Stock Option Trading Tip of The Week
Update on Last Week's Apple Trade
If you missed last week’s trade, this is what it was:
Buy to Open 1 AAPL Feb-12 440 call (AAPL120218C440)
Sell to Open 1 AAPL Jan4-12 435 call (AAPL120127C435) for a debit of $1.05 (buying a diagonal)
The stock shot up to about $452 on Friday. We had to buy back the Jan4-12 435 for about $17 ($1700). We retained the Feb-12 440 call, and sold a Feb1-12 450 call, collecting $3 ($300).
This left us with a diagonal spread that will be worth a minimum of $1500 if the stock ends up any higher than $450. We could earn more than that if it stays flat or moves slightly higher so we can sell more premium in the next two weeks.
With the stock up again this morning, we have recovered about $300 of our loss. Here is what the risk profile graph looks like with our current positions:
The graph shows that in the next 4 days we should recover up another $400 or so if the stock stays above $450 (it is trading about $452 right now). We have the opportunity to sell new Weeklys against the Feb-12 435 call for the next two weeks, so additional gains could easily come our way. We have a very good chance of covering our loss from last week’s trade.
I apologize that this graph (and our manner of contending with a bad trade) is confusing. Unless you are familiar with option trading, it should be confusing. I hope you will continue receiving this free newsletter anyway. Other reports should make more sense to you.
In spite of having 3 of last week’s suggested trades in our actual Terry’s Tips AAPL portfolio, the portfolio gained 25% last week and is now up 170% since we started the portfolio 20 months ago. This is more than 2 ½ times as great as AAPL has gone up over this period, proving once again that an options portfolio can seriously outperform the outright purchase of stock (if you pick a stock that goes up).
Happy trading.
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 look forward to having you on board, and to prospering with you.
Terry
Andy's Market Report
Have you seen the VIX lately?
18.53? Seriously?
Well, some of you asked for it and now look what you get in return - low options premium. Sellers of options need volatility, we thrive on volatility. Volatility is our friend.
But volatility is at a six-month low, which raises hopes that a calmer market will bring in more investors. There is certainly no doubt that most risk is tied up in bonds right now, but once investors are willing to take on more risk they will move back into the stock market. The question is when.
“Lower volatility is like a security blanket for retail investors. It allows them to invest for the long term,” said Ben Schwartz, chief market strategist at Lightspeed Financial, the retail broker. “Investors remain nervous about the eurozone crisis, but money is beginning to trickle back.”
Although investment banks and their institutional clients are not convinced that volatility will remain low. Because, low volatility equates to a low-price hedge against a sharp market decline.
“With Vix levels so low, this is a good time for investors to put on hedge positions,” said Pankaj Khandelwal, a senior Vix trader at Barclays Capital. “Even if you have a bullish view on the market, you can buy downside protection for your portfolio at low prices right now,” said Pankaj Khandelwal, a senior Vix trader at Barclays Capital.
And the smart money or commercial hedgers (among the largest traders in the market) have gone net short on Nasdaq, Dow and Russell 2000 futures.
This is telling.
Because when commercial hedgers move net short the market typically witnesses a correction shortly thereafter.
Whether or not we see a decline soon is THE hot question right now.
For the last three weeks it’s been like the movie Groundhog Day. Every day I wake up and market moves higher.
But the bearish indicators are piling up. But the tower of stacked pennies inevitably falls when it does - it typically comes crashing down.
Unless, we have truly entered into a market environment where investors are moving money off the sidelines and into the market then this bull run could continue. But the numbers just aren’t there. Volume is incredibly low and has been throughout the majority of this bull rally.
Has it been a bear trap all along?
Maybe so, maybe not, but one thing IS for certain, with the market at these elevated levels the risk is to the upside. Trade accordingly.
Overbought/Sold Condition Report
Overbought/Oversold as of January 28, 2012
- S&P 500 (SPY) – 65.5 (neutral)
- Dow Jones (DIA) – 55.2 (neutral)
- Russell 2000 (IWM) – 89.1 (very overbought)
- NASDAQ 100 (QQQ) – 78.7 (overbought)
Testimonial of the Week
“I joined your program recently and finally got my account funded at thinkorswim. I bought (one of the portfolios) on autotrader on Tuesday and even with the market doing unbelievable price changes I am happy to say I am up 13%. I cannot 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