from the desk of Dr. Terry F Allen

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Posts Tagged ‘implied volatility’

40% Possible in 2 Weeks With an Iron Condor?

Monday, April 17th, 2017

Today’s idea involves an esoteric Exchange Traded Product (ETP) called SVXY.  It is one of our favorite underlyings at Terry’s Tips.  Chances are, you don’t know very much about it, and I can’t help you much in this short note.  But I will share a trade I made on this ETP this morning, and my thinking behind this trade.

Terry

40% Possible in 2 Weeks With an Iron Condor?

The best way to explain how SVXY works might be to explain that it is the inverse of VXX, the ETP that some people buy when they fear that the market is about to crash.  Many articles have been published extolling the virtues of VXX as the ideal protection against a setback in the market.  When the market falls, volatility (VIX) most always rises, and when VIX rises, VXX almost always does as well.  It is not uncommon for VXX to double in value in a very short time when the market corrects.

The only problem with VXX is that in the long run, it is just about the worst equity that you could imagine buying.  Over the last 5 years, it has fallen from a split-adjusted several thousand dollar price to today’s $18 level.  About every year and a half, a reverse 1-for-4 reverse split must be engineered on VXX to keep the price high enough to bother with buying.  The last time this happened was in August 2016.  It pushed the price up from just over $9 to about $40, and it has lost over half its value since then.

Clearly, you would only buy VXX if you felt strongly that the market was about to implode.  Most of the time, we prefer to own the inverse of VXX.  That is SVXY.  So far, it has gone from $90 to over $140 in 2017, only to fall back to about $123 last week when geopolitical fears arose and depressed the market a bit, and even more significant for volatility-related ETPs like VXX and SVXY, volatility (VIX) rose from the 11 -13 range where it has hung out most of the time for the past few years to about 16 today.

When VIX rose and SVXY fell last week, something interesting happened. Implied volatility (IV) of the SVXY options skyrocketed to nearly double what it was a month ago.  I think that these high option prices will not exist for too long, and would like to sell some at this time.

Rather than selling either or both puts and calls naked (inviting the possibility of unlimited loss), a good way of selling high-IV options is through an iron condor spread.  I believe that SVXY, trading near the $123 where it opened this morning, is unlikely to be higher than $135 or lower than $95 in 11 days when the 28April17 options expire.

This is the spread I executed this morning:

Buy to Open # 28Apr17 140 calls (SVXY170428C140)
Sell to Open # 28Apr17 135 calls (SVXY170428C135)
Buy to Open # 28Apr17 90 puts (SVXY170428P90)
Sell to Open # 28Apr17 95 puts (SVXY170428P95) for a credit of $1.63 (selling an iron condor)

I received $163 for each contract I sold, less $5 in commissions.  My maximum loss is $500 less the $158 net I received, or $342.  If SVXY ends up at any price between $95 and $135 on April 28, all of these options will expire worthless and I will be able to keep my $158.  This works out to a 46% gain for the 11 days of waiting.

As with any investment, you would only commit money that you can truly afford to lose.  I like my chances here, and I committed an amount that would not change my style of living if I lost it.

44% in 46 Days From a Play on ULTA?

Tuesday, April 4th, 2017

I would like to share a trade that we made in one of our Terry’s Tips portfolios today.  By the way, we have 9 portfolios that we carry out for paying subscribers where they can see every trade (including commissions) as we make them. All of these portfolios have made positive gains so far in 2017, and the composite average has picked up 28.8% at the end of the first quarter.  Not bad compared to conventional investment results.

Enjoy today’s offering.

Terry

44% in 46 Days From a Play on ULTA?

There is a lot to like about Ulta Salon, Cosmetics & Fragrance’s (ULTA).  It has been a darling of Wall Street this year, rising about 50%.  It appears on IBD’s Top 50 list of momentum stocks.  The Motley Fool guys have written over 300 articles on the company and include it in their top three beauty stocks.  The company has a plan to add on 500 new stores, and they have exceeded earnings estimates every quarter for the past year.

The chart for the last year shows a steady climb upward, but there have been some setbacks along the way:

 

ULTA Chart April 2017

ULTA Chart April 2017

If you think the momentum might continue for about six more weeks, you might consider this trade we made on April 3rd when ULTA was trading about $285.

Buy To Open 4 ULTA 19May17 275 puts (ULTA170519P275)

Sell To Open 4 ULTA 19May17 280 puts (ULTA170519P280) for a credit limit of $1.55  (selling a vertical)

We collected $620 from this trade, less commissions of $10 at the rate Terry’s Tips  subscribers pay at thinkorswim.  A maintenance requirement of $2000 will be assessed by the broker, less the $610 net we collected, making it a $1390 investment.  This would be the maximum loss if the stock ended up below $275 on May 19th.  If it is at any price above $280 on that day, it works out to a 44% gain for the 46 days we will have to wait.

The stock can fall about $5 and we will still make the maximum gain. While this might not be much downside protection, it is surely a lot better deal than owning the stock where even a dollar drop in the stock will result in a loss for the period.

If the stock does fall below $280 near the end of the six-week period, we would probably roll out the spread to a future time period, a tactic that will give us a little more time for it to rise above $280.  If that becomes necessary, we will send you a note explaining the action we took.

As with any investment, you should do your own research on the fundamentals of any stock or options you buy, and you should only be risking money that you can truly afford to lose.

Happy trading.

Terry

How to Make 27% in 45 Days With a Bet on Tesla

Sunday, March 5th, 2017

The 9 actual portfolios carried out by Terry’s Tips are having a great 2017 so far.  Their composite value has increased 23.8% for the year, about 4 times as great as the overall market (SPY) has advanced.

The basic strategy employed by most of these portfolios is to bet on what the company won’t do rather than what it will do. Most of the time, that involves picking a blue chip company that you really like, especially one paying a large dividend, and betting that it won’t fall by very much.  You don’t care if it goes up or stays flat.  You just don’t want it to fall more than a few points while you hold your option positions.

Today, I would like to offer a different kind of a bet based on what a popular company might not do.  The company is Tesla (TSLA), and what we think it will not do is to move much higher than it is right now, at least for the next few months.

Terry

 How to Make 27% in 45 Days With a Bet on Tesla

Tesla is a company which has thousands of passionate supporters.  They have bid up the price of a company with fabulous ideas but no earnings to near all-time highs.  If you peruse some of the multiple articles recently written about the company, you can’t help but wonder how the current lofty price can be maintained.

Here are some of the things that are being said:

It’s possible that the Model 3 could bury Tesla in several ways, including:

  • It being substantially late.
  • It not being profitable at the low price it was promised, and thus require a much higher selling price.
  • A much higher selling price or emerging competition leading to much lower than expected volumes.

Tesla will need to spend about $8 billion in its network of charging stations in the U.S. alone if it wants to make recharging a car as convenient as going to a gas station.

Tesla’s acquisition of SolarCity was really a bailout. SolarCity was in deep financial trouble. It could have gone bankrupt, and will need a huge infusion of capital to survive.

The company has historically issued overly optimistic projections, and the recent exodus of its CFO is evidence that some executives are rebelling.

More and more traditional car companies are coming out with all-electric models that will compete directly with Tesla.

China represented 15.6% of its automotive sales during 2016. China’s market is weakening during early 2017 due to tax changes. Hong Kong will be crashing due to the elimination of a tax waiver which will nearly double the price of a Model S.

Goldman Sachs recently downgraded the stock and said it expected it would fall by 25% over the next six months.

Tesla has a market cap of $40 billion on revenue of around $7 billion, while General Motors (G) has a market cap of $55 million on revenue of $166 billion. Ford (F) has similar multiples, and Toyota (TM), despite significant topline growth, still has a P/S ratio of only 0.49. These numbers make Tesla look astronomically overvalued and are the reason TSLA is a magnet for short sellers.

TSLA will probably need $35 billion over the next 9 years to support its planned ramping up of manufacturing.  This will require additional stock sales which could dampen prices.

And there are many others out there making other dire predictions…

So what do you do if these writers have collectively convinced you that TSLA is overvalued?  One thing you could conclude is that the stock will not move much higher from here.

Here is a possible trade you might consider:

With TSLA trading about $252, you might believe that it is highly unlikely to move higher than $270 in the next 7 weeks.  This is a trade you might consider:

Buy To Open # TSLA 21Apr17 275 calls (TSLA170421C275)
Sell To Open # TSLA 21Apr17 270 calls (TSLA170421C270) for a credit of $1.10  (selling a vertical)

This spread is called a vertical call credit spread.  We prefer using calls rather than puts if you are bearish on the stock because if you are right, and the stock is trading below the strike price of the calls you sold on expiration day, both call options will expire worthless and no further trades need to be made or commissions payable.

For each contract sold, you would receive $110 less commissions of $2.50 (the rate Terry’s Tips’ subscribers pay at thinkorswim), or $107.50.  The broker will place a $500 maintenance requirement on you per spread.  Subtracting out the $107.50 you received, your net investment is $392.50 per spread.  This is also the maximum loss you would incur if TSLA closes above $275 April 21, 2017 (unless you rolled the spread over to a future month near the expiration date, something we often do, usually at a credit, if the stock has gained a bit since the original trade was placed).

Making a gain of $107.50 on an investment of $392.50 works out to a 27% for the 7 weeks you will have to wait it out.  That works out to over 200% annualized, and you can be wrong (i.e., the stock rises) by $18 and still make this gain.

If you were REALLY convinced that TSLA wouldn’t move higher in the next 7 weeks, you might consider selling this spread:

Buy To Open # TSLA 21Apr17 255 calls (TSLA170421C255)
Sell To Open # TSLA 21Apr17 260 calls (TSLA170421C260) for a credit of $2.00  (selling a vertical)

This spread does not allow the stock to move up much at all (about $3) for the maximum gain to come your way, but if you are right and the stock ends up at any price below $255 on April 21, you would gain a whopping 67% in the next 7 weeks.

As with all investments, option trades should only be made with money that you can truly afford to lose.

Happy trading.

Terry

How to Make 50% in 5 Months With Options on Celgene

Thursday, March 2nd, 2017

One of my favorite option plays is to pick a company I like (or one that several people I respect like) and place a bet that it will at least stay flat for the next few months. Actually, most of the time, I can find a spread that will make a great gain even if the stock falls by a few dollars while I hold the spread.

Today, I would like to share an investment we placed in a Terry’s Tips portfolio just yesterday. By the way, this portfolio has similar spreads in four other companies we like, and it has gained over 20% in the first two months of 2017. We have already closed out two spreads early and reinvested the cash in new plays. The portfolio is on target to make over 100% for the year (and it is available for Auto-Trade at thinkorswim for anyone not interested in placing the trades themselves).

Terry

How to Make 50% in 5 Months With Options on Celgene

Not only is CELG on many analysts’ “Top Picks for 2017” list, but several recent Seeking Alpha contributors have extolled the company’s business and future. One article said “Few large-cap biotech concerns have a clearer earnings and revenue growth trajectory over the next 3-5 years than Celgene.”

Zacks said, “We are expecting an above average return from the stock in the next few months.” See full article here.

So we like the company’s prospects, and this is the spread we sold yesterday when CELG was trading at $123.65:

Buy To Open # CELG 21Jul17 115 puts (CELG170721P115)
Sell To Open # CELG 21Jul17 120 puts (CELG170721P120) for a credit limit of $1.72 (selling a vertical)

For each contract sold, we received $172 less commissions of $2.50 (the rate Terry’s Tips’ subscribers pay at thinkorswim), or $169.50. The broker will place a $500 maintenance requirement on us per spread. Subtracting out the $169.50 we received, our net investment is $330.50 per spread. This is also the maximum loss we would incur if CELG closes below $115 on July 21, 2017 (unless we rolled the spread over to a future month near the expiration date, something we often do, usually at a credit, if the stock has fallen a bit since we placed the original trade).

Making a gain of $169.50 on an investment of $330.50 works out to a 51% for the five months we will have to wait it out. That works out to over 100% a year, and the stock doesn’t have to go up a penny to make that amount. In fact, it can fall by $3.65 and we will still make 51% on our money after commissions.

If the stock is trading below $120 as we near expiration in July, we might roll the spread out to a future month, hopefully at a credit. If this possibility arises (of course, we hope it won’t), we will send out a blog describing what we did as soon as we can, just in case you want to follow along.

This spread is called a vertical put credit spread. We prefer using puts rather than calls even though we are bullish on the stock because if we are right, and the stock is trading above the strike price of the puts we sold on expiration day, both put options will expire worthless and no further commissions will be due.

As with all investments, option trades should only be made with money that you can truly afford to lose.

Happy trading.

Terry

Using Investors Business Daily to Create an Options Strategy

Monday, February 20th, 2017

Today I would like to share an idea that we are using in one of our Terry’s Tips’  portfolios.  We started this portfolio on January 4, 2017, and in its first six weeks, the portfolio has gained 30% after commissions.  That works out to about 250% for the whole year if we can maintain that average gain (we probably can’t keep it up, but it sure is a good start, and a positive endorsement for the basic idea).

Terry

 Using Investors Business Daily to Create an Options Strategy

 IBD publishes a list which it calls its Top 50. It consists of companies which have a positive momentum.  Our idea is to check this list for companies that we particularly like for fundamental reasons besides the momentum factor.  Once we have picked a few favorites, we make a bet using options that will make a nice gain if the stock stays at least flat for the next 45 – 60 days.  In most cases, the stock can actually fall a little bit and we will still make our maximum gain.

The first 4 companies we selected from IBD’s Top50 list were Nvidia (NVDA), Goldman Sachs (GS), IDCC (IDCC), and HealthEquity (HQY).  For each of these companies, we sold a vertical put credit spread which involves selling a put at a strike just below the current stock price and buying a put which is usually $5 lower.  When expiration day comes along, we hope the stock will be trading at some price higher than the strike of the puts we sold so that both our long and short puts will expire worthless, and we will be able to keep the cash we collected when we made the sale.

Let’s look at one of the four spreads we placed at the beginning of the year. It involves NVDA, and the options expire this Friday.  You can’t sell this spread for this price today, but you could have back on January 4.

With NVDA trading at $99, we placed this trade:

Buy to Open 2 NVDA 17Feb17 95 puts (NVDA170217P95)

Sell to Open 2 NVDA 17Feb17 100 puts (NVDA170217P100) for a credit of $2.00

$400 was placed in our account, less $5 in commissions, or $395.  The broker placed a $500 per contract maintenance requirement on the trade ($1000).  There is no interest charged on this amount (like there would be on a margin loan), but it is just money that needs to be set aside and can’t be used to buy other stock or options).   Subtracting the cash we received from the requirement yields our net investment of $605.  This would be our maximum loss if the stock were to fall below $95 when the options expired on February 17, 2017.

NVDA is trading today at $108.50.  It looks pretty likely to be above $100 on Friday.  If it does, we will not have to make a closing trade, and both options will expire worthless.  We will be able to keep the $395 that we collected six weeks ago, and that represents a  65% gain on our investment over 6 weeks (390% annualized).  Next Monday, we will go back to the IBD Top 50 list, pick another stock (or maybe NVDA once again – it is their #1 pick), and place a similar trade for an options series that expires about 45 days from then.

We have four stocks in this portfolio, and each week, we sell a new similar spread once we have picked a stock from the Top 50 list.  So far, it has been a very profitable strategy.

As with all investments, these kinds of trade should only be made with money that you can afford to lose.

Happy trading.

Terry

An Update on Our Last Trade and a New One on AAPL

Sunday, February 5th, 2017

About a month ago, I suggested an options spread on Aetna (AET) that made a profit of 23% after commissions in two weeks. It worked out as we had hoped. Then, two weeks ago, I suggested another play on AET which would make 40% in two weeks (ending last Friday) if AET ended up at any price between $113 and $131. The stock ended up at $122.50 on Friday, and those of us who made this trade are celebrating out 40% victory. (See the last blog post for the details on this trade.)

Today, I am suggesting a similar trade on Apple (AAPL). It offers a lower potential gain, but the stock can fall in price by about $9 and the gain will still come your way.

Terry

An Update on Our Last Trade and a New One on AAPL

This trade on APPL will only yield about 30% after commissions, and you have to wait six months to get it, but the stock can fall over $8 during that time, and you would still make your 30%. Annualized, 30% every six months works out to 60% for the year. Where else are you going to find that kind of return on your investment dollars even if the stock goes down?

This is an actual trade we made today in one of our Terry’s Tips’ portfolios last Friday. It replaced an earlier trade we made on AAPL which gained over 20% in less than a month. We closed it out early because we had made nearly 90% of the possible maximum gain, and clearing up the maintenance requirement allowed us to make the following trade with AAPL trading about $129:

Buy To Open 3 AAPL 21Jul17 115 put (AAPL170721P115)
Sell To Open 3 AAPL 21Jul17 120 put (AAPL170721P120) for a credit of $1.17 (selling a vertical)

This is called a vertical put credit spread. $117 per spread less $2.50 commissions, or $114.50 x 3 = $343.50 was put into our account. The broker charges a maintenance requirement of $500 per spread, or $1500. Subtracting out the $343.50 we received from $1500 makes our net investment $1156.50..

If AAPL is trading at any price above $120 on July 21, 2017, both of the puts will expire worthless, and we will be able to keep the $343.50 we were paid on Friday. In this case, no commissions will be charged on the closing end of the trade. You don’t have to do anything except wait for the big day to come.

If AAPL is trading at any price below $120 on July 21, you will have to buy back the 120 put for $100 for every dollar it ends up below $120. If this happens in our Terry’s Tips portfolio, we will probably roll the spread out to a further-out month, hopefully at a credit.
This trade is most appropriate for people who believe in AAPL, and feel confident that if it does fall a little, it will end up being less than $9 lower in 6 months. We like our chances here.

As with all investments, this trade should only be made with money that you can afford to lose.

Happy trading.

Terry

Another Interesting Short-Term Play on Aetna (AET)

Friday, January 20th, 2017

your investment if AET doesn’t move up or down by more than $9 in the next two weeks.

Terry

 Another Interesting Short-Term Play on Aetna (AET)

 This week, once again we are looking at Aetna (AET), a health care benefits company.  If you check out its chart, you can see that it does not historically make big moves in either direction, especially down:

AET Aetna Chart 2 January 2017

AET Aetna Chart 2 January 2017

In spite of this lack of volatility, for some reason, IV of the short-term options is extremely high, 44 for the series that expires in 10 days.  The company is trying to purchase Humana, and the justice department may have some objections, and there seems to be concerns how insurance companies will fare under the Trump administration, two factors which may help explain the high IV. Neither of the possible adverse outcomes are likely to occur in the next 14 days, at least in my opinion.

AET is trading at $122 as I write this.  I think it is highly unlikely that it will fall below $113 in 14 days or above $131 when the 3Feb17 options expire.  Here is a trade I made today:

Buy to Open 10 AET 03Feb17 108 puts (AET170317P108)

Sell to Open 10 AET 03Feb17 113 puts (AET170317P113)
Buy to Open 10 AET 03Feb17 136 calls (AET170317C136)

Sell to Open 10 AET 03Feb17 131 calls (AET170317C131) for a credit of $1.48 (selling an iron condor)

There are 4 commissions involved in this trade ($1.25 each at the rate charged by thinkorswim for Terry’s Tips subscribers), so the $1480 I collected from the above trade, I paid $50 in commisisons and netted $1430.  The spread will create a maintenance requirement of $5000 less the $1430 so that my investment (and maximum loss if AET closes below $109 or above $136) is $3570.

If AET closes in two weeks at any price higher than $113 and lower than $131, all these options will expire worthless and there will be nothing more for me to do that decide how I want to spend my 40% gain.

Of course, you could only do one of these spreads if you did not want to commit the entire $3570.

If AET moves quite close to either of these prices, I will send out another note explaining how I intend to cope with a possible loss.  I hope and expect I will not have to do that.  It is only 14 days to wait.

How to Make 30% on 5 Blue-Chip Companies in 2017 Even if They Fall by 10%

Tuesday, January 3rd, 2017

Today, we set up a new portfolio at Terry’s Tips  that I would like to tell you about.  It is our most conservative of 9 portfolios.  It consists of selecting 5 blue-chip companies which pay a dividend between 2% and 3.6% and which appear on at least two top analysts’ “top 10” lists for 2017.  This portfolio is designed to gain 30% for the year, and we can know in advance exactly what each of the 5 spreads will make in advance.  For most of these companies, they can fall by 10% over the course of the year and we will still make our 30% gain.

We are also repeating our best-ever offer to come on board before January 11 rolls around.

Terry

How to Make 30% on 5 Blue-Chip Companies in 2017 Even if They Fall by 10%

The spreads we are talking about are vertical put credit spreads.  Once you have found a company you like, you select a strike price which is about 10% below the current price of the stock, and you sell long-term puts (we used options expiring on January 19, 2018) at that strike price while buying the same series puts at a lower strike price.

One of the stocks we picked was Cisco (CSCO).   Here is an example of one of the spreads we placed today.  CSCO yields 3.6% which provides a nice base and support level for the stock.  It is trading just over $30, down a little from almost $32 a couple of months ago.  Our spread will make 30% in one year if CSCO manages to be any higher than $27 when the options expire a year from now.

Here is the exact spread we placed today:

Buy To Open 3 CSCO 19Jan18 23 puts (CSCO180119P23)

Sell To Open 3 CSCO 19Jan18 27 puts (CSCO180119P27) for a credit limit of $.96  (selling a vertical)

We received $96 less $2.50 commissions, or $93.50 per spread, or $280.50 placed in our account for the 3 spreads.  There will be a $400 maintenance requirement per spread ($1200 total) less the $280.50 we received, making our investment $919.50.  If CSCO closes at any price higher than $27 a little over a year from now, on January 19, 2018, both options will expire worthless, and we will get to keep our $280.50.  This makes it a 30% return on our investment.

The actual returns on the other 4 companies we placed this kind of a spread on was actually greater than this amount.  Become a Terry’s Tips  subscriber and get to see every one of them, including other spreads which are a little more aggressive but which yield over 50% for the year and the stock does not have to go up a penny to achieve that return.

The New Year is upon us.  Start it out right by doing something really good for yourself, and your loved ones.

The beginning of the year is a traditional time for resolutions and goal-setting.  It is a perfect time to do some serious thinking about your financial future.

I believe that the best investment you can ever make is to invest in yourself, no matter what your financial situation might be.  Learning a stock option investment strategy is a low-cost way to do just that.

As our New Year’s gift to you, we are offering our service at the lowest price in the history of our company.   If you ever considered becoming a Terry’s Tips Insider, this would be the absolutely best time to do it.  Read on…

Don’t you owe it to yourself to learn a system that carries a very low risk and could gain over 100% in one year as our calendar spreads on Nike, Costco, Starbucks, and Johnson & Johnson have done in the last two years?  Or how our volatility-related portfolio gained 80% in 2016 with only two trades.

So what’s the investment?  I’m suggesting that you spend a small amount to get a copy of my 60-page (electronic) White Paper, and devote some serious early-2017 hours studying the material.

Here’s the Special Offer – If you make this investment in yourself by midnight, January 11, 2017, this is what happens:

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

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

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

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

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

With this one-time offer, you will receive all of these benefits for only $39.95, less than the price of the White Paper alone. I have never made an offer better than this in the fifteen years I have published Terry’s Tips.  But you must order by midnight on January 11, 2017. Click here, choose “White Paper with Insider Membership”, and enter Special Code 2017 (or 2017P for Premium Service – $79.95).

If you ever considered learning about the wonderful world of options, this is the time to do it.  Early in 2017, we will be raising our subscription fees for the first time in 15 years.  By coming on board now, you can lock in the old rates for as long as you continue as a subscriber.

Investing in yourself is the most responsible New Year’s Resolution you could make for 2017.  I feel confident that this offer could be the best investment you ever make in yourself.  And your family will love you for investing in yourself, and them as well.

Happy New Year!  I hope 2017 is your most prosperous ever.  I look forward to helping you get 2017 started right by sharing this valuable investment information with you.

Terry

If you have any questions about this offer or Terry’s Tips, please call Seth Allen, our Senior Vice President at 800-803-4595.  Or make this investment in yourself at the lowest price ever offered in our 15 years of publication – only $39.95 for our entire package -here using Special Code 2017 (or 2017P 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 MAX17P.

 

How to Make 40% a Year Betting on the Market, Even if it Doesn’t Go Up

Monday, December 19th, 2016

This is the time of the year when everyone is looking ahead to the New Year. The preponderance of economists and analysts who have published their thoughts about 2017 seem to believe that Trump’s first year in the oval office will be good for the economy and the market, but not great.

Today I would like to share an option trade I have made in my personal account which will earn me a 40% profit next year if these folks are correct in their prognostications.

 

Terry

How to Make 40% a Year Betting on the Market, Even if it Doesn’t Go Up

Since most people are pretty bad at picking stocks that will go higher (even though they almost universally believe otherwise), many advisors recommend the best way to invest your money is to buy the entire market instead of any individual stock.  The easiest way to do that is to buy shares of SPY, the S&P 500 tracking stock.

SPY has had quite a run of going up every year, 7 years in a row.  This year, it has gone up about 9% and last year it gained about 5%.  Since so many “experts” believe the market has at least one more year of going up, what kind of investment could be made at this time?

Since I am an options nut, I will be keeping a lot of my investment money in cash (or cash equivalents) and spend a smaller amount in an option play that could earn spectacular profits if the market (SPY) just manages to be flat or go up by any amount in 2017.

OK, it isn’t quite a calendar year, but it starts now, or whenever you make the trade, and January 19, 2017.  That’s about 13 months of waiting for my 40% to come home.

Here is the trade I made last week when SPY was trading about $225:

Buy to Open 1 SPY 19Jan18 220 put (SPY180119P220)

Sell to Open 1 SPY 19Jan18 225 put (SPY180119P225) for a credit of $1.95  (selling a vertical)

This is called a vertical put (bullish) credit spread.  You collect $195 less $2.50 commissions, or $192.50 and there will be a $500 maintenance requirement by your broker.  You do not pay interest on this amount, but you have to leave that much untouched in your account until the options expire.  The $500 is reduced by $192.50 to calculate your net investment (and maximum loss if SPY closes below $220 on January 19, 2018.  That net investment is $307.50.

If SPY is at any price higher than $225 on that date in January, both options will expire worthless and you will keep your $192.50.  That works out to a profit of 62% on your investment.

If the stock ends up below $225, you will have to buy back the 225 put for whatever it is trading for.  If SPY is below $220, you don’t have to do anything, but the broker will take the $500 you have set aside (less the $192.50 you collected) and you will have suffered a loss.

I know I said 40% in the headline, and this spread makes 62% if SPY is the same or any higher.  An alternative investment would be to lower the strikes of the above spread and do something like this:

Buy to Open 1 SPY 19Jan18 210 put (SPY180119P210)

Sell to Open 1 SPY 19Jan18 215 put (SPY180119P215) for a credit of $1.50  (selling a vertical)

This spread would get you $147.50 after commissions, involve an investment of $352.50, and would earn a profit of 42% if SPY ends up at any price above $215.  It could fall $10 from its present price over the year and you would still earn over 40%.

Many people will not make either of these trades because they could possibly lose their entire investment.  Yet these same people often buy puts or calls with the hope of making a killing, and over 70% of the time, they lose the entire amount.  Contrast that experience to the fact that the spreads I have suggested would have made over 60% every year for the last seven years without a single loss.  I doubt that anyone who buys puts or calls can boast of this kind of record.

Options involve risk, as any investment does, and should only be used with money you can truly afford to lose.

Happy trading.

Terry

 

Comparing Calendar and Diagonal Spreads in an Earnings Play

Monday, December 5th, 2016

Last week, in one of our Terry’s Tips portfolios, we placed calendar spreads with strikes about $5 above and below the stock price of ULTA which announced earnings after the close on Thursday. We closed out our spreads on Friday and celebrated a gain of 86% after commissions for the 4-day investment. It was a happy day.

This week, this portfolio will be making a similar investment in Broadcom (AVGO) which announces earnings on Thursday, December 8. I would like to tell you a little about these spreads and also answer the question of whether calendar or diagonal spreads might be better investments.

Terry

Comparing Calendar and Diagonal Spreads in an Earnings Play

Using last Friday’s closing option prices, below are the risk profile graphs for Broadcom (AVGO) for options that will expire Friday, December 9, the day after earnings are announced. Implied volatility for the 9Dec16 series is 68 compared to 35 for the 13Jan17 series (we selected the 13Jan17 series because IV was 3 less than it was for the 20Jan17 series). The graphs assume that IV for the 13Jan17 series will fall from 35 to 30 after the announcement. We believe that this is a reasonable expectation.

The first graph shows the expected profit and loss at the various prices where the stock might end up after the announcement. Note that the maximum expected gain in both graphs is almost identical and it occurs at any ending price between $160 and $170. The first graph has calendar spreads at the 160 strike (using puts) and the 170 strike (using calls). The cost of placing those spreads would be $2375 at the mid-point of the spread quotes (your actual cost would probably be slightly higher than this, plus commissions). The maximum gain occurs if the stock ends up between $160 and $170 on Friday (it closed at $164.22 last Friday), and if our assumptions about IV are correct, the gain would exceed 50% for the week if it does end up in that range.

AVGO Calendar Spreads December 2016

AVGO Calendar Spreads December 2016

This second graph shows the expected results from placing diagonal spreads in the same two series, buying both puts and calls which are $5 out of the money (i.e., $5 lower than the strike being sold for puts and $5 higher than the strike being sold for calls). These spreads cost far less ($650) but would involve a maintenance requirement of $2500, making the total amount tied up $3150.

We also checked what the situation might be if you bought diagonal spreads where the long side was $5 in the money. Once again, the profit curve was essentially identical, but the cost of the spreads was significantly greater, $4650. Since the profit curve is essentially identical for both the calendar spreads and the diagonal spreads, and the total investment of the calendar spreads is less than it would be for the diagonal spreads, the calendar spreads are clearly the better choice.

AVGO Diagonal Spreads December 2016

AVGO Diagonal Spreads December 2016

AVGO has a long record of exceeding estimates. In fact, it has bested expectations every quarter for the last three years. The stock does not always go higher after the announcement, however, and the average recent change has been 6.5%, or about $7.40. If it moves higher or lower than $7.40 on Friday than where it closed last Friday, the risk profile graph shows that we should make a gain of some sort (if IV of the 13Jan17 options does not fall more than 5).

You can’t lose your entire investment with calendar spreads because your long options have more weeks or months of remaining life, and will always be worth more than the options you sold to someone else. But you can surely lose money if the stock fluctuates too much. Options involve risk and are leveraged investments, and you should only invest money that you can truly afford to lose.

Happy trading.

Terry

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