Weekly Stock Options Trading Tips: December 21, 2009

Stock Option Trading Idea of the Week

When the December options expired last Friday, we allowed several of the out-of-the-money calls to expire worthless (with the stock falling 18% over the past three weeks, all of the short calls had become out of the money which meant that we were able to keep 100% of all the money that we had sold them for).

We are waiting for a higher stock price to sell the remainder of the calls that we are allowed to this month. Even without selling these calls, the potential for the portfolio is exceptional for the next four weeks.

Check out the risk profile graph for our Gold Bug portfolio. It would take about $4800 to reproduce the positions that we have:

If the stock (GDX) stays the same as it closed last Friday ($46.29), the graph indicates that we will make about 15% for the month. If it edges up a bit, we should make over 20% in a single month. We will only start losing money if it falls further, below $45, although we can easily lower that break-even point by selling additional calls against several longer-term uncovered calls that we currently own.

Our experience with gold is that it does fall in price quite frequently (although 18% is a relatively large drop) but that over time, the trend is decidedly toward higher prices. The recent setback in this gold index might mean that this is one of the best times ever to place a bet on gold using our Gold Bug portfolio.

In case you missed the videos I offered over the past few weeks, you can catch them here by clicking on the title you missed -

• Why Stock Options are Better Than Mutual Funds.
• How to Create a Conservative Options Portfolio.
• How to Use Options to Invest in Gold.
• Making Adjustments to a Conservative Options Portfolio

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 will also send along a special report entitled "How the Boomers Revenge (SPY) Portfolio Made 70% in 2009" - actually, it is even better than that because in the month just ended, this portfolio made 9.3% (which is not fully included in the report that was written early in December).

I look forward to having you on board, and to prospering with you.

Terry

Andy's Market Report

The strengthening dollar and the upward tick in initial jobless claims helped push the S&P 500 lower this past week. However, the fate was not the same in the tech-heavy Nasdaq 100 (QQQQ). Technology stocks managed to enter the last weekend of autumn with a much better performance over the fourth quarter and at week's end the Nasdaq was actually higher 1.0%.

So far, the S&P (SPY) is up only 4% in a roller-coaster fourth quarter, vs. 15% gains in each of the prior two quarters. The S&P 500 (SPY), Dow (DIA), Nasdaq 100 (QQQQ) and Russell (IWM) finished the week mixed -0.4%, -1.4%, 1.0% and 1.7%, respectively. For the year, the S&P 500 is up 22.1%, the Dow has advanced 17.7% and the Nasdaq is leading the way with a 40.2% gain.

The FOMC meeting on Wednesday was the main focus this past week and as usual they did not disappoint. This time around they hinted that an end to several of the emergency lending programs might occur sooner than anticipated. Whether one agrees or not is looks as though an eventual shifty in policy is near.

The PPI and CPI were also reported this past week.

The government's Consumer Price Index (CPI), its broadest inflation gauge, rose 0.4% in November, matching economists' forecasts. The index's core rate, which strips out volatile energy and food prices, was unchanged on the month, versus the 0.1% rise predicted by economists.

"There were some concerns in the market that the CPI could surprise on the upside after yesterday's PPI reading. But the figures turned out to be in line," said Michael Pond, Treasury strategist at Barclays Capital in New York.

On a technical front the Dow (DIA) and S&P 500 (SPY) have pushed very close to a short-term oversold state and with the Nasdaq 100 (QQQQ) and Russell 2000 (IWM) moving ever closer to a short-term overbought state I think we could indeed see further declines over the next 1-3 days. However, with the holiday right-around the corner we could see a Santa Claus rally rear its head. If a rally does occur will it be enough to break out of the current range that the market has been trading in for weeks? For those of us who sell options premium, well, we love the recent indecisiveness.

Andy

Overbought/Sold Condition Report

Overbought/Oversold as of December 18, 2009

Major Benchmarks

• S&P 500 (SPY) - 38.2 (neutral)

• Dow Jones (DIA) - 30.4 (neutral)

• Russell 2000 (IWM) - 63.5 (neutral)

• NASDAQ 100 (QQQQ) - 59.2 (nuetral)

Testimonial of the week

"I joined your program recently and finally got my account funded at thinkorswim. I bought the Big Bear on autotrader on Tuesday and even with the market doing unbelievable price changes I am happy to say I am up 13%. I can not believe it

Thanks again ---- I look forward to making good money in the future because I believe the market will be consolidating which will be very good for us."

Michael R.