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Posts Tagged ‘AAPL’

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.

Check Out a Long-Term Bet on FaceBook (FB)

Wednesday, April 29th, 2015

In the family charitable trust I set up many years ago, I trade options to maximize the amounts I can give away each year.  In this portfolio, I prefer not to actively trade short-term options, but each year, I make selected bets on companies I feel good about and I expect they won’t tank in price over the long run.  Last week, I made such a bet on FaceBook (FB) that I would like to tell you about today.  The spread will make over 40% in the next 8 months even if the stock were to fall $5 over that time.Terry

Check Out a Long-Term Bet on FaceBook (FB)

When most people think about trading options, they are thinking short-term.  If they are buying calls in hopes that the stock will skyrocket, they usually by the cheapest call they can find.  These are the ones which return the greatest percentage gain if you are right and the stock manages to make a big upward move.  The cheapest calls are the shortest term ones, maybe with only a week of remaining life.  Of course, about 80% of the time, these options expire worthless and you lose your entire bet, but hopes of a windfall gain keep people playing the short-term option-buying game.

Other people (including me) prefer to sell these short-term options, using longer-term options as collateral.  Instead of buying stock and writing calls against it, longer-term options require far less capital and allow for a potentially higher return on investment if the stock stays flat or moves higher.  This kind of trading requires short-term thinking, and action, as well.  When the short-term options expire, they must be replaced by further-out short options, and if they are in the money, they must be bought back before they expire, allowing you to sell new ones in their place.

Most of the strategies we advocate at Terry’s Tips involve this kind of short-term thinking (and adjusting each week or month when options expire).  For this reason, many subscribers sign up for Auto-Trade at thinkorswim (it’s free) and have trades executed automatically for them, following one or more of our 10 actual portfolios.

Some portfolios make longer-term bets, and since they do not require active trading, they are not offered through Auto-Trade.  With these bets, you place the trade once and then just wait for time to expire.  If you are right, and the stock falls a little, stays flat, or goes up by any amount, the options you started with all expire worthless, and you end up with a nice gain without making a single extra trade.

In one of our Terry’s Tips demonstration portfolios, in January of this year, we placed long-term bets that AAPL, SPY, and GOOG would move higher during 2015, and when the January 2016 options expired, we would make a nice gain.  In fact, we knew precisely that we would make 91% on our investment for that one-year period.  At this point in time, all three of these stocks have done well and are ahead of where they need to be for us to make our 91% gain for the year.  We could close out these positions right now and take a 44% gain for the 3 months we have owned these options.  Many subscribers have done just that.

Let’s look at FaceBook and the long-term trade I just made in it.  I like the company (even though I don’t use their product).  They seem to have figured out how to monetize the extraordinary traffic they enjoy.  I looked at the chart for their 3 years of existence:

FaceBook FB Chart 2015

FaceBook FB Chart 2015

Note that while there have been times when the stock tanked temporarily, if you look at any eight-month period, there was never a stretch when it was lower at the end of 8 months than at the beginning.  Making a bet on the longer-term trend is often a much safer bet, especially when you pick a company you feel good about.

With the stock trading about $80, in my charitable trust, I made a bet that in 8 months, it would be trading at some price which was $75 or higher on the third Friday of December, 2015.  I make most of my donations in December, so like to be in cash at that time.

This is the trade I placed:

Buy to open FB Dec-15 70 puts (FB151219P70)
Sell to open FB Dec-15 75 puts (FB151219P75) for a credit of $1.52  (selling a vertical)

For every contract I sold, I collected $152 which immediately went into my account.  The puts I sold were at a higher strike than the puts I bought, so they commanded a higher price.  The broker placed a maintenance requirement on me of $5 ($500 per contract) which would be reduced by the $152 I collected.  This left me with a net investment of $348.  This would be my maximum loss if FB ended up below $70 on December 19, 2015.

A maintenance requirement is not like a margin loan.  No interest is charged.  It just means that I must leave $348 in cash in the account until the puts expire (or I close out the positions).  I can’t use this money to buy other options or stock.

If the stock ended up at $74 in December, I would have to buy back the 75 put I had sold for $1.  This would reduce my profit to $52 (less commissions of $3.75 – 3 commissions of $1.25  on the initial trades as well as the closing one).

If the stock ends up at any price above $75 (which I feel confident that it will), all my puts will expire worthless, the $348 maintenance requirement will disappear, and I get to keep the $152 (less $2.50 commission).  That works out to a 43% gain for the 8 months.

Where else can you find a return like this when the stock can fall by $5 and you still make the gain?  It is a bet that I don’t expect to lose any sleep over.

Volatility’s Impact on Option Prices

Monday, April 28th, 2014

Today I would like to talk a little about an important measure in the options world – volatility, and how it affects how much you pay for an option (either put or call).


Volatility’s Impact on Option Prices

Volatility is the sole variable that can only be measured after the option prices are known.  All the other variables have precise mathematical measurements, but volatility has an essentially emotional component that defies easy understanding.  If option trading were a poker game, volatility would be the wild card.

Volatility is the most exciting measure of stock options.  Quite simply, option volatility means how much you expect the stock to vary in price. The term “volatility” is a little confusing because it may refer to historical volatility (how much the company stock actually fluctuated in the past) or implied volatility (how much the market expects the stock will fluctuate in the future).

When an options trader says “IBM’s at 20” he is referring to the implied volatility of the front-month at-the-money puts and calls.  Some people use the term “projected volatility” rather than “implied volatility.”  They mean the same thing.

A staid old stock like Procter & Gamble would not be expected to vary in price much over the course of a year, and its options would carry a low volatility number.  For P & G, this number currently is 12%.  That is how much the market expects the stock might vary in price, either up or down, over the course of a year.

Here are some volatility numbers for other popular companies:

IBM  – 16%
Apple Computer – 23%
GE – 14%
Johnson and Johnson – 14%
Goldman Sachs – 21%
Amazon – 47%
eBay – 51%
SVXY – 41% (our current favorite underlying)

You can see that the degree of stability of the company is reflected in its volatility number.  IBM has been around forever and is a large company that is not expected to fluctuate in price very much, while Apple Computer has exciting new products that might be great successes (or flops) which cause might wide swings in the stock price as news reports or rumors are circulated.

Volatility numbers are typically much lower for Exchange Traded Funds (ETFs) than for individual stocks.  Since ETFs are made up of many companies, good (or bad) news about a single company will usually not significantly affect the entire batch of companies in the index.  An ETF such as OIH which is influenced by changes in the price of oil would logically carry a higher volatility number.

Here are some volatility numbers for the options of some popular ETFs:

Dow Jones Industrial (Tracking Stock – DIA) – 13%
S&P 500 (Tracking Stock – SPY) –14%
Nasdaq (Tracking Stock – QQQ) – 21%
Russell 2000 (Small Cap – IWM) – 26%

Since all the input variables that determine an option price in the Black-Scholes model (strike price, stock price, time to expiration, interest and dividend rates) can be measured precisely, only volatility is the wild card.   It is the most important variable of all.

If implied volatility is high, the option prices are high.  If expectations of fluctuation in the company stock are low, implied volatility and option prices are low.  For example, a one-month at-the-money option on Johnson & Johnson would cost about $1.30 (stock price $100) vs. $2.00 for eBay (stock price $53).  On a per-dollar basis, the eBay option trades for about three times as much as the JNJ option.

Of course, since only historical volatility can be measured with certainty, and no one knows for sure what the stock will do in the future, implied volatility is where all the fun starts and ends in the option trading game.

How to Make 60% to 100% in 2014 if a Single Analyst (Out of 13) is Right

Monday, November 25th, 2013

Today we are going to look at what the analysts are forecasting for 2014 and suggest some option strategies that will make 60% or more if any one of the analysts interviewed by the Wall Street Journal are correct. They don’t all have to be correct, just one of the 13 they talked to.

Please continue reading down so you can see how you can come on board as a Terry’s Tips subscriber for no cost at all while enjoying all the benefits that thinkorswim by TD Ameritrade offers to anyone who opens an account with them.

How to Make 60% to 100% in 2014 if a Single Analyst (Out of 13) is Right 

Now is the time for analysts everywhere to make their predictions of what will happen to the market in 2014.  Last week, the Wall Street Journal published an article entitled Wall Street bulls eye more stock gains in 2014.  Their forecasts – ”The average year-end price target of 13 stock strategists polled by Bloomberg is 1890, a 5.7% gain … (for the S&P 500).  The most bullish call comes from John Stoltzfus, chief investment strategist at Oppenheimer (a prediction of +13%).”
The Journal continues to say “The bad news: Two stock strategists are predicting that the S&P 500 will finish next year below its current level. Barry Bannister, chief equity strategist at Stifel Nicolaus, for example, predicts the index will fall to 1750, which represents a drop of 2% from Tuesday’s close.”
I would like to suggest a strategy that will make 60% to 100% (depending on which underlying you choose to use) if any one of those analysts is right. In other words, if the market goes up by any amount or falls by 2%, you would make those returns with a single options trade that will expire at the end of 2014.
The S&P tracking stock (SPY) is trading around $180.  If it were to fall by 2% in 2014, it would be trading about $176.40.  Let’s use $176 as our downside target to give the pessimistic analyst a little wiggle room.  If we were to sell a Dec-14 176 put and buy a Dec-14 171 put, we could collect $1.87 ($187) per contract.  A maintenance requirement of $500 would be made.  Subtracting the $187 you received, you will have tied up $313 which represents the greatest loss that could come your way (if SPY were to close below $171, a drop of 5% from its present level). 
Once you place these trades (called selling a vertical put spread), you sit back and do nothing for an entire year (until these options expire on December 20, 2014). If SPY closes at any price above $176, both puts would expire worthless and you would get to keep $187 per contract, or 60% on your maximum risk. 
You could make 100% on your investment with a similar play using Apple as the underlying.  You would have to make the assumption that Apple will fluctuate in 2014 about as much as the S&P.  For most of the past few years, Apple has done much better than the general market, so it is not so much of a stretch to bet that it will keep up with the S&P in 2014.
Apple is currently trading about $520.  You could sell at vertical put spread for the January 2015 series, selling the 510 put and buying the 480 put and collect a credit of $15.  If Apple closes at any price above $510 on January 17, 2015, both puts would expire worthless and you would make 100% on your investment.  You would receive $1500 for each of these spreads you placed and there would be a $1500 maintenance requirement (the maximum loss if Apple closes below $480).
Apple is trading at about 10 times earnings on a cash-adjusted basis, is paying a 2.3% dividend, and is continuing an aggressive stock buy-back campaign, three indications that make a big stock price drop less likely to come about in 2014.
A similar spread could be made with Google puts, but the market is betting that Google is less likely to fall than Apple, and your return on investment would be about 75% if Google fell 2% or went up by any amount.  You could sell Jan-15 1020 puts and buy Jan-15 990 puts and collect about $1300 and incur a net maintenance requirement of $1700 (your maximum loss amount).
If you wanted to get a little more aggressive, you could make the assumption that the average estimate of the 13 analysts was on the money, (i.e., the market rises 5.7% in 2014).  That would put SPY at $190 at the end of the year. You could sell a SPY Dec-14 190 put and buy a Dec-14 185 put and collect $2.85 ($285), risking $2.15 ($215) per contract.  If the analysts are right and SPY ends up above $190, you would earn 132% on your investment for the year.
By the way, you can do any of the above spreads in an IRA if you choose the right broker.  I would advise against it, however, because your gains will eventually be taxed at ordinary income rates (at a time when your tax rate is likely to be higher) rather than capital gains rates.
Note: I prefer using puts rather than calls for these spreads because if you are right, nothing needs to be done at expiration, both options expire worthless, and no commissions are incurred to exit the positions.  Buying a vertical call spread is mathematically identical to selling a vertical put spread at these same strike prices, but it will involve selling the spread at expiration and paying commissions.
What are the chances that every single analyst was wrong?  Someone should do a study on earlier projections and give us an answer to that question.  We all know that a market tumble could come our way if the Fed begins to taper, but does that mean the market as a whole would drop for the entire year?  Another unanswerable question, at least at this time.
On a historical basis, for the 40 years of the S&P 500’s existence (counting 2013 which will surely be a gaining year), the index has fallen by more than 2% in 7 years.  That means if historical patterns continue for 2014, there is a 17.5% chance that you will lose your entire bet and an 83.5% chance that you will make 60% (using the first SPY spread outlined above).  If you had made that same bet every year for the past 40 years, you would have made 60% in 33 years and lost 100% in 7 years.  For the entire time span, you would have enjoyed an average gain of 32% per year.  Not a bad average gain.

Follow-Up on AAPL Earnings-Announcement Strategy

Wednesday, November 6th, 2013

Last week I told you about a spread I had placed on Apple (AAPL) just prior to their earnings announcement. I closed out that spread this week, and there was a learning experience that I would like to share with you.

Please continue reading down so you can see how you can come on board as a Terry’s Tips subscriber for no cost at all while enjoying all the benefits that thinkorswim incentive offers to anyone who opens an account with them.


Follow-Up on AAPL Earnings-Announcement Strategy: Last Monday, prior to AAPL’s earnings announcement, I bought a diagonal spread, buying Jan-14 470 calls and selling the weekly Nov1-13 525 while the stock was selling just about $525. I made this trade because I felt good about the company and believed the stock might move higher after the announcement. As it worked out, I was wrong.

I paid $62.67 for the Jan-14 470 call and sold the Nov1-13 525 call for $17.28, shelling out a net $45.39 ($4539) for each spread. (Commissions on this trade at thinkorswim were $2.50). The intrinsic value of this spread was $55 (the difference between 525 and 470) which means if the stock moved higher, no matter how high it went, it would always be worth a minimum of $55, or almost $10 above what I paid for it. Since the Jan-14 calls had almost three more months of remaining life than the Nov1-13 calls I sold, they would be worth more (probably at least $5 more) than the intrinsic value when I planned to sell them on Friday.

So I knew that no matter how much the stock were to move higher, I was guaranteed a gain on Friday. If the stock managed to stay right at $525 and the Nov-1 525 call expired worthless (or I had to buy it back for a minimal amount), I stood to gain the entire $17.28 I had collected less a little that the Jan-14 call might decay in four days.

In the after-hours trading after the announcement, the stock shot up to the $535 area and I was feeling pretty good because I knew I was assured of a profit if the stock moved higher. However, the next morning, it reversed direction and traded as low as $515. I wasn’t feeling so great then, although I still expected to make a profit (albeit a smaller one).

On Thursday, the stock rose to about $525, just where it was when I bought the spread on Monday. There was still $2.50 of time premium remaining in the Nov1-13 call which I had sold, so I was tempted to wait until it was due to expire the next day so I might pick up another $250 per spread when I sold it. However, I decided to sell it at that time.

I sold the spread for $56.25, gaining $10.86, or $1076 per spread which had cost me $4539 on Monday. That worked out to a 21% gain for the four days.  I was happy with that result.

On Friday, AAPL fell back to about $517 at the close. The spread that I had sold for $56.25 was trading at about $53. I still would have made a profit, but it would have been much lower than the one I took on Thursday.

The lesson here is that when the stock is trading very near the strike price of your short call when you have a spread like this (either a diagonal or a calendar spread), it is a good idea to sell it rather than waiting until expiration day of the short option. While you give up some of the potential gain if the stock were to remain absolutely flat, you risk doing worse if the stock were to move more than moderately in either direction.

It is better to sell your diagonal spread whenever the strike price of your short option is very close to the strike price rather than waiting until the last minute to try to squeeze out every penny of decay that might be there. In this case, I was wrong about the stock moving higher – it fell about $10 and I still made over 20% on my investment for a single week.

An AAPL Earnings-Announcement Strategy

Wednesday, October 30th, 2013

Today I would like to share with you an options investment I made yesterday, just prior to the Apple (AAPL) earnings announcement. While it is too late to make this same investment yourself, you might consider it three months from now when announcement time comes around again, or with another company that you feel good about.

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An AAPL Earnings-Announcement Strategy: Approximately every 90 days, most public companies announce their latest quarterly earnings. Just before the announcement day, things get interesting with option prices. Since stocks often make big moves in either direction once earnings (and other numbers such as gross sales, margins, and future guidance) are announced, option prices get quite expensive, both for puts and for calls.

For people who like to collect high option premiums (i.e., selling expensive options to someone else), this pre-announcement period seems like a great opportunity provided I have a feeling one way or the other about the company. I had a good feeling about AAPL this month. I wasn’t sure what earnings might be (beware of anyone who says he is sure), but I thought the company was fairly priced, and I think the huge stash of cash they are sitting on provides some protection against a large drop in the stock price.

When a situation like this occurs (where I like a company and earnings are about to be announced), one of my favorite strategies is to buy a deep in-the-money call on the company, a call that has a few months of remaining life, and sell an at-the-money call in the shortest-term option series that expires after the announcement day.

On Monday morning, AAPL was trading about $525. I bought a diagonal spread, buying Jan-14 470 calls and selling Nov1-13 525 calls (AAPL has weekly options available, and the Nov1-13 calls would expire on Friday, November 1st , four days after the announcement after the close on Monday.

I paid $62.67 for the Jan-14 470 call and sold the Nov1-13 525 call for $17.28, shelling out a net $45.39 ($4539) for each spread. (Commissions on this trade at thinkorswim were $2.50). The intrinsic value of this spread was $55 (the difference between 525 and 470) which means if the stock moved higher, no matter how high it went, it would always be worth a minimum of $55, or almost $10 above what I paid for it. Since the Jan-14 calls had almost three more months of remaining life than the Nov1-13 calls I sold, they would be worth more (probably at least $5 more) than the intrinsic value when I planned to sell them on Friday.

So I knew that no matter how much the stock were to move higher, I was guaranteed a gain on Friday. If the stock managed to stay right at $525 and the Nov-1 525 call expired worthless (or I had to buy it back for a minimal amount), I stood to gain the entire $17.28 I had collected less a little that the Jan-14 call might decay in four days. A flat market would net me about a 36% gain on my investment, and any higher price for AAPL would result in at least a 25% gain.

After a company makes its announcement, all option prices tend to fall, especially in the shortest-term series that expires just after the announcement. However, deep in-the-money options like the one I bought derive most of their value from being so deep in the money, and they generally do not fall nearly as much as shorter-term, nearer-the-money options.

On the downside, the stock could fall at least $20 before I would incur a loss. Since the delta of the Jan-14 470 call was 80, if the stock fell $20, my long call might fall about $16 ($20 x .80). That would still be less than the $17.28 I collected from the 525 which would expire worthless so I would still make a gain.

Actually, as the stock falls in value, delta for an in-the-money call gets lower, and the Jan-14 call would fall by less than $16. The stock could probably go down at least $25 before I lost money with my original spread.

In the event that AAPL fell over $25 so I lost some money on the spread, since I like the company and it is now trading for only $500, I might want to hang onto my 470 call rather than selling it on Friday. I might sell another 525 (or other strike) call with a few weeks of remaining life, reducing my initial investment by that amount.

I like to make an investment that could make 25% or more in a single week if a company I like stays flat or goes higher by any amount after an announcement, and the stock can fall about 10% and I still make a gain. A more conservative investment would be to sell an in-the-money call rather than an at-the-money call. While the potential maximum gain would be less, you could handle a much greater drop in the stock value before you entered loss territory on the downside.

Two Earnings Play for This Week – Deere and Sina

Monday, May 13th, 2013

 The Green Mountain Coffee Roasters (GMCR) spread I recommended last week resulted in a 20% gain.  Not bad considering we were blindsided by their announcing a new 5-year deal with Starbucks that shot the stock 25% higher while we were betting on a lower post-announcement price.  Our gain was not as great as last week’s 50% gain on Apple, but we will take 20% anytime (I’m sorry, but I executed the Apple spreads in a Terry’s Tips portfolio and did not share it with the free newsletter subscribers).




This week I have two earnings-related plays which need to be made before the close on Wednesday if you want to participate.




If you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free!








Two Earnings Play for This Week – Deere and Sina




Sina Corporation (SINA) is pretty much the same as Yahoo but operates in China.  I have written a Seeking Alpha article about the company – How To Play The Sina Corporation Earnings Ann… in which I explain why I believe that the stock will probably dip a bit after Wednesday’s announcement (largely because expectations are high, the current valuation is pricey, and hedge funds are selling shares).




I recommended these trades to play the SINA announcement with the stock at about $59:




BTO 10 SINA Jun-13 55 puts (SINA130622P55)


STO 10 SINA May-13 55 puts (SINA130518P55) for a debit of $1.01  (buying a calendar)




BTO 10 SINA Jun-13 57.5 puts (SINA130622P57.5)


STO 10 SINA May-13 57.5 puts (SINA130518P57.5) for a debit of $1.11  (buying a calendar)




BTO 10 SINA Jun-13 60 calls (SINA130622C60)


STO 10 SINA May-13 60 calls (SINA130518C60) for a debit of $1.18  (buying a calendar)




These trades should make a gain if the stock goes up by less than 5% or down by less than 10% by Friday at the close.




The other earnings play involves Deere & Co. (DE) which has the unenviable record of falling four straight quarters after announcing, even when they bested expectations.  I have also written a Seeking Alpha article on this play – How To Play the Deere & Company Earnings Announcement.




Expectations are high here, too, and I expect a lower price than the current $93 after earnings.  Here are the spreads I am making in Deere:




Buy To Open 10 DE Jun-13 95 puts (DE130622P95)


Sell To Open 10 DE May-13 92.5 puts (DE130518P92.5) for a debit of $2.35  (buying a diagonal)




Buy to Open 5 DE Jun-13 90 puts (DE130622P90)


Sell to Open 5 DE May-13 90 puts (DE130518P90) for a debit of $.90  (buying a calendar)




These spreads will do well if the stock falls but start to lose money if the stock moves more than $2 higher.




Please check both Seeking Alpha articles for my complete reasoning for these spreads as well as a risk profile graph for each.


A Possible Earnings Play for This Week

Monday, April 29th, 2013

Last week I suggested that you “purchase May – Apr4 calendar spreads on AAPL at the 410 and 420 strikes, paying $3.85 and $3.75 for them in hopes that AAPL moves higher than its $390 price that it closed at Friday.”  We did just that in a Terry’s Tips portfolio.


The stock did manage to move up and we sold these spreads early on Friday for $6.86 and $4.66.  We sold early because we had such a good gain and because Fridays are usually weak for AAPL (people tend to sell Weekly call premium on that day and depress the stock price).  A lower price would have resulted in a lower gain because all of our strikes were higher than the stock price.  The stock managed to move up by $8 after we closed out the spreads, and we would have done considerably better if we had waited (but taking a sure profit is our preference, and we shouldn’t look back – it only hurts).


Our gain on the spreads worked out to be 50% after commissions.  We will take that any week.


If you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free!




A Possible Earnings Play for This Week


Questor Pharmaceuticals (QCOR) is an interesting company which suffered a huge setback in September 2012 when an insurance company which handled 5% of the company’s claims decided that it would no longer cover the expensive drug that represents essentially all of QCOR’s sales.


Since that time there have been no other insurance companies to deny coverage, and many institutional investors and hedge funds have purchased stock recently, presumably after surveying other insurance companies to learn if they had any intention to do so.  In contrast to that bullish event, over the past two weeks, short interest has increased by 3.1 million shares to 27 million while the outstanding float is only 54 million.  In other words, shares sold short represent 50% of the float.  Clearly, some people are hoping that other insurance companies will deny coverage and the stock will tank once again.


For many reasons, QCOR seems to be a screaming buy.  It has been growing at a good rate, carries a forward P/E of only 5, has no debt, and has multiple consecutive quarters of top line and bottom line analyst beats.  In my opinion, if earnings beat estimates once again, a short squeeze might send the stock considerably higher.


The stock has fallen about 22% over the past month, an indication that expectations are not exceptionally high (although it has recovered about 8% in the past week).  I believe there is a strong chance that it will trade higher after the announcement, and plan to make the following trades just before the close on Tuesday (earnings will be announced after the close on that day):


Buy To Open 10 QCOR May1-13 27 calls (QCOR130503C27)

Sell To Open 10 QCOR May1-13 32 calls (QCOR130503C32) for a debit of $2.30  (buying a vertical)


Buy to Open 10 QCOR Jun-13 30 calls (QCOR130622C30)

Sell to Open 10 QCOR May1-13 30 calls (QCOR130503C30) for a debit of $1.50  (buying a calendar)


This is what the risk profile graph looks like if we assume that implied volatility (IV) of the June options falls by 15 (from 65 to 50) after earnings are announced:


QCOR Risk Profile Graph

 QCOR Risk Profile Graph


These positions will cost about $4500 to place.  If the stock stays flat, a small gain should result.  If it moves higher by any reasonable amount, a larger gain should come our way.  However, if the stock falls more than just a small amount, a loss would result.


I feel good enough about this company to take this bullish position for Tuesday’s earnings announcement.

Apple’s Fundamental Great Value May Soon Get a Gigantic PR Boost

Tuesday, February 12th, 2013

Apple’s Fundamental Great Value May Soon Get a Gigantic PR Boost

Apple (AAPL) has become one of the least expensive stocks in the entire market based on a fundamental value.  Subtracting out its $128 per-share cash value ($121.3 billion/939 million shares outstanding), its trailing P/E is a ridiculously-low 7.9.  Even if you do not adjust for cash, the trailing P/E is 10.88 and forward P/E is 9.43 according to Yahoo Finance.

The company pays a 2.2% forward dividend rate and the pay-out ratio is only 12% so there is an excellent chance that this will increase in the future or some other cash-distribution method such as the preferred stock proposal advanced by hedge fund manager David Einhorn is instituted.

The only way that such a low valuation could be justified would be if the growth rate slowed dramatically.  Surely, it will fall significantly from the nearly 50% growth numbers  that it has sported for the last five years, but the culture of this company is to continually come up with new products which will appeal to its growing base of satisfied customers, and it has barely scratched the potential in China (where Tim Cook said would be their largest market).  This year Apple will probably seal a deal with China Telecom (CHA), the largest mobile carrier by far in the world.

Here are the YOY growth rates over the past five years:

aapl graph YOY quarterly growth

aapl graph YOY quarterly growth


 Admittedly, the current growth rate is the absolute lowest that it has been for the past five years, but look what happened in November 2009 when it was at a similarly low level. The growth rate really took place from that point. Will history repeat itself? According to Zacks Investment Research, analysts expect the Apple’s growth rate in 2014 tooo be 15.30%.

When a company’s future growth rate is less than its cash-adjusted P/E, it should be considered to be a fundamental bargain. That is precisely where AAPL is right now.

There is also a potential technical indicator justification for buying the stock at this time: 

AAPL 50 Day Moving Average

AAPL 50 Day Moving Average 

One of the smartest investing decisions you could have made over the past year was to buy AAPL when it rose above the 50-day moving average and sell it when it fell below that moving average.  This strategy would have picked up the big upward move from late June to October and also picked up the huge drop since that time. 

If you check out the slope of the most recent stock price move as well as the 50-day average, you can see that they are on a collision course to cross over one another in the next two weeks.  This might be the perfect time to get in ahead of this important technical indicator before it actually kicks in.  Even if you don’t believe in technical analysis, there are so many people out there who do believe in it that it becomes a self-fulfilling prophecy once it is triggered. 

In addition to both fundamental and possible technical reasons the AAPL is undervalued at its current price, there is the possibility that a public relations coup of epic proportions might be on its way on this very day. 

On December 6, 2012, Apple (AAPL) CEO Tim Cook announced that his company would shift manufacturing of one computer line from Asia to the United States. “Next year we are going to bring some production to the U.S. on the Mac,” Cook told Bloomberg Businessweek. “We’ve been working on this for a long time, and we were getting closer to it. It will happen in 2013. We’re really proud of it. We could have quickly maybe done just assembly, but it’s broader because we wanted to do something more substantial.” 

The announcement was generally discounted as a symbolic effort to improve its public image which has been tarnished in recent years by reports of labor issues at Foxconn, its major contract supplier in China. 

At the time of his announcement, AAPL was trading at $534, or about 10% lower than it closed today Monday, February 11th ($480). Over this same time period, the S&P 500 has gained almost 7%.   Clearly, a more positive public image doesn’t necessarily result in a higher stock price, at least all by itself. 

Analysts expected the amount of production that would be shifted to the United States to be negligible.  Cook stated that they would invest $100 million to ramp up to make Mac computers, a pittance compared to the $121 billion in cash they are sitting on (and which has been the source of multiple suggestions lately on how they can best use this stash). 

But symbolically, if a huge company like Apple shifts some manufacturing jobs to the U.S., joining recent moves by Caterpillar (CAT) and General Electric (GE), and other large companies (according to a Boston Consulting Group survey ), maybe more others might join the party and collectively reduce our unemployment rate that unhappily hovers around 8% these days. 

There seems to be a nationwide movement to “buy local.”  While this usually refers to locally-grown fruits, vegetables and meat products, “buy American” has been a long-standing slogan in our country.  Maybe Apple will figure out that the extra cost of hiring U.S. workers for some manufacturing jobs adds to the bottom line because certain segments of the population will reward them by buying their products rather than Samsung’s. 

It seemed unusual to me that an oft-repeated tag line scrolling across the TV screen on CNN today was that Apple’s Tim Cook would be at President Obama’s State of the Union Address.  There undoubtedly will be dozens of other more important “real” celebrities in attendance, but why did Tim Cook get all the publicity? 

Could it be possible that Mr. Obama will publicly recognize Tim Cook’s promise to return manufacturing jobs to the United States, and give some specifics of how many people might be employed or where the new factories might be located?  Maybe Mr. Cook will be appointed to head up a commission of other large domestic company CEOs to encourage other companies to join the movement to bring back jobs to America. 

Maybe the President will announce that Apple will be making the iWatch using Corning Glass in New York rather than Zhengzhou, or some other positive news which might reflect well on Apple as well as our nation. 

Will such publicity goose up the stock?  It didn’t when the initial announcement was made in December.  But maybe this time it will be different.  An interview on Bloomberg Businessweek is a fairly commonplace event, but a company being recognized in a State of the Union Address is something serious and potentially beneficial to a company whose luster has faded as the stock has plummeted from a high over $700 a few months ago to $480 today.


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