Weekly Stock Options Trading Tips: June 13, 2009

Options Trading Idea of the Week

The 20-Month Track Record for the Shoot Strategy

Twenty month ago, we sent up 5 actual portfolios at Terry’s Tips to demonstrate how an option portfolio could outperform an investment in stock for companies you believed would go up in value.  We used what we call the Shoot Strategy in this experiment.

Now would be a good time to check out how this strategy has performed.  The results may surprise you as such as it did us.

I will be speaking as part of a free webinar from Traders Accounting next week – see below for registration information.  It should include some very interesting information for option traders.

Terry

The 20-Month Track Record for the Shoot Strategy

About 20 months ago, at Terry’s Tips, we set up 5 Shoot Strategy portfolios to demonstrate how an option portfolio could outperform a stock portfolio for companies you expected would go up in value.   The Shoot Strategy is not the same as the capstone strategies we employ. 

At Terry’s Tips, our basic strategy involves buying LEAPS (or shorter-term long options) and simultaneously selling as many short-term options as possible.  Our gains come from owning slowly-decaying options and selling faster-decaying options.  We acknowledge that we have no idea which way the market is headed in the short run, and for most of our portfolios, we use a broad-based ETF as the underlying rather than individual stocks.

An alternative strategy which we call the Shoot Strategy is more appropriate for individual stocks that you believe are headed higher.  Rather than maximizing decay by selling as many short-term options as possible, the Shoot Strategy involves selling as few short-term options as possible while at the same time covering the decay of the LEAPS.  In other words, we sell fewer short-term options than we have LEAPS.

While our basic 10K Strategy and Mighty Mesa Strategy portfolios make maximum gains if the stock stays flat, the Shoot Strategy portfolios only gain if the underlying stock goes up.  If the stock stays flat, the portfolio just breaks even, just as if the stock were bought instead of options.

After 20 months, our original argument has been proved to be correct.  In every case where the stock advanced,  the option portfolio went up by a greater percentage than the stock increased.

However, the Shoot Strategy is designed to be used for companies that you expect will go up.  In a falling market, however, we did not expect that these portfolios would outperform the market indexes.  
Over those 20 months, most stocks have not gone up.  The major market indexes have fallen by about 34% during that time.  On the other hand, our composite Shoot Strategy portfolios have only fallen 3.3% in spite of being established only to make gains if the stock went up.  You would have been 10 times as well off with your money in our Shoot Strategy portfolios compared to having it in the market as a whole during those 20 months.

It is important to point out that these portfolios are in individual stocks, and are subject to greater fluctuations than our regular 10K Strategy  and Mighty Mesa Strategy portfolios using broad-based ETFs as the underlying.  We tell our subscribers that if they decide to mirror our Shoot Strategy portfolios (or use companies of their own choosing), it is important to diversify by using the strategy on a basket of stocks rather than only one or two.

Free Webinar from Traders Accounting Starting June 18 at 8 PM EDT: Traders  Accounting---the nation's top experts on trader taxation will offerr a live webinar titled “ Increasing Cash Flow, By Creating A Tax Efficient Trading Plan [3 Part Series]”

Remember--"The only cash flow that matters is the cash flow you get to keep."

During this presentation you will learn the following:

    * IRS definition of a trader and investor.
    * Trading as business.
    * Why trade as a formal business?
    * Mark to Market accounting.
    * Special tax rules for traders.
    * What are regulated futures contracts
    * How are regulated futures contracts and other section 1256 contracts taxed?
    * Year-end net 1256 contracts loss
    * What are wash sales and how to avoid them.
    * Self-Directed 401k plans

This Webinar will be held on the following dates:

• June 18, 2009 5:00 PM - 6:00 PM PDT (8:00 PM EDT)
• June 25, 2009 5:00 PM - 6:00 PM PDT (8:00 PM EDT)
• July 2, 2009 5:00 PM - 6:00 PM PDT (8:00 PM EDT)

To register for this free webinar, go to https://www2.gotomeeting.com/register/347762347

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 the 5 Shoot Strategy portfolios as well) 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 a quiet week for the market. The summer doldrums seem to be in full effect and the short-term technical picture seemed to weigh most on the market this past week as the major indexes had trouble pushing through strong overhead resistance and a short-term overbought reading. As a result the major indexes finished the week mixed. The Dow, S&P, Russell and NASDAQ finished the week 0.4%, 0.7%, - 0.7%, and 0.5%, respectively.

"We ran at sprinters' speed and now we're taking a couple jogs around the track to see if we can sprint again," said David Darst, chief investment strategist at Morgan Stanley Smith Barney.

As I stated last week, the recent advance has pushed the market to fresh new highs for 2009 and the first time the S&P closed above its 200-day moving-average since December 2007. Moreover, the S&P (SPY) has also moved above its shorter-term measure, the 30-day moving average which is also a healthy sign. If a decline does occur over the next few weeks, the area where the S&P crossed the 30-day moving average (roughly $92.50 on SPY) should act as an area of support so we should keep a
close eye if and when the time comes.

"Bulls think this is nothing more than a resting stop," he said. "Right now clearly the tug-of-war remains in place."

As I stated before it was a relatively quiet week on Wall Street. Economic news was light, but we did have a few key items that were released.

The Fed’s Beige Book, stated that the economic decline had slowed and that there were some positive economic signs that had recently moved into the market. Furthermore, retail sales displayed a modest gain which was another positive sign for the market. Also, initial claims for the week came in below expectations, but are still increasing at an alarming rate. Jobless claims have now reached 6.8 million.

On the technical front, much like last week I expect to see a short-term decline early next week due to the short-term overbought state in the major benchmarks. Typically when we see an overbought state a short-term reprieve follows.

Like I stated earlier, I will be watching the $92.50 in SPY if indeed we do see a decline next week. This should act as a pivotal area for the market. If we see a breach of the support then I would expect to see a sharp decline follow. However, if the area acts as true support then we could see a continuation of this 3 month rally. Let’s hope for the latter.

Overbought/Sold Condition Report

Overbought/Oversold as of June 12, 2009

• S&P 500 (SPY) – 70.7 (overbought)
• Dow Jones (DIA) – 77.2 (overbought)
• Russell 2000 (IWM) – 64.9 (neutral)
• NASDAQ 100 (QQQQ) – 60.3 (neutral)

Testimonial of the week

"Well, I've just finished the daily program and it was absolutely fantastic!  You guys have put together an excellent program.  When I initially signed up, I was hoping to learn about option spreads, how to set them and when to use them.  Learning how to integrate them into well-defined strategies has been a welcome bonus."     ~ Jeremy C.