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Posts Tagged ‘Strangles’

A Remarkably Safe Way To Play The Apple Earnings Announcement

Tuesday, January 22nd, 2013

Apple announces earnings Wednesday after the close and I have come up with a strategy that looks like it can make a decent gain for the week (ranging from 5% to 15%) with almost no chance of incurring a loss. 

The big downside of the strategy is that it requires an investment of about $16,000.  I understand that many subscribers are looking for less costly option investments.

 However, if you can afford an investment of this size, check out the Seeking Alpha article I wrote just yesterday. 

Terry 

Here is the link – A Remarkably Safe Way To Play The Apple Earnings Announcement 

This is the third week in a row that I have offered a strategy centering on the unusually-high option prices in the series that expires just after an earnings announcement. 

The first play was for Wells Fargo – How to Play the Wells Fargo Earnings Announcement for Tomorrow.  This one gained 44% after commissions. 

The second play involved eBay – How to Play the EBAY Earnings Announcement.  I waited too long to close out my spreads this time around (many subscribers gained 24% or more).  But I did manage to make 11.6% after commissions, still not a bad week. 

I think this week’s earnings-announcement play is the safest one yet in spite of the high cost  requirement.  I am also sharing with paid subscribers a most promising play in Starbucks (SBUX).

All About Back Spreads

Sunday, December 9th, 2012

Back spreads and ratio spreads are usually discussed together because they are simply the mirror image of each other. Back spreads and ratio spreads are comprised of either both calls or both puts at two different strike prices in the same expiration month. If the spread has more long contracts than short contracts, it is a Back Spread. If there are more short contracts, it is a Ratio Spread.
Since ratio spreads involve selling “naked” (i.e., uncovered by another long option) they can’t be used in an IRA.  For that reason, and because we like to sleep better at night knowing that we are not naked short and could possibly lose more than our original investment, we do not trade ratio spreads at Terry’s Tips.

Back spreads involve selling one option and buying a greater quantity of an option with a more out-of-the-money strike. The options are either both calls or both puts.
A typical back spread using calls might consist of buying 10 at-the-money calls and selling 5 in-the-money calls at a strike low enough to buy the entire back spread at a credit. 
Ideally, you collect a credit when you set up a back spread.  Since the option you are buying is less expensive than the one you are buying, it is always possible to set up the back spread at a credit.  You would like as many extra long positions as possible to maximize your gains if the underlying makes a big move in the direction you are betting. 
If you are wrong and the underlying moves in the opposite direction that you originally hoped, if you had set up the back spread at a net credit at the beginning, all of your options will expire worthless and you will be able to keep the original credit as pure profit (after paying commissions on the original trades, of course).
Call back spreads work best when the stock price makes a large move up; put back spreads work best when the stock price makes a large move down.
One of the easiest ways to think about a back spread is as a vertical with some extra long options. A call back spread is a bear vertical (typically a short call vertical) plus extra long call options at the higher of the two strikes. A put back spread is a bull vertical (typically a short put vertical) plus extra long put options at the lower of the two strikes.
The purpose of a back spread is to profit on a quick extended move toward, through and beyond the long strike. The purchase of a quantity of more long options is financed by the sale of fewer short options. The danger is that because the short options are usually in the money, they might grow faster than the long out-of-the-money options if the stock price moves more slowly or with less magnitude than expected. This happens even faster as expiration approaches. The long out-of-the-money options may lose value despite a favorable move in the stock price, and that same move in the stock price may increase the value of the short options. This is when the back spread loses value most quickly. This is depicted in the “valley” of the risk profile graphs. The greatest loss in the graph occurs at exactly the strike price of the long options.

There are two reasons that I personally don’t like back spreads.  First, they are negative theta.  That means you lose money on your positions every day that nothing much happens to the underlying strike price. 

Second, and more importantly, the gains you make in the good time periods are inconsequential compared to the large losses you could incur in the other time periods.  If the stock moves in the opposite way you are hoping, you end up making a very small gain (the initial credit you collected when the positions were originally placed).  If the underlying doesn’t move much, your losses could be huge.  On the other hand, in order for you to make large gains when the market moves in the direction you hope it will, the move must be very large before significant gains come about.

Here is the risk profile graph for a back spread on SPY (buying 10 Dec-12 142 calls for $1.55 and selling 6 Dec-12 140 calls for $2.78 when SPY was trading at $142.20 and there were two weeks until expiration):

You have about $1100 at risk (the $1200 maintenance requirement less the $115 credit (after commissions) you collected at the outset.  If the stock falls by more than $2.20 so that all the calls expire worthless, you would gain the $115 credit.  If the stock moves higher by $2, you would lose just about that same amount.  It would have to move $2.20 higher before a gain could be expected on the upside, and every dollar the stock moved higher from there would result in a $400 gain (the number of extra calls you own).

The big problem is that if the stock doesn’t do much of anything, you stand to lose about $1000, a far greater loss than most of the scenarios when a gain could be expected.  In order for you to make $1000 with these positions, the stock would have to go up by $5 in the two-week period.  Of course, that happens once in a great while, but probably less than 10% of the time.  There there is a much greater likelihood of its moving less than $2 in either direction (and a loss would occur at any point within that range).

Bottom line, back spreads might be considered if you have a strong feeling that the underlying stock might move strongly in one direction or another, but I believe that there are other more promising directional strategies such as vertical spreads, calendar or diagonal spreads, or even straddles or strangles that make more sense to me.

Another Interesting Time to Buy Options

Monday, August 6th, 2012

For the past several weeks we have been discussing how to make money buying options.  For those of you who have been following us for any extended time, you understand that this is a total departure from our long-standing belief that the best way to make maximum returns is to sell short-term options to someone else.

A combination of low option prices and high actual volatility has recently caused us to reverse our strategy.  Now seems to be a good time to be buying either or both puts or calls.  Rather than blindly buying an option and hoping for the best, we are continually on the look-out for something that will give us an edge in making this buying decision.

Last week we couldn’t find an edge we were comfortable with.  We considered buying a straddle on Thursday in advance of the jobs report but the market had been quiet all week and we sat on the sidelines.  Unfortunately, as it worked out.  SPY rose almost 2% on Friday and we would have easily doubled our money if we had pulled the trigger.

Today we will talk about one of those possible edges.

Another Interesting Time to Buy Options

It seems to happen every summer.  While the overall market doesn’t seem to do much of anything (that’s why they call it the summer doldrums I suppose), on many days, the market just seems to jump all over the place.  It could be that so many traders are on vacation that the few who are working are able to move the market with very few trades.

A more likely explanation is the computer-generated program trading that has taken over the market lately.  The average holding period for a stock in our country is now less than two seconds according to one study.  When the computers sense unusual buying or selling coming into the market, they place trades in advance of the orders getting to the exchanges.  This adds to the momentum and pushes the market sharply in one direction or the other.

At some point, the momentum shifts, and the market moves sharply in the other direction.

Check out the price action of SPY on Fridays for the past ten weeks:

June 1        -3.30
June 8        +1.05
June 15    +1.30  Monthly X dividend
June 22    +1.05
June 29     +3.31
July 6        -1.30
July 13        +2.20
July 20        -1.30    Monthly X dividend
July 27        +2.51
Aug 3        +2.70

If you had bought a slightly out-of-the-money put and call (or an at-the-money straddle) on essentially any one of the Thursdays preceding these Fridays, you would have surely made money when the stock moved well over a dollar the next day.  These puts and calls with only one day of remaining life are quite cheap, and could easily double or triple in value if the market moves by over $2 which it has on half of the Fridays this summer.

This edge probably does not extend to other months of the year, however.  In April and May, the stock did not move over $.75 on any Friday.  So it seems to be a summer phenomenon.

Buying options is risky business because you can lose 100% of your investment.  But doing it with small amounts when you see an edge like this Friday action (or before jobs reports, or on the Monday following the monthly option expiration), the odds may shift in your favor.

Be careful, and good luck.  Never invest money that you can’t afford to lose.

Another Buying Straddles Story

Monday, July 16th, 2012

For most of the last year, the market (SPY) and many individual stocks have fluctuated more than the implied volatility of the options would predict.  This situation has made it quite difficult to make gains with the calendar spread strategy that we have long advocated.

Now we are experimenting with buying straddles as an alternative to our basic strategy.  This represents a total reversal from hoping for a flat market to betting on a fluctuating one.

Today I would like to report on a straddle purchase I made last week.

Another Buying Straddles Story

I selected the Russell 2000 (Small-Cap) Index (IWM) as the underlying. For many years, this equity seems to fluctuate in the same direction and by about the same amount as the market in general (SPY) although it is trading for far less ($80 vs. $134) so the percentage fluctuations are greater.

On Monday morning, IWM was trading right about $80. I bought an 80 straddle using IWM (Jul2-12 puts and calls), paying $1.53 for the pair.  If IWM moved by $1.53 in either direction, the intrinsic value of either the puts or calls would be $1.53, and there would be some time premium remaining so that either the puts or calls could be sold for a profit.

How likely was IWM to move by more than $1.53 in either direction in only one week?  Looking back at weekly price behavior for IWM, I found that in 62 of the past 66 weeks, IWM had fluctuated at least $1.60 during the week in one direction or another.  That is the key number I needed to make the purchase.  That meant that if the historical pattern repeated itself, I could count on making a profit in 94% of the weeks.  I would be quite happy with anything near that result.

Buying a straddle fits my temperament because I was not choosing which way the market might be headed (something I know from experience that I can’t do very well, at least in the short term), and I knew that I could not lose 100% of my investment (even on Friday and the stock had not moved, there would still be some time premium remaining in the options that could be sold for something).

One on the biggest problems with trading straddles is the decision on when to sell one or both sides of the trade.  We’ll discuss some of the choices next week.  What I did was place a limit order to take a reasonable profit if it came along.  When IWM had fallen about $1.75, I sold my puts for $1.85 on Thursday.  On Friday the stock reversed itself, and I was able to collect $.17 by selling the calls, making a total 20% after commissions for the week. Not a bad result, I figured.  

At some point during the week, there were opportunities to sell both the puts and calls for more than I sold them for, but I was delighted with taking a reasonable profit.  You can’t look back when trading straddles.  If I had not sold the calls but waited until the end of the week, I would have lost about 70% of my original purchase.  So selling when you have a small profit is clearly the way to go.

Buying Strangles With Weekly Options (and How We Made 67% in a Single Day Last Week)

Monday, July 2nd, 2012

Exactly one year ago, we spoke about an interesting options play that might be made before the July jobs report came out.  This Friday, the July 2012 report will come out before the market opens, and a similar trade might be in order.  It is interesting to note that one year ago, the market (SPY) was almost exactly where it is today.

 

Here are my exact words delivered on the Monday following the jobs report: “This week I would like to share an actual investment we made last Thursday which involved buying a close relative of a straddle called a strangle (buying a put and a call but at different strike prices).  Admittedly, the word strangle does not have the greatest of connotations, but it can be a wonderful thing as we learned last week.

 

Terry

 

Buying Strangles With Weekly Options (and How We Made 67% in a Single Day Last Week)

 

On Thursdays which precede the government monthly job reports,  we have sometimes employed a strategy that only does well if the stock (SPY) moves significantly in either direction once the report is published (we have noticed that volatility tends to be extreme on those days when the jobs report comes out).  Rather than betting that SPY will fluctuate by less than a dollar on Friday (the usual kind of bet we make), on the Thursday preceding the Friday jobs report, we sometimes buy either a straddle or strangle that will most likely make money if SPY moves by more than a dollar on Friday.

 

This was the Trade Alert we sent out to Insiders on Thursday, July 7, 2011 with about 10 minutes remaining in the trading day:

 

“July 7, 2011  Trade Alert    Last Minute  Portfolio


With the government jobs report due tomorrow, we would rather bet that the stock moves by a dollar or more rather than placing calendar spreads that make a gain only if the stock moves by less than a dollar.  We will invest only about a quarter of our available cash:

 

BTO 30 Jul2-11 135 put (SPY110708P135)

BTO 30 Jul2-11 136 call (SPY110708C136) for $.68 (buying a strangle)”

 

With SPY trading just about half way between $135 and $136 Thursday afternoon, we decided to buy the above strangle rather than a straddle.  If the stock had been closer to one particular strike price, we would have opted for a straddle instead.

 

We bought 30 strangles for $68 each, investing $2040.

 

If at any point on Friday, SPY changed in value by more than $1.00 in either direction, we could probably sell those options at a profit.  (At any price above $136.50, the calls could probably be sold for more than $68 we paid for the strangle, and at any price below $135.50, the puts could be sold for more than we paid for the strangle.)  A small amount could also probably be gained by selling the other side of the strangle as well (unless the stock moved well more than a dollar).

 

When the government report came out on Friday, the market was spooked by the poor numbers  – Non-farm private payrolls were expected to grow by 110,000 while the actual number was a disappointing 57,000.  Total nonfarm payrolls grew only 18,000 compared to an expected 80,000 (government jobs dropped by 39,000). The stock (SPY) opened down $1.40 and moved down almost $2 during the day.

 

Early in the day while the 135 puts were trading at about $1.00, we placed a limit order to sell 25 of our 30 puts at $1.10, and the order was executed about a half hour later. This would insure that we made a profit for the day no matter what happened from that point forward.  We were hoping that either the stock moved lower and we could sell the remaining 5 puts for a higher price or the stock would make a big move upward and maybe we could collect something from selling our 30 calls at the 136 strike.

 

The stock continued to fall, and later in the day we placed an order to sell the remaining 5 puts. We collected $1.52 ($152) each for them.  That wasn’t the absolute high for the day but it was darn close.  Had we waited until the close, we would have only received $.37 for those puts, and lost money on our investment.  This proves the value in taking a profit on the great majority of positions whenever it might come up rather than waiting for a possible windfall gain if the stock continues in only one direction.

 

Bottom line, we collected a profit for the day of $1363 after commissions on our investment of $2040, or 67%.

 

Straddle buyers like volatility as much as we don’t like it in our other portfolios.   There are many ways to profit with options. It is best to remain flexible, and use the option strategy that best matches current market conditions. Buying straddles or strangles when option prices are low and volatility is high is one very good way to make extraordinary gains, as we happily did last week.

 

The downside to buying straddles or strangles is that if the market doesn’t fluctuate much, you could lose every penny of your investment (although if you don’t wait too much longer than mid-day on the day options expire, even out-of-the-money options retain some value and should be able to be sold for something).  This makes it a much riskier investment than the other option strategies we recommend at Terry’s Tips.  However, straddle- or strangle-buying can be quite profitable if the current market patterns persist.

 

A personal thought – I think that expectations are so low for Friday’s jobs report (and May’s report was so disappointing), that there is a good chance that the market will surge on Friday.  Instead of buying a straddle or strangle, I plan to spend a very small amount of money buying an out-of-the-money Jul1-12 Weekly call (maybe paying $10 or less per option) just in case the stock skyrockets.  It is my lottery ticket purchase for the week, a reward to myself for having had such a good week (I have been quite long AAPL).  Chances are, I will lose the entire investment, just as the chances are hopelessly against you when you buy a lottery ticket.  At least my odds are better than being hit by lightning (the lottery ticket odds).

Another AAPL Spread Idea

Monday, March 26th, 2012

Last week I suggested buying a SPY Weekly strangle to take advantage of the unusually low option prices that exist today.  Last Monday, I bought a Mar4-12 141 call and 140 call for $1.09 ($111.50 including commissions).  For the first three days, the stock did not budge beyond the $1.50 in either direction that I needed to make a profit on the trade.  Finally, on Thursday it fell enough so that I could at least break even so I placed an order to sell the strangle for $1.14 which executed, exactly covering my cost after commission.  If the stock had fallen that much earlier in the week, I would have held off selling it in hopes of a nice profit.  But I was happy with a break-even trade in a very quiet week.  I plan to place a similar strangle buy on Monday (today).

You may be bored from hearing about another AAPL trade.  But here is another one this week.  Terry’s Tips carries out two option portfolios that use AAPL as the underlying.  Last week was a quiet week for AAPL.  It went up only 1.8%.  Both of our actual portfolios gained over 23% after commissions for the week.  We don’t think that is boring.  Most investors would be happy with that size gain for two years, not seven days.

One of our AAPL portfolios has been running for just under two years, and has gained just shy of 700% while the stock doubled in value.  So we are partial to this stock.

Today I will discuss an AAPL option play that is similar to one in one of our actual portfolios.

Another AAPL Spread Idea

AAPL option prices are high compared to historical levels.  Since there is an earnings announcement coming late in April, option prices tend to move higher.  The stock also tends to move higher in advance of earnings announcements.  So we set up the following portfolio with a slightly bullish stance. 

To keep it simple, with AAPL trading at $596 where it closed Friday we will buy three calendar spreads.  We will buy the Apr-12 options (which expire April 21, 2012) and sell the same-strike Mar5-12 options which expire on Friday, March 30, 2012. 

We will buy one calendar spread using puts at the 595 strike, and one calendar spread using calls at both the 600 and 605 strikes.  These spreads will cost an average of about $11.25 ($1125 plus a commission of $2.50 which is what thinkorswim charges Terry’s Tips subscribers).  So the total investment will be about $3500, and we set aside another $1200 or so in case we need to add another similar spread this week at a higher or lower strike price (based on which way the stock moves).

This what the risk profile graph shows for the above three calendar spreads:

The P/L Day column in the lower right-hand corner shows the expected gain if the stock remains at $596 or goes up or down by $10 during the week.  You can see that there should be a gain if the stock ends up within a range from about $585 to $612.  If the stock stays about flat or goes up by $10, we could make as much as 25% on our investment in five short days.  If it moves by a much larger amount we could lose money, however.

If AAPL moves about $5 higher or lower before we buy these spreads on Monday, we would raise or lower the strike prices we used by that amount, using puts for spreads at strikes below the stock price and calls for strikes which are higher than the stock price.

If, during the week, the stock moves by $10 in either direction, we would use the cash we set aside to buy another calendar spread using the same option series at either the 620 strike (using calls) if the stock has gone up by $10 or at the 580 strike (using puts) if the stock has fallen by $10.  The additional spread would provide some protection against a loss if the stock continued to move in the same direction.

If you think AAPL is headed higher next week you would start out with spreads at higher strike prices than we have used in our sample, and vice versa.  We take the position that we really don’t know which way it is headed, but we know from experience that the weeks leading up to an earnings announcement are usually up weeks, so we have set up spreads which make about as large a gain if the stock goes up by $10 as they do if the stock remains flat.

Happy trading if you choose to duplicate our positions.  Of course, you should never risk money that you can’t afford to lose.

We have made 3 short videos which explain the 3-week results of our AAPL trading. The original positions were set out in an actual account carried out at Terry’s Tips.  The YouTube link is http://youtu.be/6J9KPuimyXk

The portfolio was updated in the Week 2 video –
http://youtu.be/e0B7_6e_5AE 

And finally, adjustment trades we made were displayed in this little video –
http://youtu.be/YC3d2NuX2MI  Be sure to enlarge it to full-screen mode so you can see the numbers. 

How to Contend With Historically Low Option Prices

Monday, March 19th, 2012

Option prices for the market in general (SPY) are lower than they have been for five years.  Maybe it is time to change from a strategy of selling short-term options (the strategy carried out at Terry’s Tips) to one of buying those options and hoping the market is more volatile than those low option prices would expect.

We will discuss that possibility today.

How to Contend With Historically Low Option Prices

Before discussing the situation of low option prices for most equities, I should comment on the continuing high option prices for Apple.  Implied Volatility (IV – the most important determinate of whether option prices are “high” or “low”) is about 40 for AAPL.  This means the market is expecting AAPL to fluctuate about 40% over the course of a year.

The high option prices for AAPL has meant that our calendar spread strategies has been quite successful of late (we move our calendar spreads to new strike prices as the stock moves higher).  We carry out two AAPL portfolios at Terry’s Tips – one gained 8% last week and the other gained over 20%.  The one that gained 8% has been operating for one month less than two years and is now ahead by 642%.  It is our most profitable portfolio by a large margin. 

Compare this 40 IV number for AAPL to IV of the S&P 500 tracking stock, SPY, which is called VIX.  It is less than 15, and briefly fell below 14 last week for the first time since I can remember.  This is extreme low territory (the mean average is about 20).

The IV picture for SPY gets even more interesting when you check out the Weekly options.  When VIX is calculated, the Weekly option prices are not included (only options with 8 or more days of remaining life or included).  IV for the SPY Weeklys is only 12.47.

Last week SPY rose $2.70 and the week before, moved by $3 in both directions during the week.  If you bought an at-the-money straddle or strangle using SPY Weeklys at today’s prices in either of those weeks, you would surely have doubled your money in a single week.

With SPY closing at $140.30 last Friday, you could have bought a 140 Weekly straddle (both a put and call at the 140 strike) for $1.80 or a strangle (the 141 call and the 140 put) for $1.33.  If the stock moved by at least $1.50 in either direction next week, either of those purchases should result in a gain.  SPY moves by that much in just about every week, even in quiet markets like we have been having so far this year.

_ _ _

It is an interesting trade to try.  I plan to buy a few this week (in both my personal account and in one of the Terry’s Tips portfolios), just to test it out.  Of course, you should never risk money that you can’t afford to lose.

We have made 3 short videos which explain the 3-week results of our AAPL trading. The original positions were set out in an actual account carried out at Terry’s Tips.  The YouTube link is http://youtu.be/6J9KPuimyXk

The portfolio was updated in the Week 2 video –
http://youtu.be/e0B7_6e_5AE 

And finally, adjustment trades we made were displayed in this little video –
http://youtu.be/YC3d2NuX2MI  Be sure to enlarge it to full-screen mode so you can see the numbers. 
_ _ _
Any questions?   I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.

You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips (including the two AAPL-based portfolios) and learn all about the wonderful world of options by subscribing here.   Why wait any longer to make this important investment in yourself? 

I look forward to having you on board, and to prospering with you.

Terry

Choose an Option Strategy Based on Actual vs. Implied Volatility

Monday, October 31st, 2011

It is important to differentiate between the implied volatility of option prices and the actual volatility of the underlying stock or ETF.  It is not an easy task to recognize when the two measures deviate from one another, but if you can identify a difference, huge gains can be made with the proper option strategy.

Today we will discuss how you can capitalize on any differences that you might be able to find.

Choose an Option Strategy Based on Actual vs. Implied Volatility: 

 
Last week the European debt crisis was apparently averted, at least in the eyes of option investors.  VIX, the so-called “fear index”, the average implied volatility of option prices on the S&P 500 tracking stock (SPY) fell dramatically to just below 25 (still above its mean average of about 20 but well below the 40+ it has sometimes been at during the previous month).

When option prices are high (i.e., implied volatility, VIX) is high, there are huge gains possible by writing call options (not our favorite ploy) or buying calendar spreads (our favorite most of the time).  However, when actual market volatility is greater than the expected volatility (i.e., implied volatility of the option prices), writing calls or buying calendar spreads is generally unprofitable.

Over the last three months, we have had great difficulty making gains with our calendar spreads because actual market volatility was too great.  On the other hand, we have had some luck with buying straddles (or strangles), a strategy of buying both a put and a call on the same underlying and hoping that there is a big fluctuation in either direction.

Last Wednesday, after following VXX (a “stock” that is based on the futures of VIX), we noticed that actual volatility was huge – it had fluctuated $2 or more almost every single day for several weeks.  On Wednesday in one of our portfolios we made a small ($1400) buy of 5 VXX 43 puts and calls which would expire two days later.  We paid $279 per straddle.  When the market for VXX opened up sharply lower on Thursday, we sold the straddle for $596, netting 117% after commissions.

In another portfolio where we owned calendar spreads on VXX, we lost money.  Our results in these two portfolios clearly demonstrated that when high actual volatility occurs, you do best by buying short-term options, either puts or calls depending on which way you believe the market is headed, or both puts and calls if you admit you really don’t know which way it will go (as we usually do).  On the other hand, when actual volatility is low, calendar spreads deliver higher returns.
Now that much of the uncertainty facing the market has subsided a bit, we believe it is time for the calendar spreads to prosper once again as they have for most of the past few years (since late 2008 extending up to August of this year).

Carrying Out the Last Minute Strategy

Monday, August 1st, 2011

Last week was the worst week for the market in a year. Most investors are not happy campers. A few of our portfolios did quite well, however. Our bearish one gained, of course, but two others did well in spite of the crashing averages.

Last week we discussed our William Tell portfolio which is an options bet that AAPL will move higher. Last week, the stock fell slightly, but our William Tell portfolio gained 2.3%, once again demonstrating that an options portfolio can outperform the outright purchase of stock (see free report that explains it all below).

Our Last Minute portfolio gained 27% on the amount invested last week. This is the portfolio I would like to talk about today.

Terry

Carrying Out the Last Minute Strategy

We carry out one portfolio that is a little unusual in many respects.  It is entirely in cash until late in the day each Thursday.  At that point, we decide whether we expect that SPY will fluctuate by more or less than a dollar on Friday.  If there is an important report coming out on Friday (such as the government’s job report which is due next week on the 5th), history has shown that SPY is quite likely to move by a fairly large amount in one direction or the other.  Other weeks, when the stock has moved by a dollar or more for several days in a row, we would expect that level of volatility to continue on Friday (which often has the greatest volatility of the week).

If we expect the market (SPY) to move by more than a dollar on Friday, we buy straddles or strangles.  If we expect it to move by less than a dollar on Friday, we buy calendar spreads (the long side with only 8 days of remaining life and the short side with one day of remaining life).

Last Thursday, we had trouble deciding which way to go, and we decided to invest less than half our money.  Ironically, we could have selected either straddles or calendars and we would have made money last week.  Early in the day, the stock fell by almost $1.50, but it ended up falling only $.89 for the day.

We bought straddles, the Jul5-11 131 calls and Jul5-11 130 puts, paying $1.12 each.  We bought 20 straddles, investing $2240.  When the market tanked early in the morning, we sold those straddles for $1.47.  We made a gain of $607, or 27% for the day (after commissions).

This was the fourth consecutive week that the Last Minute portfolio has made a gain.  Over that time, we have gained a total of $2860 on an average investment of $3450.  That works out to 83% on the money at risk (per unit, and many subscribers invest in lots of units).

We also would have made a gain last week if we had guessed the stock would move less than a dollar on Friday.  In that case, since SPY was trading between $130 and $131, we would have bought calendar spreads at the 130 and 131 strikes (either puts or calls could have been used, but we typically would have bought put calendars at the 130 strike and call calendars at the 131 strike).

These two spreads would have made a gain if the net change in SPY for the day was less than a dollar.  It was, at $.89, so we couldn’t have gone wrong last week.

We are having a lot of fun with this Last Minute portfolio, and so far, it has been quite profitable as well.

By coming on the Terry’s Tips bandwagon, you can play along with us in the Last Minute portfolio as well as 7 other portfolios, including the William Tell that has done so well as AAPL has moved higher.

We have written a detailed report on how the actual William Tell portfolio gained over 100% in 2010-11 while the stock rose only 25%.  You will learn how you can use the Shoot Strategy on any other stock of your choosing as well.  You can get this special report free when you subscribe to the Terry’s Tips service for a price which is less than a dinner for two at a decent restaurant – only $79.95 for the whole enchilada, including:

1)    My 72-page White Paper which explains my favorite option strategies in detail, including Trading Rules for each, and 20 companies to use with the “Lazy Way” Strategy, (which guarantees a 100% gain in 2 years if the stock stays flat or goes up).

2)    2 FREE months of the Options Tutorial Program (a $49.90 value), which includes:
·    A 14-lesson tutorial on trading stock options which will give you a thorough understanding of trading stock options.
·    A weekly update of 8 actual portfolios so that you can follow their progress over time.
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3)    A FREE special report  “How We Made 100% on Apple in 2010-11 While AAPL Rose Only 25%“.

With this one-time offer, you will receive everything for only $79.95, the price of the White Paper alone. But you must order by Tuesday, August 2, 2011. Click here and enter Special Code 802 in the box at the bottom of the page to get the special Apple report as a free bonus.

Buying Calendar Spreads with Weekly Options

Monday, July 18th, 2011

We have a portfolio called the Last Minute portfolio. It remains in cash all week until Thursday near the close when we have to make a decision. Do we expect that SPY will fluctuate by more than a dollar, or less that a dollar on the next day.

If we think it will fluctuate less than a dollar, the best move is to buy calendar spreads, buying options with 8 days of remaining life and selling options that will expire the very next day. These spreads are designed to make money if the stock (SPY) changes by less than a dollar on Friday.

On Thursdays which precede the government monthly job reports, or when the stock option for that week has been unusually volatile, a different strategy is employed. Rather than betting that SPY will fluctuate by less than a dollar, we buy either a straddle or strangle that will most likely make money if SPY moves by more than a dollar on Friday.

Last week, there was no economic news coming out on Friday that might spook the market, but SPY had fluctuated by more than a dollar in three of the first four days that week. This would suggest that the best bet would to buy a strangle or straddle, but we did not feel too confident that the high volatility would continue, and since there is a higher risk involved in the straddle-strangle alternative, we decided to stick with calendar spreads.

With about 15 minutes of trading left on Thursday, SPY was trading at $131.10 and we bought 40 Jul4-11 – Jul-11 131 put calendar spreads, paying $.87 per spread. The stock immediately fell $.30 and we bought an additional 20 identical spreads at the 130 strike, paying $,85 for these as well. In a back test study we had learned that if a big move took place on Friday, three out of four times it was on the downside, so our initial positions should usually be set up to be bearish.

Our starting positions were heavily skewed to the downside. We could handle a $1.25 move in that direction but only a $.75 move to the upside. The actual upward move of $.76 for the day should have resulted in a break-even at best.

When the market opened up about $.40, our short position became quite uncomfortable. Shortly after the open, we were lucky enough to close out the 130 calendar spread for $.05 more than we paid for it, exactly enough to cover commissions and break even. Later in the day when SPY had fallen to near $131, we sold half our 131 spreads for $1.12, a nice premium on the $.87 cost (we gained $20 per spread after commissions, or $400 on a $1740 investment).

We were hoping that the stock would close out the day very near the current price and we would make a huge gain. We weren’t so lucky as the stock shot suddenly higher in the last half hour of trading, and we closed out the remaining spreads for $1.05 for a $14.75 gain per spread after commissions (we bought back the expiring 131 calls for $.02, avoiding the commission).

Bottom line, we were quite pleased with a 13.3% gain after commissions for the day on our capital at risk when the stock did not move in the direction we were hoping. Over the last two weeks, the Last Minute portfolio has gained $2059 on an average investment of $3630 (56%) . How many stock investments do you suppose did this well?

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Success Stories

I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.

~ John Collins