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Posts Tagged ‘Bearish Options Strategies’

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  It is currently worth about $5000 (although we have withdrawn $2000 from it to keep it at the $5000 level for new subscribers – it had gone up in value by 54% over the last couple of months while the market was weak).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  It is currently worth about $5000 (although we have withdrawn $2000 from it to keep it at the $5000 level for new subscribers – it had gone up in value by 54% over the last couple of months while the market was weak).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

Some Thoughts About Options Trading

Tuesday, September 6th, 2011

Last week was a crazy one in the market – four days of gains and then a big crash on Friday when the jobs report came out and said that there were no new jobs created last month, the worst showing in eleven months.  It was a tough week for our portfolios (we generally hate volatility) but our bearish portfolio racked up a 5.5%, the seventh week in a row when it made gains.  Over this period, this portfolio has picked up 58% in value while SPY has fallen by 8.8%.

This week I would like to share some of my thoughts about my favorite subject.  Guess what it is?

Some Thoughts About Options Trading   

I think the key to options trading success is the exact same key to stock trading success; the ability to pick stocks or ETFs that will perform exactly as you would like it to.

In stock trading, you make money only when you buy stocks that go up or short stocks that go down.

In options trading, you make money when you apply bullish options strategies on stocks that go up, bearish options strategies on stocks that go down, neutral options strategies on stocks that remain stagnant or volatile options strategies on stocks that stage quick and explosive breakouts.

You only lose money in options trading when you apply bullish options strategies on stocks that goes down, bearish options strategies on stocks that go up, neutral options strategies on stocks that breaks out and volatile options strategies on stocks that remain stagnant.

Even though the key to success in options trading is largely the same as the key to success in stock trading or any other forms of investment or trading, options trading does have a few tricks up its sleeves to help put the odds in your favor.

First of all is leverage and protection.  The ability to risk lesser capital for the same profit or a lot more profit with the same capital already puts the benefit of risk in your favor.
 
Second is the ability to make a profit in more than one direction!  Yes, since the key to success in options trading is the ability to “guess” the correct direction the underlying stock or index is going to take, won’t your chances of success be dramatically increased if you could profit in more than one direction?

For example, the 10K Strategy which we employ at Terry’s Tips (a strategy using calendar spreads at several different strike prices) makes a profit when the stock goes upwards, remains stagnant OR drops a little!  Yes, all 3 directions.  Won’t your chances of success be dramatically increased with a strategy like that?

The key to stock investing is to pick the right stock(s).  Almost no one, even the professionals can do that consistently.  That is why options trading increases the odds of success in your favor if you use a strategy that profits from more than one direction.  This is a huge advantage that you do not get when you invest in stock – it only exists in option trading.

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.

Carrying Out the Last Minute Strategy

Monday, August 1st, 2011

Last week was the worst week for the market in a year. Most investors are not happy campers. A few of our portfolios did quite well, however. Our bearish one gained, of course, but two others did well in spite of the crashing averages.

Last week we discussed our William Tell portfolio which is an options bet that AAPL will move higher. Last week, the stock fell slightly, but our William Tell portfolio gained 2.3%, once again demonstrating that an options portfolio can outperform the outright purchase of stock (see free report that explains it all below).

Our Last Minute portfolio gained 27% on the amount invested last week. This is the portfolio I would like to talk about today.

Terry

Carrying Out the Last Minute Strategy

We carry out one portfolio that is a little unusual in many respects.  It is entirely in cash until late in the day each Thursday.  At that point, we decide whether we expect that SPY will fluctuate by more or less than a dollar on Friday.  If there is an important report coming out on Friday (such as the government’s job report which is due next week on the 5th), history has shown that SPY is quite likely to move by a fairly large amount in one direction or the other.  Other weeks, when the stock has moved by a dollar or more for several days in a row, we would expect that level of volatility to continue on Friday (which often has the greatest volatility of the week).

If we expect the market (SPY) to move by more than a dollar on Friday, we buy straddles or strangles.  If we expect it to move by less than a dollar on Friday, we buy calendar spreads (the long side with only 8 days of remaining life and the short side with one day of remaining life).

Last Thursday, we had trouble deciding which way to go, and we decided to invest less than half our money.  Ironically, we could have selected either straddles or calendars and we would have made money last week.  Early in the day, the stock fell by almost $1.50, but it ended up falling only $.89 for the day.

We bought straddles, the Jul5-11 131 calls and Jul5-11 130 puts, paying $1.12 each.  We bought 20 straddles, investing $2240.  When the market tanked early in the morning, we sold those straddles for $1.47.  We made a gain of $607, or 27% for the day (after commissions).

This was the fourth consecutive week that the Last Minute portfolio has made a gain.  Over that time, we have gained a total of $2860 on an average investment of $3450.  That works out to 83% on the money at risk (per unit, and many subscribers invest in lots of units).

We also would have made a gain last week if we had guessed the stock would move less than a dollar on Friday.  In that case, since SPY was trading between $130 and $131, we would have bought calendar spreads at the 130 and 131 strikes (either puts or calls could have been used, but we typically would have bought put calendars at the 130 strike and call calendars at the 131 strike).

These two spreads would have made a gain if the net change in SPY for the day was less than a dollar.  It was, at $.89, so we couldn’t have gone wrong last week.

We are having a lot of fun with this Last Minute portfolio, and so far, it has been quite profitable as well.

By coming on the Terry’s Tips bandwagon, you can play along with us in the Last Minute portfolio as well as 7 other portfolios, including the William Tell that has done so well as AAPL has moved higher.

We have written a detailed report on how the actual William Tell portfolio gained over 100% in 2010-11 while the stock rose only 25%.  You will learn how you can use the Shoot Strategy on any other stock of your choosing as well.  You can get this special report free when you subscribe to the Terry’s Tips service for a price which is less than a dinner for two at a decent restaurant – only $79.95 for the whole enchilada, including:

1)    My 72-page White Paper which explains my favorite option strategies in detail, including Trading Rules for each, and 20 companies to use with the “Lazy Way” Strategy, (which guarantees a 100% gain in 2 years if the stock stays flat or goes up).

2)    2 FREE months of the Options Tutorial Program (a $49.90 value), which includes:
·    A 14-lesson tutorial on trading stock options which will give you a thorough understanding of trading stock options.
·    A weekly update of 8 actual portfolios so that you can follow their progress over time.
·    Specific trades for each portfolio emailed to you so you may mirror them in your own account if you wish.
·    Access to historical analytic reports and portfolio updates posted in the Insiders section of Terry’s Tips.
·    If you choose to continue after the 2 free months, do nothing, and you’ll be billed at a discounted rate of $19.95 per month.  

3)    A FREE special report  “How We Made 100% on Apple in 2010-11 While AAPL Rose Only 25%“.

With this one-time offer, you will receive everything for only $79.95, the price of the White Paper alone. But you must order by Tuesday, August 2, 2011. Click here and enter Special Code 802 in the box at the bottom of the page to get the special Apple report as a free bonus.

Some Thoughts About Options Trading

Friday, July 1st, 2011

I think the key to options trading success is the exact same key to stock trading success; the ability to pick stocks or ETFs that will perform exactly as you would like it to.

In stock trading, you make money only when you buy stocks that go up or short stocks that go down.

In options trading, you make money when you apply bullish options strategies on stocks that go up, bearish options strategies on stocks that go down, neutral options strategies on stocks that remain stagnant or volatile options strategies on stocks that stage quick and explosive breakouts.

You only lose money in options trading when you apply bullish options strategies on stocks that goes down, bearish options strategies on stocks that go up, neutral options strategies on stocks that breaks out and volatile options strategies on stocks that remain stagnant.

Even though the key to success in options trading is largely the same as the key to success in stock trading or any other forms of investment or trading, options trading does have a few tricks up its sleeves to help put the odds in your favor.

First of all is leverage and protection. The ability to risk lesser capital for the same profit or a lot more profit with the same capital already puts the benefit of risk in your favor.

Second is the ability to make a profit in more than one direction! Yes, since the key to success in options trading is the ability to “guess” the correct direction the underlying stock or index is going to take, won’t your chances of success be dramatically increased if you could profit in more than one direction?

For example, the strategy which we employ at Terry’s Tips (a strategy using calendar spreads at several different strike prices) makes a profit when the stock goes upwards, remains stagnant OR drops a little! Yes, all 3 directions. Won’t your chances of success be dramatically increased with a strategy like that?

The key to stock investing is to pick the right stock(s). Almost no one, even the professionals can do that consistently. That is why options trading increases the odds of success in your favor if you use a strategy that profits from more than one direction. This is a huge advantage that you do not get when you invest in stock – it only exists in option trading.

For the past year, we have been carrying out a demonstration options portfolio on one individual stock. Our favorite months are those when the stock stays absolutely flat and our portfolio gains value. This portfolio has consistently out-performed the gains that would have been made if we had just bought shares of the stock instead. In several time periods, our portfolio gained three times as much as the stock price did. Properly executed, options trading can be far more profitable the merely buying stock.

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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