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Posts Tagged ‘Stocks vs. Stock Options’

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.

Favorite Suggested Books for the Conservative Options Investor

Wednesday, January 6th, 2016

The market has made a dreadful start of the year.  This is the perfect time to check out the world of options because there are many profitable ways to make money with options even when the markets are crashing everywhere.

Terry’s Tips is celebrating its 14th birthday this month.  As our birthday gift to you, we are offering our service at the lowest price in the history of our company.  Thousands of subscribers have paid double this price to join.  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 on January 11, 2016. 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).

This week I will share some of my favorite books on investing.  I hope you enjoy reading one or more of them.

Terry 

Favorite Suggested Books for the Conservative Options Investor

I am often asked about my favorite books on investing (other than my own Making 36%: Duffer’s Guide to Breaking Par in the Markets Every Year, In Good Years and Bad).  There have been several revised editions of this book, and the 2015 edition came out just a couple of months ago. 

Here is my list of favorites: 

McMillan on Options, by Lawrence G. McMillan, (New York: John Wiley & Sons, second edition, 2004).  This is generally accepted as “The Bible” on options.  It is fairly expensive and the text is ponderous for most people, but everything is there.

Options Plain and Simple, by Lenny Jordan.  (London: Prentice Hall, 2000).  One of many books which describe just about all the option strategies with some good advice as to which ones work under which conditions.  Much lighter reading than McMillan on Options.

Winning the Loser’s Game, by Charles D. Ellis, (New York, McGraw-Hill, 4th Edition, 2002).  While this is not about options per se, it is just about the most sensible book I have ever found that discusses stock market investments in general.

The Little Book That Beats the Market, by Joel Greenblatt, (New York, John Wiley, 2006).  Again, this book is not about options, but is perhaps the best book written in the past several years about how to select individual stocks.

The Little Book of Common Sense Investing, by John C. Bogle (New York, John Wiley, 2007),  Another book which is not about options, but I challenge anyone to read this book because if they do, I believe there is no way they would ever buy a mutual fund again (except a no-load broad market index fund).

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

For a one-time fee of only $39.95 (less than the cost of a copy of McMillan on Options), 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 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).

Invest in Yourself in 2016 (at the Lowest Rate Ever)

Wednesday, December 30th, 2015

To celebrate the coming of the New Year I am making the best offer to come on board that I have ever offered.  It is time limited.  Don’t miss out.

Invest in Yourself in 2016 (at the Lowest Rate Ever)

The presents are unwrapped.  The New Year is upon us.  Start it out right by doing something really good for yourself, and your loved ones.

The beginning of the year is a traditional time for resolutions and goal-setting.  It is a perfect time to do some serious thinking about your financial future.

I believe that the best investment you can ever make is to invest in yourself, no matter what your financial situation might be.  Learning a stock option investment strategy is a low-cost way to do just that.

As our New Year’s gift to you, we are offering our service at the lowest price in the history of our company.   If you ever considered becoming a Terry’s Tips Insider, this would be the absolutely best time to do it.  Read on…

Don’t you owe it to yourself to learn a system that carries a very low risk and could gain over 100% in one year as our calendar spreads on Nike, Costco and Starbucks have done in 2015?

So what’s the investment?  I’m suggesting that you spend a small amount to get a copy of my 70-page (electronic) White Paper, and devote some serious early-2016 hours studying the material.

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

For a one-time fee of only $39.95, you receive the White Paper (which normally costs $79.95 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 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).

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.

Making Adjustments to Calendar and Diagonal Spreads

Thursday, October 29th, 2015

If you missed it last week, be sure to check out the short video which explains why I like calendar spreads.  This week I have followed it up with a second video entitled How to Make Adjustments to Calendar and Diagonal Spreads.

I hope you will enjoy both videos.  I also hope you will sign up for a Terry’s Tips insider subscription and start enjoying exceptional investment returns along with us (through the Auto-Trade program at thinkorswim).

Terry

Making Adjustments to Calendar and Diagonal Spreads

When we set up a portfolio using calendar spreads, we create a risk profile graph using the Analyze Tab on the free thinkorswim trading platform.  The most important part of this graph is the break-even range for the stock price for the day when the shortest option series expires.  If the actual stock price fluctuates dangerously close to either end of the break-even range, action is usually required.

The simple explanation of what adjustments need to be made is that if the stock has risen and is threatening to move beyond the upside limit of the break-even range, we need to replace the short calls with calls at a higher strike price.  If the stock falls so that the lower end of the break-even range is threatened to be breached, we need to replace the short calls with calls at a lower strike.

There are several ways in which you can make these adjustments if the stock has moved uncomfortably higher:

1. Sell the lowest-strike calendar spread and buy a new calendar spread at a higher strike price, again checking with the risk profile graph to see if you are comfortable with the new break-even range that will be created.  The calendar spread you are buying will most likely cost more than the calendar spread you are selling, so a small amount of new capital will be required to make this adjustment.
2. Buy a vertical call spread, buying the lowest-strike short call and selling a higher-strike call in the same options series (weekly or monthly).  This will require a much greater additional investment.
3. Sell a diagonal spread, buying the lowest-strike short call and selling a higher-strike call at a further-out option series.  This will require putting in much less new money than buying a vertical spread.
4. If you have a fixed amount of money to work with, as we do in the Terry’s Tips portfolios, you may have to reduce the number of calendar spreads you own in order to come up with the necessary cash to make the required investment to maintain a satisfactory risk profile graph.

There are similar ways in which you can make these adjustments if the stock has moved uncomfortably lower.  However, the adjustment choices are more complicated because if you try to sell calls at a lower strike price than the long positions you hold, a maintenance requirement comes into play.  Here are the options you might consider when the stock has fallen:

1. Sell the highest-strike calendar spread and buy a new calendar spread at a lower strike price, again checking with the risk profile graph to see if you are comfortable with the new break-even range that will be created.  The calendar spread you are buying will most likely cost more than the calendar spread you are selling, so a small amount of new capital will be required to make this adjustment.
2. Sell a vertical call spread, buying the highest-strike short call and selling a lower-strike call in the same options series (weekly or monthly).  This will require a much greater additional investment.  Since the long call is at a higher strike price than the new lower-strike call you sell, there will be a $100 maintenance requirement per contract per dollar of difference between the strike price of the long and short calls.  This requirement is reduced by the amount of cash you collect from selling the vertical spread.
3. Sell a diagonal spread, buying the highest-strike short call and selling a lower-strike call at a further-out option series.  This will require putting in much less new money than selling a vertical spread.

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).

How to Fine-Tune Market Risk With Weekly Options

Monday, August 17th, 2015

This week I would like to share an article word-for-word which I sent to Insiders this week.  It is a mega-view commentary on the basic options strategy we conduct at Terry’s Tips.  The report includes two tactics that we have been using quite successfully to adjust our risk level each week using weekly options.

If you are already trading options, these tactic ideas might make a huge difference to your results.  If you are not currently trading options, the ideas will probably not make much sense, but you might enjoy seeing the results we are having with the actual portfolios we are carrying out for our subscribers.

Terry

How to Fine-Tune Market Risk With Weekly Options

“Bernie Madoff attracted hundreds of millions of dollars by promising investors 12% a year (consistently, year after year). Most of our portfolios achieve triple that number and hardly anyone knows about us.  Even more significant, our returns are actual – Madoff never delivered gains of any sort. There seems to be something wrong here.

Our Capstone Cascade portfolio is designed to spin off (in cash) 36% a year, and it has done so for 10 consecutive months and is looking more and more likely that we will be able to do that for the long run (as long as we care to carry it out).  Actually, at today’s buy-in value (about $8300), the $3600 we withdraw each year works out to be 43%.  Theta in this portfolio has consistently added up to double what we need to make the monthly withdrawal, and we gain even more from delta when SVXY moves higher.

Other portfolios are doing even better.  Rising Tide has gained 140% in just over two years while the underlying Costco has moved up 23.8% (about what Madoff promised).   Black Gold appears to be doing even better than that (having gained an average of 3% a week since it was started).

A key part of our current strategy, and a big change from how we operated in the past, is having short options in each of several weekly series, with some rolling over (usually about a month out) each week.  This enables us to tweak the risk profile every Friday without making big adjustments that involve selling some of the long positions.  If the stock falls during a week, we will find ourselves with previously-sold short options that  are at higher strikes than the stock price, and we will collect the  maximum time premium in a month-out series by selling an at-the-money (usually call) option.

If the stock rises during the week, we may find that we have more in-the-money calls than we would normally carry, so we will sell new month-out calls which are out of the money.  Usually, we can buy back in-the-money calls and replace them with out-of-the-money calls and do it at a credit, again avoiding adjustment trades which might cause losses when the underlying displays whip-saw price action.

For the past several weeks, we have not suffered through a huge drop in our underlyings, but earlier this year, we incurred one in SVXY.  We now have a way of contending with that kind of price action when it comes along.  If a big drop occurs, we can buy a vertical call spread in our long calls and sell a one-month-out at-the-money call for enough cash to cover the cost of rolling the long side down to a lower strike.  As long as we don’t have to come up with extra cash to make the adjustment, we can keep the same number of long calls in place and continue to sell at-the-money calls each week when we replace expiring short call positions.  This tactic avoids the inevitable losses involved in closing out an out-of-the-money call calendar spread and replacing it with an at-the-money calendar spread which always costs more than the spread we sold.

Another change we have added is to make some long-term credit put spreads as a small part of an overall 10K Strategy portfolio, betting that the underlying will at least be flat in a year or so from when we placed the spread.  These bets can return exceptional returns while in many respects being less risky than our basic calendar and diagonal spread strategies.  The longer time period allows for a big drop in stock price to take place as long as it is offset by a price gain in another part of the long-term time frame.  Our Better Odds Than Vegas II portfolio trades these types of spreads exclusively, and is on target to gain 91% this year, while the Retirement Trip Fund II portfolio is on target to gain 52% this year (and the stock can fall a full 50% and that gain will still come about).

The trick to having portfolios with these kinds of extraordinary gains is to select underlying stocks or ETPs which you feel strongly will move higher.  We have managed to do this with our selections of COST, NKE, SVXY, SBUX, and more recently, FB, while we have  failed to do it (and faced huge losses) in our single failing portfolio, BABA Black Sheep where Alibaba has plummeted to an all-time low since we started the portfolio when it was near its all-time high.  Our one Asian diversification effort has served to remind us that it is far more important to find an underlying that you can count on moving higher, or at least staying flat (when we usually do even better than when it moves higher).

Bottom line, I think we are on to something big in the way we are managing our investments these days.  Once you have discovered something that is working, it is important to stick with it rather than trying to improve your strategy even more.  Of course, if the market lets us know that the strategy is no longer working, changes would be in order.  So far, that has not been the case.  The recent past has included a great many weeks when we enjoyed 10 of our 11 portfolios gaining in value, while only BABA lost money as the stock continued to tumble. We will soon find another underlying to replace BABA (or conduct a different strategy in that single losing portfolio).”

3 Options Strategies for a Flat Market

Thursday, August 6th, 2015

Before I delve into this week’s option idea I would like to tell you a little bit about the actual option portfolios that are carried out for Insiders at Terry’s Tips.  We have 11 different portfolios which use a variety of underlying stocks or ETPs (Exchange Traded Products).  Eight of the 11 portfolios can be traded through Auto-Trade at thinkorswim (so you can follow a portfolio and never have to make a trade on your own).  The 3 portfolios that cannot be Auto-Traded are simple to do on your own (usually only one trade needs to be made for an entire year).

Ten of our 11 portfolios are ahead of their starting investment, some dramatically ahead.  The only losing portfolio is based on Alibaba (BABA) – it was a bet on the Chinese market and the stock is down over 30% since we started the portfolio at the beginning of this year (our loss is much greater).  The best portfolio for 2015 is up 55% so far and will make exactly 91% if the three underlyings (AAPL, SPY, and GOOG) remain where they presently are (or move higher).  GOOG could fall by $150 and that spread would still make 100% for the year.

Another portfolio is up 44% for 2015 and is guaranteed to make 52% for the year even if the underlying (SVXY) falls by 50% between now and the end of the year.  A portfolio based on Costco (COST) was started 25 months ago and is ahead more than 100% while the stock rose 23% – our portfolio outperformed the stock by better than 4 times.  This is a typical ratio –  portfolios based on Nike (NKE) and Starbucks (SBUX) have performed similarly.

We are proud of our portfolio performance and hope you will consider taking a look at how they are set up and perform in the future.

Terry

3 Options Strategies for a Flat Market

“Thinking is the hardest work there is, which is probably the reason why so few engage in it.” – Henry Ford

If you think the market will be flat for the next month, there are several options strategies you might employ.  In each of the following three strategies, I will show how you could invest $1000 and what the risk/reward ratio would be with each strategy.  As a proxy for “the market,” we will use SPY as the underlying (this is the tracking stock for the S&P 500 index).  Today, SPY is trading at $210 and we will be trading options that expire in just about a month (30 days from when I wrote this).

Strategy #1 – Calendar Spread.  With SPY trading at $210, we will buy calls which expire on the third Friday in October and we will sell calls which expire in 30 days (on September 4, 2015).  Both options will be at the 210 strike.  We will have to spend $156 per spread (plus $2.50 commissions at the thinkorswim rate for Terry’s Tips subscribers).  We will be able to buy 6 spreads for our $1000 budget. The total investment will be $951.   Here is what the risk profile graph looks like when the short options expire on September 4th:

SPY Calendar Spread Risk Profile Graph August 2015

SPY Calendar Spread Risk Profile Graph August 2015

On these graphs, the column under P/L Day shows the gain (or loss) when the short options expire at the stock price in the left-hand column.  You can see that if you are absolutely right and the market is absolutely flat ($210), you will double your money in 30 days.  The 210 calls you sold will expire worthless (or nearly so) and you will own October 210 calls which will be worth about $325 each since they have 5 weeks of remaining life.

The stock can fluctuate by $4 in either direction and you will make a profit of some sort.  However, if it fluctuates by much more than $4 you will incur a loss.  One interesting thing about calendar spreads (in contrast to the other 2 strategies we discuss below) is that no matter how much the stock deviates in either direction, you will never lose absolutely all of your investment.  Since your long positions have an additional 35 days of life, you will always have some value over and above the options you have.  That is one of the important reasons that I prefer calendar spreads to the other strategies.

Strategy #2 – Butterfly Spread:  A typical butterfly spread in involves selling 2 options at the strike where you expect the stock to end up when the options expire (either puts or calls will do – the strike price is the important thing) and buying one option an equidistant number of strikes above and below the strike price of the 2 options you sold.  You make these trades all at the same time as part of a butterfly spread.

You can toy around with different strike prices to create a risk profile graph which will provide you with a break-even range which you will be comfortable with.  In order to keep the 3 spread strategies similar, I set up strikes which would yield a break-even range which extended about $4 above and below the $210 current strike.  This ended up involving selling 2 Sept-1 2015 calls at the 210 strike, and buying a call in the same series at the 202.5 strike and the 217.5 strike.  The cost per spread would be $319 plus $5 commission per spread, or $324 per spread.  We could buy 3 butterfly spreads with our $1000 budget, shelling out $972.

Here is the risk profile graph for that butterfly spread when all the options expire on September 4, 2015:

SPY Butterfly Spread Risk Profile Graph August 2015

SPY Butterfly Spread Risk Profile Graph August 2015

You can see that the total gain if the stock ends up precisely at the $210 price is even greater ($1287) than it is with the butterfly spread above ($1038).  However, if the stock moves either higher or lower by $8, you will lose 100% of your investment.  That’s a pretty scary alternative, but this is a strategy that does best when the market is flat, and you would only buy a butterfly spread if you had a strong feeling of where you think the price of the underlying stock will be on the day when all the options expire.

Strategy #3 – Short Iron Condor Spread.  This spread is a little more complicated (and is explained more fully in my White Paper).  It involves buying (and selling) both puts and calls all in the same expiration series (as above, that series will be the Sept1-15 options expiring on September 4, 2015).  In order to create a risk profile graph which showed a break-even range which extended $4 in both directions from $210, we bought calls at the 214 strike, sold calls at the 217 strike and bought puts at the 203 strike while selling puts at the 206 strike.  A short iron condor spread is sold at a credit (you collect money by selling it).  In this case, each spread would collect $121 less $5 commission, or $116.  Since there is a $3 difference between each of the strikes, it is possible to lose $300 per spread if the stock ends up higher than $217 or lower than $203.  We can’t lose the entire $300, however, because we collected $116 per spread at the outset.  The broker will put a hold on $300 per spread (it’s called a maintenance requirement and does not accrue interest like a margin loan does), less the $116 we collected.  That works out to a total net investment of $184 per spread (which is the maximum loss we could possibly incur).  With our $1000 budget, you could sell 5 spreads, risking $920.

Here is the risk profile graph for this short iron condor spread:

SPY Short Iron Condor Spread Risk Profile Graph August 2015

SPY Short Iron Condor Spread Risk Profile Graph August 2015

You can see the total potential gain for the short iron condor spread is about half what it was for either of the earlier spreads, but it has the wonderful feature of coming your way at any possible ending stock price between $206 and $214.  Both the calendar spread and the butterfly spread required the stock to be extremely near $210 to make the maximum gain, and the potential gains dropped quickly as the stock moved in any direction from that single important stock price.  The short iron condor spread has a lower maximum gain but it comes your way over a much larger range of possible ending stock prices.

Another advantage of the short iron condor is that if the stock ends up at any price in the profit range, all the options expire worthless, and you don’t have to execute a trade to close out the positions.  Both the other strategies require closing trades.

This is clearly not a complete discussion of these option strategies.  Instead, it is just a graphic display of the risk/reward possibilities when you expect a flat market.  Maybe this short report will pique your interest so that you will consider subscribing to our service where I think you will get a thorough understanding of these, and other, options strategies that might generate far greater returns than conventional investments can offer.

How to Make 80% a Year With Long-Term Option Bets

Thursday, May 28th, 2015

One of my favorite options plays is a long-term bet that a particular stock will be equal to or higher than it is today at some future date.  Right now might be a perfect time to make that kind of a bet with one of my favorite stocks, Apple (AAPL).Each January, I pick several stocks I feel really positive about and buy a spread that will make an extraordinary gain if the stock is flat or any higher when the options expire one year out.  Today I would like to tell you about one of these spreads we placed in one of the Terry’s Tips portfolios we carry out, and how you can place a similar spread right now.  If AAPL is only slightly higher than it is today a year from now, you would make 100% on your investment.

Terry

How to Make 80% a Year With Long-Term Option Bets

I totally understand that it may seem preposterous to think that over the long run, 80% a year is a possible expectation to have for a stock market investment.  But if the AAPL fluctuates in the future as it has in the past, it will absolutely come about. It can be done with a simple option spread that can be placed right now, and you don’t have to do anything else but wait out a year. If the stock is any higher at the end of the year, the options expire worthless and you don’t even have to close out the spread.  You just get to keep the money you got at the beginning.

Let’s check out the 10-year chart for Apple:

10 Year Apple Chart May 2015

10 Year Apple Chart May 2015

In 9 of the last 10 years, AAPL has been higher at the end of the calendar year than it was at the beginning.  Only in the market-meltdown of 2008-2009 was the stock at a lower price at the end of the year than it was at the beginning.

In January of this year, in one of our Terry’s Tips portfolios, we placed the following trade when AAPL was trading at $112.  We felt confident that the stock would be at least a little higher a year from then.  The precise date would be January 15, 2016, the third Friday of the month when monthly options expire.  This is the trade we made:

Buy To Open 7 AAPL Jan-16 105 puts (AAPL160115P105)
Sell To Open 7 AAPL Jan-16 115 puts (AAPL160115P115) for a credit of $5.25 (selling a vertical)

For each spread, we collected $525 less $2.50 in commissions, or $522.50.  For 7 spreads, we collected $3657.50 after commissions.  The amount at risk per spread was $1000 – $522.50, or $477.50.  For all 7, that worked out to $3342.50.

The proceeds from selling the spread, $3657.50, was placed in our account when the sale was made.  The broker placed a maintenance requirement on us for $7000 (the maximum we could lose if the stock ended up below $105 at expiration.  Our actual risk if this happened would be $7000 less the $3657.50 we received, or $3342.50.  If AAPL ends up at any price above $115 on January 15, 2016, both options will expire worthless and we will make a gain of 109% on our investment.

Since we placed that spread, AAPL has moved up nicely, and it is now at $132.  If you did not want to wait another six months to collect the 109%, you could buy back the spread today for $2.67 ($269.50 per spread after commissions).  Buying back all 7 spreads would cost $1886.50, resulting in a profit of $1771.  This works out to be a 53% gain for the 4 months.  We are waiting it out rather than taking a gain right now, knowing that 109% will come our way even if the stock falls about $17 from here.

AAPL might not be headed to $240 as Carl Ichan (net worth, $23 billion) believes it is, but it seems likely that it might be higher a year from now than it is today.  Options for June, 2016 have just become available for trading.  As I write this today, AAPL is trading at $132.  If you were willing to bet that over the next 12 months, the stock might edge up by $3 or more, you could sell the following spread (in my personal account, I made this exact trade today):

Buy To Open (pick a number) AAPL Jun-16 125 puts (AAPL160617P125)
Sell To Open ((pick a number) AAPL Jun-16 135 puts (AAPL160617P135) for a credit of $5.10  (selling a vertical)

Each contract will cost you about $500 to place, after commissions. This spread will make a 100% profit after commissions if AAPL ends up at any price above $135 on June 17, 2016.

You might wonder why the title of this blog mentioned 80% as a long-term annual gain possibility.  If AAPL behaves in the next 10 years as it has in the last 10 years, and makes a gain in 9 of those years, over the course of a decade, you would gain 100% in 9 years and lose 100% (although the actual loss might be less) in one year, for an average gain of 80% a year.

For sure, you would not want to place all, or even a large part, of your investment portfolio in long-term spreads like this.  But it seems to me that a small amount, something that you can afford to lose, is something that you might consider, if only for the fun of doubling your money in a single year.

How to Make Gains in a Down Market With Calendar Spreads

Thursday, May 14th, 2015

This week I came to the conclusion that the market may be in for some trouble over the next few months (or longer).  I am not expecting a crash of any sort, but I think it is highly unlikely that we will see a large upward move anytime soon.

Today, I would like to share my thinking on the market’s direction, and talk a little about how you can use calendar spreads to benefit when the market (for most stocks) doesn’t do much of anything (or goes down moderately).

Terry

How to Make Gains in a Down Market With Calendar Spreads

For several reasons, the bull market we have enjoyed for the last few years seems to be petering out.  First, as Janet Yellen and Robert Shiller, and others, have recently pointed out, the S&P 500 average has a higher P/E, 20.7 now, compared to 19.5 a year ago, or compared to the 16.3 very-long-term average.  An elevated P/E can be expected in a world of zero interest rates, but we all know that world will soon change.  The question is not “if” rates will rise, but “when.”

Second, market tops and bottoms are usually marked by triple-digit moves in the averages, one day up and the next day down, exactly the pattern we have seen for the past few weeks.

Third, it is May.  “Sell in May” is almost a hackneyed mantra by now (and not always the right thing to do), but the advice is soundly supported by the historical patterns.

The market might not tank in the near future, but it seems to me that a big increase is unlikely during this period when we are waiting for the Fed to act.

At Terry’s Tips, we most always create positions that do best if the market is flat or rises moderately.  Based on the above thoughts, we plan to take a different tack for a while.  We will continue to do well if it remains flat, but we will do better with a moderate drop than we would a moderate rise.

As much as you would like to try, it is impossible to create option positions that make gains no matter what the underlying stock does.  The options market is too efficient for such a dream to be possible.  But you can stack the odds dramatically in your favor.

If you want to protect against a down market using calendar spreads, all you have to do is buy spreads which have a lower strike price than the underlying stock.  When the short-term options you have sold expire, the maximum gain comes when the stock is very close to the strike price.  If that strike price is lower than the current price of the stock, that big gain comes after the stock has fallen to that strike price.

If you bought a calendar spread at the market (strike price same as the stock price), you would do best if the underlying stock or ETF remained absolutely flat.  You can reduce your risk a bit by buying another spread or two at different strikes.  That gives you more than one spot where the big gain comes.

At Terry’s Tips, now that we believe the market is more likely to head lower than it is to rise in the near future, we will own at-the-money calendar spreads, and others which are at lower strike prices.  It is possible to create a selection of spreads which will make a gain if the market is flat, rises just a little bit, or falls by more than a little bit, but not a huge amount.  Fortunately, there is software that lets you see in advance the gains or losses that will come at various stock prices with the calendar spreads you select (it’s free at thinkorswim and available at other brokers as well, although I have never seen anything as good as thinkorswim offers).

Owning a well-constructed array of stock option positions, especially calendar spreads, allows you to take profits even when the underlying stock doesn’t move higher.  Just select some spreads which are at strikes below the current stock price.  (It doesn’t matter if you use puts or calls, as counter-intuitive as that seems – with calendar spreads, it is the strike price, not whether you use puts or calls, that determines your gains or losses.)

Making 36%

Making 36% — A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad

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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.

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