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Stock Options 101

Welcome to Stock Options 101

Our goal is to explain stock options in simple English. As you learn more, you will appreciate how difficult a task it is. People say that investing in stock is like playing checkers, while investing in options is like playing chess. We look forward to teaching you how to play the more complex game of stock options.

Are Stock Options Risky?

Most people would answer that question with a resounding "yes". True, according to some studies, over half of all options that people buy end up being worth absolutely nothing. Nada! Tear up your ticket stub and walk away.

If buying options is such a bad investment, maybe a strategy of selling options to someone else would be a better idea. Let their loss be your gain. But there is a problem here as well - it is called selling a naked option, because that is how you feel for the whole time you have sold that option. You are facing a theoretical unlimited loss. You can lose many more times the amount you invested. At least when you bet on a horse, that is all you lose when he trips on his way to the finish line.

So if buying options is usually not a good idea, and selling them can be worse, it is easy to see why people decide that options are risky no matter what you do. It does not occur to most of them that a strategy of buying an option and simultaneously selling another option to someone else might be an entirely different story.

This website is designed to explain an options strategy that we believe is less risky than buying stock or mutual funds, and potentially a whole lot more profitable. We hope you will read through this material and learn to love the world of options as we do.

Why Trade Stock Options?

Stock options are exchanged for two main reasons: for speculation (adds risk) and for hedging (reduces risk).

Speculation

Stock options are a way of leveraging your money. This is usually done by buying call options. You are able to participate in any upward moves of a stock without having to put up all the money to buy the stock. However, if the stock does not go up in price, the call option buyer may lose 100% of his/her investment. For this reason, options are considered to be risky investments.

Hedging

Stock options can be used to considerably reduce risk. Put options are usually traded for hedging purposes. While hedging reduces risk, it also limits the amounts of gains you can make. Since most stock markets go up over time, and most people invest in stock because they hope prices will rise, there is more interest and activity in call options than there is in put options.

Terry's Tips Stock Options Trading Blog

April 22, 2019

Will Lululemon Athletica (LULU) Continue to Gain After Breaking to a Record High?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

Terry

Will Lululemon Athletica (LULU) Continue to Gain After Breaking to a Record High?

LULU has posted some impressive gains as of late and these two analysts see more upside – Why Lululemon’s Digital Business Is So Profitable and 3 Top Stocks to Buy for the Week.

April 15, 2019

Will Ulta Beauty (ULTA) Continue Higher Following the Impressive Rally?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum. The actual portfolio at Terry’s Tips which trades these weekly ideas has gained 220% so far in 2019.  Of course, we don’t expect this kind of success to persist, but so far we feel quite good about our chances.

By the way, we have another actual portfolio which trades an entirely different idea each week (one based on dividend payments), and it has notched 11 consecutive gains with nary a loss. In this portfolio, spreads are almost always closed out in one week after placing them.

Terry

Will Ulta Beauty (ULTA) Continue Higher Following the Impressive Rally?

ULTA is already up a significant amount this year and these two analysts still expect further upside – Despite Rising 50%, Ulta Beauty Is Still A Buy and Ulta Up 10.3% Since Last Earnings Report: Can It Continue?

The stock is seen consolidating sideways over the past few weeks and was last seen testing a confluence of support.  The support area consists of prior resistance that followed the earnings-inspired gap up in the middle of March as well as the 20-day moving average.  In the event the stock dips below this support confluence, further support is seen from the lower bound of a rising trend channel that originates from a low posted near the end of December.

[caption id="attachment_2377" align="alignnone" width="300"]ULTA Chart April 2019 ULTA Chart April 2019[/caption]

If you agree there's further upside ahead for ULTA, consider this trade which is a bet that the stock will continue to advance over the next six weeks, at least a little.

Buy To Open ULTA 24MAY19 342.5 Puts (ULTA190524P342.5)
Sell To Open ULTA 24MAY19 345 Puts (ULTA190524P345) for a credit of $1.14 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when ULTA was trading near $345.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers).  Each contract would then yield $111.50 and your broker would charge a $250 maintenance fee, making your investment $138.50 ($250 – $111.50).  If ULTA closes at any price above $345 on May 24, both options would expire worthless, and your return on the spread would be 81% (758% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

[caption id="attachment_2378" align="alignnone" width="258"]IBD Underlying Updates April 11, 2019 IBD Underlying Updates April 11, 2019[/caption]

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

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

Happy trading,

Terry

 

April 8, 2019

Will Intuit Inc (INTU) Continue to March Higher?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.  Our actual portfolio that makes these investments at Terry’s Tips has gained 188% so far in 2019.  Of course, past performance is not always indicative of what might happen in the future, but we feel good about our results so far.

Terry

Will Intuit Inc (INTU) Continue to March Higher?

Several analysts think INTU has some good upside momentum, here are two of them – Intuit is a Great Momentum Stock: Should You Buy? And Is Intuit Inc. A Good Stock to Buy?

INTU has been holding above a rising trendline that originates from a low posted in late December.  Currently, the stock is testing this trendline where a confluence is seen as the 20-day moving average is within proximity as well as a horizontal level near $260 that acted as prior resistance.

If you agree there's further upside ahead for INTU, consider this trade which is a bet that the stock will continue to advance over the next five weeks, or at least not decline very much.

Buy To Open INTU 10May19 257.50 Puts (INTU190510P257.50)
Sell To Open INTU 10May19 260 Puts (INTU190510P260) for a credit of $0.93 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when INTU was trading near $262.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers).  Each contract would then yield $90.50 and your broker would charge a $250 maintenance fee, making your investment $159.50 ($250 – $90.50).  If Intu closes at any price above $260 on May 10, both options would expire worthless, and your return on the spread would be 57% (650% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

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

Happy trading,

Terry

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TD Ameritrade

This Chicago brokerage firm with the unlikely name thinkorswim, Inc. by TD Ameritrade is considered by many to be the best option-friendly broker. For openers, they have extremely good analytic software and their option trading platform is exceptional. Thinkorswim Mobile has been called the best mobile app in the industry. In 2017, TD Ameritrade received 4 stars out of 5 in the annual Barron`s* Best Online Brokers Survey. TD Ameritrade was tops as an online broker for long-term investors and for novices. The company is the only broker that receives the highest 5.0 score for research amenities among all firms participated in the ranking last year.

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TD Ameritrade, Inc. and Terry's Tips are separate, unaffiliated companies and are not responsible for each other’s services and products.

Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses. Please read Characteristics and Risks of Standardized Options before investing in options

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