The First Half of 2014 Track Record at Terry's Tips
We currently carry out 10 portfolios at Terry’s Tips. Paying subscribers can follow the results of all 10 (some newsletters only reveal their winning portfolios to all subscribers). The composite average gains for all 10 portfolios achieved more than triple the market (S&P 500) for the first six months of 2014. The average was pulled down significantly by a portfolio we had set up to do the inverse of our basic strategy (in all of the other portfolios, we essentially sell short-term options using longer-term options as collateral – in the big losing portfolio, we purchased short-term options because option prices were so low, hoping in vain that volatility would increase).
Going into 2014, option prices had fallen to multi-year lows. Our basic strategy, selling short-term options (for the most part, on SPY, the S&P 500 tracking stock) did not look so promising because of the unusually low option prices. In February 2014, we switched the underlying for our 10K Classic portfolio from SPY to a volatility-related ETP which offered extremely high option prices. Over the next five months this portfolio gained 60%.
We also switched to this new ETF for two other portfolios. One, trading weekly options, started in April, and by mid-year had gained 35%. Another portfolio involved buying the stock and writing long-term options against it. We think it is the easiest and surest way to make 30% almost every year. At the half-way point of 2014, the stock could fall by 30% by the end of the year and the portfolio would still gain 30%.
One portfolio has been set up to make long-term bets that a particular underlying would not fall in value over the course of 2014. One of the choices was Google (GOOG), a stock which had moved higher in 9 of its 10 years in existence. With the spread we placed, if it ends up 2014 at any higher than where it started, we would earn 100% on our investment. At the half-way point, the stock is comfortably higher than where it started (the 3-stock portfolio had gained 47% by the end of June).
Three of our portfolios are bets on individual stocks, demonstrating that an options portfolio can outperform the outright purchase of stock by a wide margin. One portfolio gained 36% while the stock rose 23% (a disappointing result brought about by some unwanted volatility). Another portfolio composed of two coffee companies has picked up 17%, a gain dragged down by one company only moving 1.3% higher over the six months.
During the first six months of 2014, there were two losing portfolios out of 10. One tried the inverse of our basic strategy as mentioned above, and the other bet on an underlying that fell from $125 to $110 during the six months, and the portfolio understandably fell in value.
Our Contango portfolio does not trade options, but rather buys volatility-related ETFs which have doubled in value in each of the last two years. At times when we believe volatility might surge, we unload these shares until the outlook settles down. This portfolio was set up in November 2013 and had gained 44% over the next 8 months.
When we switched our favorite underlying to the new ETF, we retained SPY (trading monthly options) for one portfolio. Since this portfolio was established in November 2013, it had gained 68% by the end of June 2014.
The Long-Term Track Record at Terry's Tips
Terry’s Tips has operated sample option portfolios since 2003 for their subscribers to follow or mirror in their own accounts. These portfolios are actual portfolios, and results include all commissions that an investor would pay at thinkorswim, Inc. by TD Ameritrade. Many option newsletters conveniently (for them) do not include commissions in their performance numbers. This makes their results look a lot better than they actually are because commissions are a significant cost of trading options (unlike stock trading which involves much lower commissions).
In 2003, two actual Terry’s Tips portfolios racked up an 80% average gain for the year. However, 2004 was awful, and most of the previous year’s gains were lost. This experience caused a dramatic change in the strategy.
The 10K Strategy
We called our new way of options investing the 10K Strategy (it is not a marathon nor a sprint, but somewhere in between). The 10K Strategy had three consecutive years where the portfolios outperformed the market by a large margin. In fact, the average gains were over 50% for a 3-year period (2005. 2006, 2007). However, in the market crash in the fall of 2008 our portfolios fell by approximately the same amount as the market in general (our most popular portfolio managed to make a small gain for the last six months of 2008, however).
Shoot Strategy Demonstration Portfolio
For several years we have maintained some portfolios which show how options can outperform the purchase of stock in a company that you believe will go up in price. This is an entirely different strategy than the 10K Strategy that we use for our other portfolios (which makes the assumption that we have no idea which way the market will move in the short run).
If you are correct and the stock you choose goes up in value, the Shoot Strategy should produce a much greater percentage gain than the stock makes. If the stock stays flat, a small profit should also be made. If the stock falls a little bit, the portfolio could break even. However, if the stock falls more than a little, the portfolio could incur a greater percentage loss than the stock.
The Shoot Strategy is similar to buying stock on margin in some respects, except that no interest is paid, and the portfolio should make money if the stock stays flat (two features that make this portfolio better than buying stock on margin).
Once Terry’s Tips subscribers see how the Shoot Strategy works, they can conduct it themselves on almost any stock that they believe is headed higher.
Summary
For more than 10 years, Terry’s Tips has conducted actual portfolios for paying subscribers to follow (or mirror in their own accounts, or have trades placed for them through Auto-Trade at thinkorswim, Inc. by TD Ameritrade). In most of these years, the option portfolios have beaten the market averages by a very large margin. In some years, the portfolios have incurred losses similar to the magnitude of the market losses.
Option trading involves leverage, and leverage works in both directions. Gains (and losses) are often greater than changes in the market. However, we have tried to minimize the losses in down years so that our losses are less than those of the markets in general, and to enjoy greater gains than the markets in good years. Most of the time, we have been successful in carrying out these goals.
Terry's Tips Stock Options Trading Blog
January 22, 2015
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 . . .
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January 8, 2015
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.
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December 4, 2014
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. . . .
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