Weekly Stock Options Trading Tips: December 7, 2009

Option Trading Idea of the Week

We carry out two different strategies at Terry's Tips which involve using LEAPS as the long side (the 10K Strategy and the Shoot Strategy) and a third strategy (Mighty Mesa Strategy) which uses shorter-term options for the long side.

 

The Shoot Strategy is not one of our recommended strategies (because its success depends on picking the right stock, something we don't have confidence that we can do).  However, we carry out 6 Shoot Strategy portfolios, each using a different stock that comes highly recommended, as a way of demonstrating to subscribers that if you are smart (or lucky) enough to pick a winning stock, you can do a whole lot better with an options portfolio than you can by just buying the stock.

 

Almost a year ago, we set up a 10K Strategy portfolio using Mosaic (MOS) as the underlying, and a month earlier, we had set up a Shoot Strategy portfolio using MOS as well.  At the time, we said that if the stock moved significantly higher, we would expect the Shoot Strategy portfolio to out-perform the 10K Strategy portfolio.  And that is exactly what happened.

 

MOS shot up by over 50%, and the 10K Strategy gained "only" 37% while the Shoot Strategy portfolio gained a whopping 131%.  The large gains in the stock price actually hurt the 10K Strategy because excessive volatility in either direction is harmful. 

 

Individual stocks are much more likely to fluctuate widely, and for that reason, 7 of our 8 recommended portfolios use  baskets of stocks (ETFs) as the underlying (SPY, DIA, GDX, XLF) rather than a single stock.  Our MOS portfolio is the only one based on a single stock.

 

If the stock had gained only moderately or remained flat, the 10K Strategy portfolio would have outperformed the Shoot Strategy.  Since we maintain the assumption that we don't know which way the market is headed, we continue to have the great majority of our invested funds in the 10K Strategy and Mighty Mesa Strategy portfolios in spite of the huge gains that are possible if you are smart (or lucky) enough to pick a company that will go up.

 

It was good to see that if the stock rallied significantly as MOS did, the Shoot Strategy option portfolio did more than twice as well as a purchase of the stock would have done.  This served to prove our point about the superiority of options over stock.

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 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

Andy's Market Report

In a week where the headlines were dominated by the ongoing saga of Tiger Woods the market was able to sneak in another nice advance as it hit another fresh new high for 2009.

The S&P 500 (SPY), Dow (DIA), Nasdaq 100 (QQQQ) and Russell (IWM) finished the week 1.3%, 0.8%, 2.6% and 4.4%, respectively. For the year, the S&P 500 is up 22.4%, the Dow has advanced 18.4% and the Nasdaq is leading the way with a 39.1% gain.

Dubai was a major concern towards the latter part of the holiday shortened week, but those worries subsided as buyers came in with full force this past week.

Most of the week was spent speculating over the unemployment numbers that were due out on Friday. The anticipation grew as the week progressed and while the market sat idly by waiting for the numbers the bulls were busy buying, buying, buying.

The bulls were rewarded with their early buying interest as the unemployment came out with better-than-expected numbers. The nation's jobless rate unexpectedly slid to 10.0% in November from 10.2% in October as job losses sharply declined.

Economists' anticipated a loss of 125,000 jobs for the month. It was also reported that 159,000 fewer jobs were lost during September and October.

"I don't think they're a fluke," Robert Johnson of Morningstar said, citing other positives in the report, including an uptick in the average weekly hours worked, which rose in November to 33.2 from 33 in October. That number had been trending downward, he said.

"That's the highest that number has been in 18 months," Johnson said.

The one underlying fear for the bulls this week was the soaring price in gold. The commodity hit a record nominal high of $1226 per ounce, but ended the week lower after the dollar rallied on the unexpected strength of the jobs report.

"This gold market's taken on a life of its own," said Michael Gross, broker and futures analyst with OptionSellers.com. "You have so many investors pouring into it right now."

On the technical front, there really is not much to report this week. The major benchmarks are sitting comfortably in a neutral state so there really isn't much short-term advantage towards the bulls or bears. We do typically see strength during this time of year - typically known as a Santa Claus rally and I think this might be one of those years where Santa is kind to market participants. Of course, only time will tell.

Andy

Overbought/Sold Condition Report

Overbought/Oversold as of December 5, 2009

Major Benchmarks

• S&P 500 (SPY) - 56.4 (neutral)

• Dow Jones (DIA) - 51.4 (neutral)

• Russell 2000 (IWM) - 66.5 (neutral)

• NASDAQ 100 (QQQQ) - 59.2 (nuetral)

Testimonial of the week

"I am new to Terry's Tips but not new to options.  I have been working with your 10K strategies and I find them very interesting and useful." - Lauren