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Posts Tagged ‘Facebook’

Calendar Spreads Tweak #2

Wednesday, September 7th, 2016

This week we will continue our discussion of a popular option spread – the calendar spread which is also called a time spread or horizontal spread. We will compare the expected costs and potential returns if you select different time periods for the long and short sides of the calendar spread.

Terry

Calendar Spreads Tweak #2

First, let’s look at a typical calendar spread on Facebook (FB). Today, the stock is trading just over $130, and you might buy an at-the-money calendar spread by placing this order:

Buy To Open 1 FB 16Dec16 130 call (FB161216C130)
Sell To Open 1 FB 14Oct16 130 call (FB161014C130) for a debit of $3.75 (buying a calendar)

This spread would cost about $3.75 ($375) to buy, plus $2.50 in commissions at the rate Terry’s Tips’ subscribers pay at thinkorswim, for a total of $377.50.

When the 14Oct16 call expires on October 14, 37 days from now, this is what the risk profile graph indicates the profit or loss would be at the various possible stock prices that might exist at that time:

 

Face Book Risk Profile #1 September 2016

Face Book Risk Profile #1 September 2016

Note that the break-even range extends from about $3.50 in both directions. The loss or gain when the short call expires on October 14th is indicated in the column on the lower right titled “P/L Day.” The maximum gain is precisely at the $130 price, and it is about $150 which would result in almost a 40% gain for the month.

When this calendar spread expires on October 14th, there will be 3 months of remaining life to the 16Dec16 call that you would hold. This call will always have some value that is greater than the 16Dec16 call that is expiring on that day, no matter where FB is trading at that time. This means you can’t lose the entire $377.50 that you have invested. The closer to $130 FB is at that time, the more valuable your 16Dec16 call will be in terms of remaining time premium.

Let’s check out what the situation might be if we went further out in time and bought a calendar spread that had both sides two months later. The difference between the long and short sides of the spread will remain at three months but you will have to wait three months rather than just one month to have the spread expire and you take your losses or gains. This would be the spread that you would buy:

Buy To Open 1 FB 17Mar17 130 call (FB170317C130)
Sell To Open 1 FB 16Dec16 130 call (FB161014C130) for a debit of $3.25 (buying a calendar)

This spread would cost about $3.25 ($325) to buy, plus $2.50 in commissions at the rate Terry’s Tips’ subscribers pay at thinkorswim, for a total of $327.50. (Buy the way, the regular commission on this spread at thinkorswim would be $7.80, and for this reason, many people choose to become Terry’s Tips subscribers because this low rate will extend to all the trades they make in their account, regardless of whether or not they are following one of our portfolios. The commission savings could be greater than the low monthly cost of being a subscriber).

When this spread expires on December 16th, this is what the risk profile graph would look like:

Face Book Risk Profile #2 September 2016

Face Book Risk Profile #2 September 2016

Note that the break-even range has more than doubled so that the stock can fluctuate about $8 in either direction before the spread starts losing money. Of course, you have to wait three months for December 16th to come around, and this gives the stock lots of time to make a big move in either direction. Again, the further it moves away from $130, the less money it makes. If the stock remains unchanged, and ends up at about $130 on that day in December, the expected gain is over $350, or more than 100% of the original cost of the calendar spread.

Presumably, you are trading calendars on a stock you believe is headed higher. If you believe that FB is likely to be trading about $5 higher three months from now, you might buy the same calendar at the 135 strike instead of the 130 strike. It would cost a little less, about $315, and this is what the risk profile graph looks like for December 16th:

Face Book Risk Profile #3 September 2016

Face Book Risk Profile #3 September 2016

If the stock stays flat, the spread will make about $150, or about 45% on your investment, but if it goes up $5 and ends up near $135, you could gain over $370, or well over 100% on your investment. The break-even range extends less than $5 to the downside and about $16 on the upside, so you will be rooting for FB to move higher over the three months.

The key point to selecting the strike price of calendar spreads is to make your best guess as to where the stock might be at the future date when the calls you have sold expire. If you are right, you could enjoy some extraordinary gains.

As usual, there are no easy ways to make sure gains in this world. You inevitably must make some sort of guess as to what the underlying stock will do. The neat thing about calendar spreads is that you don’t have to be precisely right. There is a fairly large range of possible stock prices withing which gains could come your way. The further out in time you go to select dates for a calendar spread, the greater the break-even range will be, and the maximum gain will always come if the stock ends up precisely at the strike price you select when you buy the spread.

As with all investments, you should only plunk down money that you can truly afford to lose. Option spreads can make excellent gains, but large movements in the stock price in either direction could cause losses with calendar spreads (unless you anticipated that direction and selected the right strike price at the outset).

Happy trading.

Update on Facebook Earnings Announcement Play

Monday, August 1st, 2016

Last week, Facebook (FB) announced earnings which were triple the year-earlier results and were 88% higher than analyst expectations, but the stock barely budged from where it was the day before the announcement. Option players could celebrate, however. The actual portfolio at Terry’s Tips where we trade FB options gained 45.8% for the week. We have a lot of happy subscribers who follow this portfolio either on their own or through the Auto-Trade service at thinkorswim.

As good as 45% for a single week might be, you could have done even better if you had followed a trade I told you about 2 ½ months ago. That is the story I would like to share with you today.

Happy trading.

Terry

Update on Facebook Earnings Announcement Play

On May 11, 2016, I told you about two trades I was making in my personal account. You can see the entire blog which explains my thinking on our blog page. Here they are:

Today, I bought these calendar spreads on FB when the stock was trading just about $120:

Buy To Open 2 FB 16Sep16 120 calls (FB160916C120)
Sell To Open 2 FB 15Jul16 120 calls (FB160715C120) for a debit of $3.26 (buying a calendar)

Buy To Open 2 FB 16Sep16 125 calls (FB160916C125)
Sell To Open 2 FB 15Jul16 125 calls (FB160715C125) for a debit of $3.11 (buying a calendar)

My total investment for these two spreads was $1274 plus $10 commission (at the rate charged to Terry’s Tips subscribers at thinkorswim), for a total of $1284.

When these short calls expired on July 15th, FB was trading at about $122.50, just about the perfect place for me since it was right in the middle of the two strike prices of my spreads. On that day, I bought back the expiring 120 calls and sold 29Jul16 120 calls and collected $2.50 (selling a calendar spread). I sold this series because it would expire just after the July 27 earnings announcement.

I also sold the same calendar spread at the 125 strike price and collected $2.35. The net effect of these two trades (I collected $960 after commissions) reduced my net investment from $1284 to $324.

After Wednesday’s announcement, FB soared to $130 in after-hours trading, but opened at $127.52, and by late Friday when my short options were about to expire, it had fallen to about $124. I then closed out my positions by buying back the 29Jul16 calls and selling the 16Sep16 calls I still owned, collecting $2.10 per contract for the 120 strike calls and $3.10 for the 125 strike calls. After commissions, this worked out to a total of $1030, so I netted a profit of $706 on an original investment of $1284. Bottom line, I made 55% on my original investment for the 10 weeks I traded FB options.

Over this same time period, investors who owned FB stock made $4 per share on their money. If they invested $1284 like I did, they could have bought only 10 shares for $120 per share. Their gains for the 10 weeks would have been $40. My option trading made 17 times more money than the stock buyers would have made. Once again, I don’t understand why people would waste their money buying stock when they could spend a little time studying how to trade options, and make a multiple of what they could make by the simple buying of stock.

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.

More Legging Into Pre-Announcement Calendar Option Spreads

Tuesday, May 3rd, 2016

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

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

Terry

More Legging Into Pre-Announcement Calendar Option Spreads

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

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

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

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

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

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

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

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

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

How to Play the Upcoming Facebook Earnings Announcement

Wednesday, April 20th, 2016

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

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

Terry

How to Play the Upcoming Facebook Earnings Announcement

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

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

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

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

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

Tuesday, April 12th, 2016

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

Terry

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How to Play the Facebook (FB) Earnings Announcement

Monday, April 4th, 2016

Facebook (FB) will announce earnings on April 27, and this presents an opportunity to make an investment similar to the one I suggested last week regarding Starbucks (SBUX). One of the SBUX trades has already resulted in a small profit and has a guaranteed additional profit which could be significant in two weeks when the post-announcement options expire. I hope you enjoy reading about the trades I made in FB this morning (and my reasoning behind them).

Terry

How to Play the Facebook (FB) Earnings Announcement

First of all, a quick update on the suggestion I made one week ago concerning the upcoming SBUX announcement on April 21st. At that time, with SBUX trading about $58.60, I suggested 3 different ways to play this announcement, all of which were based on the stock moving a bit higher in anticipation of that big day (a good deal of the time, stocks do move higher in advance of the earnings announcement day). All three trades have increased in value since last week because SBUX has indeed moved higher, and now trades about $60.50.

One of the suggestions involved legging into a May1-16 – Apr4-16 60 call calendar spread. This involved buying May1-16 60 calls outright with a plan to sell Apr4-16 60 calls if the stock moved higher or implied volatility (IV) of the Apr4-16 options rose (two things that frequently happen as the announcement date approaches).

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

I didn’t have to wait very long for the stock to move enough higher so that I could sell the Apr4-16 60 calls for more than I had paid for the May1-16 calls. On Tuesday, I completed the calendar spread at the 60 strike by selling Apr4-16 60 calls for $1.20 ($120 per contract less $1.25 commission). After commissions, I had gained $5.50 for each spread, and was guaranteed to make an additional gain once the Apr4-16 calls expired and I would presumably sell the calendar spread. Since the May1-16 calls have two weeks more of remaining life than the Apr4-16 calls, the spread will always have at least some value. The closer the stock is to $60, the greater the value of the spread. If I am lucky enough to see it end up at $60 on April 22, I could expect to collect about $80 for each spread (on top of the $5.50 I already have collected).

While there is something nice about holding something that already has a small gain locked in, and there is still hope for a decent gain in two weeks, in retrospect, I wish I had completed the calendar on only half my positions. The stock rose to $61 and at the end of the week I could have sold the Apr4 calls for $.20 more than I did. I expected the stock to move higher in the week going into the announcement but it moved higher earlier than that. It probably still has room to climb over the next two weeks, but now I am locked in to a smaller gain than I could have made by waiting.

We are faced with a similar situation with Facebook which announces on the 27th. The May2-16 options series which expires two weeks after this date carries an IV of 37 which compares to 40 for the Apr4 series which expires just after the announcement (it is always nice to sell options with a higher IV than those that you buy). As the 27th approaches, IV for the Apr5-16, May1-16, and May2-16 series may move even higher (i.e., the option prices will increase even if the stock price remains flat).

I like to buy calendar spreads at a strike which is a couple of dollars higher than the current stock price in anticipation of the stock moving higher in the weeks or days leading up to the announcement. Today, FB fell about $4 because Deutsche Bank analyst Ross Sandler cautioned that its Q1 numbers may come in shy of high expectations, allowing investors to add to positions below current levels. There was also some disquieting news about the company’s Oculus Rift virtual reality headset. Initial product reviews were tepid and there will be some delivery problems at first (possibly due to too many sets being ordered?). In any event, the stock traded down to about $112.25 when I placed the following orders this morning.

First, I bought May2-16 114 calls for $4.40 ($440 plus $1.25 per contract, or $441.25). I then placed a good-til-cancelled order to sell Apr5-16 114 calls for $4.50. If this order is executed sometime in the next couple of weeks, I will have all my money back plus a little (including commissions) and will wait until April 29 to see how big my profit will be (the closer to $114 that FB is, the greater will be my gain). It could be as high as $200 per contract (the expected value of a FB at-the-money call with two weeks of remaining life (and an IV of 27).

In addition to buying May2-16 calls with the intention of legging into a calendar spread, I made the following two trades this morning:

Buy To Open 10 FB May2-16 114 calls (FB160513C114)
Sell To Open 10 FB Apr5-16 114 calls (FN160429C114) for a debit of $.60 (buying a calendar)

Buy To Open 10 FB May2-16 114 puts (FB160513P114)
Sell To Open 10 FB Apr5-16 114 puts (FN160429P114) for a debit of $.55 (buying a calendar)

You might notice that these are identical calendar spreads except that one is with calls and the others with puts. One thing we have learned is that the strike price is what is important with calendar spreads, not whether puts or calls are used. The risk profile is identical with either puts or calls (even though this does not make much intuitive sense).

These calendar spreads have sold the options which expire just after the announcement and these options carry the highest IV of any option series (i.e., they are the most expensive of all option series). I like these spreads because they are so cheap, and you can’t lose the entire investment no matter what. The value of your long options will always be higher than the value of the options you have sold because they have two weeks of additional remaining life.

Assuming IV of the May2-16 options will fall to about 27 (from the current 37), an at-the-money two-week option would carry a premium of at least $2.00 (the CBOE option calculator comes up with a $2.40 price). This would about triple your money if you sold the spread at this price. There is a good chance that IV might not fall that far. It is 31 for the Apr4-16 series that expires just before announcement week, for example. So it might be possible to sell the at-the-money spread for more than $2.00.

My best guess is that the call calendar spread could be sold at a profit on April 29th if FB is at any price within $4 of $114, and the put calendar spread could be sold at a profit if FB is at any price within $5 of $114.

If there is a big move in the price of FB in the next couple of weeks, I would probably buy more of these same calendar spreads at different strike prices. This would increase my chances of having at least some spreads at a strike which is close to the stock price and where the greatest profit potential lies. If FB moves up to $116, for example, I might buy some calendars at the 118 strike to expand the range of possible stock prices that would give me a net profit. I figure if I triple my money on one spread I could lose everything (an impossibility) on the other spread and still come out ahead.

I will report back to you on how these trades end up, or if I add any more spreads at different strike prices. Most companies report earnings each quarter, and there will be lots of opportunities to use these trading ideas on other companies you might like.

How to make 45% with a Safe Bet on GM

Friday, March 11th, 2016

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

Terry

How to make 45% with a Safe Bet on GM

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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.

Check Out a Long-Term Bet on FaceBook (FB)

Wednesday, April 29th, 2015

In the family charitable trust I set up many years ago, I trade options to maximize the amounts I can give away each year.  In this portfolio, I prefer not to actively trade short-term options, but each year, I make selected bets on companies I feel good about and I expect they won’t tank in price over the long run.  Last week, I made such a bet on FaceBook (FB) that I would like to tell you about today.  The spread will make over 40% in the next 8 months even if the stock were to fall $5 over that time.Terry

Check Out a Long-Term Bet on FaceBook (FB)

When most people think about trading options, they are thinking short-term.  If they are buying calls in hopes that the stock will skyrocket, they usually by the cheapest call they can find.  These are the ones which return the greatest percentage gain if you are right and the stock manages to make a big upward move.  The cheapest calls are the shortest term ones, maybe with only a week of remaining life.  Of course, about 80% of the time, these options expire worthless and you lose your entire bet, but hopes of a windfall gain keep people playing the short-term option-buying game.

Other people (including me) prefer to sell these short-term options, using longer-term options as collateral.  Instead of buying stock and writing calls against it, longer-term options require far less capital and allow for a potentially higher return on investment if the stock stays flat or moves higher.  This kind of trading requires short-term thinking, and action, as well.  When the short-term options expire, they must be replaced by further-out short options, and if they are in the money, they must be bought back before they expire, allowing you to sell new ones in their place.

Most of the strategies we advocate at Terry’s Tips involve this kind of short-term thinking (and adjusting each week or month when options expire).  For this reason, many subscribers sign up for Auto-Trade at thinkorswim (it’s free) and have trades executed automatically for them, following one or more of our 10 actual portfolios.

Some portfolios make longer-term bets, and since they do not require active trading, they are not offered through Auto-Trade.  With these bets, you place the trade once and then just wait for time to expire.  If you are right, and the stock falls a little, stays flat, or goes up by any amount, the options you started with all expire worthless, and you end up with a nice gain without making a single extra trade.

In one of our Terry’s Tips demonstration portfolios, in January of this year, we placed long-term bets that AAPL, SPY, and GOOG would move higher during 2015, and when the January 2016 options expired, we would make a nice gain.  In fact, we knew precisely that we would make 91% on our investment for that one-year period.  At this point in time, all three of these stocks have done well and are ahead of where they need to be for us to make our 91% gain for the year.  We could close out these positions right now and take a 44% gain for the 3 months we have owned these options.  Many subscribers have done just that.

Let’s look at FaceBook and the long-term trade I just made in it.  I like the company (even though I don’t use their product).  They seem to have figured out how to monetize the extraordinary traffic they enjoy.  I looked at the chart for their 3 years of existence:

FaceBook FB Chart 2015

FaceBook FB Chart 2015

Note that while there have been times when the stock tanked temporarily, if you look at any eight-month period, there was never a stretch when it was lower at the end of 8 months than at the beginning.  Making a bet on the longer-term trend is often a much safer bet, especially when you pick a company you feel good about.

With the stock trading about $80, in my charitable trust, I made a bet that in 8 months, it would be trading at some price which was $75 or higher on the third Friday of December, 2015.  I make most of my donations in December, so like to be in cash at that time.

This is the trade I placed:

Buy to open FB Dec-15 70 puts (FB151219P70)
Sell to open FB Dec-15 75 puts (FB151219P75) for a credit of $1.52  (selling a vertical)

For every contract I sold, I collected $152 which immediately went into my account.  The puts I sold were at a higher strike than the puts I bought, so they commanded a higher price.  The broker placed a maintenance requirement on me of $5 ($500 per contract) which would be reduced by the $152 I collected.  This left me with a net investment of $348.  This would be my maximum loss if FB ended up below $70 on December 19, 2015.

A maintenance requirement is not like a margin loan.  No interest is charged.  It just means that I must leave $348 in cash in the account until the puts expire (or I close out the positions).  I can’t use this money to buy other options or stock.

If the stock ended up at $74 in December, I would have to buy back the 75 put I had sold for $1.  This would reduce my profit to $52 (less commissions of $3.75 – 3 commissions of $1.25  on the initial trades as well as the closing one).

If the stock ends up at any price above $75 (which I feel confident that it will), all my puts will expire worthless, the $348 maintenance requirement will disappear, and I get to keep the $152 (less $2.50 commission).  That works out to a 43% gain for the 8 months.

Where else can you find a return like this when the stock can fall by $5 and you still make the gain?  It is a bet that I don’t expect to lose any sleep over.

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.

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Success Stories

I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.

~ John Collins