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Disadvantages of Option Trading

1.    Taxes.  Except in very rare circumstances, all gains are taxed as short-term capital gains.  This is essentially the same as ordinary income.  The rates are as high as your individual personal income tax rates. Because of this tax situation, we encourage subscribers to carry out option strategies in an IRA or other tax-deferred account, but this is not possible for everyone.  (Maybe you have some capital loss carry-forwards that you can use to offset the short-term capital gains made in your option trading).

2.    Commissions.  Compared to stock investing, commission rates for options, particularly for the Weekly options, are horrendously high.  It is not uncommon for commissions for a year to exceed 30% of the amount you have invested.   Be wary of any newsletter that does not include commissions in their results – they are misleading you big time.

3.    Wide Fluctuations in Portfolio Value.   Options are leveraged instruments.  Portfolio values typically experience wide swings in value in both directions.

The most popular portfolio at Terry’s Tips (they call it the Weekly Mesa) gained over 100% (after commissions) in the last 4 months of 2010.  The underlying stock for the Weekly Mesa is the S&P 500 tracking stock, SPY, one of the most stable of all indexes.  Yet their weekly results included a loss of 31.3% in the last week of November (they have added an insurance tactic to make that kind of loss highly unlikely in the future, by the way).  Three times, their weekly gains were above 20%.

Many people do not have the stomach for such volatility, just as some people are more concerned with the commissions they pay than they are with the bottom line results (both groups of people probably should not be trading options).

4.    Uncertainty of Gains. In carrying out option strategies, most prudent investors depend on risk profile graphs which show the expected gains or losses at the next options expiration at the various possible prices for the underlying.  These graphs are particularly important to check out when placing initial positions, and it is also wise to consult them frequently during the week as well. 

Oftentimes, when the options expire, the expected gains do not materialize.  The reason is usually because option prices (implied volatilities, VIX, - for those of you who are more familiar with how options work) fall.   (The risk profile graph software assumes that implied volatilities will remain unchanged.).   Of course, there are many weeks when VIX rises and you might do better than the risk profile graph had projected.   But the bottom line is that there are times when the stock does exactly as you had hoped  and you still don’t make the gains you originally expected.

With all these negatives, is option investing worth the bother?  We think it is.  Where else is the chance of 100% annual gains a realistic possibility?  We believe that at least a small portion of many people’s investment portfolio should be in something that at least has the possibility of making extraordinary returns.

With CD’s and bonds yielding ridiculously low returns (and the stock market not really showing any gains for the past 4 years), the options alternative has become more attractive for many investors, in spite of all the problems we have outlined above.

Terry's Tips Stock Options Trading Blog

July 7, 2016

How to Trade Out of an Earnings-Related Options Play

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.

Terry

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 . . .

June 27, 2016

100% Gain in One Week Possible With Nike Options Trade?

The Brexit vote on Friday crushed markets throughout the world, but it was a great day for Terry’s Tips subscribers who follow the eight actual portfolios we carry out for them to follow if they wish. Our composite gain for the day was greater than 10%, and that was on a day when the Dow fell over 600 points and the market as a whole (SPY) dropped even more.

One of the portfolios we carry out is designed to protect against a market crash or correction. We call it the Better Bear. It gained 34% Friday when the markets tumbled. Friday, like many days, was one when many of us are happy that we trade options rather than simply buy or sell shares of stock.

Today, I would like to share two trades I will be placing on Monday or Tuesday. I think that there is an excellent chance that these trades could double my money in a single week.

Happy trading.

Terry

100% Gain in One Week Possible With Nike Options Trade?

Nike (NKE) has fallen on hard times of late, falling from $68 in early December to $52.59 at the close on Friday. Earnings will be announced after the close on Tuesday, the 28th. Whisper numbers are about 10% higher than public estimates, and options are priced for a higher price after the announcement.

I am an options trader and rarely ever buy stock. I really don’t know if Nike will go up or down after the announcement, but there are some interesting features of the option prices that have caused me to take an interest in the company this week. As I often repeat in this newsletter, implied volatility (IV) of the option prices is the major reason that option prices are “high” or “low” compared to other option prices.

Most of the time, our basic strategy involves buying calendar spreads at a variety of strike prices. A calendar spread (also called a time spread) consists of coincidentally buying and selling either put or call options at the same strike price. The option you buy always has a longer time life than the option you sell. Our gains come from the higher decay rate of the short-term options that we have sold compared to the lower decay rate of the longer-term options that we have bought.

Most of the time, when we . . .

June 15, 2016

Half-Price Offer Expires at Midnight Today

Our 15th birthday celebration ends at midnight tonight, and the half-price offer will disappear as well. If you have ever considered learning all about the wonderful world of options, this is the best opportunity you will ever see, at least from us. The time it act is now. Don’t let it slip away from you.


Half-Price Offer Expires at Midnight Today

As our 15th 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 . . .

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