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Posts Tagged ‘Volatility’

How to Make 40% With a Single Options Trade on a Blue Chip Stock

Wednesday, November 9th, 2016

Every once in a while, market volatility soars. The most popular measure of volatility is VIX, the so-called “fear index’ which is the average volatility of options on SPY (the S&P 500 tracking stock). By the way, SPY weekly options are not included in the calculation of VIX, something which tends to understate the value when something specific like today’s election is an important reason affecting the current level of volatility.

Today I would like to share with you a trade I recommended to paying subscribers to Terry’s Tips last week. We could close it out today for a 27% profit after commissions in one week, but most of us are hanging onto our positions for another couple of weeks because we still believe the spread will result in 75% gain for three weeks when the market settles down after today’s election.

I hope you can learn something from this latest way to benefit from an elevated volatility level in the market.


How to Make 40% With a Single Options Trade on a Blue Chip Stock

As much as you might like, you can’t actually buy (or sell short) VIX, so there is no direct way to bet whether volatility will go up or down with this popular measure. However, you can buy and sell puts and calls on VIX, and execute spreads just as long as both long and short sides of the spread are in the same expiration series.

You are not allowed to buy calendar or diagonal spreads with VIX options since each expiration series is a distinct series not connected to other series. If you could buy calendars, the prices would look exceptional. There are times when you could actually buy a calendar spread at a credit, but unfortunately, they don’t allow such trades.

Vertical spreads are fair game, however, and make interesting plays if you have a feel for which way you think volatility is headed. Last week, we had a time when VIX was higher than it has been for some time, pushed up by election uncertainties, the Fed’s next interest rate increase, and the recent 9-day consecutive drop in market prices. When VIX was over 22, we sent out a special trade idea based on the likelihood that once the election is over, VIX might retreat. For the last few years, the most popular range for VIX to hang out has been in the 12-14 area. Obviously, this is a lot lower than last’s week’s 22-23 range.

If you look at a chart of VIX, you will see that it has moved above 20 on only 7 occasions over the past three years, and the great majority of time, it quickly retreated to a much lower level. Only once did it remain over 20 for more than a couple of weeks or so. Back in 2008, VIX moved up to astronomical levels and stayed there for several months, but if you recall those days, with the implosion of Lehman Bros., Long Term Capital, and bank bailouts all around, there was serious fears that our entire financial system might soon collapse. This time around, it seemed like the most fearful consideration was the American election, and specifically that Donald Trump might win and market uncertainty would surely soar even further. This does not feel like the cataclysmic possibilities that we were facing in 2008.

This is the trade we suggested, based on our assumption that Donald Trump would probably not prevail and not much different would happen out of Washington going forward:

BTO 1 VIX 23Nov16 21 call (VIX161123C21)
STO 1 VIX 23Nov16 15 call (VIX161123C15) for a credit of $2.60 (selling a vertical)

This spread involves an investment (and maximum risk) of $342.50. There is a $600 maintenance requirement (the difference between the strike prices) from which the $260 received less $2.50 commission or $257.50 must be deducted. If VIX closes at any number below 15 on November 23, both calls would expire worthless and this spread would make $257.50 on the maximum risk of $342.50, or 75%.

Maybe 3 weeks was not a long enough time to expect VIX to plummet back to 15. An argument could be made that it would be better to wait until after the Fed’s December rate decision has been made, and place this same spread in the 20Jan17 series. The price (and potential gain) would be about the same (I have sold this same spread in that series in my personal account as well). Of course, you have to wait 2 ½ months for it to come about, but 75% is a sweet number to dream about collecting in such a short time.

Since we placed the above spreads a week ago, VIX has fallen from 23 to a little over 18 today (apparently when the FBI exonerated Hillary, it looked less likely that Trump would win). It only needs to fall a little over 3 more points after the election today to deliver 75% to us on November 23rd. We like our chances here. Some subscribers are taking their gains today, just in case Mr. Trump gets elected. They can buy the spread back today for $1.65, well below the $2.60 they collected from selling it. I am personally holding out for the bigger potential gain.

Halloween Special – Lowest Subscription Price Ever

Tuesday, October 18th, 2016

Halloween Special – Lowest Subscription Price Ever

Why must Halloween be only for the kids? You got them all dressed up in cute little costumes and trekked around the neighborhood in hopes of bringing home a full basket of cavity-inducing treats and smiles all around.

But how about a treat for yourself? You may soon have some big dental bills to pay. What if you wanted to learn how to dramatically improve your investment results? Don’t you deserve a little something to help make that possible?

What better Halloween treat for yourself than a subscription to Terry’s Tips at the lowest price ever? You will learn exactly how we have set up and carried out an options strategy that doubled the starting portfolio value (usually $5000) of five individual investment accounts which traded Costco (COST), Apple (AAPL), Nike (NKE), Starbucks (SBUX), and Johnson & Johnson (JNJ), including all commissions. These portfolios took between 7 and 17 months to double their starting value, and every single portfolio managed to accomplish that goal.

One year and one week ago, we set up another portfolio to trade Facebook (FB) options, this time starting with $6000. It has now gained over 97% in value. We expect that in the next week or two, it will surge above $12,000 and accomplish the same milestone that the other five portfolios did.

Many subscribers to Terry’s Tips have followed along with these portfolios since the beginning, having all their trades made for them through the Auto-Trade program at thinkorswim. Others have followed our trades on their own at another broker. Regardless of where they traded, they are all happy campers right now.

We have made these gains with what we call the 10K Strategy. It involves selling short-term options on individual stocks and using longer-term (or LEAPS) as collateral. It is sort of like writing calls, except that you don’t have to put up all that cash to buy 100 or 1000 shares of the stock. The 10K Strategy is sort of like writing calls on steroids. It is an amazingly simple strategy that really works with the one proviso that you select a stock that stays flat or moves higher over time.

How else in today’s investment world of near-zero dividend yields can you expect to make these kinds of returns? Find out exactly how to do it by buying yourself a Halloween treat for yourself and your family. They will love you for it.

Lowest Subscription Price Ever

As a Halloween 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 HWN16 (or HWN16P for Premium Service – $79.95).

If you are ready to commit for a longer time period, you can save even more with our half-price offer on our Premium service for an entire year. This special offer includes everything in our basic service, and in addition, real-time trade alerts and full access to all 9 of our current actual portfolios so that you can Auto-Trade or follow any or all of them. We have several levels of our Premium service, but this is the maximum level since it includes full access to all nine portfolios. A year’s subscription to this maximum level would cost $1080. With this half-price offer, the cost for a full year would be only $540. Use the Special Code MAX16P.

This is a time-limited offer. You must order by Monday, October 31, 2016. That’s when the half-price offer expires, and you will have to go back to the same old investment strategy that you have had limited success with for so long (if you are like most investors).

This is the perfect time to give you and your family the perfect Halloween treat that is designed to deliver higher financial returns for the rest of your investing life.

I look forward to helping you get the school year started off right by sharing this valuable investment information with you at the lowest price ever. It may take you a little homework, but I am sure you will end up thinking it was well worth the investment.

Happy trading.


P.S. If you would 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 15 years of publication – only $39.95 for our entire package. Get it here using Special Code HWN16 (or HWN16P for Premium Service – $79.95). Do it today, before you forget and lose out. This offer expires on Monday, October 31, 2016.


Calendar Spreads Tweak #5 (Like Writing Calls on Steroids)

Thursday, October 6th, 2016

Lots of people like the idea of writing calls. They buy stock and then sell someone else the right to repurchase their shares (usually at a higher price) by selling a call against their shares. If the stock does not go up by the time that the call expires, they keep the proceeds from the sale of the call. It is sort of like a recurring dividend.

If writing calls appeals to you, today’s discussion of an option strategy is right up your alley. This strategy is like writing calls on steroids.


Calendar Spreads Tweak #5 (Like Writing Calls on Steroids)

When you set up a calendar spread, you buy an option (usually a call) which has a longer life than the same-strike call that you sell to someone else. Your expected profit comes from the well-known fact that the longer-term call decays at a lower rate than the shorter-term call you sell to someone else. As long as the stock does not fluctuate a whole lot, you are guaranteed to make a gain as time unfolds.

If you are dealing with a stock you think is headed higher, you might write an out-of-the-money call (where the strike price is higher than the current price of the stock). If you are right and the stock moves up to that strike price or above, you might lose your stock through exercise of the call, but you would be selling it at that higher price and also keeping the proceeds of your call sale.

With options, you can approximate this risk profile by buying a calendar spread at a strike which is higher than the current price of the stock. If the stock moves up to that strike price as you wait out the time for the call you sold to expire, the value of the call you own will rise and you will also keep the proceeds from the call you sold. Your long call will not go up as much as your stock would have gone up (perhaps only 60% or 70% as much), but this is a small concern considering that you have to put up such a small amount of money to buy the call compared to buying 100 shares of stock. Most of the time, you can expect that your return on investment with the calendar spread to be considerably greater than the return you would enjoy from writing calls against shares of stock.

The tweak we are discussing today concerns what you do when the call you have sold expires. On that (expiration) day, if the call is out of the money (at a strike which is higher than the price of the stock), it will expire worthless and you get to keep the money you originally sold the call for, just like it would be if you owned the stock and wrote a call against it. You would then be in a position where you could sell another call with a further-out expiration date and collect money for it, or sell your original call and no longer own a calendar spread.

If the call on expiration day is in the money (i.e., at a strike price which is lower than the price of the stock), the owner of that call will likely exercise his option and ask for your stock. However, right up until the last few minutes of trading on expiration day, there is usually a small time premium remaining in the call he or she owns, and it would be more profitable for him or her to sell the call on the market rather than exercising it.

As the owner of an in-the-money calendar spread on expiration day, you could merely sell the spread (buying back the call you originally sold and selling the call you bought), making the trade as a sale of a calendar spread. As an alternative, you could buy back the expiring call and sell another call which has a longer lifetime. This would be selling a calendar spread as well, but the date of the call you sold would probably be not as far out in the distance as the call you originally bought. At the end of the day, you would still own that original call and you would be short a call which has some remaining life before it expires.

You can see that this tweak is much like what you could do if you were in the business of writing calls. Another similarity is that you might want to sell a new call which is at a higher (or lower) strike. You could do this with either the call-writing strategy or the calendar-spread (call-writing on steroids) strategy. If you replace an expiring call with a new short call at a different strike price, you would be selling what is called a diagonal spread and you would end up owning a diagonal spread as well. A diagonal spread is exactly the same as a calendar spread except that the strike price of the long call you own is different from the call that you sold to someone else.

One limitation of the options strategy is that if you want to sell a lower-strike call than you originally did, your broker would charge you with a maintenance requirement of $100 for every dollar difference between the strike of your long call and the strike of the call you sold. There is no interest charged on this amount (like a margin loan would involve), but that amount is set aside in your account and can’t be used to buy other shares or options. If you sold a call at a strike which was $2 lower than the strike price of your long call (creating a maintenance requirement of $200), and you were able to sell that call for $2.50 ($250), you would collect more cash than the amount of the maintenance requirement, so you would still end up with more cash than what you started with before selling the new call.

This all may seem a little complicated, but once you do it a few times, it will seem quite simple and easy. And from my experience, profitable most of the time as well, far more profitable than writing calls against stock you own.

Happy trading.

IBM Pre-Announcement Play

Friday, September 30th, 2016

IBM announces earnings on October 17, less than three weeks from now. I would like to share with you a strategy I used today to take advantage of the extremely high option prices which exist for the option series that expires on October 21, four days after the announcement. I feel fairly confident I will eventually make over 100% on one or both of these trades before the long side expires in six months.


IBM Pre-Announcement Play

One of my favorite option strategies is to buy one or more calendar spreads on a company that will be announcing earnings in a few weeks. The option series which expires directly after the announcement experiences an elevated Implied Volatility (IV) relative to all the other option series. A high IV means that those options are relatively expensive compared to all the other options that are trading on that stock.

IV for the post-announcement series soars because of the well-known tendency for stock prices to fluctuate far more than usual once the announcement is made. It may go up if investors are pleased with the company’s earnings, sales, or outlook, or it may tumble because investors were expecting more. While there is some historical evidence that the stock usually moves in the opposite direction that it did in the week or two leading up to the announcement, it is not compelling enough to always bet that way.

IBM has risen about $5 over the last week, but it is trading about equal to where it was two weeks ago, so there is no indication right now as to what might happen after the announcement.

IBM has fluctuated by just under 4% on average over the last few announcement events. That would make an average of $6 either way. I really have no idea which way it might go after this announcement, but it has been hanging out around it/s current level (just under $160) for a while, so I am planning to place my bet around that number

In the week leading up to the announcement, IV for the post-announcement series almost always soars, and the stock often moves higher as well, pushed higher by investors who are expecting good news to be forthcoming. For that reason, I like to buy calendar spreads at a strike slightly above the current price of the stock in hopes that the stock will move toward that strike as we wait for the announcement day. Remember, calendar spreads make the greatest gain when the stock is exactly at the strike price on the day when the short side of the spread expires.

This is the trade I placed today when IBM was at $159 (of course, you may choose any quantity you are comfortable with, but this is what each spread cost me):

Buy To Open 1 IBM 21Apr17 160 call (IBM170421C160)
Sell To Open 1 IBM 21Oct16 160 call (IBM161021C160) for a debit of $4.71 (buying a calendar)
Each spread cost me $471 plus $2.50 (the commission rate charged to Terry’s Tips subscribers at thinkorswim), for a total of $473.50. I sold the 21Oct16 160 call for $354. In order to get all my $473.50 back once October 21st rolls around, I will have 25 opportunities to sell a one-week call (if I wish). Right now, a 160 call with one week of remaining life could be sold for about $.90. If I were to sell one of these weeklies on 6 occasions, I would get my entire investment back and still have 19 more opportunities to sell a weekly call.

Another way of moving forward would to sell new calls with a month of remaining life when the 21Oct16 calls expire. If IBM is around $160 at that time, a one-month call could be sold for about $2.00. It would take three such sales to get all of my initial investment back, and I would have three more opportunities to sell a one-month call with all the proceeds being pure profit.

Before the 21Apr17 calls expire, another earnings announcement will come around (about 3 ½ months from now). If IBM is trading anywhere near $160 at that time, I should be able to sell a 160 call with 3 weeks of remaining life for about $354, just like I sold one today. That alone would get about 75% of my initial investment back.

In any event, over the six-months that I might own the 21Apr17 calls, I will have many chances to sell new calls and hopefully collect much more time premium than I initially shelled out for the calendar spread. There may be times when I have to buy back expiring calls because they are in the money, but I should be able to sell further-out short-term calls at the same strike for a nice credit and whittle down my initial investment.
I also made this trade today:

Buy To Open 1 IBM 21Apr17 160 call (IBM170421C160)
Sell To Open 1 IBM 14Oct16 160 call (IBM161014C160) for a debit of $6.65 (buying a calendar)

This is the same calendar spread as the first one, but the sell side is the 14Oct16 series which expires a week before the announcement date week. If IV for the 21Oct16 series does escalate from its present 25 (as it should), I might be able to sell calls with a week of remaining life for a higher price than is available right now. I might end up with paying less than $473.50 for the original spread which sold the post-announcement 21Oct16 calls.

Calendar Spreads Tweak #4

Wednesday, September 21st, 2016

Today I would like to discuss how you can use calendar spreads for a short-term strategy based around the date when a stock goes ex-dividend. I will tell you exactly how I used this strategy a week ago when SPY paid its quarterly dividend.


Calendar Spreads Tweak #4

Four times a year, SPY pays a dividend to owners of record on the third Friday of March, June, September, and December. The current dividend is about $1.09. Each of these events presents a unique opportunity to make some money by buying calendar spreads using puts to take advantage of the huge time premium in the puts in the days leading up to the dividend day.

Since the stock goes down by the amount of the dividend on the ex-dividend day, the option market prices the amount of the dividend into the option prices. Check out the situation for SPY on Wednesday, September 14, 2016, two days before an expected $1.09 dividend would be payable. At the time of these prices, SPY was trading just about $213.70.

Facebook Bid Ask Puts Calls Sept 2016

Facebook Bid Ask Puts Calls Sept 2016

Note that the close-to-the-money options at the 213.5 strike show a bid of $1.11 for calls and $1.84 for puts. The slightly out-of-the-money put options are trading for nearly double the prices for those same distance-out calls. The market has priced in the fact that the stock will fall by the amount of the dividend on the ex-dividend day. In this case, that day is Friday.

SPY closed at $215.28 on Thursday. Friday’s closing price was $213.37, which is $1.91 lower. However, the change for the day was indicated as -$.82. The difference ($1.09) was the size of the dividend.

On Wednesday and Thursday, I decided to sell some of those puts that had such large premiums in them to see if there might be some opportunity there. While SPY was trading in the $213 to $216 range, I bought put calendar spreads at the 214.5, 214, 213.5, and 213 strikes, buying 21Oct16 puts at the even-strike numbers and 19Oct16 puts for the strikes ending in .5 (only even-number strikes are offered in the regular Friday 21Oct16 options). Obviously, I sold the 16Sep16 puts in each calendar spread.

Note: On August 30th, the CBOE offered a new series of SPY options that expire on Wednesday rather than Friday. The obvious reason for this offering involves the dividend situation. Investors who write calls against their SPY stock are in a real bind when they sell calls that expire on an ex-dividend Friday. First, there is very little time premium in those calls. Second, there is a serious risk that the call will be exercised by the holder to take the stock and capture the dividend. If the owner of SPY sold the series that expired on Wednesday rather than Friday, the potential problem would be avoided.

I paid an average of $2.49 including commissions for the four calendar spreads and sold them on Friday for an average of $2.88 after commissions. I sold every spread for more money that it cost (including commissions). My net gain for the two days of trading was just over 15% after commissions.

The stock fell $.82 (after accounting for the $1.09 dividend). If it had gone up by that amount, I expect that my 15% gain would also have been there. It is unclear if the gains would have been there if SPY had made a big move, say $2 or more in either direction on Friday. My rough calculations showed that there would still be a profit, but it would be less than 15%. Single-day moves of more than $2 are a little unusual, however, so it might not be much to be concerned about.

Bottom line, I am delighted with the 15% gain, and will probably try it again in three months (at the December expiration). In this world of near-zero interest rates, many investors would be happy with 15% for an entire year. I collected mine in just two days.

Trading SPY options is particularly easy because of the extreme liquidity of those options. In most cases, I was able to get an execution at the mid-point price of the calendar spread bid-ask range. I never paid $.01 more or received more than $.01 less than the mid-point price when trading these calendar spreads.

While liquidity is not as great in most options markets, it might be interesting to try this same strategy with other dividend-payers such as JNJ where the dividend is also over $1.00. I regularly share these kinds of trading opportunities with Terry’s Tips Insiders so that they can follow along in their own accounts if they wish.

Happy trading.

All About, or at Least an Introduction to Calendar Spreads

Thursday, August 25th, 2016

This week I would like start an ongoing discussion about one of my favorite option plays. It is called a calendar spread. It is also known as a time spread or a horizontal spread. But most people call it a calendar because that’s where you focus much of your attention while you hold this kind of a spread. On a specific date on the calendar, you discover whether you made or lost money since you first bought the calendar spread. In the next few blogs, I will discuss all sorts of variations and permutations you can make with calendar spreads, but today, we will focus on a bare bones explanation of the basic spread investment.


All About, or at Least an Introduction to Calendar Spreads

A calendar spread consists of the simultaneous purchase of one option (either a put or a call) and the sale of another option (either a put or call), with both the purchase and the sale at the same strike price, and the life span of the option you bought is greater than the option you sold. You can trade either puts or calls in this kind of spread, but not both in the same spread. You have to choose to use either puts or calls, but as we will see at a later time, it doesn’t make a whole lot of difference which choice you make.

Some things that we all know about options: 1) they all have a limited life span, and 2) if the underlying stock does not change in price, all options fall in value every day. This is called decay. In option parlance, it is called theta. Theta is the amount that the option will decay in value in a single day if the underlying stock remains flat.

The basic appeal of a calendar spread is that the decay (or theta) of the option that has been sold is greater than the decay (or theta) of the stock that was bought. Every day that the stock remains flat, the value of the spread should become slightly greater. For this reason, most buyers of calendar spreads are hoping that the stock does not move in either direction very much (but we will see that is not always the case with all calendar spreads).

Here is a typical calendar spread purchase on Nike (NKE) on August 24, 2016 when NKE was trading just about $60:

Buy to Open 5 NKE 20Jan17 60 calls (NKE170120C60)
Sell to Open 5 NKE 23Sep16 60 calls (NKE160923C60) for a debit of $2.20 (buying a calendar)

The options that are being bought will expire on January 21, 2017 (about 5 months from now) and the options being sold will expire on September 23, 2016, one month from now. You don’t really care what the prices are for the calls you bought or the calls you sold, just as long as the difference between the two prices is $2.20 ($220 per spread, plus a commission of about $2.50 per spread). That’s how much money you will have to come up with to buy the spread. This spread order will cost $1100 plus $12.50 in commissions, or $1112.50.

The all-important date of this spread is September 23, 2016. That is the day on which the short options (the ones you sold) will expire. If the stock is trading on that day at any price below $60, the calls that you sold will expire worthless, and you will be the owner of 5 NKE 60 calls which have about 4 months of remaining life. If NKE is trading at exactly $60 on that day, those 20Jan17 60 calls will be worth about $3.05 and you could sell them for about $1525, netting yourself a profit of about $400 after commissions. That works out to a 35% gain for a single month, not a bad return at all, especially if you can manage to do it every month for the entire year (but now, we’re dreaming). That is, alas, the maximum you could make on the original spread, and that would come only if the stock were trading at exactly $60 on the day when the short calls expired.

Here is the risk profile graph which shows the loss or gain on the original spread at various prices where the stock might be trading on September 23rd:

2016 NKE Risk Profile Graph September Expiration

2016 NKE Risk Profile Graph September Expiration

In the lower right-hand corner under P/L Day, the profit or loss on the spread is listed for each possible stock price between $58 and $62. Those numbers should be compared to the investment of just over $1100. The graph shows the maximum gain takes place if the stock ends up right about $60, and about half that gain would result if the stock has moved a dollar higher or lower from $60. If it rises or falls by $2, a loss would result, but this loss would be much lower than the potential gains if the stock fluctuated by less than $2. If the stock moves by a much greater amount than $2, even greater losses would occur.

One good thing about calendar spreads is that the value of the options you bought will always be greater than the ones you sold, so you can never lose the entire amount of money you invested when you bought the spread. If you just buy a call option with the hopes that the stock will rise, or buy a put option with hopes that the stock will fall, you risk losing 100% of your investment if you are wrong. Even worse, in most cases, you would lose the entire investment if the stock stays flat rather than moving in the direction you were hoping.

With calendar spreads, you should never lose everything that you invested and you don’t have to be exactly right about the direction the stock needs to move. There is a range of possible prices where your spread will be profitable, and if you enter your proposed spread in a software program like the (free) Analyze Tab at thinkorswim, you can tell in advance what the break-even range will be for your investment.

There are ways that you can expand the break-even range so that a greater stock price fluctuation could be tolerated, and that will be the subject of our next blog.

The Difference Between Buying Stock and Trading Options

Monday, August 15th, 2016

This week I would like discuss a little about the differences between buying stock and trading options. I would also like to tell you a little about a specific recommendation I made to paying Terry’s Tips subscribers this weekend in my weekly Saturday Report.


The Difference Between Buying Stock and Trading Options

If the truth be known, investing in stocks is pretty much like playing checkers. Any 12-year-old can do it. You really don’t need much experience or understanding. If you can read, you can buy stock. And you probably will do just about as well as anyone else because it’s basically a roulette wheel choice. Most people reject that idea, of course. Like the residents of Lake Wobegone, stock buyers believe that they are all above average – they can reliably pick the right ones just about every time.

Trading options is harder, and many people recognize that they probably aren’t above average in that arena. Buying and selling options is more like playing chess. It can be (and is, for anyone who is serious about it) a life-time learning experience.

You don’t see columns in the newspaper about interesting checker strategies, but you see a ton of pundits telling you why you should buy particular stocks. People with little understanding or experience buy stocks every day, and most of their transactions involve buying from professionals with far more resources and brains. Most stock buyers never figure out that when they make their purchase, about 90% of the time, they are buying from those professionals. Those smart guys with all the resources are the ones who are selling the stock while you are buying it at that price.

Option investing takes study and understanding and discipline that the purchase of stock does not require. Every investor must decide for himself or herself if they are willing to make the time and study commitment necessary to be successful at option trading. Most people are too lazy.

It is a whole lot easier to play a decent game of checkers than it is to play a decent game of chess. But for some of us, options investing is a whole lot more challenging, and ultimately more rewarding.

Last week I told you about three stock-based Terry’s Tips option portfolios which had doubled in value and a fourth portfolio that was almost there (and it is only 10 months old). I didn’t tell you about two other portfolios that we also carry out which are not available for Auto-Trade at thinkorswim but which are quite easy to trade on your own because they only involve one trade for an entire year (and with luck, options on both side of the spread will expire worthless so no closing trade is necessary).

We have two of these portfolios, and they are set up each January. So far in 2016, while the market (SPY) has gained 4.6%, these two option portfolios have gained 43.9%, and 56.2% without a single adjusting trade having been made. We could close either portfolio right now and take those gains off the table after paying a small commission on one or two spreads. If you buy stock rather than trading options, you will probably never see gains like this, even if you are lucky enough to pick one of the best stocks in the entire market.

This weekend, I recommended another similar spread trade that we are setting up in a new portfolio so we can watch it evolve over time. Like the above two portfolios, it cannot be Auto-Traded but is easy to set up yourself (you can call it in to your broker if you are not familiar with placing option spread trades). This spread will expire on January 20, 2017, about six months from now.

The underlying is a sort of weird derivative of a derivative of a derivative that doesn’t make much sense to anyone (even the Nobel Prize winning managers of Long Term Capital didn’t fully understand the implications of this kind of instrument). The long-term price action of this equity can be measured, however, and it showed that if this spread had been placed every month for the last 50 months, the spread would have made a profit 44 times and it would have lost money 6 times. The average gain for all the trades worked out to 38% for six months (including all the losses in those 6 losing instances). The annualized gain would rise to 90% if you re-invested your money and the average profit at the end of the first six months. Of course, historical price action doesn’t always repeat itself in future months, but if you see how this instrument is engineered, you can see that the pattern should be expected to continue.

This spread idea is so good that I feel I must restrict sharing it with only paying subscribers to the Terry’s Tips newsletter. If you come on board, you can see the full report where I show the profit from this trade for each of the last 50 months and the exact spread that should be placed. I bought more of the exact same spread in my personal account today at the same price I indicated it could be bought in the last Saturday Report.

Historical Performance of 10K Strategy Stock-Based Portfolios

Monday, August 8th, 2016

This week I would like to outline the basic stock option strategy we use at Terry’s Tips where we have created eight portfolios each of which is traded in an actual separate account and is available for Auto-Trade at TDAmeritrade/thinkorswim. Terry’s Tips subscribers can have every trade in these portfolios placed automatically for them in their own thinkorswim accounts through their free Auto-Trade service.

Enjoy the full report.


Historical Performance of 10K Strategy Stock-Based Portfolios: At Terry’s Tips, we call our options strategy the 10K Strategy. We like to think of it as shorter than a marathon but longer than a sprint. Most people who trade options seem to prefer sprints, i.e., short-term speedy wins (or losses). The basic underlying idea of our 10K Strategy is to do the opposite of what most options traders do. Instead of buying short-term calls in hopes of a quick windfall gain, we primarily sell those calls to option speculators. Since something like 80% of all options expire worthless, we like our odds of selling those options rather than buying them. We like to think that we are sort of in the business of selling lottery tickets.

We buy longer-term options to use as collateral for selling short-term options. All options go down in value every day that the underlying stock remains unchanged. This daily decay in value is called theta in options parlance. Theta for short-term options is much greater than theta for longer-term options at the same strike price, and this difference in decay rates is what makes our strategy a successful one (most of the time).

At Terry’s Tips, we currently have 4 stock-based portfolios. Other portfolios are based on Exchange Traded Products (ETPs). ETPs include Exchange Trade Funds (ETFs) such as the S&P 500 tracking stock (SPY or the Dow Jones Industrial Average tracking stock (DIA), and Exchange Traded Notes (ETNs) such as volatility-based XIV, SVXY, VXX, and UVXY. We also have a portfolio based on options of USO where we are betting that the long term price of oil will be higher than it is today.

Three out of 4 of our stock-based portfolios have doubled in value at some point in their lifetime, and the 4th, Foxy Facebook is up 71% since we started it 10 months ago. The prospects look excellent for it to double before its first year has been completed. The record:

2016 HIstorical 10K Portfolios

2016 HIstorical 10K Portfolios

In a world of record low interest rates and anemic investment returns for most equities (even hedge funds lost money in 2015), these results offer a strong vindication of the 10K Strategy. Admittedly, NKE has tumbled steadily over the past 8 months and much of the gains have been eroded away, but a basic assumption of the strategy is that you select underlying stocks which you think will remain flat or rise over time. If you are wrong and the stock doesn’t do one of those things, you should expect to lose money on that investment. So far, we have been fortunate enough to pick winners.

I invite you to become a subscriber to Terry’s Tips so that you can learn the important details of carrying out the 10K Strategy on your favorite stock (assuming that options are available for it). If you are lucky enough to pick a winner, you would have an excellent chance to make many times as much as you would make just buying the stock. It doesn’t have to go up to be a winner – just remaining flat is almost always profitable with this strategy.

Many years ago, someone wrote a book that I bought – it was entitled “Happiness is a Stock That Doubles in a Year.” If you can find a stock that will stay flat or move higher, you might very well enjoy this kind of happiness once you learn how to execute the 10K Strategy.

As with all investments, you should only use money that you can truly afford to lose. Options are leveraged investments, and unless you totally understand the risks, you can easily and quickly lose more money than you could with the equivalent investment in the purchase of stock. I think it is worth a little work to educate yourself about the risks (and potential rewards) of trading options.

How to Trade Out of an Earnings-Related Options Play

Thursday, July 7th, 2016

A little over a week ago, I told you about trades I was making in advance of Nike’s earnings announcement. Lots of things didn’t quite work out the way I had expected they would, but I still managed to make over 50% for the week on my trades. There were some good learning experiences concerning how to trade out of calendar spreads once the announcement has been made. You need to tread water until the short options you sold expire and you can close out the spreads, and that can present some challenges.

Today I would like to share those learning experiences with you in case you make similar trades prior to a company’s earnings announcement.

Happy trading.


How to Trade Out of an Earnings-Related Options Play

According to Openfolio, a site where about 70,000 users share information on their investments, three out of four investors lost money in June, with an average return of -0.10%. This compares to the results of the Terry’s Tips’ Auto-Traded portfolios where 7 of 8 portfolios gained, and the average gain was 15.1%. Our only losing portfolio was a special bet that the short-term price of oil would fall. It didn’t, and we lost a little, but that was nothing compared to 4 of the portfolios which gained over 20% for the month.

One of our portfolios trades options on Nike (NKE) which announced earnings after the close last Tuesday, June 28. We had spreads in place similar to those that I told you about last week (and several others as well). The portfolio managed to gain 29% in June, something that often happens during the month when an earnings announcement takes place.

On the Monday before the earnings announcement, with the stock trading at about $52, I placed these trades (at higher quantities):

Buy to Open 1 NKE 29Jul16 52.5 put (NKE160729P52.5)
Sell to Open 1 NKE 1Jul16 52.5 put (NKE160701P52.5) for a debit of $.50 (buying a calendar)

Buy to Open 1 NKE 29Jul16 55 call (NKE160729C55)
Sell to Open 1 NKE 1Jul16 55 call (NKE160701C55) for a debit of $.50 (buying a calendar)

In my note to you, I said I thought you could buy these spreads for $.43 ($43) each, but that was based on the prior Friday’s prices. I was disappointed to have to pay so much more, but I still believed it was a pretty good bet.

When the stock fell closer to $51, I bought half as many spreads as the above two at the 50 strike just in case the stock continued to trade lower. When you buy calendar spreads, you select strike prices where you hope the stock will end up when the short options expire, as the at-the-money strike spread will be the most profitable. Buying spreads at several strikes gives you more places where you can end up being happy, but your maximum gain is reduced a bit when you buy the increased protection that owning several strikes provides.

After I made the above trades on Monday, I suffered my second disappointment. As I had seen so many times before, in the last day before the announcement (Tuesday), the stock rallied $1.10 and closed at $53.09. If I had anticipated this better, I would not have bought the spreads at the 50 strike. In after-hours trading after the announcement (earnings were a penny above estimates but sales disappointed a little and outlook was about what was expected), the stock tanked to about $50. As we have often seen, this initial move was quickly reversed. When the market opened on Wednesday, it had moved up to $54.50.

While my positions were showing a nice paper profit at the open on Wednesday, I had to wait to near Friday’s close to get the full amount I was hoping for. I was in a bad position, however, because most of my spreads were at strike prices which were below the stock price. In option terms, my positions were negative net delta – this means that if the stock went up another dollar, I would lose money. I aggressively changed to a neutral net delta condition by closing out the lowest-strike put calendars (at the 50 strike) and changing some 52.5 calendars to diagonals, buying back in-the-money 52.5 short calls and replacing them with at-the-money 55 calls and slightly out-of-the-money 56 calls in the same 01Jul16 series.

Then I encountered my third disappointment. I had expected implied volatility (IV) of the long 29Jul16 series to be 27 after the announcement based on recent history, but it ended up being 24 which dampened my expected results. That meant the option prices would not be as high as I expected when I went to sell them. I had figured an at-the-money spread could be sold for $1.40, and the closest spread I had (the 55 strike) only yielded $.97 (however, this was almost double what I paid for it). By Friday, the stock moved above the top strike price I held (55) and closed at $55.61. Since I managed to stay neutral net delta and actually pick up some extra premium in the last three days from the new at-the-money calls I sold, I ended up making over 50% on my total investment for the week. It was a lot of work but surely worth the effort.

I had set out to make 100% in a single week, and experienced disappointments in three different areas, but at the end of the day, I was pleased to take in half that amount for the week.

What could be taken away from this play was; 1) that the stock often rises in the last day before the announcement (probably legging into the calendars would have been more profitable, but more risky), 2) the initial move after the announcement is usually reversed, and 3) it is important to make adjustments to create a neutral net delta condition for all your spreads until the short options expire.

Lowest Subscription Price Ever Still Available

Thursday, June 9th, 2016

This month marks the 15th year in business for Terry’s Tips.  We are celebrating this event by offering you our lowest subscription price ever.  If you ever wanted to learn all about the wonderful world of options and my favorite options strategy, now is the time to act.

Lowest Subscription Price Ever

As our birthday present to you, 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 15Year (or 15YearP for Premium Service – $79.95).  The premium service offers you real-time trade alerts so you can follow along with our trades if you wish, or participate in Auto-Trade at thinkorswim.

 This is a time-limited offer.  You must order by Wednesday, June 15, 2016. There’s no need or reason to wait that long, but that’s when the half-price offer expires, and you will have to go back to the same old investment strategy that you have had limited success with for so long (if you are like most investors).

This is the perfect time to our 15th birthday with us, and give yourself and your family the perfect birthday gift that is designed to deliver higher financial returns for the rest of your investing life.  It may take you a little homework on your part, but I am sure you will end up thinking it was well worth the investment.

Happy trading,


P.S. For this lowest-price-ever $39.95 offer for the complete Terry’s Tips package (including my White Paper for which over 10,000 people have paid our regular price $79.95), click here, enter Special Code 15Year (or 15YearP for Premium Service – $79.95).  It could be the best investment decision you ever make.

Making 36%

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

This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).

Learn why Dr. Allen believes that the 10K Strategy is less risky than owning stocks or mutual funds, and why it is especially appropriate for your IRA.

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Success Stories

I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.

~ John Collins