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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

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. . . .

November 28, 2014

An Options Strategy Designed to Make 40% a Month

I hope you had a wonderful Thanksgiving with your family and/or loved ones, and are ready for some exciting new information. Admittedly, the title of this week’s Idea of the Week is a little bizarre. Surely, such a preposterous claim can’t possibly have a chance of succeeding. Yet, that is about what your average monthly gain would have been if you had used this strategy for the past 37 months that the underlying ETP (SVXY) has been in existence. In other words, if the pattern of monthly price changes continues going forward, a 40% average monthly gain should result (actually, it would be quite a bit more than this, but I prefer to underpromise and over-deliver). Please read on.

We will discuss some exact trades which might result in 40%+ monthly gains over the next four weeks. I hope you will study every article carefully. Your beliefs about options trading may be changed forever.

Terry

An Options Strategy Designed to Make 40% a Month: First of all, we need to say a few words about our favorite underlying, SVXY. It is not a stock. There are no quarterly earnings reports to push it higher or lower, depending . . .

November 17, 2014

An Interesting Way to Invest in China Using Options

A week ago, I reported on a spread I placed in advance of Keurig’s (GMCR) announcement which comes after the market close on Wednesday. I bought Dec-14 140 puts and sold Nov-14 150 puts for a credit of $1.80 when the stock was trading just under $153. The spread should make a gain if it ends up Friday at any price higher than $145. You can still place this trade, but you would only receive about $1.15 at today’s prices. It still might be a good bet if you are at all bullish on GMCR.

Today I would like to discuss a way to invest in China using options. One of our basic premises at Terry’s Tips is that if you find a company you like, you can make several times as much trading options on that company than you can just buying the stock (and we have proved this premise a number of times with a large number of companies over the years). If you would like to add an international equity to your investment portfolio, you might enjoy today’s discussion.

Terry

An Interesting Way to Invest in China Using Options: My favorite print publication these days 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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