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Tip 6 - The 10K Strategy

The 10K Strategy is my favorite investment strategy. I have used it to make an average of over 50% a year for three out of four consecutive years.  I have now added a twist to the strategy so that annual returns might be less than those years but there should be a much higher likelihood of its succeeding.

I got so excited about the strategy that I wrote a book about it (see special offer below).  I set up an actual portfolio to demonstrate how the strategy worked for my subscribers in March 2009. I called it the Boomer’s Revenge portfolio (designed so Baby Boomers who had lost much of their retirement capital in late 2008 could get it back). The underlying stock was SPY (the tracking stock for the S&P 500, so we were essentially betting on the market as a whole rather than any individual stock. I started with $10,000 but every month when the portfolio was worth more than that, I withdrew the extra amount.

A little more than a year later, I had withdrawn $6600 from the portfolio and it was still worth over $10,000 (after paying all commissions, of course). Hundreds of my subscribers had mirrored this portfolio and enjoyed those returns right along with me.

Some people discounted these remarkable gains because the market had moved steadily higher most months in 2009 and early 2010. But then the May 2010 expiration month came along and concerns in Greece and Europe spooked the entire market. The S&P fell over 8%.

So how did the Boomer’s Revenge portfolio hold up when the market swooned? I am proud to report that we gained over 4% that month while investors all around were gnashing their teeth.

The great thing about this strategy is that it can make money even if the market as a whole falls in value (just as long as the drop is not too great) In May 2010 we proved that the market could fall as much as 8% and we could still make a nice gain.

What we didn’t have to do to achieve these results was maybe even more remarkable than what we did have to do. .We didn’t have to be smart traders to make this money. We did not have to guess which way the market would move. We did not have to pick a hot stock, or any stock. We just followed a pre-determined set of Trading Rules, buying longer-term options and selling short-term options to someone else.

The 10K Strategy takes a little work, and at least a small understanding of stock options, but it is well worth the effort. (Actually, you don't even have to understand it all if you subscribe to my Options Tutorial Program, where I email you every trade I make once it is made. You can mirror my trades, and maybe even get better prices than I do.) You can order it here.

Are you willing to make the effort?

How would you feel about yourself if you did not take the hour or two it might take to learn how to make extraordinary returns on your money every year, even if your stock doesn't go up at all?

On the other hand, how would it feel to know that you understood a trading strategy that could multiply your net worth many times over in a few short years? Think of the exotic vacations you could take, the fancy cars you could buy, and the early retirement you could earn — all possible because you understood and used an investment vehicle (stock options) that scare most people to death.

This is no fishy proposition.

While making 36% every year without taking big risks may sound too good to be true, this is no fishy proposition. I am not giving you fish — mahi-mahi, red snapper or sea bass. Holy mackerel, all I'm doing is teaching you how to fish. I will give you a formula. Once you have learned it, you may be able to make extraordinary returns on your money every single year – without any help from me.

You will be proud of your newfound ability to achieve stock market riches with this formula. Your family and friends will love you. Your business associates will envy you. Your mother will take full credit for your success.

Here's the fine print.

Okay, anything this good must have some drawbacks, so here they are:

  1. I can't guarantee a 36% return in one year while not risking a loss. But I can show you every trade we made in 2009 that resulted in better than a 60% gain on our money (after paying all the commissions).
  2. You will have to work. That means placing option orders with your discount broker on or about the third Friday of each month. When you subscribe to Terry's Tips, I will email you the exact trades I make in every portfolio using the 10K Strategy (for two months there is no extra charge). Once you understand how the strategy unfolds you probably won't need my help any longer. You will know exactly what to do each month on your own.  
  3. You will need to have access to an Internaet connection or a telephone on or about the third Friday (expiration day), and sometimes for adjustments at other times. This is not always easy, but I have made hundreds of trades on the telephone from a remote island in the Bahamas, a bastide in Provence, and a small village in the middle of Russia. So it is almost always possible.
  4. Most of your profits will be taxed as short-term capital gains.  This is a major disadvantage of the strategy and a big reason to carry it out in your IRA or other tax-deferred account.

Yes, you can use this strategy in your IRA. You will have to set up an IRA account with a broker who allows option spreads (very few brokers do). My favorite broker is thinkorswim, Inc. by TD Ameritrade, (Barron's choice of the #1 software-based options broker for several years running) and I highly recommend them for option traders. Their rates are quite low, their website is option-friendly, and you will have more information about your options (including deltas, gammas, and other Greek measures) than you will probably ever need.

Does the stock have to go up for the 10K Strategy to be profitable? 

As long as the stock moves only moderately (5% or so) during an expiration month, it doesn’t matter which way the stock moves.  We spend a good share of the invested amount in an insurance bet that pays off only if the stock falls (and usually maintain a cash reserve for a downside adjustment as well).

A Conservative Options Strategy

Many people believe that a conservative options strategy is an oxymoron.  Options are leveraged and depreciating investments that involve a great deal of risk.  However, for virtually every option that the 10K Strategy owns, there is an offsetting short option to protect against a moderate stock price move in either direction.

The 10K Strategy in a nutshell - it's all about the Decay Rate

Decay Rate for a Typical Option

If the price of the stock remains the same, all options become less valuable over time. This makes total sense. If you own an option that has a year to go before it expires, you would be willing to pay more for it than you would for an option that lasted only a month.

The amount that the option falls in value is called its decay. There are two interesting aspects of decay. First, it tends to be quite low when there is a long time until the option expires. Second, decay increases dramatically as the option moves toward the date when it expires (the expiration date).

A typical 12-month call option (strike price 70) for a $70 stock might be about $7.80. Instead of paying $7000 to buy 100 shares of the stock, you could buy the right to purchase the stock at $780. Having the option would give you all the rights of stock ownership except receiving dividends and voting on company matters. For every dollar the stock went up, you would gain $100 just like the owner of 100 shares would enjoy.

Of course, you wouldn’t actually make a gain until after the stock had gone up by $7.80 to cover the cost of the call option you bought. But you would have a full year for that to happen.

Each month you waited to buy this option (assuming the stock stayed at $70), you would pay less much less. When there was only a month to go until expiration, a one-month call option (same strike, same $70 stock) might sell for $1.80 The stock would only have to go up $1.80 before you made money on your call purchase, but there would only be one month for that to happen.

Most option buyers prefer to pay $1.80 for an option that only has a month of remaining life rather than $7.80 for an option that has a year of life. In the 10K Strategy, we do just the opposite.

In the 10K Strategy, at the same time we buy options with several months of remaining life until expiration, we sell someone else an option that only has a month to go until expiration. We are allowed to use our longer-term option as collateral for the short term sale.

When you simultaneously buy a long-term option and sell a short-term option on the same underlying stock or ETF at the same strike price, you are placing what is called a calendar spread (also called a time spread).

The price we pay is the difference in price between the two options. For example:

Buy one-year call option at 70 strike price for $7.80
Sell one-month call option at 70 strike price for $1.80
Cost of spread: $6.00 ($600)

After one month, if the price of the stock remains at $70, the price of the option we bought for $7.80 will have fallen in value by about $.40, and would be worth about $7.40. However, the option we sold to someone else would be worthless since the stock price is not higher than $70 and there is no time remaining for the option.

At the end of one month (assuming the stock is still at $70), the spread that we purchased for $600 would then consist of a single call option with 11 months of remaining life which is worth $740. We would have made a gain of $140, or about 23% on our investment in a single month (less commissions). At that point, we would sell another one-month option for $180 and wait for another month to expire.

If the stock remained at $70 for an entire year, and we sold a one-month option 11 more times for $1.80 a pop, we would collect $19.80 ($1980) on our original investment of $6.00 ($600), or over 300%.

The difference in the lower decay rate of the long-term option we own and the higher decay rate of the short-term option we sell is the essence of the 10K Strategy. Everything else is just details.

Of course, this is a simplified example. Commissions would eat a little into the gains, and the stock will never stay exactly flat. Sometimes it will stay almost flat, however, and we would earn over 20% in a single month in the above example.

The 10K Strategy consists spending most of your cash to purchase call calendar spreads at strikes near and above the stock price. A portion of portfolio value, usually 10% - 20% is retained as a reserve in case adjustments need to be made.

For example, if the stock falls early in an expiration month, some downside protection might be added on to insure that if the market continues to fall, a loss can be avoided. These adjustments might take one of several possible forms. The most common one would be to purchase additional calendar spreads at strike prices below the stock price.

We have also had good luck with what we call an exotic butterfly spread. This is much like a traditional butterfly spread except that one of the legs is in a further-out month. When you become a Terry’s Tips Insider, our options tutorial will include a complete set of adjustment Trading Rules, including both the traditional and exotic butterfly spreads.

Buy the Book and Learn all About Calendar Spreads and the 10K Strategy

If you would like to see how calendar spreads can be used to achieve consistent returns every year that the market moves moderately in either direction, all you have to do is buy a copy of my book (Making 36%). 

You can buy the book at the discounted price of only $12.94 - go to www.Making36Percent.com and enter the Discount Code TEE and you will receive:

  1. An electronic version of Making 36%: Duffer’s Guide to Breaking Par in the Market Every Year, in Good Years and Bad.
  2. A copy of the paperback book mailed to you by first class mail.

This may seem a little hard to believe. For a total cost of $12.94, you will have everything you need to make superior investment returns for many years. It could easily be worth hundreds of thousands of dollars to you. There is nothing else for you to buy (unless you would like to learn even more, and become a Terry's Tips Insider).

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

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

Here is what the book looks like (but the good stuff is inside):

The book was originally published at $19.95. You will receive an electronic version so you can start right away, and the paperback version will be mailed to you free of shipping and handling charges. Order it today at www.Making36Percent.com (Enter the discount code TEE and your cost will be only $12.94, including shipping by First Class mail).

This could be the best investment decision you ever make. At least, you won't be risking much to learn the strategy. And it could change your investment outlook for a lifetime. Total cost, including shipping only $12.94 - www.Making36Percent.com (Enter the discount code TEE).

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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.

Order Now

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