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