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Dear Friend,
Last week we made a little trade that doubled our investment in one day. Every month, a similar opportunity presents itself. Of course, it doesn’t always work out this nicely, but it seems to do well most of the time. Today, I would like to share our thinking with this trade.
Terry
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| Option Tip of the Week |
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An Interesting Post-Expiration Play:
Many investors are aware of a couple of phenomena which seem to prevail in the market. The first is that the Monday after the regular monthly options expiration is generally a weak day for the market. The second is that the first trading day of each month is usually a strong day.
When other indicators also suggest that these generalizations might hold true, it might be a good time to make the outright purchase of a put or call.
On Friday, July 20, the regular monthly options expired. At that time, the market was also in an overbought condition (one of the indicators that we follow, RSI, was over 70). Overbought conditions are not nearly as important indicators as are oversold conditions, but they are something to consider nonetheless.
Our favorite ETF to use when buying options is the Russell 2000 Small-Cap (IWM). It seems to fluctuate in the same direction as SPY, but by larger percentages. On expiration Friday, with IWM trading right around $79, we bought a Jul4-12 Weekly 79 put for $.85. Actually, we bought 5 of them, shelling out $425 plus $6.25 for commissions (our broker, thinkorswim, charges Terry’s Tips subscribers a flat $1.25 per option contract).
On Monday, we placed a limit order to sell those puts if the price got up to $1.73. The stock tumbled almost $2 on that day, and our order executed. We were delighted to double our money after paying the commissions. After commissions, we made a profit of $427.50 on our initial investment of $425.
We could have made more if we had waited a little longer, but we’ll take double our money any day. Selling when we did ultimately proved to be a good idea because by the end of the week, our puts expired worthless when the stock rose to above $79.
Last week was a great one for anyone who bought either puts or calls. Option prices were low (lower than they are this week) and volatility was high. If you were willing to accept a moderate profit on your option buy, you could have done well either with puts or calls last week.
For most of the past couple of months (and all of last summer as well), option prices have been lower than the actual volatility of the market (SPY, and IWM). This means that a good strategy has been to buy options rather than sell them (which is our usual preference).
This week, the first trading day of August falls on Wednesday. We might be inclined to buy a call on IWM because the market is often strong on that day. However, option prices (VIX) rose 5% Monday morning so options are not quite so cheap this week. With the big run-up in the market last Friday (SPY gained almost 2%), we are probably due for some weakness soon, so we are probably not going to buy a call this time around. We like to see other indicators which support our buying decision, and we don’t see any at this point in time. (RSI is neutral, for example.)
Buying options is still probably a good short-term idea, but sometimes it is safer just to sit on the sidelines for a week or so and wait for a more opportune time.
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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?
I look forward to having you on board, and to prospering with you.
Terry
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| Andy's Market Report |
The market continues to amaze.
Yet, if you listen to the talking heads at CNBC or Bloomberg or most any other source of financial news you would think the world is collapsing. Well, it isn’t – at least for now.
The S&P 500 is near historic highs.
And we have 0% interest rates to boot.
The S&P 500 index is up over 8% year-to-date.
In fact, it's the best first seven months of the year performance since 2009. Before that, you had to go back to 2003 to get a better performance.
And if bonds crack we should see a sharp rally in the market, but as most of us already know those that have attempted to call a top in bonds have failed miserably.
But for now, the negative sentiment among the financial media continues. The fear is palpable and is keeping many self-directed investors on the sidelines.
So why do we, as self-directed investors continue to listen to the commoditized drivel?
For instance, why would we not use major support/resistance areas to make our assumptions.? Why would we not use a 200-day moving average to make our assumptions? Why can’t we just keep things simple?
One thing is certain most self-directed investors would be far better off if they listened to just a few simple indicators and left the television watching for those who want to be entertained. Because when you are offered 50 different views from professional analysts with their respective firm’s bias sitting on the shoulders it plays out as just pure entertainment. No real value is gained.
This leads me to where we currently sit in the market.
As you can plainly see in the 20-year chart of the S&P 500 (SPY) above the major market indice is at an area of very strong overhead resistance. Not only that, but the S&P 500 has also moved into an overbought state which often precedes an imminent decline.
So, I would not be surprised if we witnessed a short-term decline. However, if all goes well this week and Wall Street is happy about the news that is certain to trickle out of Jackson Hole, well then resistance could be broken. The odds are against it, but stranger things have happened.
The Fed and the ECB both meet next week amid investor expectations of action to stimulate economic growth and, in the case of the ECB, tackle the spreading euro zone debt crisis. Ongoing weak economic data and disappointing U.S. corporate profits and outlooks mean central banks can potentially be the markets’ best friend.
So, the rally at the end of the week was not too surprising. The market tends to spike in the hours before a Fed statement like the one expected on Wednesday as traders and investors jockey for position and a chance to make a profit.
But next week's calendar has a double-whammy.
The Fed's monetary policy statement will come one day before an ECB meeting packed with intrigue. ECB President Mario Draghi said earlier this week the bank was ready to do whatever was necessary, within its mandate, to save the euro. His words helped the bulls push the market substantially higher.
But can their words continue to prop up the market? So far their actions have not helped as most economic reports on both sides of the pond continue to disappoint.
So next week is a big one. Stay tuned for what should be an interesting week in the market!!! |
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| Overbought/Sold Condition Report |
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Overbought/Oversold as of July 28th, 2012
• S&P 500 (SPY) – 73.4 (overbought)
• Dow Jones (DIA) – 73.9 (overbought)
• Russell 2000 (IWM) – 63.2 (neutral)
• NASDAQ 100 (QQQ) – 67.6 (neutral)
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| Testimonial of the Week |
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“I’ve been very impressed by not only your strong trading results, but your true dedication to your readers. Your hard work to keep us informed of both your portfolios and trading techniques is greatly appreciated. I look forward to your reports each week.” ~ Gary
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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
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