October 24, 2022

Dear Friend,

The numbers for 2022 to date:

Five-Year Average Annual Gain for Terry’s Tips portfolios – just under 60%. (All numbers are from actual accounts including all commissions).

S&P 500 (SPY) – LOST 22%
Nasdaq 100 (QQQ) – LOST 31%
Russell 2000 (IWM) – LOST 22%
Microsoft (MSFT) – LOST 28%
Terry’s Tips Option Portfolio Composite – GAINED 10% (using the above underlyings)

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Schwab Tested

Schwab (SCHW) reported earnings on Monday before the open that set records for both earnings per share and revenue. Both numbers exceeded the consensus analyst estimates. SCHW attributed the great quarter to its “diversified financial model and a significant benefit from higher rates.”

Analysts didn’t appear moved by the record numbers, though. There were no upgrades (nor downgrades), and just one price target decrease. Perhaps that’s because analysts have been overly bullish on a stock that is down 16% this year. Plus, analysts have an average price target that is 19% above Friday’s close.

Despite the earnings success, the stock didn’t do much in a week where the S&P 500 climbed nearly 5%. The stock couldn’t even manage a weekly gain of 2%, keeping it mired in a trading range that has persisted since late July. On the chart, the shares are looking up at the 20-day, 50-day and 200-day moving averages, all of which are pointing lower.

This trade is based on SCHW continuing to struggle in gaining any momentum now that earnings is past. Heavy overhead resistance should keep the stock contained. That’s why we’re going with a call credit spread with the short call strike sitting just above the 200-day moving average (blue line). Note that the 20-day and 50-day trendlines sit between the stock price and short strike, too.If you agree that SCHW will continue to trade sideways, consider the following trade that relies on the stock staying below $75 (red line) through expiration in five weeks:

Buy to Open the SCHW 25 Nov 77 call (SCHW221125C77)
Sell to Open the SCHW 25 Nov 75 call (SCHW221125C75) for a credit of $0.50 (selling a vertical)

This credit is $0.03 less than the mid-point price of the spread at Friday’s $70.32 close. Unless SCHW sags quickly, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $48.70. This trade reduces your buying power by $200, making your net investment $151.30 per spread ($200 - $48.70). If SCHW closes below $75 on Nov. 25, both options will expire worthless and your return on the spread would be 32% ($48.70/$151.30). 

Any questions?  Email Terry@terrystips.com

Testimonial of the Week

The weekly reports have proven invaluable as I’ve been able to set up similar portfolios on my own resulting in substantial profits while the markets have been dropping. I feel strongly that these strategies can benefit virtually any investor’s portfolio when used properly. When position sizing is properly maintained, these portfolios can add return non-correlated to the stock market.

~ Mark

Thank you again for being a part of the Terry's Tips newsletter.

Happy trading,

Terry