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Posts Tagged ‘Credit Spreads’

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.

 

Half-Price Offer Ends at Midnight Tonight

Monday, January 11th, 2016

All good things must end, they say.  Tonight at midnight, the lowest price offer we have ever made in the history of our company, does just that.  It ends.  Tomorrow we will return to the prices that thousands of smart investors have paid over the past 14 years.

If you ever considered becoming a Terry’s Tips Insider, this would be the absolutely best time to do it.

To get our entire package for only $39.95, you must order by midnight tonight – only $39.95 for our entire package -here using Special Code 2016 (or 2016P for Premium Service – $79.95).

Terry 

Half-Price Offer Ends at Midnight Tonight

If all good things must end, it is equally true that all bad things must end as well.  Hopefully, the dreadful start for the market in 2016 will end as well.  Volatility has skyrocketed as the market has tumbled.  The so-called fear Index (VIX – the measure of option prices on the S&P 500 tracking stock, SPY) closed above 27 on Friday. This compares to an average range of about 12 – 14 over the last few years.

When VIX reaches 27, it means that option prices are about twice as high as they are on average.  For Terry’s Tips’ subscribers, that is a big deal.  Since our strategy consists of selling those short-term options, this could be one of the most profitable opportunities that come along all year.

The historical fluctuation of VIX is that it makes sudden forays above 20 when market uncertainty flares up (usually due to an unexpected event like a war breaking out or a 9/11 type terrorist attack, of some economic calamity or fear of slower growth).  This time around, it seems to be fears that China’s unusually high growth rate might be slowing.  Instead of growing at 8% a year, their economy may only grow at 4% or 5%, still an enviable number by world-wide standards.

VIX also has a tendency to fall quickly after the market takes a second look at what caused the fears in the first place.  Over the last three years, VIX has shot up over 20 on 10 separate occasions, and in 9 of those occasions, it fell back below 20 within 11 days.  This pattern may continue as we reach the second week of 2016.  As I write this, the futures are up enough for the Dow to enjoy a triple-digit gain today.

So it seems the both good things and bad things must eventually end.  The early-2016 market correction and our best offer ever are two of those things that could end just today.  We are absolutely certain of our offer ending – the market recovery might take a bit longer.

Here’s the Special Offer – If you make this investment in yourself by midnight tonight, January 11, 2016, this is what happens:

For a one-time fee of only $39.95, you receive the White Paper (a $79.95 value by itself), which explains my favorite option strategies in detail, and shows you exactly how to carry them out on your own.

1) Two free months of the Terry’s Tips Stock Options Tutorial Program, (a $49.90 value).  This consists of 14 individual electronic tutorials delivered one each day for two weeks, and weekly Saturday Reports which provide timely Market Reports, discussion of option strategies, updates and commentaries on 11 different actual option portfolios, and much more.

2) Emailed Trade Alerts.  I will email you with any trades I make at the end of each trading day, so you can mirror them if you wish (or with our Premium Service, you will receive real-time Trade Alerts as they are made for even faster order placement or Auto-Trading with a broker).  These Trade Alerts cover all 11 portfolios we conduct.

3) If you choose to continue after two free months of the Options Tutorial Program, do nothing, and you’ll be billed at our discounted rate of $19.95 per month (rather than the regular $24.95 rate).

4) Access to the Insider’s Section of Terry’s Tips, where you will find many valuable articles about option trading, and several months of recent Saturday Reports and Trade Alerts.

With this one-time offer, you will receive all of these benefits for only $39.95, less than the price of the White Paper alone. I have never made an offer better than this in the fourteen years I have published Terry’s Tips.  But you must order by midnight on January 11, 2016. Click here, choose “White Paper with Insider Membership”, and enter Special Code 2016 (or 2016P for Premium Service – $79.95).

Investing in yourself is the most responsible New Year’s Resolution you could make for 2016.  I feel confident that this offer could be the best investment you ever make in yourself.  And your family will love you for investing in yourself, and them as well.

Happy New Year!  I hope 2016 is your most prosperous ever.  I look forward to helping you get 2016 started right by sharing this valuable investment information with you.

Terry

If you have any questions about this offer or Terry’s Tips, please call Seth Allen, our Senior Vice President at 800-803-4595 or send an email to Seth@TerrysTips.com.  Or make this investment in yourself at the lowest price ever offered in our 14 years of publication – only $39.95 for our entire package -here using Special Code 2016 (or 2016P for Premium Service – $79.95).

Favorite Suggested Books for the Conservative Options Investor

Wednesday, January 6th, 2016

The market has made a dreadful start of the year.  This is the perfect time to check out the world of options because there are many profitable ways to make money with options even when the markets are crashing everywhere.

Terry’s Tips is celebrating its 14th birthday this month.  As our birthday gift to you, we are offering our service at the lowest price in the history of our company.  Thousands of subscribers have paid double this price to join.  If you ever considered becoming a Terry’s Tips Insider, this would be the absolutely best time to do it.

To get our entire package for only $39.95, you must order by midnight on January 11, 2016. at the lowest price ever offered in our 14 years of publication – only $39.95 for our entire package -here using Special Code 2016 (or 2016P for Premium Service – $79.95).

This week I will share some of my favorite books on investing.  I hope you enjoy reading one or more of them.

Terry 

Favorite Suggested Books for the Conservative Options Investor

I am often asked about my favorite books on investing (other than my own Making 36%: Duffer’s Guide to Breaking Par in the Markets Every Year, In Good Years and Bad).  There have been several revised editions of this book, and the 2015 edition came out just a couple of months ago. 

Here is my list of favorites: 

McMillan on Options, by Lawrence G. McMillan, (New York: John Wiley & Sons, second edition, 2004).  This is generally accepted as “The Bible” on options.  It is fairly expensive and the text is ponderous for most people, but everything is there.

Options Plain and Simple, by Lenny Jordan.  (London: Prentice Hall, 2000).  One of many books which describe just about all the option strategies with some good advice as to which ones work under which conditions.  Much lighter reading than McMillan on Options.

Winning the Loser’s Game, by Charles D. Ellis, (New York, McGraw-Hill, 4th Edition, 2002).  While this is not about options per se, it is just about the most sensible book I have ever found that discusses stock market investments in general.

The Little Book That Beats the Market, by Joel Greenblatt, (New York, John Wiley, 2006).  Again, this book is not about options, but is perhaps the best book written in the past several years about how to select individual stocks.

The Little Book of Common Sense Investing, by John C. Bogle (New York, John Wiley, 2007),  Another book which is not about options, but I challenge anyone to read this book because if they do, I believe there is no way they would ever buy a mutual fund again (except a no-load broad market index fund).

Here’s the Special Offer – If you make this investment in yourself by midnight, January 11, 2016, this is what happens:

For a one-time fee of only $39.95 (less than the cost of a copy of McMillan on Options), you receive the White Paper (a $79.95 value by itself), which explains my favorite option strategies in detail, and shows you exactly how to carry them out on your own.

1) Two free months of the Terry’s Tips Stock Options Tutorial Program, (a $49.90 value).  This consists of 14 individual electronic tutorials delivered one each day for two weeks, and weekly Saturday Reports which provide timely Market Reports, discussion of option strategies, updates and commentaries on 11 different actual option portfolios, and much more.

2) Emailed Trade Alerts.  I will email you with any trades I make at the end of each trading day, so you can mirror them if you wish (or with our Premium Service, you will receive real-time Trade Alerts as they are made for even faster order placement or Auto-Trading with a broker).  These Trade Alerts cover all 11 portfolios we conduct.

3) If you choose to continue after two free months of the Options Tutorial Program, do nothing, and you’ll be billed at our discounted rate of $19.95 per month (rather than the regular $24.95 rate).

4) Access to the Insider’s Section of Terry’s Tips, where you will find many valuable articles about option trading, and several months of recent Saturday Reports and Trade Alerts.

With this one-time offer, you will receive all of these benefits for only $39.95, less than the price of the White Paper alone. I have never made an offer better than this in the fourteen years I have published Terry’s Tips.  But you must order by midnight on January 11, 2016. Click here, choose “White Paper with Insider Membership”, and enter Special Code 2016 (or 2016P for Premium Service – $79.95).

Investing in yourself is the most responsible New Year’s Resolution you could make for 2016.  I feel confident that this offer could be the best investment you ever make in yourself.  And your family will love you for investing in yourself, and them as well.

Happy New Year!  I hope 2016 is your most prosperous ever.  I look forward to helping you get 2016 started right by sharing this valuable investment information with you.

Terry

If you 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 14 years of publication – only $39.95 for our entire package -here using Special Code 2016 (or 2016P for Premium Service – $79.95).

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.

 

How to Make Extraordinary Returns with Semi-Long Option Plays

Friday, November 27th, 2015

One of my favorite stock option plays is to make a bet that sometime in the future, a particular stock will be no lower than it is today. If you are right, you can make 50% – 100% without doing anything other than making a single option trade and waiting out the time period. Ten weeks ago, I made two specific recommendations (see my September 8, 2015 blog) for making this kind of bet, one which would make 62% in 4 months and the other 100% in that same time period. Today I would like to update those suggestions and discuss a little about how you set up the option trade if you know of a company you feel good about.

If you missed them, be sure to check out the short videos which explains why I like calendar spreads, and How to Make Adjustments to Calendar and Diagonal Spreads.

Terry

How to Make Extraordinary Returns with Semi-Long Option Plays

What is a long-term bet in the options world? A month? A week? I spend most of my time selling options that have only a week of remaining life. Sometimes they only have a day of life before they expire (hopefully worthless). So I don’t deal with long-term options, at least most of the time.

Most options plays are short-term plays. People who trade options tend to have short-term time horizons. Maybe they have ADHD and can’t handle long waits to learn whether they made a gain or not. But there are all sorts of different ways you can structure options plays. While most of my activity involves extremely short-term bets, I also have quite a bit of money devoted to longer-term bets which take 4 months to a year before the pay-day comes along.

One of my favorite semi-long (if there is such a word) option plays involves picking a stock which I particularly like for the long run, or one which has been beaten down for some reason which doesn’t seem quite right. When I find such a stock, I place a bet that sometime in the future, it will be at least as high as it is now. If I am right, I can usually make 50% – 100% on the bet, and I know in advance exactly what the maximum possible gain or loss will be, right to the penny.

Ten weeks ago, I liked where the price of SVXY was. This ETP is inversely correlated with option volatility. When volatility moves higher, SVXY falls, and vice versa. At the time, fears of a world-wide slowdown were emerging. Markets fell and volatility soared. VIX, the so-called “fear index” rose from the 12 – 14 range it had maintained for a couple of years to over 20. SVXY tanked to $45, and had edged up to $47 when I recommended placing a bet that in 4 months (on January 15, 2016), SVXY would be $40 or higher.

This trade would make the maximum gain even if SVXY fell by $7 and remained above $40 on that date:

Buy to Open 1 SVXY Jan-16 35 put (SVXY160115P35)
Sell to Open 1 SVXY Jan-16 40 put (SVXY160115P40) for a credit of $1.95 (selling a vertical)

Quoting from my September 8th blog, “When this trade was executed, $192.50 (after a $2.50 commission) went into my account. If on January 15, 2016, SVXY is at any price higher than $40, both of these puts will expire worthless, and for every vertical spread I sold, I won’t have to make a closing trade, and I will make a profit of exactly $192.50.

So how much do I have to put up to place this trade? The broker looks at these positions and calculates that the maximum loss that could occur on them would be $500 ($100 for every dollar of stock price below $40). For that to happen, SVXY would have to close below $35 on January 15th. Since I am quite certain that it is headed higher, not lower, a drop of this magnitude seems highly unlikely to me.

The broker will place a $500 maintenance requirement on my account. This is not a loan where interest is charged, but merely cash I can’t use to buy shares of stock. However, since I have collected $192.50, I can’t lose the entire $500. My maximum loss is the difference between the maintenance requirement and what I collected, or $307.50.

If SVXY closes at any price above $40 on January 15, both puts will expire worthless and the maintenance requirement disappears. I don’t have to do anything except think of how I will spend my profit of $192.50. I will have made 62% on my investment. Where else can you make this kind of return for as little risk as this trade entails?

Of course, as with all investments, you should only risk what you can afford to lose. But I believe the likelihood of losing on this investment is extremely low. The stock is destined to move higher, not lower, as soon as the current turbulent market settles down.

If you wanted to take a little more risk, you might buy the 45 put and sell a 50 put in the Jan-15 series. You would be betting that the stock manages to move a little higher over the next 4 months. You could collect about $260 per spread and your risk would be $240. If SVXY closed any higher than $50 (which history says that it should), your profit would be greater than 100%. I have also placed this spread trade in my personal account (and my charitable trust account as well).”

It is now 10 weeks later. SVXY is trading at $58 ½. I could buy back the first spread for $.45 ($47.50 after commissions). That would give me a $145 profit on my maximum risk of $307.50. That works out to a 47% gain for 10 weeks. That was easy money for me.

The other spread I suggested, raising the strikes of both the long and short sides by $10, could have been sold for $260. You could buy back the spread for $102.50 including commissions, giving you a profit of $157.50 on a maximum risk of $240, or 65%. Or you could just wait it out and enjoy the full 108% gain if SVXY closes no lower than $50 on the third Friday in January. I am hanging on to both my original bets and not selling now unless something better comes along.

In some Terry’s Tips, we make similar investments like this each January, betting that one year later, stocks we like will be at least where they were at the time. The portfolio we set up this year made those kinds of bets on GOOG, AAPL, and SPY. It will make 92% on the maximum amount at risk in 6 weeks if these three stocks are where they are today or any higher when the January 2016 puts expire. In fact, GOOG could fall by $155 and we would still make over 100% on that spread we had sold in January 2015. We could close out all three spreads today and make a gain of 68% on our maximum risk.

These are just some examples of how you can make longer-term bets on your favorite stocks with options, and making extraordinary gains even if the stock doesn’t do much of anything.

 

How to Set Up a Pre-Earnings Announcement Options Strategy

Monday, November 9th, 2015

One of the best times to set up an options strategy is just before a company announces earnings.  Today I would like to share our experience doing this last month with Facebook (FB) last month.  I hope you will read all the way through – there is some important information there.If you missed them, be sure to check out the short videos which explains why I like calendar spreads , and  How to Make Adjustments to Calendar and Diagonal Spreads.

Terry

How to Set Up a Pre-Earnings Announcement Options Strategy

When a company reports results each quarter, the stock price often fluctuates far more than usual, depending on how well the company performs compared both to past performance and to the market’s collective level of expectations.  Anticipating a big move one way or another, just prior to the announcement, option prices skyrocket, both puts and calls.

At Terry’s Tips, our basic strategy involves selling short-term options to others (using longer-term options as collateral for making those sales).  One of the absolute best times for us is the period just before an upcoming earnings announcement. That is when we can collect the most premium.

An at-the-money call (stock price and strike price are the same) for a call with a month of remaining life onFacebook (FB) trades for about $3 ($300 per call).  If that call expires shortly after an earnings announcement, it will trade for about $4.80.  That is a significant difference. In options parlance, option prices are “high” or “low” depending on their implied volatility (IV).  IV is much higher for all options series in the weeks before the announcement.  IV is at its absolute highest in the series that expires just after the announcement.  Usually that is a weekly option series.

Here are IV numbers for FB at-the-money calls before and after the November 4th earnings announcement:

One week option life before, IV = 57  One week option life after, IV = 25
Two week option life before, IV = 47  Two week option life after, IV = 26
One month option life before, IV =38  One month option life after, IV = 26
Four month option life before, IV = 35  Four month option life after, IV = 31

These numbers clearly show that when you are buying a 4-month-out call (March, IV=35) and selling a one-week out call (IV=57), before an announcement, you are buying less expensive options (lower IV) than those which you are selling. After the announcement, this gets reversed.  The short-term options you are selling are relatively less expensive than the ones you are buying.  Bottom line, before the announcement, you are buying low and selling high, and after the announcement, you are buying high and selling low.

You can make a lot of money buying a series of longer-term call options and selling short-term calls at several strike prices in the series that expires shortly after the announcement.  If the long and short sides of your spread are at the same strike price, you call it a calendar spread, and if the strikes are at different prices, it is called a diagonal spread.

Calendar and diagonal spreads essentially work the same, with the important point being the strike price of the short option that you have sold.  The maximum gain for your spread will come if the stock price ends up exactly at that strike price when the option expires.  If you can correctly guess the price of the stock after the announcement, you can make a ton of money.

But as we all know, guessing the short-term price of a stock is a really tough thing to do, especially when you are trying to guess where it might end up shortly after the announcement.  You never know how well the company has done, or more importantly, how the market will react to how the company has performed.  For that reason, we recommend selecting selling short-term options at several different strike prices.  This increases your chances of having one short strike which gains you the maximum amount possible.

Here are the positions held in our actual FB portfolio at Terry’s Tips on Friday, October 30th, one week before the Nov-1 15 calls would expire just after FB announced earnings on November 4th:

Foxy Face Book Positions Nov 2015

Foxy Face Book Positions Nov 2015

We owned calls which expired in March 2016 at 3 different strikes (97.5, 100, and 105) and we were short calls with one week of remaining life at 4 different strikes (103, 105, 106, and 107). There was one calendar spread at the 105 strike and all the others were diagonal spreads.  We owned 2 more calls than we were short.  This is often part of our strategy just before announcement day.  A fairly large percent of the time, the stock moves higher in the day or two before the announcement as anticipation of a positive report kicks in.  We planned to sell another call before the announcement, hopefully getting a higher price than we would have received earlier.  (We sold a Nov1-15 204 call for $2.42 on Monday).  We were feeling pretty positive about the stock, and maintained a more bullish (higher net delta position) than we normally do.

Here is the risk profile graph for the above positions.  It shows our expected gain or loss one week later (after the announcement) when the Nov1-15 calls expired:

Foxy Face Book Rick Profile Graph Nov 2015

Foxy Face Book Rick Profile Graph Nov 2015

When we produced this graph, we instructed the software to assume that IV for the Mar-16 calls would fall from 35 to 30 after the announcement.  If we hadn’t done that, the graph would have displayed unrealistically high possible returns.  You can see with this assumption, a flat stock price should result in a $300 gain, and if the stock rose $2 or higher, the gain would be in the $1000 range (maybe a bit higher if the stock was up just moderately because of the additional $242 we collected from selling another call).

So what happened?  FB announced earnings that the market liked.  The stock soared from about $102 to about $109 after the announcement (but then fell back a bit on Friday, closing at $107.10).  We bought back the expiring Nov1-15 calls (all of which were in the money on Thursday or Friday) and sold further-out calls at several strike prices to get set up for the next week.   The portfolio gained $1301 in value, rising from $7046 to $8347, up 18.5% for the week.  This is just a little better than our graph predicted.  The reason for the small difference is that IV for the March calls fell only to 31, and we had estimated that it would fall to 30.

You can see why we like earnings announcement time, especially when we are right about the direction the stock moves.  In this case, we would have made a good gain no matter how high the stock might go (because we had one uncovered long call).  Most of the time, we select short strikes which yield a risk profile graph with more downside protection and limited upside potential (a huge price rise would yield a lower gain, and possibly a loss).

One week earlier, in our Starbucks (SBUX) portfolio, we had another earnings week.  SBUX had a positive earnings report, but the market was apparently disappointed with guidance and the level of sales in China, and the stock was pushed down a little after the announcement.  Our portfolio managed to gain 18% for the week.

Many people would be happy with 18% a year on their invested capital, and we have done it in a single week in which an earnings announcement took place.  We look forward to having three more such weeks when reporting season comes around once again over the course of a year, both for these two underlyings and the 4 others we also trade (COST, NKE, JNJ, and SPY).
“I have confidence in your system…I have seen it work very well…currently I have had a first 100% gain, and am now working to diversify into more portfolios.  Goldman/Sachs is also doing well – up about 40%…

The Worst “Stock” You Could Have Owned for the Last 6 Years

Monday, September 14th, 2015

Today I would like to tell you all about the worst “stock” you could have owned for the past 6 years.  It has fallen from $6400 to $26 today.  I will also tell you how you can take advantage of an unusual current market condition and make an options trade which should make a profit of 66% in the next 6 months.  That works out to an annualized gain of 132%.  Not bad by any standards.For the next few days, I am also offering you the lowest price ever to become a Terry’s Tips Insider and get a 14-day options tutorial which could forever change your future investment results.  It is a half-price back-to-school offer – our complete package for only $39.95. Click here, enter Special Code BTS (or BTSP for Premium Service – $79.95).

This could be the best investment decision you ever make – an investment in yourself.

Happy trading.

Terry

The Worst “Stock” You Could Have Owned for the Last 6 Years

I have put the word “stock” in quotations because it really isn’t a stock in the normal sense of the word.  Rather, it is an Exchange Traded Product (ETP) created by Barclay’s which involves buying and selling futures on VIX (the so-called “Fear Index” which measures option volatility on the S&P 500 tracking stock, SPY).  It is a derivative of a derivative of a derivative which almost no one fully understands, apparently even the Nobel Prize winners who carried out Long-Term Capital a few years back.

Even though it is pure gobbledygook for most of us, this ETP trades just like a stock.  You can buy it and hope it goes up or sell it short and hope it goes down.  Best of all, for options nuts like me, you can trade options on it.

Let’s check out the 6-year record for this ETP (that time period is its entire life):

VXX Historical Chart 2015

VXX Historical Chart 2015

It is a little difficult to see what this ETP was trading at when it opened for business on January 30, 2009, but its split-adjusted price seems to be over $6000. (Actually, it’s $6400, exactly what you get by starting at $100 and engineering 3 1-for-4 reverse splits).  Friday, it closed at $26.04.  That has to be the dog of all dog instruments that you could possible buy over that time period (if you know of a worse one, please let me know).

This ETP started trading on 1/30/09 at $100.  Less than 2 years later, on 11/19/10, it had fallen to about $12.50, so Barclays engineered a reverse 1-for-4 split which pushed the price back up to about $50.  It then steadily fell in value for another 2 years until it got to about $9 on 10/15/12 and Barclays did the same thing again, temporarily pushing the stock back up to $36.  That lasted only 13 months when they had to do it again on 11/18/13 – this time, the stock had fallen to $12.50 once again, and after the reverse split, was trading about $50.  Since then, it has done relatively better, only falling in about half over almost a two-year span.

Obviously, this “stock” would have been a great thing to sell short just about any time over the 6-year period (if you were willing to hang on for the long run).  There are some problems with selling it short, however.  Many brokers can’t find stock to borrow to cover it, so they can’t take the order.  And if they do, they charge you some healthy interest for borrowing the stock (I don’t quite understand how they can charge you interest because you have the cash in your account, but they do anyway – I guess it’s a rental fee for borrowing the stock, not truly an interest charge).

Buying puts on it might have been a good idea in many of the months, but put prices are quite expensive because the market expects the “stock” to go down, and it will have to fall quite a way just to cover the cost of the put.  I typically don’t like to buy puts or calls all by themselves (about 80% of options people buy are said to expire worthless).  If you straight-out buy puts or calls, every day the underlying stock or ETP stays flat, you lose money. That doesn’t sound like a great deal to me.  I do like to buy and sell both puts and calls as part of a spread, however.  That is another story altogether.

So what else should you know about this ETP? First, it is called VXX.  You can find a host of articles written about it (check out Seeking Alpha) which say it is the best thing to buy (for the short term) if you want protection against a market crash.  While that might be true, are you really smart enough to find a spot on the 6-year chart when you could have bought it and then figured out the perfect time to sell as well?  The great majority of times you would have made your purchase, you would have surely regretted it (unless you were extremely lucky in picking the right day both to buy and sell).

One of the rare times when it would have been a good idea to buy VXX was on August 10, 2015, just over a month ago.  It closed at its all-time low on that day, $15.54.  If you were smart enough to sell it on September 1st when it closed at $30.76, you could have almost doubled your money.  But you have already missed out if you didn’t pull the trigger on that exact day. It has now fallen over 15% in the last two weeks, continuing its long-term trend.

While we can’t get into the precise specifics of how VXX is valued in the market, we can explain roughly how it is constructed.  Each day, Barclays buys one-month-out futures on VIX in hopes that the market fears will grow and VIX will move higher.  Every day, Barclays sells VIX futures it bought a month ago at the current spot price of VIX.  If VIX had moved higher than the month-ago futures price, a profit is made.

The reason why VXX is destined to move lower over time is that over 90% of the time, the price of VIX futures is higher than the spot price of VIX.  It is a condition called contango.  The average level of contango for VIX is about 5%.  That percentage is how much higher the one-month futures are than the current value of VIX, and is a rough approximation of how much VXX should fall each month.

However, every once in a while, the market gets very worried, and contango disappears.  The last month has been one of those times.  People seem to be concerned that China and the rest of the world is coming on hard times, and our stock markets will be rocked because the Fed is about to raise interest rates.  The stock market has taken a big tumble and market volatility has soared.  This has caused the current value of VIX to become about 23.8 while the one-month futures of VIX are 22.9.  When the futures are less than the spot price of VIX, it is a condition called back-wardation.  It only occurs about 10% of the time.  Right now, backwardation is in effect, (-3.59%), and it has been for about 3 weeks.  This is an exceptionally long time for backwardation to continue to exist.

At some point, investors will come to the realization that the financial world is not about to implode, and that things will pretty much chug along as they have in the past.  When that happens, market volatility will fall back to historical levels.  For most of the past two or three years, VIX has traded in the 12 – 14 range, about half of where it is right now.  When fears subside, as they inevitably will, VIX will fall, the futures will be greater than the current price of VIX, and contango will return.  Even more significant, when VIX falls to 12 or 14 and Barclays is selling (for VXX) at that price, VXX will lose out big-time because a month ago, it bought futures at 22.9.  So VXX will inevitably continue its downward trend.

So how can you make money on VXX with options?  To my way of thinking, today’s situation is a great buying opportunity.  I think it is highly likely that volatility (VIX) will not remain at today’s high level much longer.  When it falls, VXX will tumble, contango will return, and VXX will face new headwinds going forward once again.

Here is a trade I recommended to Terry’s Tips Insiders last Friday:

“If you believe (as I do) that the overwhelming odds are that VXX will be much lower in 6 months than it is now, you might consider buying a Mar-16 26 call (at the money – VXX closed at $26.04 yesteday) and sell a Mar-16 21 call.  You could collect about $2 for this credit spread.  In 6 months, if VXX is at any price below $21, both calls would expire worthless and you would enjoy a gain of 66% on your $3 at risk.  It seems like a pretty good bet to me.”

This spread is called selling a bearish call credit vertical spread.  For each spread you sell, $200 gets put in your account.  Your broker will charge you a maintenance requirement of $500 to protect against your maximum loss if VXX closes above $26 on March 18, 2016.  Since you collect $200 at the beginning, your actual maximum loss is $300 (this is also your net investment in this spread).  There is no interest charged on a maintenance requirement; rather, it is just money in your account that you can’t use to buy other stocks or options.

This may all seem a little confusing if you aren’t up to speed on options trading.  Don’t feel like the Lone Ranger – the great majority of investors know little or nothing about options.  You can fix that by going back to school and taking the 14-day options tutorial that comes with buying the full Terry’s Tips’ package at the lowest price ever – only $39.95 if you buy before Friday, September 23, 2015.

Lowest Subscription Price Ever:  As a back-to-school special, we are offering the lowest subscription price than we have ever offered – our full package, including all the free 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 weekly newsletter 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 BTS (or BTSP for Premium Service – $79.95).

A Low-Risk Trade to Make 62% in 4 Months

Tuesday, September 8th, 2015

Market volatility continues to be high, and the one thing we know from history is that while volatility spikes are quite common, markets eventually settle down.  After enduring a certain amount of psychic pain, investors remember that that the world will probably continue to move along pretty much as it has in the past, and market fears will subside.While this temporary period of high volatility continues to exist, there are some trades to be made that promise extremely high returns in the next few months.  I would like to discuss one today, a trade I just executed in my own personal account so I know it is possible to place.

Terry

A Low-Risk Trade to Make 62% in 4 Months

As we have been discussing for several weeks, VIX, the so-called Fear Index, continues to be over 25.  This compares to the 12 – 14 level where it has hung out for the large part of the past two years.  When VIX eventually falls, one thing we know is that SVXY, the ETP that moves in the opposite direction as VIX, will move higher.

Because of the persistence of contango, SVXY is destined to move higher even if VIX stays flat.  Let’s check out the 5-year chart of this interesting ETP:

5 Year Chart SVXY September 2015

5 Year Chart SVXY September 2015

Note that while the general trend for SVXY is to the upside, every once in a while it takes a big drop.  But the big drops don’t last very long.  The stock recovers quickly once fears subside.  The recent drop is by far the largest one in the history of SVXY.

As I write this, SVXY is trading about $47, up $2 ½ for the day. I believe it is destined to move quite a bit higher, and soon.  But with the trade I made today, a 62% profit (after commissions) can be made in the next 4 months even if the stock were to fall by $7 (almost 15%) from where it is today.

This is what I did:

Buy to Open 1 SVXY Jan-16 35 put (SVXY160115P35)
Sell to Open 1 SVXY Jan-16 40 put (SVXY160115P40) for a credit of $1.95  (selling a vertical)

When this trade was executed, $192.50 (after a $2.50 commission) went into my account. If on January 15, 2016, SVXY is at any price higher than $40, both of these puts will expire worthless, and for every vertical spread I sold, I won’t have to make a closing trade, and I will make a profit of exactly $192.50.

So how much do I have to put up to place this trade?  The broker looks at these positions and calculates that the maximum loss that could occur on them would be $500 ($100 for every dollar of stock price below $40).  For that to happen, SVXY would have to close below $35 on January 15th.  Since I am quite certain that it is headed higher, not lower, a drop of this magnitude seems highly unlikely to me.

The broker will place a $500 maintenance requirement on my account.  This is not a loan where interest is charged, but merely cash I can’t use to buy shares of stock.  However, since I have collected $192.50, I can’t lose the entire $500. My maximum loss is the difference between the maintenance requirement and what I collected, or $307.50.

If SVXY closes at any price above $40 on January 15, both puts will expire worthless and the maintenance requirement disappears.  I don’t have to do anything except think of how I will spend my profit of $192.50.  I will have made 62% on my investment.  Where else can you make this kind of return for as little risk as this trade entails?

Of course, as with all investments, you should only risk what you can afford to lose.  But I believe the likelihood of losing on this investment is extremely low.  The stock is destined to move higher, not lower, as soon as the current turbulent market settles down.

If you wanted to take a little more risk, you might buy the 45 put and sell a 50 put in the Jan-15 series.  You would be betting that the stock manages to move a little higher over the next 4 months. You could collect about $260 per spread and your risk would be $240.  If SVXY closed any higher than $50 (which history says that it should), your profit would be greater than 100%.  I have also placed this spread trade in my personal account (and my charitable trust account as well).

How to Fine-Tune Market Risk With Weekly Options

Monday, August 17th, 2015

This week I would like to share an article word-for-word which I sent to Insiders this week.  It is a mega-view commentary on the basic options strategy we conduct at Terry’s Tips.  The report includes two tactics that we have been using quite successfully to adjust our risk level each week using weekly options.

If you are already trading options, these tactic ideas might make a huge difference to your results.  If you are not currently trading options, the ideas will probably not make much sense, but you might enjoy seeing the results we are having with the actual portfolios we are carrying out for our subscribers.

Terry

How to Fine-Tune Market Risk With Weekly Options

“Bernie Madoff attracted hundreds of millions of dollars by promising investors 12% a year (consistently, year after year). Most of our portfolios achieve triple that number and hardly anyone knows about us.  Even more significant, our returns are actual – Madoff never delivered gains of any sort. There seems to be something wrong here.

Our Capstone Cascade portfolio is designed to spin off (in cash) 36% a year, and it has done so for 10 consecutive months and is looking more and more likely that we will be able to do that for the long run (as long as we care to carry it out).  Actually, at today’s buy-in value (about $8300), the $3600 we withdraw each year works out to be 43%.  Theta in this portfolio has consistently added up to double what we need to make the monthly withdrawal, and we gain even more from delta when SVXY moves higher.

Other portfolios are doing even better.  Rising Tide has gained 140% in just over two years while the underlying Costco has moved up 23.8% (about what Madoff promised).   Black Gold appears to be doing even better than that (having gained an average of 3% a week since it was started).

A key part of our current strategy, and a big change from how we operated in the past, is having short options in each of several weekly series, with some rolling over (usually about a month out) each week.  This enables us to tweak the risk profile every Friday without making big adjustments that involve selling some of the long positions.  If the stock falls during a week, we will find ourselves with previously-sold short options that  are at higher strikes than the stock price, and we will collect the  maximum time premium in a month-out series by selling an at-the-money (usually call) option.

If the stock rises during the week, we may find that we have more in-the-money calls than we would normally carry, so we will sell new month-out calls which are out of the money.  Usually, we can buy back in-the-money calls and replace them with out-of-the-money calls and do it at a credit, again avoiding adjustment trades which might cause losses when the underlying displays whip-saw price action.

For the past several weeks, we have not suffered through a huge drop in our underlyings, but earlier this year, we incurred one in SVXY.  We now have a way of contending with that kind of price action when it comes along.  If a big drop occurs, we can buy a vertical call spread in our long calls and sell a one-month-out at-the-money call for enough cash to cover the cost of rolling the long side down to a lower strike.  As long as we don’t have to come up with extra cash to make the adjustment, we can keep the same number of long calls in place and continue to sell at-the-money calls each week when we replace expiring short call positions.  This tactic avoids the inevitable losses involved in closing out an out-of-the-money call calendar spread and replacing it with an at-the-money calendar spread which always costs more than the spread we sold.

Another change we have added is to make some long-term credit put spreads as a small part of an overall 10K Strategy portfolio, betting that the underlying will at least be flat in a year or so from when we placed the spread.  These bets can return exceptional returns while in many respects being less risky than our basic calendar and diagonal spread strategies.  The longer time period allows for a big drop in stock price to take place as long as it is offset by a price gain in another part of the long-term time frame.  Our Better Odds Than Vegas II portfolio trades these types of spreads exclusively, and is on target to gain 91% this year, while the Retirement Trip Fund II portfolio is on target to gain 52% this year (and the stock can fall a full 50% and that gain will still come about).

The trick to having portfolios with these kinds of extraordinary gains is to select underlying stocks or ETPs which you feel strongly will move higher.  We have managed to do this with our selections of COST, NKE, SVXY, SBUX, and more recently, FB, while we have  failed to do it (and faced huge losses) in our single failing portfolio, BABA Black Sheep where Alibaba has plummeted to an all-time low since we started the portfolio when it was near its all-time high.  Our one Asian diversification effort has served to remind us that it is far more important to find an underlying that you can count on moving higher, or at least staying flat (when we usually do even better than when it moves higher).

Bottom line, I think we are on to something big in the way we are managing our investments these days.  Once you have discovered something that is working, it is important to stick with it rather than trying to improve your strategy even more.  Of course, if the market lets us know that the strategy is no longer working, changes would be in order.  So far, that has not been the case.  The recent past has included a great many weeks when we enjoyed 10 of our 11 portfolios gaining in value, while only BABA lost money as the stock continued to tumble. We will soon find another underlying to replace BABA (or conduct a different strategy in that single losing portfolio).”

3 Options Strategies for a Flat Market

Thursday, August 6th, 2015

Before I delve into this week’s option idea I would like to tell you a little bit about the actual option portfolios that are carried out for Insiders at Terry’s Tips.  We have 11 different portfolios which use a variety of underlying stocks or ETPs (Exchange Traded Products).  Eight of the 11 portfolios can be traded through Auto-Trade at thinkorswim (so you can follow a portfolio and never have to make a trade on your own).  The 3 portfolios that cannot be Auto-Traded are simple to do on your own (usually only one trade needs to be made for an entire year).

Ten of our 11 portfolios are ahead of their starting investment, some dramatically ahead.  The only losing portfolio is based on Alibaba (BABA) – it was a bet on the Chinese market and the stock is down over 30% since we started the portfolio at the beginning of this year (our loss is much greater).  The best portfolio for 2015 is up 55% so far and will make exactly 91% if the three underlyings (AAPL, SPY, and GOOG) remain where they presently are (or move higher).  GOOG could fall by $150 and that spread would still make 100% for the year.

Another portfolio is up 44% for 2015 and is guaranteed to make 52% for the year even if the underlying (SVXY) falls by 50% between now and the end of the year.  A portfolio based on Costco (COST) was started 25 months ago and is ahead more than 100% while the stock rose 23% – our portfolio outperformed the stock by better than 4 times.  This is a typical ratio –  portfolios based on Nike (NKE) and Starbucks (SBUX) have performed similarly.

We are proud of our portfolio performance and hope you will consider taking a look at how they are set up and perform in the future.

Terry

3 Options Strategies for a Flat Market

“Thinking is the hardest work there is, which is probably the reason why so few engage in it.” – Henry Ford

If you think the market will be flat for the next month, there are several options strategies you might employ.  In each of the following three strategies, I will show how you could invest $1000 and what the risk/reward ratio would be with each strategy.  As a proxy for “the market,” we will use SPY as the underlying (this is the tracking stock for the S&P 500 index).  Today, SPY is trading at $210 and we will be trading options that expire in just about a month (30 days from when I wrote this).

Strategy #1 – Calendar Spread.  With SPY trading at $210, we will buy calls which expire on the third Friday in October and we will sell calls which expire in 30 days (on September 4, 2015).  Both options will be at the 210 strike.  We will have to spend $156 per spread (plus $2.50 commissions at the thinkorswim rate for Terry’s Tips subscribers).  We will be able to buy 6 spreads for our $1000 budget. The total investment will be $951.   Here is what the risk profile graph looks like when the short options expire on September 4th:

SPY Calendar Spread Risk Profile Graph August 2015

SPY Calendar Spread Risk Profile Graph August 2015

On these graphs, the column under P/L Day shows the gain (or loss) when the short options expire at the stock price in the left-hand column.  You can see that if you are absolutely right and the market is absolutely flat ($210), you will double your money in 30 days.  The 210 calls you sold will expire worthless (or nearly so) and you will own October 210 calls which will be worth about $325 each since they have 5 weeks of remaining life.

The stock can fluctuate by $4 in either direction and you will make a profit of some sort.  However, if it fluctuates by much more than $4 you will incur a loss.  One interesting thing about calendar spreads (in contrast to the other 2 strategies we discuss below) is that no matter how much the stock deviates in either direction, you will never lose absolutely all of your investment.  Since your long positions have an additional 35 days of life, you will always have some value over and above the options you have.  That is one of the important reasons that I prefer calendar spreads to the other strategies.

Strategy #2 – Butterfly Spread:  A typical butterfly spread in involves selling 2 options at the strike where you expect the stock to end up when the options expire (either puts or calls will do – the strike price is the important thing) and buying one option an equidistant number of strikes above and below the strike price of the 2 options you sold.  You make these trades all at the same time as part of a butterfly spread.

You can toy around with different strike prices to create a risk profile graph which will provide you with a break-even range which you will be comfortable with.  In order to keep the 3 spread strategies similar, I set up strikes which would yield a break-even range which extended about $4 above and below the $210 current strike.  This ended up involving selling 2 Sept-1 2015 calls at the 210 strike, and buying a call in the same series at the 202.5 strike and the 217.5 strike.  The cost per spread would be $319 plus $5 commission per spread, or $324 per spread.  We could buy 3 butterfly spreads with our $1000 budget, shelling out $972.

Here is the risk profile graph for that butterfly spread when all the options expire on September 4, 2015:

SPY Butterfly Spread Risk Profile Graph August 2015

SPY Butterfly Spread Risk Profile Graph August 2015

You can see that the total gain if the stock ends up precisely at the $210 price is even greater ($1287) than it is with the butterfly spread above ($1038).  However, if the stock moves either higher or lower by $8, you will lose 100% of your investment.  That’s a pretty scary alternative, but this is a strategy that does best when the market is flat, and you would only buy a butterfly spread if you had a strong feeling of where you think the price of the underlying stock will be on the day when all the options expire.

Strategy #3 – Short Iron Condor Spread.  This spread is a little more complicated (and is explained more fully in my White Paper).  It involves buying (and selling) both puts and calls all in the same expiration series (as above, that series will be the Sept1-15 options expiring on September 4, 2015).  In order to create a risk profile graph which showed a break-even range which extended $4 in both directions from $210, we bought calls at the 214 strike, sold calls at the 217 strike and bought puts at the 203 strike while selling puts at the 206 strike.  A short iron condor spread is sold at a credit (you collect money by selling it).  In this case, each spread would collect $121 less $5 commission, or $116.  Since there is a $3 difference between each of the strikes, it is possible to lose $300 per spread if the stock ends up higher than $217 or lower than $203.  We can’t lose the entire $300, however, because we collected $116 per spread at the outset.  The broker will put a hold on $300 per spread (it’s called a maintenance requirement and does not accrue interest like a margin loan does), less the $116 we collected.  That works out to a total net investment of $184 per spread (which is the maximum loss we could possibly incur).  With our $1000 budget, you could sell 5 spreads, risking $920.

Here is the risk profile graph for this short iron condor spread:

SPY Short Iron Condor Spread Risk Profile Graph August 2015

SPY Short Iron Condor Spread Risk Profile Graph August 2015

You can see the total potential gain for the short iron condor spread is about half what it was for either of the earlier spreads, but it has the wonderful feature of coming your way at any possible ending stock price between $206 and $214.  Both the calendar spread and the butterfly spread required the stock to be extremely near $210 to make the maximum gain, and the potential gains dropped quickly as the stock moved in any direction from that single important stock price.  The short iron condor spread has a lower maximum gain but it comes your way over a much larger range of possible ending stock prices.

Another advantage of the short iron condor is that if the stock ends up at any price in the profit range, all the options expire worthless, and you don’t have to execute a trade to close out the positions.  Both the other strategies require closing trades.

This is clearly not a complete discussion of these option strategies.  Instead, it is just a graphic display of the risk/reward possibilities when you expect a flat market.  Maybe this short report will pique your interest so that you will consider subscribing to our service where I think you will get a thorough understanding of these, and other, options strategies that might generate far greater returns than conventional investments can offer.

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