Author Archives: Terry Allen
Terry Rides Off Into the Sunset
January 6, 2023
Two and a half years ago, I found myself in the ICU of the University of Vermont Hospital. I had all the symptoms of Covid even though I had tested negative several times. My doctor kept saying that the tests had to be false negatives. Surely, it was Covid, he said.
I checked myself in to the ER of Porter Hospital in Middlebury at midnight on a Friday. My blood pressure was 65 over 45, and after filling me full of fluids and keeping me awake all night, they couldn’t get that upper reading over 70.
In the morning, they rushed me north to the ICU where they anticipated doing a surgical procedure on my aorta. They let me make a phone call to Jon Lewis who had been sharing the responsibilities of making the trades in our portfolios. I told him that he would have to write the Saturday Report that day as well as taking over all the portfolios on Monday. He said he didn’t think he could do it. I told him that I surely couldn’t do it, and he was the only one out there who could do it all.
When the test results at the ICU came back, we learned that I did not have Covid after all, and the anti-biotic that they had given me at Porter had saved my life. Seems that I had a tick-induced disease called Anaplasmosis, and a week later, I felt totally fine.
Ever since that Saturday in July, Jon Lewis has made every trade in every portfolio and written every Saturday Report. I spoke with him and shared ideas on a regular basis, but he made all the final decisions. Jon has done a better job than I have in carrying out the 10K Strategy. For 2022, I traded this strategy in my personal portfolio and did far worse than the market averages. It was my worst year ever.
Meanwhile, Jon beat those averages by more than 20%. He wisely handled the extreme volatility by keeping about half the portfolios in cash, and placing spreads at a larger range of strikes than we had ever used in the past.
I endured more health issues again this year. I have had asthma-like breathing issues that prevented me from playing tennis singles or taking long-distance hikes. In June, a biopsy showed a “high risk” cancer tumor in my prostate. A long course of radiation has hopefully taken care of it. And an adjustment to my pacemaker has improved my breathing considerably.
I am almost 84 years old and have been involved in Terry’s Tips for 21 years since I started in in 2001. I continue to love options trading and place trades in my personal account nearly every trading day. But this seems to be the appropriate time to turn the entire business over to Jon.
I want to thank my loyal subscribers who hung in there through the difficult years (like 2022). I have enjoyed conversations over the years with many of you. I hope some of those relationships will continue as we move forward.
I will continue to read the Saturday Report each week, and surely have thoughts I would like to share with Jon. I may offer some additions to the quotations list at the end, but going forward, this is his baby. I am absolutely certain that if volatility falls just a bit to where it has hung out in the great majority of years, he will kill the market averages by a huge margin.
I wish Jon, and all the subscribers who make Terry’s Tips possible, all the luck in the world. You have made this a wonderful ride for me, and I thank you from the bottom of my heart.
Happy trading,
Terry
It’s in the Genes
December 20, 2022
Moderna (MRNA), the company of COVID vaccine fame, announced this week that a cancer vaccine, in combination with a Merck (MRK) drug, showed positive results in a trial on melanoma patients. The stock jumped 20% on the news but then pulled back amid the overall market swoon.
Oddly, the stock received a downgrade and a target price increase from the same analyst after the news. I guess he wants to cover his bets. But that reflects the opinion of the greater analyst community, where only half the recommendations are a buy or better. Moreover, the average target price is just $210, which is a mere 8.6% above Friday’s close. That’s closer than most stocks, meaning analysts will likely not hit the stock with damaging target price decreases to compensate for not lowering their target throughout the bear market. In other words, the target price is perfectly reasonable, unlike most stocks.
On the chart, MRNA had been trading sideways for a month amid an intermediate-term uptrend that pulled the shares 50% higher. But the big pop this week shot the stock up to its highest level since January. In addition, the shares pulled away from their rising 20-day moving average, a trendline the stock had been clinging to.
This trade is based on MRNA continuing to gain on the heels of its trial report. This is consistent with the options market, where out-of-the-money (OTM) calls are more expensive than equally OTM puts. Note also that the 20-day (blue line) sits above the strike of our spread’s short put at $175 (red line). If you agree that MRNA will continue its rally – or at least remain atop the 20-day – consider the following trade that relies on the stock staying above $175 through expiration in five weeks:
Buy to Open the MRNA 20 Jan 170 put (MRNA230120P170)
Sell to Open the MRNA 20 Jan 175 put (MRNA230120P175) for a credit of $1.35 (selling a vertical)
This credit is $0.02 less than the mid-point price of the spread at Friday’s $193.29 close. Unless MRNA surges quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $133.70. This trade reduces your buying power by $500, making your net investment $366.30 per spread ($500 – $133.70). If MRNA closes above $175 on Jan. 20, both options will expire worthless and your return on the spread would be 37% ($133.70/$366.30).
Market Like Mongo
December 12, 2022
Market Like Mongo
Database platform provider MongoDB (MDB) reported earnings after the close on Tuesday that topped estimates on all accounts. Adjusted earnings were up sharply from a year earlier, and easily topped the analyst estimate. Revenue was up nearly 50% from a year ago and beat expectations by nearly 10%. And for good measure, the company raised guidance for Q4 and fiscal 2023, with both metrics beating the consensus analyst forecast.
Despite hitting the trifecta on beating estimates, analysts were mixed in their response. The stock received one upgrade, but target price changes were both up and down. But that’s been the pattern with most stocks, as analysts are finally lowering their ridiculously high targets after stocks have slumped this year. Even so, MDB’s average target price is $273, 42% above Friday’s close. Analysts have some work to do before the target price can be taken seriously.
On the chart, MDB dropped 76% from its December 2021 high before rallying 42% in just the past month. Most of the strength came after earnings, when the stock soared as much as 29% the day after earnings. That was MDB’s largest post-earnings maximum move in its brief five-year history. The price spike also pulled the stock above its now-rising 20-day moving average and flattening 50-day moving average.
This trade is based on MDB continuing its rally on the heels of a strong earnings report, or at least staying above the 50-day moving average (blue line). Note that the short put strike of our spread (red line) is below the 50-day. If you agree that MDB will remain atop the 50-day, consider the following trade that relies on the stock staying above $170 through expiration in six weeks:
Buy to Open the MDB 20 Jan 165 put (MDB230120P165)
Sell to Open the MDB 20 Jan 170 put (MDB230120P170) for a credit of $1.40 (selling a vertical)
This credit is $0.05 less than the mid-point price of the spread at Friday’s $191.75 close. Unless MDB surges quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $138.70. This trade reduces your buying power by $500, making your net investment $361.30 per spread ($500 – $138.70). If MDB closes above $170 on Jan. 20, both options will expire worthless and your return on the spread would be 38% ($138.70/$361.30).
ULTA is More than Skin Deep
December 5, 2022
Ulta Beauty (ULTA) reported impressive earnings on Thursday after the bell that beat estimates on all counts. Earnings came in more than a dollar higher than expectations, while revenue beat by more than 4%. Same-store sales came in a whopping 60% above the analyst number. Moreover, ULTA raised full-year guidance for both earnings and sales. Significantly, the common complaints of supply chain constraints and slower consumer spending were absent from ULTA’s report and follow-up call.
Analysts cheered the news, hitting the stock with several target price increases, though there were no rating upgrades. Even so, the consensus price target is just a mere 4% above ULTA’s Friday close, while more than half the covering analysts rate the stock a hold. This suggests that future upgrades and target increases are possible, which could give the stock a boost.
Despite the solid report, ULTA was flat on Friday. Perhaps this is because the stock is on an impressive 26% rally since late October. In fact, ULTA hit an all-time high on Friday. This rally has been tracked by the 20-day moving average, although the trendline has not been tested for the past month. We are going with a safer trade this week, going further out of the money than usual with the short strike that is sitting right on the 20-day, as shown in the chart.
This trade is based on ULTA continuing its rally on the heels of a strong earnings report. That said, we are giving the stock about 7% of downside room before the spread moves into the money. If you agree that ULTA will continue its rally – or at least remain atop the 20-day (blue line) – consider the following trade that relies on the stock staying above $440 (red line) through expiration in seven weeks:
Buy to Open the ULTA 20 Jan 435 put (ULTA230120P435)
Sell to Open the ULTA 20 Jan 440 put (ULTA230120P440) for a credit of $1.00 (selling a vertical)
This credit is $0.05 less than the mid-point price of the spread at Friday’s $471.33 close. Unless ULTA surges quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $98.70. This trade reduces your buying power by $500, making your net investment $401.30 per spread ($500 – $98.70). If ULTA closes above $440 on Jan. 20, both options will expire worthless and your return on the spread would be 25% ($98.70/$401.30).
Cutting Back on Meds
November 28, 2022
Medical-device maker Medtronic (MDT) reported earnings this week that hardly impressed the Street. Quarterly sales and earnings fell from a year earlier, with revenue falling short of analyst expectations while profits met projections. The company also cut its full-year guidance, citing the usual supply-chain disruptions and a slower recovery in medical procedures postponed due to the pandemic.
MDT’s report was met with a couple of downgrades along with a heavy dose of target price declines. Nevertheless, the average price target sits above $94, about 19% higher than Friday’s close. That leaves room for more price target cutbacks.
The stock price has been sliding from more than a year, falling 42% from a record high reached in Sep. 2021. Since April, MDT has displayed a pattern of lower highs and lows with the 50-day moving average keeping a lid on brief rallies. The 50-day currently sits at $83, which is also the strike of the short call in our credit spread. This trade is thus based on the current downtrend continuing, with the declining 50-day providing resistance and keeping our spread out of the money.
If you agree that MDT will continue to trade beneath the 50-day moving average (blue line), consider the following trade that relies on the stock staying below $83 (red line) through expiration in six weeks:
Buy to Open the MDT 6 Jan 85 call (MDT230106C85)
Sell to Open the MDT 6 Jan 83 call (MDT230106C83) for a credit of $0.40 (selling a vertical)
This credit is $0.03 less than the mid-point price of the spread at Friday’s $79.12 close. Unless MDT falls quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $38.70. This trade reduces your buying power by $200, making your net investment $161.30 per spread ($200 – $38.70). If MDT closes below $83 on Jan. 6, both options will expire worthless and your return on the spread would be 24% ($38.70/$161.30).
Down Goes Tyson
November 21, 2022
Down Goes Tyson
Tyson Foods (TSN) can’t seem to get out of its own way. The company reported earnings on Nov. 14 that missed estimates on profits but beat on revenue. Higher chicken prices squeezed gross margins, which were cut in half.
But TSN has other problems. The week before earnings, the company’s CFO was arrested for public intoxication and criminal trespass. This week, the company recalled 94,000 pounds of ground beef that reportedly contained a “reflective, mirror-like material,” whatever that means.
Analysts didn’t seem to like the earnings news, as the stock was hit with a few target price downgrades. Even so, the average price target is 24% above Friday’s close, which seems overly optimistic. Perhaps the options market is more in touch with TSN’s prospects, as out-of-the-money puts are priced higher than the corresponding calls.
The stock traded lower after earnings and throughout the week, falling nearly 3%. While hardly catastrophic, the more bearish development is the continued resistance provided by the 50-day moving average. The stock hasn’t closed a day above the 50-day since it crossed below it in early August. Moreover, recent rally attempts in the past couple of weeks were firmly rebuffed.
This trade is based on TSN continuing to trade sideways or lower beneath the weight of the 50-day moving average (blue line). Note that the short call strike (red line) of our credit spread lies just above this trendline, meaning that TSN will have to overcome this resistance to put our spread in danger
If you agree that TSN will continue to trade beneath the 50-day moving average, consider the following trade that relies on the stock staying below $67.50 through expiration in four weeks:
Buy to Open the TSN 16 Dec 70 call (TSN221216C70)
Sell to Open the TSN 16 Dec 67.5 call (TSN221216C67.5) for a credit of $0.50 (selling a vertical)
This credit is $0.02 less than the mid-point price of the spread at Friday’s $65.52 close. Unless TSN falls quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $48.70. This trade reduces your buying power by $250, making your net investment $201.30 per spread ($250 – $48.70). If TSN closes below $67.50 on Dec. 16, both options will expire worthless and your return on the spread would be 24% ($48.70/$201.30).
A Stock With Some Bite
November 14, 2022
Oil and gas producer Diamondback Energy (FANG) – which may have the best ticker symbol in finance – reported earnings on Monday that beat analyst expectations on both the top and bottom lines. Higher oil prices led to huge jumps in net income (+82%) and revenue (28%) compared to a year earlier. For the record, the average price of oil jumped 32% from last year’s third quarter.
Analysts were bullish on the results, reacting with several price target increases. The average price target now stands 9.6% above Friday’s close, which seems reasonable for an energy stock.
FANG had traded mostly flat in 2022 … until late September. That’s when the stock went on a major rally that has covered 48% in just seven weeks. In fact, a late-week surge allowed the stock to post all-time intraday and closing highs on Friday. The stock has been riding above the support of its 20-day moving average since closing above this trendline in early October.
This trade is based on FANG continuing its rally or at least not pulling back below the 20-day (blue line), which will cross above the short strike of our put spread (red line) within the next couple of days. Note that FANG’s strike prices are unusual (155.35 and 152.7), though that should have no impact on the trade or profit potential.
If you agree that FANG will continue to respect the 20-day moving average, consider the following trade that relies on the stock staying above $155.35 through expiration in five weeks:
Buy to Open the FANG 16 Dec 152.7 put (FANG221216P152.7)
Sell to Open the FANG 16 Dec 155.35 put (FANG221216P155.35) for a credit of $0.75 (selling a vertical)
This credit is $0.05 less than the mid-point price of the spread at Friday’s $164.35 close. Unless FANG surges quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $73.70. This trade reduces your buying power by $265, making your net investment $191.30 per spread ($265 – $73.70). If FANG closes above $155.35 on Dec. 16, both options will expire worthless and your return on the spread would be 38% ($73.70/$191.30).
ABBV Not Immune to a Pullback
October 8, 2022
Pharmaceutical giant AbbVie (ABBV) reported mixed results in its recent earnings report. While earnings beat the consensus estimate, revenue fell short. Notably, the company’s immunology portfolio, which includes popular TV-ad drugs such as Humira, fell short of expectations. ABBV’s CEO cited the usual (and seemingly generic) “economic headwinds” as hurting the company’s aesthetic business (ABBVIE makes Botox).
While analysts didn’t hit ABBV with any downgrades, there was a flurry of target price decreases. The average estimate is now $157, about 8% above Friday’s close. That doesn’t seem unreasonable, nor is the average analyst rating, which has been slipping into the buy-hold region.
On the charts, ABBV’s earnings knocked the stock below its 200-day moving average, a trendline that has provided solid resistance to any rally attempts other than a brief spurt prior to earnings. This trade is thus a bet that the stock will continue to trade sideways as it has for the past six months, with the 200-day defining the upper rail of the trading range. Note that the short call of our spread is above the 200-day, so the stock will have to break this resistance to move the spread into the money.
If you agree that ABBV will continue to respect the 200-day (blue line), consider the following trade that relies on the stock staying below $150 (red line) through expiration in six weeks:
Buy to Open the ABBV 16 Dec 155 call (ABBV221216C155)
Sell to Open the ABBV 16 Dec 150 call (ABBV221216C150) for a credit of $1.98 (selling a vertical)
This credit is $0.02 less than the mid-point price of the spread at Monday’s $148.10 close. Unless ABBV falls quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $196.80. This trade reduces your buying power by $500, making your net investment $303.20 per spread ($500 – $196.80). If ABBV closes below $150 on Dec. 16, both options will expire worthless and your return on the spread would be 65% ($196.80/$303.20).
Go With VLO
October 31, 2022
Go With VLO
Oil refiner Valero Energy (VLO) reported earnings this week that either missed or beat both profit and revenue estimates, depending on the source. I won’t quibble with who’s right or wrong. What’s important is that revenue and profits soared above the figures from a year ago. Moreover, VLO’s CEO said that product demand surpassed 2019 levels.
The report was met with target price increases from several analysts. What’s interesting about VLO compared to most stocks, though, is that the average target price is only 9% above Friday’s closing price. In other words, it’s reasonable. To me, that adds some weight to the price increases we saw this week.
On the charts, the stock is down a bit since earnings. But the month-long uptrend remains intact, assisted by the 20-day moving average. The shares have not closed a day below this trendline in October, a period that includes a pullback that tested support. Based on this support, we’re going with a put credit spread with the short put strike sitting right on the 20-day (blue line) and will soon be below it. Thus, the stock will have to break through the trendline to move the spread into the money.
If you agree that VLO will continue to respect the 20-day, consider the following trade that relies on the stock staying above $120 (red line) through expiration in seven weeks:
Buy to Open the VLO 16 Dec 115 put (VLO221216P115)
Sell to Open the VLO 16 Dec 120 put (VLO221216P120) for a credit of $1.65 (selling a vertical)
This credit is $0.02 less than the mid-point price of the spread at Friday’s $125.98 close. Unless VLO surges quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $163.70. This trade reduces your buying power by $500, making your net investment $336.30 per spread ($500 – $163.70). If VLO closes above $120 on Dec. 16, both options will expire worthless and your return on the spread would be 49% ($163.70/$336.30).
Schwab Tested
October 24, 2022
Schwab (SCHW) reported earnings on Monday before the open that set records for both earnings per share and revenue. Both numbers exceeded the consensus analyst estimates. SCHW attributed the great quarter to its “diversified financial model and a significant benefit from higher rates.”
Analysts didn’t appear moved by the record numbers, though. There were no upgrades (nor downgrades), and just one price target decrease. Perhaps that’s because analysts have been overly bullish on a stock that is down 16% this year. Plus, analysts have an average price target that is 19% above Friday’s close.
Despite the earnings success, the stock didn’t do much in a week where the S&P 500 climbed nearly 5%. The stock couldn’t even manage a weekly gain of 2%, keeping it mired in a trading range that has persisted since late July. On the chart, the shares are looking up at the 20-day, 50-day and 200-day moving averages, all of which are pointing lower.
This trade is based on SCHW continuing to struggle in gaining any momentum now that earnings is past. Heavy overhead resistance should keep the stock contained. That’s why we’re going with a call credit spread with the short call strike sitting just above the 200-day moving average (blue line). Note that the 20-day and 50-day trendlines sit between the stock price and short strike, too.If you agree that SCHW will continue to trade sideways, consider the following trade that relies on the stock staying below $75 (red line) through expiration in five weeks:
Buy to Open the SCHW 25 Nov 77 call (SCHW221125C77)
Sell to Open the SCHW 25 Nov 75 call (SCHW221125C75) for a credit of $0.50 (selling a vertical)
This credit is $0.03 less than the mid-point price of the spread at Friday’s $70.32 close. Unless SCHW sags quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $48.70. This trade reduces your buying power by $200, making your net investment $151.30 per spread ($200 – $48.70). If SCHW closes below $75 on Nov. 25, both options will expire worthless and your return on the spread would be 32% ($48.70/$151.30).
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