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Posts Tagged ‘profits’

Align Technology (ALGN) A Buy After Being Added To The S&P 500

Monday, July 3rd, 2017

This week we are featuring a company listed on the Investor’s Business Daily (IBD) Top 50 List that has also recently been added to the S&P 500 index.  The stock has displayed strong upwards momentum and we look to place spreads that take advantage of this underlying strength.

Terry

Align Technology (ALGN) A Buy After Being Added To The S&P 500

Align Technology is the designer and manufacturer of the Invisalign System which they state is the most advanced clear aligner system in the world.  Analysts are optimistic of the company’s growth prospects and have recently revised up their expectations.  Zacks ranks this stock as a Strong Buy and these analysts have recently raised their targets: Align Technology (ALGN) PT Raised to $175 at Morgan Stanley; Huge At-Home Ortho Opportunity and Leerink Lifts Target On Align Technology, Sees 27% Upside.

From a technical perspective, ALGN boasts a strong uptrend and trades above key technical indicators.  On a daily chart, the stock jumped above the 20-day moving average following an earnings report in January and has held above it since.

A rising trend channel has been identified to contain price action since late April and a horizontal level at $145.24 offers additional support to create a confluence near the lower bound of the trend channel.

ALGN Chart July 2017

ALGN Chart July 2017

*source Tradingview.com

If you agree there’s further upside ahead for Align Technology, consider this trade which is a bet that the stock will continue to advance, or at least not decline very much over the next seven weeks.

Buy To Open ALGN 18Aug17 140 Puts (ALGN170818P140)
Sell To Open ALGN 18Aug17 145 Puts (ALGN170818P145) for a credit of $1.60 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when ALGN was trading near $150.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

If you use our favorite broker for this trade, tastyworks, your commission on this trade will only be $1 per opening contract ($2 per spread) (and there is no commission on closing trades, only the $.10 clearing fee).  Each contract would then yield $158 and your broker would charge a $500 maintenance fee, making your investment $342 ($500 – $158).  If ALGN closes at any price above $145 on August 18, 2017, both options would expire worthless, and your return on the spread would be 46% (342% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates July 1, 2017

IBD Underlying Updates July 3, 2017

IBD Underlying Updates June 30, 2017

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  The Terry’s Tips portfolio which places spreads like the above one has gained 80% in the first six months of 2017 in spite of incurring some losses on some of the spreads placed.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

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

Happy trading,

Terry

Merck Breaks Out, can it Continue to Trade Higher?

Wednesday, June 28th, 2017

This week we are featuring an option trading idea based on a stock that just broke out following the Senate healthcare bill.  I hope that it is of interest to you.

Terry

Merck Breaks Out, can it Continue to Trade Higher?
Merck, broke out to fresh all-time highs last week following news from the proposed senate bill that would allow for less regulation and would not crack down on drug pricing.  The Senate appears to be moving toward a vote, which should keep MRK buoyed.

If you concur with the views expressed by these analysts, consider making this trade which is a bet that MRK will continue to advance (or at least not decline very much) over the next six weeks:

Technicals

After breaking out, prices are consolidating above the recent breakout level.  The stock should remain above a downward sloping trend line that shows support near $65. Additional support is seen near the 20-day moving average at $64.33.  Momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal.

MRK Chart June 2017

MRK Chart June 2017

*source Stockcharts.com

Buy To Open MRK AUG18   62.50 puts (MRK170818P625
Sell To Open MRK AUG18   65.00 puts (MRK170818P650) for a credit of $0.65 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when MRK was trading slightly above $66.20.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

If you use our favorite broker for this trade, tastyworks, your commission on this trade will only be $2 per spread (and there is no commission on closing trades, only the $.10 clearing fee).  Each contract would then yield $63 and your broker would charge a $250 maintenance fee, making your investment $187 ($250 – $63).  If MRK closes at any price above $65 on August 18, 2017, both options would expire worthless, and your return on the spread would be 34% (230% annualized).

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

Happy trading,

Terry

Lumentum Holdings (LITE) Is Coiling For An Up Move

Tuesday, June 27th, 2017

This week we are looking at another company listed on the Investor’s Business Daily (IBD) Top 50 List.  We use this list in our portfolio to find stocks that have been strongly trending higher and this week’s stock is an outperformer which has done exactly that.  The Terry’s Tips ’ portfolio that uses this list as its source for underlying ideas is now up 90.3% for the year to date.

Terry

Lumentum Holdings (LITE) Is Coiling For An Up Move

Lumentum Holdings hit all-time highs earlier this month and analysts believe there’s further upside ahead.  Here are two articles that reveal where Lumentum could be heading and why – Lumentum (LITE) PT Raised to $80 at Needham & Company; 3D Sensing Could Double LITE’S Value and DA Davidson Starts Lumentum (LITE) at Buy.

The technical outlook for LITE is solid.  The stock has been trending higher for over a year and a half and an acceleration of momentum can be seen since the start of May, shortly after the company announced earnings.

The earnings report caused a gap above the 20-day moving average and the stock has held above it since.  In addition to the moving average, horizontal support has been identified at $60.50 which held a decline earlier this month.

Lumentum has been consolidating sideways in a range over the past two weeks which is common in strong bullish trends.  A break of the upper end of the range, identified at $65.30, is likely to accompany an acceleration to the upside.

Lumentum Chart June 2017

Lumentum Chart June 2017

*source Tradingview.com

If you agree there’s further upside ahead for Lumentum, consider this trade which is a bet that the stock will continue to advance, or at least not decline very much over the next four weeks.

Buy To Open LITE 18Augy17 55 Puts (LITE170818P55)
Sell To Open LITE 18Aug17 60 Puts (LITE170818P60) for a credit of $1.73 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when LITE was trading at $64.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

If you use our favorite broker for this trade, tastyworks, your commission on this trade will only be $2 per spread (and there is no commission on closing trades, only the $.10 clearing fee).  Each contract would then yield $171 and your broker would charge a $500 maintenance fee, making your investment $329 ($500 – $171).  If LITE closes at any price above $60 on August 18, 2017, both options would expire worthless, and your return on the spread would be 52% (312% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates June 23, 2017

IBD Underlying Updates June 23, 2017

IBD Underlying Updates June 23, 2017

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  As we said above, the Terry’s Tips portfolio which places spreads like the above one has gained 90% in the first six months of 2017 in spite of incurring some losses on some of the spreads placed.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

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

Happy trading,

Terry

Is Arista Networks (ANET) Ready For An Acceleration To The Upside?

Tuesday, June 20th, 2017

This week we are featuring another option trading idea based on a selection from Investor’s Business Daily (IBD) Top 50 List.  I hope that it is of interest to you.

Terry

Is Arista Networks (ANET) Ready For An Acceleration To The Upside?

Arista Networks is up 56.3% YTD and recently published articles indicate the stock is poised for more upside.  Here are two of them – With legal risks fading, Barclays raises Arista Networks target and Needham: 100G upgrade cycle is a boon for Arista Networks.

If you concur with the views expressed by these analysts, consider making this trade which is a bet that ANET will continue to advance (or at least not decline very much) over the next five weeks:

Buy To Open ANET 21Jul17 145 puts (ANET170721P145)

Sell To Open ANET 21Jul17 150 puts (ANET170721P150) for a credit of $1.80 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when ANET was trading slightly above $150.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

If you use our favorite broker for this trade, tastyworks, your commission on this trade will only be $2 per contract (and there is no commission on closing trades, only the $.10 clearing fee).  Each contract would then yield $178 and your broker would charge a $500 maintenance fee, making your investment $322 ($500 – $178).  If ANET closes at any price above $150 on July 17, 2017, both options would expire worthless, and your return on the spread would be 55% (572% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates June 19, 2017

IBD Underlying Updates June 19, 2017

IBD Underlying Updates June 16, 2017

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  The Terry’s Tips portfolio which places spreads like the above one has gained 76% in the first five months of 2017 in spite of incurring some losses on some of the spreads placed.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

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

Happy trading,

Terry

Actual Positions in One Terry’s Tips Portfolio

Monday, June 5th, 2017

For the first time ever, I will share with you the exact strategy we use in one of the 9 portfolios we carry out at Terry’s Tips.  I will reveal the exact positions we have in this portfolio, their original cost, and our reasoning for putting them on.  This portfolio started out with $3000 at the beginning of 2017, and has gained 83% so far.  It is not our best performing portfolio, but it exceeds the average 2017 gain of 51.7% for all 9 portfolios.

Terry

Actual Positions in One Terry’s Tips Portfolio

Our Honey Badger portfolio is one of our most aggressive (least conservative).  Our strategy is to select companies which rank high on the Investor’s Business Daily Top 50 List, and make the assumption that these high-momentum stocks will continue to be strong for another six or ten weeks.  The stocks don’t actually have to go up at all for us to make the maximum gain on the spreads we place.  We select strike prices which are just below the then-current stock price so we can tolerate a small drop in the price while we hold the positions.

Here are the exact words we published in our June 3, 2017 Saturday Report which reviews performance of all nine portfolios:

Summary of Honey BadgerPortfolio This portfolio started with $3000 in early January 2017.  It will be our most aggressive portfolio. We will select companies from Investor’s Business Daily (IBD) highest-ranked momentum list (The Top 50) and sell vertical put credit spreads betting that the momentum will last at least another 2 months or so.  In 2017, we have had profitable trades with NVDA, HQY, AMAT, ANET, and ULTA, and suffered a big loss on GS which fell by $30 after we placed the trade.

Current positions:

On May 8 when LRCX was trading at $152:
Buy To Open (BTO) 3 LRCX 16Jun17 145 puts (LRCX170616P145)
Sell To Open (STO) 3 LRCX 16Jun17 150 puts (LRCX170616P150) for a credit of $1.90  (selling a vertical)
If LRCX ends up above $150 on June 16, this spread will gain $562.50 after commissions on an investment of $937.50, or 60% (360% annualized)

On May 11 when AVGO was trading at $230:

BTO 4 AVGO 23Jun17 220 puts (AVGO170623P220)

STO 4 AVGO 23Jun17 225 puts (AVGO170623P225) for a credit of $1.62  (selling a vertical)   If ULTA ends up above $225 on June 23, this spread will gain $638 after commissions on an investment of $1362, or 47% (281% annualized)

On May 11 when ULTA was trading at $300:

BTO 4 ULTA 16Jun17 290 puts (ULTA170616P290)

STO 4 ULTA 16Jun17 295 puts (ULTA170616P295) for a credit of $1.90  (selling a vertical)

If ULTA ends up above $295 on June 17, this spread will gain $750 after commissions on an investment of $1250, or 60% (360% annualized)

Honey Badger Portfolio Positions June 2017

Honey Badger Portfolio Positions June 2017

 Results for the week:  With AVGO (at $254.53) up $13.32 (5.5%), LRCX (at $158.74) up $3.62 (2.3%) and ULTA (at $311.47) up $9.07 (3.0%), for the week, the portfolio gained $810 or 17.3%.   The big gain this week came about because of the surge in AVGO which makes the spread almost certain to make the maximum gain when it expires in three weeks.  All three stocks in this portfolio are comfortably above the price then need to be to achieve the maximum gain.  If they remain above the strike of the option we have sold, we will pick up another $180 in 3 weeks.  This will make the gain for the first six months of the year a nice 88% (after commissions, of course).

Since the IBD Top 50 list is such an important source for this portfolio, we keep a careful watch on the stocks which are added on to the list each week and which ones are deleted.  Over time, we hope to determine whether deletions might be good prospects for bearish spreads.  Momentum often works in both directions, and perhaps stocks which had strong upward momentum will have strong downward momentum when IBD determines that the upward trend has ended.

Here are the changes we reported to our subscribers this week:

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates June 2017

IBD Underlying Updates June 2017

We hope you enjoyed this peek at one of our portfolios, and the strategy we use in this portfolio.  While we know that lots of newsletters out there are making all sorts of great promises about how wonderful their performance is, we don’t know of a single one which will reveal all their trades and is doing anywhere near what we have done. Our results include all commissions as well (most newsletters conveniently ignore commissions to make their results look better).  We invite you to come on board and share in our success.

Happy trading,

Terry

Closing Out Last Week’s Facebook Trades

Wednesday, May 10th, 2017

Today I would like to report on the gains I made last Friday on the trades I told you about that I had placed last Monday in advance of Facebook’s (FB) earnings announcement on May 3.  I was fortunate enough for the stock to take a moderate drop after the announcement, and have some thoughts on how I might play the FB  earnings announcement in 3 months.

Terry

Closing Out Last Week’s Facebook Trades

A little over a week ago, I passed on a pre-earnings trade I had made on Facebook in advance of their May 3 after-market announcement.  Essentially, I bought calendar spreads (long side 16Jun17 series and short side 05May17 series) at the 150, 152.5 and 155 strikes when FB was trading just under $152.

I was hoping that the stock would barely budge after the announcement.  I was lucky.  It did just that, falling a bit to close out the week at $150.24, about $1.50 lower than it was when I bought the spreads.

Near the close, I was able to buy back all of the expiring options (puts at the 150 strike, calls at the 152.5 and 155 strikes for $.02 or $.03), and sell every long call for a higher price than I had paid for the original spread.

Here are the spreads I made today when FB was trading just under $152:

Buy to Open 2 FB 16Jun17 150 puts (FB170616P150)

Sell to Open 2 FB 05 May17 150 puts (FB170505P150) for a debit of $1.49 (buying a calendar)   Spread closed for $2.19, gaining $140.

Buy to Open 1 FB 16Jun17 150 calls (FB170616C150)

Sell to Open 1 FB 05 May17 152.5 calls (FB170505C152.5) for a debit of $3.03 (buying a diagonal)  Spread closed for $3.75, gaining $72.

Buy to Open 1 FB 16Jun17 155 calls (FB170616C155)

Sell to Open 1 FB 05 May17 152.5 calls (FB170505C152.5) for a debit of $.55 (buying a diagonal)  Spread closed for $1.55, gaining $100.

Buy to Open 2 FB 16Jun17 155 calls (FB170616C155)

Sell to Open 2 FB 05 May17 155 calls (FB170505C155) for a debit of $1.59 (buying a diagonal) Spread closed for $1.62, gaining $6.

These spreads cost me a total of $974 plus $12 in commissions at tastyworks’ ultra-low rate of $1.00 per contract.  Even better, when I closed out these trades on Friday, I did not incur a commission at all (only paid the $.10 per contract clearing fee).

I made a net profit of $318 on an investment of $986, or 32% on an investment that lasted for 5 days. The Terry’s Tips portfolio that trades FB options gained 22% last week, and now has gained 215% for the year (after commissions).  The stock has gained 30% in 2017, but our portfolio has done 7 times that number.

The risk profile graph I published in the last blog assumed that implied volatility (IV) of the June options would fall from 24% to 16%.  I was a little too conservative.  IV fell to 18%, and the spreads performed a little better than the graph had projected.

While this is certainly a nice gain for the week, it only came about because I was lucky enough for the stock not to fluctuate very much.  In the future, I think I might buy more spreads at strikes below the current stock price of FB because the clear pattern around announcement time has been for the company to exceed expectations by a nice margin and the stock falls a small amount on the news.

Happy trading,

Terry

Interesting Earnings Play on Facebook

Tuesday, May 2nd, 2017

Facebook (FB) has had a great year so far, gaining just over 30%.  Terry’s Tips has an actual portfolio that trades calendar and diagonal spreads on FB.  This portfolio has gained 157% this year, more than 5 times as much as the stock has gone up.  A big part of this gain came just after the January earnings announcement when the stock dropped a small amount on the news.

FB announces earnings after the close on Wednesday (May 3), and I would like to share some trades I made today in my personal account at my favorite broker, tastyworks.  These trades approximate the current risk profile of the Terry’s Tips’ FB portfolio.

Terry

Interesting Earnings Play on Facebook

Terry’s Tips carries out 9 actual portfolios for paying subscribers.  After the first four months of 2017, all 9 portfolios are in the black.  The composite average has gained 34.5% for the year, certainly an outstanding result.  The FB portfolio is by far the greatest gainer.  We know that we cannot expect to continue these extraordinary gains for the entire year, but we are confident that many portfolios will continue producing gains which outperform the market averages.

Implied volatility (IV) of FB options tends to escalate prior to an earnings announcement.  For example, it is about 45% for the 05May17 series that expires this Friday.  This compares to 24% for the 16Jun17 series that expires six weeks later. We will buy the relatively cheap 16Jun17 series and sell the more expensive 05May17 series.

Here are the spreads I made today when FB was trading just under $152:

Buy to Open 2 FB 16Jun17 150 puts (FB170616P150)

Sell to Open 2 FB 05 May17 150 puts (FB170505P150) for a debit of $1.49 (buying a calendar)

Buy to Open 1 FB 16Jun17 150 calls (FB170616C150)

Sell to Open 1 FB 05 May17 152.5 calls (FB170505C152.5) for a debit of $3.03 (buying a diagonal)

Buy to Open 1 FB 16Jun17 155 calls (FB170616C155)

Sell to Open 1 FB 05 May17 152.5 calls (FB170505C152.5) for a debit of $.55 (buying a diagonal)

Buy to Open 2 FB 16Jun17 155 calls (FB170616C155)

Sell to Open 2 FB 05 May17 155 calls (FB170505C155) for a debit of $1.59 (buying a diagonal)

The second and third spreads together essentially create a calendar spread at the 152.5 strike price.  This was necessary because the 16Jun17 series does not offer that strike.

These spreads cost me a total of $974 plus $12 in commissions at tastyworks’ ultra-low rate of $1.00 per contract.  Even better, when I close out these trades, probably on Friday, I will not incur a commission at all (only pay the $.10 per contract clearing fee).

Here is the risk profile graph which shows the expected gains and losses from these trades after the close on Friday, May 5, 2017.  The graph assumes that IV of the June options will fall from 24% to 16%:

FB Risk Profile Graph May 2017

FB Risk Profile Graph May 2017

These spreads will do best if the stock remains flat or moves moderately higher.  If it falls within the range of about $150 to about $155, I should make about 40% for the week.  While we all know that anything can happen after an earnings announcement, if the last announcement is any example, it could be a good week.

One thing I like about these kinds of spreads is that your risk is clearly limited, and you can’t lose your entire investment because the long options will always have a greater value than the options you sold to someone else.

As with all investments, especially with options, you should only use money that you can truly afford to lose.

Happy trading,

Terry

40% Possible in 2 Weeks With an Iron Condor?

Monday, April 17th, 2017

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

Terry

40% Possible in 2 Weeks With an Iron Condor?

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

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

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

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

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

This is the spread I executed this morning:

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

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

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

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

Thursday, March 2nd, 2017

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

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

Terry

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

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

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

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

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

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

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

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

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

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

Happy trading.

Terry

Another Interesting Short-Term Play on Aetna (AET)

Friday, January 20th, 2017

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

Terry

 Another Interesting Short-Term Play on Aetna (AET)

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

AET Aetna Chart 2 January 2017

AET Aetna Chart 2 January 2017

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

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

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

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

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

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

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

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

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

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