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. 

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

The March options expiration cycle ended without much fanfare, but not after reaping a respectable 2% gain. All of the major indices saw gains exceed 2% with the small-call Russell 2000 being the exception. The market has now pushed higher nine out of the last ten weeks. The Nasdaq and S&P 500 have led the way all year and are now higher on the year 17.3% and 11.7%, respectively. Both have also pushed above key levels. The Nasdaq sits above 3000 and the S&P is now above pre financial crisis levels trading over 1400.

There is no doubt that this rally has been one for the ages. For instance, last week marked the first time the S&P closed below its 20-day moving average. The streak: 52 days. It was the second longest streak of all time. The last time such a streak occurred – 1944!

Moreover, last week broke the 1% daily decline and ended the 10th longest such streak. If that wasn’t enough, last week also saw the first “90% down day” this year. Another historical streak. We can all thank the slow and steady rise in the market for the historical accomplishments.

“We are seeing this unbelievable rally in the market and yet the market is unbelievably complacent. We haven’t been this bullish for a long time,” said Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research, based in Austin, Texas.

But, where are we now? How will the market fare over the next few months? Are there any historical precedents that we should be aware of going forward?

Well, I am not a prophet. I can’t predict the future. But, I can tell you how the next few weeks fare on a historical basis. Hopefully this will give you a “heads up” as to what to anticipate going forward.

The day after expiration is typically bearish. March is no different; in fact, the week after expiration has seen the Dow down 15 of the last 24 years. But weakness continues throughout the rest of the month. The end of March is actually one of the weaker periods for the stock market.

Will it happen again this year? No one knows for certain, but with Apple making up roughly 18% of the Nasdaq 100, when the tech behemoth’s parabolic move comes to an end we should see a sharp decline in not only the Nasdaq, but the S&P as well. Remember, since the latest rally began Apple has managed to tack on approximately 54%. Yes, 54%. I am very curious how the largest company in the universe manages to be mispriced by several hundred billion dollars. Yet, Wall Street analysts keep pushing estimates higher.

My thought – we will be discussing this magnificent run five years from now when Apple is trading with a market cap far below $500 billion. Like its predecessors in the exclusive $500 billion club, it is my opinion that Apple will eventually suffer the same fate.

But don’t just listen to me, listen to what the market is saying.

While the investor’s fear gauge, VIX has been sliding to five year lows, the expected volatility in Apple has increased, judging by a VIX index that tracks Apple options. Apple, like IBM and other bellwether names, has its own VIX index.

The CBOE Apple VIX index , which measures the expected 30-day volatility of the underlying shares of Apple, jumped 35 percent this week, suggesting more gyrations ahead as more investors speculate on short-term moves.

The end of March should be very interesting. April is typically a strong month and then we enter the “sell in May” period. One thing is certain, 2012 should be one for the record books. I can’t wait to see how it plays out

Three weeks ago, we set up a special portfolio with a goal to make 100% on AAPL options in 4 weeks.  We closed out the positions last Friday, a week early.  We failed to reach our goal.  The portfolio started out with a value of $4488 and after 3 weeks, it was worth $7172.

The gain for the 3 weeks was 60% (after commissions).  Even though we failed in our initial goal, most of us were happy with making 60% in less than a month on our money.

For two years, Terry’s Tips has carried out at least one portfolio (and sometimes two) which use AAPL as the underlying, and we have noticed some patterns of stock price actions and option values that I would like to share with you today.

Lessons Learned Around the Apple New Product Announcement

AAPL has been a great underlying stock for Terry’s Tips subscribers.  In April, 2010 (just under two years ago), we set up an actual brokerage account to trade options on AAPL.  We started with $5000 in the account. 

We maintained a bullish position in this portfolio because we liked the prospects for this company.  Actually, it performed quite a bit better than we expected.  Over the two years, whenever the portfolio value grew to over $10,000, we withdrew cash from it so that new Terry’s Tips subscribers who wanted to mirror the portfolio in their own account (or have trades made for them through the Auto-trade program at thinkorswim) could get started with $10,000.

A total of $13,000 was withdrawn from the portfolio over two years, and the account today is still worth more than $10,000, or double what subscribers started with.  It works out to a gain of about 565% over the period.

We learned some things along the way.  First, in the few weeks leading up to an announcement of earnings or a new product release, the stock tended to move higher.  Once the announcement was made, the stock usually fell back a bit (market expectations seem to be greater than the reality). 

There is an old saw in the market – “buy on the rumor and sell on the news,” and it seemed to prevail after the Apple announcements most of the time.

Last week, we expected a similar pattern once the news about the new iPad was announced.  We added new spreads to our portfolio to provide downside protection in case the pattern continued (we bought new calendar spreads at strike prices well below the current price of the stock).  These spreads ultimately lost money when the stock did not fall this time around.  At one point shortly after the announcement, it did fall by almost $30 but quickly reversed itself.

In spite of this experience, we expect that in future AAPL announcements, such as the quarterly earnings announcement due near the end of April, we plan to add downside protection once again.

The second big pattern we noticed concerned the option prices around announcement time.  Leading up to the announcement, option prices soared.  The implied volatility of the March options got up to 40, and fell all the way to 25 after the announcement.  In the experimental portfolio we started with $4488, we had used Weekly Mar2-12 as the long side, and these prices collapsed after the announcement.  The portfolio lost money for the week.

In our other AAPL portfolio, the one we have been running for almost 2 years, our long positions were in further-out months, and these option prices did not collapse.  As a result, this portfolio gained 11% for the week (even though we had placed some downside protection spreads in it as well).

In future announcement periods, we intend to use longer-term call options as the long side to avoid the collapse of shorter-term option prices once the announcement has been made, even though those options are quite a bit more costly.

We have made 3 short videos which explain the 3-week results of the special shorter-term portfolio (which we have now closed down and replaced with a new set of AAPL options).  If you have not already seen these videos, you might check them out.

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

 

The bulls were once again successful in pushing the market higher this past week. It marked the ninth advance in ten weeks. The S&P 500 is already 9.0% higher year-to-date and the Nasdaq 100 is up a staggering 14.7%. The bulls have been in control since December 19th, in what has been one of the most persistent rallies in market history.

This past week did have some significance for the bears. Trading on Tuesday was relatively dramatic in that the S&P 500 fell 1.5% to suffer its worst one-day drop in almost three months. The action came on the heels of weak action abroad, where markets remained concerned about the implications of slower growth in China and news that Eurozone GDP declined by 0.3% in the fourth quarter, unrevised from its preliminary reading. The disconcerting macro picture came as the stock market began to show fatigue during its run to a new multi-year high in the preceding week.

Widespread weakness and concern that stocks were possibly setting up for a correction caused the VIX to spike more than 15%, putting it back near its monthly high.

However, the pullback was short-lived as the market bounced back over the next three trading days. It was the best string of gains in over three months. So, for now, the bulls reign supreme.

Friday also marked the three-year anniversary of the S&P 500’s plunge to a 12-year low, a move that was followed by a sharp rally. The S&P 500 still is up 102 percent from that low.

“Everyone’s looking for a correction here, which just tells me we’re probably going to have another little run up before we get that correction,” said Scott Billeaudeau, portfolio manager at Fifth Third Asset Management in Minneapolis.

Technically speaking, the market is hovering near key resistance levels, which could influence next week’s direction. A push above 1,376 by the S&P 500 could suggest further gains ahead, while holding at or below that level could indicate a continuation of Tuesday’s selling.

Moreover, we have a short-term overbought in all of the major indices, although that indicator hasn’t really worked well so far this year. Furthermore, almost every indicator I follow has once again pushed into a short-term overbought state.

If the aforementioned bearish technical were not enough, we are entering into one of the weakest stretches on a seasonal basis for the market.

My thought is that we will see a choppy to lower market over the coming weeks. Trade accordingly and remember, trade small and trade often. Always, use position-sizing as your most important risk- management tool.

Greetings!

A little over two weeks ago, we set out with a goal to make 100% on our AAPL options in 4 weeks.  We started with calendar spreads at several different strike prices, one below the stock price and most of them at higher strikes.

We thought we could double our money in 4 weeks if the stock would hold steady or move moderately higher.  As you may know, it overachieved this goal and rose over $20 in each of the first two weeks.

Today we will discuss the adjustments we had to make to keep up with the skyrocketing stock.

By the way, in spite of the stock moving much higher than we would have liked, we have gained 78% (after commissions) on our actual portfolio over the past two weeks, about 9 times as great as the increase in the stock price.

Next week, we will disclose the actual positions we will set up in an effort to duplicate this performance in the next 4 weeks.  Stay tuned.

Terry

Making Adjustments When the Stock is Moving Strongly Higher

As AAPL chugged steadily higher, our calendar spreads (all in calls) so became all in the money (i.e., at strike prices which were lower than the stock price).  Since we were betting that the stock would stay flat or rise moderately, we needed to buy back our lowest-strike short calls and replace them with higher-strike short calls.  Each such trade required us to put up a little extra cash because the calls we were buying back cost more than the premium we received from selling new higher-strike calls.

When our cash reserve was used up, we had to take off (sell) some of our positions, once again buying back our lowest-strike short calls, but this time selling our lowest-strike long calls and using the cash to buy new calendar spreads at higher strike prices.

I know that this all sounds complicated, and is a lot of work, but we think it is worth if a 78% gain in two weeks is one of the rewards.

The actual adjustment trades we made last week at displayed in this little video –
http://youtu.be/YC3d2NuX2MI  Be sure to enlarge it to full-screen mode so you can see the numbers. 

Two weeks ago, the original positions were set out in an actual account carried out at Terry’s Tips.  The YouTube link is http://youtu.be/6J9KPuimyXk

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

Again, switching to full-screen mode is advised.

 

Last week I offered a video which showed the actual positions of an AAPL options portfolio designed to gain as much as 100% over the next 4 weeks.  While it probably won’t be quite that good, we might come close.

The first week was encouraging.  We had been hoping that AAPL would stay flat or move slightly higher. It had a great week, moving up by $20.29, or about 4%.

Our little portfolio gained 35%, almost 9 times as much as the stock gained.  Ironically, we would have done better if the stock had not gone up so much.

This week I would like to show the actual trades we made last week to get set up for next week, and our current positions.  I am sending this to you earlier than usual in case you might like to duplicate these positions in your own account on Monday.

Enjoy the videos.

Interesting AAPL Stock Options Strategy – Week 2

A week ago, the original positions were set out in an actual account carried out at Terry’s Tips.  The YouTube link is http://youtu.be/6J9KPuimyXk

It is important to click the lower right-hand corner of the YouTube video to enlarge it to full-screen mode.  Otherwise, you can’t see the numbers.

This week’s video can be seen at http://youtu.be/e0B7_6e_5AE 

Again, switching to full-screen mode is advised.

In this week’s video, I show how we would adjust the portfolio if AAPL were to reverse direction and start going down next week.

I like Apple.  I think the stock will at least hold steady, or might go up over the next month.  If it does, I expect to double my money with an options strategy I have just set up.  Today I would like to share that strategy with you in a short video.  Check it out here – Interesting AAPL Play Using Weekly Options

I hope you will enjoy it.

Interesting AAPL Stock Options Strategy

In spite of the big run-up in the price of AAPL since it announced blow-out earnings that exceeded all expectations, I think the stock has more room to go up.  It is still undervalued by traditional investment measures.  The problem is that people can’t believe that the largest company in the world can continue to grow as fast it has over the last couple of years.

And it keeps doing better than even the highest expectations.

I think it has a good chance of continue going higher.  I expect that the rumors may be right – they will announce the iPad 3 early in March, and maybe a new television system using the cloud.  And maybe they will start paying dividends.  What else do they plan to do with the spare $100 billion they have sitting in cash?

If they start paying a dividend, there are many mutual funds out there who would love to own the stock but are prevented from doing so because their charter allows them to only but dividend-paying stocks.  No matter how small the dividend might be, millions of dollars will pour into the stock once dividends are declared.

My little options strategy should make over 35% a week for the next 4 weeks if the stock holds steady or goes up moderately (actually, if it goes up a little, the weekly gain could be closer to 50%).   Spend a couple of minutes checking it out – Interesting AAPL Play Using Weekly Options

Greetings!

Last week I shared the actual positions we held in what we call our Shoot Strategy portfolio (which uses AAPL as the underlying).  Last week was a great one for AAPL. The stock rose 7.3%.  Our portfolio gained 22.1% after commissions, or more than 3 times the amount the stock went up.

One of the potential problems of the options portfolio is that the stock goes up too fast.  When that appears to be happening, as it did in Apple last week, adjustments need to be made.  We will talk a little about those adjustments this week.

Terry

Making Adjustments to the Shoot Strategy

First, let’s repeat the table of the actual positions we started with at the beginning of last week:

You can see that all of the short calls (at the 460, 465, and 470 strike prices were out of the money at the beginning of the week (i.e., at higher numbers than the stock price).

Early in the week, the stock started moving higher, and the 460 short call became well in the money, so we needed to make an adjustment.  This is the first move we made:

Buy-To-Close 1 AAPL Feb-12 460 call (AAPL120218C460)?Sell-To-Open 1 AAPL Feb-12 470 call (AAPL120218C470) for a debit of $4.84  (buying a vertical)

This trade used up most of the $519 we had in the portfolio.  When the stock continued higher, we needed to adjust once again.  This is the Trade Alert we issued on Tuesday:

“We are in a position where we would make less if the stock goes up than if it stays flat, so we should roll to some higher strikes:? ?

Buy-To-Close 1 AAPL Feb-12 460 call (AAPL120218C460)?
Sell-To-Close 1 AAPL Apr-12 430 call (AAPL120421C430) for a credit of $33.20  (selling a diagonal)? ?

Buy-To-Open 1 AAPL Apr-12 470 call (AAPL120421C470)
?Sell-To-Open 1 AAPL Feb-12 470 call (AAPL120218C470) for a debit of $13.30  (buying a calendar)? ?

Buy-To-Open 1 AAPL May-12 475 call (AAPL120519C475)?
Sell-To-Open 1 AAPL Feb-12 475 call (AAPL120218C475) for a debit of $17.93  (buying a calendar)”

The first trade generated a large stash of cash (about $3300) which we used to buy two new calendar spreads at the 470 and 475 strike prices.  The stock continued to climb, and we had to adjust again on Wednesday.  This is the Trade Alert we issued on that day:

“Once again we have a short call which is too far in the money:
 
Buy-To-Close 1 AAPL Feb-12 465 call (AAPL120218C465)
Sell-To-Close 1 AAPL Apr-12 455 call (AAPL120421C455) for a credit of $19.55  (selling a diagonal)
 
Buy-To-Open 1 AAPL May-12 480 call (AAPL120519C480)
Sell-To-Open 1 AAPL Feb-12 480 call (AAPL120218C480) for a debit of $19.30  (buying a calendar)”

We sold our deepest in-the-money Apr-12 call as we bought back the lowest-strike Feb-12 short call and used the proceeds to buy a calendar spread (going all the way out to May) at the 480 strike.  The stock continued to move higher, and we had to adjust once again on Thursday.  This is the Trade Alert we issued on that day:

“It is not easy to keep up with the rising stock price:? ?

Buy-To-Close 1 AAPL Feb-12 470 call (AAPL120218C470)?
Sell-To-Close 1 AAPL Apr-12 455 call (AAPL120421C455) for a credit of $23.10  (selling a diagonal)?

?Buy-To-Close 1 AAPL Feb-12 470 call (AAPL120218C470)?
Sell-To-Open 1 AAPL Feb-12 485 call (AAPL120218C485) for a debit of $9.45  (buying a vertical)? ?

Buy-To-Close 1 AAPL Feb-12 470 call (AAPL120218C470)
?Sell-To-Open 1 AAPL Feb-12 490 call (AAPL120218C490) for a debit of $11.55  (buying a vertical)? ?

Buy-To-Close 1 AAPL Feb-12 475 call (AAPL120218C475)?
Sell-To-Open 1 AAPL Mar-12 495 call (AAPL120317C495) for a debit of $2.05  (selling a diagonal)”

The first trade took off another Apr-12 call and we used the cash to buy two vertical spreads, rolling our short calls to a higher strike.  We did not have enough cash to make a third vertical spread purchase, so we sold a diagonal, trading the Feb-12 475 short call for a Mar-12 495 call.  Again, moving our short calls to higher strikes to keep up with the surging stock.

The stock continued higher, and we issued a second Trade Alert on Thursday:

“We have 3 short calls at the 480 strike that we should buy back:? ?

Buy-To-Close 1 AAPL Feb-12 480 call (AAPL120218C480)
?Sell-To-Close 1 AAPL Apr-12 460 call (AAPL120421C460) for a credit of $27.00  (selling a diagonal)? ?

Buy-To-Close 2 AAPL Mar-12 480 calls (AAPL120317C480)
?Sell-To-Open 2 AAPL Mar-12 500 calls (AAPL120317C500) for a debit of $9.10  (buying a vertical)”

The first trade was designed to generate sufficient cash to be able to buy two vertical spreads, rolling up the short Mar-12 480 calls to the 500 strike.  And the stock continued higher, necessitating the third Trade Alert for Thursday:

“We have enough cash to roll one in-the-money short call higher:?

?Buy-To-Close 1 AAPL Feb-12 485 call (AAPL120218C485)
?Sell-To-Close 1 AAPL Feb-12 500 call (AAPL120218C500) for a debit of $8.10  (buying a vertical)”

Admittedly, there is a lot more work involved with adjusting the option portfolio than there is just owning the stock.  That is why most of our subscribers who mirror this and our other 7 portfolios sign up for the Auto-Trade program at thinkorswim and have all the trades made automatically for them (there is no charge for this service at thinkorswim other than the commissions, which are also only $1.25 per contract for Terry’s Tips subscribers).

Was it worth all this effort?  It was a magnificent week for AAPL owners.  The stock soared 7.3%.  Lots of smiling faces all around.  Meanwhile, our options portfolio gained 22.1% after commissions, or more than 3 times the gain made by the owners of the stock.  At the close Friday, our portfolio had grown from $12,141 to $14,829 in a single week.  Since we started this portfolio with $5000 some 20 months ago (we withdrew $2000 along the way), AAPL has gained 85% while our portfolio has done 3.7 times as well, gaining 317%.

We think this extraordinary better performance is worth the extra effort we have to put in. Investors who owned the stock over this time period would have seen their $5000 grow to $9250 while our options portfolio has grown to $16,829.  Stock owners would have gained $4250 while we gained $11,829.

This may sound confusing, or maybe even too good to be true, but Terry’s Tips Insiders are generally not confused, and they know full well from experience that these results are real.   We feel that we have definitively proved that an options portfolio can significantly outperform the outright purchase of stock if you pick a stock that goes up.

Actually, we are a little confused why anyone who really believes in a particular stock would buy shares in it rather than setting up an options portfolio like this one.  Do you understand why?  Other than it taking a little more work?  Surely, learning a little about options is something that could pay off every year for the rest of your life.  Why not start off right now by clicking here?  
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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 William Tell) 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

Two weeks ago, Apple announced blow-out earnings that pleased just about everyone who follows the stock.  Since that time, AAPL has soared by 9.2%.  Owners of the stock are celebrating.

Meanwhile, the actual options portfolio we carry out at Terry’s Tips increased in value by 42.5% over this same time period.  Options outperformed the stock by more than 4 times.

Today I will share with you the actual option positions we hold in this portfolio, and show the potential gains (or losses) that lie ahead.  This is an important report that I hope you will read carefully

Why Owning Options Beats Owning Stock

In April, 2010, we set up a $5000 portfolio to demonstrate that a well-designed options portfolio could substantially outperform the outright purchase of stock.  We selected AAPL as the underlying, a company we thought had a good future.

We never imagined that future would be quite as spectacular as it has been so far.  The stock has skyrocketed by 72% since then.  Meanwhile, our options portfolio has gone up by 263%.  Our subscribers who mirrored our portfolio from the very beginning have gained over 3.5 times as much as they would have if they had merely purchased shares of AAPL.

We withdrew $3000 of the original $5000 so new subscribers could mirror the portfolio with a smaller investment.  The original investment, now $2000, as grown to its present value of $12,141 in 21 months.  Not bad by any standards, if we do say so ourselves.

How did we do it?   Quite simply, we bought call options with a few months of remaining life and sold call options with only one month of remaining life against these positions. The shorter-term calls we sold to someone else decay at a faster rate than the longer-term calls that we own.  This gives us a major advantage over anyone who has just gone out and bought shares of stock.

In options terminology, we created a portfolio that maximized net delta (the equivalent number of shares of stock we own) as long as there was positive theta (which means that the portfolio would make a small gain every day that the stock remained absolutely flat).

Here are the actual positions of this report from our weekly report sent to paying subscribers:

If you spent $12,141 (the portfolio value) to buy stock, you could purchase 26 shares.  The net delta of this portfolio (117) means that we own the equivalent of 117 shares, or over 4 times as many as the stock owners control.  Meanwhile, theta ($32) means that we are collecting a sort of dividend of $32 every day that the stock remains flat.  We don’t actually get a check for that amount, but that is how much the portfolio should gain from the different decay rates of the long and short options in the portfolio.

Here is the risk profile graph which shows the gains (or losses) that this portfolio should experience when the current short options (Feb-12) expire on February 17, 2012 at the various possible stock prices.  (Note: If the stock moves sharply from its present level, we would make adjustments to the portfolio that would shift the curve in the direction the stock had moved.)

The graph shows that the portfolio should gain over 15% in two weeks if the stock remains absolutely flat or goes up by about $10.  Surely, this is a better place to be compared to what the stockholders have.  If the stock stays flat, they will not make anything.

If the stock falls about $5 in two weeks, the owners of stock would lose that amount while the portfolio should break even. If the stock falls about $10 in two weeks, the options portfolio would do just about the same as the owners of stock would do.  If it falls more than $10, the options portfolio would suffer a greater loss than the stock would, but we would have made an adjustment to reduce or eliminate that possible loss (by rolling down short calls to lower strike prices).

This may sound confusing, or maybe even too good to be true, but Terry’s Tips Insiders are generally not confused, and they know full well from experience that these results are real.   We feel that we have definitively proved that an options portfolio can significantly outperform the outright purchase of stock if you pick a stock that goes up.

Actually, we are a little confused why anyone who really believes in a particular stock would buy shares in it rather than setting up an options portfolio like this one.  Do you understand why?  Other than it taking a little more work?  Surely, learning a little about options is something that could pay off every year for the rest of your life.  Why not start off right now by clicking here?