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Tip 7 - Trading ETF Options

Exchange-Traded Funds, or ETFs, are index funds that trade just like stocks on major stock exchanges. All the major stock indexes have ETFs based on them, including: Dow Jones Industrial Average (DIA), Standard & Poor's 500 Index (SPX), and Nasdaq 100 Composite (QQQQ).

In addition, just about every major industry has an ETF for investors who wish to select an entire industry rather than individual stocks.

ETFs differ fundamentally from traditional mutual funds, which do not trade during the normal trading hours of the day. Traditional mutual funds take orders during Wall Street trading hours, but the transactions actually occur at the close of the market. The price they receive is the sum of the closing day prices of all the stocks contained in the fund. Not so for ETFs, which trade instantaneously all day long (just like ordinary stock).

Since ETFs trade all day, options are available on them.  These options provide interesting opportunities for certain strategies, including what I call the 10K Strategy, which is the major strategy offered by Terry’s Tips.

For the most part, at Terry’s Tips, we use broad-based ETFs as underlyings (SPY, DIA) for our option portfolios because they do not fluctuate wildly like individual stocks often do (our strategy works best when the underlying stays flat or moves only slightly in either direction).

We have had good luck with one ETF that is not broad-based, but made up of 84 companies in the banking and financial services area (XLF). 

The 15 most important components of the Financial SPDR (XLF) and their weights are:

1  JPMorgan Chase & Co. (JPM)  11.80% 

2  Bank of America Corp. (BAC) 8.90% 

3  Wells Fargo & Co. (WFC) 8.60% 

4  Citigroup Inc.(C)  5.60% 

5  U.S. Bancorp (USB) 4.20% 

6  Goldman Sachs Group Inc. (GS) 3.10% 

7  Bank of New York Mellon Corp. (BK) 2.90% 

8  American Express Co. (AXP) 2.60% 

9  MetLife Inc. (MET) 2.20% 

10  Merrill Lynch & Co. Inc. (MER)  2.20% 

11  Travelers Cos. Inc. (TRV) 2.00% 

12  PNC Financial Services Group Inc. (PNC) 1.90% 

13  AFLAC Inc. (AFL) 1.80% 

14  CME Group Inc. (CME) 1.60% 

15  Morgan Stanley  (MS) 1.60% 

A hedged strategy:The options strategy I use with XLF is a hedged strategy. In many respects, this strategy involves taking less risk than if I had just purchased XLF stock. Half the options are “long”, meaning they benefit when XLF moves in one particular direction, while half are “short”, meaning that they benefit if XLF moves in the other direction.   No matter which way XLF moves, half the options benefit from the change in stock price.

XLF options can be better than XLF stock. I must admit that I am an options guy, not a stock guy. No matter how much I like XLF (and I do), I know that I can make a whole lot more with the options than I ever can with the stock. And I can do it with a strategy that is “hedged”. I can make money with XLF even if the stock does not go up. Usually, I can even make money when it goes down, (just as long as it doesn’t go down too much, too fast).

If you trade actively in options, and particularly if you are hedged (meaning that you are putting on many different positions rather than speculating with the simple purchase of puts or calls), it is important to look at the options market for the underlying security. Option markets for individual companies, except for a very few extremely active stocks, often have large spreads between the bid and asked price. In many cases, a single market maker sets the prices, and it is difficult to get good executions when you trade.

This means that every time you buy an option, you pay more than you would if the options were more actively traded, and when you sell, you receive less than you would in an active options market. The options market for XLF is liquid. Bid-asked spreads are small, and you can successfully execute spread orders and count on getting decent prices regardless of whether you are buying or selling.

Why is XLF better than trading individual companies?  It has nothing to do with the company.  Rather, it has to do with the price behavior of most individual companies.  The 10K Strategy does best when the stock does not gyrate wildly.  At certain times, most individual companies are subject to sudden wide swings in their stock prices.  Earnings are announced, and the company either exceeds (or fails to meet) expected results, and the stock moves accordingly.  An analyst upgrades (or downgrades) the stock unexpectedly, and the stock makes a big move.   Sudden price changes in the stock can result in losses when using the 10K Strategy, so we prefer to trade on a basket of stocks (like XLF) rather than an individual company.  That way, if one company has a big swing in stock price, the effect on the total basket of stocks is usually minimal.  (If the companies are all in the same industry, sometimes one company’s gain is another’s loss, so the net effect on the basket of stocks is zero).

I call my system the 10K Strategy.  It is somewhere between a boring buy-and-hold strategy and day-trading.  It is not a marathon – you do not have to wait forever to see results.  Neither is it a sprint, dependent on short-term increases in the price of the stock.  Like any race, it takes a little effort to execute.  But the extraordinary profit potential makes it all worth while, at least to my way of thinking.

A Simple Options Strategy:The 10K Strategy is based on the simple fact that all options become less valuable every day (if the stock stays flat), but short-term options go down in value (decay) at a faster rate than long-term options.  I purchase slower-decaying long-term options and use them as collateral to sell faster-decaying short-term options to someone else.  If the stock stays flat, I always win.  Guaranteed!

But as we know, all stocks do not stay flat.  Some good stocks, like XLF, actually go up much of the time.  Having a good feeling about a stock (and being right) makes the 10K Strategy even more profitable than just enjoying the option decay advantage.  If the stock goes up, I can make more with the 10K Strategy than I ever could with the stock alone.

If the 10K Strategy is so simple, why doesn’t everybody follow it?  First of all, only Terry’s TipsInsiders know about it.  That’s a pretty small, but growing, universe.  Second, it really isn’t as simple as the basic underlying concept makes it seem.  The strategy consists of calendar spreads at several different strike prices (both above and below the stock price), with differing numbers of spreads at different strikes (depending on your personal risk tolerance), often involves puts rather than calls (even if you are bullish on the stock), and is governed by a strict set of Trading Rules that determine when adjustments need to be made.

Does the 10K Strategy make money all the time?  I’m afraid that nothing could be quite that good.  But it is close.  In March 2009, I set up the XLF portfolio using the 10K Strategy (we call it the Marco Polo portfolio).  This portfolio was set up in an actual brokerage account all by itself, and the positions (and every trade) updated each week for Terry’s Tips Insiders.

In the first 7 months, the portfolio gained 35% after all commissions (60% annualized) in spite of some extreme mid-month volatility.  Several times, the stock fluctuated by over 30% in a single month, something that our strategy has the most trouble handling.  To check how the portfolio has performed since that time, go to our Track Record page.

It all sounds too complicated – can you manage the 10K Strategy for me?  Unfortunately, I can’t manage your money.  I publish an options newsletter, and am not a licensed investment advisor.  But through a mechanism called Auto-Trade, the best of all brokerage firms (in my opinion, and also Barron’s), thinkorswim, Inc. by TD Ameritrade, will execute my recommendations in your account for you. 

How Much Does It Cost to Learn All About the 10K Strategy?  The White Paper costs less than a meal for two at a decent restaurant.  It gives you all the information you will need to execute the 10K Strategy, and set up, and maintain, a portfolio that matches the degree of risk that you are comfortable taking.  Complete Trading Rules for every risk level portfolio are included as well.

And there is more.  First, you will receive a free Stock Options Tutorial which will acquaint you with the basics of option trading, including a simple explanation of the often-intimidating “Greeks.”  Second, you will receive a free two-month subscription to our Insiders Newsletter, where you can watch our actual portfolios unfold each week (and receive Trading Alerts whenever a change is made in a portfolio).  If you wish, you can mirror one or more of these portfolios in your own account, or sign up for Auto-Trade with thinkorswim, Inc. by TD Ameritrade and have the trades made for you.

And there is still more, like a list of 20 “Lazy Way” companies which allow you to make two trades at the beginning, and do nothing more for two full years.  At the end of this period, you will have earned a minimum 100% on your investment, mathematically guaranteed, if the stock stays flat or goes up by any amount.  In most cases, it can even fall by 5% and you make at least 100%, and it can fall by 25% and a small profit still results.  (You can figure out all these numbers precisely, before you make the investment.)

Once you have become an Insider (by buying the White Paper), you will have access to several valuable reports on a variety of option strategies, many of which you will not be able to find in any books on options.

All this for less than the cost of a meal for two at a decent restaurant.  And once you put the strategy to work, you might well be spending many pleasant evenings at better-than-decent restaurants for the rest of your life.  Who knows?  In could happen.  It did to me, and I want to pass on my learning experiences to you.

So here’s my offer:

Become a Terry’s Tips Insider, pay only $79.95, and receive my 72 page White Paper which describes 4 unique trading strategies with complete Trading Rules for each, including the 10K Strategy that earned an average of 103% for 8 portfolios in 2005, and get all these additional benefits absolutely free:

  • My Stock Options Tutorial Program service, fourteen separate lessons which provide a sound background for options trading (a $29.90 value).
  • A list of 20 “Lazy Way” companies which make 100% mathematically guaranteed in 2 years if the stock stays flat, goes up by any amount, or falls by less than 5%.  The “Lazy Way” strategy involves making two trades up front, and then sitting back and waiting for 2 years for your 100% to come in.
  • Two free months of the Insiders weekly reports (a $49.90 value) – with updates on several actual portfolio accounts with every trade ever made in each one.  Each account is a real-time unfolding of one of the basic strategies developed in the White Paper.  Different underlyings or investment amounts are used for each portfolio.
  • If you would like, I will email you with every trade I make in each of these accounts, so you can make those same trades yourself if you wish, maybe at even better prices.

Here is the link that could change the way you invest your money for the rest of your life - https://www.terrystips.com/signup.

If you are not convinced that now is the right time to make this investment in yourself, at least sign up for my free newsletter. You will receive my free report, "How to Create an Options Portfolio That Will Outperform a Stock or Mutual Fund Investment".

For more information about the "Lazy Way" strategy to double your money, click Tip #5.

For more information about how you can use the 10K Strategy in your IRA, click Tip #4.

For more information about options in general, click Tip #1.

But the most important link is right here - https://www.terrystips.com/signup. That is where you can order my White Paper and maybe change how you ever thought about investing for the rest of your life.

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Terry's Tips Stock Options Trading Blog

January 16, 2018

Wingstop (WING) Rallies on Earnings Forecast, Can It Continue the Momentum?

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 take advantage of the momentum. The Terry’s Tips actual portfolio that executes these trades has gained 26% in the first two weeks of 2018 and is our third-best performing portfolio so far in this new year.

Terry

Wingstop (WING) Rallies on Earnings Forecast, Can It Continue the Momentum?

Wingstop shares have already made an impressive gain in the first few weeks of the new year and several analysts believe there is further upside ahead. CNBC has published an article outlining the factors driving the recent rally while Wingstop CEO Charlie Morrison shares his outlook for growth in a video interview with Jim Cramer.

January 8, 2018

Adobe Systems (ADBE): Q4 Earnings Beat to Fuel Further Momentum

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 take advantage of the momentum. Speaking of our portfolios, I would like to share with you the exact report for 2017 that we sent to Terry’s Tips’ paying subscribers this week – “All of the portfolios except Boomers’ Revenge and Vista Valley have been reset for 2018. Boomers’ Revenge will start over with $5000 after the 1/19/18 spreads expire with an almost-certain gain of 56% for the “year” starting and ending on the third Friday of January. The others:

Capstone Cascade – (restarted with $10,000 on 1/2/18) – 48% gain for 2017
Contango (our only portfolio not available for Auto-Trade – restarted with $5000 on 1/2/18) – 138% gain for 2017
Earnings Eagle (started with $5000 on 6/7/17) – 31% gain over last 6 months of 2017
Galloping Turtle (restarted with new strategy on 11/20/17 after withdrawal of $3960) – 79% gain for 2017
Honey Badger (restarted with $5000 using a new strategy on 12/26/17) – 48% loss for 2017, our only losing portfolio (fully recovered loss in the first week of 2018)
Leaping Leopard (restarted on 12/26/17 with $5000 after withdrawal of $2001) – 40% gain for 2017
Rising Tide (restarted on 1/2/18 with $5000 after withdrawal of $7615) – 152% gain for 2017
Vista Valley (restarted on 1/19/18 with $5000 after withdrawal of $5058) – 101% gain for 2017
Wiley Wolf (restarted on 11/8/17 with $5000 after $19,840 withdrawal) – 728% gain for 2017 as FB soared 56%.”
Terry

January 2, 2018

Fleetcor Technologies (FLT) Likely to Cross $200 Mark

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 take advantage of the momentum.  The 2017 trading year is over.  The 10 option portfolios carried out at Terry’s Tips gained an average of 113% for the year.  Only one portfolio lost money, and four of them earned over 100%.  It was the best year in our 16-year history.  We look forward to a similar outcome in 2018.  We invite you to come along for the ride.

Terry

Fleetcor Technologies (FLT) Likely to Cross $200 Mark

Two recent analyst upgrades suggest Fleetcor Technologies stock will cross the $200 point as Deutsche Bank has raised their price targets to $225 and Jefferies has raised their target to $218.

FLT posted a sixth consecutive week of gains in the past week and closed at an all-time record high.  In fact, the stock has only had three down weeks in the last 19 and each one of those declines was not very significant.  A rising trendline is in play that originates from a low posted in September and offers support near the $190 price point where the 20-period daily moving average is also found to add confluence.

[caption id="attachment_1993" align="alignnone" width="300"]FLT Chart January 2018 FLT Chart January 2018[/caption]

*source Tradingview.com

If you agree there's further upside ahead for Fleetcor Technologies, consider this trade which is a bet that the stock will continue to advance, or at least not decline very much over the next seven weeks.

Buy To Open FLT 16Feb18 185 Puts (FLT180216P185)
Sell To Open FLT 16Feb18 190 Puts (FLT180216P190) for a credit of $1.78 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when FLT was trading near $192.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

If you use our favorite broker for this trade, tastyworks, your commission on this trade will only be $1 per opening contract ($2 per spread) (and there is no commission on closing trades, only the $.10 clearing fee).  Each contract would then yield $176 and your broker would charge a $500 maintenance fee, making your investment $324 ($500 – $176).  If FLT closes at any price above $190 on February 16, 2018, both options would expire worthless, and your return on the spread would be 54% (431% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

[caption id="attachment_1994" align="alignnone" width="258"]IBD Underlying Updates December 28, 2017 IBD Underlying Updates December 28, 2017[/caption]

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry

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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TD Ameritrade, Inc. and Terry's Tips are separate, unaffiliated companies and are not responsible for each other’s services and products.

tastyworks, Inc. has entered into a Marketing Agreement with Terry’s Tips (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks and/or any of its affiliated companies. Neither tastyworks nor any of its affiliated companies is responsible for the privacy practices of Marketing Agent or this website. tastyworks does not warrant the accuracy or content of the products or services offered by Marketing Agent or this website.

tastyworks, Inc. and Terry’s Tips are separate, unaffiliated companies and are not responsible for each other’s services and products. Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses. Options trading in a tastyworks account is subject to tastyworks’ review and approval. Please read Characteristics and Risks of Standardized Options before investing in options

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