Stock Option Trading Idea of the Week
Carrying Out the Last Minute Strategy
We carry out one portfolio that is a little unusual in many respects. It is entirely in cash until late in the day each Thursday. At that point, we decide whether we expect that SPY will fluctuate by more or less than a dollar on Friday. If there is an important report coming out on Friday (such as the government's job report which is due next week on the 5th), history has shown that SPY is quite likely to move by a fairly large amount in one direction or the other. Other weeks, when the stock has moved by a dollar or more for several days in a row, we would expect that level of volatility to continue on Friday (which often has the greatest volatility of the week).
If we expect the market (SPY) to move by more than a dollar on Friday, we buy straddles or strangles. If we expect it to move by less than a dollar on Friday, we buy calendar spreads (the long side with only 8 days of remaining life and the short side with one day of remaining life).
Last Thursday, we had trouble deciding which way to go, and we decided to invest less than half our money. Ironically, we could have selected either straddles or calendars and we would have made money last week. Early in the day, the stock fell by almost $1.50, but it ended up falling only $.89 for the day.
We bought straddles, the Jul5-11 131 calls and Jul5-11 130 puts, paying $1.12 each. We bought 20 straddles, investing $2240. When the market tanked early in the morning, we sold those straddles for $1.47. We made a gain of $607, or 27% for the day (after commissions).
This was the fourth consecutive week that the Last Minute portfolio has made a gain. Over that time, we have gained a total of $2860 on an average investment of $3450. That works out to 83% on the money at risk (per unit, and many subscribers invest in lots of units).
We also would have made a gain last week if we had guessed the stock would move less than a dollar on Friday. In that case, since SPY was trading between $130 and $131, we would have bought calendar spreads at the 130 and 131 strikes (either puts or calls could have been used, but we typically would have bought put calendars at the 130 strike and call calendars at the 131 strike).
These two spreads would have made a gain if the net change in SPY for the day was less than a dollar. It was, at $.89, so we couldn't have gone wrong last week.
We are having a lot of fun with this Last Minute portfolio, and so far, it has been quite profitable as well.
By coming on the Terry's Tips bandwagon, you can play along with us in the Last Minute portfolio as well as 7 other portfolios, including the William Tell that has done so well as AAPL has moved higher.
We have written a detailed report on how the actual William Tell portfolio gained over 100% in 2010-11 while the stock rose only 25%. You will learn how you can use the Shoot Strategy on any other stock of your choosing as well. You can get this special report free when you subscribe to the Terry's Tips service for a price which is less than a dinner for two at a decent restaurant - only $79.95 for the whole enchilada, including:
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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.
I encourage you to skip one dinner out this week, and spend the time and money on a subscription to Terry's Tips which might well change your investment for the rest of your life. Maybe you will be able to upgrade to a better restaurant and visit it every week forever, and still be ahead financially.
I look forward to having you on board, and to prospering with you.
Terry
Andy's Market Report
It was a horrible week for the major indices. All of the major benchmarks, plunged on concerns over the continued inability of Congress to reach a debt ceiling deal. If the debt ceiling fiasco weren't enough market participants were greeted with a sluggish second quarter GDP growth report that only helped to compound the current bearish sentiment.
But there is always a silver lining.
The sharp decline led to a sharp advance in the VIX.
The investor's fear gauge jumped to 25.25 and I can tell you firsthand, premium sellers rejoiced. Now if we can only stay at these levels or even push towards 30 we could have the opportunity of the year ahead of us.
So, for once I would like to thank the inept politicians that reside in Washington. Thank you for creating an absurd situation that has allowed volatility to finally make a significant presence in today's market. Because as most of us know, volatility is a premium sellers best friend and I for one am glad to see my long lost friend make an appearance.
We witnessed a short spike back in March shortly after the Fukushina-Daiichi disaster, but the VIX was not able to sustain those levels. My hope is that the recent market uncertainty will continue for a sustained period. The hope is that the VIX will trade in a range between 25-35. This, in my opinion, is the sweet spot for selling premium and for premium selling strategies.
In economic news, second quarter GDP rose just 1.3%. If that wasn't bad enough, the first quarter was revised lower from 1.9% to a unbelievably paltry 0.4%. Can you say double-dip?
Technically speaking, we are entering the weakest part of the year for the market. August and September are two of the worst performing months for the market and I expect to see much of the same this time around.
However, over the short-term all of the major indices are in an oversold to very oversold state so I expect to see a bounce (1-3 days) as we enter next week.
But, as I stated last week the SPY is still range bound.
Except for a nice spike in volatility not much has changed over the past few weeks - range-bound trading persists. It appears we could see the markets move sideways for a few more months. The summer doldrums are upon us and until I see a break of the $126 -$137 range I would expect to see more of the same.
Andy
Overbought/Sold Condition Report
Overbought/Oversold as of July 30, 2011
- S&P 500 (SPY) - 21.8 (oversold)
- Dow Jones (DIA) - 18.4 (very oversold)
- Russell 2000 (IWM) - 20.2 (oversold)
- NASDAQ 100 (QQQQ) - 36.7 (neutral)