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Posts Tagged ‘Straddles’

How to Contend With Historically Low Option Prices

Monday, March 19th, 2012

Option prices for the market in general (SPY) are lower than they have been for five years.  Maybe it is time to change from a strategy of selling short-term options (the strategy carried out at Terry’s Tips) to one of buying those options and hoping the market is more volatile than those low option prices would expect.

We will discuss that possibility today.

How to Contend With Historically Low Option Prices

Before discussing the situation of low option prices for most equities, I should comment on the continuing high option prices for Apple.  Implied Volatility (IV – the most important determinate of whether option prices are “high” or “low”) is about 40 for AAPL.  This means the market is expecting AAPL to fluctuate about 40% over the course of a year.

The high option prices for AAPL has meant that our calendar spread strategies has been quite successful of late (we move our calendar spreads to new strike prices as the stock moves higher).  We carry out two AAPL portfolios at Terry’s Tips – one gained 8% last week and the other gained over 20%.  The one that gained 8% has been operating for one month less than two years and is now ahead by 642%.  It is our most profitable portfolio by a large margin. 

Compare this 40 IV number for AAPL to IV of the S&P 500 tracking stock, SPY, which is called VIX.  It is less than 15, and briefly fell below 14 last week for the first time since I can remember.  This is extreme low territory (the mean average is about 20).

The IV picture for SPY gets even more interesting when you check out the Weekly options.  When VIX is calculated, the Weekly option prices are not included (only options with 8 or more days of remaining life or included).  IV for the SPY Weeklys is only 12.47.

Last week SPY rose $2.70 and the week before, moved by $3 in both directions during the week.  If you bought an at-the-money straddle or strangle using SPY Weeklys at today’s prices in either of those weeks, you would surely have doubled your money in a single week.

With SPY closing at $140.30 last Friday, you could have bought a 140 Weekly straddle (both a put and call at the 140 strike) for $1.80 or a strangle (the 141 call and the 140 put) for $1.33.  If the stock moved by at least $1.50 in either direction next week, either of those purchases should result in a gain.  SPY moves by that much in just about every week, even in quiet markets like we have been having so far this year.

_ _ _

It is an interesting trade to try.  I plan to buy a few this week (in both my personal account and in one of the Terry’s Tips portfolios), just to test it out.  Of course, you should never risk money that you can’t afford to lose.

We have made 3 short videos which explain the 3-week results of our AAPL trading. The original positions were set out in an actual account carried out at Terry’s Tips.  The YouTube link is http://youtu.be/6J9KPuimyXk

The portfolio was updated in the Week 2 video -
http://youtu.be/e0B7_6e_5AE 

And finally, adjustment trades we made were displayed in this little video –
http://youtu.be/YC3d2NuX2MI  Be sure to enlarge it to full-screen mode so you can see the numbers. 
_ _ _
Any questions?   I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.

You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips (including the two AAPL-based portfolios) and learn all about the wonderful world of options by subscribing here.   Why wait any longer to make this important investment in yourself? 

I look forward to having you on board, and to prospering with you.

Terry

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).

Carrying Out the Last Minute Strategy

Monday, August 1st, 2011

Last week was the worst week for the market in a year. Most investors are not happy campers. A few of our portfolios did quite well, however. Our bearish one gained, of course, but two others did well in spite of the crashing averages.

Last week we discussed our William Tell portfolio which is an options bet that AAPL will move higher. Last week, the stock fell slightly, but our William Tell portfolio gained 2.3%, once again demonstrating that an options portfolio can outperform the outright purchase of stock (see free report that explains it all below).

Our Last Minute portfolio gained 27% on the amount invested last week. This is the portfolio I would like to talk about today.

Terry

Carrying Out the Last Minute Strategy

We carry out one portfolio that is a little unusual in many respects.  It is entirely in cash until late in the day each Thursday.  At that point, we decide whether we expect that SPY will fluctuate by more or less than a dollar on Friday.  If there is an important report coming out on Friday (such as the government’s job report which is due next week on the 5th), history has shown that SPY is quite likely to move by a fairly large amount in one direction or the other.  Other weeks, when the stock has moved by a dollar or more for several days in a row, we would expect that level of volatility to continue on Friday (which often has the greatest volatility of the week).

If we expect the market (SPY) to move by more than a dollar on Friday, we buy straddles or strangles.  If we expect it to move by less than a dollar on Friday, we buy calendar spreads (the long side with only 8 days of remaining life and the short side with one day of remaining life).

Last Thursday, we had trouble deciding which way to go, and we decided to invest less than half our money.  Ironically, we could have selected either straddles or calendars and we would have made money last week.  Early in the day, the stock fell by almost $1.50, but it ended up falling only $.89 for the day.

We bought straddles, the Jul5-11 131 calls and Jul5-11 130 puts, paying $1.12 each.  We bought 20 straddles, investing $2240.  When the market tanked early in the morning, we sold those straddles for $1.47.  We made a gain of $607, or 27% for the day (after commissions).

This was the fourth consecutive week that the Last Minute portfolio has made a gain.  Over that time, we have gained a total of $2860 on an average investment of $3450.  That works out to 83% on the money at risk (per unit, and many subscribers invest in lots of units).

We also would have made a gain last week if we had guessed the stock would move less than a dollar on Friday.  In that case, since SPY was trading between $130 and $131, we would have bought calendar spreads at the 130 and 131 strikes (either puts or calls could have been used, but we typically would have bought put calendars at the 130 strike and call calendars at the 131 strike).

These two spreads would have made a gain if the net change in SPY for the day was less than a dollar.  It was, at $.89, so we couldn’t have gone wrong last week.

We are having a lot of fun with this Last Minute portfolio, and so far, it has been quite profitable as well.

By coming on the Terry’s Tips bandwagon, you can play along with us in the Last Minute portfolio as well as 7 other portfolios, including the William Tell that has done so well as AAPL has moved higher.

We have written a detailed report on how the actual William Tell portfolio gained over 100% in 2010-11 while the stock rose only 25%.  You will learn how you can use the Shoot Strategy on any other stock of your choosing as well.  You can get this special report free when you subscribe to the Terry’s Tips service for a price which is less than a dinner for two at a decent restaurant – only $79.95 for the whole enchilada, including:

1)    My 72-page White Paper which explains my favorite option strategies in detail, including Trading Rules for each, 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 if you wish.
·    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% on Apple in 2010-11 While AAPL Rose Only 25%“.

With this one-time offer, you will receive everything for only $79.95, the price of the White Paper alone. But you must order by Tuesday, August 2, 2011. Click here and enter Special Code 802 in the box at the bottom of the page to get the special Apple report as a free bonus.

Buying Calendar Spreads with Weekly Options

Monday, July 18th, 2011

We have a portfolio called the Last Minute portfolio. It remains in cash all week until Thursday near the close when we have to make a decision. Do we expect that SPY will fluctuate by more than a dollar, or less that a dollar on the next day.

If we think it will fluctuate less than a dollar, the best move is to buy calendar spreads, buying options with 8 days of remaining life and selling options that will expire the very next day. These spreads are designed to make money if the stock (SPY) changes by less than a dollar on Friday.

On Thursdays which precede the government monthly job reports, or when the stock option for that week has been unusually volatile, a different strategy is employed. Rather than betting that SPY will fluctuate by less than a dollar, we buy either a straddle or strangle that will most likely make money if SPY moves by more than a dollar on Friday.

Last week, there was no economic news coming out on Friday that might spook the market, but SPY had fluctuated by more than a dollar in three of the first four days that week. This would suggest that the best bet would to buy a strangle or straddle, but we did not feel too confident that the high volatility would continue, and since there is a higher risk involved in the straddle-strangle alternative, we decided to stick with calendar spreads.

With about 15 minutes of trading left on Thursday, SPY was trading at $131.10 and we bought 40 Jul4-11 – Jul-11 131 put calendar spreads, paying $.87 per spread. The stock immediately fell $.30 and we bought an additional 20 identical spreads at the 130 strike, paying $,85 for these as well. In a back test study we had learned that if a big move took place on Friday, three out of four times it was on the downside, so our initial positions should usually be set up to be bearish.

Our starting positions were heavily skewed to the downside. We could handle a $1.25 move in that direction but only a $.75 move to the upside. The actual upward move of $.76 for the day should have resulted in a break-even at best.

When the market opened up about $.40, our short position became quite uncomfortable. Shortly after the open, we were lucky enough to close out the 130 calendar spread for $.05 more than we paid for it, exactly enough to cover commissions and break even. Later in the day when SPY had fallen to near $131, we sold half our 131 spreads for $1.12, a nice premium on the $.87 cost (we gained $20 per spread after commissions, or $400 on a $1740 investment).

We were hoping that the stock would close out the day very near the current price and we would make a huge gain. We weren’t so lucky as the stock shot suddenly higher in the last half hour of trading, and we closed out the remaining spreads for $1.05 for a $14.75 gain per spread after commissions (we bought back the expiring 131 calls for $.02, avoiding the commission).

Bottom line, we were quite pleased with a 13.3% gain after commissions for the day on our capital at risk when the stock did not move in the direction we were hoping. Over the last two weeks, the Last Minute portfolio has gained $2059 on an average investment of $3630 (56%) . How many stock investments do you suppose did this well?

Buying Strangles with Weekly Options (and How We Made 67% in a Single Day Last Week)

Monday, July 11th, 2011

We have a portfolio called the Last Minute portfolio. It remains in cash all week until Thursday near the close when calendar spreads are placed, buying options with 8 days of remaining life and selling options that will expire the very next day. These spreads are designed to make money if the stock (SPY) changes by less than a dollar on Friday (we set money aside to make a hedging bet on Friday if it becomes necessary).

On Thursdays which precede the government monthly job reports, a different strategy is employed (we have noticed that volatility tends to be extreme on those days when the jobs report comes out). Rather than betting that SPY will fluctuate by less than a dollar, we buy either a straddle or strangle that will most likely make money if SPY moves by more than a dollar on Friday.

This was the Trade Alert we sent out to Insiders on Thursday with about 10 minutes remaining in the trading day:

“July 7, 2011 Trade Alert – Last Minute Portfolio

With the government jobs report due tomorrow, we would rather bet that the stock moves by a dollar or more rather than placing calendar spreads that make a gain only if the stock moves by less than a dollar. We will invest only about a quarter of our available cash:

BTO 30 Jul2-11 135 put (SPY110708P135)

BTO 30 Jul2-11 136 call (SPY110708C136) for $.68 (buying a strangle)”

With SPY trading just about half way between $135 and $136 Thursday afternoon, we decided to buy the above strangle rather than a straddle. If the stock had been closer to one particular strike price, we would have opted for a straddle instead.

We bought 30 strangles for $68 each, investing $2040.

If at any point on Friday, SPY changed in value by more than $1.00 in either direction, we could probably sell those options at a profit. (At any price above $136.50, the calls could probably be sold for more than $68 we paid for the strangle, and at any price below $135.50, the puts could be sold for more than we paid for the strangle.) A small amount could also probably be gained by selling the other side of the strangle as well (unless the stock moved well more than a dollar).

When the government report came out on Friday, the market was spooked by the poor numbers – Non-farm private payrolls were expected to grow by 110,000 while the actual number was a disappointing 57,000. Total nonfarm payrolls grew only 18,000 compared to an expected 80,000 (government jobs dropped by 39,000). The stock (SPY) opened down $1.40 and moved down almost $2 during the day.

Early in the day while the 135 puts were trading at about $1.00, we placed a limit order to sell 25 of our 30 puts at $1.10, and the order was executed about a half hour later. This would insure that we made a profit for the day no matter what happened from that point forward. We were hoping that either the stock moved lower and we could sell the remaining 5 puts for a higher price or the stock would make a big move upward and maybe we could collect something from selling our 30 calls at the 136 strike.

The stock continued to fall, and later in the day we placed an order to sell the remaining 5 puts. We collected $1.52 ($152) each for them. That wasn’t the absolute high for the day but it was darn close. Had we waited until the close, we would have only received $.37 for those puts, and lost money on our investment. This proves the value in taking a profit on the great majority of positions whenever it might come up rather than waiting for a possible windfall gain if the stock continues in only one direction.

Bottom line, we collected a profit for the day of $1363 after commissions on our investment of $2040, or 67%.

Straddle buyers like volatility as much as we don’t like it in our other portfolios. There are many ways to profit with options. It is best to remain flexible, and use the option strategy that best matches current market conditions. Buying straddles or strangles when option prices are low and volatility is high is one very good way to make extraordinary gains, as we happily did last week.

The downside to buying straddles or strangles is that if the market doesn’t fluctuate much, you could lose every penny of your investment (although if you don’t wait too much longer than mid-day on the day options expire, even out-of-the-money options retain some value and should be able to be sold for something). This makes it a much riskier investment than the other option strategies we recommend at Terry’s Tips. However, straddle- or strangle-buying can be quite profitable if the current market patterns persist.

Buying Straddles with Weekly Options

Thursday, July 7th, 2011

Buying Straddles with Weekly Options

For the past 7 days, SPY had fluctuated more than $1.00 every day. One of the portfolios that we carry out at Terry’s Tips involves placing calendar spreads near the close on Thursday (buying options with 8 days of remaining life and selling options that will expire the next day). The risk profile graph for these spreads shows that a profit will be made if SPY fluctuates by less than a dollar in either direction on Friday (which it has done historically most of the time).

However, with 7 consecutive days of greater-than-$1.00 fluctuations, it did not seem like a prudent bet to place calendar spreads on Thursday (especially since SPY tends to be more volatile on Fridays when the Weekly options expire than it is on the other days).

Instead of buying calendar spreads, we bought SPY 132 puts and calls which would expire on Friday, paying $97 for each pair (with commissions, $99.50 each). At the time, SPY was trading right at $132.

This is called buying a straddle. If at any point on Friday, SPY changed in value by more than $1.00 in either direction, we could sell those options at a profit. (At any price above $133, the calls could be sold for more than we paid for the straddle, and at any price below $131, the puts could be sold for more than we paid for the straddle.)

SPY managed to change $2.00, beating the $1.00 threshold for the 8th consecutive day. Subscribers who held their straddles until near the close were able to double their money on Friday (admittedly, most of us pulled the trigger earlier than that, but I did manage to keep a few spreads until the end in my personal account).

Straddle buyers like volatility as much as we don’t like it in our other portfolios. What they like best is a whip-saw market where the market moves sharply higher (and they sell their calls) and then down (when they unload their puts). There are many ways to profit with options. Buying straddles when option prices are low and volatility is high is one very good way to make extraordinary gains.

The downside to buying straddles is that if the market doesn’t fluctuate much, you could lose every penny of your investment. This makes it a much riskier investment than the other option strategies we recommend at Terry’s Tips. However, straddle-buying can be quite profitable if the current market patterns persist.

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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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