope with a market like this?

You might consider using options to hedge against market moves in both directions.  Check out how two of our portfolios are doing it.

Using Options to Hedge Market Risk   

Some Terry’s Tips subscribers choose to mirror in their own accounts one or more of our actual portfolios (or have trades executed automatically for them by their broker).  We recommend to that they select two portfolios, one of which does best in an up market and one that does best in a down market.

Almost all of our portfolios do best if not much of anything happens in the market, but that has not been the case in the last few weeks.  It is during times like this that both a bullish and bearish portfolio be carried out at the same time.

We have one bearish portfolio.  It is called the 10K Bear.  It is currently worth about $5000 (although we have withdrawn $2000 from it to keep it at the $5000 level for new subscribers – it had gone up in value by 54% over the last couple of months while the market was weak).

Here is the risk profile graph for the 10K Bear portfolio.  It shows how much the $5000 portfolio should gain or lose by the regular September options expiration this Friday at the various possible ending prices for SPY (currently trading just under $116): 

Using Options to Hedge Market Risk

  

Some Terry’s Tips subscribers choose to mirror in their own accounts one or more of our actual portfolios (or have trades executed automatically for them by their broker).  We recommend to that they select two portfolios, one of which does best in an up market and one that does best in a down market.

Almost all of our portfolios do best if not much of anything happens in the market, but that has not been the case in the last few weeks.  It is during times like this that both a bullish and bearish portfolio be carried out at the same time.

We have one bearish portfolio.  It is called the 10K Bear.  It is currently worth about $5000 (although we have withdrawn $2000 from it to keep it at the $5000 level for new subscribers – it had gone up in value by 54% over the last couple of months while the market was weak).

Here is the risk profile graph for the 10K Bear portfolio.  It shows how much the $5000 portfolio should gain or lose by the regular September options expiration this Friday at the various possible ending prices for SPY (currently trading just under $116):



Remember, this is an actual brokerage account at thinkorswim which any paying Terry’s Tips subscriber can duplicate if he or she wishes.  The graph shows that if the stock stays absolutely flat next week, there could be a gain of over $1000 for the week.  If the stock should fall by $2, an even higher gain should result.  (Once the stock falls by $2, we would likely make some downside adjustments so that further drops in the stock price would generate higher gains.  After all, this is our bearish bet.)

Where else could you expect a 20% gain if the market doesn’t move one bit?  In a single week?  Or even more if the market should fall?

Admittedly, today’s option prices are extremely high (in 92% of the weeks over the last 5 years, option prices have been lower than they are right now, so we are in truly unusual times).  The risk profile graphs for our portfolios usually do not look as promising as they do right now.

One of the bullish portfolios that we recommend to be matched against the 10K Bear portfolio is called the Ultra Vixen.  This portfolio is based on the underlying “stock” (actually an ETN, an exchange traded note) called VXX.  This index is based on the short-term futures of VIX (the measure of SPY option prices, the so-called “fear index”).  When the market drops, VIX generally rises (as do the VIX futures prices), and VXX usually moves higher.  Over the last month while the market dropped over 10%, VXX has more than doubled in price.  For that reason, many people consider VXX to be an excellent hedge against market crashes.

We don’t like VXX as an investment possibility, however.  Over time, due to a mechanism called contango (futures prices become more expensive in further-out months), VXX is destined to fall over time.  It may be a good hedge as a short-term investment but is awful as a long-term holding.  It fell for 12 consecutive months last year, for example, even though VIX fluctuated in both directions.

Our Ultra Vixen portfolio is set up to benefit when VXX goes down (which it does when the market is flat or goes up).  We generally maintain a net short position on VXX with some call positions for protection in case the stock does go up.  However, our portfolio does best if the market stays flat or moves higher, so it is a good hedge against the 10K Bear portfolio.

Here is the risk profile graph for Ultra Vixen for next Friday’s expiration (September 16th).  It is a $10,000 portfolio and the underlying stock (VXX) is trading about $45.83:





The graph shows that a 10% gain for the week is possible if the stock falls as much as $3 or goes up by as much as $2.  (Historically, in about half the weeks, VXX fluctuates by less than a dollar in either direction.)  Where else besides options do you find opportunities like this?  In a single week?

Both the 10K Bear and Ultra Vixen portfolios should make excellent gains every week when the market is flat, and one or the other should make gains when the market moves more than moderately in either direction.  Theoretically, if the two portfolios together break even in the high-fluctuation weeks and they both make gains when the market doesn’t do much of anything, the long-run combined results should be extraordinary.

Creative Ways to Profitably Trade Options

Monday, August 29th, 2011

For over 11 years, Terry’s Tips has carried out different option strategies in actual brokerage accounts.  Of course, commissions are paid in these accounts so the results are exactly what you would experience if you followed the trades we make.

Paying subscribers can watch these portfolios unfold over time to get a better understanding on what causes the bottom line to grow or shrink (yes, unfortunately, that does happen occasionally).

Today I would like to discuss how three of these portfolios are set up and how they did last week.

Creative Ways to Profitably Trade Options   

Most of our strategies involve buying LEAPS or other longer-term options and selling short-term (higher decaying) against these long positions.  While that is the central idea, there is a multitude of ways it can be carried out.

We use the central idea in an unusual way in a portfolio we call the Last Minute.  It sits in cash until late in the day on Thursday when we make a guess as to whether we think SPY will move more or less than $2 on Friday.  If we think it won’t move by that much (like we did last week in spite of Mr. Bernanke’s upcoming speech), we buy calendar spreads at several different strikes, some above and some below the stock price.

Last week, we might have done better to have guessed in the other direction since SPY moved by more than $2 on the upside and almost that much on the downside.  But during the day, when the stock had moved up about $.45, we sold all our calendar spreads, making a nice 22% gain after commissions for a single day of trading.

The Last Minute portfolio has made gains in 14 of the 17 weeks it has been running, and has made 187% on the average weekly investment.  (One of the losing weeks was only a $39 loss, and in another one, I made an uncharacteristically stupid trading decision and passed up an 8% gain only to lose money by the end of the day.)

Another portfolio which uses the central idea is set up for subscribers who are fearful that the market might move lower.  It is called the 10K Bear.  Two weeks ago, SPY fell by 4.6% in a single week and our 10K Bear portfolio gained 17.5% after commissions.  Last week, SPY did a complete turn-around and rose 4.7%.  Our 10K Bear portfolio managed to gain 1% for the week in spite of being on the wrong side of the trend.  Admittedly, option prices are unusually high right now, and this bearish portfolio could not be expected to make a gain with such a stock price move in normal times, but it is nice to see that in today’s market, we seem to be able to make weekly gains no matter which way the market moves.

A third portfolio uses the central idea in a different way.  We picked an underlying stock (AAPL) which we think is headed higher, and instead of selling as much short-term premium as we can, we sell just enough to cover the decay of our long positions.  If the stock goes higher, we should experience a much greater percentage gain than the stock.  Last week, in spite of Steve Jobs’ resignation, AAPL gained 7.7%.  Our portfolio gained a whopping 31.4%, proving once again that options can consistently outperform stock.

An analogy – Checkers is to buying stocks as chess is to trading options

Monday, August 22nd, 2011

Last week we saw the market fall for the fourth consecutive week.  Volatility in the options market shot higher than we have seen in many years.  As usual, there are abundant ways in the options market that do not exist in conventional investments.

For example, our Bearish SPY portfolio gained 17.5% last week while the market (SPY) fell by 4.5%.  This portfolio has now gained 42.3% over the last couple of months as the market has steadily gone down.

Today I would like to discuss a little about the challenges of learning a bit more about the options business.

An analogy – Checkers is to buying stocks as chess is to trading options

Someone said that investing in stocks is pretty much like playing checkers.  Any 10-year old can do it.  You really don’t need much experience or understanding.  If you can read, you can buy stock (and probably do just about as well as anyone else because it’s basically a roulette wheel choice in spite of the near universal belief that you are smarter than anyone else).

Options, on the other hand, 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 (and for some reason, these professionals are selling the stock to them instead of buying it).

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 in option trading.  Most people are not.

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.

Using Options to Protect Against a Market Crash

Monday, August 8th, 2011

We carry out a Bearish portfolio for our subscribers to follow (either by mirroring our trades on their own or having trades made for them by thinkorswim through its Auto-Trade program). Subscribers who follow this portfolio are happy campers this week. They made 26% on their money last week while most everyone else was suffering.

Today I would like to tell you how this bearish portfolio works.

Terry

Using Options to Protect Against a Market Crash

Our bearish portfolio is made up of put LEAP options that we buy (at strike prices which are higher than the current stock price) and short-term put options that we sell (at strike prices which are lower than the current stock price).  We use options on SPY so we are betting that the market in general will fall rather than just one individual stock.

The neat thing about this strategy is that if the market doesn’t fall (but stays flat), it also returns a nice profit.  It can even go up a couple of dollars and a gain should result.  Here is what the risk profile graph looks like for a typical bearish option portfolio using our strategy:

This is a Bearish options portfolio with $7000 invested.  This risk profile graph shows what gains or losses might come in two weeks at the August 19, 2011 expiration.

You can see that if the stock ends up flat in two weeks ($120.08), this portfolio should gain almost $1100 (17%).  If it should fall a couple of dollars, the gain should be about $1600 (23%).  No matter how far the stock falls in the two-week period, a minimum gain of $1000 should result.  That is just what happened last week when this portfolio gained 26%.

If the stock goes up $2, this portfolio also makes money (about 4% for two weeks).  A loss situation only results if the stock were to go up by about $3.  

An important part of this strategy involves making adjustments if the stock starts moving significantly in either direction.  Last week, when it started going down, we had to buy back short puts we had sold that had become in the money (i.e., the stock price was higher than the strike price).  We replaced these short puts with lower-strike puts (at strikes which were lower than the stock price).  This kind of adjustment tends to shift the entire risk profile graph curve to the left.

How many bearish investments can you make and still expect a gain even if you are wrong? Shorting stock only makes money if you are right and the stock falls.  Buying puts is usually a bad idea because they become worth less every day that the stock fails to fall.

A properly-executed options strategy can make big gains if the stock remains flat, smaller gains if the stock moves slightly higher, and very large gains if the stock falls. Where else besides options can you find this kind of opportunity?  If you know of one, please send it along to me.

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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