from the desk of Dr. Terry F Allen

Skip navigation

Member Login  |  Contact Us  |  Sign Up

802-877-8330

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

November 22, 2021

On Target Trade


Target
(TGT) reported earnings before the bell on Wednesday that beat estimates on
both revenue and profits. The company also expects its fiscal Q4 comparable
sales growth to be higher than previous forecasts. Moreover, TGT claimed the
supply chain mess has not been an issue - store shelves are full and ready for
the holiday buying onslaught.





Analysts
were mostly bullish on the report, giving TGT several target price increases
(there was one lower price). One went as high as $350, a 38% premium to
Friday’s closing price. The stock price was not rewarded, however. The shares
dropped 4.7% on Wednesday and slid further the rest of the week. However, this
was a common theme among several retailers, including Walmart (WMT). In fact,
the overall retail sector was lower for the week.





The pullback dropped the shares to just above their 50-day moving average (blue line in chart). This trade is thus a bet that TGT will regain its footing and stay above the 50-day as holiday sales numbers – that are predicted to be robust – start rolling in. The short 245 strike (red line) of our put credit spread is below the 50-day, relying on trendline support to hold through expiration.









If
you agree that TGT will stay atop its 50-day moving average line in chart),
consider the following trade that relies on the stock remaining above 245  (through expiration in six weeks.





Buy
to Open TGT 31Dec 240 put (TGT211231P240)

Sell to Open TGT
31Dec 245 put (TGT211231P245) for a credit of $1.60 (selling a vertical)





This
credit is $0.02 less than the mid-point
of the option spread when TGT was trading around $251. Unless the stock rises
quickly from here, you should be able to get close to this amount.





Your
commission on this trade will be only $1.30 per spread.  Each spread would then yield $158.70. This
trade reduces your buying power by $500 and makes your net investment $341.30
($500 – $158.70) for one spread.  If TGT
closes above $245 on December 31, both options will expire worthless and your return on the spread would
be 46% ($158.70/$341.30).


November 15, 2021

An AFRMation Trade


Affirm
Holdings (AFRM) provides a platform for point-of-sale payments for consumers
and merchants. In August, AFRM announced a partnership with Amazon.com (AMZN)
to offer flexible payment solutions to customers with AMZN purchases above $50.
AFRM reported earnings on Wednesday after the bell that missed on profits but
beat on revenue. The company also raised sales guidance.





Wall
Street apparently forgave the earnings miss, largely because it was not clear
if the discrepancy used comparable numbers. Moreover, AFRM said its AMZN
relationship as a buy-now-pay-later service was exclusive. Clearly, analysts
were looking at AFRM’s growth prospects, as the company was greeted with
several target price upgrades that reached as high as $185 (the stock closed at
$149 on Friday).





After a nasty, four-day 21% plunge heading into earnings that pulled the stock to its 50-day moving average, the stock rebounded 13.7% the day after the earnings news. Given the earnings rebound, analyst target upgrades and deal with AMZN, we are going with a bullish trade on AFRM that keys on the stock maintaining its three-month rally and staying atop its 50-day moving average (blue line in chart). The short put strike of our credit spread sits at $133 (red line in chart), just below the 50-day.









If
you agree that AFRM will continue its uptrend and stay atop its 50-day moving
average line in chart), consider the following trade that relies on the stock
remaining above $133  (through expiration
in seven weeks.





Buy
to Open AFRM 31Dec 128 put (AFRM211231P128)

Sell to Open AFRM 31Dec
133 put (AFRM211231P133) for a credit of $1.85 (selling a vertical)





This
credit is $0.05 less than the mid-point
of the option spread when AFRM was trading at $149. Unless the stock rises
quickly from here, you should be able to get close to this amount.





Your
commission on this trade will be only $1.30 per spread.  Each spread would then yield $183.70. This
trade reduces your buying power by $500 and makes your net investment $316.30
($500 – $183.70) for one spread.  If AFRM
closes above $133 on December 31, both options will expire worthless and your return on the spread would
be 58% ($183.70/$316.30).


November 10, 2021

A Me(h)T Trade


MetLife
(MET) won’t get anyone’s juices flowing. It’s frankly a rather boring insurance
and financial services company that’s been around for 158 years. But who cares …
if we can make money on a trade, right?





MET
reported earnings last week that beat estimates on the top and bottom lines.
Hardly anyone noticed. Analysts were silent. There were no stories other than a
dry listing of its key performance numbers. And the stock fell 2% the next day.
Ho hum.





But MET is up 36% for the year, which is well ahead of the S&P 500’s 25%. After a swoon in June and July, the stock has been grinding steadily higher along the dual support of its 50-day and 200-day moving averages. The key is the 50-day (blue line in chart), which has allowed just three daily closes below it during the past three months. This trendline, which is rising slightly, sits at $61.10, which is above the short strike of our put spread trade. Thus, MET would have to pierce this support to hurt this trade. And the 200-day (red line in chart) sits at $61 to provide another layer of support. The last time MET closed below the 200-day was more than a year ago.









If
you agree that MET will continue its slow ascent and stay atop its 50-day
moving average line in chart), consider the following trade that relies on the
stock remaining above $62.50  (through
expiration in six weeks.





Buy
to Open MET 17Dec 60 put (MET211217P60)

Sell to Open MET 17Dec
62.5 put (MET211217P62.5) for a credit of $0.75 (selling a vertical)





This
credit is $0.04 less than the mid-point
of the option spread when MET was trading at $64. Unless the stock rises
quickly from here, you should be able to get close to this amount.





Your
commission on this trade will be only $1.30 per spread.  Each spread would then yield $73.70. This
trade reduces your buying power by $250 and makes your net investment $176.30
($250 – $73.70) for one spread.  If MET
closes above $62.50 on December 17, both options will expire worthless and your return on the spread would
be 42% ($73.70/$176.30).


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.

Order Now

Sign Up Your 2 Free Reports & Our Newsletter Now!

Sign up for Dr. Terry F Allen’s free newsletter and get immediate access to his most current report on his stock option trading strategies.

tastyworks

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with Terry’s Tips (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks and/or any of its affiliated companies. Neither tastyworks nor any of its affiliated companies is responsible for the privacy practices of Marketing Agent, its website or this email. tastyworks does not warrant the accuracy or content of the products or services offered by Marketing Agent or its website.

Member Login  |  Programs and Pricing  |  Testimonials  |  About Us  |  Terms and Conditions  |  Accessibility Statement  |  Privacy Policy  |  Site Map

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

©Copyright 2001–2022 Terry's Tips, Inc. dba Terry's Tips
235 Primrose Lane, Ferrisburgh, VT 05456

Close Window

Sign up for the Terry’s Tips Free Newsletter and Receive 2 Options Strategy Reports:

or

Login to Your Existing Account Now

No Thanks

Newsletter Signup

Member Login

Enter your primary email below, and we'll send you a new password