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Posts Tagged ‘diagonal spreads’

Making a Long-Term Options Bet on Oil

Sunday, January 17th, 2016

 

The market is closed for the Marin Luther King holiday today, and maybe you have a little time to see how we plan to make some exceptional returns by playing what might happen with oil prices.

I would like to share with you details on a new portfolio we have set up at Terry’s Tips. It is a long-term bet that the price of oil will eventually recover from its recent 12-year lows, but maybe it will get even worse in the short run before an eventual recovery takes place. In the wonderful world of stock options, you can bet on both possibilities at once, and possibly make double-digit monthly gains while you wait for the future to unfold.

I hope you enjoy my thinking about an option strategy based on the future of oil prices. Maybe you might like to emulate these positions in your own account or become a Terry’s Tips Insider and watch them evolve over time.

Terry

Making a Long-Term Options Bet on Oil

Nobel Laureate Yale University professor Robert Shiller was interviewed by Alex Rosenberg of CNBC on July 6, 2015. He delivered his oft-repeated message that he believed that both stocks and bonds were overvalued and likely to fall. The last couple of weeks in the market makes his forecast seem pretty accurate. And then he continued on to say that he thought that oil would be a good investment, and that he was putting some of his own money on a bet that oil prices would move higher in the long run.
“One should have a wide variety of assets in one’s portfolio. And oil, by the way, is a particularly important asset to have in one’s portfolio, because we need it, and the economy thrives on it,” he said.

“So yeah, prices have come down a lot, partly because of the invention of fracking,” which has increased supply levels. “Will that reverse and go up smartly? I don’t know. But I’m just thinking—historically, commodities have been a good part of a portfolio, and they’re not pricey, so why not?”

So how has his advice turned out? On the day that Shiller suggested buying oil, USO (the most popular ETP that tracks the price of oil) was trading at $19. It is almost exactly half of that amount today.

We might wonder how Mr. Shiller feels about losing half his money in six months. If he hasn’t sold it yet, he really hasn’t lost it of course, but his account value is surely a whole lot less than it was.

I like the idea of getting into oil at a price which is half of what this apparently brilliant man bought it for, and also would like to benefit if the steady drop in the price of oil might continue a bit longer in the short run. Iran is scheduled to start dumping lots of its oil on the world market as the sanctions are removed, and OPEC has shown no inclination to reduce production (in its effort to discourage American frackers who have a higher cost of production). If the supply of oil continues to grow at a faster rate than demand, lower prices will probably continue to be the dominant trend, at least until a major war or terrorist action breaks out, or OPEC changes its tune and cuts back on production. If oil costs more to produce than it can be sold for (as OPEC asserts), then eventually supply must shrink to such a point that oil prices will improve.

Intuition would tell us that lower gas prices in the U.S. should help our economy (except for oil producers). Instead of paying $4 per gallon of gas, American drivers can pay about half that amount and have lots of money left over to buy other things. One would think that this would stimulate the economy and be good for the stock market. Apparently, it has not worked out that way. The recent drop in the stock market was supposedly due to fears of weakness in international economies. Many of them are dependent on oil revenues, and they are in bad shape with oil so cheap. Sometimes what seems intuitively true doesn’t work out in the real world.

It makes sense to me that at some point, supply and demand must even out, and a price achieved that is at least as high as the average cost of getting oil out of the ground. On a 60 Minutes episode on the subject of oil drilling in Saudi Arabia, the minister cited $60 per barrel as that number. This is more than double the current selling price of oil. It seems logical to believe that sometime in the future, this number will once again be reached. If that is the case, USO should be double what it is now.

The portfolio we created at Terry’s Tips (aptly called Black Gold) involves buying call LEAPS on USO which expire in 2018 so we have two years to wait for a rebound in oil.

Here are the two spreads we placed in this portfolio which was set up with $3500 (the actual cost of these spreads, including commissions, was $3186)

Buy To Open 7 USO Jan-18 8 calls (USO180119C8)
Sell To Open 7 USO Mar-16 10.5 calls (USO160318C10.5) for a debit of $2.32 (buying a diagonal)

Buy To Open 10 USO Jan-18 8 calls (USO180119C8)
Sell To Open 10 USO Feb-16 8 calls (USO160229C8) for a debit of $1.52 (buying a calendar)

The first spread (the diagonal) is set up to provide upside protection. The intrinsic value of this spread is $2.50 (the difference between the strike prices of the long and short sides). No matter how high the stock moves, this spread can never trade for less than $2.50. Actually, since there are 22 more months of life to the long Jan-18 calls, they will always have an additional time premium value that will keep the spread value well over $2.50. Since we paid only $2.32 for the spread, we can never lose money on it if the stock were to move higher.

The second spread, the calendar which is slightly in the money (at the 8 strike while the stock is trading about $8.75) is designed to provide downside protection in case the price of oil moves lower. Ideally, we would like the stock to fall about $.75 to end up exactly at $8 in 5 weeks when the Feb-16 calls expire. If that happens, those calls we sold will expire worthless and we will be in a position to sell new calls that expire a month later at the same strike. We should be able to collect about $500 from that sale, well over 10% of the initial cost of all the positions). No matter where the stock ends up, we will sell new calls at the February expiration, most likely in the March-16 series at the 8 strike price. If that is near the money, we should be able to collect about $.50 for each option, and it won’t take too many monthly sales at that level to completely cover our initial $1.52 cost of the spread. We will have 21 opportunities to sell new monthly premium to cover the original cost.

The long side of the calendar spread (the Jan-18 calls) will always have a value which is greater than the short-term calls that we sell at the 8 strike price. It is not always certain that they will be worth $1.32 more than the short-term calls like they are at the beginning, however. If the stock stays within a few dollars of $8, the long side should be worth at least $1.32 higher than the short side. If the stock makes a very large move in either direction, the long side might not be worth $1.32 more than the short side. Hopefully, we will collect new premium each month early on so that the original $1.32 cost has been returned to us and we are then playing with the house’s money for all the remaining months.

When the Mar-16 10.5 calls expire, we will sell new calls with about a month or two of life, choosing strike prices that are appropriate at the time, being careful not to choose a strike which is too low to insure we have at least some spreads which will not lose money no matter how high the stock price moves over the next two years. Presumably, we will be selling short term (one or two month) calls at increasingly higher strike prices as the stock moves higher in the long run, collecting new premium and watching the value of our long Jan-18 8 calls increase substantially in value as they become more and more in the money.

This is the risk profile graph which shows what we should make or lose at various possible stock prices in 5 weeks when the Feb-16 calls expire:

USO Risk Profile Graph Jan 2016
USO Risk Profile Graph Jan 2016

The stock can fall about 9% in 5 weeks before a loss occurs on the downside, or it can go up by any reasonable amount and a double-digit gain should be made on the original cost of the spreads. Each month, we plan to sell enough short-term premium to give us a 10% gain as long as the stock does not fluctuate outside a range of about 10% in either direction. Most months, this should be possible.

This explanation may be a little confusing to anyone who is not familiar with stock options. It would all make total sense if you became a Terry’s Tips Insider and read our 14-day tutorial. It takes a little effort, but it could change your investment returns for the rest of your life.

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).

Portfolios Gain an Average of 10% for the Month

Monday, December 7th, 2015

This week we are reporting the results for the actual portfolios we carry out at Terry’s Tips. Many of our subscribers mirror our trades in their own accounts or have thinkorswim execute trades automatically for them through their free Auto-Trade program. In addition, we are showing the actual positions we currently hold in one of these portfolios so you can get a better idea of how we carry out the 10K Strategy.

Enjoy the full report.

Terry

Portfolios Gain an Average of 10% for the Month

The market (SPY) edged up 0.8% in November. In spite of mid-month relatively high volatility, things ended up just about where they started. The 6 actual portfolios carried out at Terry’s Tips outperformed the market by a factor of 12, gaining an average of 10.0%.

This 10% was less than October’s 14.2% average gain for the portfolios. The big reason why November lagged behind October was that we had one big losing portfolio this month (more on that later). Here are the results for each portfolio:

First Saturday Report Chart November 2015

First Saturday Report Chart November 2015
 * After doubling in value, portfolio had 2-for-1 split in October 2015

** After doubling in value, portfolio had 2-for-1 split in September 2015.
***Portfolio started with $4000 and $5600 withdrawn in December 2014.

S&P 500 Price Change for November = +0.8%
Average Portfolio Company Price Change for November = +1.8%
Average Portfolio Value Change for November = +10.0%

Further Comments: We have now recorded a 24.2% gain for the first two months of our First Saturday Reports. This is surely a remarkable result, 4 times better than the 5.4% that the market gained over those two months. Our results work out to an annualized rate of 145%, a level that we are surely not going to be able to maintain forever. But is has been fun so far.

All of the underlying stock prices did not gain in November. SBUX fell 1.3%, yet the Java Jive portfolio picked up 13.6%, proving once again that a lower stock price can still yield good gains, just as long as the drop is not too great.

Only one of our underlying stocks had an earnings announcement this month. Facebook (FB) announced and the stock edged higher, causing our Foxy Facebook to be our greatest gainer (up 22.1%) for November. We will have two earnings announcements in December – COST on the 8th and NKE which reports on the 20th or 21st. NKE also will have a 2-for-1 stock split on December 23rd. History shows that stocks which have a split tend to move higher after the split is announced, but then they move lower after the split has taken place. We will keep that in mind when we establish option positions later this month.

New Portfolio JNJ Jamboree Starts off With a Nice Gain: In its first month of operation, our newest portfolio gained 14.3% while the stock closely mirrored the market’s gain, picking up 0.9% compared to the market’s 0.8% gain. JNJ pays a healthy dividend which reduces volatility a bit, but the portfolio’s early performance demonstrates that the 10K Strategy can make good gains even when the options carry a low Implied Volatility (IV).

What Happened in Vista Valley, our big Loser This Month? NKE experienced extreme volatility, first dropping when Dick’s had a dismal earnings announcement, and then recovering when reports indicated that NKE was doing much better than most of the retailers. In the second week of November, NKE crashed $9.92 (7.5%). This is a truly unusual drop, and immediately forced us to make a decision. Do we lower the strike prices of our options to protect ourselves against a further drop, or do we hang on and wait for a recovery?

We were a little concerned by some analyst reports which argued that while NKE was a great company, its current valuation was extremely high (and probably unsustainable). So we lowered the strike prices from the 130–135 range to the 120-125 range. This ended up being a big mistake, because in the subsequent week, the stock rose $10.79, totally reversing the week-earlier drop. This forced us to sell off the lower-strike spreads and start over again with the higher strikes we had at the beginning of the month. If we had done nothing, the portfolio would have made a large gain for the month. Since we have selected underlyings that we believe are headed higher, in the future we should be slow to adjust to the downside unless there is strong evidence to refute our initial positive take on the company. This experience is another reminder that high volatility is the Darth Vader of the 10K Strategy world.

Here are the actual positions we held in one of the 6 Terry’s Tips portfolios. This portfolio uses the S&P 500 tracking stock (SPY) as the underlying. We have been running this portfolio for only two months. These positions are typical of how we carry out the 10K Strategy for all the portfolios.
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Summary of Spy 10K Classic Portfolio. This $5000 portfolio was set up on October 6, 2015. It uses the 10K Strategy with short calls in several weekly series, some of which expire each week and is counted as one of our stock-based portfolios (even though it is not technically a stock, but an ETP).

First Saturday Report November 2015 10K Spy Positions

First Saturday Report November 2015 10K Spy Positions
 Results for the week: With SPY up $1.69 (0.8%) for the 5-week month, the portfolio gained $491 or 8.6%. This is about what we should expect when the market is ultimately flat, but with high volatility inside the month. We dodged a bullet by refraining from adjusting last week when the stock tanked on Thursday because it recovered that entire loss on Friday.

Our positions right now are a little unusual for us because we only have short calls in the next two weekly option series. Usually, we have 3 or 4 short series in place. The reason we ended up where we are right now is that when we buy back expiring calls each Friday, if the market that week has been flat or down, we sell next-week at-the-money calls. If the market has moved higher, we go to further-out series and sell at strikes which are higher than the stock price. Most weeks in November were flat or down, so we did not move out to further-out option series.

Looking forward to next week, the risk profile graph shows that our break-even range extends from about $2 on the downside to $3 on the upside. An absolutely flat market should result in a much greater weekly gain than we experienced last month because we have an unusually high number of near-the-money calls expiring next week.

First Saturday Report November 2015 10K Spy Risk Profile
First Saturday Report November 2015 10K Spy Risk Profile

As we approach the regular monthly option series for December (they expire on the third Friday, the 18th), we need to remember that a dividend is payable to holders of SPY on December 17. If we have short in-the-money calls on that date, we risk having them exercised and leaving us with the obligation to pay that dividend. For that reason, we will roll out of any in-the-money short calls a day earlier than usual to avoid this possibility.

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%…

First Saturday Report with October 2015 Results

Monday, November 2nd, 2015

This week I would like to share with you (for the first time ever) every option position we hold in every stock-based actual portfolio we carry out at Terry’s Tips.  You can access this report here.If you missed it last week, 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.

There is a lot of material to cover in the report and videos, but I hope you will be willing to make the effort to learn a little about a non-traditional way to make greater investment returns than just about anything out there.

Terry

First Saturday Report with October 2015 Results

Here is a summary of how well our 5 stock-based portfolios using our 10K Strategy performed last month as well as for their entire lifetime:

First Saturday Report October Results 2015

First Saturday Report October Results 2015

 

While it was a good month for the market, the best in 4 years, our 5 portfolios outperformed the market by 166% in October.

Enjoy the full report here.

Making Adjustments to Calendar and Diagonal Spreads

Thursday, October 29th, 2015

If you missed it last week, be sure to check out the short video which explains why I like calendar spreads.  This week I have followed it up with a second video entitled How to Make Adjustments to Calendar and Diagonal Spreads.

I hope you will enjoy both videos.  I also hope you will sign up for a Terry’s Tips insider subscription and start enjoying exceptional investment returns along with us (through the Auto-Trade program at thinkorswim).

Terry

Making Adjustments to Calendar and Diagonal Spreads

When we set up a portfolio using calendar spreads, we create a risk profile graph using the Analyze Tab on the free thinkorswim trading platform.  The most important part of this graph is the break-even range for the stock price for the day when the shortest option series expires.  If the actual stock price fluctuates dangerously close to either end of the break-even range, action is usually required.

The simple explanation of what adjustments need to be made is that if the stock has risen and is threatening to move beyond the upside limit of the break-even range, we need to replace the short calls with calls at a higher strike price.  If the stock falls so that the lower end of the break-even range is threatened to be breached, we need to replace the short calls with calls at a lower strike.

There are several ways in which you can make these adjustments if the stock has moved uncomfortably higher:

1. Sell the lowest-strike calendar spread and buy a new calendar spread at a higher strike price, again checking with the risk profile graph to see if you are comfortable with the new break-even range that will be created.  The calendar spread you are buying will most likely cost more than the calendar spread you are selling, so a small amount of new capital will be required to make this adjustment.
2. Buy a vertical call spread, buying the lowest-strike short call and selling a higher-strike call in the same options series (weekly or monthly).  This will require a much greater additional investment.
3. Sell a diagonal spread, buying the lowest-strike short call and selling a higher-strike call at a further-out option series.  This will require putting in much less new money than buying a vertical spread.
4. If you have a fixed amount of money to work with, as we do in the Terry’s Tips portfolios, you may have to reduce the number of calendar spreads you own in order to come up with the necessary cash to make the required investment to maintain a satisfactory risk profile graph.

There are similar ways in which you can make these adjustments if the stock has moved uncomfortably lower.  However, the adjustment choices are more complicated because if you try to sell calls at a lower strike price than the long positions you hold, a maintenance requirement comes into play.  Here are the options you might consider when the stock has fallen:

1. Sell the highest-strike calendar spread and buy a new calendar spread at a lower strike price, again checking with the risk profile graph to see if you are comfortable with the new break-even range that will be created.  The calendar spread you are buying will most likely cost more than the calendar spread you are selling, so a small amount of new capital will be required to make this adjustment.
2. Sell a vertical call spread, buying the highest-strike short call and selling a lower-strike call in the same options series (weekly or monthly).  This will require a much greater additional investment.  Since the long call is at a higher strike price than the new lower-strike call you sell, there will be a $100 maintenance requirement per contract per dollar of difference between the strike price of the long and short calls.  This requirement is reduced by the amount of cash you collect from selling the vertical spread.
3. Sell a diagonal spread, buying the highest-strike short call and selling a lower-strike call at a further-out option series.  This will require putting in much less new money than selling a vertical spread.

Why I Like Calendar Spreads

Wednesday, October 21st, 2015

I have created a short video which explains why I like calendar spreads.  It also shows the exact positions we hold in 3 Terry’s Tips actual portfolios so you can get a better idea of how we use calendar spreads.

 

I hope you will enjoy the video, and I welcome your comments.

 

Terry

 

Why I Like Calendar Spreads

 

The basic reason I like calendar spreads (aka time spreads) is that they allow you to make extraordinary gains compared to owning the stock if you are lucky enough to trade in a stock that stays flat or moves moderately higher.

 

I get a real kick out of making serious gains when the stock just sits there and doesn’t do anything.  Calendar spreads almost always do extremely well when nothing much happens in the market.

 

While I call them calendar spreads, if you look at the actual positions that we hold in our portfolios, you will see that the long calls we own are not always at the same strike prices as the short calls we have sold to someone else.  That makes them diagonal spreads rather than calendar spreads, but they operate exactly the same as calendar spreads.

 

With both calendar and diagonal spreads, the long calls you own decay at a slower rate than the short calls that you have sold to someone else, and you benefit from the differences in decay rates.  Both spreads do best when the stock ends up precisely at the strike price of an expiring option.  At that point, the short options expire worthless and new options can be sold at a further-out time series at the maximum time premium of any option in that series.

 

If you have sold short options at a variety of strike prices you can make gains over a wider range of possible stock prices.  We use the analyze tab on the free thinkorswim software to select calendar and diagonal spreads which create a risk profile graph which provides a break-even range that lets us sleep at night and will yield a profit if the stock ends up within that range.  I encourage you to try that software and create your own risk profile for your favorite stock, and create a break-even range which you are comfortable with.

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.

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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.

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