Weekly Stock Options Trading Tips: November 9, 2009

Option Trading Idea of the Week

Lots of people seem to be interested in gold these days.  The price of gold has chugged steadily higher for many years, and its recent all-time high prices seem to dominate the investment headlines.
 
Today I would like to offer a short video which shows how you can make much greater returns with a gold options portfolio than you could by merely owning gold or an ETF based on the price of gold.  You can see the video here.
  

There are several different ways that you can invest in gold, ranging from buying gold bars or coins to an ETF based on the price of gold (GLD or GOLD) to buying individual gold mining stocks to buying an ETF based on 34 mining companies (GDX).
 
Buying the gold itself or buying GLD or GOLD has certain inherent disadvantages - there are storage and insurance costs that depreciate your investment every day that the price of gold does not go up.  In addition, selling your gold bars or coins is not quite so simple as selling a stock.  (The gold ETFs are more liquid, but they charge you a management fee for that liquidity).
 
Compare these disadvantages to an option portfolio that can gain 10% or more in a single month even if the price of gold does not go up a penny.  If the price of gold does go up (and this translates to higher values for gold mining companies), then the options portfolio could make 15% or 20% or more in a single month.
 
The cost of mining gold is relatively fixed, so any increases in the price of gold should go right to the bottom line for gold mining companies.  That is the reason why there is such a high correlation between the price of GDX and the price of gold.
 
Buying GDX as a way of adding gold to your portfolio is probably a better bet than buying the raw metal or an ETF based on the price of gold even though it is far more volatile than the price of gold itself.
 
On the other hand, the options portfolio should outperform GDX in virtually every month because it makes money over such a larger range of possible stock prices.
 
The actual Gold Bug portfolio (a $5000 investment) carried out at Terry's Tips will make a gain in two weeks at the November 20 expiration at any price of GDX between $44 ½ and $52 (current price of GDX = $47.62).  If GDX ends up between $46 and $50 ½ in two weeks, this portfolio will gain between 10% and 16%).
 
When an options portfolio can do so much better than the purchase of gold or an ETF bet on the price of gold, we find it hard to believe that anyone would add gold to their portfolio in any other way than the options alternative.
 
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.

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 advanced every day this past week and as a result all of the ten major sectors finished the week higher with the Industrial sector leading the way (+6.0%). The advance was due in part to a short-term oversold state coupled with a positive earnings report from Cisco and a surprising surge in nonfarm productivity.

The S&P 500 (SPY), Dow (DIA), Nasdaq 100 (QQQQ) and Russell (IWM) advanced 3.2%, 3.2%, 3.1% and 3.3%, respectively. For the year, the S&P 500 is up 18.4%, the Dow has advanced 14.2% and the Nasdaq is leading the way with a 34.0% gain.

In economic news, as I stated before nonfarm productivity came in at a blistering 9.5% which was well above economists' expectations of 6.5%.

"The combination of rapidly increasing productivity and falling unit labor costs puts downward pressure on inflation, and should make the Fed more comfortable about pursuing accommodative monetary policy amidst economic growth," J.P. Morgan economists said in a note to clients.

On the negative, on Friday October nonfarm payrolls fell 190,000 which were below economists' expectations of 175,000. Furthermore, the unemployment rate climbed to 10.2% from 9.8%, the highest rate since April 1983. Since the beginning of the recession in December 2007, the number of the unemployed has risen by 8.2 million and the unemployment rate has surged 5.3%.

"This may be the toughest employment situation we've seen in the postwar era," said Mark Gertler, an economics professor at New York University.

Could we indeed be in store for a 'Jobless Recovery'? Only time will tell. However, one thing is certain, productivity is surging while jobless rate continues to advance.

On the technical front, all of the major benchmarks I follow are currently in a short-term neutral state, but are quickly nearing a short-term overbought state. Another surge in the indices and we will no doubt see an overbought state which should signal a reprieve (1-3 days). If a reprieve does occur I will once again be watching the 1020 on the S&P 500 (SPX). This has been an area of very strong support.

So, 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 is only 2.9% from its recent high and up more than 60% since the low set in March.


 Andy

Overbought/Sold Condition Report

Overbought/Oversold as of November 9, 2009

Major Benchmarks

• S&P 500 (SPY) - 62.7 (neutral)

• Dow Jones (DIA) - 68.9 (neutral)

• Russell 2000 (IWM) - 54.2 (neutral)

• NASDAQ 100 (QQQQ) - 66.8 (neutral)

Testimonial of the week

Thanks for delivering a service that so far has exceeded what you sell it to be. - Jeff