1. Taxes. Except in very rare circumstances, all gains are taxed as short-term capital gains. This is essentially the same as ordinary income. The rates are as high as your individual personal income tax rates. Because of this tax situation, we encourage subscribers to carry out option strategies in an IRA or other tax-deferred account, but this is not possible for everyone. (Maybe you have some capital loss carry-forwards that you can use to offset the short-term capital gains made in your option trading).
2. Commissions. Compared to stock investing, commission rates for options, particularly for the Weekly options that we trade in many of our portfolios, are horrendously high. It is not uncommon for commissions for a year to exceed 30% of the amount you have invested. Because of this huge cost, all of our published results include all commissions. Be wary of any newsletter that does not include commissions in their results – they are misleading you big time.
Speaking of commissions, if you become a Terry’s Tips subscriber, you may be eligible to pay only $1.25 for a single option trade at thinkorswim. This low rate applies to all your option trading at thinkorswim, not merely those trades made mirroring our portfolios (or Auto-Trading).
3. Wide Fluctuations in Portfolio Value. Options are leveraged instruments. Portfolio values typically experience wide swings in value in both directions.
One of our most popular portfolio (we call it the 10K Bear) has gained nearly 70% (after commissions, of course) in the last six months. The underlying stock for the 10K Bear is the S&P 500 tracking stock, SPY, one of the most stable of all indexes. Yet our weekly results included a loss of 34.7% in the last week of November when SPY rose $8.52 in a single week (a highly-unusual upside move). Many times over the past six months, our weekly gains were above 20%, however, when SPY fell in value during the week.
Many people do not have the stomach for such volatility, just as some people are more concerned with the commissions they pay than they are with the bottom line results (both groups of people probably should not be trading options).
4. Uncertainty of Gains. In carrying out our option strategies, we depend on risk profile graphs which show the expected gains or losses at the next options expiration at the various possible prices for the underlying. We publish these graphs for each portfolio every week for subscribers and consult them hourly during the week.
Oftentimes, when the options expire, the expected gains do not materialize. The reason is usually because option prices (implied volatilities, VIX, - for those of you who are more familiar with how options work) fall. (The risk profile graph software assumes that implied volatilities will remain unchanged.). Of course, there are many weeks when VIX rises and we do better than the risk profile graph had projected. But the bottom line is that there are times when the stock does exactly as you had hoped (usually, we like it best when it doesn’t do much of anything) and you still don’t make the gains you originally expected.
With all these negatives, is option investing worth the bother? We think it is. Where else is the chance of 50% or 100% annual gains a realistic possibility? We believe that at least a small portion of many people’s investment portfolio should be in something that at least has the possibility of making extraordinary returns.
With CD’s and bonds yielding ridiculously low returns (and the stock market not really showing any gains for the past 4 years), the options alternative has become more attractive for many investors, in spite of all the problems we have outlined above.
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
It was a rather dull week for the market, but a strong upside gap on the first trading day of the year helped the market book a 1.6% gain for the week.
The strong upside gap was quickly met with investors struggling to find a direction in what has been a very turbulent market as of late. The gap higher this week in the Nasdaq 100 (QQQ), pushed the tech-heavy ETF into a short-term overbought state and at a level of strong overhead resistance at $58.
Typically, the aforementioned factors do not bode well for the bulls going forward, at least for the short-term (1-5 days). I would not be surprised to see a push lower to close the gap over the next 1-5 trading sessions.
In notable economic news this week, the economy created 200,000 jobs in December, according to a report issued by the Labor Department. The unemployment rate now stands at 8.5 percent, the lowest in nearly three years.
But try not to get too excited.
Jason Goepfert of Sentimentrader.com came out last Thursday with some interesting statistics on how the S&P has performed immediately following the January payroll report.
“The S&P has declined 6 of the last 8 years on the day the Nonfarm Payroll report was released in January. Often, that weakness has continued, which is what we’ve been touching on with regard to questionable seasonality heading into the latter half of the month. When the Payroll report beat expectations in January, then over the next two days it rose only 1 out of 5 times, averaging a return of -1.1%. When it missed expectations, then the next two days were up 2 out of 8 times, averaging -0.6%. So damned if you do, damned if you don’t for the short-term. Over the next 3 weeks, it was similarly negative. The average risk (i.e. maximum decline) was more than four times larger than the average reward, starting from the opening print on the Friday of the Payroll report.”
So, it seems as though the struggle that typically follows the January Nonfarm Payroll report lines up with the other bearish readings that currently reside in the market. So, with that being said it is hard for me to think gains are to follow over the short-term (1-5 days) with such strong bearish waves rolling in.
"I am a new subscriber as of August of this year and have been very pleased with the service provided by Terry's Tips. I started an auto traded account with thinkorswim and have been impressed on how well the actual fills mirror the recommendations. My portfolio is up over 14% within the first 60 days -- way above my expectations --- Jeff