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3% a Week Possible With This Strategy?:
This strategy is based on my favorite underlying “stock” (actually an Exchange Traded Product, ETP) called SVXY. It is the inverse of VXX, a volatility-related ETP which many people buy for protection just in case the market crashes (when that happens, volatility soars, and so does VXX). The only problem is that volatility has been pretty much tame for quite a while, and VXX has consistently moved lower.
In fact, VXX is just about the worst investment you could have made over the last few years. Since it was started 7 years ago, it was at a pre-reverse split price of over $3000 and now it is about $28. It is hard to find anything out there that has been that bad.
SVXY is the inverse of VXX, and that sounds to me like a better investment for the long run. SVXY has only been around for 2 ½ years, and in each of the first two calendar years, it has about doubled in value. So far this year it is up about 40%.
Of course, the big risk with owning SVXY is that a crash or correction will come along and the stock will fall by a large amount. However, over the long run, because of contango (discussed in this newsletter on many occasions), it inevitably will rise.
One possible good investment might be to just buy SVXY. We do essentially this in one of the 10 portfolios we carry out at Terry’s Tips, in fact – it has gained over 40% since we set it up in November 2013 (sometimes we sell shares when we have fears of impending market volatility such as the fiscal cliff scare, and buy shares back when it looks like the possible crisis has blown over).
SVXY is an extremely volatile ETP and option prices are extremely high. For that reasons, we trade it in several Terry’s Tips portfolios. The proposed new strategy I am telling you about here will not be traded at Terry’s Tips unless it ends up looking highly likely that we could make the 3% a week that I think is possible.
This strategy is based on my observation that weekly put prices on SVXY are more expensive than weekly call prices, and they also seem to be higher than they should be given what the stock does most of the time. You can sell someone a weekly put that is $5 out of the money (i.e., $5 less than the current stock price) and collect more than a dollar ($100 per contract) for it. In other words, if the stock does anything other than fall over $6 in a week, you get to keep the entire option price you collected. SVXY has only fallen $6 in a single week once in 2014 (although in 2013, it fell considerably more on two occasions).
It is possible to sell puts naked (not in an IRA, however), but that would require a huge maintenance requirement that would reduce your return on investment. Besides, the risk would just be too great for most of us. Instead, I will buy a longer-term put at a strike about $6 below the strike of the call I plan to sell. That will create a maintenance requirement of $600 per trade (less the value of the put that is sold).
To start off, today with SVXY trading about $87, I placed the following spread order:
Buy to Open 1 SVXY Jan-15 75 put (SVXY150117P75)
Sell to Open 1 SVXY Aug-2 81 put (SVXY140808P81) for a debit of $7.20 (buying a diagonal)
The spread executed. I paid $8.70 for the Jan-15 75 put and received $1.50 for the Aug2-14 81 put that expires in 10 days. The spread cost me $720 plus a $2.50 commission:
Thinkorswim offers a special commission rate for Terry’s Tips subscribers ($1.25 for a single option trade). Many people have become Terry’s Tips insiders to qualify for this rate for all their trades. If you are paying more than this, you might consider it yourself.
My total investment is $720 plus the $600 maintenance requirement, or $1320. That is the maximum I can lose if SVXY falls below $75 and stays there through next January. I can live with that unlikely possibility.
A week from Friday when the Aug2-14 81 put expires (most likely worthless), I will either buy it back for a small amount and sell a new put for the Aug-14 series that expires a week later (at a strike which is about $6 less than the then-current stock price) or do nothing and wait until Monday to sell a new put.
If the Aug2-14 81 put ends up in the money because SVXY has fallen below $81, I will buy it back and sell an Aug-14 81 put as a calendar spread, collecting a credit of some amount.
In any event, as soon as I make a trade, I will tell you about it. I think this strategy might be a little fun to play, and if it does manage to make 3% a week, I could live with 150% a year on my money.
On another subject, have you got your free report entitled 12 Important Things Everyone with a 12 Important Things Everyone with a 401(K) or IRA Should Know (and Probably Doesn’t)? This report includes some of my recent learnings about popular retirement plans and how you can do better. Order it here. You just might learn something (and save thousands of dollars as well).
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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 and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?
Even better, you can become a Terry’s Tips Insider, and receive all our educational reports and materials absolutely free by opening a new account at the best options broker around - thinkorswim. If you open an account with our link, they will give you 60 days of free trading or up to $600, the same deals they give to everyone who opens an account with them. You must use this link to sign up - open thinkorswim account – and once you have funded your account with at least $3500, email Seth@TerrysTips.com and let him know that you have done it, and this is what he will do – sign you for our Premium Service package ($119.95 value plus an extra 4 months of our Premium Service, valued at another $190.80). You get $300.65 worth of services without paying us one penny.
I look forward to having you on board, and to prospering with you.
Terry
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