Weekly Stock Options Trading Tips: April 13, 2009

Stock Options Trading Idea of the Week

The Importance of Adjusting

This week I would like to update a report I sent to you just three weeks ago when we set up a new portfolio called the Boomer's Revenge.  As you probably know, the biggest concern for our strategy is that the market moves too much in either direction (we do best when it remains flat, something it hasn't done much of for the last seven months or so).
 
When the market does move too much, it is important to make an adjustment that causes the break-even range to shift in the direction that the stock is moving.  We did that a couple of weeks ago, and the results are quite dramatic as you can see below.

Terry

The Importance of Adjusting: Three weeks ago, we set up a new portfolio that we call the Boomer's Revenge.  At the time, SPY was trading at $77 ½ and the risk profile graph looked like this:




You can see from this graph that if we had made no adjustments, with the stock soaring to $85.80 over the past 3 weeks, we would be dangerously close to losing money for the April expiration month.  In my report to you 3 weeks ago, I talked about the possibility of the stock moving up by 10% - I said "But how often does SPY go up by 10% in a single month?  Our 10-year back test showed that it happens less than one out of 20 times."  But it has now gone up by almost 11% and the month has a week to go.
 
Fortunately, we had set aside about 10% of this $10,000 portfolio's starting value for making adjustments when the stock moved significantly in either direction.  In this case, we needed to do something when the stock moved higher.  We bought back some of the lower-strike calls we had sold and replaced them with higher-strike calls in the April expiration month.  This required us to spend almost the entire stash of free cash we had set aside.
 
The results were most encouraging.  Most importantly, the $10,000 portfolio is now worth $11,390, so our many subscribers who mirrored the portfolio have made a gain of almost 14% over the three weeks.  Some investors would be happy with that kind of return for an entire year.
 
And it might even get better.  Here is what the risk profile graph looks like with one week to go until the April expiration:
 
The first graph (before the adjustments were made) showed that we would come close to losing money if the stock got as high as $86, but after making the adjustments, we have socked away almost 14% and could add a few more percentage points next week if the stock manages to stay about where it is now.  If it does start to move in either direction, we will buy back the short April calls we have sold earlier and replace them with short May calls so that we do not lose money next week.
 
The important learning message here is that once you have set up your calendar spreads, you can't just go away and ignore what the market is doing.  When the stock moves significantly in either direction, you need to adjust so that you don't slide into a loss situation for the month.  We shouldn't congratulate ourselves too much for doing the right thing this month, but it does look pretty nice looking at a 14% gain for the a few short weeks.
 
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 (including the Boomer's Revenge) 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 

Andy's Market Report

Overbought/Sold Condition Report

Overbought/Oversold as of April 9, 2009

• S&P 500 (SPY) - 71.5 (overbought)
• Dow Jones (DIA) - 70.0 (overbought)
• Russell 2000 (IWM) -  71.1 (overbought)
• NASDAQ 100 (QQQQ) - 73.5 (overbought)

Testimonial of the week