Stock Options Trading Idea of the Week
The Joys of Calendar Spreads and Our
On October 23, 2008 we started a $10,000 options portfolio that was to be our "most conservative" portfolio. I sent you a copy of the risk profile graph that showed the gain or loss that would come about in 4 weeks at the November 21 expiration. If you recall, the stock (SPY) could go up (or down) by 15% over that period and a large gain would result no matter where it landed within that range. (We also set aside $1,000 to make adjustments in case the stock started to move strongly in either direction.)
This new portfolio is called the Big Dripper because we intend to withdraw $150 in cash (1 ½%) from it every month forever, regardless of how much it gains or falls during a single expiration month. We will create positions that allow for a greater fluctuation in the stock price than any of our other portfolios for a gain to result. Our annual profit target for the Big Dripper is 20% - 25% a year (with an extremely high expectation of reaching that target).
Just in case a windfall gain (which we described as 20% or more in a single month) resulted, we would withdraw much of it so that new subscribers could mirror the portfolio (either on their own or through Auto-Trade with their broker) with about $10,000 to start.
Eight days has now expired, and the windfall gain has already come about. In this short period of time, the Big Dripper has made a whopping gain of 34%, well more than our target for the entire year. And the risk profile graph shows that further large gains are possible in the next three weeks over a wide range of possible stock prices (current price of SPY is $96.83). The stock can fluctuate by as much as 10% in either direction and we will gain an additional 20% in three weeks:
The New York Times has reported that October 2008 was the most volatile month in 80-year history of the S&P 500. At Terry's Tips we feature an stock options trading strategy that does best when volatility is low, so we would expect to get killed when stock prices are fluctuating all over the place as they have recently. However, over the past two weeks, our portfolios have gained an average of over 26%, and it is all due to the discrepancy in short- and long-term option prices that we hope will continue (if it doesn't we should be back to our historical above-average gains).
Our recent experience has demonstrated the exceptional opportunities that exist for a calendar spread strategy especially when there is a discrepancy between the option prices of short- and longer-term options. It is a phenomenon worth waiting for and plowing everything you can into when it comes up.
Maybe it is time for you to come on board and participate in these exceptional gains with us - it will cost you less than a decent dinner for two, and might dramatically change your investment returns for the rest of your life - check it out here.
Andy's Market Report
No, I am not going to say it. I refuse to write, once again, that it was another crazy week for the stock market. Okay, there you go. Are you happy now?
Several weeks ago, October 10th to be exact, the market moved decisively lower and many on Wall Street, particularly the talking heads, stated that the bottom had been established. It was straight up from there, right? Well, not exactly.
The market did bounce sharply higher, but the rally only lasted two sessions. From that point forward the market carved its way lower to eventually establish a new closing low which happened to occur earlier this week.
On Monday, the market looked bleak before the open as Asian and European markets were substantially lower, but the market managed to shrug off the bearish sentiment to rally at the open, but like all of the other rally attempts over the past two weeks it failed miserably and a new low had been established as a result.
The performance of the S&P 500 (SPY) was now 27.6% lower than it was just 18 trading days prior. It was a staggering loss to say the least.
It was much of the same for most of trading day Tuesday. The market was drifting around in an extreme short-term oversold state (that was been established in the prior session) and then two hours before the close the market began to rally. This time the bulls were able to stave off the bearish thwarts. The major market benchmark closed the day higher approximately 10%.
The rally occurred in the face of the lowest consumer confidence reading ever.
Layoffs, steadily declining home prices and tumbling investments pushed the reading to 38, well below economists' expectations of 52. The CCI declined a staggering 38.1% in one month.
"Consumers are extremely pessimistic," said Lynn Franco, director of the Conference Board's Consumer Research Center. "This news does not bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season."
The advance was attributed to a mix of bottom-fishing, the rebalancing of mutual funds near their fiscal year-end, low volume and massive short-covering. Prior to Tuesday's bullish bounce the market had declined 13.9% during the previous five trading sessions. As much as all of those might have attributed to the advance I think the fact that the market was at historic oversold levels might have been the most important factor in Tuesday's steep advance.
Wednesday was a 'Fed day' and the announcement from Bernanke and his crew trumped all news. The Fed, as expected, lowered the rate by 50 basis points to 1.0%. This was the second 50 basis point cut in three weeks.
Thursday, brought the GDP report and many on Wall Street were expecting the worst. So, when the numbers came in slightly better than expected the market rallied, although the gains were most realized in the premarket hours.
The Commerce Department's reported that GDP declined at an annual rate of 0.3 % during the third quarter. Economists anticipated a 0.5 percent %. It was the worst reading in 7 years.
Gross Domestic Product is the broadest measure of economic growth or contraction. Again, while the report was better than expected, it still pointed to an economy that is contracting.
Goldman Sachs U.S. Economic Research
"Real GDP dipped 0.3 percent at an annual rate in the third quarter, roughly splitting the difference between the consensus expectation of a 0.5 percent decline and our estimate for no change. The guts of this report are quite weak, as consumer spending (-3.1 percent), residential investment (-19.1 percent), and capital spending (-1.0 percent) all fell. Relative to our expectations, the declines in consumer and capital spending were worse than we had estimated; the drop in housing activity was modestly smaller. Although the reduced pace of inventory liquidation contributed less to growth than we had expected, government spending-mainly for defense-was much stronger. On balance, we see this report as weaker than implied by the initial market reaction."
Technical Mumbo Jumbo
Why is October so incredibly horrible for the stock market? The 1929 crash, Black Monday in 1987are just to name a few of the horrible market events that October has hosted. Now we can add the 2008 Credit Crisis.
Needless to say (but I guess I will anyway), it was the worst month in 21 years. It would have been even worse, but this past week was the best week for the stock market in 34 years.
"It seems like it all came together in October," said Denis Amato, chief investment officer at Ancora Advisers. "You had people recognize that things were worse than normal with the credit crisis. It just sort of collapsed all into that one period."
The fear has clamed a bit though as indicated by the VIX. The investors fear gauge hit an intraday high in the 90's in October before settling at 59.76 on the final trading day of the month.
Next week the have an election to contend with in the stock market. Currently, the overall market, including a few leading sectors have pushed into an overbought state, so I expect to see a near-term decline before another substantial push higher. I would not be surprised to see the S&P 500 (SPY) close the 10/6 gap by the end of the year. The move that I speak of would take an 11.7% gain. You can bet if and when it does occur that we will see a wall of overhead resistance (particularly if we reach it while in a short-term overbought state) at that level so mark it on your charts.
Historically, weak Octobers lead to a bearish first week in November so it will be interesting to see if that precedent holds up with all of the madness that the market has to absorb next week.
Overbought/Sold Condition Report
Overbought/Oversold as of October 31 , 2008
Major Benchmarks - Dow (DIA) - 62.0 (neutral)
- S&P 500 (SPY) - 62.2 (neutral)
- Russell 2000 (IWM) - 66.7 (neutral)
- Nasdaq 100 (QQQQ) - 64.2 (neutral)
- Emerging Markets (EEM) - 68.3 (neutral)
Testimonial of the week
"I joined your program recently and finally got my account funded at thinkorswim. I bought the Big Bear on autotrader on Tuesday and even with the market doing unbelievable price changes I am happy to say I am up 13%. I can not believe it
Thanks again ---- I look forward to making good money in the future because I believe the market will be consolidating until July 2009 which will be very good for us."
Michael R. 10/25/08
