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Begin Part 2 of 2
SEMINARS NOW ON CD!!
To learn more about options so you can take advantage of up and down markets, check out the Options You Can Use seminar now on CD's! Also be sure to look at the Technical Analysis series on CD as well as the stock splits and covered call series. Go to
http://www.stockseminarsonline.com
and look for the link to the CD seminars. 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.
SUBSCRIBER QUESTIONS
Q: A question regarding projected value of an option contract when a stock hits the Target If we purchase the option when the Alert is issued, can we project the option value by multiplying the dollar move by the delta and adding that total to the original option price?
A: We love using options for several reasons, but some key points are the leverage it gives us to enter positions on higher priced stocks without putting up the farm as well as a clearly defined risk. Those can provide tremendous returns. You also need to understand your targets well because options are time and price sensitive. We take you through a very straightforward and direct approach in our Options You Can Use Seminar. It takes the mystery out of options and shows you how to use these powerful tools in your investment arsenal.
As for calculating projected option price targets, the procedure you outline is how we figure out where to put in a sell order on option plays, and we use a variation to always calculate our potential percentage gain on any position to determine whether it is worth the money we have to put into the play.
We figure out what the dollar move the option will make, multiply that by the delta, and add the result to the bid price of the option at the time we bought it. That gives us roughly the bid price of the option (the price we can sell it at) when the stock hits the projected target. We use the following formula to pre-enter sell points for option plays or for buy back points in covered call plays (except we use the option ask price as opposed to the bid).
The formula: (Stock buy price - Stock target price) x option delta + option bid price = option bid price when stock hits target price.
It is also important to determine the percentage gain on an option play to see if it is worth our effort for the return. This is particularly true when playing puts or calls with definite support or resistance levels we anticipate will stall the move. We want to have enough of a return that is not eaten up by the spread and commissions.
The formula: (Stock buy price - Stock target price) x option delta/option ask price
THE PLAYS:
Good movers: XOMA; MOR; MTXX; INTL; SSD
Friday plays:
MOR: Made the move Friday on continued solid volume.
XOMA: Beautiful move on strong volume.
WEDC: Up to the top of the pattern but no volume.
Best Plays:
1) MOR: Looks ready to make the move, showing high volume.
2) WEDC: Looks ready to move.
3) Watchlist: ACL is trying to make the move. USNA is forming up very well.
NEW PLAYS:
Upside:
A BIG COVERED CALL: This is a low maintenance play. What it involves is taking a stock that looks to be steady or has bottomed and has enough premium built into its options so you can buy the stock and write the call against it and earn 4% to 5% a month over the life of the play. The stock may run up and you forgo a bigger gain, but many would like to earn that percentage on their money for less than a half year. Do it twice in a year and you bank 40% to 50% gain on your money. How many mutual funds would like to make that claim? Typically we look 4 to 5 months as the term of the play. That means you earn 20% to 25% on your money during that period without really worrying about the play. Option premiums had been somewhat low until recently, but we see some pickup of late. Now we can start looking at these lower maintenance plays again.
On this play we can do one of two things. We can buy the stock and let it run up to the strike price of the option we want to sell and then sell the option, or we can execute what is called a buy/write. In a buy/write you are buying the stock and selling the call in once transaction. The benefit? You buy the stock at the ask but you sell the call AT THE ASK as well. That has benefits. If the stock is right at the strike you want to sell or close to it, you get a better return because you can sell the call at the ask rather than the bid if you did the transactions separately. That translates into a better return, and the return is the key. Second, it is simple; you do the trade in one step and are done. You don't have to have the stock rise or fall and then make a second decision. Uncomplicated, straightforward, good return. Hard to beat.
The second choice is to let it rally to 20 and then sell the call when it appears to be stalling out. That pumps up some more value in the option when we sell it. That gives us a better return obviously, but the stock needs to make the run. That is not too hard for QLGC to do.
QLGC (Qlogic--$36.46; +1.19; optionable): Storage
http://biz.yahoo.com/p/q/qlgc.html
STATUS: QLGC gives us a break here because it has a 37.50 call option to utilize. Friday it tested the 18 day MVA on the high (37.14) and fell back a bit to close. Volume was way off the recent pace on the rally up. This is right at its current downtrend line; is it going to fall back or just taking a break? On this play we don't really care a whole lot. On the buy/write we can nab 4% clean (4.6% counting a capital gain if QLGC is over 37.50 on expiration) each month for 5 months (23% total). If it can rally further from here, we can buy, let it move up to 37.50 or more and then sell the option. At that point the option will be worth about 8.10. With the capital gain of $1.02 tacked on that gives a 25% total return, or 5% a month. We are tempted just to take the buy/write gain as there is no worry about the stock turning back down here or not.
Volume: 14.88M Avg Volume: 13.028M
BUY POINT: $36.48 Volume=12M Target=$37.5 Stop=$33.55
POSITION: QLC AU - January $37.50 call to sell, Stock to buy
http://www.investmenthouse.com/cd/qlgc.html
GE (General Electric--$31.55; -0.74; optionable): Bringing good things to life
http://biz.yahoo.com/p/g/ge.html
STATUS: Ascending wedge. GE's pattern matches that of the larger indexes, showing you how important this mega stock is the in their movement. Unlike the large cap indexes, however, GE is above its 50 day MVA (30.17) as it works through its pattern. Accumulation since May is positive at 2 up weeks on rising volume to 1 week on falling volume. Money flow has shot ahead of the stock price as it works through its three week base. We like to see money flow shoot higher as the stock works sideways under good accumulation; that is akin to pressure building and building for a breakout. It may test back to the 10 day MVA again (31.30) again before the breakout comes.
Volume: 21.839M Avg Volume: 30.354M
BUY POINT: $31.85 Volume=35M Target=$36 Stop=$29.62
POSITION: GE LY - Dec. $27.50 c (79 delta) and/or Stock
http://www.investmenthouse.com/cd/ge.html
IWM (Ishares Russell 2000--$78.95; +1.19; optionable): Russell 2000 (small cap) index shares
http://biz.yahoo.com/p/i/iwm.html
STATUS: Ascending wedge. A common pattern in the indexes, but IWM is showing good accumulation during the short August pattern at 2 accumulation weeks to 0 distribution weeks. It is sitting on top of its 18 day MVA (77.77). We are looking for the index to move up to test its 50 day MVA (82.73) on this breakout.
Volume: 1.236M Avg Volume: 1.528M
BUY POINT: $79.02 Volume=2M Target=$82.65 Stop=$77.25
POSITION: IWM KO - Nov. $75 c (71 delta)
http://www.investmenthouse.com/cd/iwm.html
WTFC (Wintrust Financial--$33.87; +1.03; no options): Regional banks
http://biz.yahoo.com/p/w/wtfc.html
STATUS: Cup w/handle. We cannot forget the regional banks even as other stocks start to move. These have been the leaders, and after the corrections and bases in June and July, they are ready to move up again to new breakouts. Friday WTFC rallied on sharply higher, average volume. It has formed a weeklong handle to its short 7-week base, and it looks ready to break to a new high. This much is evident from its relative strength line. Money flow is also solid, rallying ahead of the of the price movement.
Volume: 147.5K Avg Volume: 153.481K
BUY POINT: $34.02 Volume=225K Target=$40.32 Stop=$31.64
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/cd/wtfc.html
MEMBER PORTFOLIO: CUB, EBAY, HOTT; LOW, NOC, PG, QLGC, RCII, SRCL, WM
LOW 07/06 Test 50 36.79 -1.15 0 0 4.1M 0 0
Earnings due out this week, and LOW was showing life Wednesday and Thursday before some lighter volume selling Friday. We anticipate it may try to move up toward the 50 day MVA near 39.40 early int eh week.
WM 08/03 A Wedge 37.89 -0.11 37.55 42.25 3M 5.2M 38.85
Current. A nice low volume test of the 10 day MVA on the low (37.20) as WM has continued to test its move 6 sessions back. Looks just about ready to continue the move.
CONTINUING/WATCHLIST:
We have made a change to the table. Instead of average volume we have included the target volume.
Stock Date Play Close +/- Pivot Tgt Vol TgtV Stop
$DJX 08/12 A Wedge 87.78 -0.40 87.72 92.55 454K 0 84.95
Current. A doji right below the 50 day MVA on lower volume. A pullback to the 10 day MVA may be in order.
ACL 08/06 DB hdl 35.3 -0.28 35.81 42.94 153K 900K 33.31
Buy alert not issued. Low volume the past week, ACL needs to test back toward 35 and then rally to the breakout on some very strong volume.
AMGN 08/14 BO 47.53 -0.27 47.75 52.75 11M 18M 45.15
New. Looking for a new buy point here.
AMGN 08/03 Test 50 47.53 -0.27 44.75 52.65 11M 20M 45.15
Current. Looking good with some tight, low volume doji's over the 10 day MVA at the end of the week.
AMI 07/24 A Wedge 6.39 +0.08 6.77 9.94 32K 173K 6.45
Current. Working through a flat base now that is holding roughly at 6 on the low. We will let it work for us and give a breakout.
BRKL 08/12 BO 12.62 +0.08 12.11 15.12 454K 1.1M 11.85
Current. Moved laterally Friday on low volume as it tests the big move.
CFCP 07/29 A Wedge 14.38 +0.09 15.55 18.65 8.2K 55K 14.35
Buy not hit. Working laterally at 14, holding above the 50 day MVA on very low volume. Forming up well.
COH 08/13 BO 27.26 +0.28 25.55 30 945K 1.4M 24.95
Current. Slightly higher on no volume. After four straight solid moves higher it is ready to test 26.
COLM 08/13 BO 37.73 -0.26 36.85 42.38 143K 275K 36
A doji at some resistance at 38. A test back toward 37 and then a move back up.
COLM 08/01 Dbl btm 37.73 -0.26 35 39.95 143K 275K 35.45
COLM 07/27 Dbl btm 37.73 -0.26 34.25 39.95 143K 275K 35.45
CUB 07/06 Cup 21.43 +0.43 0 0 40K 0 0
CVTX 08/17 Test 18 27.14 -0.11 26.75 34.95 335K 1.3M 24.88
Current. Looking for new positions after a test of the 10 day MVA. The target for original positions is still 30, but we can let some ride higher if it hits the next buy with a lot of volume.
DOCC 08/08 BO 14.55 +0.35 13.75 16.5 209K 200K 13.51
Current. Rallying again on continued strong, above average volume.
DOCC 07/25 BO 14.55 +0.35 11.9 16.5 209K 200K 13
Current.
DROOY 05/21 A Wedge 3.22 -0.06 4.85 7 747K 4M 4.30
EBAY 07/02 Test 50 58.97 +0.28 57.95 63 6.6M 600K 58.50
GE 08/17 A Wedge 31.55 -0.74 31.85 36 22M 35M 29.62
New.
HOTT 07/06 Test 50 16.88 +0.37 0 0 494K 1M 0
INTL 08/05 Dbl btm 24 +0.64 21.49 24.65 443K 375K 22.95
Current. Another strong move up Friday on continued above average volume. Will need a rest soon. On a closer test to 24.65 early in the week (24.25 on Friday high), we will go ahead and take some gain.
IVGN 08/08 BO 36.37 +0.23 36.35 42.25 729K 1.5M 33.57
Current. Nice lateral move along the 10 day MVA. Looks ready again.
IWM 08/17 A Wedge 78.95 +1.19 79.02 82.65 1.2M 2M 77.25
New.
LOW 07/06 Test 50 36.79 -1.15 0 0 4.1M 0 0
MLNM 08/14 Test 50 14.35 -0.27 14.35 19 3.7M 7M 13.35
Current. Tested lower on low volume Friday, but is still looking very sharp.
MOR 08/15 A Wedge 11.49 +0.39 11.25 13.48 21K 23K 10.46
Current. Strong move on continued strong volume Friday.
MTXX 07/31 A Wedge 10.54 +0.66 10.5 12 229K 38K 9.94
Current. A very strong breakout as patience paid off.
NBTB 08/10 A Wedge 17.55 +0.2 18.35 22 19K 85K 17.07
Buy not hit. Still in the pattern. Waiting on this one as well.
NOC 07/06 Test 50 117.15 +1.64 0 0 1.9M 1.7M 0
PG 07/05 Put 90.99 -0.33 0 0 4.8M 4.5M 0
Current. Good test of the 18 day MVA and recovery; needed it as volume was higher.
QLGC 08/17 Test 18 36.46 +1.19 36.48 37.5 15M 12M 33.55
RCII 07/06 Cup 56.69 +1.14 0 0 338K 0 0
Continued the move higher though volume was back below average.
SBIB 08/08 Dbl btm 15.27 +0.17 15.35 18.35 133K 203K 14.28
Buy not hit. Stronger move Friday on continued above average volume. Looks better here, and on a continued move on stronger volume it is a buy.
SCIO 07/29 cup hdl 26.03 +0.92 32.55 39 1.4M 1.5M 29.95
Trying to move back up to test the 200 day MVA again.
SSD 08/01 PreSplt 61.3 +1.79 58.05 68 14K 25K 59.15
Current. Solid move Friday on some rising though still low volume. Splits Monday, but we expect it to rise some more through the split.
TELK 08/03 Test BO 13.62 -0.28 14.65 17.65 215K 400K 13.05
Current. Testing the 18 day MVA again on very low volume.
USNA 08/10 cup hdl 6.11 -0.39 7.35 10 26K 65K 6.55
Buy not hit. Tested lower toward the 50 day MVA Friday on rising volume, closing near the low. This is not as good handle action. It will have to prove its strength with a strong breakout.
VALM 07/29 BO 22.29 -0.04 22.38 26.85 36K 120K 20.81
Stalled out at the prior high on low Friday volume.
VFC 08/10 DB hdl 42.44 -0.49 40.65 45 416K 440K 41.55
Current. Tested lower Friday on some rising, average volume. Looks ready to test back toward 41.50 - 41.
WEDC 08/07 A Wedge 7.45 +0.1 7.63 9.85 26K 105K 7.1
Buy not hit. Ran up to the top of the pattern on low volume. May need to test back once again before it is ready.
WM 08/03 A Wedge 37.89 -0.11 37.55 42.25 3M 5.2M 38.85
WTFC 08/17 cup hdl 33.87 +1.03 34.02 40.32 148K 225K 31.64
New.
WTW 08/10 BO 46.75 -0.12 44.44 49.75 272K 546K 42.74
Current. Doji on very low volume Friday following the strong move Wednesday and Thursday. Looks to test 46 again.
WTW 05/23 Test BO 46.75 -0.12 43.7 50 272K 250K 42.74
Current.
XOMA 08/15 A Wedge 5.66 +0.81 4.92 6.51 2.3M 710K 4.95
Current. Huge breakout Friday on very strong volume.
Good Investing!
Jon L. Johnson and The Daily Staff
All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.
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