| |
|
|
|
Dear Friend,
Last week was the worst week for the stock market all year. The S&P 500 (SPY) fell by 4.3%. Most investors are unhappy. But not Terry’s Tips subscribers. We carry out five separate portfolios based on SPY. These portfolios gained an average of 16% last week. The worst-performing portfolio notched a 7% gain in value (after commissions, of course).
Today I would like to talk a little about the importance of having at least some of your money invested in something that does best when the general market falls in value. The answer, of course, is a properly-executed options strategy. It can be real simple to set up and carry out.
Terry
|
| |
|
|
 |
|
 |
| Option Tip of the Week |
|
Use Options to Protect Against Market Declines
Last week we discussed the importance of volatility on option prices. When the market falls, the implied volatility of option prices generally moves higher. If you have an options portfolio composed of mostly calendar or diagonal spreads, when implied volatility rises, the value of your entire portfolio is likely to go up as well. That is exactly what happened to our portfolios last week when the market tanked. Implied volatility rose, and so did the value of our portfolios.
One of our portfolios is specifically designed to prosper when he market moves south. It is called the 10K Bear. Last week, this portfolio gained 35%. Over the last three weeks while SPY fell by 7.7%, the 10K Bear portfolio gained a whopping 87.7%.
With results like this, you don’t have to put a lot of your money in a bearish options portfolio to protect against losses in your other (stock or mutual fund) investments. Let’s say you own $50,000 worth of an index fund. Over the last three weeks, presumably your portfolio value has fallen by about $3850 (7.7%). If you had followed our 10K Bear portfolio with one-tenth your index fund investment ($5000), your gain would have been $4385 over those three weeks. Instead of being behind by $3850, you would have been ahead by $535 during the worst three weeks for the market all year. Wouldn’t that be a great place to be right now?
How do we set up the 10K Bear? Right now, we own Jun-12 puts at several different strikes ranging from 131 to 137 (SPY closed at $129.74 at the end of last week). We are short May4-12 options that expire this Friday (May 25th) at strikes ranging from 126 to 132 (with most of the short puts at strikes which are lower than the stock price).
It is important for us to maintain two conditions in the portfolio. Both involve (Greek) option measures (sorry). First, total net theta for the portfolio must be positive. That means that every day the stock stays flat we make money. Second, the portfolio must be negative net delta. That means whenever the market moves lower, the portfolio gains value.
As long as both conditions are in place (adjustments are sometimes necessary to keep them that way), the portfolio should always make gains if the market is flat or falls in value. If the market moves higher, the portfolio will lose value because of its net delta negativity, but some of this loss is offset by the daily gain from theta. Our goal is to minimize losses when the market moves higher by making adjustments (usually buying back some of the lowest-strike short puts and selling higher-strike puts in their place).
I understand that much of what I have just said is totally Greek to you. But it really is simple once you have an understanding of options, and that is exactly what I would love to give you when you come on board and take our tutorial.
Clearly, it would have been best if you had set up a 10K Bear portfolio (or something like it) three weeks ago before the market tanked, but it is never too late to protect your other investments from weaker markets (just in case they do continue). I am suggesting that you place 10% of your money in such a hedge. It seems so logical that I don’t understand why everyone doesn’t do it.
_ _ _
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 (including the 10K Bear which does so well in weaker markets) 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 |
"What has changed in the world since April? We went from hearing a constant refrain that the world is awash in money and markets must go higher to hearing nobody wants to take any risk. ... All in a week,"
-Peter Cecchini, global head of institutional equity derivatives at Cantor Fitzgerald & Co in New York.
Nothing displays the need for safety than the chart for the 20+ Treasury Bond Fund (NYSE: TLT).
The safe haven of U.S. bonds continues regardless if yields are next to nothing. Indeed the world is scared and has no better place to go. This is the last of the major parabolic moves that has yet to pullback. How long it will continue is anyone’s guess, but believe me like all bubbles this one will inevitably suffer the same fate.
As for the broad market, the sell-off has been steady, but accelerating as each trading day passes. The S&P 500 fell 4.3% for the week, its steepest weekly decline this year, and closed below 1,300 for the first time in four months. The S&P 500 is down 7.3% so far in May. The “sell in May” phenomenon continues.
The uncertainties surrounding a Greece default have led to a market that has reached short to intermediate- term oversold readings across the board. Almost every sector has pushed into an oversold extreme. As a result, I expect to see a hard, short-term bounce that should provide the bears another wonderful selling opportunity.
Crude oil futures were lower this week, falling 4.3% to around $91.66 per barrel. Gold futures closed higher this week, trading at $1589.95.
In notable economic news this week, initial claims for unemployment benefits held steady at a seasonally adjusted 370,000 according to the Labor Department. Last week’s figure was revised upwards to 370,000 from the previously reported 367,000. Analysts expected claims to drop to 365,000 last week. The latest decline has been historic, yet the market remains in positive territory for the year.
Jason Goepfert of Sentimentrader.com recently stated “the selling pressure we've seen over the past 3 weeks isn't unprecedented, but it's very, very unusual. Using the Dow Jones Industrial Average back to 1900, there are only a handful of situations that can compare to the persistency of the decline we've suffered. Over the past 15 trading days, the Dow has declined 13 times. On the two days it managed to squeak out a gain, it was no more than +0.5%. That's remarkably weak. So weak, in fact, that we haven't witnessed anything similar in nearly 40 years. And over the past 112 years, there have been only 9 other precedents.”
Indeed we are making history. Now is not the time to be a hero. Trade wisely and always remember trading is a marathon and not a sprint. Pick your spots and trade small. Expect volatility to kick higher which should provide premium selling options strategies excellent opportunities over the coming months. |
|
|
|
|
|
|
|
| Overbought/Sold Condition Report |
|
Overbought/Oversold as of May 19, 2012
• S&P 500 (SPY) – 13.4 (very oversold)
• Dow Jones (DIA) – 12.6 (very oversold)
• Russell 2000 (IWM) – 11.4 (very oversold)
• NASDAQ 100 (QQQ) – 8.3 (very oversold)
|
|
|
|
|
|
|
|
| Testimonial of the Week |
|
I have a PhD in math, but make my living from computers (software.) It is fair to say that during the last 25+ years I spent THOUSANDS of hours reading, learning, simulating and developing trading systems. Since I subscribed to your service, I spend most of my research time on it and I gain bigger and bigger confidence that "this is it (for me). I learn something new from every single report. It is extremely useful for me that you don't simply list the changes to be made, but reveal the thought process behind them and discuss alternatives. I feel that these lessons will make me a better trader". – Joseph J.
|
|
|
|
|
| |
|
|
|
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
|
| |
|
|
|
|
|
