from the desk of Dr. Terry F Allen

Skip navigation

Member Login  |  Contact Us  |  Sign Up

1-800-803-4595

Posts Tagged ‘ETF’

Halloween Special Expires at Midnight Tonight

Monday, October 31st, 2016

Halloween Special Expires at Midnight Tonight

I want to send you a copy of the October 29, 2016 Saturday Report, the weekly email sent to paying subscribers to Terry’s Tips.  This report details how our 13 actual portfolios perform each week.    Last week was a down one for the market (SPY lost 0.7%), and many of our portfolios experienced a similar loss.  Others did considerably better.

The portfolio based on Johnson and Johnson (JNJ) gained 25% while the stock rose 1.7%.  The portfolio based on Facebook (FB) gained 8.7% even though FB fell by 0.6% last week.  This portfolio was started with $6000 one year and three weeks ago, and is now worth $13,449, a gain of 124%.

One of our portfolios invests in companies which are about to announce earnings, and closes out the positions on the Friday after the announcement.  Last week, we closed out our spreads in Mastercard (MA) which had been put on only a week and a half earlier.  We enjoyed a gain of 34.3% (after commissions, as is the case for all of these portfolios).

Finally, we have a portfolio that is designed as protection against a market crash or correction.  While SPY fell only 0.6%, this bearish portfolio picked up 13.6% (admittedly, this was an unusually positive result which rarely occurs to this extent, but sometimes we are a little lucky).

Watching how these portfolios unfold over time in the Saturday Report is a wonderful (and easy) way to learn the intricacies of option trading.  You can get started today by coming on board at our half-off Halloween Special which expires at midnight tonight. I will personally send you the October 29th Saturday Report so you can start immediately.

Most of these portfolios employ what we call the 10K Strategy.  It involves selling short-term options on individual stocks and using longer-term (or LEAPS) as collateral.  It is sort of like writing calls, except that you don’t have to put up all that cash to buy 100 or 1000 shares of the stock.  The 10K Strategy is sort of like writing calls on steroids.  It is an amazingly simple strategy that really works with the one proviso that you select a stock that stays flat or moves higher over time.

Lowest Subscription Price Ever

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

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

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

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

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

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

Happy trading.

Terry

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

 

 

Halloween Special – Lowest Subscription Price Ever

Tuesday, October 18th, 2016

Halloween Special – Lowest Subscription Price Ever

Why must Halloween be only for the kids? You got them all dressed up in cute little costumes and trekked around the neighborhood in hopes of bringing home a full basket of cavity-inducing treats and smiles all around.

But how about a treat for yourself? You may soon have some big dental bills to pay. What if you wanted to learn how to dramatically improve your investment results? Don’t you deserve a little something to help make that possible?

What better Halloween treat for yourself than a subscription to Terry’s Tips at the lowest price ever? You will learn exactly how we have set up and carried out an options strategy that doubled the starting portfolio value (usually $5000) of five individual investment accounts which traded Costco (COST), Apple (AAPL), Nike (NKE), Starbucks (SBUX), and Johnson & Johnson (JNJ), including all commissions. These portfolios took between 7 and 17 months to double their starting value, and every single portfolio managed to accomplish that goal.

One year and one week ago, we set up another portfolio to trade Facebook (FB) options, this time starting with $6000. It has now gained over 97% in value. We expect that in the next week or two, it will surge above $12,000 and accomplish the same milestone that the other five portfolios did.

Many subscribers to Terry’s Tips have followed along with these portfolios since the beginning, having all their trades made for them through the Auto-Trade program at thinkorswim. Others have followed our trades on their own at another broker. Regardless of where they traded, they are all happy campers right now.

We have made these gains with what we call the 10K Strategy. It involves selling short-term options on individual stocks and using longer-term (or LEAPS) as collateral. It is sort of like writing calls, except that you don’t have to put up all that cash to buy 100 or 1000 shares of the stock. The 10K Strategy is sort of like writing calls on steroids. It is an amazingly simple strategy that really works with the one proviso that you select a stock that stays flat or moves higher over time.

How else in today’s investment world of near-zero dividend yields can you expect to make these kinds of returns? Find out exactly how to do it by buying yourself a Halloween treat for yourself and your family. They will love you for it.

Lowest Subscription Price Ever

As a Halloween 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 HWN16 (or HWN16P for Premium Service – $79.95).

If you are ready to commit for a longer time period, you can save even more with our half-price offer on our Premium service for an entire year. This special offer includes everything in our basic service, and in addition, real-time trade alerts and full access to all 9 of our current actual portfolios so that you can Auto-Trade or follow any or all of them. We have several levels of our Premium service, but this is the maximum level since it includes full access to all nine portfolios. A year’s subscription to this maximum level would cost $1080. With this half-price offer, the cost for a full year would be only $540. Use the Special Code MAX16P.

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

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

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

Happy trading.

Terry

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

 

Calendar Spreads Tweak #5 (Like Writing Calls on Steroids)

Thursday, October 6th, 2016

Lots of people like the idea of writing calls. They buy stock and then sell someone else the right to repurchase their shares (usually at a higher price) by selling a call against their shares. If the stock does not go up by the time that the call expires, they keep the proceeds from the sale of the call. It is sort of like a recurring dividend.

If writing calls appeals to you, today’s discussion of an option strategy is right up your alley. This strategy is like writing calls on steroids.

Terry

Calendar Spreads Tweak #5 (Like Writing Calls on Steroids)

When you set up a calendar spread, you buy an option (usually a call) which has a longer life than the same-strike call that you sell to someone else. Your expected profit comes from the well-known fact that the longer-term call decays at a lower rate than the shorter-term call you sell to someone else. As long as the stock does not fluctuate a whole lot, you are guaranteed to make a gain as time unfolds.

If you are dealing with a stock you think is headed higher, you might write an out-of-the-money call (where the strike price is higher than the current price of the stock). If you are right and the stock moves up to that strike price or above, you might lose your stock through exercise of the call, but you would be selling it at that higher price and also keeping the proceeds of your call sale.

With options, you can approximate this risk profile by buying a calendar spread at a strike which is higher than the current price of the stock. If the stock moves up to that strike price as you wait out the time for the call you sold to expire, the value of the call you own will rise and you will also keep the proceeds from the call you sold. Your long call will not go up as much as your stock would have gone up (perhaps only 60% or 70% as much), but this is a small concern considering that you have to put up such a small amount of money to buy the call compared to buying 100 shares of stock. Most of the time, you can expect that your return on investment with the calendar spread to be considerably greater than the return you would enjoy from writing calls against shares of stock.

The tweak we are discussing today concerns what you do when the call you have sold expires. On that (expiration) day, if the call is out of the money (at a strike which is higher than the price of the stock), it will expire worthless and you get to keep the money you originally sold the call for, just like it would be if you owned the stock and wrote a call against it. You would then be in a position where you could sell another call with a further-out expiration date and collect money for it, or sell your original call and no longer own a calendar spread.

If the call on expiration day is in the money (i.e., at a strike price which is lower than the price of the stock), the owner of that call will likely exercise his option and ask for your stock. However, right up until the last few minutes of trading on expiration day, there is usually a small time premium remaining in the call he or she owns, and it would be more profitable for him or her to sell the call on the market rather than exercising it.

As the owner of an in-the-money calendar spread on expiration day, you could merely sell the spread (buying back the call you originally sold and selling the call you bought), making the trade as a sale of a calendar spread. As an alternative, you could buy back the expiring call and sell another call which has a longer lifetime. This would be selling a calendar spread as well, but the date of the call you sold would probably be not as far out in the distance as the call you originally bought. At the end of the day, you would still own that original call and you would be short a call which has some remaining life before it expires.

You can see that this tweak is much like what you could do if you were in the business of writing calls. Another similarity is that you might want to sell a new call which is at a higher (or lower) strike. You could do this with either the call-writing strategy or the calendar-spread (call-writing on steroids) strategy. If you replace an expiring call with a new short call at a different strike price, you would be selling what is called a diagonal spread and you would end up owning a diagonal spread as well. A diagonal spread is exactly the same as a calendar spread except that the strike price of the long call you own is different from the call that you sold to someone else.

One limitation of the options strategy is that if you want to sell a lower-strike call than you originally did, your broker would charge you with a maintenance requirement of $100 for every dollar difference between the strike of your long call and the strike of the call you sold. There is no interest charged on this amount (like a margin loan would involve), but that amount is set aside in your account and can’t be used to buy other shares or options. If you sold a call at a strike which was $2 lower than the strike price of your long call (creating a maintenance requirement of $200), and you were able to sell that call for $2.50 ($250), you would collect more cash than the amount of the maintenance requirement, so you would still end up with more cash than what you started with before selling the new call.

This all may seem a little complicated, but once you do it a few times, it will seem quite simple and easy. And from my experience, profitable most of the time as well, far more profitable than writing calls against stock you own.

Happy trading.

Calendar Spreads Tweak #4

Wednesday, September 21st, 2016

Today I would like to discuss how you can use calendar spreads for a short-term strategy based around the date when a stock goes ex-dividend. I will tell you exactly how I used this strategy a week ago when SPY paid its quarterly dividend.

Terry

Calendar Spreads Tweak #4

Four times a year, SPY pays a dividend to owners of record on the third Friday of March, June, September, and December. The current dividend is about $1.09. Each of these events presents a unique opportunity to make some money by buying calendar spreads using puts to take advantage of the huge time premium in the puts in the days leading up to the dividend day.

Since the stock goes down by the amount of the dividend on the ex-dividend day, the option market prices the amount of the dividend into the option prices. Check out the situation for SPY on Wednesday, September 14, 2016, two days before an expected $1.09 dividend would be payable. At the time of these prices, SPY was trading just about $213.70.

Facebook Bid Ask Puts Calls Sept 2016

Facebook Bid Ask Puts Calls Sept 2016

Note that the close-to-the-money options at the 213.5 strike show a bid of $1.11 for calls and $1.84 for puts. The slightly out-of-the-money put options are trading for nearly double the prices for those same distance-out calls. The market has priced in the fact that the stock will fall by the amount of the dividend on the ex-dividend day. In this case, that day is Friday.

SPY closed at $215.28 on Thursday. Friday’s closing price was $213.37, which is $1.91 lower. However, the change for the day was indicated as -$.82. The difference ($1.09) was the size of the dividend.

On Wednesday and Thursday, I decided to sell some of those puts that had such large premiums in them to see if there might be some opportunity there. While SPY was trading in the $213 to $216 range, I bought put calendar spreads at the 214.5, 214, 213.5, and 213 strikes, buying 21Oct16 puts at the even-strike numbers and 19Oct16 puts for the strikes ending in .5 (only even-number strikes are offered in the regular Friday 21Oct16 options). Obviously, I sold the 16Sep16 puts in each calendar spread.

Note: On August 30th, the CBOE offered a new series of SPY options that expire on Wednesday rather than Friday. The obvious reason for this offering involves the dividend situation. Investors who write calls against their SPY stock are in a real bind when they sell calls that expire on an ex-dividend Friday. First, there is very little time premium in those calls. Second, there is a serious risk that the call will be exercised by the holder to take the stock and capture the dividend. If the owner of SPY sold the series that expired on Wednesday rather than Friday, the potential problem would be avoided.

I paid an average of $2.49 including commissions for the four calendar spreads and sold them on Friday for an average of $2.88 after commissions. I sold every spread for more money that it cost (including commissions). My net gain for the two days of trading was just over 15% after commissions.

The stock fell $.82 (after accounting for the $1.09 dividend). If it had gone up by that amount, I expect that my 15% gain would also have been there. It is unclear if the gains would have been there if SPY had made a big move, say $2 or more in either direction on Friday. My rough calculations showed that there would still be a profit, but it would be less than 15%. Single-day moves of more than $2 are a little unusual, however, so it might not be much to be concerned about.

Bottom line, I am delighted with the 15% gain, and will probably try it again in three months (at the December expiration). In this world of near-zero interest rates, many investors would be happy with 15% for an entire year. I collected mine in just two days.

Trading SPY options is particularly easy because of the extreme liquidity of those options. In most cases, I was able to get an execution at the mid-point price of the calendar spread bid-ask range. I never paid $.01 more or received more than $.01 less than the mid-point price when trading these calendar spreads.

While liquidity is not as great in most options markets, it might be interesting to try this same strategy with other dividend-payers such as JNJ where the dividend is also over $1.00. I regularly share these kinds of trading opportunities with Terry’s Tips Insiders so that they can follow along in their own accounts if they wish.

Happy trading.

All About, or at Least an Introduction to Calendar Spreads

Thursday, August 25th, 2016

This week I would like start an ongoing discussion about one of my favorite option plays. It is called a calendar spread. It is also known as a time spread or a horizontal spread. But most people call it a calendar because that’s where you focus much of your attention while you hold this kind of a spread. On a specific date on the calendar, you discover whether you made or lost money since you first bought the calendar spread. In the next few blogs, I will discuss all sorts of variations and permutations you can make with calendar spreads, but today, we will focus on a bare bones explanation of the basic spread investment.

Terry

All About, or at Least an Introduction to Calendar Spreads

A calendar spread consists of the simultaneous purchase of one option (either a put or a call) and the sale of another option (either a put or call), with both the purchase and the sale at the same strike price, and the life span of the option you bought is greater than the option you sold. You can trade either puts or calls in this kind of spread, but not both in the same spread. You have to choose to use either puts or calls, but as we will see at a later time, it doesn’t make a whole lot of difference which choice you make.

Some things that we all know about options: 1) they all have a limited life span, and 2) if the underlying stock does not change in price, all options fall in value every day. This is called decay. In option parlance, it is called theta. Theta is the amount that the option will decay in value in a single day if the underlying stock remains flat.

The basic appeal of a calendar spread is that the decay (or theta) of the option that has been sold is greater than the decay (or theta) of the stock that was bought. Every day that the stock remains flat, the value of the spread should become slightly greater. For this reason, most buyers of calendar spreads are hoping that the stock does not move in either direction very much (but we will see that is not always the case with all calendar spreads).

Here is a typical calendar spread purchase on Nike (NKE) on August 24, 2016 when NKE was trading just about $60:

Buy to Open 5 NKE 20Jan17 60 calls (NKE170120C60)
Sell to Open 5 NKE 23Sep16 60 calls (NKE160923C60) for a debit of $2.20 (buying a calendar)

The options that are being bought will expire on January 21, 2017 (about 5 months from now) and the options being sold will expire on September 23, 2016, one month from now. You don’t really care what the prices are for the calls you bought or the calls you sold, just as long as the difference between the two prices is $2.20 ($220 per spread, plus a commission of about $2.50 per spread). That’s how much money you will have to come up with to buy the spread. This spread order will cost $1100 plus $12.50 in commissions, or $1112.50.

The all-important date of this spread is September 23, 2016. That is the day on which the short options (the ones you sold) will expire. If the stock is trading on that day at any price below $60, the calls that you sold will expire worthless, and you will be the owner of 5 NKE 60 calls which have about 4 months of remaining life. If NKE is trading at exactly $60 on that day, those 20Jan17 60 calls will be worth about $3.05 and you could sell them for about $1525, netting yourself a profit of about $400 after commissions. That works out to a 35% gain for a single month, not a bad return at all, especially if you can manage to do it every month for the entire year (but now, we’re dreaming). That is, alas, the maximum you could make on the original spread, and that would come only if the stock were trading at exactly $60 on the day when the short calls expired.

Here is the risk profile graph which shows the loss or gain on the original spread at various prices where the stock might be trading on September 23rd:

2016 NKE Risk Profile Graph September Expiration

2016 NKE Risk Profile Graph September Expiration

In the lower right-hand corner under P/L Day, the profit or loss on the spread is listed for each possible stock price between $58 and $62. Those numbers should be compared to the investment of just over $1100. The graph shows the maximum gain takes place if the stock ends up right about $60, and about half that gain would result if the stock has moved a dollar higher or lower from $60. If it rises or falls by $2, a loss would result, but this loss would be much lower than the potential gains if the stock fluctuated by less than $2. If the stock moves by a much greater amount than $2, even greater losses would occur.

One good thing about calendar spreads is that the value of the options you bought will always be greater than the ones you sold, so you can never lose the entire amount of money you invested when you bought the spread. If you just buy a call option with the hopes that the stock will rise, or buy a put option with hopes that the stock will fall, you risk losing 100% of your investment if you are wrong. Even worse, in most cases, you would lose the entire investment if the stock stays flat rather than moving in the direction you were hoping.

With calendar spreads, you should never lose everything that you invested and you don’t have to be exactly right about the direction the stock needs to move. There is a range of possible prices where your spread will be profitable, and if you enter your proposed spread in a software program like the (free) Analyze Tab at thinkorswim, you can tell in advance what the break-even range will be for your investment.

There are ways that you can expand the break-even range so that a greater stock price fluctuation could be tolerated, and that will be the subject of our next blog.

Historical Performance of 10K Strategy Stock-Based Portfolios

Monday, August 8th, 2016

This week I would like to outline the basic stock option strategy we use at Terry’s Tips where we have created eight portfolios each of which is traded in an actual separate account and is available for Auto-Trade at TDAmeritrade/thinkorswim. Terry’s Tips subscribers can have every trade in these portfolios placed automatically for them in their own thinkorswim accounts through their free Auto-Trade service.

Enjoy the full report.

Terry

Historical Performance of 10K Strategy Stock-Based Portfolios: At Terry’s Tips, we call our options strategy the 10K Strategy. We like to think of it as shorter than a marathon but longer than a sprint. Most people who trade options seem to prefer sprints, i.e., short-term speedy wins (or losses). The basic underlying idea of our 10K Strategy is to do the opposite of what most options traders do. Instead of buying short-term calls in hopes of a quick windfall gain, we primarily sell those calls to option speculators. Since something like 80% of all options expire worthless, we like our odds of selling those options rather than buying them. We like to think that we are sort of in the business of selling lottery tickets.

We buy longer-term options to use as collateral for selling short-term options. All options go down in value every day that the underlying stock remains unchanged. This daily decay in value is called theta in options parlance. Theta for short-term options is much greater than theta for longer-term options at the same strike price, and this difference in decay rates is what makes our strategy a successful one (most of the time).

At Terry’s Tips, we currently have 4 stock-based portfolios. Other portfolios are based on Exchange Traded Products (ETPs). ETPs include Exchange Trade Funds (ETFs) such as the S&P 500 tracking stock (SPY or the Dow Jones Industrial Average tracking stock (DIA), and Exchange Traded Notes (ETNs) such as volatility-based XIV, SVXY, VXX, and UVXY. We also have a portfolio based on options of USO where we are betting that the long term price of oil will be higher than it is today.

Three out of 4 of our stock-based portfolios have doubled in value at some point in their lifetime, and the 4th, Foxy Facebook is up 71% since we started it 10 months ago. The prospects look excellent for it to double before its first year has been completed. The record:

2016 HIstorical 10K Portfolios

2016 HIstorical 10K Portfolios

In a world of record low interest rates and anemic investment returns for most equities (even hedge funds lost money in 2015), these results offer a strong vindication of the 10K Strategy. Admittedly, NKE has tumbled steadily over the past 8 months and much of the gains have been eroded away, but a basic assumption of the strategy is that you select underlying stocks which you think will remain flat or rise over time. If you are wrong and the stock doesn’t do one of those things, you should expect to lose money on that investment. So far, we have been fortunate enough to pick winners.

I invite you to become a subscriber to Terry’s Tips so that you can learn the important details of carrying out the 10K Strategy on your favorite stock (assuming that options are available for it). If you are lucky enough to pick a winner, you would have an excellent chance to make many times as much as you would make just buying the stock. It doesn’t have to go up to be a winner – just remaining flat is almost always profitable with this strategy.

Many years ago, someone wrote a book that I bought – it was entitled “Happiness is a Stock That Doubles in a Year.” If you can find a stock that will stay flat or move higher, you might very well enjoy this kind of happiness once you learn how to execute the 10K Strategy.

As with all investments, you should only use money that you can truly afford to lose. Options are leveraged investments, and unless you totally understand the risks, you can easily and quickly lose more money than you could with the equivalent investment in the purchase of stock. I think it is worth a little work to educate yourself about the risks (and potential rewards) of trading options.

List of Options Which Trade After Hours (Until 4:15)

Tuesday, May 31st, 2016

Some time ago, I noticed that the value of some of our portfolios was changing after the market for the underlying stock had closed. Clearly, the value of the options was changing after the 4:00 EST close of trading. I did a Google search to find a list of options that traded after hours, and came up pretty empty. But now I have found the list, and will share it with you just in case you want to play for an extra 15 minutes after the close of trading each day.

Terry

List of Options Which Trade After Hours (Until 4:15)

Since option values are derived from the price of the underlying stock or ETP (Exchange Traded Product), once the underlying stops trading, there should be no reason for options to continue trading. However, more and more underlyings are now being traded in after-hours, and for a very few, the options continue trading as well, at least until 4:15 EST.

Options for the following symbols trade an extra 15 minutes after the close of trading – DBA, DBB, DBC, DBO, DIA, EFA, EEM, GAZ, IWM, IWN, IWO, IWV, JJC, KBE, KRE, MDY, MLPN, MOO, NDX, OEF, OIL, QQQ, SLX, SPY, SVXY, UNG, UUP, UVXY, VIIX, VIXY, VXX, VXZ, XHB, XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY, XME, XRT.

Most of these symbols are (often erroneously) called ETFs (Exchange Traded Funds). While many are ETFs, many are not – the popular volatility-related market-crash-protection vehicle – VXX is actually an ETN (Exchange Traded Note). A better way of referring to this list is to call them Exchange Traded Products (ETPs).

Caution should be used when trading in these options after 4:00. From my experience, many market makers exit the floor exactly at 4:00 (volume is generally low after that time and not always worth hanging around). Consequently, the bid-ask ranges of options tend to expand considerably. This means that you are less likely to be able to get decent prices when you trade after 4:00. Sometimes it might be necessary, however, if you feel you are more exposed to a gap opening the next day than you would like to be.

How To Protect Yourself Against a Market Crash With Options

Monday, May 23rd, 2016

Today’s idea is a little complicated, but it involves an important part of any prudent investment strategy. Market crashes do come along every once in a while, and we are eight years away from the last one in 2008. What will happen to your nest egg if it happens again this year?

Options can be a good form of market crash insurance, and it is possible to set up a strategy that might even make a small gain if the crash doesn’t come along. That possibility sets it apart from most forms of insurance which cost you out-of-pocket money if the calamity you insure against doesn’t occur.

Terry

How To Protect Yourself Against a Market Crash With Options

There are some strong indications that the old adage “Sell in May and Go Away” might be the appropriate move right now. Goldman Sachs has downgraded its outlook on equities to “neutral” over the next 12 months, saying there’s no particular reason to own them. “Until we see sustained signals of growth recovery, we do not feel comfortable taking equity risk, particularly as valuations are near peak levels,” the firm said in a research note.

For several months, Robert Shiller has been warning that the market is seriously overvalued by his unique method of measuring prices against long-term average p/e’s. George Soros is keeping the bears happy as well, doubling his wager against the S&P 500. The billionaire investor, who has been warning that the 2008 financial crisis could be repeated due to China’s economic slowdown, bought 2.1M-share “put” options in SPY during Q1. The magnitude of his bet against SPY is phenomenal, essentially 200 million shares short. Of course, he almost always deals in stratospheric numbers, but the size of this bet indicates that he feels pretty strongly about this one. He didn’t become a billionaire by being on the wrong side of market bets.

So what can you do to protect yourself against a big tumble in the market? We are setting up a bearish portfolio for Terry’s Tips subscribers, and this is what it will look like. It is based on the well-known fact that when the market crashes, volatility soars, and when volatility soars, the Exchange Traded Product (ETP) called VXX soars along with it.

Some people buy VXX as market crash insurance (or its steroid-like cousin, UVXY). Over the long run, VXX has been a horrible investment, however, possibly the worst thing you could have done with your money over the past six years. It has fallen from a split-adjusted $4000 to its present price of about $15. It has engineered 1-for-4 reverse splits three times to make the price worth bothering to trade. The split usually occurs when it gets down to about $12, so you can expect another reverse split soon.
An option strategy can be set up that allows you to own the equivalent of VXX while not subjecting you to the long-run inevitable downward trend. When volatility does pick up, VXX soars. In fact, it doubled once and went up 50% another time, both temporarily, in the last year alone. While it is a bad long-term investment, if your timing is right, you might pick up a windfall. Our options strategy is designed to achieve the potential upside windfall while avoiding the long-term prospects you face by merely buying the ETP.

Our new portfolio will buy VXX 20Jan17 15 calls and sell fewer contracts in short-term calls. Sufficient short-term premium will be collected from selling the short term calls to cover the decay on the long calls (and a little bit more).

This portfolio will start with $3000. The entire amount will not be used at the outset, but rather be held in cash in case it might be needed to cover a maintenance call in case the market moves higher.

These might be the starting positions:

BTO 3 VXX 20Jan17 15 calls (VXX170120C15)
STO 3 VXX 17Jun16 15 calls (VXX160617C15) for a debit of $2.40 (buying a diagonal)

BTO 3 VXX 20Jan17 15 calls (VXX170120C15)
STO 3 VXX 24Jun16 16 calls (VXX160624C16) for a debit of $2.45 (buying a diagonal)

BTO 4 VXX 20Jan17 16 calls (VXX170120C16) for $3.30

Here is what the risk profile graph looks like with those positions as of June 18th after the short calls expire:
VXX Better Bear Risk Profile Graph May 2016

VXX Better Bear Risk Profile Graph May 2016
You can see that the portfolio will make gains no matter how high VXX might go. It will make a small gain (about 8% for the month) if the stock stays flat, and starts losing if VXX moves below $14.50. If it falls that far, we might sell call or two at the 14 strike and incur a maintenance requirement which would be partially offset by the amount we collected from selling the call(s). A trade like this would reduce or eliminate a loss if the ETP continues to fall, and it might have to be repeated if VXX continues even lower. At some point, some long calls might need to be rolled down to a lower strike to eliminate maintenance requirements that come along when you sell a call at a lower strike than the long call that covers it.

The above positions could be put on for about $2800. There would be about $200 in cash remaining for the possible maintenance requirement in case one might be necessary.

You probably should not attempt to set up and carry out this strategy unless you are familiar with options trading as it is admittedly a little complicated. A better idea might be to become a Terry’s Tips Insider and open an account at thinkorswim so that these trades could automatically be made for you through their Auto-Trade program.

Every investment portfolio should have a little downside insurance protection. We believe that options offer the best form for that kind of insurance because it might be possible to make a profit at the same time as providing market crash insurance.

As with all forms of investing, you should not be committing money that you truly cannot afford to lose.

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 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.

 

Making 36%

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

This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).

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.

Order Now

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