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Update on 5% a Week “Conservative” Portfolio

Last week was a bad one for the market.  The S&P 500 fell 3.5%.  Six of the 8 portfolios carried out at Terry’s Tips made gains last week. Once again, our subscribers where happy that they owned options rather than stock.

One of the two portoflios that lost money is not carried out with our basic strategy, but is a proxy for owning stock in AAPL (which fell over $12 last week, obviously causing a loss).

Our 10K Bear portfolio gained almost 10% for the week, and now has gone up over 70% since we started it 5 months ago (SPY has fallen 7.5% over that time period).  This portfolio continues to be a good hedge against other investments which do best when markets move higher.

Today I would like to update the report I sent out last week on a $1479 investment which we believe should make 5% a week.

Update on 5% a Week “Conservative” Portfolio:

Three weeks ago, we made the following trades in one of our portfolios as a demonstration of an option play that we believe will make at least 5% a week after paying all commissions.  At the time, SPY was trading just about $125:

Buy To Open 1 SPY Jan-12 132 put (SPY120121P132)
Sell To Open 1 SPY Dec2-11 125 put (SPY111209P125) for a debit of $6.98  (buying a diagonal)
 
Buy To Open 1 SPY Jan-12 118 call (SPY120121C118)
Sell To Open 1 SPY Dec2-11 125 call (SPY111209P125) for a debit of $7.05  (buying a diagonal)

These two spreads cost us a total of $1403 plus commissions of $5 (the commission rate for Terry’s Tips subscribers at thinkorswim).  It is an interesting option play because the deep in-the-money Jan-12 put and call together will be worth at least $1400 (their intrinsic value) when they expire on the third Friday in January (7 weeks after we made these trades).  Since we only paid $1408 for these options, as long as we don’t have to buy back any short options we might sell against them, we are guaranteed to collect at least $1400 when they expire in January.

An interesting additional feature of this portfolio is that if the stock manages to make a big move during the 7 or so weeks of the long options’ existence, the original long put and call might be able to be sold at the beginning of the final week for well more than their intrinsic value.  The closer to one of the original strike prices the stock becomes, the greater the additional time premium will be.  Of course, if the stock moves outside the original range (118 – 132), the total value would exceed the original intrinsic value of $14 (again, as long as the short options continue to be out of the money).

We will have 6 opportunities to sell Weekly puts and calls using the Jan-12 options as collateral for those sales.  Any money we collect from selling those options is pure profit (unless they end up in the money and we have to buy them back on the Friday that they expire).

Since the options we sold were both at the 125 strike price, one of them would have to be bought back on Friday, December 9th (unless SPY closed exactly at $125.00, an unlikely event). 

As we reported a week ago, the portfolio gained 6.2% after commissions in its first week, and we started out last week being short a Dec-11 SPY 127 call (which we had sold for $1.28 and a Dec-11 SPY 126 put (which we had sold for $1.99).  If we would be lucky enough for the stock to remain in the $126 – $127 range all week, the $324 we collected (after commissions) by selling these two options would be pure profit (a whopping 22% on our original investment in a single week).

The secret of success to this little strategy is in the adjustments that invariably need to be made because the stock usually doesn’t stay perfectly flat all week.  Last week was no exception.  SPY fell $4.46.  Ouch!

When SPY fell over $2, we bought back our short 126 put and sold a 123 put which also expired on Friday, December 16.  Buying this vertical spread cost us $181 after commissions, but our net cost was reduced by what we gained by selling a vertical spread on the short 127 call, replacing it with a short 124 call (this sale gained us $104 after commissions).  So we had now lost $77 of the potential maximum $324 gain for the week.

On Friday, we had to buy back the in-the-money 123 put, paying out $133, and we bought back the out-of-the-money 124 call for $1 (no commission charged at thinkorswim for this trade).  These trades reduced the potential maximum gain by $134. For the week, then, we gained $113, or 7.6% on the original investment of $1479 ($1408 plus an adjustment cost) three weeks earlier.

At the outset, we said that we expected this little investment would gain us an average of 5% a week, and we have exceeded that goal in each of the first two weeks.  Going into the third week, we have collected $127 from selling a 121 put which expires on December 23 and $142 from selling a 122 call which expires on that same day. 

If SPY ends up between $121 and $122 this Friday (and no adjustments become necessary), we could earn $269, or 18% on our original investment.  (At the end of the day last Friday, these two options were worth a total of $253, so we had already picked up a paper gain of $16).

Here is the risk profile graph for our positions, indicating the loss or gain next Friday at the various possible prices for SPY. Of course, if SPY fluctuates by $2, we would make an adjustment as we did this week, and hopefully turn a possible loss into a gain (as we did last week).

If you can follow the above trades, you have a good understanding how we carry out our portfolios at Terry’s Tips.  If this strategy can indeed make 5% a week (and there is the possibility of much more), we wonder why anyone would be buying stock or mutual funds rather than investing in an option strategy similar to this. 

Many of our subscribers are mirroring our trades in this portfolio (or having thinkorswim make the trades for them through their Auto-Trade service).  Last week they were all happy campers. 
___

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 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

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