Stock Option Trading Idea of the Week
Hot off the Presses: Making 36%: Duffer's Guide to Breaking Par in the Market Every Year, In Good Years and Bad (2010 Revised Edition)
When the market crashed in late 2008, option prices soared to levels never seen in the history of the stock market. At that time we published a book called the Mighty Mesa which explained a new option strategy to best cope with the unprecedented high option prices.
The Mighty Mesa Strategy was based on the same premise as our earlier (and quite successful strategy in most years) 10K Strategy - the difference in decay rates for long-term options and short-term options. Option prices were so high at that time that a mesa-shaped risk profile graph could be constructed for our portfolios that showed a profit coming in one month even if the stock fluctuated by as much as 10% in either direction.
The mesa-shaped graph compared to a steeper-sloped mountain-shaped graph of the 10K Strategy (where a greater profit was possible but across of much smaller break-even range).
The Mighty Mesa Strategy employed calendar spreads over a wide range of strike prices both above and below the price of the stock, with the long side of the spreads going out only 2 - 4 months. With such high option prices, the more spreads you could place, the greater the possible gains might be. The 10K Strategy, on the other hand, used true LEAPS for the long side, and most of the spreads ended up being diagonal because each month, most of the short options which we sold were at the strike price where the most time premium could be gained (rather than at the same strike as the long option).
Starting in early 2009 and going for just about a full year, option prices (measured by VIX, the most popular measure of SPY volatility) steadily fell, (VIX falling from over 80 at one point to as low as 16 last week). This huge drop in option prices caused us to abandon the Mighty Mesa Strategy in favor of the 10K Strategy for almost all of our portfolios beginning early in 2010.
The 2010 Revised copy of Making 36% includes an updated version of the 10K Strategy and shows how we used it to make over 60% in the first year of running the Boomer's Revenge portfolio.
If you order the book in the next two weeks, no later than May 17, 2010, I will send you a copy of Making 36% by first-class mail for the total price of only $9.97. Order it here and use the discount code of VAL.
The book is a little about golf and a lot about a potentially highly-profitable options strategy that could change your financial future forever.
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 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
P.S. If you order the book in the next two weeks, no later than May 17, 2010, I will send you a copy of Making 36% by first-class mail for the total price of only $9.97. Order it here and use the discount code of VAL.
Andy's Market Report
Spring is here in Vermont, well, almost. The remains from the recent two feet that resides outside my window is Old Man Winter's last attempt at redemption after a poor showing this past winter.
Anyway, after several weeks of paltry gains, the market finally took a step back this past week. The markets cruised through most of the week, but eventually suffered a big loss on the last day of April as investors showed their disappointment with two economic reports and worries about a criminal investigation of Goldman Sachs. However, the major indexes still had their third straight monthly gain.
"The market may just be a little bit tired," said Michael Sheldon, chief market strategist at RDM Financial Group in Westport, Conn. "A lot of good news is priced into the market."
"They're really going after Goldman pretty hard," said Ryan Detrick, senior technical analyst at Schaeffer's Investment Research. "That's got people on edge."
Investors were also worried about the debt problems in Europe, namely Greece, but Spain and Portugal have also moved on to the radar.
All three countries saw their debt ratings cut by Standard & Poor's this past week. Greece's rating was cut to junk status. The concern in the markets is that a loan default could threaten the euro, the currency shared by 16 European nations, and in turn jeopardize the global economic recovery.
The market has essentially rallied for two straight months, but May is upon us and we have all heard the old adage "sell in May and go away'. Here are just a few stats that tend to back-up the phrase spoken frequently among traders and Wall Street over the past few weeks.
May is historically one of the weaker performing months. It is something to consider over the intermediate-term in this already overextended market. I looked at the historical average return of the S&P on a monthly basis over the last 60 years to see if it actually backed up typical range-bound summer months also known as the "summer doldrums".
As you can see May through September are rather weak with July being the best month.
The Stock Trader's Almanac states that a $10,000 investment compounded to $544,323 during the November-April period over the last 56 years compared to a $272 loss for May-October. I think that sums up the significance of the historical period known as the "Summer Doldrums".
Keep this in mind as we move into the summer months. Corrections happen. Flat periods happen. The market can't continue to advance in this manner without corrections and lengthy consolidation periods. This is the nature of the market. Consider learning alternative investment strategies such as premium selling options strategies as a way to diversify your current portfolio so that you are better equipped in any market environment, bullish bearish or neutral.
As I have stated before my feeling is that the S&P 500 has maxed out its gains over the short to intermediate-term and should push back, at least to the gap from 3/5 over the intermediate-term - more specifically, a move to the $112.34 in the S&P 500 (SPY) or $45.76 in the NASDAQ 100 (QQQQ).
Andy
Overbought/Sold Condition Report
Overbought/Oversold as of May 1, 2010
Major Benchmarks
- S&P 500 (SPY) - 39.0 (neutral)
- Dow Jones (DIA) - 40.3 (neutral)
- Russell 2000 (IWM) - 40.2 (neutral)
- NASDAQ 100 (QQQQ) - 38.8 (neutral)