Today I would like to share all the details of how we work our primary options strategy when we find a stock we like.  It is a long and maybe tedious report but the possible gains are so great that it might be worth your plowing through the details to see how it works.

We are also pleased to extend our lowest-price-ever offer that we made last week - only $39.95 for our entire package (see details at end) – click here using Special Code 2014 (or 2014P for Premium Service - $79.95).   Subscribing now will also get you exactly how to make what I believe is the easiest and safest way to make 30% in one year that I have ever seen - with one simple trade and a year of waiting it out.

The following trades were made in an actual brokerage account at thinkorswim by TD Ameritrade.  It is one of eight portfolios carried out by Terry’s Tips for its paying subscribers. Many of these subscribers have the trades mirrored in their own accounts through the Auto-Trade service offered at thinkorswim by TD Ameritrade so they don’t have to place any trades themselves.  Commissions were paid at the regular rates charged by this broker for Terry’s Tips subscribers (no commissions are charged when buying back a short option for $.05 or less). 

This special commission rate is only $1.25 per option contract (the regular rate for a single contract is $3.90 so it is important to request the lower rate by emailing support@thinkorswim.com and let them know that you are a Terry’s Tips subscriber).

The strategy employed in this portfolio is the foundation 10K Strategy used in most Terry’s Tips portfolios. However, we used it on a company we believed was headed higher so that gains might come from a higher stock price as well as decay of short-term options.  The goal is to maximize net delta while maintaining a barely-positive net theta.  If the underlying stock goes up in price (in this case, NKE), this portfolio is designed to go up by a greater percentage.  So it is important to pick a stock you really feel good about.  We picked Nike.

The goal of the portfolio (we called it Vista Valley) was outlined when we set it up in July 2013 – “This $4000 portfolio will be set up in the spirit of Peter Lynch.  In 1977, Peter Lynch was named head of the then obscure Magellan Fund which had $18 million in assets. By the time Lynch resigned as a fund manager in 1990, the fund had grown to more than $14 billion in assets and had averaged a 29.2% return and as of 2003 had the best 20-year return of any mutual fund ever.  His primary investment advice was to “invest in what you know.”  This Vista Valley portfolio will be designed to demonstrate how options can be used instead of buying stock in a company you like.  With options, you are able to effectively own many more shares for the same amount of money and make gains when the stock stays flat as well as when it moves higher. This portfolio will be made up of primarily diagonal and calendar spreads.

Because we have bought Nike shoes and sportswear for years, we were familiar with the company and we liked it.  Nike seemed to be the perfect underlying to use in this portfolio.”

The initial positions were set up on July 23, 2013 when NKE was trading just above $63.  We allocated $4000 to this portfolio.  This is the Trade Alert that we sent out:

July 23, 2013  Trade Alert -  Vista Valley  Portfolio

These trades will get us set up with Nike as outlined in the Saturday Report:

BTO 3 NKE Jan-15 62.5 calls (NKE150117C62.5)

STO 3 NKE Aug-13 62.5 calls (NKE130817C62.5) for a debit of $5.76  (buying a calendar)

BTO 2 NKE Jan-15 65 calls (NKE150117C65)

STO 2 NKE Aug-13 65 calls (NKE130817C65) for a debit of $5.70  (buying a calendar)

BTO 3 NKE Jan-14 65 calls (NKE14018C65)

STO 3 NKE Aug-13 65 calls (NKE130817C65) for a debit of $2.48  (buying a calendar)

BTO = Buy to Open. STO = Sell to Open

We selected an out-of-the-money strike for 5 of the 8 spreads because we were bullish on the stock.  The other 3 calendar spreads, at the 62 ½ strike, were barely in the money.  The more bullish you are on a stock, the more out-of-the-money calls you will sell.

At the end of the first week, the stock had fallen a bit, and we experienced the bid-ask-spread-penalty of a new portfolio (buying at the higher ask price and selling at the lower bid price) and the stated value fell as new portfolios almost always do. 

These positions (and the Greeks) tell us where we stand.  Delta is 152 which means we own the equivalent of 152 shares of NKE.  If we had used our $4000 to buy shares of stock, we would have been able to buy only 63 shares, so our option positions give us many more shares (and we don’t have to pay margin interest to enjoy the extra shares).

Gamma (-75) shows how much that delta will change if the stock goes up by a dollar.  It shows that if the stock goes up $2, we will essentially own no shares whatsoever (we still could benefit by the more-rapid decay (theta) of the option positions, however.  If the stock were to go up by a dollar, we would probably want to make an adjustment to keep us in a higher delta position.

Theta ($7) shows how much we should make each day from the decay of the short options.  That number says that the portfolio should gain about $84 a week if the stock remains flat.  Theta generally gets higher as expiration gets closer.

Every week in the Saturday Report, we publish the risk profile graph for each option portfolio.  Here it is for Saturday, August 3, 2103.

The P/L Day column shows the expected loss or gain when the August calls would expire on Friday. August 16, just two weeks from then, at the stock price in the first column, or you can look at the graph curve to see where the largest profit area might be.  In this case, a higher stock price would be best, but once the stock reached $65, the expected return would start falling.  To start off, we were hoping for just a moderate increase in the stock price over the first two weeks.

Unfortunately, in the next week, the stock popped up more than we wanted, up $3.77 to $66.30.  You can see from the graph that at $66.30, our expected gain would be quite small, almost nothing.  The biggest downside of this strategy is that a big sudden move in either direction for the stock is not a good thing.  For a stock like NKE which we like, we maintain a positive net delta at all times (i.e., we are long the equivalent of actual shares), so we always want the stock to move higher, but small increases are almost always preferable.

When the stock moved up so quickly in our second week of having our options in place, we had to make an adjustment to expand the break-even point on the upside.  These are the trades we made:

BTC 1 NKE Aug-13 62.5 call (NKE130817C62.5)

STC 1 NKE Jan-15 62.5 call (NKE150117C62.5) for a credit of $5.20  (selling a calendar)

BTC 2 NKE Aug-13 62.5 calls (NKE130817C62.5)
STO 2 NKE Aug-13 67.5 calls (NKE130817C67.5) for a debit of $1.42  (buying a vertical)

BTC 2 NKE Aug-13 62.5 calls (NKE130817C62.5)

STO 2 NKE Sep-13 67.5 calls (NKE130921C67.5) for a debit of $2.60  (selling a diagonal)

Our goal was to get rid of all the short calls we had at the 65 strike price and replace them with higher-strike short calls. The first trade involved taking off (selling) one of the original calendar spreads we had bought.  We did this because we needed to generate some cash that we could use in the second and third trades.

The second trade involved buying back 2 of the Aug-13 62.5 calls which we had sold earlier, and replacing them with short calls at the 67.5 strike, also in the Aug-13 series.  Since this strike was higher than the current stock price, it is quite bullish to be short calls at that strike.  We were fortunate to make this trade before the stock had made its big upward move.

The third trade involved buying back the remaining 2 short 62.5 calls and selling 67.5 calls which had an extra month of remaining life, the Sep-13 series. This trade was made after the stock had made its biggest move, and was quite expensive compared to the second trade.

The risk profile graph with these new positions showed how we had expanded the break-even point at the higher prices:

You can see that the stock could now go as high as $66.50 before the portfolio would start losing out.  Making the adjustments reduced the expected gains, however.  The big upward move so early in the portfolio’s life was not a good start.

We didn’t make any more trades until Friday, August 16, on the day that the August options expired.  The stock had fallen back a bit to about $64.  We bought back all of the Aug-13 65 and 67.5 calls for $.01 ($1), paying no commissions (buying back short options for $.05 or less is commission-free at thinkorswim).

At that time, we sold 2 Sep-13 65 calls for $.90 and 3 Sep-13 62.5 calls for $2.11, and our positions looked like this:

Results for the week: With NKE down $2.66 (4.1%) for the week, the portfolio lost $392 or 9.8%. 

We were not off to a good start.  The high volatility, first up, then down, had hurt us in both directions (if we had not adjusted so strongly by moving every short 62.5 short call to a higher strike, we would have done much better, but our mandate is to always maintain a positive net delta, and we did just that).

The risk profile graph going into the September expiration looked like this:

Now the stock could go up at least $3 before we would start gaining less, and it could fall almost $2 before we would lose on the downside.  Our maximum gain for the month would come if the stock ended up very close to $65 when the September options expired.

On the Monday following the August expiration, the stock turned around and surged higher once again (this is really beginning to hurt), and we issued the following trade alert:

August 19, 2013  Trade Alert -  Vista Valley  Portfolio

With the stock up strongly we have become neutral net delta and we have enough cash to roll to a higher strike and increase theta;

BTC 3 NKE Sep-13 62.5 calls (NKE130921C62.5)
STO 3 NKE Sep-13 65 calls (NKE130921C65) for a debit of $1.68  (buying a vertical)

That trade changed the risk profile graph to:

We were in a position to make a gain if the stock moved $3 to the upside but were vulnerable if it were to fall by only a little.  At this point, the portfolio value is still down almost 10% from where it started about a month earlier.

For the next three weeks, the stock edged slightly higher (just what we like best) and we did not have to make any adjustments.  With the September expiration fast approaching, we bought back our short calls and rolled them to October at higher strikes with these trades:

BTC 5 NKE Sep-13 65 calls (NKE130921C65)

STO 5 NKE Oct-13 67.5 calls (NKE131019C67.5) for a debit of $.18  (selling a diagonal)

BTC 2 NKE Sep-13 67.5 calls (NKE130921C67.5)

STO 2 NKE Oct-13 70 calls (NKE131019C70) for a debit of $.02  (selling a diagonal)

Two weeks later the stock had moved up again, and we issued this trade alert:

September 24, 2013  Trade Alert -  Vista Valley  Portfolio

The stock is looking strong and we currently do better if it were to fall:

BTC 1 NKE Oct-13 67.5 call (NKE131019C67.5)

STC 1 NKE Jan-14 65 call (NKE140118C65) for a credit of $3.05  (selling a diagonal)

BTC 2 NKE Oct-13 67.5 calls (NKE131019C67.5)

STO 2 NKE Oct-13 72.5 calls (NKE131019C72.5) for a debit of $2.40  (buying a vertical)

The first trade was closing out one of our spreads (originally a calendar spread, i.e., same strikes for both long and short sides, but now a diagonal spread with different strikes).  We did this to generate some cash that we used in the second trade to move the short calls to a higher strike price.

Three days later with the stock continuing to move higher, we had to make some big adjustments to get our short calls to higher strike prices:

September 27, 2013  Trade Alert -  Vista Valley  Portfolio

With the stock up strongly we need to roll to higher strikes:

BTC 2 NKE Oct-13 67.5 calls (NKE131019C67.5)

STC 2 NKE Jan-15 62.5 calls (NKE150117C62.5) for a credit of $7.80  (selling a diagonal)

BTC 2 NKE Oct-13 70 calls (NKE131019C70)

STC 2 NKE Jan-14 65 calls (NKE140118C65) for a credit of $5.40  (selling a diagonal)

BTO 2 NKE Jan-15 75 calls (NKE150117C75)

STO 2 NKE Oct-13 75 calls (NKE131019C75) for a debit of $6.38  (buying a calendar)

BTO 2 NKE Jan-15 77.5 calls (NKE150117C77.5)

STO 2 NKE Oct-13 77.5 calls (NKE131019C77.5) for a debit of $5.94  (buying a calendar)

Once again, we took off some diagonal spreads to generate some cash which we used to buy new calendar spreads at higher strikes.  Here were the positions we held after these trades, and the risk profile graph at that time:

At this point, we had made a nice gain because we had managed to remain positive net delta (the equivalent of 111 shares) so that when the stock price moved higher, our portfolio made good gains.  Theta was up to $12 which means that we were making nearly 2% a week from short option decay if the stock remained flat.  The risk profile graph at this time looked promising as well:

At this point we were looking at a possible double-digit gain if the stock stayed flat or went up be a moderate amount over the next 3 weeks, and it could fall by $2 and we would still make a gain.

We did not have to make any more trades until the day the October options expired on the 18^th.  At that time with NKE trading just under $76, we bought back all the expiring short calls and replaced them with November calls at the 75 and 77.5 strikes:

October 18, 2013  Trade Alert -  Vista Valley  Portfolio

These trades will get us set up for next month:

BTC 2 NKE Oct-13 72.5 calls (NKE131019C72.5)
STO 2 NKE Nov-13 75 calls (NKE131116C75) for a debit of $1.01  (selling a diagonal)

BTC 1 NKE Oct-13 75 call (NKE131019C75)
STO 1 NKE Nov-13 75 call (NKE131116C75) for a credit of $1.34  (selling a calendar)

BTC 1 NKE Oct-13 75 call (NKE131019C75)
STO 1 NKE Nov-13 77.5 call (NKE131116C77.5) for a credit of $.38  (selling a diagonal)

BTC 2 NKE Oct-13 77.5 calls (NKE131019C77.5)
STO 2 NKE Nov-13 77.5 calls (NKE131116C77.5) for a credit of $.53  (selling a calendar)

Our positions after these trades were as follows:

The portfolio had now gained over 33% over less than three months, and the risk profile graph going into the November expiration once again looked promising:

We were looking at another double-digit gain for the expiration month if the stock remained flat or went up less than $4, and it could fall by almost $3 before we would lose money on the downside.

On November 11^th the stock had continued to move higher so that he 75 calls were well into the money and we issued the following:

November 11, 2013  Trade Alert -  Vista Valley  Portfolio

As discussed in the Saturday Report, there is very little time premium remaining in the 75 short calls and we should roll them out to higher strikes going forward:

BTC 2 NKE Nov-13 75 calls (NKE131116C75)

STO 2 NKE Dec-13 77.5 calls (NKE131221C77.5) for a debit of $.05  (selling a diagonal)

BTC 1 NKE Nov-13 75 call (NKE131116C75)

STO 1 NKE Dec1-13 78 call (NKE131206C78) for a debit of $1.42  (selling a diagonal)

At this time we sold a weekly for the first time, the Dec1-13 78 call.  Weekly options on NKE trade at each dollar increment while the regular monthly options trade at 2 ½ increments, so we could be more precise in setting up the portfolio each month by selling weekly options.

On the November expiration day we issued this trade alert:

November 15, 2013  Trade Alert -  Vista Valley  Portfolio

These trades will get us set up for next month.  We are selling a Dec1-13 weekly because a strike is available which isn’t for the monthly series:

BTC 3 NKE Nov-13 77.5 calls (NKE131116C77.5)

STO 3 NKE Dec-13 80 calls (NKE131221C80) for a credit of $.23  (selling a diagonal)

BTO 2 NKE Jan-15 80 calls (NKE150117C80)

STC 2 NKE Jan-15 65 calls (NKE150117C65) for a credit of $9.10  (selling a vertical)

BTO 3 NKE Jan-15 80 calls (NKE150117C80)

STO 3 NKE Dec-13 80 calls (NKE131221C80) for a debit of $5.56  (buying a calendar)

BTC 2 NKE Dec-13 77.5 calls (NKE131221C77.5)

STO 2 NKE Dec1-13 79 calls (NKE131206C79) for a debit of $2.05  (buying a diagonal)

BTO 1 NKE Jan-15 80 call (NKE150117C80)

STC 1 NKE Jan-15 75 call (NKE150117C75) for a credit of $2.50  (selling a vertical)

Our positions now looked like this:

We had enjoyed the double-digit gain we expected for the last month, and could look forward to another one for the next month:

At this time, we were only 41 deltas long and while theta was larger than ever, we needed to be vigilant in case the stock moved higher.  Ten days later that happened:

November 25, 2013  Trade Alert -  Vista Valley  Portfolio

We should get a little longer:

BTC 1 NKE DEC1-13 78 call (NKE131206C78)

STO 1 NKE Dec-13 82.5 call (NKE131221C82.5) for a debit of $.90  (selling a diagonal)

On December 6, the weekly calls we had sold were up for expiration and we issued the following:

December 6, 2013  Trade Alert -  Vista Valley  Portfolio

We need to roll over these expiring calls today:

BTC 2 NKE DEC1 13 79 calls (NKE131206C79)
STO 2 NKE Dec-13 82.5 calls (NKE131221C82.5) for a credit of $.05  (selling a diagonal)

The stock took a little breather and started falling a bit, causing us to do the following:

December 13, 2013  Trade Alert -  Vista Valley  Portfolio

Nike announces earnings next week and has fallen steadily for the past week so that all of our short calls are well out of the money.  We may need to get a little protection in case the announcement is not received well:

BTC 3 NKE Dec-13 82.5 calls (NKE131221C82.5)

STO 3 NKE Dec-13 77 calls (NKE131221C77) for a credit of $1.42  (selling a vertical)

BTC 1 NKE Dec-13 80 call (NKE131221C80)

STO 1 NKE Dec-13 77.5 call (NKE131221C77.5) for a credit of $.75 (selling a vertical)

BTO 1 NKE Jul-14 75 call (NKE140719C75)

STO 1 NKE Dec-13 77.5 call (NKE131221C77.5) for a debit of $4.93  (buying a diagonal)

We rolled down some of the higher-strike short calls and replaced them with lower strike calls, and used the cash to add a new diagonal spread.

Here is what we reported in the Saturday Report the next day:

Results for the week: With NKE down $3.46 (4.3%) for the week, the portfolio lost $559 or 9.1%.  This was quite a drop for the stock but the real reason for such a big paper loss was that the short options are unusually high due to next week’s earning announcement.  The risk profile graph shows that a double-digit gain is possible next week if the stock stays the same or moves moderately higher.  If that occurs, last week’s loss will be covered by a large margin.  We are still bullish on the stock.

The next week, earnings were announced, and although they were good, the stock traded lower after the results, but earlier in the week, it had traded higher so that the change for the week was minimal (just what we like).  Here is what was reported in the Saturday Report on December 20:

Results for the week: With NKE up $.94 (1.2%) for the week, the portfolio gained $1179 or 21.1%.  This week was the earnings announcement and option premiums had been pushed up quite high.  There was some disappointment with the results, and the stock fell $.92 yesterday but it was up for the week.  When our short calls returned to their intrinsic value we picked up a bundle.  The risk profile graph shows that our expected returns for next month will be lower than last week, but a double-digit gain is once more possible if the stock continues to move as it has in the past.

In the next week, we made some adjustments:

December 23, 2013  Trade Alert -  Vista Valley  Portfolio

These trades will get us set up for next month.  Selling weeklies will allow us to get   strikes which is not available in the monthly series:

BTO 4 NKE Jan-15 77.5 calls (NKE150117C77.5)

STC 4 NKE Jan-15 80 calls (NKE150117C80) for a debit of $1.20  (buying a vertical)

STO 1 NKE Jan4-14 76 call (NKE120124C76) for $2.21

STO 1 NKE Jan4-14 77 call (NKE120124C77) for $1.66

The first trade lowered the strike price of 4 of the 2015 calls so that we could sell short-term options at a lower strike price than 80.

The stock then popped up a bit and we had to roll to higher strikes once again:

December 27, 2013  Trade Alert -  Vista Valley  Portfolio

We have become negative net delta:

BTC 1 NKE Jan4-14 77 call (NKE120124C77)

STC 1 NKE Jan-15 75 call (NKE150117C75) for a credit of $6.67  (selling a diagonal)

BTC 1 NKE Jan4-14 76 call (NKE120124C76)

STO 1 NKE Jan4-14 80 call (NKE120124C80) for a debit of $2.40  (buying a vertical)

BTC 3 NKE Jan-14 77.5 calls (NKE140118C77.5)

STO 3 NKE Jan4-14 79 calls (NKE120124C79) for a debit of $.70  (selling a diagonal)

This left us with the following positions for the last week in 2013 as reported in the Saturday Report:

Results for the week: With NKE up $.82 (1.1%) for the week, the portfolio gained $48 or 0.7%.  This portfolio continues to do well.  Now that the earnings announcement has passed, option prices have moved lower, and next month does not look as potentially great as last month, although a double-digit gain is still possible if the stock ends up right about $80 when the January calls expire.

So that ended our year. The portfolio was in operation for less than six months and gained 70% while the stock moved up by 23.8%.  We believe that it was a good demonstration of how an options portfolio can outperform the outright purchase of shares in a company that you believe is headed higher.  In this case, the percentage gain in our options portfolio was nearly three times as great as the increase in the stock price.

There are two downsides of our 10K Strategy.  First, a big quick move to the upside will result in a loss if an adjustment is not made, and second, a move to the downside might be more costly than if you owned stock instead.  On the other hand, our strategy generally makes good gains if the stock remains flat, something that is often the prevailing situation between earnings announcements.

There is something comforting about owning positions that make money every day the stock does nothing.  It’s almost like collecting a dividend.  And if the stock moves moderately higher (which we expect because we picked a stock which we think is going up) our percentage gain using options can be significantly higher than owning the stock would yield.

In 2014, at Terry’s Tips, we plan to carry out three actual portfolios that use the 10K Strategy on four companies we like – Costco, Nike, Green Mountain Coffee Roasters, and Starbucks (these last two companies are in a portfolio called Java Jive  which is essentially betting that people will continue to consume large amounts of coffee). 

We invite you along to see how these portfolios perform.  You might choose to mirror them on your own, or have trades executed for you in your account at thinkorswim through their Auto-Trade program.

And now for the Special Offer – If you make this investment in yourself by midnight, January 18, 2014, this is what happens:

For a one-time fee of only $39.95, you receive the White Paper (which normally costs $79.95 by itself), which explains my favorite option strategies in detail, and shows you exactly how to carry them out on your own.

1) Two free months of the Terry’s Tips Stock Options Tutorial Program, (a $49.90 value).  This consists of 14 individual electronic tutorials delivered one each day for two weeks, and weekly Saturday Reports which provide timely Market Reports, discussion of option strategies, updates and commentaries on 8 different actual option portfolios, and much more. 

2) Emailed Trade Alerts.  I will email you with any trades I make at the end of each trading day, so you can mirror them if you wish (or with our Premium Service, you will receive real-time Trade Alerts as they are made for even faster order placement or Auto-Trading with a broker).  These Trade Alerts cover all 8 portfolios we conduct.

3) If you choose to continue after two free months of the Options Tutorial Program, do nothing, and you’ll be billed at our discounted rate of $19.95 per month (rather than the regular $24.95 rate).

4) Access to the Insider’s Section of Terry’s Tips, where you will find many valuable articles about option trading, and several months of recent Saturday Reports and Trade Alerts.

5) A FREE special report “How We Made 70% on Nike in the last six months of 2013 while the stock rose only 23%”. This report is a good example of how our 10K Strategy  works for individual companies that you believe are headed higher.

With this one-time offer, you will receive all of these benefits for only $39.95, less than the price of the White Paper alone. I have never made an offer better than this in the twelve years I have published Terry’s Tips.  But you must order by midnight on January 18, 2014. Click here, choose “White Paper with Insider Membership”, and enter Special Code 2014 (or 2014P for Premium Service - $79.95).

Terry

P.S.  If you would have any questions about this offer or Terry’s Tips, please call Seth Allen, our Senior Vice President at 800-803-4595.  Or make this investment in yourself at the lowest price ever offered in our 8 years of publication – only $39.95 for our entire package -click here using Special Code 2014 (or 2014P for Premium Service - $79.95).