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Posts Tagged ‘Calendar Spreads’

What Can Be Learned From Successful Option Strategies

Tuesday, March 21st, 2017

Today I would like to share some thoughts I sent out on Saturday to paying subscribers at Terry’s Tips.  These thoughts reflected on the recent successes of the nine actual options portfolios we carry out and comment on each week. By the way, all nine portfolios are profitable for 2017 and the composite average gain is currently 28.9% since the beginning of the year.  Last week while the market (SPY) fell 0.3%, our portfolios gained an average of 3.2% for the week, demonstrating that we don’t have to rely on a rising market to enjoy portfolio gains.

Terry

 What Can Be Learned From Successful Option Strategies

 

If we can identify the strategies that resulted in the extraordinary returns we have enjoyed in the first quarter, maybe we can use those strategies for other underlying stocks or ETPs and time periods.

First, we must admit that we had some good luck.  Anyone who makes these kinds of returns must admit that some of it was based on pure luck.  Anyone who follows the mutual fund industry knows this intimately.  Every year, millions of dollars get plowed into the top-performing funds, and a year or five years later (whichever period the top-rated award covered), those funds almost universally underperform in the subsequent period.  As Burton Malkiel explained in the oft-revised book, A Random Walk Down Wall Street, - ”The past history of stock prices cannot be used to predict the future in any meaningful way.” The top stocks (or mutual funds) end up in that position largely on a random basis.  (Some of us remember way back when the Wall Street Journal had a column where monkeys throwing darts competed against the top picks of top-rated analysts, and the monkeys won about half the time.)

But luck doesn’t account for it all.  Our biggest winner was Wiley Wolf where FB rose 21.6% for the year. Our portfolio is up 117.5%, or 5.4 times greater. This is the only portfolio that uses the 10k Strategy, and we have learned that it will return a multiple of what the stock price does.  Unfortunately, that works in both directions, and if the stock had fallen by that amount, our losses would have been proportionately greater.  So we can conclude that we were lucky to be playing FB for a period when it was rising nicely, but our strategy had something to do with achieving the exceptional returns.

A less dramatic explanation of the power of an options strategy has taken place in our SPY-based Leaping Leopard portfolio.  In this portfolio, we are using the strategy of long-term vertical put credit spreads.  This is our favorite way to play underlyings which we believe will at least remain flat, or are likely to rise.  The market (SPY) has picked up 4.9% for the year to date, a wonderful record.  Our Leaping Leopard portfolio has gained 14.9%, or 3 times the size of the index gain.  Even better, our strategy is set up so that if SPY loses as much as 5% or goes up by any amount over the course of the year, we will enjoy a gain of about 40%.  The huge difference between what the market does and our portfolio performance is clearly caused by the strategy.

Returning to the being lucky theme, the volatility-related portfolios have prospered because contango has remained at an elevated level for the entire first quarter of the year.  With the election of a president whose promises and plans were seen to be unusually volatile and uncertain (which ideas would be proposed, and which might actually become real was a real question), the market expected that in the near future, volatility would be great.  Meanwhile, the market racked up small and steady gains, and VIX fell to historic lows and has pretty much remained there.  When VIX is low and the futures are predicting high uncertainty for SPY, contango rises to the historic highs we have seen pretty much all year.

This contango condition has been the major contributor to our Contango portfolio gaining 44.6% so far this year, and to a lesser degree, the 29% gain in Vista Valley and the 14.7% gain in Capstone Cascade.  In the Capstone Cascade portfolio, SVXY has soared by over 40% for the year, a perfect backdrop for a strategy of selling naked puts on the underlying ETP.  At the present level of theta, this portfolio will gain over 100% for the year. We have been selling at strikes which are seriously out-of-the-money, and we would have done just as well if SVXY had not soared like it did.  Even worse, we tried to protect against the possibility of a falling SVXY (we bought into the fears that uncertainty would be the predominant condition), and we also sold some well out-of-the-money calls on the ETP. These short calls caused our returns to be lower than if we had not been so worried that volatility would heat up.

It is far more difficult to predict the short-term movements of a stock than the longer-term movements.  Short-term fluctuations are often caused by emotionally-driven actions in response to news items such as analysts upgrades or downgrades or quarterly numbers or rumors, while longer-term fluctuations are more likely to be based on the fundamental performance of the underlying company or ETP.  In most of our portfolios, we take a longer-term perspective, such as our Boomer’s Revenge portfolio where the shortest-term spread had six months of remaining life when it was placed.  This portfolio is our most conservative, and is designed to gain 30% for the year.  So far, thanks to the rising market, it is ahead of schedule, picking up 18.2% to date.  We are now in the enviable position of being able to look forward to the full 30% annual gains even if the 5 underlying stocks were to fall by 10% between now and the end of the year.

To summarize, the first 11 weeks of 2017 have been good ones for the market.  SPY has gained 4.9%. The prudent owner of a large-market-based index fund will have gained this much so far this year.  This is about the average 2017 gain initially predicted by the composite of the published analysts we identified at the outset of the year.  So the market has achieved in 11 weeks what the analysts expected for the entire year, making it a remarkable year so far.

The difference between this 4.9% market gain and the composite 28.9% of our portfolios is clearly due to the options strategies that we have employed. Options are leveraged investments, and should be expected to perform exponentially better (or worse) than the percentage gains of their underlyings.  However, in most of our portfolios, we can look forward to unusually large gains when the underlyings remain absolutely flat or even lose a little over the course of the year.  This fact alone is proof that a well-designed and executed options strategy can be expected to outperform the market in general or any mutual fund in particular (where over 80% of the funds have underperformed the market over a multi-decade time period, yet still collect billions of dollars every year in fees for their efforts).  We like to think that the performance of our portfolios so far this year is the result of our doing a decent job in the options arena.

How to Make 27% in 45 Days With a Bet on Tesla

Sunday, March 5th, 2017

The 9 actual portfolios carried out by Terry’s Tips are having a great 2017 so far.  Their composite value has increased 23.8% for the year, about 4 times as great as the overall market (SPY) has advanced.

The basic strategy employed by most of these portfolios is to bet on what the company won’t do rather than what it will do. Most of the time, that involves picking a blue chip company that you really like, especially one paying a large dividend, and betting that it won’t fall by very much.  You don’t care if it goes up or stays flat.  You just don’t want it to fall more than a few points while you hold your option positions.

Today, I would like to offer a different kind of a bet based on what a popular company might not do.  The company is Tesla (TSLA), and what we think it will not do is to move much higher than it is right now, at least for the next few months.

Terry

 How to Make 27% in 45 Days With a Bet on Tesla

Tesla is a company which has thousands of passionate supporters.  They have bid up the price of a company with fabulous ideas but no earnings to near all-time highs.  If you peruse some of the multiple articles recently written about the company, you can’t help but wonder how the current lofty price can be maintained.

Here are some of the things that are being said:

It’s possible that the Model 3 could bury Tesla in several ways, including:

  • It being substantially late.
  • It not being profitable at the low price it was promised, and thus require a much higher selling price.
  • A much higher selling price or emerging competition leading to much lower than expected volumes.

Tesla will need to spend about $8 billion in its network of charging stations in the U.S. alone if it wants to make recharging a car as convenient as going to a gas station.

Tesla’s acquisition of SolarCity was really a bailout. SolarCity was in deep financial trouble. It could have gone bankrupt, and will need a huge infusion of capital to survive.

The company has historically issued overly optimistic projections, and the recent exodus of its CFO is evidence that some executives are rebelling.

More and more traditional car companies are coming out with all-electric models that will compete directly with Tesla.

China represented 15.6% of its automotive sales during 2016. China’s market is weakening during early 2017 due to tax changes. Hong Kong will be crashing due to the elimination of a tax waiver which will nearly double the price of a Model S.

Goldman Sachs recently downgraded the stock and said it expected it would fall by 25% over the next six months.

Tesla has a market cap of $40 billion on revenue of around $7 billion, while General Motors (G) has a market cap of $55 million on revenue of $166 billion. Ford (F) has similar multiples, and Toyota (TM), despite significant topline growth, still has a P/S ratio of only 0.49. These numbers make Tesla look astronomically overvalued and are the reason TSLA is a magnet for short sellers.

TSLA will probably need $35 billion over the next 9 years to support its planned ramping up of manufacturing.  This will require additional stock sales which could dampen prices.

And there are many others out there making other dire predictions…

So what do you do if these writers have collectively convinced you that TSLA is overvalued?  One thing you could conclude is that the stock will not move much higher from here.

Here is a possible trade you might consider:

With TSLA trading about $252, you might believe that it is highly unlikely to move higher than $270 in the next 7 weeks.  This is a trade you might consider:

Buy To Open # TSLA 21Apr17 275 calls (TSLA170421C275)
Sell To Open # TSLA 21Apr17 270 calls (TSLA170421C270) for a credit of $1.10  (selling a vertical)

This spread is called a vertical call credit spread.  We prefer using calls rather than puts if you are bearish on the stock because if you are right, and the stock is trading below the strike price of the calls you sold on expiration day, both call options will expire worthless and no further trades need to be made or commissions payable.

For each contract sold, you would receive $110 less commissions of $2.50 (the rate Terry’s Tips’ subscribers pay at thinkorswim), or $107.50.  The broker will place a $500 maintenance requirement on you per spread.  Subtracting out the $107.50 you received, your net investment is $392.50 per spread.  This is also the maximum loss you would incur if TSLA closes above $275 April 21, 2017 (unless you rolled the spread over to a future month near the expiration date, something we often do, usually at a credit, if the stock has gained a bit since the original trade was placed).

Making a gain of $107.50 on an investment of $392.50 works out to a 27% for the 7 weeks you will have to wait it out.  That works out to over 200% annualized, and you can be wrong (i.e., the stock rises) by $18 and still make this gain.

If you were REALLY convinced that TSLA wouldn’t move higher in the next 7 weeks, you might consider selling this spread:

Buy To Open # TSLA 21Apr17 255 calls (TSLA170421C255)
Sell To Open # TSLA 21Apr17 260 calls (TSLA170421C260) for a credit of $2.00  (selling a vertical)

This spread does not allow the stock to move up much at all (about $3) for the maximum gain to come your way, but if you are right and the stock ends up at any price below $255 on April 21, you would gain a whopping 67% in the next 7 weeks.

As with all investments, option trades should only be made with money that you can truly afford to lose.

Happy trading.

Terry

How to Make 50% in 5 Months With Options on Celgene

Thursday, March 2nd, 2017

One of my favorite option plays is to pick a company I like (or one that several people I respect like) and place a bet that it will at least stay flat for the next few months. Actually, most of the time, I can find a spread that will make a great gain even if the stock falls by a few dollars while I hold the spread.

Today, I would like to share an investment we placed in a Terry’s Tips portfolio just yesterday. By the way, this portfolio has similar spreads in four other companies we like, and it has gained over 20% in the first two months of 2017. We have already closed out two spreads early and reinvested the cash in new plays. The portfolio is on target to make over 100% for the year (and it is available for Auto-Trade at thinkorswim for anyone not interested in placing the trades themselves).

Terry

How to Make 50% in 5 Months With Options on Celgene

Not only is CELG on many analysts’ “Top Picks for 2017” list, but several recent Seeking Alpha contributors have extolled the company’s business and future. One article said “Few large-cap biotech concerns have a clearer earnings and revenue growth trajectory over the next 3-5 years than Celgene.”

Zacks said, “We are expecting an above average return from the stock in the next few months.” See full article here.

So we like the company’s prospects, and this is the spread we sold yesterday when CELG was trading at $123.65:

Buy To Open # CELG 21Jul17 115 puts (CELG170721P115)
Sell To Open # CELG 21Jul17 120 puts (CELG170721P120) for a credit limit of $1.72 (selling a vertical)

For each contract sold, we received $172 less commissions of $2.50 (the rate Terry’s Tips’ subscribers pay at thinkorswim), or $169.50. The broker will place a $500 maintenance requirement on us per spread. Subtracting out the $169.50 we received, our net investment is $330.50 per spread. This is also the maximum loss we would incur if CELG closes below $115 on July 21, 2017 (unless we rolled the spread over to a future month near the expiration date, something we often do, usually at a credit, if the stock has fallen a bit since we placed the original trade).

Making a gain of $169.50 on an investment of $330.50 works out to a 51% for the five months we will have to wait it out. That works out to over 100% a year, and the stock doesn’t have to go up a penny to make that amount. In fact, it can fall by $3.65 and we will still make 51% on our money after commissions.

If the stock is trading below $120 as we near expiration in July, we might roll the spread out to a future month, hopefully at a credit. If this possibility arises (of course, we hope it won’t), we will send out a blog describing what we did as soon as we can, just in case you want to follow along.

This spread is called a vertical put credit spread. We prefer using puts rather than calls even though we are bullish on the stock because if we are right, and the stock is trading above the strike price of the puts we sold on expiration day, both put options will expire worthless and no further commissions will be due.

As with all investments, option trades should only be made with money that you can truly afford to lose.

Happy trading.

Terry

Another Interesting Short-Term Play on Aetna (AET)

Friday, January 20th, 2017

your investment if AET doesn’t move up or down by more than $9 in the next two weeks.

Terry

 Another Interesting Short-Term Play on Aetna (AET)

 This week, once again we are looking at Aetna (AET), a health care benefits company.  If you check out its chart, you can see that it does not historically make big moves in either direction, especially down:

AET Aetna Chart 2 January 2017

AET Aetna Chart 2 January 2017

In spite of this lack of volatility, for some reason, IV of the short-term options is extremely high, 44 for the series that expires in 10 days.  The company is trying to purchase Humana, and the justice department may have some objections, and there seems to be concerns how insurance companies will fare under the Trump administration, two factors which may help explain the high IV. Neither of the possible adverse outcomes are likely to occur in the next 14 days, at least in my opinion.

AET is trading at $122 as I write this.  I think it is highly unlikely that it will fall below $113 in 14 days or above $131 when the 3Feb17 options expire.  Here is a trade I made today:

Buy to Open 10 AET 03Feb17 108 puts (AET170317P108)

Sell to Open 10 AET 03Feb17 113 puts (AET170317P113)
Buy to Open 10 AET 03Feb17 136 calls (AET170317C136)

Sell to Open 10 AET 03Feb17 131 calls (AET170317C131) for a credit of $1.48 (selling an iron condor)

There are 4 commissions involved in this trade ($1.25 each at the rate charged by thinkorswim for Terry’s Tips subscribers), so the $1480 I collected from the above trade, I paid $50 in commisisons and netted $1430.  The spread will create a maintenance requirement of $5000 less the $1430 so that my investment (and maximum loss if AET closes below $109 or above $136) is $3570.

If AET closes in two weeks at any price higher than $113 and lower than $131, all these options will expire worthless and there will be nothing more for me to do that decide how I want to spend my 40% gain.

Of course, you could only do one of these spreads if you did not want to commit the entire $3570.

If AET moves quite close to either of these prices, I will send out another note explaining how I intend to cope with a possible loss.  I hope and expect I will not have to do that.  It is only 14 days to wait.

How to Make 40% a Year Betting on the Market, Even if it Doesn’t Go Up

Monday, December 19th, 2016

This is the time of the year when everyone is looking ahead to the New Year. The preponderance of economists and analysts who have published their thoughts about 2017 seem to believe that Trump’s first year in the oval office will be good for the economy and the market, but not great.

Today I would like to share an option trade I have made in my personal account which will earn me a 40% profit next year if these folks are correct in their prognostications.

 

Terry

How to Make 40% a Year Betting on the Market, Even if it Doesn’t Go Up

Since most people are pretty bad at picking stocks that will go higher (even though they almost universally believe otherwise), many advisors recommend the best way to invest your money is to buy the entire market instead of any individual stock.  The easiest way to do that is to buy shares of SPY, the S&P 500 tracking stock.

SPY has had quite a run of going up every year, 7 years in a row.  This year, it has gone up about 9% and last year it gained about 5%.  Since so many “experts” believe the market has at least one more year of going up, what kind of investment could be made at this time?

Since I am an options nut, I will be keeping a lot of my investment money in cash (or cash equivalents) and spend a smaller amount in an option play that could earn spectacular profits if the market (SPY) just manages to be flat or go up by any amount in 2017.

OK, it isn’t quite a calendar year, but it starts now, or whenever you make the trade, and January 19, 2017.  That’s about 13 months of waiting for my 40% to come home.

Here is the trade I made last week when SPY was trading about $225:

Buy to Open 1 SPY 19Jan18 220 put (SPY180119P220)

Sell to Open 1 SPY 19Jan18 225 put (SPY180119P225) for a credit of $1.95  (selling a vertical)

This is called a vertical put (bullish) credit spread.  You collect $195 less $2.50 commissions, or $192.50 and there will be a $500 maintenance requirement by your broker.  You do not pay interest on this amount, but you have to leave that much untouched in your account until the options expire.  The $500 is reduced by $192.50 to calculate your net investment (and maximum loss if SPY closes below $220 on January 19, 2018.  That net investment is $307.50.

If SPY is at any price higher than $225 on that date in January, both options will expire worthless and you will keep your $192.50.  That works out to a profit of 62% on your investment.

If the stock ends up below $225, you will have to buy back the 225 put for whatever it is trading for.  If SPY is below $220, you don’t have to do anything, but the broker will take the $500 you have set aside (less the $192.50 you collected) and you will have suffered a loss.

I know I said 40% in the headline, and this spread makes 62% if SPY is the same or any higher.  An alternative investment would be to lower the strikes of the above spread and do something like this:

Buy to Open 1 SPY 19Jan18 210 put (SPY180119P210)

Sell to Open 1 SPY 19Jan18 215 put (SPY180119P215) for a credit of $1.50  (selling a vertical)

This spread would get you $147.50 after commissions, involve an investment of $352.50, and would earn a profit of 42% if SPY ends up at any price above $215.  It could fall $10 from its present price over the year and you would still earn over 40%.

Many people will not make either of these trades because they could possibly lose their entire investment.  Yet these same people often buy puts or calls with the hope of making a killing, and over 70% of the time, they lose the entire amount.  Contrast that experience to the fact that the spreads I have suggested would have made over 60% every year for the last seven years without a single loss.  I doubt that anyone who buys puts or calls can boast of this kind of record.

Options involve risk, as any investment does, and should only be used with money you can truly afford to lose.

Happy trading.

Terry

 

Comparing Calendar and Diagonal Spreads in an Earnings Play

Monday, December 5th, 2016

Last week, in one of our Terry’s Tips portfolios, we placed calendar spreads with strikes about $5 above and below the stock price of ULTA which announced earnings after the close on Thursday. We closed out our spreads on Friday and celebrated a gain of 86% after commissions for the 4-day investment. It was a happy day.

This week, this portfolio will be making a similar investment in Broadcom (AVGO) which announces earnings on Thursday, December 8. I would like to tell you a little about these spreads and also answer the question of whether calendar or diagonal spreads might be better investments.

Terry

Comparing Calendar and Diagonal Spreads in an Earnings Play

Using last Friday’s closing option prices, below are the risk profile graphs for Broadcom (AVGO) for options that will expire Friday, December 9, the day after earnings are announced. Implied volatility for the 9Dec16 series is 68 compared to 35 for the 13Jan17 series (we selected the 13Jan17 series because IV was 3 less than it was for the 20Jan17 series). The graphs assume that IV for the 13Jan17 series will fall from 35 to 30 after the announcement. We believe that this is a reasonable expectation.

The first graph shows the expected profit and loss at the various prices where the stock might end up after the announcement. Note that the maximum expected gain in both graphs is almost identical and it occurs at any ending price between $160 and $170. The first graph has calendar spreads at the 160 strike (using puts) and the 170 strike (using calls). The cost of placing those spreads would be $2375 at the mid-point of the spread quotes (your actual cost would probably be slightly higher than this, plus commissions). The maximum gain occurs if the stock ends up between $160 and $170 on Friday (it closed at $164.22 last Friday), and if our assumptions about IV are correct, the gain would exceed 50% for the week if it does end up in that range.

AVGO Calendar Spreads December 2016

AVGO Calendar Spreads December 2016

This second graph shows the expected results from placing diagonal spreads in the same two series, buying both puts and calls which are $5 out of the money (i.e., $5 lower than the strike being sold for puts and $5 higher than the strike being sold for calls). These spreads cost far less ($650) but would involve a maintenance requirement of $2500, making the total amount tied up $3150.

We also checked what the situation might be if you bought diagonal spreads where the long side was $5 in the money. Once again, the profit curve was essentially identical, but the cost of the spreads was significantly greater, $4650. Since the profit curve is essentially identical for both the calendar spreads and the diagonal spreads, and the total investment of the calendar spreads is less than it would be for the diagonal spreads, the calendar spreads are clearly the better choice.

AVGO Diagonal Spreads December 2016

AVGO Diagonal Spreads December 2016

AVGO has a long record of exceeding estimates. In fact, it has bested expectations every quarter for the last three years. The stock does not always go higher after the announcement, however, and the average recent change has been 6.5%, or about $7.40. If it moves higher or lower than $7.40 on Friday than where it closed last Friday, the risk profile graph shows that we should make a gain of some sort (if IV of the 13Jan17 options does not fall more than 5).

You can’t lose your entire investment with calendar spreads because your long options have more weeks or months of remaining life, and will always be worth more than the options you sold to someone else. But you can surely lose money if the stock fluctuates too much. Options involve risk and are leveraged investments, and you should only invest money that you can truly afford to lose.

Happy trading.

Terry

Update on Oil Trade (USO) Suggestion

Friday, December 2nd, 2016

On Monday, I reported on an oil options trade I had made in advance of OPEC’s meeting on Wednesday when they were hoping to reach an agreement to restrict production.  The meeting took place and an agreement was apparently reached.  The price of oil shot higher by as much as 8% and this trade ended up losing money.  This is an update of what I expect to do going forward.

Terry

Update on Oil Trade (USO) Suggestion

Several subscribers have written in and asked what my plans might be with the oil spreads (USO) I made on Monday this week.  When OPEC announced a deal to limit production, USO soared over a dollar and made the spreads at least temporarily unprofitable (the risk profile graph showed that a loss would result if USO moved higher than $11.10, and it is $11.40 before the open today).  I believe these trades will ultimately prove to be most profitable, however.

First, let’s look at the option prices situation.  There continues to be a huge implied volatility (IV) advantage between the two option series.  The long 19Jan18 options (IV=36) are considerably cheaper than the short 02Dec16 and 09Dec16 options (IV=50).  The long options have a time premium of about $1.20 which means they will decay at an average of $.02 per week over their 60-week life.  On the other hand, you can sell an at-the-money (11.5 strike) put or call with one week of remaining life for a time premium of over $.20, or ten times as much.  If you sell both a put and a call, you collect over $.40 time premium for the week and one of those sales will expire worthless (you can’t lose money on both of them).

 

At some point, the stock will remain essentially flat for a week, and these positions would return a 20%+ “dividend” for the week.  If these option prices hold as they are now, this could happen several times over the next 60 weeks.

 

I intend to roll over my short options in the 02Dec16 series that expires today and sell puts and calls at the 11.5 and 11 strikes for the 09Dec16 series.  I will sell one-quarter of my put positions at the 10.5 strike, going out to the 16Dec16 series instead.  I have also rolled up (bought a vertical spread) with the 19Jan18 puts, buying at the 12 strike and selling the original puts at the 10 strike.  This will allow me to sell new short-term puts at prices below $12 without incurring a maintenance requirement.

 

Second, let’s look at the oil situation.  The OPEC companies supposedly agreed to restrict production by a total of 1.2 million barrels a day.  That is less than a third of the new oil that Iran has recently added to the supply when restrictions were relaxed on the country.  The third largest oil producer (the U.S.) hasn’t participated in the agreement, and has recently added new wells as well as announcing two major oil discoveries.  Russia, the second largest producer, is using its recent highest-ever production level as the base for its share of the lowered output.  In other words, it is an essentially meaningless offer.

 

Bottom line, I do not expect the price of oil will move higher because of this OPEC action.  It is highly likely that these companies may not follow through on their promises as well (after all, many of them have hated each other for centuries, and there are no penalties for not complying).   Oil demand in the U.S. has fallen over the past 5 years as more electric cars and hybrids have come on the market, and supply has continued to grow as fracking finds oil in formerly unproductive places.  I suspect that USO will fluctuate between $10 and $11 for much of the next few months, and that selling new weekly puts and calls against our 19Jan18 options will prove to be a profitable trading strategy.  You can do this yourself or participate in the Boomer’s Revenge portfolio which Terry’s Tips subscribers can follow through Auto-Trade at thinkorswim which is essentially doing the same thing.

Happy trading.

Terry

Benefiting From the Current Uncertainty of Oil Supply

Tuesday, November 29th, 2016

The price of oil is fluctuating all over the place because of the uncertainty of OPEC’s current effort to get a widespread agreement to restrict supply. This has resulted in unusually high short-term option prices for USO (the stock that mirrors the price of oil). I would like to share with you an options spread I made in my personal account today which I believe has an extremely high likelihood of success.

Terry

Benefiting From the Current Uncertainty of Oil Supply

I personally believe that the long-run price of oil is destined to be lower. The world is just making too much of it and electric cars are soon to be here (Tesla is gearing up to make 500,000 next year and nearly a million in two years). But in the short run, anything can happen.

Meanwhile, OPEC is trying to coax producers to limit supply in an effort to boost oil prices. Every time they boast of a little success, the price of oil bounces higher until more evidence comes out that not every country is on board. Iran and Yemen won’t even show up to the meeting. Many oil-producing companies have hated one another for centuries, and the idea of cooperating with each other seems a little preposterous to me.

The good old U.S.A. is one of the major producers of oil these days, and it is not one of the participants in OPEC’s discussion of limiting supply. Two significant new domestic oil discoveries have been announced in the last couple of months, and the total number of operating rigs has moved steadily higher in spite of the currently low oil prices.

Bottom line, option prices on USO are higher than we have seen them in quite a while, especially the shortest-term options. Implied volatility (IV) of the long-term options I would like to buy is only 36 compared to 64 for the shortest-term weekly options I will be selling to someone else.

Given my inclination to expect lower rather than higher prices in the future, I am buying both puts and calls which expire a little over a year from now and selling puts and calls which expire on Friday. Here are the trades I made today when USO was trading at $10.47:

Buy To Open 20 USO 19Jan18 10 puts (USO180119P10)
Sell To Open 20 USO 02Dec16 10 puts (USO161202P10) for a debit of $1.20 (buying a calendar)

Buy To Open 20 USO 19Jan18 10 calls (USO180119C10)
Sell To Open 20 USO 02Dec16 10.5 calls (USO161202C10.5) for a debit of $1.58 (buying a diagonal)

Of course, you can buy just one of each of these spreads if you wish, but I decided to pick up 20 of them. For the puts, I paid $1.43 ($143) for an option that has 60 weeks of remaining life. That means it will decay in value by an average of $2.38 every week of its life. On the other hand, I collected $.23 ($23) from selling the 02Dec16 out-of-the-money 10 put, or almost 10 times what the long-term put will fall by. If I could sell that put 60 times, I would collect $1380 of over the next 60 weeks, more than 10 times what I paid for the original spread.

Here is the risk profile graph which shows what my spreads should be worth when the short options expire on Friday:

USO Risk Profile Graph December 2016

USO Risk Profile Graph December 2016

My total investment in these spreads was about $5600 after commissions, and I could conceivably make a double-digit return in my very first week. If these short-term option prices hold up for a few more weeks, I might be able to duplicate these possible returns many more times before the market settles down.

As usual, I must add the caveat that you should not invest any money in options that you cannot truly afford to lose. Options are leveraged investments and can lose money, just as most investments. I like my chances with the above investment, however, and look forward to selling new calls and puts each week for a little over a year against my long options which have over a year of remaining life.

Black Friday: How A VIX Spread Gained 70% in 3 Weeks

Saturday, November 26th, 2016

On Wednesday of this week, a VIX spread I recommended for paying subscribers expired after only 3 weeks of existence.  It gained 70% on the investment, and it is the kind of spread you might consider in the future whenever VIX soars (usually temporarily) out of its usual range because of some upcoming uncertain event (this time it was the election that caused VIX to spike).

In addition to telling you about this spread so you can put it in your book of future possibilities, we are offering a Black Friday -  Cyber Monday special offer to encourage you to come on board at a big discount price.

Terry

How A VIX Spread Gained 70% in 3 Weeks

VIX is the average implied volatility (IV) of options which are traded on the S&P 500 tracking stock (SPY).  It is called the “fear index” because when market fears arise because of some future uncertain event, option prices move higher and push VIX up.  Most of the time, VIX fluctuates between 12 and 14, but every once in a while, it spikes much higher.

Just before the election that took place on November 8, VIX soared to 22.  I recommended to my paying subscribers to place a bet that VIX would fall back below 15 when the option series that expired on November 23 came around.  Here are the exact words I wrote in my November 5 Saturday Report:

“When VIX soared to above 22 this week, we sent out a special note describing a bearish vertical call credit spread which would make very large gains if VIX retreated toward its recent average of hanging out in the 12-14 range.  As you surely know, you can’t actually buy (or sell short) VIX, as it is the average implied volatility (IV) of SPY options (excluding the weeklies).  However, you can buy and sell puts and calls on VIX, and execute spreads just as long as both long and short sides of the spread are in the same expiration series.

You are not allowed to buy calendar or diagonal spreads with VIX options since each expiration series is a distinct series not connected to other series.  If you could buy calendars, the prices would look exceptional.  There are times when you could actually buy a calendar spread at a credit, but unfortunately, they don’t allow such trades.

Vertical spreads are fair game, however, and make interesting plays if you have a feel for which way you think volatility is headed.  Right now, we have a time when VIX is higher than it has been for some time, pushed up by election uncertainties, the Fed’s next interest rate increase, and the recent 9-day consecutive drop in market prices.  This week, when VIX was over 22, we sent out a special trade idea based on the likelihood that once the election is over, VIX might retreat to the lower 12-14 range where it has hung out most of the time recently.  This is the trade we suggested:

BTO 1 VIX 23Nov16 21 call (VIX161123C21)

STO 1 VIX 23Nov16 15 call (VIX161123C15) for a credit of $2.60 (selling a vertical)”

This spread caused a maintenance requirement of $600 against which we received $260 for selling the spread.  That made our net investment $340 (and maximum loss if VIX ended up above 17.60 on November 23rd.

It worked out exactly as we expected.  VIX fell to below 13 and both puts expired worthless on Wednesday.  We pocketed the full $260 per contract (less $2.50 commission) for the 3 weeks.  How sweet it is.  We also placed the identical spread at this $2.60 price for the series that closes on December 28 (after the Fed interest rate decision has been made public).  With VIX so much lower, we could close out the spread right now for $75, netting us a 51%  profit.  Many subscribers have reported to us that they have done just that.

And now for the special Black Friday – Cyber Monday special offer.

Black Friday/Cyber Monday Special Offer:  As a post Thanksgiving special, we are offering one of the lowest subscription prices that we have ever offered – our full package, including several valuable case study reports, my White Paper, which explains my favorite option strategies in detail, and shows you exactly how to carry them out on your own, a 14-day options tutorial program which will give you a solid background on option trading, and three months of our Saturday Reports full of tradable option ideas.  All this for a one-time fee of $69.95, normally $139.80 (not including bonus reports).

For this low-price Black Friday/Cyber Monday $69.95 offer, click here, enter Special Code BFCM16 (or BFCM16P for Premium Service – $199.95).

If you are ready to commit for a longer time period, you can save even more with our half-price offer on our Premium service for an entire year.  This special offer includes everything in our basic service, and in addition, real-time trade alerts and full access to all of our portfolios so that you can Auto-Trade or follow any or all of them.  We have several levels of our Premium service, but this is the maximum level since it includes full access to all nine portfolios which are available for Auto-Trade.  A year’s subscription to this maximum level would cost $1080.  With this half-price offer, the cost for a full year would be only $540.  Use the Special Code MAX16P.

This is a time-limited offer.  You must order by midnight Monday , November 28th, 2016.  That’s when the Black Friday/Cyber Monday offer expires, and you will have to go back to the same old investment strategy that you have had limited success with for so long (if you are like most investors).

This is the perfect time to give you and your family the perfect Holiday Season treat that is designed to deliver higher financial returns for the rest of your investing life.

I look forward to helping you survive the Holidays by sharing this valuable investment information with you for our first ever Black Friday/ Cyber Monday Sale. It may take you a little homework, but I am sure you will end up thinking it was well worth the investment.

Happy trading.

Terry

P.S.  If you would have any questions about this offer or Terry’s Tips, please email Seth Allen, our Senior Vice President at seth@terrystips.com.  Or make this investment in yourself at the Black Friday/Cyber Monday sale price – the first time this has been offered in our 15 years of publication – only $69.95 for our entire package.  Get it here using Special Code BFCM16 (or BFCM16P for Premium Service – $199.95).   Do it today, before you forget and lose out.  This offer expires at midnight November 28th, 2016.

Option Idea Which Must Be Executed Before Market Closes November 1st

Tuesday, November 1st, 2016

Option Idea Which Must Be Executed Before Market Closes November 1st

I am sorry to send you a second email message today, but I need to hurry because it will disappear tomorrow.  It involves Gilead Sciences (GILD)

Gilead (GILD) announces earnings on Tuesday, November 1st after the close.  The post-announcement options are extremely expensive.  Implied Volatility (IV) for the 04Nov16 series is 60 compared to 34 for the 16Dec16 series which expires six weeks later.  The company has fallen 32% from its 52-week high and pays a dividend of 2.5% and has a p/e of only 6.4 which should provide some level of support. Expectations are for lower sales and earnings.  These facts support the idea that a big drop in stock price is unlikely after the announcement.  This trade will make money if the stock is flat or goes up by any amount (a maintenance requirement of $400 per spread, less the amount of the credit, will result):

Buy To Open 1 GILD 16Dec16 70 put (GILD161216P70)

Sell To Open 1 GILD 04Nov16 74 put (GILD161104P74) for a credit of $.25  (buying a diagonal)

We bought 5 contracts of exact spread today in our portfolio that trades on earnings announcements.  It will make a maximum gain if the stock closes on Friday exactly at $74.  Any price higher than that will also result in a profit.  The stock should be able to fall about $2 before any loss should appear on the downside.

This is the risk profile graph for this spread, assuming that IV for the 16Dec16 series falls by 5 after the announcement:

GILD Risk Profile Graph Oct 31 2016

GILD Risk Profile Graph Oct 31 2016

The theoretical risk of this investment is $375 (the $400 maintenance requirement less the $25 received).  However, since we plan to close the spread on Friday and there will still be 6 weeks of remaining life for the 16Dec16 70 put, the actual risk is far less than $375.  That is the amount that you will tie up in your account for this week, however.

You can see that if the stock is flat or moderately higher on Friday, you will make a profit of about $100 on your $475 investment, or about 25%.  Not bad for a week.

If the stock falls by more than $2, the graph indicates that a loss would result.  Since we believe the low valuation and the high dividend rate both provide a solid support level for the stock, we don’t believe the stock will fall by very much, and we feel good about making this investment.

 Lowest Subscription Price Ever

As a Halloween special, we are offering the lowest subscription price than we have ever offered – our full package, including several valuable case study reports, my White Paper, which explains my favorite option strategies in detail, and shows you exactly how to carry them out on your own, a 14-day options tutorial program which will give you a solid background on option trading, and two months of our Saturday Reports full of tradable option ideas.  All this for a one-time fee of $39.95, less than half the cost of the White Paper alone ($79.95).

For this lowest-price-ever $39.95 offer, click here, enter Special Code HWN16 (or HWN16P for Premium Service – $79.95).

 If you are ready to commit for a longer time period, you can save even more with our half-price offer on our Premium service for an entire year.  This special offer includes everything in our basic service, and in addition, real-time trade alerts and full access to all of our portfolios so that you can Auto-Trade or follow any or all of them.  We have several levels of our Premium service, but this is the maximum level since it includes full access to all nine portfolios which are available for Auto-Trade.  A year’s subscription to this maximum level would cost $1080.  With this half-price offer, the cost for a full year would be only $540.  Use the Special Code MAX16P.

 This is a time-limited offer.  You must order by midnight tonight, October 31, 2016.  That’s when the half-price offer expires, and you will have to go back to the same old investment strategy that you have had limited success with for so long (if you are like most investors).

This is the perfect time to give you and your family the perfect Halloween treat that is designed to deliver higher financial returns for the rest of your investing life.

I look forward to helping you survive Halloween by sharing this valuable investment information with you at the lowest price ever. It may take you a little homework, but I am sure you will end up thinking it was well worth the investment.

Happy trading.

Terry

P.S.  If you would have any questions about this offer or Terry’s Tips, please call Seth Allen, our Senior Vice President at 800-803-4595.  Or make this investment in yourself at the lowest price ever offered in our 15 years of publication – only $39.95 for our entire package.  Get it here using Special Code HWN16 (or HWN16P for Premium Service – $79.95).   Do it today, before you forget and lose out.  This offer expires at midnight tonight, October 31, 2016.

 

Making 36%

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

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

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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