|
An Interesting Way to Invest in China Using Options:
An Interesting Way to Invest in China Using Options: My favorite print publication these days is Bloomberg BusinessWeek which also includes a monthly edition called Bloomberg Markets. There are times when I find myself at least skimming nearly every article in both publications. I used to read the Wall Street Journal every day, but it got to be just too much. Now I only read the Saturday edition along with Barron’s. This week’s cover story in Bloomberg Markets is entitled “Jack Ma Wants it All.” It discusses the fascinating story of Ali Baba (BABA) and Ma’s business philosophy which treats customers first, employees second, and stockholders third. This is precisely Costco’s philosophy, and it has worked wonders for COST, even for stockholders.
Last week was 11/11, a sort of anti-Valentines Day in China called Singles Day (BABA owns the name as well) when unattached people buy something for themselves. BABA reported online sales of $9 billion on that day. For comparison, online spending on Black Friday, the hectic U.S. shopping day after Thanksgiving, totaled $1.2 billion in 2013. On Cyber Monday, the top online spending day, sales totaled $1.84 billion, according to research firm comScore.
The only part about Ma’s strategy I didn’t like was his international investments in apparently unrelated businesses. I generally prefer companies which “stick to their own knitting.” But BABA might be an interesting way to invest in China, and the option prices are attractive (high IV, relatively small bid-asked ranges, lots of volume, and weekly options are traded).
I tried to get a link to the Bloomberg Markets article, but there doesn’t appear to be one. It is fascinating, however, and worth a trip to the library or newsstand to read the December issue.
Proposed New Terry’s Tips Portfolio: One of the most successful strategies we have carried out over the years has been using calendar and diagonal spreads on individual companies we like. If the stock price moves higher (as we expect), we have often gained several times the percentage increase in the stock. For example, in the 15 months since we started the Vista Valley portfolio which trades NKE call options, the stock has increased by 51% and our portfolio has gained 141%.
BABA would be an interesting company to start a new portfolio to trade. An at-the-money July-Dec2 calendar spread would cost about $12. There would be 7 opportunities to sell a one-month-out at-the-money call, and the going price is about $5. If we could do that 3 times we would have all our money back with 4 more chances to take some pure profits.
If we set up a $5000 portfolio using this strategy (owning Jul-15 calls to start, and selling one weekly at each of 4 weeks, from at-the-money to just out-of-the-money, this is what the risk profile graph would look like for the first full month of waiting:
The break-even range would extend about $5 on the downside and $15 on the upside, a fairly wide range for a $115 stock for one month. An at-the-money result would cause a better-than-15% return for the month. It looks like an attractive way to add a little international coverage to our portfolio choices, and to enjoy gains if the stock falls as much as $5 in a month or does any better than that. If you just bought the stock, it would have to move higher before you made any gains. With options, you make the highest gain if it just manages to stay flat for the month. At all times, you enjoy a wider break-even range than you ever could by merely buying a stock that you like.
Update on the ongoing SVXY put demonstration portfolio. This sample demonstration portfolio holds a SVXY Mar-15 75, and each week, (almost always on Friday), we buy back an expiring weekly put and sell a one-week put in its place, trying to sell at a strike which is $1 - $2 in the money (i.e., at a strike which is $1 or $2 above the stock price) Our goal in this portfolio is to make 3% a week.
Last week, SVXY edged up $.70 and we bought back the expiring Nov1-14 73 put and sold a Nov-14 73 put (selling a calendar), collecting a credit of $1.45 ($143.50 after commissions).
The account value is now $1500, up $55 for the week, and $266 from the starting value of $1234 on October 17th, 4 weeks ago. This works out to $66 a week, well more than the $37 weekly gain we need to achieve our 3% weekly goal.
I will continue trading this account and let you know from time to time how close I am achieving my goal of 3% a week. I will follow the guidelines already sent to you for rolling over as outlined above and earlier, so you should be able to do it on your own if you wish.
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).
--------------------------------
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
|
