Weekly Stock Options Trading Tips: November 23, 2009

Option Trading Idea of the Week

Three weeks ago we established our first gold-based portfolio based on GDX, an ETF of 34 mining companies. The value of this ETF tends to be highly correlated with the price of gold.

Shortly after we set up the portfolio, the stock dropped about 5% and we panicked (we were set up for higher prices, and here it was going down strongly). Of course, then the stock reversed itself and shot up more than 10%, and we had to scramble to catch up on the upside.

In spite of all the unnecessary (and costly) adjustments, the portfolio gained 4.5% for the 3 weeks of its existence. That works out to be about 78% annualized. We also covered the usual 3% - 5% bid-ask-spread-penalty of setting up a new portfolio, so the 4.5% gain understates the true improvement (the portfolio which started with $5000 is worth $5,227 right now, but I would require about $5,500 to replace our current positions).

Looking forward to next month, the risk profile graph suggests the possibility of some extraordinary gains.

GDX closed Friday at $50.82. In 4 weeks, we expect a 20% minimum gain in the portfolo at any ending price between the current price and $59. If it edges up just a couple of points, we could make 30% in a single month.

We are looking forward to waiting this month out. It should be fun. I invite you to become a Terry's Tips Insider, learn the exact options we have in this portfolio, and follow along for yourself, either doing it yourself or through Auto-Trade at thinkorswim.

In case you missed the earlier videos, you can catch the first one here - Why Stock Options are Better Than Mutual Funds. Click here for the second video - How to Create a Conservative Options Portfolio. And here for the third video - How to Use Options to Invest in Gold.

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

Andy's Market Report

The market rallied again during the beginning of the week hitting fresh new highs only to reach 'very overbought' levels. As a result of the technically 'very overbought' levels the market sold off as the week moved closer and closer to options expiration.

The S&P 500 (SPY), Dow (DIA), Nasdaq 100 (QQQQ) and Russell (IWM) finished the week -0.2%, 0.5%, -1.0% and -0.3%, respectively. For the year, the S&P 500 is up 20.8%, the Dow has advanced 17.6% and the Nasdaq is leading the way with a 36.1% gain.

On the economic front, initial jobless claims held at a 10-month low last week. Could this be a sign that firings have come to a halt and that we are indeed moving towards a full-blown economic recovery? Only time will tell, but certainly this is a positive sign if this continues over the next few months.

Jobless claims were reported unchanged at 505,000 which was in-line with economists' expectations.

"The labor market is improving, but at a glacial pace," said Tom Porcelli, a senior economist at RBC Capital Markets in New York, who had forecast claims would fall to 503,000. "People are having a hard time finding a job as companies remain wary of the economic recovery. We expect it will be a jobless recovery."

In other notable economic news housing starts took an unexpected tumble as they fell 10.6% during October. Analysts were expecting an increase.

"I think we will see a bounce up again," David Crowe, chief economist for the National Association of Home Builders stated. "But not substantially. . . . It will be a much slower recovery than is typical for growing out of recession."

On the technical front, all of the major indices I follow have pushed back into a short-term neutral state as we enter the post-expiration, holiday-shortened week. Typically, the market is bearish the trading day following options expiration. I would not be surprised to see history repeat itself once again. However, this week also includes a bullish holiday, Thanksgiving. Turkey day is typically quite bullish for the market so we could possibly see a nice advance as volume tapers and the bulls take over. Of course we could see the exact opposite, but as I stated before Thanksgiving is historically bullish.

Also, the S&P (SPX) is still well above what has been a strong (and pivotal) level of 1020 so if the index does happen to decline I will be keeping an eye on that level.

As I have stated over the past few weeks, the much hyped and talked about stock market correction has yet to materialize. I am beginning to wonder if it will as we continue to see a recovery in productivity. Again, could we witness a jobless recovery? In a consumer driven economy that might be tough but we shall see soon enough, right? One thing is certain, the S&P 500 continues to set new highs and is up more than 60% since the low set in March.


Andy

Overbought/Sold Condition Report

Overbought/Oversold as of November 21, 2009

Major Benchmarks

• S&P 500 (SPY) - 44.9 (neutral)

• Dow Jones (DIA) - 58.4 (neutral)

• Russell 2000 (IWM) - 40.6 (neutral)

• NASDAQ 100 (QQQQ) - 40.5 (neutral)

Testimonial of the week

"I've loved your strategies for over 3 years now.   I've never been a floor trader but I certainly know how it works.   I have taken your strategy and twisted it to meet my needs. .  . This saved me a year ago when everyone was jumping out of 7th story windows.   Not sure how you did.  Your window must have been on the first floor, because you're still trading." 
 
- Sam 11/09