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Tip 2 - Check Out Auto-Trade

Auto-Trade is a service offered by several on-line brokers.  Auto-Trade makes it possible for an investor to carry out an options strategy in his own account without becoming an options guru or making all the trades on his or her own. 

This is how it works.  First, you subscribe to an investment newsletter (we hope you will pick Terry’s Tips, but there are dozens of others you can choose from as well).  Then you sign an agreement with a broker which authorizes him to make trades in your account in accordance with recommendations made by the newsletter.  You specify how much you cash you would like to allocate to the newsletter’s recommendations.

Terry’s Tips operates a little differently than most newsletters.  We maintain 8 actual portfolio accounts (using different underlying stocks or ETFs and risk levels). When you sign up for Auto-Trade at a broker for the Terry’s Tips newsletter, you tell the broker which portfolios you would like to mirror, and how many “units” you would like to employ.  For example, if we have a portfolio that would require $5,000 to mirror, and you would like to invest $10,000 in that portfolio, you would select 2 units. 

For most of our portfolios, when the portfolio gains more than 3% over the "starting" value, we withdraw the gains (in increments of 3%) so that new subscribers can mirror the portfolio with close to the starting value.  Of course, subscribers can decide on their own if they want to withdraw cash from their account, or use it to make other investments.

Terry’s Tips is also different from other newsletters in two important ways.  First, since our portfolios are actual broker accounts, we account for all commissions.  Many newsletters display their results and do not account for commissions.  This is extremely misleading because commissions on option portfolios can be huge – sometimes 30% or more over the course of a year.  Our results are always net of commission costs.

Second, Terry’s Tips portfolio results are an open book. We believe in full disclosure.  Insiders can see every trade ever made in every portfolio.  Nothing is swept under the rug.  Other newsletters may tell you only about the one portfolio you have signed up for, and if that one doesn’t make money for you, they might tell you that you were just unlucky because you didn’t sign up for one of the profitable ones that they conducted.

At the present time, the only broker who offers an Auto-Trade program honoring Terry's Tips Trade Alerts is a Chicago broker with the unlikely name of thinkorswim, Inc by TD Ameritrade.  Several other brokers have asked us to be added to their list of investment newsletter providers, but we have not accepted their offers because we have been totally satisfied with thinkorswim, Inc by TD Ameritrade.  In fact, our experience has taught us that there is not a single reason why any options investor should use a different broker for their Auto-Trade program.  Here are some of the reasons:

  • Extremely options-friendly
  • Best (free) options software available anywhere
  • Low commissions.
  • Choice of several commission plans depending whether your average option order quantities are small or large (10 or more).
  • Great personal service.  For example, they will set up one of our portfolios on any Wednesday for you other than during the monthly expiration week so you don’t have to place all the trades yourself.
  • No extra charge for orders placed through a broker
  • And best of all – they get excellent executions.  Barron’s named them the best broker for executing option orders, and our experience has been the same.  At one time, other brokers had Auto-Trade for Terry’s Tips, and many times we discovered that the thinkorswim, Inc by TD Ameritrade brokers had executed far better prices than the other brokers received, saving subscribers many dollars (often enough to pay for their entire Terry’s Tips Premium Service subscription price).

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Terry's Tips Stock Options Trading Blog

January 22, 2015

How to Make 20% in one Month on Your Favorite Stock (Using Options)

This week I would like to show you the exact positions of one of the 9 portfolios we are currently carrying out for Insiders at Terry’s Tips. It involves one of my favorite places to shop, Costco, and its stock, COST. We expect to make just under 20% on this portfolio in the next four weeks, even if the stock does not go up a single penny. Welcome to the wonderful world of stock options.

Terry

How to Make 20% in one Month on Your Favorite Stock (Using Options)

The basic strategy that we carry out at Terry’s Tips is to buy longer-term options on stocks we like and sell shorter-term options against them. Since the decay rates of the shorter-term options is . . .

January 8, 2015

Try a Vertical Put Credit Spread on a Stock That You Like

This week I would like to share my thoughts about the market for 2015, and also one of my favorite option strategies when I find a stock I really like. Whenever I find a stock I particularly like for one reason or another, rather than buy the stock outright, I use options to dramatically increase the returns I enjoy if I am right (and the stock goes up, or at least stays flat).

Today I would like to share a trade that I made today in my personal account.  Maybe you would like to do something similar with a company you particularly like.

And Happy New Year – I hope that 2015 will by your best year ever for investments (even if the market falls a bit).

Terry

Try a Vertical Put Credit Spread on a Stock That You Like

First, a few thoughts about the market for 2015.  The Barron’s Roundtable (made up of 10 mostly large investment bank analysts) predicted an average 10% market gain for 2015.  None of the analysts predicted a market loss for the year.  Others have suggested that the year should be approached with more caution, however. The whopping gain in VIX in the last week of 2014 is a clear indication that investors have become more fearful of what’s ahead. The market has gained about 40% over the past two years.  The bull market has continued for 90 months, a near-record–breaking string.

The forward P/E for the market has expanded to 19, several points higher than the historical average, and 2 points above where it was a year ago.  The trailing market P/E is 22.7x compared to 14x for the 125-year average.  Maybe such high valuations are appropriate for a zero-interest environment, but that is about to change. For the first time since 2007, the Fed will not be propping up the market with their Quantitative Easing purchases. The Fed has essentially promised that they will raise interest rates in 2015.  The only question is when it will happen.

There is an old adage that says “don’t fight the Fed.”  Not only have they stopped pumping billions into the economy every month, they plan to raise interest rates this year.  Like it or not, stock market investments made in 2015 are tantamount to picking a fight with the Fed.

While the U.S. economy is strong (and apparently growing), a great number of U.S. companies depend on foreign sales for a significant share of their business, and the foreign prospects aren’t so great for a number of countries. This situation could cause domestic company earnings to disappoint, and stock prices could fall.  At the very best, 2015 seems like a good time to take a cautious approach to investing.

Even if the market is not great for 2015, surely some shares will move higher. Barron’s chose General Motors (GM) as one of its best 10 picks for 2015 and made a compelling argument for the company’s prospects.  The 3.27% dividend should insulate the company from a big down-draft if the market as a whole has a correction in 2015.

I was convinced by their analysis that GM was highly likely to move higher in 2015.  Today, with GM trading at $35.70, I placed the following trade:

Buy To Open 10 GM Jun-15 32 puts (GM150619P32)

Sell To Open 10 GM Jun-15 37 puts (GM150619P37) for a credit of $2.20  (selling a vertical)

I like to go out about six months with spreads like this to give the stock a little time to move higher.  The above trade put $2200 in my account.  There will be a $5000 maintenance requirement which is reduced to $2800 when you subtract out the amount of cash I received.  This means that my maximum loss would be $2800, and this would come about if the stock closes below $32 on June 19, 2015.

If the stock closes at any price above $37, both the long and short puts will expire worthless and I will not have to make any more trades.  If this happens, I will make a profit of $2200 (less $25 commission, or $2175) on an investment of $2800.  This works out to a gain of 77%.

In order for me to make 77% on this investment, GM only needs to go up by $1.50 (4.2%).  If it stays exactly the same on June 19th ($35.70), I will have to buy back the 37 put for a cost of $1.30 ($1300 for 10 contracts).  That would leave me with a gain of $862.50, or 30.8%.

If I had purchased shares of GM with the $2800 I had at risk, I could have bought 78 shares.  I I might have collected a dividend of $91 over the 6 months.  With my options investment, I would have gained nearly 10 times that much if the stock did not move up at all.

Bottom line, even though I am taking a greater risk with options, the upside potential is so much greater than merely buying the stock that it seems to be a better move when you find a company that looks like it will be a winner.

December 4, 2014

Further Discussion on an Options Strategy Designed to Make 40% a Month

Last week we outlined an options play based on the historical fluctuation pattern for our favorite ETP called SVXY. This week we will compare those fluctuations to the market in general (using the S&P 500 tracking stock, SPY, as the market definition). We proposed buying a vertical call spread for a one-month-out expiration date with the lower strike about 6% above the starting stock price.

The results were a little unbelievable, possibly gaining an average of 65% a month (assuming the fluctuation pattern continued into the future). If you used an outside indicator to determine which months were more likely to end up with a winning result, you would invest in just under half the months, but when you did invest, your average gain might be in the neighborhood of 152%. Your average monthly gain would be approximately the same if you only invested half the time or all the time, but some people like to increase the percentage of months when they make gains (the pain of losing always seems to be worse than the pleasure of winning).

This week we will offer a second way to bet that the stock will rise by 12.5% in about 38% of the months (as it has in the past). It involves buying a calendar spread rather than a vertical call spread (and sort of legging into a long call position as an alternative to the simple purchase of a call).

Terry

Further Discussion on an Options Strategy Designed to Make 40% a Month:

First. Let’s compare the monthly price fluctuations of SPY and SVXY. You will see that they are totally different. . . .

Making 36%

Making 36% – A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad

This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).

Learn why Dr. Allen believes that the 10K Strategy is less risky than owning stocks or mutual funds, and why it is especially appropriate for your IRA.

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