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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.

Terry

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.

Half-Price Offer Ends at Midnight Tonight

Monday, January 11th, 2016

All good things must end, they say.  Tonight at midnight, the lowest price offer we have ever made in the history of our company, does just that.  It ends.  Tomorrow we will return to the prices that thousands of smart investors have paid over the past 14 years.

If you ever considered becoming a Terry’s Tips Insider, this would be the absolutely best time to do it.

To get our entire package for only $39.95, you must order by midnight tonight – only $39.95 for our entire package -here using Special Code 2016 (or 2016P for Premium Service – $79.95).

Terry 

Half-Price Offer Ends at Midnight Tonight

If all good things must end, it is equally true that all bad things must end as well.  Hopefully, the dreadful start for the market in 2016 will end as well.  Volatility has skyrocketed as the market has tumbled.  The so-called fear Index (VIX – the measure of option prices on the S&P 500 tracking stock, SPY) closed above 27 on Friday. This compares to an average range of about 12 – 14 over the last few years.

When VIX reaches 27, it means that option prices are about twice as high as they are on average.  For Terry’s Tips’ subscribers, that is a big deal.  Since our strategy consists of selling those short-term options, this could be one of the most profitable opportunities that come along all year.

The historical fluctuation of VIX is that it makes sudden forays above 20 when market uncertainty flares up (usually due to an unexpected event like a war breaking out or a 9/11 type terrorist attack, of some economic calamity or fear of slower growth).  This time around, it seems to be fears that China’s unusually high growth rate might be slowing.  Instead of growing at 8% a year, their economy may only grow at 4% or 5%, still an enviable number by world-wide standards.

VIX also has a tendency to fall quickly after the market takes a second look at what caused the fears in the first place.  Over the last three years, VIX has shot up over 20 on 10 separate occasions, and in 9 of those occasions, it fell back below 20 within 11 days.  This pattern may continue as we reach the second week of 2016.  As I write this, the futures are up enough for the Dow to enjoy a triple-digit gain today.

So it seems the both good things and bad things must eventually end.  The early-2016 market correction and our best offer ever are two of those things that could end just today.  We are absolutely certain of our offer ending – the market recovery might take a bit longer.

Here’s the Special Offer – If you make this investment in yourself by midnight tonight, January 11, 2016, this is what happens:

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

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

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

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

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

With this one-time offer, you will receive all of these benefits for only $39.95, less than the price of the White Paper alone. I have never made an offer better than this in the fourteen years I have published Terry’s Tips.  But you must order by midnight on January 11, 2016. Click here, choose “White Paper with Insider Membership”, and enter Special Code 2016 (or 2016P for Premium Service – $79.95).

Investing in yourself is the most responsible New Year’s Resolution you could make for 2016.  I feel confident that this offer could be the best investment you ever make in yourself.  And your family will love you for investing in yourself, and them as well.

Happy New Year!  I hope 2016 is your most prosperous ever.  I look forward to helping you get 2016 started right by sharing this valuable investment information with you.

Terry

If you have any questions about this offer or Terry’s Tips, please call Seth Allen, our Senior Vice President at 800-803-4595 or send an email to Seth@TerrysTips.com.  Or make this investment in yourself at the lowest price ever offered in our 14 years of publication – only $39.95 for our entire package -here using Special Code 2016 (or 2016P for Premium Service – $79.95).

An Option Play Designed to Make 68% in One Month

Monday, December 14th, 2015

Last week, VIX, the so-called “fear index” rose 65% to close at 24.39. It was the 10th time that it moved over 20 in the last 3 years. In 9 of those 10 occasions, VIX fell back below 20 in less than 10 days, and in the other instance (August 21, 2015), it took 40 days to fall back below 20. Today I would like to tell you about a trade I am making today that will make 68% in one month if that pattern continues this time around.

Terry

An Option Play Designed to Make 68% in One Month

Last week was a bad one for the market. The S&P 500 tracking stock (SPY) fell $7.74 to close at $201.88, down 3.7% for the week. SPY closed out 2014 at $205.54 and started out 2015 at $206.38, so if last week’s close holds up for two more weeks, the market will record a calendar year loss for the first time since 2008.

Apparently, the reason for the big drop centered around the Fed’s likely move to raise interest rates on Wednesday, the first time it has done so in a decade. I believe that the institutions (who control over 90% of the trading volume) were carrying out a last-ditch effort to discourage this move. After all, does the Fed want to be the bad guys who are responsible for the worst yearly market in 7 years? Would raising rates be a good idea at a time when the market is lower than it was a year ago? (We should remember that the Fed is composed of big banks who make greater profits when interest rates are higher, so raising rates may seem to be self-serving).

I have no idea if the Fed will raise rates in two days as Janet Yellen has indicated they plan to. If they do, I suspect it will be a small start, maybe 0.25%, and they will also report that they intend to be slow to make further increases. In either case, no rate increase or a small one, the big change will be that the uncertainty over the timing of the increase will cease to exist. Either choice should result in a higher market and more importantly for option traders, a lower VIX.

As I have written about extensively, an Exchange Traded Product (ETP) called SVXY varies inversely with VIX. When VIX moves higher, SVXY crashes, and vice versa. Last week, SVXY fell $14.27, from $59.41 to $45.14, (24%) when VIX rose 65%.

When VIX falls back below 20, as it has done every single time it rose over 20 for the past 3 years, SVXY will be trading higher than it is today. Here is the trade that will make 68% if SVXY is trading any higher than it closed on Friday in 32 days (on January 15, 2016).

Buy To Open 1 SVXY Jan-16 40 put (SVXY160115P40)
Sell To Open 1 SVXY Jan-16 45 put (SVXY160115P45) for a credit of $2.05 (selling a vertical)

This trade will put $205 in your account (less $2.50 commissions at the rate Terry’s Tips subscribers pay at thinkorswim), or $202.50. The broker will place a maintenance requirement on your account of $500, but your maximum amount at risk is $500 less the $202.50 you collected, or $297.50) – this loss would occur if SVXY closed at any price below $40 at the January expiration. The break-even price for you would be $43.00 – any price above this would be profitable and any price below it would incur a loss. There is no interest charge on the maintenance requirement, but that much in your account will be set aside so that you can’t buy other stocks or options with it.

At the close of trading on January 15, 2016, if SVXY is at any price above $45, both these puts options will expire worthless and you will keep the $202.50 you collected when you made the trade. This works out to be a 68% gain on your investment at risk. You will not have to make a trade at that time, but just wait until the end of the day to see the maintenance requirement disappear.

Of course, there are other ways you could make a similar bet that SVXY will head higher as soon as some of the market uncertainty dissipates. You could sell the same spread at any weekly option series for the next 5 weeks and receive approximately the same credit price. For shorter time periods, you don’t have to wait so long to pocket your profit, but there is less time for uncertainty to settle down and SVXY move higher.

Actually, VIX does not have to fall for SVXY to at least remain flat. It should trade at least at $45 as long as VIX does not rise appreciably between now and when the options expire.

A more aggressive trade would be to bet that SVXY rises to at least $50 in 33 days. In this trade, you would buy Jan-16 45 puts and sell Jan-16 50 puts. You should collect at least $2.80 ($277.50 after commissions) and make 124% on your maximum risk of $222.50 if SVXY closed at any price above $50 on January 15, 2016.

The last time that VIX closed above 20 was on November 13, 2016. On that day, SVXY closed at $50.96. On the very next day, VIX fell below 20 and SVXY rose to $56.16. It never traded below the $50.96 number until last Friday when VIX once again moved above 20.

I think this is an opportune time to make a profitable trade which is essentially a bet that the current market uncertainty will be temporary, and might be over as soon as Wednesday when the Fed makes its decision concerning interest rates. Of course, a serious terrorist action or other calamity might spook markets as well, and the uncertainty will continue.

No option trades are sure bets, even if the last 10 times a certain indicator flashed and a 68% profit could have been made every time. As with all investments, you should never risk any money that you truly can’t afford to lose. However, I feel pretty good about the two investments outlined above, and will be making them today, shortly after you receive this letter.

 

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.

Terry

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.

A $350 Investment on Apple Could Double in 2 Months

Thursday, December 3rd, 2015

On January 27, 2016, at 4:30 EST, Apple (AAPL) will announce earnings for 2015. This has always been an exciting time for investors, and this year should not be any different from years past.

Today, I made a $350 bet on AAPL’s earnings. I feel confident that I will double my money in 2 months on this wager, even if the stock does not do much between now and then. I would like to share my thinking with you, and maybe you will like to do something similar yourself.

Terry

A $350 Investment on Apple Could Double in 2 Months

AAPL is trading today about $116, only $5 higher than it was a year ago at this time.
Over that year, earnings have grown about 30% and sales have increased 20%, and the stock has gone up less than 5%. The world’s most valuable company sells at only 11 times earnings while it is growing nearly double that percentage, and even the 11 number should be adjusted to a lower figure because of the large stash of cash they are sitting on.

By any fundamental valuation standards, AAPL is a screaming bargain. Yet it has been in this same position for years, often held down because of tepid guidance it invariably puts out while announcing sales and earnings which are considerably above the guidance they gave last time around. The company seems to enjoy setting a low expectation bar and then crushing it with stellar earnings.

While Black Friday was a disappointment for most retailers, AAPL apparently had its best day ever. One analyst reported “the iPhone and Apple Watch were the most popular, with the Watch likely the number seller online. IPads are emerging as the first computing device for kids, with the iPad Air 2 the hottest gift item for kids eight and older, the Mini for those younger.” It sounds like it might be a good Christmas selling season for the company.

Two things almost always occur in the week or weeks leading up to AAPL’s January earnings announcement. First, the stock usually moves up $5 or so in anticipation of a positive announcement. Second, option prices skyrocket because there is often a big move in the stock after the announcement, either up or down.

With these thoughts in mind, I bought calendar spreads on AAPL today with the stock about $116. I chose the 120 strike price because I think at some point in the next few weeks, the stock will edge up to that price. I bought Feb-16 120 calls and sold Dec-16 120 calls as a calendar spread, paying $347 plus $2.50 commission per spread (the commission rate paid by Terry’s Tips subscribers at thinkorswim).
Just before the Dec-16 calls expire, I will buy them back and sell a further-out weekly option at a strike price which will hopefully net me at least $100. I expect to repeat this once or twice in the subsequent weeks, hopefully reducing my initial $350 cost to about $150 when I can sell the calls I am most looking forward to.

Those calls will be the Jan5-16 calls which will expire on January 29, just after the earnings announcement. They are not yet available for sale, but will be offered in a couple of weeks. These are the calls which will be juiced up by the uncertainty of the coming announcement. Looking back to January 2015 when there were two weeks to the post-announcement, these are thebif prices for those calls:

At-the-money – $4.00
$1 away-from-the-money – $3.50
$1 away-from-the-money – $3.05
$1 away-from-the-money – $2.66
$1 away-from-the-money – $2.28

If I am successful in getting my cost down to $150 by that time, I should be able to sell Jan5-16 calls for more than my net investment, therefore guaranteeing me a profit no matter what the stock price does after the announcement. Of course, the closer to $120 it is, the more profitable it will be for me when I close out the Feb-16 – Jan5-16 spread on Friday, January 29, 2016.

As with most option investments, this obviously will take a little work to carry out. But I sort of like that kind of work when it might result in my doubling my money in a two-month time period. It seems like a low-risk, high potential gain to me, and I look forward to having a little fun with it.

Of course, you should only make option investments with money you can truly afford to lose. Profits are not guaranteed, no matter how promising they might appear when you first set up your positions.

How to Make Extraordinary Returns with Semi-Long Option Plays

Friday, November 27th, 2015

One of my favorite stock option plays is to make a bet that sometime in the future, a particular stock will be no lower than it is today. If you are right, you can make 50% – 100% without doing anything other than making a single option trade and waiting out the time period. Ten weeks ago, I made two specific recommendations (see my September 8, 2015 blog) for making this kind of bet, one which would make 62% in 4 months and the other 100% in that same time period. Today I would like to update those suggestions and discuss a little about how you set up the option trade if you know of a company you feel good about.

If you missed them, 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.

Terry

How to Make Extraordinary Returns with Semi-Long Option Plays

What is a long-term bet in the options world? A month? A week? I spend most of my time selling options that have only a week of remaining life. Sometimes they only have a day of life before they expire (hopefully worthless). So I don’t deal with long-term options, at least most of the time.

Most options plays are short-term plays. People who trade options tend to have short-term time horizons. Maybe they have ADHD and can’t handle long waits to learn whether they made a gain or not. But there are all sorts of different ways you can structure options plays. While most of my activity involves extremely short-term bets, I also have quite a bit of money devoted to longer-term bets which take 4 months to a year before the pay-day comes along.

One of my favorite semi-long (if there is such a word) option plays involves picking a stock which I particularly like for the long run, or one which has been beaten down for some reason which doesn’t seem quite right. When I find such a stock, I place a bet that sometime in the future, it will be at least as high as it is now. If I am right, I can usually make 50% – 100% on the bet, and I know in advance exactly what the maximum possible gain or loss will be, right to the penny.

Ten weeks ago, I liked where the price of SVXY was. This ETP is inversely correlated with option volatility. When volatility moves higher, SVXY falls, and vice versa. At the time, fears of a world-wide slowdown were emerging. Markets fell and volatility soared. VIX, the so-called “fear index” rose from the 12 – 14 range it had maintained for a couple of years to over 20. SVXY tanked to $45, and had edged up to $47 when I recommended placing a bet that in 4 months (on January 15, 2016), SVXY would be $40 or higher.

This trade would make the maximum gain even if SVXY fell by $7 and remained above $40 on that date:

Buy to Open 1 SVXY Jan-16 35 put (SVXY160115P35)
Sell to Open 1 SVXY Jan-16 40 put (SVXY160115P40) for a credit of $1.95 (selling a vertical)

Quoting from my September 8th blog, “When this trade was executed, $192.50 (after a $2.50 commission) went into my account. If on January 15, 2016, SVXY is at any price higher than $40, both of these puts will expire worthless, and for every vertical spread I sold, I won’t have to make a closing trade, and I will make a profit of exactly $192.50.

So how much do I have to put up to place this trade? The broker looks at these positions and calculates that the maximum loss that could occur on them would be $500 ($100 for every dollar of stock price below $40). For that to happen, SVXY would have to close below $35 on January 15th. Since I am quite certain that it is headed higher, not lower, a drop of this magnitude seems highly unlikely to me.

The broker will place a $500 maintenance requirement on my account. This is not a loan where interest is charged, but merely cash I can’t use to buy shares of stock. However, since I have collected $192.50, I can’t lose the entire $500. My maximum loss is the difference between the maintenance requirement and what I collected, or $307.50.

If SVXY closes at any price above $40 on January 15, both puts will expire worthless and the maintenance requirement disappears. I don’t have to do anything except think of how I will spend my profit of $192.50. I will have made 62% on my investment. Where else can you make this kind of return for as little risk as this trade entails?

Of course, as with all investments, you should only risk what you can afford to lose. But I believe the likelihood of losing on this investment is extremely low. The stock is destined to move higher, not lower, as soon as the current turbulent market settles down.

If you wanted to take a little more risk, you might buy the 45 put and sell a 50 put in the Jan-15 series. You would be betting that the stock manages to move a little higher over the next 4 months. You could collect about $260 per spread and your risk would be $240. If SVXY closed any higher than $50 (which history says that it should), your profit would be greater than 100%. I have also placed this spread trade in my personal account (and my charitable trust account as well).”

It is now 10 weeks later. SVXY is trading at $58 ½. I could buy back the first spread for $.45 ($47.50 after commissions). That would give me a $145 profit on my maximum risk of $307.50. That works out to a 47% gain for 10 weeks. That was easy money for me.

The other spread I suggested, raising the strikes of both the long and short sides by $10, could have been sold for $260. You could buy back the spread for $102.50 including commissions, giving you a profit of $157.50 on a maximum risk of $240, or 65%. Or you could just wait it out and enjoy the full 108% gain if SVXY closes no lower than $50 on the third Friday in January. I am hanging on to both my original bets and not selling now unless something better comes along.

In some Terry’s Tips, we make similar investments like this each January, betting that one year later, stocks we like will be at least where they were at the time. The portfolio we set up this year made those kinds of bets on GOOG, AAPL, and SPY. It will make 92% on the maximum amount at risk in 6 weeks if these three stocks are where they are today or any higher when the January 2016 puts expire. In fact, GOOG could fall by $155 and we would still make over 100% on that spread we had sold in January 2015. We could close out all three spreads today and make a gain of 68% on our maximum risk.

These are just some examples of how you can make longer-term bets on your favorite stocks with options, and making extraordinary gains even if the stock doesn’t do much of anything.

 

First Saturday Report with October 2015 Results

Monday, November 2nd, 2015

This week I would like to share with you (for the first time ever) every option position we hold in every stock-based actual portfolio we carry out at Terry’s Tips.  You can access this report here.If you missed it last week, be sure to check out the short videos which explains why I like calendar spreads, and  How to Make Adjustments to Calendar and Diagonal Spreads.

There is a lot of material to cover in the report and videos, but I hope you will be willing to make the effort to learn a little about a non-traditional way to make greater investment returns than just about anything out there.

Terry

First Saturday Report with October 2015 Results

Here is a summary of how well our 5 stock-based portfolios using our 10K Strategy performed last month as well as for their entire lifetime:

First Saturday Report October Results 2015

First Saturday Report October Results 2015

 

While it was a good month for the market, the best in 4 years, our 5 portfolios outperformed the market by 166% in October.

Enjoy the full report here.

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.

Terry

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).

A Low-Risk Trade to Make 62% in 4 Months

Tuesday, September 8th, 2015

Market volatility continues to be high, and the one thing we know from history is that while volatility spikes are quite common, markets eventually settle down.  After enduring a certain amount of psychic pain, investors remember that that the world will probably continue to move along pretty much as it has in the past, and market fears will subside.While this temporary period of high volatility continues to exist, there are some trades to be made that promise extremely high returns in the next few months.  I would like to discuss one today, a trade I just executed in my own personal account so I know it is possible to place.

Terry

A Low-Risk Trade to Make 62% in 4 Months

As we have been discussing for several weeks, VIX, the so-called Fear Index, continues to be over 25.  This compares to the 12 – 14 level where it has hung out for the large part of the past two years.  When VIX eventually falls, one thing we know is that SVXY, the ETP that moves in the opposite direction as VIX, will move higher.

Because of the persistence of contango, SVXY is destined to move higher even if VIX stays flat.  Let’s check out the 5-year chart of this interesting ETP:

5 Year Chart SVXY September 2015

5 Year Chart SVXY September 2015

Note that while the general trend for SVXY is to the upside, every once in a while it takes a big drop.  But the big drops don’t last very long.  The stock recovers quickly once fears subside.  The recent drop is by far the largest one in the history of SVXY.

As I write this, SVXY is trading about $47, up $2 ½ for the day. I believe it is destined to move quite a bit higher, and soon.  But with the trade I made today, a 62% profit (after commissions) can be made in the next 4 months even if the stock were to fall by $7 (almost 15%) from where it is today.

This is what I did:

Buy to Open 1 SVXY Jan-16 35 put (SVXY160115P35)
Sell to Open 1 SVXY Jan-16 40 put (SVXY160115P40) for a credit of $1.95  (selling a vertical)

When this trade was executed, $192.50 (after a $2.50 commission) went into my account. If on January 15, 2016, SVXY is at any price higher than $40, both of these puts will expire worthless, and for every vertical spread I sold, I won’t have to make a closing trade, and I will make a profit of exactly $192.50.

So how much do I have to put up to place this trade?  The broker looks at these positions and calculates that the maximum loss that could occur on them would be $500 ($100 for every dollar of stock price below $40).  For that to happen, SVXY would have to close below $35 on January 15th.  Since I am quite certain that it is headed higher, not lower, a drop of this magnitude seems highly unlikely to me.

The broker will place a $500 maintenance requirement on my account.  This is not a loan where interest is charged, but merely cash I can’t use to buy shares of stock.  However, since I have collected $192.50, I can’t lose the entire $500. My maximum loss is the difference between the maintenance requirement and what I collected, or $307.50.

If SVXY closes at any price above $40 on January 15, both puts will expire worthless and the maintenance requirement disappears.  I don’t have to do anything except think of how I will spend my profit of $192.50.  I will have made 62% on my investment.  Where else can you make this kind of return for as little risk as this trade entails?

Of course, as with all investments, you should only risk what you can afford to lose.  But I believe the likelihood of losing on this investment is extremely low.  The stock is destined to move higher, not lower, as soon as the current turbulent market settles down.

If you wanted to take a little more risk, you might buy the 45 put and sell a 50 put in the Jan-15 series.  You would be betting that the stock manages to move a little higher over the next 4 months. You could collect about $260 per spread and your risk would be $240.  If SVXY closed any higher than $50 (which history says that it should), your profit would be greater than 100%.  I have also placed this spread trade in my personal account (and my charitable trust account as well).

Update on Last Week’s SVXY Volatility Trade

Friday, September 4th, 2015

Last week I suggested buying two calendar spreads on the inverse volatility ETP called SVXY.  At the time, it was trading at $58 and history showed it was highly likely to move higher in the short run.  It didn’t.  Instead, it has fallen to below $46 today.  Anyone who followed this trade (as I did) is facing about a 75% loss right now.

Today I would like to discuss this trade a bit more, and tell you what I am doing about it.

Terry

Update on Last Week’s SVXY Volatility Trade

As I said last week, the market is going crazy.  VIX, the so-called Fear Index, skyrocketed to 40 last week, something it hasn’t done for over 2 years.  It has fallen to about 28 today, and if history is any indicator, it is headed for the 12 – 14 level where it has hung out for the large part of the past two years.

Here is the two-year chart of VIX so you can get an idea of how unusual the current high level of volatility is:
XIV Chart September 2015

XIV Chart September 2015

Note that about 90% of the time, VIX is well below 20.  When it moves higher than that number, it is only for a short period of time.  Every excursion over 20 is quickly reversed.

There is a strong correlation between the value of VIX and the price changes in SVXY.
When VIX is low (or falling), SVXY almost always moves higher.  When VIX shoots higher (or stays higher), SVXY will fall.  Over the past month, SVXY has fallen from the low $90’s to about half of that today.  Never in the 7-year history of this ETP has it fallen by such a whopping amount.

SVXY is constructed by trading on the futures of VIX.  Each day, the ETP purchases at the spot price of VIX and sells the one-month-out futures.  Since about 90% of the time, the futures price is greater than the spot price (a condition called contango), SVXY gains slightly in value.  The average contango number is about 5%, and that is how much SVXY is expected to gain in those months.

Every once in a while (less than 10% of the time), current uneasiness is so high (like it is today), VIX is higher than the futures values.  When this occurs, it is called backwardation (as opposed to contango).  Right now, we have backwardation of about -8%.  If this continued for a month, SVXY might be expected to fall by that amount.

However, backwardation is not the dominant condition for very long.  It rarely lasts as long as a week.  It is highly likely that contango will return, VIX will fall back below 20, and SVXY will recover.

Let’s review the trades I made last week:

Buy To Open 1 SVXY Oct1-15 60 call (SVXY151002C60)
Sell To Open 1 SVXY Sep1-15 60 call (SVXY150904C60) for a debit of $3.35  (buying a calendar)

Buy To Open 1 SVXY Oct1-15 65 call (SVXY151002C65)
Sell To Open 1 SVXY Sep1-15 65 call (SVXY150904C65) for a debit of $3.30  (buying a calendar)

For every two spreads I bought, I shelled out $665 plus $5 in commissions, or $670.

Here is what the risk profile graph says these positions will be worth at the close in 10 days when the short calls expire next Friday:

SVXY Risk Profile Graph September 2015

SVXY Risk Profile Graph September 2015

The chart shows that if the stock fell below $46 (as it has today), the spreads will lose nearly $500 of the $670 cost.  That is just about what has happened. In fact, implied volatility (IV) of the SVXY options has fallen from about 100 to about 90 which means the value of the Oct1-15 calls has also fallen a bit that the above graph indicates.  The 60 spread could be sold right now for about $1.20 and the 65 spread would get only about $.65.  That works out to a loss of about $480 on a $670 investment (about 75% after commissions).

While a 75% loss is just awful, remember that we expected to make 90% on these spreads if the stock had ended up between $60 and $67 as we expected it would (and we would presumably have rolled the Sep1-15 expiring calls to future weekly series and increased our gain to well over 100%.

Every once in a while, the market does exactly the opposite of what you expected (or what historic experience would predict). This is one of those times.  Fortunately, they occur in far less than 50% of the time.  If you made this same bet on a number of occasions, over the long run, you should make excellent gains.

This time, you either have a choice of closing out the spreads or doing nothing, just hanging on (waiting for a resurgence of SVXY and being able to sell the remaining Oct1-15 calls at a higher price).  If you do sell the spread rather than letting the short Sep1-15 calls expire worthless today, be sure to use a limit order.  Most of the time, you should be able to get a price which is just slightly below the mid-point of the quoted spread price.  Options on SVXY carry wide bid-ask ranges, but spreads are usually possible to execute near the mid-point of the quoted prices.

I plan to do nothing today.  Even if I decide to sell Sep2-15 or Sep-15 calls against my long Oct1-15 positions, I will do it later (once SVXY has moved higher, as it should when the market settles down and VIX falls back to where it usually hangs out).

The spreads I suggested making a week ago have proved to be extremely unprofitable (at least so far).  But taking losses is a necessary part of option trading.  There are often big losses, but big gains are also possible (and oftentimes, probable).

 

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