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Dear Friend,
For the past several weeks we have been discussing how to make money buying options. For those of you who have been following us for any extended time, you understand that this is a total departure from our long-standing belief that the best way to make maximum returns is to sell short-term options to someone else.
A combination of low option prices and high actual volatility has recently caused us to reverse our strategy. Now seems to be a good time to be buying either or both puts or calls. Rather than blindly buying an option and hoping for the best, we are continually on the look-out for something that will give us an edge in making this buying decision.
Last week we couldn’t find an edge we were comfortable with. We considered buying a straddle on Thursday in advance of the jobs report but the market had been quiet all week and we sat on the sidelines. Unfortunately, as it worked out. SPY rose almost 2% on Friday and we would have easily doubled our money if we had pulled the trigger.
Today we will talk about one of those possible edges.
Terry
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| Option Tip of the Week |
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Another Interesting Time to Buy Options:
It seems to happen every summer. While the overall market doesn’t seem to do much of anything (that’s why they call it the summer doldrums I suppose), on many days, the market just seems to jump all over the place. It could be that so many traders are on vacation that the few who are working are able to move the market with very few trades.
A more likely explanation is the computer-generated program trading that has taken over the market lately. The average holding period for a stock in our country is now less than two seconds according to one study. When the computers sense unusual buying or selling coming into the market, they place trades in advance of the orders getting to the exchanges. This adds to the momentum and pushes the market sharply in one direction or the other.
At some point, the momentum shifts, and the market moves sharply in the other direction.
Check out the price action of SPY on Fridays for the past ten weeks:
June 1 -3.30
June 8 +1.05
June 15 +1.30 Monthly X dividend
June 22 +1.05
June 29 +3.31
July 6 -1.30
July 13 +2.20
July 20 -1.30 Monthly X dividend
July 27 +2.51
Aug 3 +2.70
If you had bought a slightly out-of-the-money put and call (or an at-the-money straddle) on essentially any one of the Thursdays preceding these Fridays, you would have surely made money when the stock moved well over a dollar the next day. These puts and calls with only one day of remaining life are quite cheap, and could easily double or triple in value if the market moves by over $2 which it has on half of the Fridays this summer.
This edge probably does not extend to other months of the year, however. In April and May, the stock did not move over $.75 on any Friday. So it seems to be a summer phenomenon.
Buying options is risky business because you can lose 100% of your investment. But doing it with small amounts when you see an edge like this Friday action (or before jobs reports, or on the Monday following the monthly option expiration), the odds may shift in your favor.
Be careful, and good luck. Never invest money that you can’t afford to lose.
_ _ _
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 |
It was the fourth straight week of gains for the Dow.
But, don’t get too confident about the bullish prospects just yet.
It took an incredible rally Friday to bring the major indices back into positive territory. The first four days of the week were less than stellar for the bullish camp and nothing really new has changed.
Yes, we had a better-than expected nonfarm payroll report, but the European difficulties haven’t changed. If anything, the challenges have increased.
There is no doubt the market has been resilient. After a sharp sell-off on May 1st, the market has managed to climb steadily higher over the past two months in the face of what many, including myself, would consider bad news.
As a whole earnings haven’t really impressed. The European woes continue. And all but a few economic data points have disappointed.
There is no doubt it’s has been a tough environment for most traders and investors.
However, in my opinion, as a self-directed investor there could not be a better time to invest. I’m not speaking about in the traditional way. No the way Ben Graham would have you think. You can analyze a security any way you wish, but the probability of it going up or down will always be 50/50. It’s either going up or down. So you have a 50% chance of success. Subtract fees and commissions and your probability of success moves below 50%.
I am speaking of a way to invest with greater than a 50% chance of success.
I am speaking about using options. Yes, you are all here for a reason. You have just realized or known for a while that using various options strategies gives you a better chance to grow your wealth consistently over a long period of time.
The 10K strategy among others promotes this type of statistical approach. It is the wave of the future for investors. Why do think so many of the world’s best mathematicians and scientists have flocked to Wall Street in recent years? It’s because quantitative strategies rule Wall Street. Times have changed. Buy and hold, while an okay strategy for a portion of overall portfolio, is not the most effective way to grow wealth for self-directed investors.
It’s the statistical approach, the one that allows probabilities to make the decisions, not the machismo of a Wall Street analyst who ultimately has the same odds as a coin flip.
Best of all, with a little work you can learn these strategies. Terry has been teaching how to trade options for years. Now it is up to us, as self-directed investors, to take it upon ourselves to learn alternative ways to grow our wealth over the long-term. Remember, it is your hard-earned money.
Anyway...back to the market.
Next week I expect to see a short-term pullback as the major indices are either in or near an overbought state. Moreover, all of the major indices have pushed up against areas of VERY STRONG overhead resistance. So, don’t be surprised to see some weakness over the next few weeks. |
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| Overbought/Sold Condition Report |
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Overbought/Oversold as of August 4, 2012
• S&P 500 (SPY) – 69.2 (neutral)
• Dow Jones (DIA) – 66.7 (neutral)
• Russell 2000 (IWM) – 57.2 (neutral)
• NASDAQ 100 (QQQ) – 73.4 (overbought)
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| Testimonial of the Week |
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At 55 years old, I've been "playing" with the stock market for years, mostly with very limited success. The majority of my life savings is in multiple mutual funds which, as we all know, are considered superior if they (inconsistently) have returns of 10-11%. After less than six months of investing some IRA funds into two Terry’s Tips portfolios, however, you've caused me to believe that I really will be able to retire on a nice income – and, hopefully, in the not too distant future. Thanks for the spectacular returns and thanks for being willing to share your knowledge and insights.
~Cliff
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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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