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
Overbought/Oversold as of April 6, 2009
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