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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

November 14, 2017

Coherent Inc. (COHR) Jumps After Earnings Beat, Is There More Upside Ahead?

This week we are featuring another of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our portfolios to identify stocks with momentum and place spreads that profit if the momentum continues, at least a little.

I would also like to include a table which reviews how the previous 12 Trading Idea of the Week selections have worked out in the real world. We have had an exceptionally good record.

Terry

Coherent Inc. (COHR) Jumps After Earnings Beat, Is There More Upside Ahead?

Before we discuss this week’s trading idea, I would like to review the past 12 ideas we have published here. Each of these ideas was first distributed to Terry's Tips’ paid subscribers in our weekly Saturday Report, and then on Monday or Tuesday, to the free newsletter subscribers such as you. Here are the results:

November 8, 2017

Black Friday Special Offer Lowest Price Ever

Learn the Exact Details of the Options Strategies That Have Resulted in Average Gains of 120% so far in 2017…

…at a Near-Give-Away Price Never Offered Before

Terry’s Tips is an options newsletter that has been around for 16 years. Over that time period, we have developed and refined several options strategies that are enjoying unprecedented success.

We carry out 10 separate options portfolios for our subscribers to follow on their own with our favorite brokerage tastyworks or by having the trades executed automatically through thinkorswim’s Auto-Trade program.

Each portfolio is carried out in a separate account available for everyone to see (we don’t just publicize the most successful ones). Each portfolio employs a specific pre-defined strategy using one or more underlying stocks or ETPs (Exchange Traded Products). Unlike other options newsletters, we include the actual commissions in all our results.

November 6, 2017

Arista Networks (ANET) Hits Fresh All-Time Highs, What’s Next?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our portfolios to spot outperforming stocks and place spreads that profit if the momentum continues. Actually, the stock can even decline a little for the maximum gain to be made.

The 10 portfolios carried out by Terry's Tips for its paying subscribers had its best week ever last week, gaining an average of 9.1%. The composite portfolio average for 2017 has soared to 120%. Isn’t it time for you to see exactly how we are doing it?

Terry

Arista Networks (ANET) Hits Fresh All-Time Highs, What’s Next?

Several analysts are optimistic about Arista Network’s future following their earnings report last week, here are two of them – Arista Networks Keeps Enjoying Soaring Sales and Why Shares of Arista Networks Are Surging Today.

ANET fell under pressure last week ahead of its earnings report, falling just over 10% in a two-day correction. The turn lower led to a break of the 20 period daily moving average as well as a rising trendline that had been in play for nearly three months. However, the stock recovered after the earnings beat and closed the week out at a fresh all-time high. Although the rising trendline is no longer in play as support, the break back above it as well as the moving average signals that buyers have regained control.

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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TastyWorks

Tastyworks is a new brokerage firm from the brains behind tastytrade and it is our top choice of options-friendly brokers. Their commission rates are extremely competitive - options trades are only $1 per contract to open and $0 commission to close (all options trades incur a clearing fee of $0.10 per contract). The tastyworks trading platform quickly became our favorite platform for options trading and it keeps getting better with new features released each week. Terry uses tastyworks and loves everything about them!

TD Ameritrade

This Chicago brokerage firm with the unlikely name thinkorswim, Inc. by TD Ameritrade is considered by many to be the best option-friendly broker. For openers, they have extremely good analytic software and their option trading platform is exceptional. Thinkorswim Mobile has been called the best mobile app in the industry. In 2017, TD Ameritrade received 4 stars out of 5 in the annual Barron`s* Best Online Brokers Survey. TD Ameritrade was tops as an online broker for long-term investors and for novices. The company is the only broker that receives the highest 5.0 score for research amenities among all firms participated in the ranking last year.

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