In the past when we were trading only Monthly options, one of the decisions we needed to make on Fridays was whether it was better to buy back out-of-the-money options on Friday and sell new Monthlys on that day or let them expire worthless and sell new Monthlys on Monday. Most of the time we decided that it was a toss-up because the cost of buying back the options on Friday (and paying an extra commission) was usually about the same as the decay in the Monthly options over the weekend.
The story is entirely different now that Weekly options are available - we have determined that it is overwhelmingly better to roll over Weekly options on Friday than it is to let them expire worthless and sell new options on Monday. Last Monday, for example, the at-the-money SPY options could be sold for an average of $.15 less on Monday than they could have been sold for on Friday. (The Monthly at-the-money SPY options decayed about $.10 over the weekend).
The cost of buying back out-of-the-money options on Friday usually is about $.02 or $.03. This is an extremely low cost, and makes even more sense for investors like us who trade at thinkorswim (no commission is charged at thinkorswim for buying back options for $.05 or less).
On average, near-the-money options sold for $.10 less on Monday than they could have been sold for on Friday. Again, it is better to pay the small price to roll over on Friday than it is to wait until Monday. Since these Weekly options have only a few days of remaining life, the decay over the weekend is significant.
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 exactly how we made 13% after commissions last week in 5 actual SPY 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 an initial drop early in the week, the major indices came roaring back Friday to close the week with only modest declines. The S&P 500 (SPY) fell as much as 2.3% this past week before recovering to finish the week with a slight 0.7% decline.
The rally Friday came after several highly anticipated events were announced. First, the Commerce Department reported that GDP grew at a 1.6% rate in the April-June period. The number was still well below the earlier estimate of 2.4%, but not as bad as the 1.4% anticipated by economists.
"These are terrible numbers," Kim Caughey, equity research analyst at Fort Pitt Capital Group in Pittsburgh, said. "But they weren't frighteningly horrible."
Furthermore, Wall Street participants were encouraged by Fed Reserve chairman's comments at the Fed's annual conference in Jackson Hole, WY that while an economic recovery remains tentative, the Fed remains ready to take the necessary steps to stimulate the economy. Bernanke stated that the central bank would purchase more debt securities in order to keep interest rates low. He proposed that this type of action would help in the process of growing the economy.
"It could have been worse, and because it wasn't, that was good news," said Alan Gayle, senior investment strategist for RidgeWorth Investments, based in Richmond, Va. "Clearly the bar is being lowered for what constitutes good news these days."
The short-term bullish reprieve Friday came on the heels of what has been a dismal month on the stock market. After reaching a recent high on August 9th, the market has been dropping steadily throughout the month on poor economic reports that show that indeed the economy was weakening.
For instance, earlier in the week, when the market was in the midst of a sharp decline it was reported that existing home sales had plummeted 27.2% to a seasonally adjusted rate of 3.83 million in July. The surprisingly low number marked the lowest level since records began back in 1999. To add insult to injury, July is historically one of the better months for home sales and at this rate it is quite possible that new sales lows could reach historical proportions each month through the rest of the year.
On the technical side of things, the market, in my opinion, bounced because the major indices had pushed into very oversold conditions over the short-term. As I always state, typically, when that occurs we will witness a short-term reprieve in the market. Furthermore, the gap lower on Tuesday and a new level of strong support were keeping the bears from pushing the market lower over the short-term. Now that we have pushed back into a neutral state and only a few pennies away from closing the gap from Tuesday I would not be surprised to see another decline that tests the early July lows.
September is the worst month for the market with an average return of -0.67%. Only February with a paltry -0.02% has an average return that is negative. However, a continued move lower, as long as it is steady bodes well for credit spread strategies, because in a declining market premiums will increase. Why you ask? Just look at the VIX, which measures the implied volatility of the S&P 500 index options. As it increases, premiums increase and therefore selling options can become much more lucrative, particularly in a market that trades in a range or moves steadily lower.
Andy
I have really benefited from your original "White Paper." Your teaching has opened a whole new world of profit for me. I have recently purchased your latest book and I really like the modifications to the trading rules. I have captured almost $8000 in premiums in the last 2 months. Only $3000 until I have my leaps paid for. Then it's pure PROFIT. I'm Lovin' It!!! - Mark