The Options Report : Market Analysis

What Would Yogi Berra Do?

Ken Trester — Thu, 17 Jul 2008 14:46:43 GMT

If you don’t know where you’re going, you’ll end up some place else.” -- Yogi Berra

Ha! I love Yogi.

How can anyone be so right and make you scratch your head at the same time? Yogi could have said, “You need to know where you’re going,” instead. But had Yogi been so direct, his line just wouldn’t have had the same punch.

In mid March I wrote, “Topic A in the financial press is the continuing market collapse. When will it hit bottom; what will the bottom number be; when will it be safe to buy stocks again?” Now that line doesn’t nearly have the same cache as Yogi’s does it? No it’s a little more professorial. Well, I’m no Yogi.

Here we are in mid-July, four months later and Topic A remains the continuing market collapse. Question number one remains when will be safe to buy stocks again?

Over the months I’ve reminded you that us stock options players can make money on either side. We don’t care about the market direction. If you look at my posted track record you’ll see that advice in real world action:

8 of our last 10 positions made money; that’s an 80% winning ratio. All 8 winners were puts. One loser was a call; the other a put.

If you are interested in more information about my newsletter, Complete Options, go to http://www.completeoptions.com/COR-II-WEB-02-20-08.htm

While I’m happy as a clam making money for you I am concerned about two things. This sinking market is worrisome. Sure we’re making money but it’s like the over all market – and the country – is forced withstand this Chinese water torture. This is not good.

Second and on a personal level the market will turn around and some day I’ll be writing that 8 of out past 10 winners were calls; not puts.

We need to know where we are going and when we are going there to keep taking profits.

How will we know when the market truly turns? How will we know when the Bear isn’t just giving us just a head fake?

First you’ll see my recommended calls increase in frequency. And then there will be this:

Volume.

The volume will noticeably change.

Determining when the market hits bottom or a temporary bottom is to measure the amount of panic in the market. One classic line is “only buy when there is blood in the

streets” or when in the pit of the stomach, you feel the world is coming to an end.

This is, indeed, the time to buy. One easy way to measure such panic is to look at two indexes, the CBOE Volatility Index (VIX) and the Nasdaq Volatility Index (VNX).

The CBOE Volatility Index measures the implied volatility of the puts and calls of the S&P 100 Index (OEX). The Nasdaq Volatility Index measures the implied volatility of puts and calls of the Nasdaq 100 Index. The higher the implied volatility, the more expensive the options.

The implied volatility getting extremely high is a sign of panic in the market. Sometimes it takes a few weeks to reach that bottom, but when the VIX and VNX are extremely high, it is time to start entering bullish strategies.

And we will.

One warning, however, the VIX and VNX must be at extremes. I’ll keep my eye that; you don’t need to.

Sorry about that technical jargon. As I said I’m no Yogi.

You’ve hired me and it’s my job to make trading options profitable. 8 out of 10 winning options trades does that nicely.

I’m going to take care of the heavy lifting giving my best recommendations weekly.

Here’s how Yogi would advise you… "When you get to a fork in the road, take it."

That’s all I meant to say – when the market changes direction I’ll get you there.

For more information about my newsletter, Complete Options, go to http://www.completeoptions.com/COR-II-WEB-02-20-08.htm

Why Options Now?

Ken Trester — Wed, 16 Jul 2008 14:12:18 GMT

The past year or so has been very instructive even for veteran investors.

Sharp, sudden rallies are followed by equally sharp, sudden collapses. I will not lie to you – this is a tough market.

But the lesson is clear -- it pays to have exposure to the market at all times. How else can you make money?

Trading stocks right now is not easy and the risk of losing and losing big time has put a lot of traders on the side line.

But as a Complete Options subscriber (http://www.completeoptions.com/COR-II-WEB-02-20-08.htm ) you could be in exactly the right place.

Options are excellent speculative vehicles which require relatively little financial exposure and still offer big time profit potential. Cheap options can give you outstanding bang for your buck or good downside insurance when you buy puts.

The Best News

Right now is the best time to use options as a replacement for purchasing stocks and you’ll get far more leverage and far less risk as you participate in the stock market.

This strategy protects you from the risk of a crash in the market, as long as you don't go overboard.

To use options as surrogates for stocks you must usually purchase in-the-money calls (the stock price is above the strike price) that have minimal time value. But this is a mistake since in-the-money options are expensive.

When trading with more expensive stocks you will have to pay from 5 to 10 points ($500 to $1,000) for in-the-money options. The drawback to this is that if the stock has a sharp correction much of your premium will collapse. You’ll lose big time.

To protect yourself somewhat from this you can buy an out-of-the-money LEAP, which is a long-term option that can last for up to two and a half years. This large amount of time helps the option premium hold up better during a stock decline.

But a LEAP is more expensive than a shorter-term option. So when you buy a LEAP it is very important to set a mental stop loss on the underlying stock.

Build Your Own Portfolio

If your stock buying program has been on the sidelines you might consider using LEAPs as a substitute.

For example as I am writing GE is trading at $27.48; 500 shares would cost you $13,740.00 a lot of money to risk in this market.

Take a look at what a GE LEAP option can do. You can control 500 shares of a January 2010 30 GE call for just over $1,300. The most you can lose is $1,300 and you have control of GE for another 17 months.

I ask you what is the safer and more prudent trade in this market -- $13,000 of stock or a $1,300 LEAP option?

I could list trade after trade like GE and in virtually every case you’d be better off trading LEAPs if you want market participation right now.

How to Protect Your LEAP Profits

As I said above you need to use a stop loss as we do here at Complete Options. You need to set a mental stop loss and if the stock closes below this stop loss, sell the LEAP.

This will usually protect you from losing much or your entire option premium if the stock declines. Letting time and money slip away is a major sin of option buyers.

This stop loss should be a "trailing stop." As the option increases in price due to a rise in the stock you keep moving the stop loss up so that it is never more than 5 or 10 percent below the stock price.

But if the stock price declines, you do not adjust the trailing stop. This way, if the stock declines from its high you will be able to sell the LEAP in plenty of time to preserve most of your profit.

Also, LEAPs tend to lose their value quickly in the last six months before expiration. So if you own a LEAP that is out of the money when it moves into its final six months of life, you should strongly consider closing your position.

Another key to buying LEAPs and in-the-money options is to make sure that you are paying a fair price. These options cost more than short-term options, so your risk in the event of a price collapse is greater. The less money you have on the table, the less your risk will be.

To sum up, options can be excellent surrogates for stocks. But be sure to pay a fair price for these more expensive options and use a stop loss to protect your premium in case the stock declines.

Need options trading help; need options profits? Go to: http://www.completeoptions.com/COR-II-WEB-02-20-08.htm

Nine Principles For Successful Options Trading

Ken Trester — Tue, 04 Mar 2008 21:32:20 GMT

This week I'm going to give you nine critical principles - guidelines if you like -- I use in my own trading.

As you may know I've been trading since 1973 and these nine principles have helped me more than you can imagine...

You see to be a really successful options trader you need to know the "nuances" of trading.

My nine principles are not hard but it's like anything else - the devil is in the details.

Before I get to my nine principles, I'd like to point out my winning trades this week - I'm proud of them and I suspect my subscribers are smiling as well. I would also like to take this opportunity to spotlight a technique that I often use in combination with my nine principles.

First and foremost my recommendations are about hitting home runs (making the really big profits in just a few days) and there is one technique that I use frequently: buying extremely cheap options. Some call this technique "bottom fishing."

The following profits were all earned using this technique...

I closed the Hecla Mining short-term Power Option for a 76% profit and also a Thornburg Mortgage Call debit spread for a 33% profit.
Three other Power Options were closed for three-week profits. A Nortel Networks Jun Put was closed for a 63% profit, a Rigel Pharmaceuticals Jun Put was closed for a 40% profit, and a Broadcom My Put was closed for a 29% profit.

Not bad - all the calls and puts were opened and closed in 3 weeks or less.

I was just reviewing my buy prices in my newsletters so far this year. The lowest price was just $58.00 per contract; highest was $270.00.

That's cheap.

Obviously that means you can control 100 shares of stock for as little as $58. I don't know about in your neck of the woods but my last parking ticket cost more than that.

The biggest potential loss on that should have been around $29 - but in fact I "hit a double" - earning 21% in 21 days. Not too shabby. And when there are losses, the key is taking small losses while racking up home runs (and some doubles and triples) on cheap options. Cheap options have the potential for the very biggest of the big gains. It just stands to reason - the smaller the investment, the bigger potential percentage gain.

Now, let's cover the nine principles of option trading that should improve your overall profits.

If you are new, be patient. Don't invest everything right away. Decide how much you want to risk in options during the next twelve months and spread your purchases over that time frame.
Diversify. Take at least two or three positions and try to always own both calls and puts. With the recent swings in the market, playing both sides will improve your chances in the long run. Don't forget this.
Minimize your risk. Pay as little as possible for each option and always be ready to cut your losses. Part of my job is to help find the cheap options and then get you out with a profit - FAST!
Plan before you play. If you do not have a game plan that tells you when to take profits and when to cut losses you will have a very difficult time making a profit. I can help lay out a game plan for you with every options play.
Don't be greedy. The downfall of 90% of all options investors is greed. Putting all your money down on a "sure thing" is a certain recipe for disaster. I've been trading since 1973 - there are no sure things; never bet the farm.
Maximize your leverage. Try to buy options that will increase in value by at least 100%. Buying cheap options is the first step in this strategy. I'm always on the prowl for 100% winners - sometimes I take less. But any profit in 3 weeks is a dandy profit in my book.
Buy options on high volatility stocks. You have a limited amount of time to work with. Your best plays are on volatile stocks.
In general, buy out-of-the-money options. These options normally have lower prices, and less risk. I can help you make money and point out the best possible risk reward picture.
Be patient. This is worth repeating. Contrary to common wisdom, buying speculative options is not a game that requires action every day. Successful options buying requires patience and selectivity. It is the only way to win this game.

If you follow these principles, you will increase your chances of making profits in the options game.

Now to the latest market analysis...

My indicators are giving neutral to bearish readings. This week is historically one of the most bullish weeks of the year for stocks so we could see a bounce following last week's sell-off. However, major investors continue to use rallies as chances to sell stocks and lower their exposure, especially in the financial sector. As long as financial stocks remain weak, the overall market will have a hard time sustaining rallies.

The past few months have been very instructive as to the power of stock charts. We've often referred to the bearish moving average crosses that all the major indexes have made. This is the primary sign of a bear market and is the main reason many institutions continue to sell stocks into rallies.

There are also a couple of secondary chart indicators that have been very good at predicting when the selling will begin and when it might end. For example, the rally early last week took the Dow Industrials up to their 50-day moving average. But once the index reached that level, the selling began.

Another, more subtle trend has arisen recently as a support level, and that is the Dow's long-term growth trendline. This trendline proved to be the low in 2003 when the previous bear market came to an end. And it has proven to be a support level over the first few weeks of 2008. The positive aspect of this is that this growth trendline promotes a "higher low" chart pattern, which of course is half of the "higher lows, higher highs" formula that investors need to see before they believe that the bear market has ended.

Currently the Dow is once again perched right at its growth trendline. If that fails as support, 12,000 is the next test. And if that fails... We've stated numerous times that a fall to 11,000 is the likely next stop. Options players should continue to focus on bearish positions and try to buy puts on mini-rallies so you get the best price possible.

Up Market? Down Market? It Makes No Difference to Options Traders... Find out more on how I can help you with a subscription to The Complete Option Report.