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Why Calendar Spreads Are So Much Better Than Buying Stock:
I like just about everything about Costco. I like to shop there. I buy wine by the case, paying far less than my local wine store (I am not alone – Costco is the largest retailer of wine in the world, selling several billions of dollars’ worth every year). I like Costco because they treat their employees well, paying them about double what Walmart pays its people. I like shopping at Costco because I know I am never paying more than I should for anything I buy. It seems to me that the other customers like it, too. Everyone seems to be happy while roaming the aisles and enjoying the free samples they offer (I have a skinflint friend who shops at Costco once a week just for the samples – they are his lunch that day).
But most of all, I like the stock (COST). It has been very nice to me over the years, and I have consistently made a far greater return using options than I would have if I had just gone out and bought the stock.
I recently set up an actual brokerage account to trade COST options for the educational benefit of Terry’s Tips paying subscribers. I put $5000 in the account. Today, it is worth $6800. I started out buying calendar spreads, some at at-the-money strike prices and others at higher strike prices (using calls). I currently own October 2015 calls at the 145 and 150 strike prices (the stock is trading about $146.50), and I am short (having sold to someone else) May-15 calls at the 145, 147, and 150 strike prices. These calls will expire in 23 days, on May 15, 2015. (Technically, the 147 calls I am short are with a diagonal spread rather than a calendar spread because the long side is at the 145 strike. With calendar spreads, the long and short sides are at the same strike price.)
Here is the risk profile graph for my positions. It shows how much money I will make (or lose) at the various possible prices where COST might be on May 15th when the short options expire:
In the lower right-hand corner, the P/L Day number shows the expected gain or loss if the stock stays flat ($148.54), or is $3 higher, or lower, than the current price. If the stock stays absolutely flat, I should make about $976, or about 14% on the $6800 I have invested.
I could have bought 46 shares of the stock with $6800 instead of owning these options. If the stock doesn’t go up any in the next 23 days, I would not gain a penny. But the options will make a profit of about $976.
If the stock falls $2 by May 15, I would lose $92 with my stock investment, and my options would make a gain of $19. I am still better off owning the options. Only if the stock falls more than $2 ½ dollars over those three weeks would I be worse off with the options positions. But I like this stock. I think it is headed higher. That’s why I bought COST in the first place.
If I am right, and the stock goes up by $3, I would make $138 if I owned 46 shares of the stock, or I would make $1,700 with my options positions. That’s more than 10 times as much as I would make by owning the stock.
Can you understand why I am confused why anyone would buy stock rather than trading the options when they find a stock they really like? It just doesn’t make any sense to me.
Of course, when the options I have sold are set to expire in 23 days, I need to do something. I will need to buy back the options that are in the money (at a strike which is lower than the stock price), and sell new options (collecting even more money) in a further-out month, presumably June. The lazy guys who just bought the stock instead of owning stock are lucky in this regard – they don’t have to do anything. But if the stock had stayed flat or risen moderately over those three weeks, I know that I am way ahead of the stock-owners every time.
While stock owners sit around and do nothing, my job on May 15 will be to roll over the short calls to the next month (and use the cash that is generated to buy new spreads to increase future returns even more). I show my subscribers exactly what and how to make those trades each month (in both the COST portfolio and 9 other portfolios which use different underlying stocks). Hopefully, eventually, they won’t need me any longer, but they will have discovered how to use stock options to dramatically increase their investment returns on their own.
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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. seth@terrystips.com
You can see every trade made in 8 - 10 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?
Even better, you can become a Terry’s Tips Insider, and receive all our educational reports and materials absolutely free by opening a new account at the best options broker around - thinkorswim. If you open an account with our link, they will give you 60 days of free trading or up to $600, the same deals they give to everyone who opens an account with them. You must use this link to sign up - open thinkorswim account – and once you have funded your account with at least $3500, email Seth@TerrysTips.com and let him know that you have done it, and this is what he will do – sign you for our Premium Service package ($119.95 value plus an extra 4 months of our Premium Service, valued at another $190.80). You get $300.65 worth of services without paying us one penny.
I look forward to having you on board, and to prospering with you.
Terry
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