Weekly Stock Option Trading Tips: April 6, 2009

To sign up for paid services, please call 1-800-803-4595.

This week I would like to share a simple truth about options trading that might be worth thousands of dollars to you over the years if you really understand and use it.

Terry

The Difficulties of Making Money at Expiration: If you deal in calendar spreads like we do at Terry's Tips, expiration week is the one you look forward to all month. Especially the last day or two when the decay on the current-month short options you sold is at its highest. Sometimes the decay in the last two days is greater than decay over the entire previous month.

Unfortunately, there is a catch. Whether it is market manipulation or some other unknown strange force, markets tend to get a little crazy as options expire. Last week was a great example. There was a mini-expiration on Tuesday. March 31 when the quarterly March series expired. We owned calendar spreads at strikes both above and below the stock price.

As usual, we were hoping for a flat market because we would make gains on all of our spreads. However, on Monday, SPY tanked 3.5%. In order to prevent even bigger losses, we rolled over our highest-strike short March quarterlies to April. On Tuesday, the market reversed itself and shot back up, forcing us to roll over the lower-strike calendar spreads for less than we could have earned one day earlier.

We have 8 portfolios at Terry's Tips. Only 3 of them had significant numbers of March SPY quarterlies in them, and all 3 lost money last week. Our other 5 portfolios did not get caught up in the high volatility so we did not make many trades, and all 5 portfolios made gains for the week.

Our new Boomer's Revenge portfolio I told you about a few weeks ago went up a whopping 9% last week.

Bottom line, expiration week is one of the hardest ones to make money in. Time after time we have seen extreme volatility during that week take away nice gains that were so close we could almost taste them. Most of the time, it is far better to roll over the soon-to-expire early in expiration week (at the latest) even though it means giving up some attractive decay potential.   Things are just too crazy to make gains most of the time.

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 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

Wall Street managed to ignore the harsh unemployment news on Friday to finished the week, once again, in positive territory. If the markets are any indication, the U.S. is potentially in the throes of an economic recovery. Yes, I know, that is highly debatable as we could just be witnessing a bear-rally. With that being said , the recent four-week advance is the sharpest since 1933 and has left the major indexes (Dow, S&P 500) at a seven-week high. With the exception of Healthcare (-1.9%) all of the other sectors that make up the S&P advanced. The tech-heavy NASDAQ has pushed to a three month high and is up 2.8% on the year.

The week certainly did not start out positive as the S&P lost 3.5% on Monday. News that the auto-task force was attempting to force out Rick Wagoner from GM and threatened to withhold any further bailout money until the transition was initiated. Shares of GM lost 25% on the day. Moreover, the auto-task force said they would provide Chrysler with capital for 30-days to work out an arrangement with Fiat. If an agreement was made the government would be willing to pump $6 billion more into the company. However, if an agreement was not made the company would be allowed to fail.

Monday was a long lost affair as soon as the opening bell rang Tuesday. Market participants did not bother to look back to Monday's woes during the last trading day of the year/quarter. Turnaround Tuesday was led by the financial sector as they reaped 6.7% on the day. For the month the S&P advanced 8.5%, the first positive month over the last eight months. Although for the quarter it was down 11.5%.

The positive performance on Tueday was despite several disappointing economic reports. The S&P Home Price Index fell -19.0% year-over-year in January which was worse than economists' anticipated. Furthermore, Consumer Confidence was reported at 26.0 in March, below the 28.0 consensus. Finally, Chicago PMI was reported at 31.4 in March which was also below economists' expectations of 34.3.

Despite the poor economic news the market continued to rally throughout the week. The recent rally has many market participants' clinging to the idea that the economy will stabilize during the latter part of 2009. This was evident by the reaction to the poor ADP employment number released on Wednesday.

The report showed a decline of 742,000 jobs in March which was well below the 663,000 that economists' had predicted. However, the poor report was not enough to stop the market from rallying 1.7% on the day.

Thursday was witness to the largest advance during the week. The market rallied another 2.9% as beginning of the quarter buying came into play. The G-20 also agreed on Thursday to pump another $500 billion into the IMF fund, but that was largely expected.

Friday brought the always highly-anticipated Nonfarm Payroll report. The report was basically in line with expectations so the market once again responded favorably. While the report was in line with expectations it still reported another significant decline in jobs. The unemployment rate soared to 8.5% and pushed the tally of the jobless to over $13 million.

"Even if the economy continues to show signs of improvement, businesses will cut jobs and trim fats to stay lean and mean," said Sung Won Sohn, economist at the Martin Smith School of Business at California State University, Channel Islands.

As for the technical side of things, the market has pushed into an short-term overbought state which means that a short-term reprieve is likely over the next few sessions. Couple that with the typical fade that occurs after the unemployment report is released and I think we are indeed set for a short-term pullback during the holiday shortened week.


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
Check out our track record \| Tell A Friend About Terry's Tips.com

Vermont Web Design, Vermont Search Engine Optimzation and Website Hosting provided by Vermont Design Works

Stock Options Trading Strategies from Terry's Tips, since 2001.

Weekly Stock Options Trading Tips: April 6, 2009

This Week's Tips

Weekly Archive

Stock Options Trading Idea of the Week

The Difficulties of Making Money at Expiration

Andy's Market Report

Overbought/Sold Condition Report

Testimonial of the week