Weekly Stock Option Trading Tips: April 27, 2009

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When you buy a stock or mutual fund, your only desired income is that the stock prices go up. The same is not true if you are trading options instead of stock. You can tailor your positions so that you make gains when the stock stays flat or goes down just as easily as you create a situation where the biggest gains come with a higher stock price.

In short, options give you considerably more flexibility than buying stock (or selling short). Instead of making money when the stock moves in only one direction, with options you can actually make gains when it moves in either direction (as long as the move is moderate).

Today I would like to tell you a little about 4 separate portfolios that have different desired outcomes for the stock price.

Terry

Achieving Multiple Market Goals with Options: Four of the Terry's Tips 7 portfolios use the S&P 500 tracking stock (SPY) as the underlying stock. This is no accident. SPY is considered to be "the" market, and since it is made up of so many large companies, it does not fluctuate (at least in "normal" times very much compared to other underlyings. Since our strategy does best when the market is not volatile, this is the ideal ETF to follow.

There are other reasons to prefer SPY as well. Options are available at every dollar increment and option markets are quite liquid (bid-asked spreads are small because so many people trade in SPY, meaning that good prices are often possible to get). Quarterly options are also available which gives us an additional 4 "mini-expirations" each year.

Each of our 4 SPY portfolios conducts itself a little differently. The Mighty Stag portfolio will probably out-perform the others if the stock stays absolutely flat. The risk profile graph is usually a mountain-shaped curve with the top of the mountain very close to the current price of the stock at the beginning of the expiration month.

The Big Dripper Portfolio is perhaps the most conservative portfolio, with a larger break-even range established at the beginning of each month. The risk profile graph curve looks more like a mesa than a mountain.   In addition, some cash is set aside in case excessive volatility makes further adjustments necessary. The potential gain is somewhat less than the other SPY portfolios in exchange for what should be a lower risk level. The annual goal for the Big Dripper is 18% - 24% a year, and $150 (1.5%) is withdrawn each month regardless of how the portfolio performs.

The Boomer's Revenge portfolio uses true call LEAPS for the long side (while the other 3 SPY portfolios use shorter-term long options, using both puts and calls in calendar spreads). Since most of the time, the short options are at different strike prices than the LEAPS, the spreads are called diagonal call spreads rather than calendar spreads. (Diagonal spreads are any spreads where the long side has more days of remaining life than the short side, regardless of the strike prices).

The Big Bear Mesa portfolio maintains a negative net delta (i.e., short) position at all times so that it does best if the market stays flat or goes down. This portfolio is designed to offer a degree of diversification for investors who have other investments such as mutual funds or stocks that do best when stock prices move higher. If the market goes up by over 5% in an expiration month, this portfolio generally enters a loss condition.

All 4 portfolios usually make a gain every month that the stock moves by less than 5% in either direction (which has been the case more than half the time over the past 10 years). Our portfolios most always make gains when the market moves in 2 of the possible 3 ways that it might go (up, flat, or down). This gives our option strategy a great advantage over a stock or mutual fund investment that does not make anything at all (or loses money) in a flat or up to a 5% lower market in a month.

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 7 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

After a six week stretch of market gains the major indexes finished the volatile week of trading mixed. The volatile week was a result of a slew of earnings from 13 Dow components and ongoing speculation of government "stress tests" on major financial institutions. For the week the Dow, S&P, NASDAQ, and Russell moved -0.7%, 0.4%, 1.3% and -0.1%, respectively.

Earnings reports guided the market for most of the week. 143 companies in the S&P 500 reported this past week and overall the results were not that bad. 83 companies reported better-than-expected earnings while the remaining 40 were below expectations. However, the average EPS fell roughly 40% which is certainly not a glowing number. Moreover, revenue fell by over 10%.

The financial sector saw the most volatility this past week due to Bank of America, Morgan Stanley and the "financial stress tests".

Bank of America reported better-than-expected earnings, which was hampered by the huge increase in the company's first quarter credit loss. Morgan Stanley reported a larger than anticipated decline and cut its dividend. As for the financial "stress tests", the Fed stated that the preliminary results were good. They reported that most U.S. banking institutions have capital levels "well in excess of amounts necessary to be well capitalized". The final results will be made public on May 4th. Stay tuned!

"It is important to recognize that the assessment is a 'what if' exercise intended to help supervisors gauge the extent of additional capital needs across a range of potential economic outcomes. A need for additional capital or a change in composition of capital to build a buffer under an economic scenario that is more adverse than expected is not a measure of the current solvency or viability of the firm," the report says.

As for economic news, existing home sales declined 3.0% in March. However, new home sales were reported at 356,000, which easily beat economists' expectations of 337,000. Lower interest rates have helped to pick up the housing market, but the ever growing unemployment rate and tight credit continue to weigh down the sector.

"The economic downturn remains intense, but it is no longer intensifying," said Mark Zandi, chief economist at Moody's Economy.com. "We are still falling, but we are no longer crashing."

On the technical front, much like last week the S&P is once again at the 870 level which has acted as a strong area of overhead resistance. Moreover, the push into resistance has also created a short-term overbought state in several of the major indexes. I expect to see a short-term pullback (1-2 days) as a result of the aforementioned. After that, well, we will just have to let Mr. Market guide us.


Tip 1: All About Stock Options	Tip 5: Double Your Money The Lazy Way
Tip 2: Check Out Autotrade	Tip 6: The 10K Strategy
Tip 3: Never Buy A Mutual Fund	Tip 7: Trading ETF Options
Tip 4: Turbocharge Your IRA, Roth IRA, or 401K	Tip 8: Other Stock Option Resources
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Weekly Stock Options Trading Tips: April 27, 2009

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