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Posts Tagged ‘Terry’s Tips’

Closing Out Last Week’s Facebook Trades

Wednesday, May 10th, 2017

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

Terry

Closing Out Last Week’s Facebook Trades

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Happy trading,

Terry

Interesting Earnings Play on Facebook

Tuesday, May 2nd, 2017

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

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

Terry

Interesting Earnings Play on Facebook

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FB Risk Profile Graph May 2017

FB Risk Profile Graph May 2017

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

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

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

Happy trading,

Terry

40% Possible in 2 Weeks With an Iron Condor?

Monday, April 17th, 2017

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

Terry

40% Possible in 2 Weeks With an Iron Condor?

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

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

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

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

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

This is the spread I executed this morning:

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

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

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

44% in 46 Days From a Play on ULTA?

Tuesday, April 4th, 2017

I would like to share a trade that we made in one of our Terry’s Tips portfolios today.  By the way, we have 9 portfolios that we carry out for paying subscribers where they can see every trade (including commissions) as we make them. All of these portfolios have made positive gains so far in 2017, and the composite average has picked up 28.8% at the end of the first quarter.  Not bad compared to conventional investment results.

Enjoy today’s offering.

Terry

44% in 46 Days From a Play on ULTA?

There is a lot to like about Ulta Salon, Cosmetics & Fragrance’s (ULTA).  It has been a darling of Wall Street this year, rising about 50%.  It appears on IBD’s Top 50 list of momentum stocks.  The Motley Fool guys have written over 300 articles on the company and include it in their top three beauty stocks.  The company has a plan to add on 500 new stores, and they have exceeded earnings estimates every quarter for the past year.

The chart for the last year shows a steady climb upward, but there have been some setbacks along the way:

 

ULTA Chart April 2017

ULTA Chart April 2017

If you think the momentum might continue for about six more weeks, you might consider this trade we made on April 3rd when ULTA was trading about $285.

Buy To Open 4 ULTA 19May17 275 puts (ULTA170519P275)

Sell To Open 4 ULTA 19May17 280 puts (ULTA170519P280) for a credit limit of $1.55  (selling a vertical)

We collected $620 from this trade, less commissions of $10 at the rate Terry’s Tips  subscribers pay at thinkorswim.  A maintenance requirement of $2000 will be assessed by the broker, less the $610 net we collected, making it a $1390 investment.  This would be the maximum loss if the stock ended up below $275 on May 19th.  If it is at any price above $280 on that day, it works out to a 44% gain for the 46 days we will have to wait.

The stock can fall about $5 and we will still make the maximum gain. While this might not be much downside protection, it is surely a lot better deal than owning the stock where even a dollar drop in the stock will result in a loss for the period.

If the stock does fall below $280 near the end of the six-week period, we would probably roll out the spread to a future time period, a tactic that will give us a little more time for it to rise above $280.  If that becomes necessary, we will send you a note explaining the action we took.

As with any investment, you should do your own research on the fundamentals of any stock or options you buy, and you should only be risking money that you can truly afford to lose.

Happy trading.

Terry

What Can Be Learned From Successful Option Strategies

Tuesday, March 21st, 2017

Today I would like to share some thoughts I sent out on Saturday to paying subscribers at Terry’s Tips.  These thoughts reflected on the recent successes of the nine actual options portfolios we carry out and comment on each week. By the way, all nine portfolios are profitable for 2017 and the composite average gain is currently 28.9% since the beginning of the year.  Last week while the market (SPY) fell 0.3%, our portfolios gained an average of 3.2% for the week, demonstrating that we don’t have to rely on a rising market to enjoy portfolio gains.

Terry

 What Can Be Learned From Successful Option Strategies

 

If we can identify the strategies that resulted in the extraordinary returns we have enjoyed in the first quarter, maybe we can use those strategies for other underlying stocks or ETPs and time periods.

First, we must admit that we had some good luck.  Anyone who makes these kinds of returns must admit that some of it was based on pure luck.  Anyone who follows the mutual fund industry knows this intimately.  Every year, millions of dollars get plowed into the top-performing funds, and a year or five years later (whichever period the top-rated award covered), those funds almost universally underperform in the subsequent period.  As Burton Malkiel explained in the oft-revised book, A Random Walk Down Wall Street, - ”The past history of stock prices cannot be used to predict the future in any meaningful way.” The top stocks (or mutual funds) end up in that position largely on a random basis.  (Some of us remember way back when the Wall Street Journal had a column where monkeys throwing darts competed against the top picks of top-rated analysts, and the monkeys won about half the time.)

But luck doesn’t account for it all.  Our biggest winner was Wiley Wolf where FB rose 21.6% for the year. Our portfolio is up 117.5%, or 5.4 times greater. This is the only portfolio that uses the 10k Strategy, and we have learned that it will return a multiple of what the stock price does.  Unfortunately, that works in both directions, and if the stock had fallen by that amount, our losses would have been proportionately greater.  So we can conclude that we were lucky to be playing FB for a period when it was rising nicely, but our strategy had something to do with achieving the exceptional returns.

A less dramatic explanation of the power of an options strategy has taken place in our SPY-based Leaping Leopard portfolio.  In this portfolio, we are using the strategy of long-term vertical put credit spreads.  This is our favorite way to play underlyings which we believe will at least remain flat, or are likely to rise.  The market (SPY) has picked up 4.9% for the year to date, a wonderful record.  Our Leaping Leopard portfolio has gained 14.9%, or 3 times the size of the index gain.  Even better, our strategy is set up so that if SPY loses as much as 5% or goes up by any amount over the course of the year, we will enjoy a gain of about 40%.  The huge difference between what the market does and our portfolio performance is clearly caused by the strategy.

Returning to the being lucky theme, the volatility-related portfolios have prospered because contango has remained at an elevated level for the entire first quarter of the year.  With the election of a president whose promises and plans were seen to be unusually volatile and uncertain (which ideas would be proposed, and which might actually become real was a real question), the market expected that in the near future, volatility would be great.  Meanwhile, the market racked up small and steady gains, and VIX fell to historic lows and has pretty much remained there.  When VIX is low and the futures are predicting high uncertainty for SPY, contango rises to the historic highs we have seen pretty much all year.

This contango condition has been the major contributor to our Contango portfolio gaining 44.6% so far this year, and to a lesser degree, the 29% gain in Vista Valley and the 14.7% gain in Capstone Cascade.  In the Capstone Cascade portfolio, SVXY has soared by over 40% for the year, a perfect backdrop for a strategy of selling naked puts on the underlying ETP.  At the present level of theta, this portfolio will gain over 100% for the year. We have been selling at strikes which are seriously out-of-the-money, and we would have done just as well if SVXY had not soared like it did.  Even worse, we tried to protect against the possibility of a falling SVXY (we bought into the fears that uncertainty would be the predominant condition), and we also sold some well out-of-the-money calls on the ETP. These short calls caused our returns to be lower than if we had not been so worried that volatility would heat up.

It is far more difficult to predict the short-term movements of a stock than the longer-term movements.  Short-term fluctuations are often caused by emotionally-driven actions in response to news items such as analysts upgrades or downgrades or quarterly numbers or rumors, while longer-term fluctuations are more likely to be based on the fundamental performance of the underlying company or ETP.  In most of our portfolios, we take a longer-term perspective, such as our Boomer’s Revenge portfolio where the shortest-term spread had six months of remaining life when it was placed.  This portfolio is our most conservative, and is designed to gain 30% for the year.  So far, thanks to the rising market, it is ahead of schedule, picking up 18.2% to date.  We are now in the enviable position of being able to look forward to the full 30% annual gains even if the 5 underlying stocks were to fall by 10% between now and the end of the year.

To summarize, the first 11 weeks of 2017 have been good ones for the market.  SPY has gained 4.9%. The prudent owner of a large-market-based index fund will have gained this much so far this year.  This is about the average 2017 gain initially predicted by the composite of the published analysts we identified at the outset of the year.  So the market has achieved in 11 weeks what the analysts expected for the entire year, making it a remarkable year so far.

The difference between this 4.9% market gain and the composite 28.9% of our portfolios is clearly due to the options strategies that we have employed. Options are leveraged investments, and should be expected to perform exponentially better (or worse) than the percentage gains of their underlyings.  However, in most of our portfolios, we can look forward to unusually large gains when the underlyings remain absolutely flat or even lose a little over the course of the year.  This fact alone is proof that a well-designed and executed options strategy can be expected to outperform the market in general or any mutual fund in particular (where over 80% of the funds have underperformed the market over a multi-decade time period, yet still collect billions of dollars every year in fees for their efforts).  We like to think that the performance of our portfolios so far this year is the result of our doing a decent job in the options arena.

Options Which Trade After Hours (Until 4:15)

Wednesday, March 15th, 2017

First, I would like to report that the 9 actual option portfolios carried out at Terry’s Tips  have gained a composite 24.9% so far in 2017.  It has been a good year so far for the market, but it (i.e., SPY) is up only 5.2%, so we have done 4+ times better.  Maybe it would be a good time for you to take a peek at the exact positions and strategies we are using to ring up these kinds of gains.

I noticed that the value of some of our portfolios was changing after the market for the underlying stock had closed.  Clearly, the value of the options was changing after the 4:00 EST close of trading.  I did a Google search to find a list of options that traded after hours, and came up pretty empty.  But now I have found the list, and will share it with you just in case you want to play for an extra 15 minutes after the close of trading each day.

Terry

Options Which Trade After Hours (Until 4:15)

 Since option values are derived from the price of the underlying stock or ETP (Exchange Traded Product), once the underlying stops trading, there should be no reason for options to continue trading.  However, more and more underlyings are now being traded in after-hours, and for a very few, the options continue trading as well, at least until 4:15 EST.

Options for the following symbols trade an extra 15 minutes after the close of trading – DBA, DBB, DBC, DBO, DIA, EFA, EEM, GAZ, IWM, IWN, IWO, IWV, JJC, KBE, KRE, MDY, MLPN, MOO, NDX, OEF, OIL, QQQ, SLX, SPY, SVXY, UNG, UUP, UVXY, VIIX, VIXY, VXX, VXZ, XHB, XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY, XME, XRT.

Most of these symbols are (often erroneously) called ETFs (Exchange Traded Funds).  While many are ETFs, many are not – the popular volatility-related market-crash-protection vehicle – VXX is actually an ETN (Exchange Traded Note).  A better way of referring to this list is to call them ETPs.

Caution should be used when trading in these options after 4:00.  From my experience, many market makers exit the floor exactly at 4:00 (volume is generally low after that time and not always worth hanging around).  Consequently, the bid-ask ranges of options tend to expand considerably.  This means that you are less likely to be able to get decent prices when you trade after 4:00.  Sometimes it might be necessary, however, if you feel you are more exposed to a gap opening the next day than you would like to be.

How to Make 40% in 45 Days With a Bet on Ford

Monday, March 13th, 2017

Last week I suggested a bearish spread on Tesla that would make 67% in 49 days.  The stock has fallen about $7 since then, and the spread that I placed has already picked up 30% in a single week.  I am tempted to close it out and take the profit, but I think I will wait it out and happily collect the entire 67% in six weeks.

Today I am reporting on a spread I placed on Ford (F) on Friday when the stock was trading at $12.54.

Terry

How to Make 40% in 45 Days With a Bet on Ford

Several articles have been published lately which are bullish on Ford, including Ford and Its 4.8% Dividend Yield, and Ford: Break-Out Ahead

On Friday, when F was trading at $12.54, I made a bet that this high dividend yield would at least keep the stock where it is right now for the near future.

Here is the trade I made:

With F trading at $12.54:

Buy To Open # F 28Apr17 11.5 puts (F170428P11.5)
Sell To Open # F 28Apr17 12.5 puts (F170428P12.5) for a credit of $.30 (selling a vertical)

This spread is called a vertical put credit spread.  I prefer using puts rather than calls if I am bullish on the stock because if you are right, and the stock is trading above the strike price of the puts I sold on expiration day, both put options will expire worthless and no further trades need to be made or commissions payable.

For each contract sold, I would receive $30 less commissions of $1.00 (the rate that TastyWorks.com charges).  By the way, you should check out this new brokerage firm because their commission rates are just about the best you will find anywhere.  Here they are:

TastyWorks commission rates

TastyWorks commission rates

Yes, that’s true.  Absolutely no commissions when you close out a trade.  TastyWorks was started early this year by the same people who started thinkorswim (which was later sold to TD Ameritrade).  They haven’t quite set up everything yet, but the commission rates and great trading platform is bound to attract many new subscribers (tell them we sent you, by the way).

The broker will place a $100 maintenance requirement on the above spread.  Subtracting out the $29 you received, your net investment is $71 per spread ($100 – $29).  This is also the maximum loss you would incur if F closes below $11.50 on April 21, 2017 (unless you rolled the spread over to a future month near the expiration date, something I often do, usually at a credit, if the stock has lost a bit since the original trade was placed).

Making a gain of $29 on an investment of $71 works out to 40% for the 6 weeks you will have to wait it out.  That works out to over 300% annualized.  Who says options can’t be fun?

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

Happy trading.

Terry

How to Make 27% in 45 Days With a Bet on Tesla

Sunday, March 5th, 2017

The 9 actual portfolios carried out by Terry’s Tips are having a great 2017 so far.  Their composite value has increased 23.8% for the year, about 4 times as great as the overall market (SPY) has advanced.

The basic strategy employed by most of these portfolios is to bet on what the company won’t do rather than what it will do. Most of the time, that involves picking a blue chip company that you really like, especially one paying a large dividend, and betting that it won’t fall by very much.  You don’t care if it goes up or stays flat.  You just don’t want it to fall more than a few points while you hold your option positions.

Today, I would like to offer a different kind of a bet based on what a popular company might not do.  The company is Tesla (TSLA), and what we think it will not do is to move much higher than it is right now, at least for the next few months.

Terry

 How to Make 27% in 45 Days With a Bet on Tesla

Tesla is a company which has thousands of passionate supporters.  They have bid up the price of a company with fabulous ideas but no earnings to near all-time highs.  If you peruse some of the multiple articles recently written about the company, you can’t help but wonder how the current lofty price can be maintained.

Here are some of the things that are being said:

It’s possible that the Model 3 could bury Tesla in several ways, including:

  • It being substantially late.
  • It not being profitable at the low price it was promised, and thus require a much higher selling price.
  • A much higher selling price or emerging competition leading to much lower than expected volumes.

Tesla will need to spend about $8 billion in its network of charging stations in the U.S. alone if it wants to make recharging a car as convenient as going to a gas station.

Tesla’s acquisition of SolarCity was really a bailout. SolarCity was in deep financial trouble. It could have gone bankrupt, and will need a huge infusion of capital to survive.

The company has historically issued overly optimistic projections, and the recent exodus of its CFO is evidence that some executives are rebelling.

More and more traditional car companies are coming out with all-electric models that will compete directly with Tesla.

China represented 15.6% of its automotive sales during 2016. China’s market is weakening during early 2017 due to tax changes. Hong Kong will be crashing due to the elimination of a tax waiver which will nearly double the price of a Model S.

Goldman Sachs recently downgraded the stock and said it expected it would fall by 25% over the next six months.

Tesla has a market cap of $40 billion on revenue of around $7 billion, while General Motors (G) has a market cap of $55 million on revenue of $166 billion. Ford (F) has similar multiples, and Toyota (TM), despite significant topline growth, still has a P/S ratio of only 0.49. These numbers make Tesla look astronomically overvalued and are the reason TSLA is a magnet for short sellers.

TSLA will probably need $35 billion over the next 9 years to support its planned ramping up of manufacturing.  This will require additional stock sales which could dampen prices.

And there are many others out there making other dire predictions…

So what do you do if these writers have collectively convinced you that TSLA is overvalued?  One thing you could conclude is that the stock will not move much higher from here.

Here is a possible trade you might consider:

With TSLA trading about $252, you might believe that it is highly unlikely to move higher than $270 in the next 7 weeks.  This is a trade you might consider:

Buy To Open # TSLA 21Apr17 275 calls (TSLA170421C275)
Sell To Open # TSLA 21Apr17 270 calls (TSLA170421C270) for a credit of $1.10  (selling a vertical)

This spread is called a vertical call credit spread.  We prefer using calls rather than puts if you are bearish on the stock because if you are right, and the stock is trading below the strike price of the calls you sold on expiration day, both call options will expire worthless and no further trades need to be made or commissions payable.

For each contract sold, you would receive $110 less commissions of $2.50 (the rate Terry’s Tips’ subscribers pay at thinkorswim), or $107.50.  The broker will place a $500 maintenance requirement on you per spread.  Subtracting out the $107.50 you received, your net investment is $392.50 per spread.  This is also the maximum loss you would incur if TSLA closes above $275 April 21, 2017 (unless you rolled the spread over to a future month near the expiration date, something we often do, usually at a credit, if the stock has gained a bit since the original trade was placed).

Making a gain of $107.50 on an investment of $392.50 works out to a 27% for the 7 weeks you will have to wait it out.  That works out to over 200% annualized, and you can be wrong (i.e., the stock rises) by $18 and still make this gain.

If you were REALLY convinced that TSLA wouldn’t move higher in the next 7 weeks, you might consider selling this spread:

Buy To Open # TSLA 21Apr17 255 calls (TSLA170421C255)
Sell To Open # TSLA 21Apr17 260 calls (TSLA170421C260) for a credit of $2.00  (selling a vertical)

This spread does not allow the stock to move up much at all (about $3) for the maximum gain to come your way, but if you are right and the stock ends up at any price below $255 on April 21, you would gain a whopping 67% in the next 7 weeks.

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

Happy trading.

Terry

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

Thursday, March 2nd, 2017

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

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

Terry

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

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

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

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

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

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

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

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

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

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

Happy trading.

Terry

Using Investors Business Daily to Create an Options Strategy

Monday, February 20th, 2017

Today I would like to share an idea that we are using in one of our Terry’s Tips’  portfolios.  We started this portfolio on January 4, 2017, and in its first six weeks, the portfolio has gained 30% after commissions.  That works out to about 250% for the whole year if we can maintain that average gain (we probably can’t keep it up, but it sure is a good start, and a positive endorsement for the basic idea).

Terry

 Using Investors Business Daily to Create an Options Strategy

 IBD publishes a list which it calls its Top 50. It consists of companies which have a positive momentum.  Our idea is to check this list for companies that we particularly like for fundamental reasons besides the momentum factor.  Once we have picked a few favorites, we make a bet using options that will make a nice gain if the stock stays at least flat for the next 45 – 60 days.  In most cases, the stock can actually fall a little bit and we will still make our maximum gain.

The first 4 companies we selected from IBD’s Top50 list were Nvidia (NVDA), Goldman Sachs (GS), IDCC (IDCC), and HealthEquity (HQY).  For each of these companies, we sold a vertical put credit spread which involves selling a put at a strike just below the current stock price and buying a put which is usually $5 lower.  When expiration day comes along, we hope the stock will be trading at some price higher than the strike of the puts we sold so that both our long and short puts will expire worthless, and we will be able to keep the cash we collected when we made the sale.

Let’s look at one of the four spreads we placed at the beginning of the year. It involves NVDA, and the options expire this Friday.  You can’t sell this spread for this price today, but you could have back on January 4.

With NVDA trading at $99, we placed this trade:

Buy to Open 2 NVDA 17Feb17 95 puts (NVDA170217P95)

Sell to Open 2 NVDA 17Feb17 100 puts (NVDA170217P100) for a credit of $2.00

$400 was placed in our account, less $5 in commissions, or $395.  The broker placed a $500 per contract maintenance requirement on the trade ($1000).  There is no interest charged on this amount (like there would be on a margin loan), but it is just money that needs to be set aside and can’t be used to buy other stock or options).   Subtracting the cash we received from the requirement yields our net investment of $605.  This would be our maximum loss if the stock were to fall below $95 when the options expired on February 17, 2017.

NVDA is trading today at $108.50.  It looks pretty likely to be above $100 on Friday.  If it does, we will not have to make a closing trade, and both options will expire worthless.  We will be able to keep the $395 that we collected six weeks ago, and that represents a  65% gain on our investment over 6 weeks (390% annualized).  Next Monday, we will go back to the IBD Top 50 list, pick another stock (or maybe NVDA once again – it is their #1 pick), and place a similar trade for an options series that expires about 45 days from then.

We have four stocks in this portfolio, and each week, we sell a new similar spread once we have picked a stock from the Top 50 list.  So far, it has been a very profitable strategy.

As with all investments, these kinds of trade should only be made with money that you can afford to lose.

Happy trading.

Terry

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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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