Weekly Stock Options Trading Tips: July 27, 2009

Stock Options Trading Idea of the Week

Shoot Strategies Move Into Profits (Dow down 32%, SPY down 34%, Shoots up 1%)

This week was a big one for one of our back-burner strategies called the Shoot Strategy because it finally moved into the profit range during a period when the markets in general fell an average of 25%.  Details of this strategy come with the package when you become a Terry's Tips subscriber.

Terry

Shoot Strategies Move Into Profits (Dow down 32%, SPY down 34%, Shoots up 1%):

Twenty-one months ago we set up 5 Shoot Strategy portfolios to demonstrate how options could outperform the purchase of stock when you found a company that you believed would go up in price.  Since we assume that trying to pick winning individual stocks is a loser's game (the professionals have more inside information, research data, etc. than we ever could hope to have), we selected our companies from the top 10% of stocks listed at Magic Formula Investing.
 
Those 21 months were not good months for the market, especially if you were betting that the companies you chose would go up in price.  Over those months, the Dow Jones Industrial Average fell by 32% and the S&P 500 fell by 34%.  Our options portfolios were consistently far ahead of the markets in general, and now have achieved a small gain for the period in spite of the dreadful performance by the markets. 
 
This record provides solid evidence that a properly-executed options strategy can outperform the purchase of stock (and probably mutual funds as well) unless you are incredibly lucky and pick a huge winner.
 
In case you don't know about the Shoot Strategy, it simply involves buying call LEAPS for a company you think will go up in value, and simultaneously selling just enough short-term calls to slightly more than cover the average monthly decay of your LEAPS.   If the stock stays flat, you make a very small gain (better than you would have made if you had bought the stock instead), but if the stock goes up, you make a greater percentage gain than you would have made if you had bought the stock.  Full details are available for Terry's Tips subscribers.

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 portfolios (12 portfolios if you count the Shoot Strategy ones as well) 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

It was another great week for the market. The major market benchmarks have advanced over 11% just in the past two weeks to the best levels since late fall of last year. The push higher can be attributed to a series of upbeat earnings forecasts which created more optimism in the ongoing economic recovery. The Dow has moved 947 points and pushed through the 9,000 level for the first time since January.

The latest advance suggests several forces are at play. Positive economic earnings and economic news have certainly fueled the rally, but some market analysts state that the most recent surge is a result of short-covering. Short-covering occurs when investors buy stocks after having sold borrowed shares in a belief (or bet) that the market would fall. The quick rush to cover their ill-timed belief that the market would fall can provide a surge in the market just like we witnessed last week.

Market analysts have also stated that professional money managers have become afraid of missing out on a continued surge in this rally.

"There is so much cash still on the sidelines," said David Darst, chief investment strategist at Morgan Stanley Smith Barney. "People missed it and they're beginning to worry that the train isn't going to come back for them."

Sentiment has certainly turned bullish over the past few months and my guess is that the sentiment of choice for 2009 should continue as we head into 2010. Now my focus will turn to the 200-day moving average as an area of support.

I did expect to see a pause in the recent bullish attack, but as we all know there are no certainties in the world of trading. With the recent overbought to very overbought readings in the major benchmarks I, like many other market technicians, anticipated a short-term decline or at minimum a pause in the bullish surge. Well, the bulls decided to defy the readings and continued the push higher into some of the most overbought readings in years. So, with that being said, I do expect a decline over the next few trading sessions, although it will be how the market reacts afterwards that tells us what to expect over the remaining days of the summer doldrums. Again, the 200-day moving average will be a focal point to see if this rally has intermediate-term legs.

"It's healthy that there is fear and skepticism in the marketplace," said Jeffrey Frankel, president of Stuart Frankel & Co. "The more people are concerned and the more people are careful, the healthier the market will be. What gets us in trouble is when there is no fear."

Next week, market participants will be faced with another wave of data that could fuel or smother the rally. Several major companies will provide quarterly results plus more economic snapshots including consumer confidence, housing and the economy's overall output should provide the market with another glimpse into the health of the economic recovery.

Overbought/Sold Condition Report

Overbought/Oversold as of July 24, 2009

• S&P 500 (SPY) - 92.9 (very overbought)
• Dow Jones (DIA) - 89.6 (very overbought)
• Russell 2000 (IWM) -  90.4 (very overbought)
• NASDAQ 100 (QQQQ) - 81.8 (very overbought)

Testimonial of the week