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Dear Friend,
Exactly one year ago, we spoke about an interesting options play that might be made before the July jobs report came out. This Friday, the July 2012 report will come out before the market opens, and a similar trade might be in order. It is interesting to note that one year ago, the market (SPY) was almost exactly where it is today.
Here are my exact words delivered on the Monday following the jobs report: “This week I would like to share an actual investment we made last Thursday which involved buying a close relative of a straddle called a strangle (buying a put and a call but at different strike prices). Admittedly, the word strangle does not have the greatest of connotations, but it can be a wonderful thing as we learned last week.
Terry
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| Option Tip of the Week |
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Buying Strangles With Weekly Options (and How We Made 67% in a Single Day Last Week)
On Thursdays which precede the government monthly job reports, we have sometimes employed a strategy that only does well if the stock (SPY) moves significantly in either direction once the report is published (we have noticed that volatility tends to be extreme on those days when the jobs report comes out). Rather than betting that SPY will fluctuate by less than a dollar on Friday (the usual kind of bet we make), on the Thursday preceding the Friday jobs report, we sometimes buy either a straddle or strangle that will most likely make money if SPY moves by more than a dollar on Friday.
This was the Trade Alert we sent out to Insiders on Thursday, July 7, 2011 with about 10 minutes remaining in the trading day:
“July 7, 2011 Trade Alert - Last Minute Portfolio
With the government jobs report due tomorrow, we would rather bet that the stock moves by a dollar or more rather than placing calendar spreads that make a gain only if the stock moves by less than a dollar. We will invest only about a quarter of our available cash:
BTO 30 Jul2-11 135 put (SPY110708P135)
BTO 30 Jul2-11 136 call (SPY110708C136) for $.68 (buying a strangle)”
With SPY trading just about half way between $135 and $136 Thursday afternoon, we decided to buy the above strangle rather than a straddle. If the stock had been closer to one particular strike price, we would have opted for a straddle instead.
We bought 30 strangles for $68 each, investing $2040.
If at any point on Friday, SPY changed in value by more than $1.00 in either direction, we could probably sell those options at a profit. (At any price above $136.50, the calls could probably be sold for more than $68 we paid for the strangle, and at any price below $135.50, the puts could be sold for more than we paid for the strangle.) A small amount could also probably be gained by selling the other side of the strangle as well (unless the stock moved well more than a dollar).
When the government report came out on Friday, the market was spooked by the poor numbers – Non-farm private payrolls were expected to grow by 110,000 while the actual number was a disappointing 57,000. Total nonfarm payrolls grew only 18,000 compared to an expected 80,000 (government jobs dropped by 39,000). The stock (SPY) opened down $1.40 and moved down almost $2 during the day.
Early in the day while the 135 puts were trading at about $1.00, we placed a limit order to sell 25 of our 30 puts at $1.10, and the order was executed about a half hour later. This would insure that we made a profit for the day no matter what happened from that point forward. We were hoping that either the stock moved lower and we could sell the remaining 5 puts for a higher price or the stock would make a big move upward and maybe we could collect something from selling our 30 calls at the 136 strike.
The stock continued to fall, and later in the day we placed an order to sell the remaining 5 puts. We collected $1.52 ($152) each for them. That wasn’t the absolute high for the day but it was darn close. Had we waited until the close, we would have only received $.37 for those puts, and lost money on our investment. This proves the value in taking a profit on the great majority of positions whenever it might come up rather than waiting for a possible windfall gain if the stock continues in only one direction.
Bottom line, we collected a profit for the day of $1363 after commissions on our investment of $2040, or 67%.
Straddle buyers like volatility as much as we don’t like it in our other portfolios. There are many ways to profit with options. It is best to remain flexible, and use the option strategy that best matches current market conditions. Buying straddles or strangles when option prices are low and volatility is high is one very good way to make extraordinary gains, as we happily did last week.
The downside to buying straddles or strangles is that if the market doesn’t fluctuate much, you could lose every penny of your investment (although if you don’t wait too much longer than mid-day on the day options expire, even out-of-the-money options retain some value and should be able to be sold for something). This makes it a much riskier investment than the other option strategies we recommend at Terry’s Tips. However, straddle- or strangle-buying can be quite profitable if the current market patterns persist.
A personal thought – I think that expectations are so low for Friday’s jobs report (and May’s report was so disappointing), that there is a good chance that the market will surge on Friday. Instead of buying a straddle or strangle, I plan to spend a very small amount of money buying an out-of-the-money Jul1-12 Weekly call (maybe paying $10 or less per option) just in case the stock skyrockets. It is my lottery ticket purchase for the week, a reward to myself for having had such a good week (I have been quite long AAPL). Chances are, I will lose the entire investment, just as the chances are hopelessly against you when you buy a lottery ticket. At least my odds are better than being hit by lightning (the lottery ticket odds).
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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 |
Euro Crisis Resolved?
In a slowing global economy and Europe on the brink of a potential disaster, the U.S. economy looks like the best house in a bad neighborhood to many global investors. A continuation of that trend in the second half of 2012 will depend a lot on the U.S. consumer, which looks to be pulling back judging by the latest news on personal income/spending and the University of Michigan's consumer sentiment survey.
But, a step forward was seen Friday as euro zone leaders agreed to allow the rescue fund to inject aid directly into struggling banks and intervene on bond markets to support troubled euro zone countries.
They also pledged to create a single banking supervisor for euro zone banks based around the European Central Bank in a landmark first step towards a European banking union that could help shore up struggling member Spain.
"It is a first step to break the vicious circle between banks and sovereigns," European Council President Herman Van Rompuy told a final news conference after talks which stretched right through the night.
Food For Thought
According to the Bloomberg chart below we should expect to see more paltry gains over the next few months.
Indeed the “summer doldrums” are the slowest months of the year, but that shouldn’t stop you from using savvy, logical, statistically-based strategies to outperform the market.
Most self-directed investors just listen to the talking heads and maintain their “buy and hold” positions without attempting to learn about opportunistic strategies that allow them to make money during sideways to lower markets like we typically witness during the summer months.
Why? Because the financial industry doesn’t teach opportunistic strategies. They really don’t teach anything. They recommend diversification and conveniently create products touting the same mundane industry-wide beliefs that have led most self-directed investors to minimal gains over the past ten years.
We entered a different type of investment environment ten years ago. All of the best and brightest have left the mutual fund behemoths that dominate our industry and have moved into hedge funds. Their political ties are known.
Their agenda is plain to see. It is our job as astute, self-directed investors to make our own investment decisions. It is our job to educate ourselves on what truly makes sense. It’s not an easy task.
Don’t settle any longer. Take the hard-money you earn and invest it wisely. Diversify strategies, not stocks. How many segments either on the radio or television have you heard the so-called professionals speak of calendars, diagonals, LEAPS or a variation of the three?
Never?
Is it because the strategies are too difficult for investors to understand or is it because the so-called professionals don’t know the strategies themselves and are unwilling to learn because the financial industry and its cronies are no more than glorified vacuum salesmen?
They aren’t incentivized to teach you how to grow wealth. They are incentivized to sell you the same products that have led to minimal (at best) growth. And their products are simply a smorgasbord of hyped up, over diversified funds that have been shoved down the throat of every investor for years.
It is your job to learn the strategies they aren’t willing to teach you. It is your job as a self-directed investor to use the strategies successful hedge fund managers use. The fact that you are here, reading this, means that you have taken the first step.
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| Testimonial of the Week |
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“Btw, the last 8 months or so have really been a fantastic learning experience with the current strategies!” ~ Sylvio
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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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