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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

April 26, 2016

Last Minute Facebook Earnings Play

Facebook (FB) announces earnings tomorrow, Wednesday the 27th, after the close. There is still time to place what I think will be a dynamite options play. You have until the close tomorrow to get these spreads in place.

Terry

Last Minute Facebook Earnings Play

Over the past few weeks, I have suggested legging into calendar spreads at a price slightly above the current stock price for companies that would be announcing earnings about two or three weeks later. The underlying idea of these spreads is that, 1) in the days leading up to the announcement, the stock tends to drift higher as hope for a positive announcement grows and, 2) implied volatility (IV) of the option series that expires directly after the announcement date almost always soars because big moves in the stock often take place right after results are disclosed.

In my personal account, in the last few weeks, I have both told you about and used this strategy for SBUX, JNJ, and FB. In each case, I bought a slightly out-of-the-money call a few weeks out and . . .

April 20, 2016

How to Play the Upcoming Facebook Earnings Announcement

Over the last 3 weeks, I have suggested a way to leg into calendar spreads at a credit in advance of the earnings announcement for Starbucks (SBUX), Facebook (FB), and Abbvie (ABBV). All three calendars ended up being completed, and all three have already delivered a small profit. Once earnings are announced and the short side of the calendar spread expires, all three spreads are guaranteed to produce a much larger profit as well (depending on how close the stock price is to the strike price).

Today I would like to discuss another Facebook play. While this one does not guarantee profits, I believe it is even more exciting in many ways. It is possible that you could double your money in less than two weeks. I also believe it is extremely unlikely to lose money.

Terry

How to Play the Upcoming Facebook Earnings Announcement

All sorts of articles have been written over the past few weeks about the prospects for FB, some positive and some negative. We will all learn who was right and who was wrong late next week when FB announces earnings on April 27, and the details of the company’s large assortment of new and wondrous initiatives will be disclosed.

The high degree of uncertainty over the announcement has caused implied volatility (IV) of the options to soar, particularly in the series that expires two days after the announcement. Those Apr5-16 options carry an IV of 52. This compares to only 35 for longer-term option series and 32 for the Apr4-16 series which expires this week.

Buying calendar spreads at this time represents one of the best opportunities I have ever seen to buy cheap options and sell expensive options against them. The FB calendar spreads are exceptionally cheap right now, at least to my way of thinking.

I have written an article which was published by TheStreet.com today which describes the actual calendar spreads I have bought yesterday and today (and I have bought a lot of them). The article fully explains my thinking as to which spreads I purchased. Read the full article here.

April 12, 2016

Earnings Season Has Arrived – How to Capitalize on it With Options

For each of the last two Mondays I have told you about an earnings-related trade I made. Today I would like to review my thinking on those trades, update how they are going, and offer you a new idea of a third trade I made his morning.

Terry

Earnings Season Has Arrived – How to Capitalize on it With Options

In the last few weeks leading up to a quarterly earnings announcement, two things usually happen. First of all, the stock often moves higher as the announcement day approaches as some investors start hoping that the company might beat expectations. The second thing is even more likely (and essentially always happens). Implied Volatility (IV) of the option prices moves much high. This means that the prices for options temporarily rise in value across the board. The greatest upward move in IV takes place in the options series which expires just after the announcement date.

The reason that IV becomes greater at this time is that once earnings are announced, the stock is likely to move either up or down by a much larger amount than it does most trading days. When volatility is . . .

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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