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us stock market, understanding the stock market
Begin Part 2 of 3
SUBSCRIBER QUESTIONS
Q: I have been so tempted to play puts in this wonderful downtrend. However, I am afraid to get a stock "put" to me. My question is, if a stock is trading at $55/share, would a stock get put to me if I buy a Aug-50 put or a Aug-60 put. Can you give a brief description on how that works? Why are put contracts so damn expensive compared to call options? Thank you, your faithful subscriber JD.
A: Your question brings out some of the common misperceptions of option trading/investing. The biggest: you have unlimited risk in options. The answer is 'yes' only in really one type of option transacction. On all the others the anwer is a big 'NO' in that your risk is 100% defined BEFORE you enter the play. That is just one of the reasons we really like options: our risk is limited to what we put into a play. And because options allow us to use smaller sums of money to leverage into a position, the risk is technically less than owning a stock (e.g., a $10 stocks goes to $0, you lose $10 per share. A $1.50 option on that same stock goes to $0, you lose $1.50 per share.).
You only would get a stock put to you if you sold the put without owning it (i.e., buying it) first. If the stock falls, the value of the put goes up, and someone can put the stock to you, that is make you buy it, at a price higher than market price. For instance, you sell a $15 put and the stock falls from $16 to $10. Someone owning that put can go buy the stock at $10 and force you to buy it for $15. That only happens if you sell the put naked.
In this market we do not sell many naked puts. We are buying puts to take advantage of of the downside action (we also sell some calls naked from time to time, but that does involve theoretically limitless risk). As we are buying, that means we are coming out of pocket to buy the options. We can choose to exercise them or not or sell them or not. Our risk is defined at the maximum to the cost of our purchase. In that sense they are just like buying calls on stocks anticipated to move to the upside. There is no difference other than you are taking opposite positions.
As we have noted before, the downside of late has been as easy and as fast as the upside in the last of the big bull market. We receive emails from subscribers somewhat shocked at how easy and how fast the gains are coming to the downside as they play the same pattern and even same stock again and again. We cover these topics in detail in our seminars which are also AVAILABLE ON CD's RIGHT NOW. You get reference quality materials as well. The 'Options You Can Use' seminar discusses understanding options and very straight forward, simple ways to use them to take advantage of the market ups and downs. Technical Analysis III discusses how to play a down market. We recommend the entire Technical Analysis series (I, II, AND III) to fully understand market movements. Package prices are available. We don't want to sound like a commercial, but the information is detailed and is just beyond the scope of this forum.
To sign up, go to the following link and click on the CD sales link:
http://www.stockseminarsonline.com
This is Jon Johnson's internet site for online seminars and the theories taught are the same that have delivered dozens and dozens of fantastic downside put plays during this downtrend. Hope you check it out.
THE PLAYS:
Good movers: WHI hit the target. Apparel had a tough day as did other stocks that have been leading. The puts tanked and hit many targets.
BONUS PLAYS:
We are going to get a bounce here. Dell announced it will surpass earnings, JNPR beat them, and the market started a reversal Thursday. We are looking at capturing this upside, one reason because there have been several bounces down this trend and it is primed to rise higher. These are not long term investments, but they hold potential for very nice returns.
FLEX (Flextronics--$8.14; +1.12; optionable): Contract electronics manufacturer
http://biz.yahoo.com/p/f/flex.html
STATUS: This sector is announcing things are looking better. FLEX broke over its 18 day MVA Thursday on very strong volume. That gives is some room to run; not a ton, but enough to make us a good return. We can use stock or options on this one given the price though the options leverage helps.
Volume: 17.842M Avg Volume: 11.317M
BUY POINT: $8.41 Volume=12M Target=$10.69 Stop=$7.82
POSITION: QFL JU - Oct. 7.50 call (70 delta) and/or stock
http://www.investmenthouse.com/cs/flex.html
MSFT (Microsoft--$52.91; +0.67; optionable): Software
http://biz.yahoo.com/p/m/msft.html
STATUS: Ascending wedge. One of the patterns in tech making higher lows. After pulling back to the up trendline in the wedge MSFT tested lower and rallied Thursday on huge volume. We want to catch it early and let it run to the top of the range at 56. If it breaks over there and keeps running, we will let it.
Volume: 64.814M Avg Volume: 35.779M
BUY POINT: $53.15 Volume=45M Target=$56.25 Stop=$51.95
POSITION: MSQ HJ - Aug. $50 call (70 delta)
http://www.investmenthouse.com/cs/msft.html
ORCL (Oracle--$9.42; +0.44; optionable): Software
http://biz.yahoo.com/p/o/orcl.html
STATUS: Making higher lows itself and showing 2 weeks of accumulation to no distribution weeks since mid-May. It cracked over its exponential 50 day MVA Thursday on strong, above average volume. Looks ready to make some money for us here.
Volume: 73.131M Avg Volume: 49.508M
BUY POINT: $9.55 Volume=70M Target=$12 Stop=$8.88
POSITION: ORQ IU - Sept. $7.50 call (79 delta) and/or stock
http://www.investmenthouse.com/cs/orcl.html
Revisited:
CHRZ (Computer Horizons--$4.6; -0.05; no options): Software
Play Date: 07/02/2002
http://biz.yahoo.com/p/c/chrz.html
STATUS: Ascending wedge. After the big breakout in late June, CHRZ has been moving laterally up the 18 day MVA on very low volume. It looks to be massing for the move here.
Volume: 70.4K Avg Volume: 104.863K
BUY POINT: $4.55 Volume=160K Target=$6.45 Stop=$4.10
POSITION: Stock
http://www.investmenthouse.com/cs/chrz.html
IRN (Idine Rewards Network--$11.5; -0.39; no options): Business management
Play Date: 07/08/2002
http://biz.yahoo.com/p/i/irn.html
STATUS: Looks ready for that new multi-year high as it tested the 10 day MVA on the low (11.20) and rallied back. A good recovery after almost breaking out Wednesday. With the bounce we think it will do just that.
Volume: 29.7K Avg Volume: 67.5K
BUY POINT: $12.05 Volume=100K Target=$14.74 Stop=$10.45
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/cs/irn.html
ZQK (Quicksilver--$25.83; -0.72; optionable): Apparel
Play Date: 07/09/2002
http://biz.yahoo.com/p/z/zqk.html
STATUS: Clothing had a tough day as many retailers reported so-so same store sales. ZQK reversed from its breakout attempt Wednesday and sold lower Thursday on rising volume. It held the 18 day MVA on the low (25.07) and rallied back. A good recovery, but it might take another few days of lateral movement to make the breakout. In a market run, however, it could go ahead and start now.
Volume: 557.6K Avg Volume: 253.636K
BUY POINT: $27.11 Volume=320K Target=$32.55 Stop=$24.25
POSITION: ZQK KE - Nov. $25 calls and/or Stock
http://www.investmenthouse.com/cs/zqk.html
PRE-ANNOUNCEMENT PLAYS
CHBS (Christopher Banks--$40.71; -1.76; optionable): Forecast to announce a split on 7-17-02 in conjunction with a board meeting or on 7-31-02 in conjunction with its annual shareholder meeting. The company will not confirm the board meeting date, but based upon our research this is the date for the meeting.
http://biz.yahoo.com/p/c/chbs.html
BACKGROUND: Last announced a 3 for 2 split on 11-14-01 in conjunction with a board meeting. The stock price was $38.76. The annual shareholder meeting is scheduled for 3:00 CT on 7-31-02 at which time no additional shares were authorized. The company has sufficient shares for a 3 for 2 split.
STATUS: Ascending wedge. CHBS ran into some trouble on the breakout attempt, reversing off of a tombstone doji. Today it suffered with the apparel sector on the less than stellar news. Volume was strong. It traded below the 50 day MVA, but then rallied back to hold above that level. The strong volume is a good indication that big money was stepping up to support the stock. It did this in early June and made it right back. Still looking solid, and a bounce from the 50 day MVA is a good thing. Looking for some more positions here. It has very good accumulation at 3 to 1 during the wedge.
Volume: 747.4K Avg Volume: 354.727K
BUY POINT: New positions: 42.25 (aggressive). Breakout: $44.05. Volume=606K Target=$52.35 Stop=$39.50
POSITION: URH IG - Sept. $35c (81 delta) and/or stock
http://www.investmenthouse.com/cs/chbs.html
CLE (Claires Stores--$20.88; -0.57; optionable): Forecast to announce a split on 8-22-02 in conjunction with earnings. At this time the company has not specified a time for the release.
BACKGROUND: Last announced a 3:2 split on 8-14-96 in conjunction with earnings at a price of $30. The annual shareholder meeting was on 6-27-02 at which time no additional shares were authorized. The company has sufficient shares for a 2 for 1 split.
http://biz.yahoo.com/p/c/cle.html
STATUS: Apparel. CLE had the dips today as well with the rest of the apparel sector, testing the 50 day MVA on rising, above average volume. ON the low it undercut the 50 day (20.12) and rallied back to close right on the 50. A steeper handle than we would want, but we will see if it can bounce as we are looking CHBS to do.
Volume: 243.6K Avg Volume: 213.636K
BUY POINT: New positions on bounce: 22.05. Breakout: $23.15 Volume=320K Target=$27.85 Stop=$21.45
POSITION: CLE KD - Nov. $20 call (72 delta) and/or stock
http://www.investmenthouse.com/cs/cle.html
OTRKB (Oshkosh Truck--$58.51; -1.29; no options): Forecast to announce a split on 7-25-02 before the market opens in conjunction with earnings.
BACKGROUND: Last announced a 3 for 2 split on 7-26-99 in conjunction with earnings. The stock price was $55. The annual shareholder meeting was on 2-8-02 at which time no additional shares were authorized. The company has sufficient shares for a 3 for 2 or 2 for 1 split.
http://biz.yahoo.com/p/o/otrkb.html
STATUS: Cup w/handle. Testing further back in the handle on very low volume. This is just what you want in a handle. Again, a breakout from the base would put OTRKB at a new high. Not a bad entry point for a split play.
Volume: 78.6K Avg Volume: 90.272K
BUY POINT: $62.55 Volume=135K Target=$78.55 Stop=$57.55
POSITION: Stock (no option chain)
http://www.investmenthouse.com/cs/otrkb.html
PRE-SPLITS BEST PLAYS: Remember, we try to grab Pre-Splits as they break out of good patterns or as they start a run right before the split. Not looking for home runs, but looking for those $3 to $4 moves running into the split, watching for topping signs and potential resistance. Not huge money, but it can be very steady. We set our initial stops at the 7-8% range below the purchase price (or just below obvious support), and move them up on a move to preserve our profits.
Upside:
ACMR (A.C. Moore--$43.66; -2.32; no options): Splits 2:1 on 8-1-02
http://biz.yahoo.com/p/a/acmr.html
STATUS: The move off the 50 day MVA reversed Thursday with a test of the 50 day MVA on the low (43.00) that bounced back up to close just over the 18 day MVA. Volume fell way off the pace. Need to see it hold in this area and then start the move on stronger volume. Aggressive positions can be taken on a strong move over 46; then on the breakout from the cup with handle pattern that has formed.
Volume: 127.5K Avg Volume: 102.636K
BUY POINT: New positions: Aggressive: 46.10. Breakout: 48.05 (original buy point $44.29). Volume=100K Target=$48.55 (initial). Breakout: 48.01. Stop=$41.75
POSITION: Stock (no option chain)
http://www.investmenthouse.com/cs/acmr.html
ANFI (American National--$14.8; -0.27; no options): Splits 5:4 on 7-19-02
http://biz.yahoo.com/p/a/anfi.html
STATUS: Reversed after gapping to a breakout Wednesday. Thursday it tested the 50 day MVA on the low (14.16) and then rebounded sharply. This is a pattern it has shown three times in the last month. Looking at picking up more positions on a move back over the 18 day MVA (15).
Volume: 67.9K Avg Volume: 75.545K
BUY POINT: From here: 15.35. Volume=100K Target=$19.25 Stop=$14.74
POSITION: Stock (no option chain)
http://www.investmenthouse.com/cs/anfi.html
CONTINUING CANDIDATES
KLAC (KLA Tencor--$40.2; -1.12; optionable): Chip equipment
http://biz.yahoo.com/p/k/klac.html
STATUS: Ready to move in a rally, KLAC reversed from the low and rallied over $3, a $4 intraday move on huge volume. It will gap up tomorrow and that will allow it to clear the 18 day MVA and still give it room to run. First target is right at the down trendline, but can move up to the 50 day MVA at 50.
Volume: 18.831M Avg Volume: 13.111M
BUY POINT: $43.35 Volume=1.3M Target=$48.55 (initial) Stop=$40.32
POSITION: KCQ HJ - Aug. $50 call (69 delta)
http://www.investmenthouse.com/cs/klac.html
POST-SPLITS BEST PLAYS:
CPS (Choicepoint--$45.50; +0.52; optionable): Management services
Play Date: 07/11/2002
http://biz.yahoo.com/p/c/cps.html
STATUS: Continuing its bounce up the 50 day MVA as it has done since the first of the year, CPS has made a quick double bottom on the 50 day (44.98), something that it has done before its larger moves off of that level on the rally up. Volume Thursday was very heavy as it tested below the MVA and then rebounded for a gain. Looking to pick up positions when it clears the 18 day MVA (45.79)
Volume: 523K Avg Volume: 269.59K
BUY POINT: $45.84 Volume=500K Target=$48 (initial); then 55 if it rallies over 48 on strong volume. Stop=$44.15
POSITION: OCE JW - Oct. $41.25 call (74 delta) and/or stock.
http://www.investmenthouse.com/cs/cps.html
JAH (Jarden--$20.08; +1.08; no options): Rubber & Plastics
http://biz.yahoo.com/p/j/jah.html
STATUS: Big volume move on huge volume, ready for the breakout.
Volume: 284.9K Avg Volume: 77.272K
BUY POINT: $20.12 Volume=115K Target=$24.22 Stop=$18.25
POSITION: Stock (no option chain)
http://www.investmenthouse.com/cs/jah.html
End Part 2 of 3
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us stock market
understanding the stock market
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