| |
|
|
|
Dear Friend,
If you like a stock, there is a much better way to make money on it other than buying shares. The answer is to use options, of course. Today I would like to share one simple trade you can make as an alternative to owning the stock. It should gain over 50% in two months even if the stock does not go up by a penny. If the stock falls by 10% over that period, you should make about 20%. Meanwhile, people who bought the stock would have absolutely nothing to show for their investment (except maybe a loss).
Why would you ever buy a share of stock when options could deliver these kinds of returns?
Terry
|
| |
|
|
 |
|
 |
| Option Tip of the Week |
|
An Interesting Options Play for Green Mountain Coffee Roasters
Green Mountain Coffee Roasters (GMCR) has had a rocky year, but for the last few months it seems to have stabilized and might be worth a second look (especially if you could make 20% or more on it with options in just two months as I propose here). First, check out a recent Seeking Alpha article Green Mountain: Stock Is A Good Brew. It might give you a little confidence in the stock.
In the interests of presenting both sides, check out the downside case, also at Seeking Alpha – Stay Away From Green Mountain Coffee. However, even this critic advises against shorting the stock.
GMCR is selling at 9x or 10x earnings and doesn’t appear likely to have a big sell-off in the near future. One option investor recently made a huge options bet that the stock will move higher – see Bulls Smell the Coffee at Green Mountain. These options could return $5 million to the buyer if the stock is above $30 when the November options expire on the 17th.
The option strategy I suggest should make about 20% in two months even if GMCR falls by 10% over that time period.
I have watched this company for many years. It is located in my home state of Vermont. I used to play tennis with its founder, Bob Stiller, every week. (I don’t want to brag, but I remember that I won about 90% of the matches – he seemed to be more interested in growing his company than staying in tennis shape.) Just today, Bob donated $10 million to Champlain College, a local business school that has also been one of my favorite charities (and where I was a trustee for 11 years).
Here is what the risk profile graph looks like for the stock (currently trading at just under $24). These positions cost about $2700 to put on:
The graph shows that a nice profit averaging over 30% can be made in two months at any ending price on December 21st which is higher than $22, and a profit of some sort at any price higher than $20.50. This downside break-even point would mean that the stock fell by 14% from its current level.
Here are the actual positions that create the above risk profile graph:
I used 10 diagonal call spreads, buying January 2013 calls and selling December 23 calls for about $2.70 ($270 per spread). This simple trade is far superior to owning the stock as far as I am concerned. If the stock falls 10%, you still make about 20% on your investment. If the stock stays exactly where it is on January 18th you should earn almost 60% on your money.
Why would anyone buy the stock when they could place a simple spread like this and make money even if the stock goes nowhere or even falls by as much as 10%? It just doesn’t make sense to me.
----
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?
I look forward to having you on board, and to prospering with you.
Terry
|
 |
|
 |
|
|
|
|
| Andy's Market Report |
Surprisingly, most of the major indices closed the week flat. The Dow, S&P and Russell 2000 finished the week 0.1%, 0.3% and -0.3%. The only outlier was the tech heavy NASDAQ 100 which closed the week down -1.3%. Could the weakness in QQQ be a tell going forward?
Apple, Google, IBM, Intel and Microsoft are just a few of the names that have struggled recently. Several have already reported weaker than anticipated earnings (I am sure everyone is already aware of the Google debacle) and I would not be surprised to see the trend continue as we deeper into earnings season.
As it stands the S&P 500 (SPY) is trading at levels seen throughout September and slightly above the QE ‘til Infinity rally. So, even though we saw a sharp decline Friday, the market is still sitting at the bottom part of what has been a fairly tight trading range. If the S&P breaks 1420 (as I stated last week) we could begin to see a true correction. Not necessarily one that bleeds into bear market territory, but certainly a reprieve that carries the market down into the low to mid 1300s.
Wall Street's mood will continue to be sour if we continue to see a large number of companies falling short of top-line expectations. Of the 116 S&P 500 companies that have reported results so far, 58% have missed on revenue expectations, according to Thomson Reuters data.
Again, if this trend continues expect to see a decline over the next several weeks. "Traders are going to look at things that mimic the U.S. economy - and currently, everything that mimics the economy has been performing awfully," said Todd Schoenberger, managing principal at the BlackBay Group in New York.
One of the positives, at least for options traders, is that the recent decline has pushed the VIX higher. On Friday, the investor’s fear gauge pushed higher 13.5% to close above 17. This is good news to those of us who sell premium as part of our options strategies...Terry’s 10K strategy thrives on higher options premium.
My hope is that the VIX reaches 22, which in my opinion is the sweet spot for selling premium. Of course, we would most likely have to see a continuation of Friday’s decline, but remember corrections are normal, so don’t fret.
Fiscal Cliff Update: Earnings season and the upcoming election have been stealing the headlines but I think it is worth noting what I think is the most important news-driven event – the “fiscal cliff”.
As the deadline for fiscal peril in the U.S. nears, Wall Street is worried that the impact could be much worse than anyone thought-while investors remain nearly oblivious to the danger.
Looming tax increases and spending cuts -- which Federal Reserve Chairman Ben Bernanke has labeled the "fiscal cliff" -- would send the economy into a deeper recession than many have predicted, according to economists at Bank of America Merrill Lynch.
Last year when all the so-called “fiscal cliff” was at the forefront the market lost 11% in just a few short days. Just some food for thought. |
|
|
|
|
|
|
|
| Overbought/Sold Condition Report |
Overbought/Oversold as of October 19, 2012
• S&P 500 (SPY) – 32.0 (neutral)
• Dow Jones (DIA) – 31.0 (neutral)
• Russell 2000 (IWM) – 30.3 (neutral)
• NASDAQ 100 (QQQQ) – 28.1 (oversold)
|
|
|
|
|
|
|
|
| Testimonial of the Week |
|
I never miss reading your Saturday report and always find it interesting and thought provoking. I trade mostly options in four accounts (three are think or swim and one is tradestation) and your knowledge of trading options and the way you share it is very helpful.
Pete
|
|
|
|
|
| |
|
|
|
Thank you again for being a part of the Terry's Tips newsletter. If you are interested in signing up as an Insider, visit Terry's Tips today for details.
Sincerely,
Dr. Terry Allen
Terry's Tips
|
| |
|
|
|
|
|
