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Posts Tagged ‘SPY’

Follow-Up on Last Week’s 10K Bear Portfolio

Monday, November 14th, 2011

Last week I discussed our 10K Bear portfolio, the one that is designed to do best when the market falls.  Today I would like to expand that discussion and report on how well the portfolio did last week when there was extreme volatility (SPY fell over 4% on Wednesday but managed a gain of about 1% for the week).

Once again, I hope you will spend a few minutes studying the graph below.  If you can see what will happen in the next few days (ending Friday, November 18th), you will have a much better understanding of why I believe that options offer more potential than just about any other investment you can make.

I hope you will make a 5-minute investment in yourself and study the graph carefully.

Follow-Up on Last Week’s 10K Bear Portfolio: 

Most people own stocks or mutual funds that do best when the market moves higher.  How do they make out when the market moves lower?  Presumably, their portfolio value goes down.  Maybe they don’t feel so badly because all of their friends have also suffered a loss as well.

But if you’re anything like me, you hate to lose money, even if all my friends are losing at the same time.

Doesn’t it make sense that some of your money should be invested in something that does best when the market moves lower?  It’s called hedging.  Hedge funds do it all the time.  They even have named themselves after the idea.

We have set up a portfolio that is designed to do to just that.  We call it the 10K Bear portfolio.  Many Terry’s Tips subscribers (myself included) duplicate the trades made in this portfolio in their own account through the Auto-Trade program at TD Ameritrade’s thinkorswim.  Others copy the trades on their own in their account.

The neat thing about this portfolio is that it can make gains even if the stock goes up.  How many investments make gains when the stock moves in the opposite direction that you are betting on?  Therein lies the magic of options trading.

Two weeks ago, the S&P 500 (“the market”), SPY, fell 2.4%.  Our 10K Bear portfolio gained a whopping 24% for the week.  Last week, SPY rose $1.18, about 1%, and our portfolio gained 5.8%.  I call that having your cake and eating it too. 

Obviously, this portfolio does not make money every single week, regardless of what the market does.  But it almost always makes gains if the market stays flat or falls moderately, and also can make smaller gains if the market moves just slightly higher.  At the beginning of each week, we create a risk profile graph like the one below so we know exactly how the portfolio will perform at the various stock prices where it might end up on Friday.

The 10K Bear is a portfolio currently worth about $4200.  We own puts at several different strike prices (between $124 and $128).  These puts will expire on the third Friday in January of 2012.  Against these long puts we have sold Weekly puts which will expire on November 18, 2011.  These Weekly puts are at lower strike prices (from $122 to $126).

The Weekly puts that we have sold have higher decay rates than the January puts that we own (all options fall in value, or decay, every day the underlying stock remains flat).  This means that every day that the market does not fluctuate, our portfolio value grows larger.   That is the neat thing about a properly-designed options portfolio.  You can make gains even if you are wrong.  When you buy stock, the only way you make money is if the stock moves higher.  With options, you can make substantial gains even if the market stays absolutely flat (or moves moderately either up or down).

Here is the risk profile graph for our 10K Bear portfolio.  It shows how much the portfolio will gain or lose at the possible ending stock prices this Friday.

The second column from the right (under P/L Day) gives the dollar loss or gain at the three selected prices in the first column (Stk Price), and you can estimate the losses or gains from the graph curve at other possible stock prices.  At last Friday’s close, SPY was trading at $126.66.

You can see that if the stock is absolutely the same at the close next Friday, the portfolio will gain $470, or just over 10%.  If the stock falls moderately, by $2, and ends up at $124.66, the gain should be $970, or about 20%.  (Both these numbers will be reduced slightly from commissions and trading costs when the Weeklys are bought back next Friday and replaced with Weeklys that expire on November 25th.)

The stock can go up as high as $128 before a loss should result.  In other words, the portfolio makes excellent money if the stock stays flat, even more money if the market falls moderately, and it also can gain if the market goes up (as long as the rise is not too great).

Where else can you invest your money and expect these kinds of returns?  If you know of anything that can offer even remotely as great as these gains, please send the details along to me.  If you like, I would share them with my subscribers so we all could benefit.

Why are you waiting any longer before you learn the details of how you can start making money using the 10K Strategy that is the basis of the 8 actual portfolios that we carry out (and you can easily duplicate in your own account, either on your own or through the Auto-Trade program at thinkorswim)?

Give yourself (and your loved ones) an early Christmas gift, and increase your earning potential exponentially by subscribing today.  Do it right here.

A Bearish Option Portfolio That Can Gain Even if the Market Doesn’t Fall

Monday, November 7th, 2011

Where should you place your investment dollars in this time of uncertainty?  There are no easy answers. 

The stock market is not an comfortable place to be.  Through the first ten months of 2011 (in what many have considered to be a good year for the market), it has gained about 2%.  It is lower today than it was three years ago.  Bonds do not yield enough to make much of a difference, and CD rates are pathetic.  Foreign stocks have not done appreciably better than domestic stocks.  And real estate has been a great way to lose money big time.

I believe that our SPY portfolios offer greater potential for monetary returns than any investment alternative out there.  (SPY is the tracking stock for the S&P 500 stock index, so you are trading on the entire market rather than an individual stock.)

Today I would like to share with you the risk profile graph of one of our SPY portfolios – this one is called the 10K Bear.  It is positioned to do best if the market falls.  It can serve as a hedge against your other investments which presumably do best if the market moves higher.

I hope you will spend a few minutes studying the graph below.  If you can see what will happen in the next few days (ending Friday, November 11th), you will have a much better understanding of why I believe that options offer more potential than just about any other investment you can make.

I hope you will make a 5-minute investment in yourself and study the graph carefully.

A Bearish Option Portfolio That Can Gain Even if the Market Doesn’t Fall:

 
The 10K Bear is a portfolio currently worth about $4000.  We own puts at several different strike prices (between $124 and $128).  These puts will expire on the third Friday in January of 2012.  Against these long puts we have sold Weekly puts which will expire on November 11, 2011.  These Weekly puts are at lower strike prices (from $121 to $125).

The Weekly puts that we have sold have higher decay rates than the January puts that we own (all options fall in value, or decay, every day the underlying stock remains flat).  This means that every day that the market does not fluctuate, our portfolio value grows larger.   That is the neat thing about a properly-designed options portfolio.  You can make gains even if you are wrong.  When you buy stock, the only way you make money is if the stock moves higher.  With options, you can make substantial gains even if the market stays absolutely flat (or moves moderately either up or down).

Here is the risk profile graph for our 10K Bear portfolio.  It shows how much the portfolio will gain or lose at the possible ending stock prices this Friday.

The second column from the right (under P/L Day) gives the dollar loss or gain at the three selected prices in the first column (Stk Price), and you can estimate the losses or gains from the graph curve at other possible stock prices.  At last Friday’s close, SPY was trading at $125.75.

You can see that if the stock is absolutely the same at the close next Friday, the portfolio will gain $901, or about 22% on the $4000 portfolio value.  If the stock falls moderately, by $2, and ends up at $123.75, the gain should be $1,337, or about 33%.  (Both these numbers will be reduced slightly from commissions and trading costs when the Weeklys are bought back next Friday and replaced with Weeklys that expire on November 18th.)

The stock can go up as high as $129 before a loss should result.  In other words, the portfolio makes excellent money if the stock stays flat, even more money if the market falls moderately, and it also can gain if the market goes up (as long as the rise is not too great).

Where else can you invest your money and expect these kinds of returns?  If you know of anything that can offer even remotely as great as these gains, please send the details along to me.  If you like, I would share them with my subscribers so we all could benefit.

Last week, the market was weak.  SPY fell $3.12.  Our 10K Bear portfolio gained 24% (after commissions and roll-over costs).  That is more than most stock investments make in several years.  We did it in a single week.

Why are you waiting any longer before you learn the details of how you can start making money using the 10K Strategy that is the basis of the 8 actual portfolios that we carry out (and you can easily duplicate in your own account, either on your own or through the Auto-Trade program at thinkorswim)?

Give yourself (and your loved ones) an early Christmas gift, and increase your earning potential exponentially by subscribing today.  Do it right here.

Choose an Option Strategy Based on Actual vs. Implied Volatility

Monday, October 31st, 2011

It is important to differentiate between the implied volatility of option prices and the actual volatility of the underlying stock or ETF.  It is not an easy task to recognize when the two measures deviate from one another, but if you can identify a difference, huge gains can be made with the proper option strategy.

Today we will discuss how you can capitalize on any differences that you might be able to find.

Choose an Option Strategy Based on Actual vs. Implied Volatility: 

 
Last week the European debt crisis was apparently averted, at least in the eyes of option investors.  VIX, the so-called “fear index”, the average implied volatility of option prices on the S&P 500 tracking stock (SPY) fell dramatically to just below 25 (still above its mean average of about 20 but well below the 40+ it has sometimes been at during the previous month).

When option prices are high (i.e., implied volatility, VIX) is high, there are huge gains possible by writing call options (not our favorite ploy) or buying calendar spreads (our favorite most of the time).  However, when actual market volatility is greater than the expected volatility (i.e., implied volatility of the option prices), writing calls or buying calendar spreads is generally unprofitable.

Over the last three months, we have had great difficulty making gains with our calendar spreads because actual market volatility was too great.  On the other hand, we have had some luck with buying straddles (or strangles), a strategy of buying both a put and a call on the same underlying and hoping that there is a big fluctuation in either direction.

Last Wednesday, after following VXX (a “stock” that is based on the futures of VIX), we noticed that actual volatility was huge – it had fluctuated $2 or more almost every single day for several weeks.  On Wednesday in one of our portfolios we made a small ($1400) buy of 5 VXX 43 puts and calls which would expire two days later.  We paid $279 per straddle.  When the market for VXX opened up sharply lower on Thursday, we sold the straddle for $596, netting 117% after commissions.

In another portfolio where we owned calendar spreads on VXX, we lost money.  Our results in these two portfolios clearly demonstrated that when high actual volatility occurs, you do best by buying short-term options, either puts or calls depending on which way you believe the market is headed, or both puts and calls if you admit you really don’t know which way it will go (as we usually do).  On the other hand, when actual volatility is low, calendar spreads deliver higher returns.
Now that much of the uncertainty facing the market has subsided a bit, we believe it is time for the calendar spreads to prosper once again as they have for most of the past few years (since late 2008 extending up to August of this year).

A Useful Way to Think About Delta

Monday, October 24th, 2011

This week we will talk a little about one of the “Greeks” – the variables designed to predict how option prices will change when underlying stock prices change or time elapses. It is important to have a basic understanding of some of these measures before embarking on trading options.

I hope you enjoy this short discussion.

A Useful Way to Think About Delta 


The first “Greek” that most people learn about when they get involved in options is Delta.  This important measure tells us how much the price of the option will change if the underlying stock or ETF changes by $1.00. 

If you own a call option that carries a delta of 50, that means that if the stock goes up by $1.00, your option will increase in value by $.50 (if the stock falls by $1.00, your option will fall by a little less than $.50).
The useful way to think about delta is to consider it the probability of that option finishing up (on expiration day) in the money.  If you own a call option at a strike price of 60 and the underlying stock is selling at $60, you have an at-the-money option, and the delta will likely be about 50.  In other words, the market is saying that your option has a 50-50 chance of expiring in the money (i.e., the stock is above $60 so your option would have some intrinsic value).

If your option were at the 55 strike, it would have a much higher delta value because the likelihood of its finishing up in the money (i.e., higher than $55) would be much higher.  The stock could fall by $4.90 or go up by any amount and it would end up being in the money, so the delta value would be quite high, maybe 70 or 75.  The market would be saying that there is a 70% or 75% chance of the stock ending up above $55 at expiration.

On the other hand, if your call option were at the 65 strike while the stock was selling at $60, it would carry a much lower delta because there would be a much lower likelihood of the stock going up $5 so that your option would expire in the money.

Of course, the amount of remaining life also has an effect on the delta value of an option.  We will talk about that phenomenon next week.

Low Cost ($180) SPY Calendar Spread Which Might Double in One Week

Monday, October 3rd, 2011

Option prices are higher than they have been in several years.  Today I would like to suggest a way to capitalize on these high prices be selling some short-term premium.  You might double your money in a week.  

Maybe you would be unlucky and it would take two weeks to double your money (of course, there are no guarantees in the investment world, but this one looks pretty good to us). 

What I am hoping is that you try this little investment, and if you are successful, you use some of your gain to join Terry’s Tips where you can get a complete education on how to generate consistent gains which could far exceed conventional investments.

Timing is everything – you act soon, you can become a Terry’s Tips Insider for a special low price (see below).

Low Cost ($180) SPY Calendar Spread Which Might Double in One Week

For the past several weeks, SPY has fluctuated in a range between $112 and $120.  Right now it is resting very close to the lower end of that range.  To place the spread that I am suggesting, you first need to make your best bet as to where the stock will be trading at the close of business on Friday.

Your chances of picking the right strike price are about as good as picking the right horse in a horse race, but the good thing about the calendar spread is that if your horse comes close to winning (i.e., the stock closes not too far away from your strike price choice), you can also be a winner.

When you buy a calendar spread, the maximum gain comes when the stock ends up at precisely the same price as the strike price of your spread.  At that price, the short position expires worthless (or very near to it) and the long side will have more time premium than any other option in that expiration series.

Once you have made your best bet as to where the price of SPY will be next Friday, you would put this spread on placing this trade:

BTO (buy to open) 1 SPY Oct-11 115 call (SPY111022C115)
STO (sell to open) 1 SPY Oct1-11 115 call (SPY111007C115) for $1.80 (buying a calendar spread)

This sample is for the 115 strike (you might select a higher or lower strike).  If you select a strike of 112 or higher, we would recommend using calls, or if lower than 112, using puts, although mathematically it makes no difference.  At thinkorswim, Terry’s Tips subscribers would pay a $2.50 commission to place this spread.

The $1.80 price is what you would have had to pay last Friday.  It will probably be less than this if you place the trade today or tomorrow.

You will have two opportunities to get your investment back (and hopefully, more).  The first will come on Friday (October 7).  You will buy back the call you sold short and sell the next-week call at the same strike.  This is the trade you would make then:

BTC (buy to close) 1 SPY Oct1-11 115 call (SPY111007C115)
STO (sell to open) 1 SPY Oct2-11 115 call (SPY111014C115) for $  (selling a calendar spread)

At last Friday’s closing option prices, if the stock is trading between $113 and $116, you would be able to sell this spread for a minimum of $180.  You would have all your money back, and when you made this same trade a week later (on October 21), anything you received from the sale would be pure profit.

An alternative move would be to close out the original calendar spread on October 7 rather than rolling over for another week.  If the strike you selected was within $3 or $4 of the stock price on that day, you should be able to sell the spread at a profit.

This little option spread might be a way to get your feet wet in the options world, and you would learn a little about how calendar spreads work without having to wait very long to see the results.  The closer your selected strike price is to the stock price when the short options expire, the greater your return. 

We hope you will re-invest some of the gain you might make by taking advantage of our discounted price for new subscribers who come on board by October 11, 2011.  Here is that special offer:

iPhone 5 Introduction Offer: Apple will introduce iPhone 5 on October 4.  For the first time, Sprint will be able to sell an iPhone.  It could be a big deal for Apple, and all of us who are betting on their stock.

On April 29, 2010, Terry’s Tips set up an actual portfolio to show how an options portfolio could outperform a stock portfolio using the same stock.  We chose Apple (AAPL) as a stock that we thought would go up.  On the day we set up the portfolio, AAPL was trading at $277.

In the next nine months, AAPL rose 25% and our $5000 starting portfolio value had soared to $10,087 (after all commissions, of course), a gain of over 100%.  

Our options portfolio had outperformed the purchase of stock by a huge margin – gaining 4 times as much as the stock gained.  Of course, the stock has now gone even higher, and our $5000 portfolio recently surpassed the $12,000 level.
 
We have written up a special report which shows exactly how we gained over 100% with an options portfolio while the stock rose only 25%.  You could easily use this same strategy on any stock of your own choosing, and presumably do as well (assuming that you picked a stock that went higher).
 
This report is worth many times the price of the entire subscription by itself. Together with my White Paper, this report is a short and complete explanation of how you can use an options strategy to double your money if the stock goes up only 25%

If you sign up by October 11, one week after the iPhone 5 hits the shelves, we will discount our introductory package all the way down to $59.95, a full $20 lower than thousands of subscribers have paid. 

This is what you get:
 
1)   My 70+ page White Paper which explains my favorite option strategies in detail, including my 10 Trading Rules, and 20 companies to use with the ‘Lazy Way” Strategy, (which guarantees a 100% gain in 2 years if the  stock stays flat or goes up).
 
2)   2 FREE months of the Options Tutorial Program (a $49.90 value), which includes:
 
 - A 14-lesson tutorial on trading stock options which will give you a thorough understanding of trading stock options.
 - A weekly update of 8 actual portfolios so that you can follow their progress over time.
 - Specific trades for each portfolio emailed to you so you may mirror them in your own account.
 - Access to historical analytic reports and portfolio updates posted in the Insiders section of Terry’s Tips.
  - If you choose to continue after the 2 free months, do nothing, and you’ll be billed at a discounted rate of $19.95 per month.  
 
3)    A FREE special report – “How We Made 100% with Apple in 2010-11 While the Stock Rose only 25%.”

 
With this one-time offer, you will receive everything for only $59.95, less than the value of the White Paper alone. But you must order by October 11, 2011.   Click here – http://www.terrystips.com/order.php and enter Special Code iPhone5.  
 
Why wait?  Do it today!  You will learn a strategy that could pay you back many times over, and do it every year for the rest of your investing life.  

Terry

P.S. Receive the special free report entitled “How We Made 100% on Apple in 2010-11 While AAPL Rose Only 25%”  in addition to all the other benefits of a Terry’s Tips subscription for the discounted special price of only $59.95,  go to http://www.terrystips.com/order.php, and use Special Code iPhone5.

Using Options to Prosper in Down Markets

Monday, September 26th, 2011

Last week was the worst week for the market for almost three years.  The S&P 500 fell by a whopping 6.6%.  Investors seem to be dumping everything.  Usually, when stock markets crash, gold moves higher, but last week, gold fell $100 in a single day, the worst one-day drop in its history.  Silver and other commodities were crushed as well.  Billions of dollars are going into treasuries even though over half the S&P 500 companies have higher yields. 

What do you in times like these?  Would you be surprised if I said that a well-designed options portfolio might be the perfect solution?

Using Options to Prosper in Down Markets

At Terry’s Tips, we conduct an actual portfolio which we call the 10K Bear.  We believe that this portfolio offers a better alternative than any other as a downside hedge vehicle.  Even better, the market does not have to go down for you to make a gain.  A flat or slightly higher market also makes weekly gains most of the time

Here is the current risk profile graph for our 10K Bear portfolio.  It shows the loss or gain that should result from a $5200 investment in SPY put options on September 30 when the Weeklys expire in a few days.  Last Friday, SPY closed at $113.54  (This graph assumes that today’s option prices – VIX – will remain unchanged – if VIX falls significantly over the next 4 days, the gains would be less than the graph indicates.)

The graph shows that about an 18% gain would be made if the stock stays flat, and a higher gain would result if SPY fell up to $3 (if it fell that far, we would make an adjustment to extend the downside potential).  Commissions would reduce results somewhat as well. The stock could go up as high as $116.50 before a loss would occur on the upside.  Clearly, this is an excellent hedge against a market drop, and it has the added advantage of also making gains if the market is flat or slightly higher.

How do we create an options portfolio like this?  It is the strategy we use when we want to bet on the direction of the market.  Most of the portfolios at Terry’s Tips make the assumption that we have no idea of which direction the market will take in the short run.

The 10K Bear portfolio involves buying put options with several months of remaining life and selling short-term (Weekly) puts to someone else.  The puts we sell are mostly at lower strikes than those we own.  Rather than trying to sell short-term puts which maximize the amount of short-term decay we could collect, we aim to sell just enough short-term decay to cover the decay of the longer-term puts we own.

In Greek terms (pardon me for using Greeks if you are not familiar with them), we seek to maximize the negative net delta of the portfolio while maintaining a positive theta.  As the stock fluctuates during the month, adjustments are often required to maintain these two goals.  (Adjustments we made in the August expiration month enabled the 10K Bear  portfolio to gain 55% while the original positions at the beginning of the month projected a gain of less than half that amount).

While this may seem to be a little complicated right now, if you become a Terry’s Tips subscriber, it should all become quite clear.  You can follow how the 10K Bear operates over time (as well as several other bullish-leaning portfolios) so that you can do it on your own if you wish.  (Most of our subscribers don’t do it on their own, but sign up for the Auto-Trade program at thinkorswim and have them execute the trades automatically for them).

An Options Strategy That Can Deal With High Volatility

Monday, September 19th, 2011

The New York Times published an article last week which showed how market volatility was greater than any time in history, and that there were many indications that such high volatility had now become the norm.

Some people call the current market activity a “wolf” market – neither a bear market nor a bull market, but one characterized by high short-term volatility, big swings in both directions, while the general market is not really charging higher or falling lower.

We have developed an options strategy to contend with a wolf market, and I would like to tell you a little about it today.

An Options Strategy That Can Deal With High Volatility

 

We call it the 10K Wolf portfolio.  It was started a little over a week ago with $10,000.  The portfolio consists of buying in-the-money SPY LEAPS that expire in June 2012.  We bought puts that had a strike price of 125 and calls that had a strike price of 115.

The advantage to buying long-term in-the-money puts and calls is that much of their value is intrinsic.  The time premium component is relatively small, and these options decay quite slowly, especially in the early months (before they have only 3 or 4 months of remaining life, when we would most likely sell them and replace them with longer-term puts and calls).

The total cost of each pair of LEAPS cost about $2800.  As long as SPY trades within the range of $115 – $125 (and we are not short any in-the-money options which we are careful to make sure of), the minimum value of the pair of LEAPS will be at least $1000. (Actually, if the stock moves outside that range, the total value of the put and call LEAPS would be greater than $1000).

That leaves $1800 of time premium that will decay over the 9 months of remaining life.  We will need to sell $200 worth of Weekly puts and calls each month to cover the decay of the LEAPS.

With today’s high option prices (they are high because volatility is high), we are able to sell out-of-the-money Weekly puts and calls that generate more than $200 in premium income each week.  If they remain out-of-the-money, they will expire worthless in a week and we can sell the next week’s out-of-the-money puts and calls, presumably collecting another $200 per pair of LEAPS that own).

You can see that we can sell enough premium each week to cover the decay that our long positions will suffer each month.  The other three weeks of option selling should be pure profit. The gains that we expect are really a little better than this example because in the early months, the pair of LEAPS will decay less than the $200 average that it will decay over the entire 9-month period.  In the later months when they will be decaying at more than $200, we would no longer own them.

Adjustments often need to be made during the week if the stock moves more than moderately in either direction.  Last week, SPY moved almost $5 higher.  We had to buy back short calls that had become in the money (the strike price was lower than the stock price) and replace them with higher-strike short calls.  Each of these trades meant that we had to shell out money, but at the same time, we bought back inexpensive well-out-of-the-money puts and replaced them with more costly higher-strike Weekly puts at a credit of approximately the same as rolling up the calls cost us.

Last week, in its first full week of operation, in spite of the volatility (the 10K Strategy does best in flat markets), the 10K Wolf gained 7.4% (after commissions, of course).  Some people would be happy with that kind of return for an entire year in today’s investment world.

Here is the risk profile graph for this portfolio for next week:

The break-even range is about $3 in either direction from the current SPY price of $121.52, assuming no adjustments are made. We would make about 7% in an absolutely flat market, or about 6% if SPY were to fluctuate less than $2 in either direction. Price changes higher than $2 would require that an adjustment be made, so it is not clear what the profit or loss might be.

Obviously, carrying out the 10K Wolf strategy takes a lot of work. Rather than doing it yourself, we think a better idea would be to become a Terry’s Tips Insider, sign up for the Auto-Trade program at thinkorswim and let them make all the trades that we make in this portfolio in your own account for you, so you will enjoy exactly the same results as our portfolio. You can read about your gains, and smile, when we send out the Saturday Report each week, or whenever you check up on your trading account.

Some Thoughts About Options Trading

Tuesday, September 6th, 2011

Last week was a crazy one in the market – four days of gains and then a big crash on Friday when the jobs report came out and said that there were no new jobs created last month, the worst showing in eleven months.  It was a tough week for our portfolios (we generally hate volatility) but our bearish portfolio racked up a 5.5%, the seventh week in a row when it made gains.  Over this period, this portfolio has picked up 58% in value while SPY has fallen by 8.8%.

This week I would like to share some of my thoughts about my favorite subject.  Guess what it is?

Some Thoughts About Options Trading   

I think the key to options trading success is the exact same key to stock trading success; the ability to pick stocks or ETFs that will perform exactly as you would like it to.

In stock trading, you make money only when you buy stocks that go up or short stocks that go down.

In options trading, you make money when you apply bullish options strategies on stocks that go up, bearish options strategies on stocks that go down, neutral options strategies on stocks that remain stagnant or volatile options strategies on stocks that stage quick and explosive breakouts.

You only lose money in options trading when you apply bullish options strategies on stocks that goes down, bearish options strategies on stocks that go up, neutral options strategies on stocks that breaks out and volatile options strategies on stocks that remain stagnant.

Even though the key to success in options trading is largely the same as the key to success in stock trading or any other forms of investment or trading, options trading does have a few tricks up its sleeves to help put the odds in your favor.

First of all is leverage and protection.  The ability to risk lesser capital for the same profit or a lot more profit with the same capital already puts the benefit of risk in your favor.
 
Second is the ability to make a profit in more than one direction!  Yes, since the key to success in options trading is the ability to “guess” the correct direction the underlying stock or index is going to take, won’t your chances of success be dramatically increased if you could profit in more than one direction?

For example, the 10K Strategy which we employ at Terry’s Tips (a strategy using calendar spreads at several different strike prices) makes a profit when the stock goes upwards, remains stagnant OR drops a little!  Yes, all 3 directions.  Won’t your chances of success be dramatically increased with a strategy like that?

The key to stock investing is to pick the right stock(s).  Almost no one, even the professionals can do that consistently.  That is why options trading increases the odds of success in your favor if you use a strategy that profits from more than one direction.  This is a huge advantage that you do not get when you invest in stock – it only exists in option trading.

Creative Ways to Profitably Trade Options

Monday, August 29th, 2011

For over 11 years, Terry’s Tips has carried out different option strategies in actual brokerage accounts.  Of course, commissions are paid in these accounts so the results are exactly what you would experience if you followed the trades we make.

Paying subscribers can watch these portfolios unfold over time to get a better understanding on what causes the bottom line to grow or shrink (yes, unfortunately, that does happen occasionally).

Today I would like to discuss how three of these portfolios are set up and how they did last week.

Creative Ways to Profitably Trade Options   

Most of our strategies involve buying LEAPS or other longer-term options and selling short-term (higher decaying) against these long positions.  While that is the central idea, there is a multitude of ways it can be carried out.

We use the central idea in an unusual way in a portfolio we call the Last Minute.  It sits in cash until late in the day on Thursday when we make a guess as to whether we think SPY will move more or less than $2 on Friday.  If we think it won’t move by that much (like we did last week in spite of Mr. Bernanke’s upcoming speech), we buy calendar spreads at several different strikes, some above and some below the stock price.

Last week, we might have done better to have guessed in the other direction since SPY moved by more than $2 on the upside and almost that much on the downside.  But during the day, when the stock had moved up about $.45, we sold all our calendar spreads, making a nice 22% gain after commissions for a single day of trading.

The Last Minute portfolio has made gains in 14 of the 17 weeks it has been running, and has made 187% on the average weekly investment.  (One of the losing weeks was only a $39 loss, and in another one, I made an uncharacteristically stupid trading decision and passed up an 8% gain only to lose money by the end of the day.)

Another portfolio which uses the central idea is set up for subscribers who are fearful that the market might move lower.  It is called the 10K Bear.  Two weeks ago, SPY fell by 4.6% in a single week and our 10K Bear portfolio gained 17.5% after commissions.  Last week, SPY did a complete turn-around and rose 4.7%.  Our 10K Bear portfolio managed to gain 1% for the week in spite of being on the wrong side of the trend.  Admittedly, option prices are unusually high right now, and this bearish portfolio could not be expected to make a gain with such a stock price move in normal times, but it is nice to see that in today’s market, we seem to be able to make weekly gains no matter which way the market moves.

A third portfolio uses the central idea in a different way.  We picked an underlying stock (AAPL) which we think is headed higher, and instead of selling as much short-term premium as we can, we sell just enough to cover the decay of our long positions.  If the stock goes higher, we should experience a much greater percentage gain than the stock.  Last week, in spite of Steve Jobs’ resignation, AAPL gained 7.7%.  Our portfolio gained a whopping 31.4%, proving once again that options can consistently outperform stock.

An analogy – Checkers is to buying stocks as chess is to trading options

Monday, August 22nd, 2011

Last week we saw the market fall for the fourth consecutive week.  Volatility in the options market shot higher than we have seen in many years.  As usual, there are abundant ways in the options market that do not exist in conventional investments.

For example, our Bearish SPY portfolio gained 17.5% last week while the market (SPY) fell by 4.5%.  This portfolio has now gained 42.3% over the last couple of months as the market has steadily gone down.

Today I would like to discuss a little about the challenges of learning a bit more about the options business.

An analogy – Checkers is to buying stocks as chess is to trading options

Someone said that investing in stocks is pretty much like playing checkers.  Any 10-year old can do it.  You really don’t need much experience or understanding.  If you can read, you can buy stock (and probably do just about as well as anyone else because it’s basically a roulette wheel choice in spite of the near universal belief that you are smarter than anyone else).

Options, on the other hand, 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 (and for some reason, these professionals are selling the stock to them instead of buying it).

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 in option trading.  Most people are not.

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.

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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