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Posts Tagged ‘Credit Spreads’

More Legging Into Pre-Announcement Calendar Option Spreads

Tuesday, May 3rd, 2016

Over the past month I have suggested legging into calendar spreads in advance of an earnings announcement for 4 different companies. In every case, you should have been able to duplicate my success in creating a calendar spread at a credit. These spreads are absolutely guaranteed to make a profit since the long side of the spreads has more time remaining and will always be worth more than the short side, regardless of what the stock does after the earnings announcement.

Today I would like to suggest two more companies where I am trying to set up calendar spreads at a credit.

Terry

More Legging Into Pre-Announcement Calendar Option Spreads

First, an update on the Facebook (FB) pre-earnings play I suggested last week. Earlier, I showed how you could leg into a calendar spread in FB at the 110 strike, and this proved to be successful. In addition, last week I suggested something different – the outright buying of 17JUN16 – 29APR16 calendar spreads at the 105 strike (using puts and paying $1.58), the 110 strike (using puts and paying $1.52) and the 115 strike (using calls and paying $1.52). I was able to execute all three of these spreads in my account at these prices, and you should have been able to do the same.

As you probably know, FB reported blow-out numbers, and the stock soared, initially to over $121, but then it fell back to $117 near the close on Friday the 29th. We were hoping that the stock could end up inside our range of strikes (105 – 115) but we were not so lucky. At 3:00 on Friday, I sold these three spreads for $.95, $1.82, and $3.40 for a total of $6.17 for all 3. This compared to a cost of $4.62 for the 3 spreads. Deducting out $15 in commissions, I netted $1.40 ($140) for every set of three calendar spreads I had put on. While this was a disappointing result, it worked out to 22% on the investment in only 4 days. I enjoyed the thrill of holding a possible 100% gain (if the stock had ended up at $110 instead of $117) and still managed to make a greater return than most people do in an entire year.

This week, on Monday morning, I looked at Costco (COST), (one of my favorite stocks) which reports earnings on May 25. The options series that expires just after this announcement is the 27MAY16 series. With the stock at about $148.50, I bought 10JUN16 150 calls (which expire two weeks later than the 27MAY16 options), paying $2.90. Implied Volatility (IV) for those options was 21 and the 27MAY16 series was only 22. I expect the difference between these IVs to get much higher over the next couple of weeks (mostly, the 27MAY16 series should move higher).

I immediately placed an order to sell the 27MAY16 150 calls (good-til-cancelled order) for $3.05 which would give me a credit of $.15 ($15 less $2.50 commissions). The stock shot $2 higher and this order executed less than 2 hours after I placed it. I apologize that I didn’t send this out to you in time for you to duplicate what I did.

I still like the company and its prospects, so I placed another order to buy 10JUN16 152.5 calls, paying $2.56 when COST was trading at $150.80. I then placed a good-til-cancelled order to sell 27MAY16 152.5 calls for $2.65. That has not executed yet.

Another company that looked interesting was Target (TGT) which announces earnings before the bell on May 18. IV for the 20MAY16 series was 27, only barely higher than the 3JUN16 series of 24 (this difference should get bigger). When the stock was trading about $79.40, I bought 3JUN16 79.5 calls for $1.88 and immediately placed an order to sell 20MAY16 calls for $1.95. This order executed about 2 hours later when the stock rose about $.60. Once again, I apologize that I did not get his trade possibility out to you in time for you to copy it.

Tomorrow I intend to buy TGT 3JUN16 81 calls and as soon as I get them, I will place an order to sell 20MAY16 81 calls for $.10 more than I paid for them. If the stock rises or IV of the 20MAY16 options gets larger (as it should), another credit calendar guaranteed profit spread should be in place.

In the last few weeks, I have both told you about and used this strategy for SBUX, JNJ, FB, and TWX. Now I have added COST and TGT to the list. In each case, I bought a slightly out-of-the-money call a few weeks out and immediately placed an order to sell the post-announcement same-strike call so that I would create a calendar spread at a credit.

The ultimate gain on these spreads will depend on how close the stock ends up to the strike price of my calendar spread after the announcement. The nearer to the strike, the greater the gain. It is fun owning a spread that you are certain will make a profit, no matter what the stock does.

How to Play the Upcoming Facebook Earnings Announcement

Wednesday, April 20th, 2016

Over the last 3 weeks, I have suggested a way to leg into calendar spreads at a credit in advance of the earnings announcement for Starbucks (SBUX), Facebook (FB), and Abbvie (ABBV). All three calendars ended up being completed, and all three have already delivered a small profit. Once earnings are announced and the short side of the calendar spread expires, all three spreads are guaranteed to produce a much larger profit as well (depending on how close the stock price is to the strike price).

Today I would like to discuss another Facebook play. While this one does not guarantee profits, I believe it is even more exciting in many ways. It is possible that you could double your money in less than two weeks. I also believe it is extremely unlikely to lose money.

Terry

How to Play the Upcoming Facebook Earnings Announcement

All sorts of articles have been written over the past few weeks about the prospects for FB, some positive and some negative. We will all learn who was right and who was wrong late next week when FB announces earnings on April 27, and the details of the company’s large assortment of new and wondrous initiatives will be disclosed.

The high degree of uncertainty over the announcement has caused implied volatility (IV) of the options to soar, particularly in the series that expires two days after the announcement. Those Apr5-16 options carry an IV of 52. This compares to only 35 for longer-term option series and 32 for the Apr4-16 series which expires this week.

Buying calendar spreads at this time represents one of the best opportunities I have ever seen to buy cheap options and sell expensive options against them. The FB calendar spreads are exceptionally cheap right now, at least to my way of thinking.

I have written an article which was published by TheStreet.com today which describes the actual calendar spreads I have bought yesterday and today (and I have bought a lot of them). The article fully explains my thinking as to which spreads I purchased. Read the full article here.

Earnings Season Has Arrived – How to Capitalize on it With Options

Tuesday, April 12th, 2016

For each of the last two Mondays I have told you about an earnings-related trade I made. Today I would like to review my thinking on those trades, update how they are going, and offer you a new idea of a third trade I made his morning.

Terry

Earnings Season Has Arrived – How to Capitalize on it With Options

In the last few weeks leading up to a quarterly earnings announcement, two things usually happen. First of all, the stock often moves higher as the announcement day approaches as some investors start hoping that the company might beat expectations. The second thing is even more likely (and essentially always happens). Implied Volatility (IV) of the option prices moves much high. This means that the prices for options temporarily rise in value across the board. The greatest upward move in IV takes place in the options series which expires just after the announcement date.

The reason that IV becomes greater at this time is that once earnings are announced, the stock is likely to move either up or down by a much larger amount than it does most trading days. When volatility is expected to be high, option prices rise in anticipation of that higher level of anticipated price changes.

One of my favorite option plays is based on these two tendencies to occur as the announcement day approaches. I like to leg into a calendar spread at a strike price which is slightly higher than the stock price. I do this by buying a call option at that strike in the option series that expires two weeks after the series which expires just after the announcement is made. Once I have made my purchase, I place a good-til-cancelled order to sell a call at the same strike in the series that expires just after the announcement date (the series which will carry the highest IV and therefore the highest option prices). I set a limit price which is sufficiently greater than what I paid for the two-week-longer call to cover the commissions and leave a small profit as well.

This limit price should be met if either or both of the tendencies end up happening (the stock moves higher or IV increases). Most of the time, I have been able to complete the trade and end up with a calendar spread at a credit.

If I am successful in setting up a calendar spread at a credit, I am guaranteed to make a nice profit on the spread. I can’t lose because the call I own has two weeks more of life than the same-strike call I have sold to someone else, so it can be sold at a credit, no matter what the stock price does after the announcement. My greatest gain will come if the stock ends up very close to the strike price which I selected.

The Starbucks (SBUX) Play: SBUX announces on April 21. Two weeks ago, with SBUX trading about $58.60, I placed an order to buy SBUX May1-16 calls. I paid $1.12 ($112 per contract) plus $1.25 commission at the rate paid by Terry’s Tips subscribers at thinkorswim (if you are paying more than this as commission rate, you might consider opening an account at this brokerage – see the offer below).

I immediately placed an order to sell Apr4-16 60 calls at a limit price of $1.20. The Apr4-16 series expires on April 22, the day after the announcement on the 21st. This trade executed the very next day. After commissions, I had gained $5.50 for each spread, and was guaranteed to make an additional gain once the Apr4-16 calls expired. Since the May1-16 calls have two weeks more of remaining life than the Apr4-16 calls, the spread will always have at least some value. The closer the stock is to $60, the greater the value of the spread. If I am lucky enough to see it end up at $60 on April 22, I could expect to collect about $80 for each spread (on top of the $5.50 I already have collected).

The Facebook (FB) Play: One week ago today, knowing that FB would announce earnings on April 27, when the stock was trading at $112 (it had fallen $4 at the open from Friday’s close because an analyst forecast that their earnings would disappoint). I bought May2-16 114 calls for $4.40 ($440 plus $1.25 per contract, or $441.25). I then placed a good-til-cancelled order to sell Apr5-16 114 calls for $4.50. These calls would expire on April 29, two days after the announcement on the 27th.

Both the stock and IV of the Apr5-16 options rose on Tuesday, and my trade executed. IV for the Apr4-16 series was 40 when I reported this trade to you two weeks ago, and it is now 48. Now I am guaranteed a profit in FB as well, and I am rooting for the company to exceed expectations and a $114 price come along after the announcement. (As I write this, FB has fallen further, to about $110). There is something nice about holding an options investment that is guaranteed to make a gain no matter what the stock price does. Most of the time, I would be anguishing when my stock is dropping in price.

Closing Out the Trades: On the Friday when the short calls in these calendar spreads expire, you will have to make a decision. If the stock price is trading at a lower price than the strike price, you don’t really need to do anything as the short calls will expire worthless. However, you might want to buy them back at a nominal price (if that price is $.05 or lower, thinkorswim does not charge any commission, by the way). You would only buy them back if you also planned to make a sell trade as well. You could either sell the call you own which has two weeks of remaining life (essentially closing out the calendar spread), or you might sell the same-strike call which has one week of remaining life (this sale can almost always be made at more than 50% of what you could sell the two-week-out call).

A third alternative would be let the short call expire worthless and just hang on to your long calls (remember, they did not cost you anything at the beginning), and hope for a windfall gain if the stock manages to soar. Most of the time, I resist buying puts or calls outright, preferring instead to be a seller of short-term options. But every once in a while, it is fun to hang on to an option and see what might happen, especially when it didn’t cost me anything. It is sort of like getting a free lottery ticket (with better odds but a smaller pay-off than the lottery offers).

If the Sell Trade Doesn’t Execute: Some of the time, the stock will fall after you have made your call purchase and IV doesn’t rise enough to force an execution on your sell order. In those cases, I wait until the end of the day just before the announcement and sell the same call in my good-til-cancelled order at whatever price I can get. I have found that the stock often ticks up in the final hour of that day, and I can get a better price than earlier.

The calendar spread that you have created will not be made at a credit, but it still might be cheap compared to usual standards because of the elevated IV of the call you are selling.

Another alternative might be to sell your long call. It might be sold at a small profit, or more likely, a small loss. Even if the stock has fallen, IV might have moved high enough to make the option worth more than you paid for it.

This Week’s Trade, Abbvie (ABBV): ABBV is a drug company that pays a high dividend and doesn’t fluctuate very much. For these reasons, IV and option prices are quite low, but that doesn’t mean you can’t make gains with this same strategy. ABBV announces earnings before the market opens on April 28th.

With the stock trading about $58.50 this morning, I bought ABBV May2-16 58.5 calls for $1.87. This series closes two weeks later than the Apr5-16 series which expires on April 29, just after the April 28 announcement date. I have placed a good-til-cancelled order to sell Apr5-16 58.5 calls at a limit price of $1.95. IV for this series is currently 34 and can be expected to rise over the next week or two.

I selected the 58.5 strike instead of a higher strike because there is a $.57 dividend payable on April 13 (tomorrow) which may depress the stock by about that much. In fact, you might want to wait until tomorrow to buy the Apr5-16 call because it might be cheaper then.

I will report back to you on how these trades end up.

Some Ways to Play the SBUX Earnings Announcement

Monday, March 28th, 2016

In the few weeks before a company makes its quarterly earnings announcement, option prices make some predictable changes and the stock usually edges up in advance of the announcement. There are several ways you can take advantage of these changes to pick up some nice trading profits using stock options. Today I would like to share some trades I placed today on Starbucks (SBUX).

Terry

Some Ways to Play the SBUX Earnings Announcement

SBUX is slated to announce earnings on April 21st. Implied Volatility (IV) for pre-announcement weeks is 20 and it pops up to 25 for the Apr4-15 series which expires just after the announcement. The next two weekly series also have an IV of 25 which is likely to fall to 20 after the announcement.

SBUX has a record of coming very close to meeting earnings expectations. For the four quarters, there has never been a difference of more than a penny between what the market expected from the announcement and the actual earnings figure. Consequently, the stock has not fluctuated very much after the announcement.

Many times, in the weeks or days leading up to the announcement, hope for a better-than-expected announcement often causes the stock to tick a little higher.

SBUX closed last week at $58.36. I think there is a good chance that it might drift up to the $60 as we head into the announcement week. There are several ways you could play the tendency for the stock to move higher just before that time. One way would be to leg into a calendar spread by buying a further-out 60 call and wait for the stock to move up before completing the short side. If it does move up, you would get the calendar spread at a very attractive price (possible even at a credit which means you would be assured of a gain no matter what happens to the stock after the announcement). The downside is the possibility that it does not move higher, and time starts eating away at your long call before you can complete the spread.

Today, with SBUX trading about $58.60, I placed an order to buy SBUX May1-16 calls. I paid $1.12 ($112 per contract) plus $1.25 commission at the rate paid by Terry’s Tips subscribers at thinkorswim (if you are paying more than this as commission rate, you might consider opening an account at this brokerage – see the offer below).

A second way to play it would be to buy a May1-16 – Apr-16 60 call calendar spread. This is the trade I made today:

Buy to Open 5 SBUX May1-16 60 calls (SBUX160506C69)
Sell to Open 5 SBUX Apr-16 60 calls (SBUX160415C60) for a debit of $.68 (buying a calendar)
The Apr-16 series expires in the week before the announcement, so you could roll into the higher-IV Apr4-16 series when it expires on April 15. An at-the-money call with a week of remaining life when IV is 25 is about $.80, so if you are lucky and the stock is trading near $60, you could sell the Apr4-16 60 calls for more than you paid for the original calendar, and you would still own a calendar with two weeks of remaining life.

A third way to play the expectation rise would be to buy a May1-16 – Apr4-16 60 calendar spread. This way you would be selling the high-IV series now rather than waiting. Here is the spread I placed today:

Buy to Open 10 SBUX May1-16 60 calls (SBUX160506C69)
Sell to Open 10 SBUX Apr4-16 60 calls (SBUX160422C60) for a debit of $.24 (buying a calendar)

If the stock ends up at $60 after the announcement, a two-week at-the-money call at an IV of 20 would be worth about $.60 so you could about double your money after commissions. Of course, you are betting that the stock does not make a big move after the announcement. Such a move is always possible even though SBUX does not have a history of big moves after announcing (average change 2.6%, or about $1.50). The attractive thing about this spread is that it costs so little that risk is quite limited. There will always be some value to a call with two weeks of remaining life, and $.24 isn’t much to have to cover.

I will report back to you on how these three trades ended up. Hopefully, we might find out which of the three choices works out. Most companies report earnings each quarter, and there will be lots of opportunities to use these trading ideas on other companies you might like.

 

How to make 45% with a Safe Bet on GM

Friday, March 11th, 2016

Lots of people like GM. It is one of the most popular stocks in some of the largest mutual funds in America. Investors seem to like the 5.2% dividend it pays. Today I will show you how you could make 8 times that much with an options bet that will net 45% even if the stock doesn’t go up by a penny.

Terry

How to make 45% with a Safe Bet on GM

First, an update on my last 3 trade recommendations. Five weeks ago, I suggested a trade that would make 66% after commissions if Facebook (FB) closed at any price above $97.50 on March 18, 2016. FB is now trading above $106 and that looks like a sure winner when it closes out a week from today.

A little over 3 weeks ago I suggested a similar trade on Costco (COST) when it was trading at $147.20. This one would make 40% after commissions if COST finishes at any price above $145 next Friday (March 18th). It is now trading near $152. This one also looks like a sure winner.

The third suggestion was made two weeks ago, and it involved Nike (NKE) which according to both the Nasdaq and EarningsWhispers.com would announce earnings on March 17, just before the Mar-16 options expired. Now it appears that my sources were both wrong. The announcement (still unconfirmed) will probably not take place until the following week. We had expected that our long calls would benefit from rising expectations before the announcement, but we should have bought calls with a week of additional life to take advantage of that possibility. Even worse, the stock has fallen about $3 since we placed the spread, and it looks like it will end up being a loss unless the stock rallies strongly next week.

Today, I am suggesting a play on General Motors (GM). There is a lot to like about GM. For the second year in a row, Barron’s ranked it as one of its five favorite stocks for the coming year. Their 2015 prognosis was not a good one as the stock fell from about $35 to $30 in 2015 in spite of 5% higher sales and earnings. Barron’s second try seems to be more likely to work out.

In its January earnings announcement, GM exceeded expectations all around, authorized a new $5.5 billion buyback, and raised guidance. The market hardly budged, apparently worried about GM’s Chinese sales (which had gained 12% in 2015) and some concerns about price cutting from rivals.

The company sells at a P/E ratio of only 5.2 and pays a well-covered dividend of 5.2%. There are very few other companies out there selling so low with such a dividend.

Kevin O’Leary, “Mr. Wonderful” of Shark Tank, in a recent AARP interview, said that his mother told him never to buy a stock that didn’t pay a dividend, and that over the past 40 years, 71% of the returns on the S&P came from dividends, not capital appreciation. Dividends are clearly important these days, mostly because they usually provide a solid floor for the stock price. When the overall market fell in the first few weeks of 2015, GM edged briefly down to the $28 level, and quickly recovered back above $30 where it stands now.

A recent Seeking Alpha article makes a compelling case that GM could double in value over the next 4 years – General Motors: Multiple Catalysts Should Double Your Money By 2020. One the biggest reasons the author cited was GM’s fast-growing finance arm which has so far not contributed anything to its parent’s coffers, but which could be soon passing on $1 billion a year or so.

I am not convinced that GM is destined to move significantly higher over the next few years, but I am comfortable believing that the combination of a high dividend rate, low P/E, a large buyback program, stable sales, and the finance arm possibility suggest that the stock is quite unlikely to fall very much from its current level.

I am suggesting a bet that GM will be at least $28 when the Jan-17 options expire on January 20, 2017. If that is true, this spread would make 45% on your money after commissions. That means it could fall about 8% from where it is now ($30.50), and the same 40% gain would result.

In the same AARP article, the Sharks recommended that you should expect to make 4% to 6% on your money each year over time. It seems to me that it makes sense to put some of your money, at least a small portion, in something that could make many times that much if the risk level is reasonable.

I made this trade in my personal account yesterday to confirm that this price was available:

Buy To Open 10 GM Jan-17 25 puts (GM170120P25)
Sell To Open 10 GM Jan-17 28 puts (GM170120P28) for a credit of $.98 (selling a vertical)

I collected $980 less the $25 commission, or $955 (of course, you could sell a single spread and take only 1/10th the risk). My maximum loss and net investment is $2145. This works out to be a 45% gain if the stock closes at any price above $28. I will make a gain at any price above $27.05. When the Jan-17 expiration date comes along, I will not have to do anything. If the stock is at any price above $28, both the long and short put will expire worthless and I will be able to keep the $955 I collected at the beginning. It feels like a safe investment to me, and a whole lot better than the 5.2% dividend they are paying.

 

How to Own 100 Shares of Google (Worth $71,600) for $15,000 or Make 12% a Month With Options

Tuesday, March 8th, 2016

Way back when Google (GOOGL) went public at $80 a share, I decided that I would like to own 100 shares and hang on to it for the long run. Obviously, that was a good idea as the stock is trading today at $716. My $8000 investment would now be worth $144,000 (the stock had a 2-for-1 split in November 2014) if I had been able to keep my original shares. Unfortunately, over the years, an options opportunity inevitably came along that looked more attractive to me than my 100 shares of GOOGL, and I sold my shares to take advantage of the opportunity.

Many times my investment account had compiled a little spare cash, and I went back into the market and bought more shares of GOOGL, always paying a little more to buy it back. At some point it felt like I just had too much money tied up in it. An $8000 commitment is one thing, but $144,000 is a major commitment.

Today I would like to share how I own the equivalent of 100 shares of GOOGL for an investment of less than $15,000, and the neat thing about my investment is that I get expect to get a “dividend” in the next month of about $1700 if the stock just sits there and doesn’t go anywhere.

I own options, of course. Here are two ways you can play it if you like Google.

Terry

How to Own 100 Shares of Google (Worth $71,600) for $15,000 or Make 12% a Month With Options:

You would have to shell out about $71,600 today to buy 100 shares of GOOGL stock. If you bought it on margin, you might have to come up with about half that amount, $35,800, but you have to shell out interest on the margin loan each month. I like money coming in, not going out.

Last week we talked about the Greek measure delta. This is simple the equivalent number of shares of stock that an option has. I own GOOGL 700 calls that expire on the third Friday of January 2017. You could buy one today for $8360. I own 2 of them for a cost of about $16,800

The delta for these Jan-17 700 calls is 60. That means if the stock goes up by a dollar, the value of each of my options will go up by $60. With these 2 options I own the equivalent of 120 shares of stock.

Since all options decline a little bit every day that the stock stays flat (it is called decay), simply owning options is just about as bad as paying margin interest on a stock loan. As I said earlier, I like money coming in rather than going out.

Over the course of the next ten months, the 700 call option will fall in value and end up being worth $1,600 if GOOGL is flat (trading at $716). That works out to an average monthly decay of $666 for each call I own.

One of the things I could do with these calls would be to cover this decay amount by selling two Apr2-16 750 calls for $700 each. The delta on these calls is 26. That means I would own the equivalent of 68 shares of stock worth $48,688 yet I only would have shelled out $16,800 less $1400, or $15,400. In other words, my option investment would cost less than 1/3 of what buying the stock would cost and I would not be paying any interest. Of course, it would take a little work on my part. In one month, if the stock were selling at less than $750, the calls I had sold would expire worthless and I would have to sell more one-month-out calls for at least $666 to cover the average monthly decay of the Jan-17 700 calls I had purchased. It will probably be at a different strike than 750, depending on what the new stock price was at the time.

If the stock were to rise above $750 in one month (I would be delighted because I would make a gain of about $2300 for the month – 68x$34), I would have to buy back the Apr2-16 750 calls just before they expired and sell May2-16 calls at a higher strike price, making sure I collected enough to cover the cost of buying back the Apr2-16 750 calls and the $666 each call will fall on average each month.

Instead of simply using options to own stock with only 1/3 of what it would cost to buy the stock, I chose a different way of trading. Most of the time, I would participate in the higher stock price, but I will make a nice gain every month even if the stock stays flat. Since I own 2 call options at a lower strike price than the market price I am entitled to use them as collateral to sell someone else the opportunity to buy shares of GOOGL. I sold one Apr2-16 725 call, collecting $15.40 ($1540) at today’s price. This option will expire in 30 days (April 8). If the stock is at any price less than $725, this call will expire worthless and I will get to keep the entire $1540.

This Apr2-16 725 call option that I sold carries a delta of 46, making my net option value (120-46) 74 deltas (the equivalent of 74 shares of stock). I also sold a second Apr2-16 call, this one at the 735 strike price, collecting $1150. This call has a delta of 39, giving me a 35 net delta value (60+60-46-39). I won’t own the equivalent of 120 shares of stock that I would have if I hadn’t sold calls against my Jan-17 calls, but I could possibly make even greater gains from option decay.

I now own the equivalent of 35 shares of GOOGL at a cost of $16,800 less the $2690 I collected from selling the two calls, or $14,110.

The neat thing about my option positions is that if the stock doesn’t go up (as I hope it will), my disappointment will be soothed a bit because I will gain about $1700 over the next month. Here is the risk profile graph for my positions:

GOOG Risk Profile Graph March 2016

GOOG Risk Profile Graph March 2016

 

The P/L Day column in the lower right-hand corner shows what the gain or loss will be at the price in the first column on the left. It shows that when the Apr2-16 calls expire on April 8, my positions will have a $1,742 gain in value (12% for the month on my investment of $14,110). If the stock were to gain just a little, I could make as much as $3000. If it went up 5% (about $35) I would make about the same amount as if it remained unchanged.

While a possible 12% gain every month sounds a little too good to be true, if you do it right, the actual gain would be greater. For the first few months, the Jan-17 700 calls I bought will decay less than the average $666 monthly amount. Theta (decay for a single day) is $12, or about $360 for the first month. For the last month just before it expires, the Jan-17 700 calls would decay about $1250. The best way to play this strategy would be to put some money back in (using cash you have taken out every month) when there is about 3 or 4 remaining months to the Jan-17 calls and sell those calls and replace them with calls expiring at a more distant-out month, such as July 2017 or January 2018.

There are disadvantages to owing the options I do rather than the stock. The biggest problem comes when the stock fluctuates by large numbers in either direction. If the stock falls 5% ($36), my options would lose about $2196. If I owned 68 shares of stock, I would lose $2448, about 11% more than the options loss. However, if the stock were to tumble significantly more than 5% in one month, the option loss would be considerably greater than the loss of share value. If the stock goes up by 5% in the next month, I would gain $2448 if I owned 68 shares of stock, and only $1884 with the options, or about $564 (23%) less than the stock would have gained. Using options rather than stock, I give up a little potential gain if the stock picks up 5% in one month but make a much greater gain if the stock is flat or moves moderately higher.

The major advantage to my options positions comes when the stock fluctuates well less than 5% in a month. As we showed earlier, an absolutely flat stock will result in a 12% gain while owning the stock would not make a penny.

I have just outlined two possible ways that you can invest in a company you like with options rather than buying the stock. One strategy allows you to have the equivalent of owning stock while having to come up with only one-third of the cash. A second strategy is designed to make about 12% in every month when the stock is flat or rises moderately. Either way seems smarter to me than just buying the stock.

 

Make 40% in One Month With This Costco Trade

Friday, February 19th, 2016

Make 40% in One Month With This Costco Trade

Two weeks ago, LinkedIn (LNKD) issued poor guidance while at the same time announced higher than expected earnings. Investors clobbered the stock, focusing on the guidance rather than the earnings. At the same time, as is often the case, another company in the same industry, Facebook (FB) was also traded down. With FB falling to $98, I reported to you on a trade that would make 66% after commissions if the company closed at any price above $97.50 on March 18, 2016. FB has now recovered and is well over $104 and this spread looks like it will be a winner. All we have to do is wait out the remaining 4 weeks (no closing trade will be necessary as long as the stock is at any price above $97.50).

Today, a similar thing took place. Walmart (WMT) announced earnings which narrowly beat estimates, but missed top line revenue by a bit. However, they projected that next quarterly earnings (starting now) would be flat. This announcement was a big disappointment because they had earlier projected growth of 3% – 4%. The stock fell 4.5% on that news.

Costco (COST) is also a retailer, and many investors believe that as Walmart goes, so will Costco. They sold COST down on WMT’s news by the same percentage, 4.5%. This how the lemmings do it, time and time again.

That seemed to be an over-reaction to me. COST is a much different company than WMT. COST is adding on new stores every month while WMT is in the process of closing 200 stores, for example. WMT has a much greater international exposure than COST, and the strong dollar is hurting them far more.

I expect cooler heads will soon prevail and COST will recover. Today, with COST trading at $147.20, I made a bet that 4 weeks from now, COST will be at least $145. If it is, I will make 40% after commissions on this spread trade. The stock can fall by $2.20 by that time and I will still make 40%.

Here is what I did for each contract:

Buy to Open 1 COST Mar-16 140 put (COST160318P140)
Sell to Open 1 COST Mar-16 145 put (COST160318P145) for a credit of $1.45 (selling a vertical)

This is called selling a bull put credit spread. When the trade is made, your broker will deposit the proceeds ($145) in your account (less the commission of $2.50 which Terry’s Tips subscribers pay at thinkorswim), or a net of $142.50). The broker will make a maintenance requirement of $500 (the difference between the two strike prices). There is no interest on this requirement (like a margin loan), but it just means that $500 in your account can’t be used to buy other stock or options.

Since you received $142.50 when you sold the spread, your net investment is $357.50 (the difference between $500 and $142.50). This is your maximum loss if COST were to end up at any price lower than $140 when the puts expire. The break-even price is $143.57. Any ending price above this will be profitable and any ending price below this will result in a loss. (If the stock ends up at any price between $140 and $145, you will have to repurchase the 145 put that you originally sold, and the 140 put you bought will expire worthless.)

Since I expect the stock will recover, I don’t expect to incur a loss. It is comforting to know that the stock can fall by $2.20 and I will still make my 40%.

If you wanted to be more aggressive and bet the stock will move higher, back above the $150 where it was before today’s sell-off, you could buy March puts at the 145 strike and sell them at the 150 strike. You could collect at least $2.00 for that spread, and you would gain 65% if COST ended up above $150. Higher risk and higher reward. The stock needs to move a bit higher for you to make the maximum gain. I feel more comfortable knowing it can fall a little and still give me a seriously nice gain for a single month.

By the way, these trades can be made in an IRA (if you have a broker like thinkorswim which allows options spread trading in an IRA).

If you make either of these trades, please be sure you do it with money you can truly afford to lose. Options are leveraged instruments and often have high-percentage gains and losses. With spreads like the above, at least you know precisely what the maximum loss could be. You can’t lose more than you risk.

If the market knocks you down, try laughing instead of crying – Some Market Definitions

Wednesday, February 17th, 2016

First, an update on the Facebook (FB) trade I told you about a week ago – it was trading about $98 and the spread I suggested would make 66% if the stock was any higher than $97.50 in one month. FB is now at almost $105 and that is looking like a sure winner. It’s a good feeling to make 66% while lots of people are anguishing over recent losses. Now for a few chuckles today…

Terry

If the market knocks you down, try laughing instead of crying –  Some Market Definitions:

CEO –Chief Embezzlement Officer.

CFO– Corporate Fraud Officer.

BULL MARKET — A random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET — A 6 to 18 month period when the kids get no allowance, the wife gets no jewellery, and the husband gets no sex.

VALUE INVESTING — The art of buying low and selling lower.

P/E RATIO — The percentage of investors wetting their pants as the market keeps crashing.

STANDARD & POOR — Your life in a nutshell.

STOCK ANALYST — Idiot who just downgraded your stock.

STOCK SPLIT — When your ex-wife and her lawyer split your assets equally between themselves.

FINANCIAL PLANNER — A guy whose phone has been disconnected.

MARKET CORRECTION — The day after you buy stocks.

OUT OF THE MONEY — When your checking account’s overdraft hits bottom.

CASH FLOW– The movement your money makes as it disappears down the toilet.

YAHOO — What you yell after selling it to some poor sucker for $240 per share.

WINDOWS — What you jump out of when you’re the sucker who bought Yahoo @ $240 per share.

INSTITUTIONAL INVESTOR — Past year investor who’s now locked up in a nuthouse.

PROFIT — An archaic word no longer in use.

 

An Option Trade for Anyone Who Likes Facebook (FB)

Tuesday, February 9th, 2016

The market seems to be crashing because of a fear of a worldwide economic slowdown, and last week a disappointing guidance from LinkedIn (LNKD) spooked many social media stocks like Facebook (FB). I think that FB was sold down far more than it should have and that it will recover soon. Today I made a trade which will make 66% on my investment (after commissions) in 25 days even if FB doesn’t gain a penny from here. I would like to share the details of this option trade with you today.

Terry

An Option Trade for Anyone Who Likes Facebook (FB)

Less than two weeks ago, Facebook had a blow-out quarter that exceeded estimates by a large margin, both on the top and bottom lines. Ad revenue from Instagram topped expectations all around, and the future looks even better, especially in this election year when candidates are finding that social media is one of the best ways to reach voters in local elections (Ted Cruz reportedly spend $10k a day on Instagram in Iowa and won the election).

After the announcement, FB soared 15% and hit a high north of $117 a couple of days later. And then LNKD announced, and the entire gain disappeared. As I write this on Monday, the stock is back down to $98.

For Q4 2015, LinkedIn actually had a decent quarter. Revenues grew by 34% over the prior-year period and beat analyst estimates by more than $4.3 million. On the bottom line, non-GAAP EPS of $0.94 smashed estimates for $0.78. Unfortunately, investors like to be more forward looking, and guidance was down – the company expects 2016 revenue of $3.6B-3.65B and EPS of $3.05-3.20, below a consensus of $3.91B and $3.67.

This guidance implies 2016 revenue growth of just 20-22%, a dramatic slowdown from the 35% seen in 2015. One analyst reported, “The problem for LNKD is that the name is heavily compared to the social media giant Facebook (FB). Fair or not, the most recent results show a large divide between the success of these firms. In another strong quarter, FB reported a GAAP profit of $2.56 billion on nearly $6 billion in revenues. For the entire year in 2015, LinkedIn didn’t even hit $3 billion in revenues and lost more than $164 million.”

FB has clearly found a way to monetize its traffic while LNKD has not, and FB was
unfairly penalized pretty much because of tepid guidance provided by a not-so-popular alternative social media company.

So what do you do if you’re an options nut and you think FB shouldn’t be trading this low? My favorite strategy is to sell what is called a vertical put credit spread. You choose a strike price which is at a number where you think the minimum price will be at some time in the future and you sell a put option at that strike while you buy a lower-strike put option in the same series. The higher-strike put option sells for more than you pay for the lower-strike put, and cash is deposited in your account when you make the trade. If you are right, both puts expire worthless and you get to keep the money that you collected when you originally placed the trade.

Here is what I did today while FB was trading just about $98:

Buy to Open 1 FB Mar-16 95 put (FB160318P95)
Sell to Open 1 FB Mar-16 97.5 put (FB160318P97.5) for $1.02 (selling a vertical)

For each contract I sold, $102 was placed in my account (less $2.50 for the commission at the cost Terry’s Tips subscribers pay at thinkorswim), for a net of $99.50. The broker will place a maintenance requirement on my account of $250 for each contract. This is not a margin loan and no interest is charged, but I can’t use that amount to buy other options or stock. Since I received $99.50 from the sale, the most I could actually lose is $150.50, and that is all that is tied up from the $250 maintenance requirement.

If FB closes at any price above $97.50 on March 18, both puts will expire worthless and I will get to keep the $99.50 I received for each contract. There will be no trade necessary and no commission to pay. That works out to a gain of 66% for the month.

If the stock falls from $98 to $97 on that date, I would have to buy back the 97.5 put for $50, so my gain would be just less than $50. The break-even price would be about $96.50 below which I would lose money up to the $150.50 maximum. In order to lose the maximum amount, FB would have to close at or below $95.

You might choose a further-out date, say April, July, or September instead of March for this trade to give the stock a little more time to move higher. You could probably get more than $1.02 for those months, but you would have to wait that much longer to be able to collect your money.

Another way to play this spread would be to select higher strike prices and hope that FB doesn’t just stay flat but moves higher. If you bought puts at the 97.5 strike and sold puts at the 100 strike, you could collect about $1.20 for the spread. If the stock ended up above $100, you would make a little less than $120 per spread on a risk of $130, or about 90%. This is a much more bullish bet because the stock has to move higher for you to collect the maximum gain. I personally think it should move this high, but I feel more comfortable betting that it at least doesn’t fall any more from here.

 

An Option Play Designed to Make 68% in One Month

Monday, December 14th, 2015

Last week, VIX, the so-called “fear index” rose 65% to close at 24.39. It was the 10th time that it moved over 20 in the last 3 years. In 9 of those 10 occasions, VIX fell back below 20 in less than 10 days, and in the other instance (August 21, 2015), it took 40 days to fall back below 20. Today I would like to tell you about a trade I am making today that will make 68% in one month if that pattern continues this time around.

Terry

An Option Play Designed to Make 68% in One Month

Last week was a bad one for the market. The S&P 500 tracking stock (SPY) fell $7.74 to close at $201.88, down 3.7% for the week. SPY closed out 2014 at $205.54 and started out 2015 at $206.38, so if last week’s close holds up for two more weeks, the market will record a calendar year loss for the first time since 2008.

Apparently, the reason for the big drop centered around the Fed’s likely move to raise interest rates on Wednesday, the first time it has done so in a decade. I believe that the institutions (who control over 90% of the trading volume) were carrying out a last-ditch effort to discourage this move. After all, does the Fed want to be the bad guys who are responsible for the worst yearly market in 7 years? Would raising rates be a good idea at a time when the market is lower than it was a year ago? (We should remember that the Fed is composed of big banks who make greater profits when interest rates are higher, so raising rates may seem to be self-serving).

I have no idea if the Fed will raise rates in two days as Janet Yellen has indicated they plan to. If they do, I suspect it will be a small start, maybe 0.25%, and they will also report that they intend to be slow to make further increases. In either case, no rate increase or a small one, the big change will be that the uncertainty over the timing of the increase will cease to exist. Either choice should result in a higher market and more importantly for option traders, a lower VIX.

As I have written about extensively, an Exchange Traded Product (ETP) called SVXY varies inversely with VIX. When VIX moves higher, SVXY crashes, and vice versa. Last week, SVXY fell $14.27, from $59.41 to $45.14, (24%) when VIX rose 65%.

When VIX falls back below 20, as it has done every single time it rose over 20 for the past 3 years, SVXY will be trading higher than it is today. Here is the trade that will make 68% if SVXY is trading any higher than it closed on Friday in 32 days (on January 15, 2016).

Buy To Open 1 SVXY Jan-16 40 put (SVXY160115P40)
Sell To Open 1 SVXY Jan-16 45 put (SVXY160115P45) for a credit of $2.05 (selling a vertical)

This trade will put $205 in your account (less $2.50 commissions at the rate Terry’s Tips subscribers pay at thinkorswim), or $202.50. The broker will place a maintenance requirement on your account of $500, but your maximum amount at risk is $500 less the $202.50 you collected, or $297.50) – this loss would occur if SVXY closed at any price below $40 at the January expiration. The break-even price for you would be $43.00 – any price above this would be profitable and any price below it would incur a loss. There is no interest charge on the maintenance requirement, but that much in your account will be set aside so that you can’t buy other stocks or options with it.

At the close of trading on January 15, 2016, if SVXY is at any price above $45, both these puts options will expire worthless and you will keep the $202.50 you collected when you made the trade. This works out to be a 68% gain on your investment at risk. You will not have to make a trade at that time, but just wait until the end of the day to see the maintenance requirement disappear.

Of course, there are other ways you could make a similar bet that SVXY will head higher as soon as some of the market uncertainty dissipates. You could sell the same spread at any weekly option series for the next 5 weeks and receive approximately the same credit price. For shorter time periods, you don’t have to wait so long to pocket your profit, but there is less time for uncertainty to settle down and SVXY move higher.

Actually, VIX does not have to fall for SVXY to at least remain flat. It should trade at least at $45 as long as VIX does not rise appreciably between now and when the options expire.

A more aggressive trade would be to bet that SVXY rises to at least $50 in 33 days. In this trade, you would buy Jan-16 45 puts and sell Jan-16 50 puts. You should collect at least $2.80 ($277.50 after commissions) and make 124% on your maximum risk of $222.50 if SVXY closed at any price above $50 on January 15, 2016.

The last time that VIX closed above 20 was on November 13, 2016. On that day, SVXY closed at $50.96. On the very next day, VIX fell below 20 and SVXY rose to $56.16. It never traded below the $50.96 number until last Friday when VIX once again moved above 20.

I think this is an opportune time to make a profitable trade which is essentially a bet that the current market uncertainty will be temporary, and might be over as soon as Wednesday when the Fed makes its decision concerning interest rates. Of course, a serious terrorist action or other calamity might spook markets as well, and the uncertainty will continue.

No option trades are sure bets, even if the last 10 times a certain indicator flashed and a 68% profit could have been made every time. As with all investments, you should never risk any money that you truly can’t afford to lose. However, I feel pretty good about the two investments outlined above, and will be making them today, shortly after you receive this letter.

 

Making 36%

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