Weekly Stock Options Trading Tips: March 23, 2009

Stock Options Trading Idea of the Week

The New Boomer's Revenge Portfolio

This week I would like to show you the risk profile graph of a new portfolio we are starting for our subscribers next week.  It is called the Boomer’s Revenge.  It uses true LEAPS for the long side of calendar spreads and is designed to allow Baby Boomers (or anyone else) who lost about half of their retirement funds over the last six months to get back those losses in far less time than conventional investments are likely to do.

 

Terry

 

The Boomer’s Revenge Portfolio:  Check out the following risk profile graph and compare it to what you would make with a prudent investment such as a low-cost index mutual fund that mirrored the S&P 500 (SPY):

 

 

This graph shows the gain or loss that will result in this portfolio in 4 weeks at the April options expiration.  The portfolio was started with $10,000 at a time when SPY was trading at about $77 ½.  About 10% of portfolio value will be set aside in case adjustments are needed due to extreme volatility of the stock.

 

You can see from the graph that if SPY ends up about where it is right now when the April options expire in 4 weeks, the portfolio will gain over 15% in a single month.  Of course, if you bought the index fund and the stock remained flat, you would earn nothing.

 

If the stock were to fall about 5% in the next 4 weeks, this portfolio will also make a gain (of about 10%).  Your index fund would lose 5%, of course.

 

If the stock goes up about 5% in the next 4 weeks, this portfolio will also make about 10% while your index fund would gain only half that amount.

 

If the stock manages to go up by 10% in the next 4 weeks, this portfolio would only gain 5%, however, and your index fund would gain the full 10%.  But how often does SPY go up by 10% in a single month?  Our 10-year back test showed that it happens less than one out of 20 times. 

 

It seems to me that any reasonable person would conclude that this portfolio would be a much better investment than the purchase of a market-tracing index fund (and I believe that such an investment is far smarter than any other kind of mutual fund investment). 

 

What do you think?  I would love to hear from you by email, 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 the Boomer’s Revenge portfolio and 6 other 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

The market followed the exceptional gains last week with another push higher this week. The market spiked higher, particularly after the Fed announcement Wednesday, but sold off during the last two sessions, but still managed to hold onto some of the gains made earlier in the week. The Dow, S&P 500 and NASDAQ advanced 0.8%, 1.6% and 1.8%, respectively.

It was a big week for economic data. On Monday, the Industrial Production report showed a larger than anticipated decline of 1.4%.

"There is no relief in sight as inventories rocket and exports plunge," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, in a research note. "More bad news is ahead."

"The monthly numbers are erratic but the trend is clearly downward," Shepherdson said.

On Tuesday Housing Starts and Building Permits reports showed a unexpected jump. Housing starts increased 22% month-over-month and building permits increased 3%. The report was deemed very good as it could have a positive affect in the GDP for the 1st quarter.

"Investors are starting to get a sense that things are stabilizing. They're not getting any worse," said Terry Morris, a portfolio manager with National Penn Investors Trust Company in Reading, Pennsylvania.

On Wednesday all market participants waited until the latter part of the day for the always highly anticipated Fed announcement. As expected, the FOMC decided to leave its policy rate unchanged in the range of 0.0% - .25%, and said
that rates would “remain low for the foreseeable future”. More importantly, it also effectively embarked on a policy of quantitative easing.

The FOMC also stated that it would purchase $300 billion worth of Treasuries over the next 6 months and expand credit easing by purchasing $750 billion of mortgage-backed securities.

“This move indicates that the central bank is pulling out all the stops in trying to turn around the economic downturn by opting for the relatively aggressive quantitative easing on top of various initiatives at credit easing,” RBC says.

As for the technical outlook, well, we are currently in a neutral state so there is no real advantage over the short-term. However, typically we see a weak performance from the market the day or two after options expiration.

Overbought/Sold Condition Report

Overbought/Oversold as of March 20, 2009

• S&P 500 (SPY) – 52.2 (neutral)
• Dow Jones (DIA) – 53.2 (neutral)
• Russell 2000 (IWM) – 53.8 (neutral)
• NASDAQ 100 (QQQQ) – 61.1 (neutral)
• Oil Services (OIH) – 59.3 (neutral)

Testimonial of the week

"I have been a subscriber for about a year. I autotrade in 2 different accounts, all your strategies. I read everything you write on Saturdays. I love your happiness thoughts and everything else. I usually do not communicate at all but I had to tell you how well my accounts with you are doing compared to everything else. You are awesome. Keep up the good work.   Thank you."  Maya