Posts Tagged ‘Bullish Options strategies’

Align Technology (ALGN) A Buy After Being Added To The S&P 500

Monday, July 3rd, 2017

This week we are featuring a company listed on the Investor’s Business Daily (IBD) Top 50 List that has also recently been added to the S&P 500 index.  The stock has displayed strong upwards momentum and we look to place spreads that take advantage of this underlying strength.

Terry

Align Technology (ALGN) A Buy After Being Added To The S&P 500

Align Technology is the designer and manufacturer of the Invisalign System which they state is the most advanced clear aligner system in the world.  Analysts are optimistic of the company’s growth prospects and have recently revised up their expectations.  Zacks ranks this stock as a Strong Buy and these analysts have recently raised their targets: Align Technology (ALGN) PT Raised to $175 at Morgan Stanley; Huge At-Home Ortho Opportunity and Leerink Lifts Target On Align Technology, Sees 27% Upside.

From a technical perspective, ALGN boasts a strong uptrend and trades above key technical indicators.  On a daily chart, the stock jumped above the 20-day moving average following an earnings report in January and has held above it since.

A rising trend channel has been identified to contain price action since late April and a horizontal level at $145.24 offers additional support to create a confluence near the lower bound of the trend channel.

ALGN Chart July 2017

ALGN Chart July 2017

*source Tradingview.com

If you agree there’s further upside ahead for Align Technology, 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 ALGN 18Aug17 140 Puts (ALGN170818P140)
Sell To Open ALGN 18Aug17 145 Puts (ALGN170818P145) for a credit of $1.60 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when ALGN was trading near $150.  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 $158 and your broker would charge a $500 maintenance fee, making your investment $342 ($500 – $158).  If ALGN closes at any price above $145 on August 18, 2017, both options would expire worthless, and your return on the spread would be 46% (342% annualized).

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

IBD Underlying Updates July 1, 2017

IBD Underlying Updates July 3, 2017

IBD Underlying Updates June 30, 2017

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.  The Terry’s Tips portfolio which places spreads like the above one has gained 80% in the first six months of 2017 in spite of incurring some losses on some of the spreads placed.  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

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Posted in Credit Spreads, Monthly Options, Stock Option Trading Idea Of The Week, Stock Options Strategies, Terry's Tips Portfolios, Weekly Options | No Comments »

Merck Breaks Out, can it Continue to Trade Higher?

Wednesday, June 28th, 2017

This week we are featuring an option trading idea based on a stock that just broke out following the Senate healthcare bill.  I hope that it is of interest to you.

Terry

Merck Breaks Out, can it Continue to Trade Higher?
Merck, broke out to fresh all-time highs last week following news from the proposed senate bill that would allow for less regulation and would not crack down on drug pricing.  The Senate appears to be moving toward a vote, which should keep MRK buoyed.

If you concur with the views expressed by these analysts, consider making this trade which is a bet that MRK will continue to advance (or at least not decline very much) over the next six weeks:

Technicals

After breaking out, prices are consolidating above the recent breakout level.  The stock should remain above a downward sloping trend line that shows support near $65. Additional support is seen near the 20-day moving average at $64.33.  Momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal.

MRK Chart June 2017

MRK Chart June 2017

*source Stockcharts.com

Buy To Open MRK AUG18   62.50 puts (MRK170818P625
Sell To Open MRK AUG18   65.00 puts (MRK170818P650) for a credit of $0.65 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when MRK was trading slightly above $66.20.  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 $2 per spread (and there is no commission on closing trades, only the $.10 clearing fee).  Each contract would then yield $63 and your broker would charge a $250 maintenance fee, making your investment $187 ($250 – $63).  If MRK closes at any price above $65 on August 18, 2017, both options would expire worthless, and your return on the spread would be 34% (230% annualized).

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

Happy trading,

Terry

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Posted in Credit Spreads, Stock Option Trading Idea Of The Week, Stock Options Strategies, Terry's Tips Portfolios, Weekly Options | No Comments »

Lumentum Holdings (LITE) Is Coiling For An Up Move

Tuesday, June 27th, 2017

This week we are looking at another company listed on the Investor’s Business Daily (IBD) Top 50 List.  We use this list in our portfolio to find stocks that have been strongly trending higher and this week’s stock is an outperformer which has done exactly that.  The Terry’s Tips ’ portfolio that uses this list as its source for underlying ideas is now up 90.3% for the year to date.

Terry

Lumentum Holdings (LITE) Is Coiling For An Up Move

Lumentum Holdings hit all-time highs earlier this month and analysts believe there’s further upside ahead.  Here are two articles that reveal where Lumentum could be heading and why – Lumentum (LITE) PT Raised to $80 at Needham & Company; 3D Sensing Could Double LITE’S Value and DA Davidson Starts Lumentum (LITE) at Buy.

The technical outlook for LITE is solid.  The stock has been trending higher for over a year and a half and an acceleration of momentum can be seen since the start of May, shortly after the company announced earnings.

The earnings report caused a gap above the 20-day moving average and the stock has held above it since.  In addition to the moving average, horizontal support has been identified at $60.50 which held a decline earlier this month.

Lumentum has been consolidating sideways in a range over the past two weeks which is common in strong bullish trends.  A break of the upper end of the range, identified at $65.30, is likely to accompany an acceleration to the upside.

Lumentum Chart June 2017

Lumentum Chart June 2017

*source Tradingview.com

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

Buy To Open LITE 18Augy17 55 Puts (LITE170818P55)
Sell To Open LITE 18Aug17 60 Puts (LITE170818P60) for a credit of $1.73 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when LITE was trading at $64.  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 $2 per spread (and there is no commission on closing trades, only the $.10 clearing fee).  Each contract would then yield $171 and your broker would charge a $500 maintenance fee, making your investment $329 ($500 – $171).  If LITE closes at any price above $60 on August 18, 2017, both options would expire worthless, and your return on the spread would be 52% (312% annualized).

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

IBD Underlying Updates June 23, 2017

IBD Underlying Updates June 23, 2017

IBD Underlying Updates June 23, 2017

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.  As we said above, the Terry’s Tips portfolio which places spreads like the above one has gained 90% in the first six months of 2017 in spite of incurring some losses on some of the spreads placed.  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

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Posted in Credit Spreads, Monthly Options, Stock Option Trading Idea Of The Week, Stock Options Strategies, Terry's Tips Portfolios, Weekly Options | No Comments »

Is Alibaba (BABA) Ready to Accelerate Higher?

Wednesday, June 21st, 2017

This week we are featuring an option trading idea based on a stock on the IBD Top 50 List that just delivered robust earnings guidance.  We have added this spread to the Terry’s Tips  portfolio which trades vertical credit put spreads on selected IBD Top 50 companies (this portfolio has gained 77% so far in 2017).

Terry

Is Alibaba (BABA) Ready to Accelerate Higher?

Alibaba, broke out to fresh all-time highs last week following better than expected financial results both on the top and bottom line.  Prices have been forming a bull flag pattern which is a pause that refreshes higher.

If you concur with the views expressed by these analysts, consider making this trade which is a bet that BABA will continue to advance (or at least not decline very much) over the next five weeks:

What impressed investors even more than the company’s financial result, was the company’s forward guidance. The Chinese e-commerce giant estimates that revenue will increase almost 50% in the 2018 fiscal year. Analysts had previously estimated a revenue increase of about 35%. In the wake of this news, the average price target was raised to $160 with the highest at $190.

Technicals

After a round of profit taking the stock should resume its climb.  The stock price has not closed below its 10-day moving average since February.  One way to bet on a further climb would be to put on a bull put credit spread where the short strike was below the 20-day moving average.  Support is seen near the 10-day moving average at $136.92.

 

BABA Chart June 2017

*source Stockcharts.com

Buy To Open BABA 21Jul17 133 puts (BABA170728P133)
Sell To Open BABA 21Jul17 136 puts (BABA170728P136) for a credit of $1.12 (selling a vertical)

This price was $0.03 less than the mid-point of the option spread when BABA was trading slightly above $139.  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 $2 per contract (and there is no commission on closing trades, only the $.10 clearing fee).  Each contract would then yield $110 and your broker would charge a $300 maintenance fee, making your investment $190 ($300 – $110).  If BABA closes at any price above $136 on July 28, 2017, both options would expire worthless, and your return on the spread would be 58% (603% annualized).

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

Happy trading,

Terry

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Posted in Credit Spreads, Monthly Options, Stock Option Trading Idea Of The Week, Stock Options Strategies, Terry's Tips Portfolios, Weekly Options | No Comments »

Actual Positions in One Terry’s Tips Portfolio

Monday, June 5th, 2017

For the first time ever, I will share with you the exact strategy we use in one of the 9 portfolios we carry out at Terry’s Tips.  I will reveal the exact positions we have in this portfolio, their original cost, and our reasoning for putting them on.  This portfolio started out with $3000 at the beginning of 2017, and has gained 83% so far.  It is not our best performing portfolio, but it exceeds the average 2017 gain of 51.7% for all 9 portfolios.

Terry

Actual Positions in One Terry’s Tips Portfolio

Our Honey Badger portfolio is one of our most aggressive (least conservative).  Our strategy is to select companies which rank high on the Investor’s Business Daily Top 50 List, and make the assumption that these high-momentum stocks will continue to be strong for another six or ten weeks.  The stocks don’t actually have to go up at all for us to make the maximum gain on the spreads we place.  We select strike prices which are just below the then-current stock price so we can tolerate a small drop in the price while we hold the positions.

Here are the exact words we published in our June 3, 2017 Saturday Report which reviews performance of all nine portfolios:

Summary of Honey BadgerPortfolio This portfolio started with $3000 in early January 2017.  It will be our most aggressive portfolio. We will select companies from Investor’s Business Daily (IBD) highest-ranked momentum list (The Top 50) and sell vertical put credit spreads betting that the momentum will last at least another 2 months or so.  In 2017, we have had profitable trades with NVDA, HQY, AMAT, ANET, and ULTA, and suffered a big loss on GS which fell by $30 after we placed the trade.

Current positions:

On May 8 when LRCX was trading at $152:
Buy To Open (BTO) 3 LRCX 16Jun17 145 puts (LRCX170616P145)
Sell To Open (STO) 3 LRCX 16Jun17 150 puts (LRCX170616P150) for a credit of $1.90  (selling a vertical)
If LRCX ends up above $150 on June 16, this spread will gain $562.50 after commissions on an investment of $937.50, or 60% (360% annualized)

On May 11 when AVGO was trading at $230:

BTO 4 AVGO 23Jun17 220 puts (AVGO170623P220)

STO 4 AVGO 23Jun17 225 puts (AVGO170623P225) for a credit of $1.62  (selling a vertical)   If ULTA ends up above $225 on June 23, this spread will gain $638 after commissions on an investment of $1362, or 47% (281% annualized)

On May 11 when ULTA was trading at $300:

BTO 4 ULTA 16Jun17 290 puts (ULTA170616P290)

STO 4 ULTA 16Jun17 295 puts (ULTA170616P295) for a credit of $1.90  (selling a vertical)

If ULTA ends up above $295 on June 17, this spread will gain $750 after commissions on an investment of $1250, or 60% (360% annualized)

Honey Badger Portfolio Positions June 2017

Honey Badger Portfolio Positions June 2017

 Results for the week:  With AVGO (at $254.53) up $13.32 (5.5%), LRCX (at $158.74) up $3.62 (2.3%) and ULTA (at $311.47) up $9.07 (3.0%), for the week, the portfolio gained $810 or 17.3%.   The big gain this week came about because of the surge in AVGO which makes the spread almost certain to make the maximum gain when it expires in three weeks.  All three stocks in this portfolio are comfortably above the price then need to be to achieve the maximum gain.  If they remain above the strike of the option we have sold, we will pick up another $180 in 3 weeks.  This will make the gain for the first six months of the year a nice 88% (after commissions, of course).

Since the IBD Top 50 list is such an important source for this portfolio, we keep a careful watch on the stocks which are added on to the list each week and which ones are deleted.  Over time, we hope to determine whether deletions might be good prospects for bearish spreads.  Momentum often works in both directions, and perhaps stocks which had strong upward momentum will have strong downward momentum when IBD determines that the upward trend has ended.

Here are the changes we reported to our subscribers this week:

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

IBD Underlying Updates June 2017

IBD Underlying Updates June 2017

We hope you enjoyed this peek at one of our portfolios, and the strategy we use in this portfolio.  While we know that lots of newsletters out there are making all sorts of great promises about how wonderful their performance is, we don’t know of a single one which will reveal all their trades and is doing anywhere near what we have done. Our results include all commissions as well (most newsletters conveniently ignore commissions to make their results look better).  We invite you to come on board and share in our success.

Happy trading,

Terry

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Posted in 10K Strategies, Monthly Options, Stock Option Trading Idea Of The Week, Stock Options Strategies, Terry's Tips Portfolios, Weekly Options | No Comments »

44% in 46 Days From a Play on ULTA?

Tuesday, April 4th, 2017

I would like to share a trade that we made in one of our Terry’s Tips portfolios today.  By the way, we have 9 portfolios that we carry out for paying subscribers where they can see every trade (including commissions) as we make them. All of these portfolios have made positive gains so far in 2017, and the composite average has picked up 28.8% at the end of the first quarter.  Not bad compared to conventional investment results.

Enjoy today’s offering.

Terry

44% in 46 Days From a Play on ULTA?

There is a lot to like about Ulta Salon, Cosmetics & Fragrance’s (ULTA).  It has been a darling of Wall Street this year, rising about 50%.  It appears on IBD’s Top 50 list of momentum stocks.  The Motley Fool guys have written over 300 articles on the company and include it in their top three beauty stocks.  The company has a plan to add on 500 new stores, and they have exceeded earnings estimates every quarter for the past year.

The chart for the last year shows a steady climb upward, but there have been some setbacks along the way:

 

ULTA Chart April 2017

ULTA Chart April 2017

If you think the momentum might continue for about six more weeks, you might consider this trade we made on April 3rd when ULTA was trading about $285.

Buy To Open 4 ULTA 19May17 275 puts (ULTA170519P275)

Sell To Open 4 ULTA 19May17 280 puts (ULTA170519P280) for a credit limit of $1.55  (selling a vertical)

We collected $620 from this trade, less commissions of $10 at the rate Terry’s Tips  subscribers pay at thinkorswim.  A maintenance requirement of $2000 will be assessed by the broker, less the $610 net we collected, making it a $1390 investment.  This would be the maximum loss if the stock ended up below $275 on May 19th.  If it is at any price above $280 on that day, it works out to a 44% gain for the 46 days we will have to wait.

The stock can fall about $5 and we will still make the maximum gain. While this might not be much downside protection, it is surely a lot better deal than owning the stock where even a dollar drop in the stock will result in a loss for the period.

If the stock does fall below $280 near the end of the six-week period, we would probably roll out the spread to a future time period, a tactic that will give us a little more time for it to rise above $280.  If that becomes necessary, we will send you a note explaining the action we took.

As with any investment, you should do your own research on the fundamentals of any stock or options you buy, and you should only be risking money that you can truly afford to lose.

Happy trading.

Terry

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Posted in 10K Strategies, Monthly Options, Stock Option Trading Idea Of The Week, Stock Options Strategies, Terry's Tips Portfolios, Weekly Options | No Comments »

Benefiting From the Current Uncertainty of Oil Supply

Tuesday, November 29th, 2016

The price of oil is fluctuating all over the place because of the uncertainty of OPEC’s current effort to get a widespread agreement to restrict supply. This has resulted in unusually high short-term option prices for USO (the stock that mirrors the price of oil). I would like to share with you an options spread I made in my personal account today which I believe has an extremely high likelihood of success.

Terry

Benefiting From the Current Uncertainty of Oil Supply

I personally believe that the long-run price of oil is destined to be lower. The world is just making too much of it and electric cars are soon to be here (Tesla is gearing up to make 500,000 next year and nearly a million in two years). But in the short run, anything can happen.

Meanwhile, OPEC is trying to coax producers to limit supply in an effort to boost oil prices. Every time they boast of a little success, the price of oil bounces higher until more evidence comes out that not every country is on board. Iran and Yemen won’t even show up to the meeting. Many oil-producing companies have hated one another for centuries, and the idea of cooperating with each other seems a little preposterous to me.

The good old U.S.A. is one of the major producers of oil these days, and it is not one of the participants in OPEC’s discussion of limiting supply. Two significant new domestic oil discoveries have been announced in the last couple of months, and the total number of operating rigs has moved steadily higher in spite of the currently low oil prices.

Bottom line, option prices on USO are higher than we have seen them in quite a while, especially the shortest-term options. Implied volatility (IV) of the long-term options I would like to buy is only 36 compared to 64 for the shortest-term weekly options I will be selling to someone else.

Given my inclination to expect lower rather than higher prices in the future, I am buying both puts and calls which expire a little over a year from now and selling puts and calls which expire on Friday. Here are the trades I made today when USO was trading at $10.47:

Buy To Open 20 USO 19Jan18 10 puts (USO180119P10)
Sell To Open 20 USO 02Dec16 10 puts (USO161202P10) for a debit of $1.20 (buying a calendar)

Buy To Open 20 USO 19Jan18 10 calls (USO180119C10)
Sell To Open 20 USO 02Dec16 10.5 calls (USO161202C10.5) for a debit of $1.58 (buying a diagonal)

Of course, you can buy just one of each of these spreads if you wish, but I decided to pick up 20 of them. For the puts, I paid $1.43 ($143) for an option that has 60 weeks of remaining life. That means it will decay in value by an average of $2.38 every week of its life. On the other hand, I collected $.23 ($23) from selling the 02Dec16 out-of-the-money 10 put, or almost 10 times what the long-term put will fall by. If I could sell that put 60 times, I would collect $1380 of over the next 60 weeks, more than 10 times what I paid for the original spread.

Here is the risk profile graph which shows what my spreads should be worth when the short options expire on Friday:

USO Risk Profile Graph December 2016

USO Risk Profile Graph December 2016

My total investment in these spreads was about $5600 after commissions, and I could conceivably make a double-digit return in my very first week. If these short-term option prices hold up for a few more weeks, I might be able to duplicate these possible returns many more times before the market settles down.

As usual, I must add the caveat that you should not invest any money in options that you cannot truly afford to lose. Options are leveraged investments and can lose money, just as most investments. I like my chances with the above investment, however, and look forward to selling new calls and puts each week for a little over a year against my long options which have over a year of remaining life.

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Posted in 10K Strategies, Earnings Announcement Options Strategy, Monthly Options, Stock Option Trading Idea Of The Week, Stock Options Strategies, Terry's Tips Portfolios, Weekly Options | No Comments »

Halloween Special Expires at Midnight Tonight

Monday, October 31st, 2016

Halloween Special Expires at Midnight Tonight

I want to send you a copy of the October 29, 2016 Saturday Report, the weekly email sent to paying subscribers to Terry’s Tips.  This report details how our 13 actual portfolios perform each week.    Last week was a down one for the market (SPY lost 0.7%), and many of our portfolios experienced a similar loss.  Others did considerably better.

The portfolio based on Johnson and Johnson (JNJ) gained 25% while the stock rose 1.7%.  The portfolio based on Facebook (FB) gained 8.7% even though FB fell by 0.6% last week.  This portfolio was started with $6000 one year and three weeks ago, and is now worth $13,449, a gain of 124%.

One of our portfolios invests in companies which are about to announce earnings, and closes out the positions on the Friday after the announcement.  Last week, we closed out our spreads in Mastercard (MA) which had been put on only a week and a half earlier.  We enjoyed a gain of 34.3% (after commissions, as is the case for all of these portfolios).

Finally, we have a portfolio that is designed as protection against a market crash or correction.  While SPY fell only 0.6%, this bearish portfolio picked up 13.6% (admittedly, this was an unusually positive result which rarely occurs to this extent, but sometimes we are a little lucky).

Watching how these portfolios unfold over time in the Saturday Report is a wonderful (and easy) way to learn the intricacies of option trading.  You can get started today by coming on board at our half-off Halloween Special which expires at midnight tonight. I will personally send you the October 29th Saturday Report so you can start immediately.

Most of these portfolios employ what we call the 10K Strategy.  It involves selling short-term options on individual stocks and using longer-term (or LEAPS) as collateral.  It is sort of like writing calls, except that you don’t have to put up all that cash to buy 100 or 1000 shares of the stock.  The 10K Strategy is sort of like writing calls on steroids.  It is an amazingly simple strategy that really works with the one proviso that you select a stock that stays flat or moves higher over time.

Lowest Subscription Price Ever

As a Halloween special, we are offering the lowest subscription price than we have ever offered – our full package, including several valuable case study reports, my White Paper, which explains my favorite option strategies in detail, and shows you exactly how to carry them out on your own, a 14-day options tutorial program which will give you a solid background on option trading, and two months of our Saturday Reports full of tradable option ideas.  All this for a one-time fee of $39.95, less than half the cost of the White Paper alone ($79.95).

For this lowest-price-ever $39.95 offer, click here, enter Special Code HWN16 (or HWN16P for Premium Service – $79.95).

 If you are ready to commit for a longer time period, you can save even more with our half-price offer on our Premium service for an entire year.  This special offer includes everything in our basic service, and in addition, real-time trade alerts and full access to all of our portfolios so that you can Auto-Trade or follow any or all of them.  We have several levels of our Premium service, but this is the maximum level since it includes full access to all nine portfolios which are available for Auto-Trade.  A year’s subscription to this maximum level would cost $1080.  With this half-price offer, the cost for a full year would be only $540.  Use the Special Code MAX16P.

 This is a time-limited offer.  You must order by midnight tonight, October 31, 2016.  That’s when the half-price offer expires, and you will have to go back to the same old investment strategy that you have had limited success with for so long (if you are like most investors).

This is the perfect time to give you and your family the perfect Halloween treat that is designed to deliver higher financial returns for the rest of your investing life.

I look forward to helping you survive Halloween by sharing this valuable investment information with you at the lowest price ever. It may take you a little homework, but I am sure you will end up thinking it was well worth the investment.

Happy trading.

Terry

P.S.  If you would have any questions about this offer or Terry’s Tips, please call Seth Allen, our Senior Vice President at 800-803-4595.  Or make this investment in yourself at the lowest price ever offered in our 15 years of publication – only $39.95 for our entire package.  Get it here using Special Code HWN16 (or HWN16P for Premium Service – $79.95).   Do it today, before you forget and lose out.  This offer expires at midnight tonight, October 31, 2016.

 

 

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Posted in 10K Strategies, Monthly Options, Stock Option Trading Idea Of The Week, Stock Options Strategies, Terry's Tips Portfolios, Weekly Options | No Comments »

Calendar Spreads Tweak #1

Thursday, September 1st, 2016

This week we will continue our discussion of a popular option spread – the calendar spread which is also called a time spread or horizontal spread. We will check out the feasibility of buying spreads at different strike prices in an effort to reduce risk.

Terry

Calendar Spreads Tweak #1

First, let’s look at a typical calendar spread on Facebook (FB). Last Friday, when FB was trading about $124.20, we bought 5-month-out 20Jan17 calls and sold one-month-out 30Sep16 calls. The spread would cost $5.43 ($543), and this is what the risk profile graph looked like:

Face book Risk Profile May 2016

Face book Risk Profile May 2016

Note that the break-even range extends from about $3 on the downside to $5 on the upside, a range of $8. (The loss or gain when the short calls expire on September 30 is indicated in the column on the right titled “P/L Day.”) The maximum gain is precisely at the $125 price, and it is about $150 which would result in a nice 27% gain for the month.

Next, I tested whether I could expand the break-even range by adding the same calendar spread at the 120 and 130 strike prices (the 20Jan17 series only offers strikes at $5 increments, unlike the weekly series). The 120 spread would cost $464 and the 130 spread would be $483, so buying all three spreads would involve an investment of about $1500. Here is what the risk profile graph looks like for the three spreads:

Face Book Risk Profile 2 September 2016

Face Book Risk Profile 2 September 2016

Note that the break-even range is almost exactly the same with the three spreads. The maximum gain is also about $150, but with three spreads, it would mean a 10% gain rather than a 27% one because you would have about $1500 invested rather than $543. Clearly, adding calendar spreads at strikes $5 above and below the current stock price is not the way to go – about triple the investment, the same expected maximum gain, and about the same break-even range.

Presumably, you are trading calendars on a stock you believe is headed higher. You might choose to buy an at-the-money calendar and a second one at a higher strike. If you do this, your investment is about $1000 and this is the risk profile graph:

Face Book Risk Profile 3 September 2016

Face Book Risk Profile 3 September 2016

The break-even range is once again about $8 from the lowest point to the highest, but it extends just over a dollar on the downside and $7 on the upside. If you are bullish on the stock, this seems to be a better way to go. The maximum gain is about $150 once again, and this results in a 15% gain for the month. The best thing about this choice of two spreads is that the maximum gain can be achieved across a 5-point range rather than being available at only one precise price point.

Another strategy might be to buy the 125 calendar spread, and then wait to see which way the stock moves, and then buy another calendar in that direction. As we have seen, the cost of an at-the-money calendar is not much greater than the same calendar which is $5 away from the money. The big risk with this strategy is that the stock might whipsaw. For example, it might fall $3 which might prompt you to buy a 120 calendar, and then shoot higher, going up to $128 which might cause you to add a new spread at the 130 strike.

As usual, there are no easy ways to make sure gains in this world. The best bet seems to be to take a position that the stock is headed in one particular direction (usually up unless you are trading on some ETP that is destined to go down, like VXX), and combine an at-the-money spread with one at a higher strike price. Most months you should be making a significant gain if your stock behaves as you expect, and that gain can materialize over a nice range of possible prices.

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Posted in Monthly Options, Stock Option Trading Idea Of The Week, Stock Options Strategies, VXX, Weekly Options | No Comments »

All About, or at Least an Introduction to Calendar Spreads

Thursday, August 25th, 2016

This week I would like start an ongoing discussion about one of my favorite option plays. It is called a calendar spread. It is also known as a time spread or a horizontal spread. But most people call it a calendar because that’s where you focus much of your attention while you hold this kind of a spread. On a specific date on the calendar, you discover whether you made or lost money since you first bought the calendar spread. In the next few blogs, I will discuss all sorts of variations and permutations you can make with calendar spreads, but today, we will focus on a bare bones explanation of the basic spread investment.

Terry

All About, or at Least an Introduction to Calendar Spreads

A calendar spread consists of the simultaneous purchase of one option (either a put or a call) and the sale of another option (either a put or call), with both the purchase and the sale at the same strike price, and the life span of the option you bought is greater than the option you sold. You can trade either puts or calls in this kind of spread, but not both in the same spread. You have to choose to use either puts or calls, but as we will see at a later time, it doesn’t make a whole lot of difference which choice you make.

Some things that we all know about options: 1) they all have a limited life span, and 2) if the underlying stock does not change in price, all options fall in value every day. This is called decay. In option parlance, it is called theta. Theta is the amount that the option will decay in value in a single day if the underlying stock remains flat.

The basic appeal of a calendar spread is that the decay (or theta) of the option that has been sold is greater than the decay (or theta) of the stock that was bought. Every day that the stock remains flat, the value of the spread should become slightly greater. For this reason, most buyers of calendar spreads are hoping that the stock does not move in either direction very much (but we will see that is not always the case with all calendar spreads).

Here is a typical calendar spread purchase on Nike (NKE) on August 24, 2016 when NKE was trading just about $60:

Buy to Open 5 NKE 20Jan17 60 calls (NKE170120C60)
Sell to Open 5 NKE 23Sep16 60 calls (NKE160923C60) for a debit of $2.20 (buying a calendar)

The options that are being bought will expire on January 21, 2017 (about 5 months from now) and the options being sold will expire on September 23, 2016, one month from now. You don’t really care what the prices are for the calls you bought or the calls you sold, just as long as the difference between the two prices is $2.20 ($220 per spread, plus a commission of about $2.50 per spread). That’s how much money you will have to come up with to buy the spread. This spread order will cost $1100 plus $12.50 in commissions, or $1112.50.

The all-important date of this spread is September 23, 2016. That is the day on which the short options (the ones you sold) will expire. If the stock is trading on that day at any price below $60, the calls that you sold will expire worthless, and you will be the owner of 5 NKE 60 calls which have about 4 months of remaining life. If NKE is trading at exactly $60 on that day, those 20Jan17 60 calls will be worth about $3.05 and you could sell them for about $1525, netting yourself a profit of about $400 after commissions. That works out to a 35% gain for a single month, not a bad return at all, especially if you can manage to do it every month for the entire year (but now, we’re dreaming). That is, alas, the maximum you could make on the original spread, and that would come only if the stock were trading at exactly $60 on the day when the short calls expired.

Here is the risk profile graph which shows the loss or gain on the original spread at various prices where the stock might be trading on September 23rd:

2016 NKE Risk Profile Graph September Expiration

2016 NKE Risk Profile Graph September Expiration

In the lower right-hand corner under P/L Day, the profit or loss on the spread is listed for each possible stock price between $58 and $62. Those numbers should be compared to the investment of just over $1100. The graph shows the maximum gain takes place if the stock ends up right about $60, and about half that gain would result if the stock has moved a dollar higher or lower from $60. If it rises or falls by $2, a loss would result, but this loss would be much lower than the potential gains if the stock fluctuated by less than $2. If the stock moves by a much greater amount than $2, even greater losses would occur.

One good thing about calendar spreads is that the value of the options you bought will always be greater than the ones you sold, so you can never lose the entire amount of money you invested when you bought the spread. If you just buy a call option with the hopes that the stock will rise, or buy a put option with hopes that the stock will fall, you risk losing 100% of your investment if you are wrong. Even worse, in most cases, you would lose the entire investment if the stock stays flat rather than moving in the direction you were hoping.

With calendar spreads, you should never lose everything that you invested and you don’t have to be exactly right about the direction the stock needs to move. There is a range of possible prices where your spread will be profitable, and if you enter your proposed spread in a software program like the (free) Analyze Tab at thinkorswim, you can tell in advance what the break-even range will be for your investment.

There are ways that you can expand the break-even range so that a greater stock price fluctuation could be tolerated, and that will be the subject of our next blog.

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Posted in Monthly Options, Stock Option Trading Idea Of The Week, Stock Options Strategies, Terry's Tips Portfolios, Weekly Options | No Comments »

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