Dr. Terry Allen

Value, special situations, growth, stock options
Dr. Terry Allen
Value, special situations, growth, stock options
Contributor since: 2012
Company: Terry's Tips Inc
In my opinion, buying naked put LEAPS is a poor way to protect against a market crash. The market would have to fall a full 10% before you would make a penny on the investment you suggested. While that happens every once in a while, you are basically trying to time the market, hoping that the next 18 months is one of those windows when a large correction will take place. You might be lucky, but the odds are seriously against you.
There are a lot of other ways to hedge against a market crash (using options) that won't cost you so much. Some strategies won't cost you anything, in fact, except tying up a little money.
I have spent my entire Sunday afternoon digesting this fine article and reading every comment (whew!). I am impressed that the author is at his computer and responding to comments on this same afternoon.
For many years, I have recommended XIV (and SVXY, because it has options) in my TerrysTips options newsletter. I was delighted to find someone who agreed with me. However, I believe that ZIV is a better long-term holding than XIV. It has a similar upward inclination because of contango but does far better when fear raises its ugly head and crushes XIV. Last week, for example, when fear escalated because of the crisis in Greece, XIV and SVXY each fell 16.5% while ZIV lost only 4%. This is typical in down markets. For the last two years, ZIV has outperformed XIV, even though this has been a relatively good stretch for XIV.
I also might point out that the recent comment of the extreme volatility of XIV made by Allan Harris was essentially nothing more than a plug for his newsletter (if you click on the link at the end).
Sorry this is so long, but I did not have time to make it shorter.
So what is the algorithm? An explanation seems to be missing.
Where did you get your numbers for the interesting but apparently totally incorrect graph? The S&P 500 rose over 30% in 2013 yet your graph shows it going up about 10%. The S&P 500 grew twice as much in 2013 as it did in 2014 but your graph shows nearly the opposite.
I would do it if the numbers were available. See my comments above.
Please see my response to deancope above - over a 5-year period including the biggest one-year market collapse in this century, SPY still did better than any target-date fund.
I checked back to see if what you say might be true. The earliest S&P Target-Date Scorecard was for the years 2006-2010 which included the 37.22% drop in the S&P 500 in 2008. The annualized gain for the S&P 500 over those 5 years was 5.2%. There was not a single target-date fund that did that well, although many were close, much closer than they were in the most recent 5-year bull market. Bottom line, however, the numbers were nowhere near being reversed. SPY beat every target-date over that period as well.
The Wall Street media machine would love for us all to believe exactly what you have said. But a worker who must choose between investment alternatives available to him in his company's 401(k) plan essentially must decide whether to bet on the stock market or not. Over the long run, buying SPY is a far better choice than any target fund. The market does manage to go up over the long run but bonds have yielded essentially nothing for a very long time. When the person retires, he can close out his 401(k) and choose the allocation that best suits him at that time. With his money in SPY over his working years, he will undoubtedly be far ahead with his SPY returns than he would with any target fund.
I stand corrected. Thank you. I have asked Seeking Alpha to change the number.
Very well researched and written article. Thank you. I have recommended reading it to my subscribers (to my Terry;s Tips newsletter). We carry out an options portfolio using NKE as the underlying that made 70% over the past six months, and we are looking forward to picking up more, especially if the stock moves sideways for a while as you suggest it might.
This Forbes article cites the 5.3% as well as Buffett's belief that future years will be lower - http://onforb.es/1ixNXFK
Where did you get your 4.5% dividend figure? It is closer to 2%, or just about how much the fees are for anyone with an equity mutual fund, bringing the net annual gain back to 5.3%.
The 5.3% average market growth of the U.S. stock market over the last 100 years was calculated by Warren Buffett and published in his 2008 letter to stockholders. Do you consider him to be just "other people?" Your 10% figure is exactly what the Wall Street media machine is trying to foist on the gullible public - I guess they succeeded with you at least.
The Dow should go the way of the buggy whip. The only company that has been in the Dow since the beginning is GE. Since the turn of the century, GE has fallen by 50%. If it were the only company in the Dow, we would be looking at a Dow of 6000 instead of 16,000. They only goosed up the Dow by adding high-flyers and eliminating decaying companies, all part of Wall Streets propaganda machine.
Okay, let's take 15 years. The S&P500 has gone up an average of 4.2% compounded annually (calculate it yourself). That doesn't count
dividends (which were taxed as ordinary income for most of those years so really get cut in half) but it also does not count the fees that managers extract for managing your money. And the total does not take into effect that the 500 companies are an all-star selection with the weak ones being removed and replaced by others which are growing faster. Bottom line, the market has not performed half as well as Wall Street propaganda would lead us to believe.
The S&P 500 is juiced up to all-star status just like the Dow. A couple of times every year, weak companies are dropped from the index and stronger ones added to it. Of course their records would look similar.
You have clearly drunk the Wall Street cool-aid hook line and sinker. Brainwashing works. While I will be guilty of mixing metaphors, you have enjoyed the sausage without any understanding of the ingredients that went into making it.
Sometimes it's a good thing that options don't trade after hours.
Actually, they didn't. We closed out the spread for a 26% gain after commissions.
I hope you didn't pay too much for the puts and were quick to close them out early in the day on Thursday. We closed out the spread I suggested for a 26% gain after commissions.
No problem. I did read your article and thought it was good. Great minds must think alike. Now we have to wait until tomorrow to see if we were so smart or not so smart. So much of the market is dependent on unforseeable unexpected news events beyond our control.
They are not Aug 2 calls but the weekly calls that expire 8/9/13 - they are typically called Aug2-13 77.5 calls (GMCR130809C77.5). I own large numbers of Dec-13 67.5 calls and have sold the Aug2 weekly calls at the 77.5, 80, and 82.5 strikes. With the stock up strongly since placing these orders Monday morning I am showing a 10% paper gain on the positions at this point.
Thanks for your kind words. I appreciate them.
Oh, the power of Seeking Alpha. When my article was published, GMCR was down over $2 on the day, and in the few hours after it hit the Internet, the stock moved higher by over $4.50 and is now up over $2.50. It was either a remarkable coincidence or maybe lots of investors read these articles and act on what they read.
While most companies move higher going into earnings, when the last month or quarter has been up strongly as both GOOG and STX (and SBUX although I did not write a Seeking Alpha article about it but did for my subscribers), the stock is quite often down for the last two or three days before the announcement, so if you are placing a bearish bet, it might be best not to wait until the last minute. That proved to be very profitable for us with STX and SBUX this week.
Nobody probably reads down this far, but I hope someone sees that I really nailed this one on the head. They beat estimates and the stock tanked anyway because expectations were so high. A court re-affirmed a $650 million lawsuit in their favor this week as well (which should have moved the stock higher).
You did better than we did. We bought 3 different spreads, 915 calls in three different months and sold weekly 910 calls which expired worthless. We averaged a gain of 58% on these plays. Not bad for one day.
You must be feeling great today. Congrats.
The short-term option prices often move higher just before the announcement and since you are short them you are seeing a paper loss. As I write this just after the announcement it looks like there will be a big drop rather than just a moderate one. I placed a bunch of diagonals at a credit so I don't care how far down it goes - a profit is guaranteed with those (I also bought naked long puts because I felt so strongly that it would drop after the announcement, but I couldn't recommend that in my article or they wouldn't have accepted it due to its being too much about options.
Yes, you are right. I have corrected it. Thanks.
Yes, Jul2-13 is the weekly expiring on Friday, July 12. This is the designation that is used on the trading platform at my broker, thinkorswim, and I understood was used by many other platforms as well.
Thank you. I will try to fix it.
Well, it's been eight years since my settling with the SEC (without admitting guilt, by the way), and ever since then at least 30 unregistered newsletters are having trades executed through Auto-Trade programs openly and daily. One would think that if the SEC intended to shut them down they would have done it long before now.
The essence of Auto-Trade is that it is a contract between the customer and a broker (who is licensed). The newsletter does not participate in that contract, and is just publishing its trade recommendations for all its subscribers to see. The customer makes an agreement with the broker to honor those recommendations and execute trades in his or her account.
Auto-Trade is something the broker offers, not the newsletter. The SEC can't go after the newsletter for expressing its opinions. The newsletter is not a party in the Auto-Trade contract.