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Posts Tagged ‘profits’

Calendar Spreads Tweak #4

Wednesday, September 21st, 2016

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

Terry

Calendar Spreads Tweak #4

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

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

Facebook Bid Ask Puts Calls Sept 2016

Facebook Bid Ask Puts Calls Sept 2016

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

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

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

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

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

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

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

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

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

Happy trading.

Calendar Spreads Tweak #1

Thursday, September 1st, 2016

This week we will continue our discussion of a popular option spread – the calendar spread which is also called a time spread or horizontal spread. We will check out the feasibility of buying spreads at different strike prices in an effort to reduce risk.

Terry

Calendar Spreads Tweak #1

First, let’s look at a typical calendar spread on Facebook (FB). Last Friday, when FB was trading about $124.20, we bought 5-month-out 20Jan17 calls and sold one-month-out 30Sep16 calls. The spread would cost $5.43 ($543), and this is what the risk profile graph looked like:

Face book Risk Profile May 2016

Face book Risk Profile May 2016

Note that the break-even range extends from about $3 on the downside to $5 on the upside, a range of $8. (The loss or gain when the short calls expire on September 30 is indicated in the column on the right titled “P/L Day.”) The maximum gain is precisely at the $125 price, and it is about $150 which would result in a nice 27% gain for the month.

Next, I tested whether I could expand the break-even range by adding the same calendar spread at the 120 and 130 strike prices (the 20Jan17 series only offers strikes at $5 increments, unlike the weekly series). The 120 spread would cost $464 and the 130 spread would be $483, so buying all three spreads would involve an investment of about $1500. Here is what the risk profile graph looks like for the three spreads:

Face Book Risk Profile 2 September 2016

Face Book Risk Profile 2 September 2016

Note that the break-even range is almost exactly the same with the three spreads. The maximum gain is also about $150, but with three spreads, it would mean a 10% gain rather than a 27% one because you would have about $1500 invested rather than $543. Clearly, adding calendar spreads at strikes $5 above and below the current stock price is not the way to go – about triple the investment, the same expected maximum gain, and about the same break-even range.

Presumably, you are trading calendars on a stock you believe is headed higher. You might choose to buy an at-the-money calendar and a second one at a higher strike. If you do this, your investment is about $1000 and this is the risk profile graph:

Face Book Risk Profile 3 September 2016

Face Book Risk Profile 3 September 2016

The break-even range is once again about $8 from the lowest point to the highest, but it extends just over a dollar on the downside and $7 on the upside. If you are bullish on the stock, this seems to be a better way to go. The maximum gain is about $150 once again, and this results in a 15% gain for the month. The best thing about this choice of two spreads is that the maximum gain can be achieved across a 5-point range rather than being available at only one precise price point.

Another strategy might be to buy the 125 calendar spread, and then wait to see which way the stock moves, and then buy another calendar in that direction. As we have seen, the cost of an at-the-money calendar is not much greater than the same calendar which is $5 away from the money. The big risk with this strategy is that the stock might whipsaw. For example, it might fall $3 which might prompt you to buy a 120 calendar, and then shoot higher, going up to $128 which might cause you to add a new spread at the 130 strike.

As usual, there are no easy ways to make sure gains in this world. The best bet seems to be to take a position that the stock is headed in one particular direction (usually up unless you are trading on some ETP that is destined to go down, like VXX), and combine an at-the-money spread with one at a higher strike price. Most months you should be making a significant gain if your stock behaves as you expect, and that gain can materialize over a nice range of possible prices.

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.

Terry

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.

How to Trade Out of an Earnings-Related Options Play

Thursday, July 7th, 2016

A little over a week ago, I told you about trades I was making in advance of Nike’s earnings announcement. Lots of things didn’t quite work out the way I had expected they would, but I still managed to make over 50% for the week on my trades. There were some good learning experiences concerning how to trade out of calendar spreads once the announcement has been made. You need to tread water until the short options you sold expire and you can close out the spreads, and that can present some challenges.

Today I would like to share those learning experiences with you in case you make similar trades prior to a company’s earnings announcement.

Happy trading.

Terry

How to Trade Out of an Earnings-Related Options Play

According to Openfolio, a site where about 70,000 users share information on their investments, three out of four investors lost money in June, with an average return of -0.10%. This compares to the results of the Terry’s Tips’ Auto-Traded portfolios where 7 of 8 portfolios gained, and the average gain was 15.1%. Our only losing portfolio was a special bet that the short-term price of oil would fall. It didn’t, and we lost a little, but that was nothing compared to 4 of the portfolios which gained over 20% for the month.

One of our portfolios trades options on Nike (NKE) which announced earnings after the close last Tuesday, June 28. We had spreads in place similar to those that I told you about last week (and several others as well). The portfolio managed to gain 29% in June, something that often happens during the month when an earnings announcement takes place.

On the Monday before the earnings announcement, with the stock trading at about $52, I placed these trades (at higher quantities):

Buy to Open 1 NKE 29Jul16 52.5 put (NKE160729P52.5)
Sell to Open 1 NKE 1Jul16 52.5 put (NKE160701P52.5) for a debit of $.50 (buying a calendar)

Buy to Open 1 NKE 29Jul16 55 call (NKE160729C55)
Sell to Open 1 NKE 1Jul16 55 call (NKE160701C55) for a debit of $.50 (buying a calendar)

In my note to you, I said I thought you could buy these spreads for $.43 ($43) each, but that was based on the prior Friday’s prices. I was disappointed to have to pay so much more, but I still believed it was a pretty good bet.

When the stock fell closer to $51, I bought half as many spreads as the above two at the 50 strike just in case the stock continued to trade lower. When you buy calendar spreads, you select strike prices where you hope the stock will end up when the short options expire, as the at-the-money strike spread will be the most profitable. Buying spreads at several strikes gives you more places where you can end up being happy, but your maximum gain is reduced a bit when you buy the increased protection that owning several strikes provides.

After I made the above trades on Monday, I suffered my second disappointment. As I had seen so many times before, in the last day before the announcement (Tuesday), the stock rallied $1.10 and closed at $53.09. If I had anticipated this better, I would not have bought the spreads at the 50 strike. In after-hours trading after the announcement (earnings were a penny above estimates but sales disappointed a little and outlook was about what was expected), the stock tanked to about $50. As we have often seen, this initial move was quickly reversed. When the market opened on Wednesday, it had moved up to $54.50.

While my positions were showing a nice paper profit at the open on Wednesday, I had to wait to near Friday’s close to get the full amount I was hoping for. I was in a bad position, however, because most of my spreads were at strike prices which were below the stock price. In option terms, my positions were negative net delta – this means that if the stock went up another dollar, I would lose money. I aggressively changed to a neutral net delta condition by closing out the lowest-strike put calendars (at the 50 strike) and changing some 52.5 calendars to diagonals, buying back in-the-money 52.5 short calls and replacing them with at-the-money 55 calls and slightly out-of-the-money 56 calls in the same 01Jul16 series.

Then I encountered my third disappointment. I had expected implied volatility (IV) of the long 29Jul16 series to be 27 after the announcement based on recent history, but it ended up being 24 which dampened my expected results. That meant the option prices would not be as high as I expected when I went to sell them. I had figured an at-the-money spread could be sold for $1.40, and the closest spread I had (the 55 strike) only yielded $.97 (however, this was almost double what I paid for it). By Friday, the stock moved above the top strike price I held (55) and closed at $55.61. Since I managed to stay neutral net delta and actually pick up some extra premium in the last three days from the new at-the-money calls I sold, I ended up making over 50% on my total investment for the week. It was a lot of work but surely worth the effort.

I had set out to make 100% in a single week, and experienced disappointments in three different areas, but at the end of the day, I was pleased to take in half that amount for the week.

What could be taken away from this play was; 1) that the stock often rises in the last day before the announcement (probably legging into the calendars would have been more profitable, but more risky), 2) the initial move after the announcement is usually reversed, and 3) it is important to make adjustments to create a neutral net delta condition for all your spreads until the short options expire.

Lowest Subscription Price Ever Still Available

Thursday, June 9th, 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.  If you ever wanted to learn all about the wonderful world of options and my favorite options strategy, now is the time to act.

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. There’s no need or reason to wait that long, but 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.

Happy trading,

Terry

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.

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,

Terry

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.

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

Tuesday, May 31st, 2016

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

Terry

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

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

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

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

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

How Option Prices are Determined

Tuesday, May 17th, 2016

Today I would like to pass along some basic information about how stock options prices are determined. I have discussed this in the past, but we now have many new subscribers who may not have seen our earlier blogs. I apologize if this is old information for you.

Terry

How Option Prices are Determined

Of course, the market ultimately determines the price of any option as buyers bid and sellers ask at various prices. Usually, they meet somewhere in the middle and a price is determined. This buying and selling action is generally not based on some pie-in-the-sky notion of value, but is soundly grounded on some mathematical considerations.

There are 5 components that determine the value of an option:

1. The price of the underlying stock

2. The strike price of the option

3. The time until the option expires

4. The cost of money (interest rates less dividends, if any)

5. The volatility of the underlying stock

The first four components are easy to figure out. Each can precisely be measured. If they were the only components necessary, option pricing would be a no-brainer. Anyone who could add and subtract could figure it out to the penny.

The fifth component – volatility – is the wild card. It is where all the fun starts. Options on two different companies could have absolutely identical numbers for all of the first four components and the option for one company could cost double what the same option would cost for the other company. Volatility is absolutely the most important (and elusive) ingredient of option prices.

Volatility is simply a measure of how much the stock fluctuates. So shouldn’t it be easy to figure out? It actually is easy to calculate, if you are content with looking backwards. The amount of fluctuation in the past is called historical volatility. It can be precisely measured, but of course it might be a little different each year.

So historical volatility gives market professionals an idea of what the volatility number should be. However, what the market believes will happen next year or next month is far more important than what happened in the past, so the volatility figure (and the option price) fluctuates all over the place based on the current emotional state of the market.

In future newsletters, we’ll continue this discussion of volatility and why it is the most important variable in option pricing.

 

Last Minute Facebook Earnings Play

Tuesday, April 26th, 2016

Facebook (FB) announces earnings tomorrow, Wednesday the 27th, after the close. There is still time to place what I think will be a dynamite options play. You have until the close tomorrow to get these spreads in place.

Terry

Last Minute Facebook Earnings Play

Over the past few weeks, I have suggested legging into calendar spreads at a price slightly above the current stock price for companies that would be announcing earnings about two or three weeks later. The underlying idea of these spreads is that, 1) in the days leading up to the announcement, the stock tends to drift higher as hope for a positive announcement grows and, 2) implied volatility (IV) of the option series that expires directly after the announcement date almost always soars because big moves in the stock often take place right after results are disclosed.

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

In every case, I was able to complete the calendar spread at a credit which was large enough to cover the cost of the call I had bought as well as commissions on the trade ($1.25 per option at the commission rate thinkorswim charges Terry’s Tips subscribers). This means I not only made a small profit at the time, but I was guaranteed a much larger profit when the short calls expired. The closer the stock price ends up to the strike price, the greater that profit will be.

Last week, I also tried this strategy with Time Warner (TWX), another company I like. I bought 27 May 16 76 calls when TWX was trading at $75.50, paying $2.31. I immediately placed a good-til-cancelled order to sell 6 May 16 76 calls for $2.39. This was executed the following day, and I now own a calendar spread that is guaranteed to make me a profit. TWX announces on May 4 before the open and I will close out the calendar two days later when the 6 May 16 calls expire.

There is something wonderful about owning an option spread that is guaranteed to make a profit. The only question mark is how big that profit will be.

FB announces after the close tomorrow, April 27. It is too late to leg into a calendar spread like I did for the above 4 companies, but it is not too late to take advantage of some huge IV advantages. IV for the 29 APR 16 series has soared to 82 (it was “only” 52 a week ago). IV for the 17 JUN 16 series is only 34. These IVs make the FB calendar spreads exceptionally cheap right now, at least to my way of thinking.

With FB trading about $109 today, these are the calendar spreads I have placed:

Buy to Open FB 17 JUN 16 105 puts (FB160617P105)
Sell to Open FB 29 APR 16 105 puts (FB160417P105) for a debit of $1.58 (buying a calendar)

Buy to Open FB 17 JUN 16 110 puts (FB160617P110)
Sell to Open FB 29 APR 16 110 puts (FB160417P110) for a debit of $1.52 (buying a calendar)

Buy to Open FB 17 JUN 16 115 calls (FB160617C115)
Sell to Open FB 29 APR 16 115 calls (FB160417C115) for a debit of $1.52 (buying a calendar)

These prices are a little more than the mid-point of the bid-ask range for the calendar spreads. You should be able to get these prices.

On Friday when the short options expire, an at-the-money calendar spread with 49 days of remaining life (as these are) should be worth over $5, or more than what I paid for all three spreads. If the stock is $5 higher or lower than a strike, the calendar should be worth over $2.50, well more than what any of the spreads cost.

I think these are good trades to make and am hoping for a $110 price for FB on Friday near the close. If that comes about, I should more than double my investment in less than a week.

 

How to Play the Upcoming Facebook Earnings Announcement

Wednesday, April 20th, 2016

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

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

Terry

How to Play the Upcoming Facebook Earnings Announcement

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

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

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

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

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