Most of our strategies involve buying LEAPS or other longer-term options and selling short-term (higher decaying) against these long positions. While that is the central idea, there is a multitude of ways it can be carried out.
We use the central idea in an unusual way in a portfolio we call the Last Minute. It sits in cash until late in the day on Thursday when we make a guess as to whether we think SPY will move more or less than $2 on Friday. If we think it won't move by that much (like we did last week in spite of Mr. Bernanke's upcoming speech), we buy calendar spreads at several different strikes, some above and some below the stock price.
Last week, we might have done better to have guessed in the other direction since SPY moved by more than $2 on the upside and almost that much on the downside. But during the day, when the stock had moved up about $.45, we sold all our calendar spreads, making a nice 22% gain after commissions for a single day of trading.
The Last Minute portfolio has made gains in 14 of the 17 weeks it has been running, and has made 187% on the average weekly investment. (One of the losing weeks was only a $39 loss, and in another one, I made an uncharacteristically stupid trading decision and passed up an 8% gain only to lose money by the end of the day.)
Another portfolio which uses the central idea is set up for subscribers who are fearful that the market might move lower. It is called the 10K Bear. Two weeks ago, SPY fell by 4.6% in a single week and our 10K Bear portfolio gained 17.5% after commissions. Last week, SPY did a complete turn-around and rose 4.7%. Our 10K Bear portfolio managed to gain 1% for the week in spite of being on the wrong side of the trend. Admittedly, option prices are unusually high right now, and this bearish portfolio could not be expected to make a gain with such a stock price move in normal times, but it is nice to see that in today's market, we seem to be able to make weekly gains no matter which way the market moves.
A third portfolio uses the central idea in a different way. We picked an underlying stock (AAPL) which we think is headed higher, and instead of selling as much short-term premium as we can, we sell just enough to cover the decay of our long positions. If the stock goes higher, we should experience a much greater percentage gain than the stock. Last week, in spite of Steve Jobs' resignation, AAPL gained 7.7%. Our portfolio gained a whopping 31.4%, proving once again that options can consistently outperform stock.
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 month of losses the market finally decided that the week of options expiration was the perfect time to turn things around. The S&P 500, Dow and Nasdaq reaped gains of 4.7%, 4.3% and 5.9%, respectively.
Libya and the much-anticipated Bernanke appearance in Jackson Hole dominated the headlines most of the week. Warren Buffet's $5 billion stake in Bank of America was not far behind. In my opinion, just more noise for the 24-hour media circus to focus on.
The U.S. economy and Europe's debt sovereign issues are the real issues that the global economy faces. If the U.S. or Europe fall into a deep recession I would expect to see a trickle down scenario occur in the global economy. The world's largest growing economy China would certainly suffer from the decline in growth of the two largest economic regions of the world. And a decline in China would lead to similar fate for the emerging markets.
The chance for a global recession; how about 50%? At least Nobel laureate Michael Spence thinks so. He spoke yesterday in Hong Kong about the outlook for the global economy. Spence's remarks follow cuts in global growth forecasts by leading financial institutions, Citigroup and UBS among others, as central bankers from around the world gathered for a Federal Reserve symposium Jackson Hole, Wyoming.
I am sure that some of you out there don't agree with Spence's sentiment. That is perfectly acceptable. However, there is no denying that the economy is still hobbled by a depressed housing market, high oil prices and fears that the European debt crisis will deteriorate into a repeat of the 2008 financial crisis. The Dow has lost about 11 percent of its value since late July on fears that the economy might slip back into recession well off the highs, but far from an official bear market.
With that being said, I just can't help to think that the selling is over with. The economic fears remain and they do not seem to be getting better anytime soon. If the economic slowdown shows even the slightest glimpse of acceleration I would expect to see a move back to the recent lows.
Remember, investors seeking the safety of U.S. debt have forced down the yield on the 10-year Treasury note to 2.19 percent -- a full point lower than it was when the Fed completed its Treasury purchases about two months ago. Yet the economy is still sputtering. Bonds should be the focal point right now for every investor right now.
The 8/18 gap in the S&P 500 (SPY) closed Thursday (bearish) with a Pre-Bernanke rally and now the market is moving into one the weakest performing month of the year.
My guess is that we will see the bears move back into the market next week. Historically, the week after options expiration is bearish and typically the we see post-Bernanke reversal over the short-term, but after that, well, your guess is as good as mine. The market is teetering here. The bulls and bears are both fighting hard, but inevitably some one wins. The great thing about the struggle is that as long as the market remains volatile and in a range, selling options should continue to work extremely well in this market. So, really, I don't care too much about the direction of the market, just as long as the VIX can stay in the sweet spot I have mentioned over the past few months. (25-35). Let's hope the market's offerings continue.
Andy
I'm very satisfied and impressed with the autotrading as it's gone to date. I couldn't possibly keep on top of the adjustments as you do. I monitor the TOS risk graphs daily and enjoy reading the Saturday Reports. - Walter