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Posts Tagged ‘LEAPS’

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.


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.

The Difference Between Buying Stock and Trading Options

Monday, August 15th, 2016

This week I would like discuss a little about the differences between buying stock and trading options. I would also like to tell you a little about a specific recommendation I made to paying Terry’s Tips subscribers this weekend in my weekly Saturday Report.


The Difference Between Buying Stock and Trading Options

If the truth be known, investing in stocks is pretty much like playing checkers. Any 12-year-old can do it. You really don’t need much experience or understanding. If you can read, you can buy stock. And you probably will do just about as well as anyone else because it’s basically a roulette wheel choice. Most people reject that idea, of course. Like the residents of Lake Wobegone, stock buyers believe that they are all above average – they can reliably pick the right ones just about every time.

Trading options is harder, and many people recognize that they probably aren’t above average in that arena. Buying and selling options is more like playing chess. It can be (and is, for anyone who is serious about it) a life-time learning experience.

You don’t see columns in the newspaper about interesting checker strategies, but you see a ton of pundits telling you why you should buy particular stocks. People with little understanding or experience buy stocks every day, and most of their transactions involve buying from professionals with far more resources and brains. Most stock buyers never figure out that when they make their purchase, about 90% of the time, they are buying from those professionals. Those smart guys with all the resources are the ones who are selling the stock while you are buying it at that price.

Option investing takes study and understanding and discipline that the purchase of stock does not require. Every investor must decide for himself or herself if they are willing to make the time and study commitment necessary to be successful at option trading. Most people are too lazy.

It is a whole lot easier to play a decent game of checkers than it is to play a decent game of chess. But for some of us, options investing is a whole lot more challenging, and ultimately more rewarding.

Last week I told you about three stock-based Terry’s Tips option portfolios which had doubled in value and a fourth portfolio that was almost there (and it is only 10 months old). I didn’t tell you about two other portfolios that we also carry out which are not available for Auto-Trade at thinkorswim but which are quite easy to trade on your own because they only involve one trade for an entire year (and with luck, options on both side of the spread will expire worthless so no closing trade is necessary).

We have two of these portfolios, and they are set up each January. So far in 2016, while the market (SPY) has gained 4.6%, these two option portfolios have gained 43.9%, and 56.2% without a single adjusting trade having been made. We could close either portfolio right now and take those gains off the table after paying a small commission on one or two spreads. If you buy stock rather than trading options, you will probably never see gains like this, even if you are lucky enough to pick one of the best stocks in the entire market.

This weekend, I recommended another similar spread trade that we are setting up in a new portfolio so we can watch it evolve over time. Like the above two portfolios, it cannot be Auto-Traded but is easy to set up yourself (you can call it in to your broker if you are not familiar with placing option spread trades). This spread will expire on January 20, 2017, about six months from now.

The underlying is a sort of weird derivative of a derivative of a derivative that doesn’t make much sense to anyone (even the Nobel Prize winning managers of Long Term Capital didn’t fully understand the implications of this kind of instrument). The long-term price action of this equity can be measured, however, and it showed that if this spread had been placed every month for the last 50 months, the spread would have made a profit 44 times and it would have lost money 6 times. The average gain for all the trades worked out to 38% for six months (including all the losses in those 6 losing instances). The annualized gain would rise to 90% if you re-invested your money and the average profit at the end of the first six months. Of course, historical price action doesn’t always repeat itself in future months, but if you see how this instrument is engineered, you can see that the pattern should be expected to continue.

This spread idea is so good that I feel I must restrict sharing it with only paying subscribers to the Terry’s Tips newsletter. If you come on board, you can see the full report where I show the profit from this trade for each of the last 50 months and the exact spread that should be placed. I bought more of the exact same spread in my personal account today at the same price I indicated it could be bought in the last Saturday Report.

Lowest Subscription Price Ever

Tuesday, June 7th, 2016

This month marks the 15th year in business for Terry’s Tips. We are celebrating this event by offering you our lowest subscription price ever. Read on.

Today I would also like to share with you a small bet I made today on Nike. It should make 60% in 8 months even if the stock does not go up a penny. It can actually fall a little and you would still make 60%. But the big news today is our 15th birthday celebration offer.

Lowest Subscription Price Ever

As our birthday present to you, 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 15Year (or 15YearP for Premium Service – $79.95). The premium service offers you real-time trade alerts so you can follow along with our trades if you wish, or participate in Auto-Trade at thinkorswim.

This is a time-limited offer. You must order by Wednesday, June 15, 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 our 15th birthday with us, and give yourself and your family the perfect birthday gift that is designed to deliver higher financial returns for the rest of your investing life. It may take you a little homework on your part, but I am sure you will end up thinking it was well worth the investment.

A Conservative Nike Trade Which Should Gain 60% in 8 Months

Timing is everything. The price of Nike (NKE) was beaten down last week, apparently on the news that one of their largest retailers, Sports Authority, had declared bankruptcy and was conducting a going-out-of-business sale. I believe that this news has unfairly impacted the price of NKE. After all, people will continue to buy NKE shoes. It just won’t be at Sports Authority.

NKE has been doing very well lately. It has had 4 consecutive spectacular quarters, exceeding estimated earnings by a wide margin each time, yet it is trading very near the low for the year, down 20% from its high reached in December. In that month, there was a 2-for-1 stock split, and this often results in a lower stock price over the subsequent few months (apparently, a fair number of people sell off half their stock so they retain the same number of shares they had before the split, with most or all of their original investment back in their pocket). The same thing happened to Google when it split its stock a few years ago – it was lower at the end of the year than it was at the beginning, the only time in its first 9 years of existence that that happened.

NKE is trading about $54 today. If you believed that this was about as low as it might go, you might make a 5-month bet that it won’t be trading below $52.50 when the 21Oct16 options expire. You would make 50% on your money (after commissions) if you bought 21Oct16 50 puts and sold 21Oct16 52.5 puts, collecting $.86 and risking $1.64 if the stock falls below $50 by that time (using the commission rate charged to Terry’s Tips subscribers at thinkorswim – $1.25 per contract).

This trade, executed as a vertical put credit spread, would put $83.50 in your account. Your broker would assess a maintenance requirement of $250. Subtracting out the $83.50 you received, the net amount the trade would cost you would be $166.50. This is also the maximum loss you could possibly incur. It would come along only if NKE fell below $50 on October 16th. If NKE is at any price above $52.50 on that date, both put options would expire worthless and you would not have to make another trade to close out your positions (saving you commissions on that end of the trade).

An even safer bet could be made by trading those same strikes for the 20Jan17 series where you could collect $.96, risk $1.54, and make 60% on your investment (and maximum loss) if NKE closes above $52.50 in January. Not only is the gain greater, but you have an extra quarter (including the Christmas selling season) to watch NKE grow (or at least not fall).

I consider this to be a conservative investment because I believe NKE has had its price unfairly pushed lower because of the Sports Authority bankruptcy and is selling near the low for the year in spite of exceeding earnings estimates every quarter for the last year. The stock does not have to go up a penny to make 60% on this trade. All it has to do is not fall by more than $1.50 by January 20, 2017. I think it is highly likely to be trading safely higher than $52.50 at the time.

As always, you should only invest money in stock options if you can truly afford to lose it. Options are risky, and while potential gains can be far greater than conventional investments, they usually incur a greater degree of risk (although in the above case, I like the odds when a stock is unfairly downtrodden and doesn’t have to go up a penny to guarantee a gain on the trade).

Happy trading,


P.S. For this lowest-price-ever $39.95 offer for the complete Terry’s Tips package (including my White Paper for which over 10,000 people have paid our regular price $79.95), click here, enter Special Code 15Year (or 15YearP for Premium Service – $79.95). It could be the best investment decision you ever make.

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.


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.

How to Own 100 Shares of Google (Worth $71,600) for $15,000 or Make 12% a Month With Options

Tuesday, March 8th, 2016

Way back when Google (GOOGL) went public at $80 a share, I decided that I would like to own 100 shares and hang on to it for the long run. Obviously, that was a good idea as the stock is trading today at $716. My $8000 investment would now be worth $144,000 (the stock had a 2-for-1 split in November 2014) if I had been able to keep my original shares. Unfortunately, over the years, an options opportunity inevitably came along that looked more attractive to me than my 100 shares of GOOGL, and I sold my shares to take advantage of the opportunity.

Many times my investment account had compiled a little spare cash, and I went back into the market and bought more shares of GOOGL, always paying a little more to buy it back. At some point it felt like I just had too much money tied up in it. An $8000 commitment is one thing, but $144,000 is a major commitment.

Today I would like to share how I own the equivalent of 100 shares of GOOGL for an investment of less than $15,000, and the neat thing about my investment is that I get expect to get a “dividend” in the next month of about $1700 if the stock just sits there and doesn’t go anywhere.

I own options, of course. Here are two ways you can play it if you like Google.


How to Own 100 Shares of Google (Worth $71,600) for $15,000 or Make 12% a Month With Options:

You would have to shell out about $71,600 today to buy 100 shares of GOOGL stock. If you bought it on margin, you might have to come up with about half that amount, $35,800, but you have to shell out interest on the margin loan each month. I like money coming in, not going out.

Last week we talked about the Greek measure delta. This is simple the equivalent number of shares of stock that an option has. I own GOOGL 700 calls that expire on the third Friday of January 2017. You could buy one today for $8360. I own 2 of them for a cost of about $16,800

The delta for these Jan-17 700 calls is 60. That means if the stock goes up by a dollar, the value of each of my options will go up by $60. With these 2 options I own the equivalent of 120 shares of stock.

Since all options decline a little bit every day that the stock stays flat (it is called decay), simply owning options is just about as bad as paying margin interest on a stock loan. As I said earlier, I like money coming in rather than going out.

Over the course of the next ten months, the 700 call option will fall in value and end up being worth $1,600 if GOOGL is flat (trading at $716). That works out to an average monthly decay of $666 for each call I own.

One of the things I could do with these calls would be to cover this decay amount by selling two Apr2-16 750 calls for $700 each. The delta on these calls is 26. That means I would own the equivalent of 68 shares of stock worth $48,688 yet I only would have shelled out $16,800 less $1400, or $15,400. In other words, my option investment would cost less than 1/3 of what buying the stock would cost and I would not be paying any interest. Of course, it would take a little work on my part. In one month, if the stock were selling at less than $750, the calls I had sold would expire worthless and I would have to sell more one-month-out calls for at least $666 to cover the average monthly decay of the Jan-17 700 calls I had purchased. It will probably be at a different strike than 750, depending on what the new stock price was at the time.

If the stock were to rise above $750 in one month (I would be delighted because I would make a gain of about $2300 for the month – 68x$34), I would have to buy back the Apr2-16 750 calls just before they expired and sell May2-16 calls at a higher strike price, making sure I collected enough to cover the cost of buying back the Apr2-16 750 calls and the $666 each call will fall on average each month.

Instead of simply using options to own stock with only 1/3 of what it would cost to buy the stock, I chose a different way of trading. Most of the time, I would participate in the higher stock price, but I will make a nice gain every month even if the stock stays flat. Since I own 2 call options at a lower strike price than the market price I am entitled to use them as collateral to sell someone else the opportunity to buy shares of GOOGL. I sold one Apr2-16 725 call, collecting $15.40 ($1540) at today’s price. This option will expire in 30 days (April 8). If the stock is at any price less than $725, this call will expire worthless and I will get to keep the entire $1540.

This Apr2-16 725 call option that I sold carries a delta of 46, making my net option value (120-46) 74 deltas (the equivalent of 74 shares of stock). I also sold a second Apr2-16 call, this one at the 735 strike price, collecting $1150. This call has a delta of 39, giving me a 35 net delta value (60+60-46-39). I won’t own the equivalent of 120 shares of stock that I would have if I hadn’t sold calls against my Jan-17 calls, but I could possibly make even greater gains from option decay.

I now own the equivalent of 35 shares of GOOGL at a cost of $16,800 less the $2690 I collected from selling the two calls, or $14,110.

The neat thing about my option positions is that if the stock doesn’t go up (as I hope it will), my disappointment will be soothed a bit because I will gain about $1700 over the next month. Here is the risk profile graph for my positions:

GOOG Risk Profile Graph March 2016

GOOG Risk Profile Graph March 2016


The P/L Day column in the lower right-hand corner shows what the gain or loss will be at the price in the first column on the left. It shows that when the Apr2-16 calls expire on April 8, my positions will have a $1,742 gain in value (12% for the month on my investment of $14,110). If the stock were to gain just a little, I could make as much as $3000. If it went up 5% (about $35) I would make about the same amount as if it remained unchanged.

While a possible 12% gain every month sounds a little too good to be true, if you do it right, the actual gain would be greater. For the first few months, the Jan-17 700 calls I bought will decay less than the average $666 monthly amount. Theta (decay for a single day) is $12, or about $360 for the first month. For the last month just before it expires, the Jan-17 700 calls would decay about $1250. The best way to play this strategy would be to put some money back in (using cash you have taken out every month) when there is about 3 or 4 remaining months to the Jan-17 calls and sell those calls and replace them with calls expiring at a more distant-out month, such as July 2017 or January 2018.

There are disadvantages to owing the options I do rather than the stock. The biggest problem comes when the stock fluctuates by large numbers in either direction. If the stock falls 5% ($36), my options would lose about $2196. If I owned 68 shares of stock, I would lose $2448, about 11% more than the options loss. However, if the stock were to tumble significantly more than 5% in one month, the option loss would be considerably greater than the loss of share value. If the stock goes up by 5% in the next month, I would gain $2448 if I owned 68 shares of stock, and only $1884 with the options, or about $564 (23%) less than the stock would have gained. Using options rather than stock, I give up a little potential gain if the stock picks up 5% in one month but make a much greater gain if the stock is flat or moves moderately higher.

The major advantage to my options positions comes when the stock fluctuates well less than 5% in a month. As we showed earlier, an absolutely flat stock will result in a 12% gain while owning the stock would not make a penny.

I have just outlined two possible ways that you can invest in a company you like with options rather than buying the stock. One strategy allows you to have the equivalent of owning stock while having to come up with only one-third of the cash. A second strategy is designed to make about 12% in every month when the stock is flat or rises moderately. Either way seems smarter to me than just buying the stock.


Making a Long-Term Options Bet on Oil

Sunday, January 17th, 2016


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

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

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


Making a Long-Term Options Bet on Oil

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.


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.

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.


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.

Why I Like Calendar Spreads

Wednesday, October 21st, 2015

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


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




Why I Like Calendar Spreads


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


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


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


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


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

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

Monday, September 14th, 2015

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

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

Happy trading.


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

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

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

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

VXX Historical Chart 2015

VXX Historical Chart 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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