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Tip 5 – Shoot for the Stars Strategy

In spite of the odds against winning, many people seem to like to invest in individual stocks. It is sort of like picking horses at the race track (and often for similar sound selection reasons, like the reputation of the trainer or the jockey or the color of his silks, or the horse’s name or his recent race record, or what the touts are touting).

To our way of thinking, picking individual stocks is a lot more like gambling than carrying out a prudent option strategy such as the 10K Strategy .  But picking individual stocks is easier, and a whole lot more fun for many people.

If you insist on picking individual companies, there are two good ways to use an options strategy to multiply your gains if you are lucky enough to pick a winner.  First, the 10K Strategy, our favorite strategy, is best if you merely like a particular company.  Second, if you really LOVE the company, you might use the Shoot Strategy.

At Terry’s Tips, we conduct options strategies based on several individual companies we feel good about.  For example, in October 2013 we set up a portfolio based on Nike (NKE), a company we liked.  If we had really loved NKE, we would have used the Shoot Strategy.  We were lucky to have picked a good company. We started with $4000 in the portfolio (set up in an actual brokerage account with no other positions) when NKE was trading at $63.  By the end of November 2014, NKE had surged to $99, up 57%.  Our portfolio was then worth $11,435, a gain of 186%.  Our options portfolio had performed more than 3 times as well as the stock had gained.

If we had loved the stock at the outset, rather than just liking it, we would have used the Shoot Strategy instead of the 10K Strategy, and we would have gained even more. This time around. the Shoot Strategy would have done much better.  On the other hand, we felt pretty good about almost tripling our investment in 16 months while taking less risk than is involved in the Shoot Strategy.

While we don’t use the Shoot Strategy in any of our actual portfolios, we show you exactly how to do it if you have a company you really love.  It is more risky than our 10K Strategy but it should outperform if the stock actually does move up a lot.  If the stock stays flat, the Shoot Strategy will usually about break even. On the other hand, if the stock stays flat, the 10K Strategy is designed to make a nice gain.

The Shoot Strategy is outlined in my White Paper as the Shoot for the Stars Strategy.  Les Brown said “Shoot for the moon.  Even if you miss, you’ll land among the stars.  And Confucius said long ago “If you shoot for the stars and hit the moon, it's OK. But you've got to shoot for something. A lot of people don't even shoot.”

This is how the Shoot Strategy works -

1.  If the stock goes up, the Shoot Strategy will make money.  The gain will be considerably greater than the percentage gain would have been if the stock had been bought instead of the LEAPS.

2. If the stock stays flat, your account value will be about flat as well, or a small gain might result.  Since you are collecting slightly more than the average monthly decay of the LEAPS each month (until they have only a few months of remaining life) you might often make a small gain.  However, even a small gain is more than you would have made if you had bought the stock and it doesn’t go up a penny.

3. If the stock falls, a loss will usually result just like it would if you had bought the stock, and the loss will likely be a greater percentage loss than if the stock itself had been purchased instead.  However, in many cases, the loss could be reduced (or eliminated) if the stock fell during those months when our Trading Rules call for selling in-the-money calls.

General Trading Rules for executing the Shoot Strategy:

Pick a stock you believe is headed higher (we suggest using www.magicformulainvesting.com. as a guide – see discussion below).

1. Buy slightly in-the-money or out-of-the-money call LEAPS.  At least two LEAPS must be purchased.  If your budget does not warrant buying at least two true LEAPS, shorter-term calls can be purchased as long as they have at least six months of remaining life.
         Calculate the average monthly decay of the LEAPS (time premium divided by the
         number of remaining months).

2.  Sell enough slightly out-of-the-money current month calls to cover the average monthly decay.

3. Near or at expiration, roll over the short calls to the next month (if they are in the money), again selling enough out-of-the-money contracts to cover the average monthly decay.  If the expiring calls are out-of-the-money, let them expire worthless and sell the next month out, as above.

4. If short-term calls that have been sold become in the money (i.e., the stock has gone up), they must be bought back during expiration week, and the amount paid must be added to the remaining decay of the LEAPS and a new (higher) average monthly decay bogey established based on the number of remaining months of the LEAPS.

There are a number of other Trading Rules that have proved to be successful for the Shoot Strategy, including how to change tactics if the stock should fall, how to adjust which calls to sell during seasonally positive (and negative) months of the year, and the best time to sell the original LEAPS.  These important additional Trading Rules are included in the White Paper that comes with the Terry’s Tips Insider service.

Deciding Which Companies to Buy:


The best single source we have found for selecting individual companies is the Magic Formula system outlined in the small book by Joel Greenblat called “The Little Book That Beats the Market” and is available online at www.magicformulainvesting.com

Rather than relying entirely on the Magic Formula, it might be even better to select individual stocks that also rank high at Investors Business Daily (IBD), Value Line, and by composite analyst rankings.  While we prefer the 10K Strategy because of its lower risk, using the Shoot Strategy offers considerably higher returns than merely buying the stock, and if you carry it out correctly, you can sometimes make money with the Shoot Strategy even if the stock stays flat.

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Terry's Tips Stock Options Trading Blog

May 23, 2016

How To Protect Yourself Against a Market Crash With Options

Today’s idea is a little complicated, but it involves an important part of any prudent investment strategy. Market crashes do come along every once in a while, and we are eight years away from the last one in 2008. What will happen to your nest egg if it happens again this year?

Options can be a good form of market crash insurance, and it is possible to set up a strategy that might even make a small gain if the crash doesn’t come along. That possibility sets it apart from most forms of insurance which cost you out-of-pocket money if the calamity you insure against doesn’t occur.

Terry

How To Protect Yourself Against a Market Crash With Options

There are some strong indications that the old adage “Sell in May and Go Away” might be the appropriate move right now. Goldman Sachs has downgraded its outlook on equities to "neutral" over the next 12 months, saying there's no particular reason to own them. "Until we see sustained signals of growth recovery, we do not feel comfortable taking equity risk, particularly as valuations are near peak levels," the firm said in a research note.

For several months, Robert Shiller has been warning that the market is seriously overvalued by his unique method of measuring prices against long-term average p/e’s. George Soros is keeping the bears happy as well, doubling his wager against the S&P 500. The billionaire investor, who has been warning that the 2008 financial crisis could be repeated due to China's economic slowdown, bought 2.1M-share "put" options in SPY during Q1. The magnitude of his bet against SPY is phenomenal, essentially 200 million shares short. Of course, he almost always deals in stratospheric numbers, but the size of this bet indicates that he feels pretty strongly about this one. He didn’t become a billionaire by being on the wrong side of market bets.

So what can you do to protect yourself against a big tumble in the market? We are setting up a bearish . . .

May 17, 2016

How Option Prices are Determined

Today I would like to pass along some basic information about how stock options prices are determined. I have discussed this in the past, but we now have many new subscribers who may not have seen our earlier blogs. I apologize if this is old information for you.

Terry

How Option Prices are Determined

Of course, the market ultimately determines the price of any option as buyers bid and sellers ask at various prices. Usually, they meet somewhere in the middle and a price is determined. This buying and selling action is generally not based on some pie-in-the-sky notion of value, but is soundly grounded on some mathematical considerations.

There are 5 components that determine the value of an option:

1. The price of the underlying stock

May 11, 2016

An Options Play on Facebook Which Should Make 50% in 60 Days

Today I would like to suggest an options trade on Facebook (FB). It will involve waiting 6 weeks to close out. Many option players have short attention spans and don’t like to wait that long. On the other hand, I think this trade has a very high likelihood of making a profit of at least 50%, even if the stock fluctuates more than we might like. To my way of thinking, it should be worth the wait, especially since I think that there is a very small likelihood that this play would end up losing money.

Terry

An Options Play on Facebook Which Should Make 50% in 60 Days

Over the past month I have suggested legging into calendar spreads in advance of an earnings announcement for 7 different companies (FB, COST, TWX, TGT, SBUX, and JNJ, and ABBV). In every case, I was personally successful at creating a calendar spread at a credit and guaranteeing myself a profit no matter where the stock price ended up after the announcement. You should have been able to duplicate every one of these successes as well. I got a kick out of having 7 consecutive winning trades, some of which made me more than 100% on my amount at risk.

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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