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.
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.