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Begin part 2 of 3

SUBSCRIBER QUESTIONS

Q: Love your service. Sometimes in your option plays you choose expirations that are several months out while others not so far. Why do you like to go so far out on some option plays?

A: Glad you enjoy the service. Over the years, playing options has taught us that the trend and time are your friends, particularly when the market turns choppy as we have seen of late. With options, time is very important because options expire. Thus time works against you on options you buy, and you need time. Time to let the play work, time to let the trend you are playing work. Those two elements can often make you money in a play even when things get choppy.

They say time is money, and with options you pay for time. It is one of the components that makes up the overall price of the option (along with volatility, intrinsic value, etc.). The more time you buy before expiration, the more you pay for the option. Many option players buy same month expirations (e.g., October expirations in October); they are speculating. They have to be right on the movement AND have the timing exactly right or they will lose. When an option gets within 60 days of expiration it starts to lose value based on eroding time value. When it gets within 30 days, time value is bleeding away rapidly, particularly if the option is out of the money. It can be impossible to ever get back your investment unless the stock makes a huge, fast move.

In investing you want to give yourself the edge. You want to stack the deck in your favor. That is why we focus on stocks in solid patterns ready to break higher, split plays with leaders that often race up to the announcement and the actual split, leaders that test the 50 day MVA, etc. as opposed to randomly choosing a stock with a 'good' name. Even with that we know that stocks can start a move and then stall a bit, or take a consolidation, then resume the move. With extra time that rest period does not cost us much in lost time value, and we don't have to be exact to the right minute in entering a play. Thus we are not continually trying to make up lost ground. It acts more like the stock: when it is not moving, the value is not eroding away on us. That helps take out some of the emotion of option investing.

Accordingly, we always look and see how much extra it costs to get another month or two of time. In some instances the time value is low for a month and we would much rather grab that additional time as long as it does not turn the economics of the trade on its head. Typically it is easy to see if that will happen as it either costs a lot more or not. You will see the demarcation point when you look at the various months available.

It is not perfect; if the stock falls, the option value will fall as well and you may not recover even if the stock does. You still have to enforce loss rules. If the pattern breaks down you don't know when it will recover. If it takes too long, you end up losing more than if you cut your losses and looked for better game.

When selling options (short selling options as opposed to selling options we already own) we put time on our side because the time decay works FOR us along with any price movement in the direction we want. We are selling either the right to buy a stock at a certain price (calls) or the right to put a stock to someone at a certain price (puts). In either situation we are obligated to either produce the stock (if called) or buy the stock (if put). That makes this a riskier strategy, but one that is very powerful because it puts time on your side along with the trend. You have two friends in this situation, stacking the deck in your favor a bit more. We really like selling options and we discuss how we do that in our online seminars in the Options You Can Use Seminar.

SEMINARS ON CD

http://www.stockseminarsonline.com

This is Jon Johnson's own site devoted exclusively to seminars designed to teach you what you need to know about the stock market and stock movement and how to take advantage of those moves without incurring the usual high costs of travel and related expenses usually associated with seminars.

THE PLAYS

As the market sells we get more conservative upside and look to more downside plays. Even then we are not taking wholesale downside positions as the correction could be half way over point-wise already. We will look for the downside positions to set up a bit more aftertwo back to back downsessions. At that point they should be ready for the next downleg.

Thursday night play results:
VSV: Tapped the 10 day MVA on lwo volume. Still beautiful.
LRCX: Making the test higher and rolling over on sharp volume. Ready now.
TLCV: Tested the 50 day MVA on the low and recovered. It looks ready as well.

New Plays for Monday:

Upside:

Play Date: 09/27/2003
HILL (Dot Hill Sys.--$13.9; -0.36; optionable): PC data storage devices
http://biz.yahoo.com/p/h/hill.html
STATUS: Rolling. HILL has spent the past 11 weeks rolling up and down from 14 to 17. It tried a breakout from the range to start September, but it was dumped back down and started the up and down action again. After selling down from 17 to start the week HILL showed a very tight doji Friday, closing right at 14. Looking for HILL to continue the range, rolling back up to 17.
Volume: 1.193M Avg Volume: 841.545K
BUY POINT: $14.26 Volume=1.3M Target=$17 Stop=$13.24
POSITION: HCQ LV - Dec. $12.50c (71 delta) &/or Stock
http://www.investmenthouse.com/cd/hill.html

Play Date: 09/27/2003
NYB (New York Community Bancorp--$31.83; -0.12; optionable): Savings & loan
http://biz.yahoo.com/p/n/nyb.html
STATUS: Cup w/handle. Even with the dip late last week NYB is still in a solid pattern. Indeed, as discussed in the summary, the pullback has allowed this stock to complete its base, forming a low volume handle the past three sessions. Those are good to see in this type of base because the lower volume selling frustrates those that bought the stock back in July at the high at 33 as it rallied back to that level but then fades. The impatient ones sell. The low volume shows there are not many sellers, certainly many fewer than the recent buyers. Accumulation in the 11 week base is an excellent 3 to 0 (3 up weeks on rising volume to 0 down weeks on rising volume). The price action in the base has been solid, with volume drying up to well below average during August and early September at the bottom, and then swelling as it rallied toward the high the past two weeks. Just waiting for the breakout.
Volume: 461.3K Avg Volume: 968.007K
BUY POINT: $33.35 Volume=1.5M Target=$40 Stop=$31.52
POSITION: NYB AF - Jan. $30c (72 delta) &/or Stock
http://www.investmenthouse.com/cd/nyb.html

Downside:

Play Date: 09/27/2003
TUES (Tuesday Morning--$28.61; -1.26; optionable): Discount variety retail
http://biz.yahoo.com/p/t/tues.html
STATUS: Put. TUES has performed well, but it peaked in late August and tumbled to start the month. It landed at 30 and moved laterally for two weeks, a decent looking consolidation. Friday, however, it tumbled below the 50 day MVA (29.94) on no news. Volume rose but was still below average. We are looking for TUES to move up to test the 50 day MVA again early this week and then roll over from there for a quick play to the middle of the July trading range.
Volume: 240.102K Avg Volume: 295.654K
BUY POINT: $29.15 Volume=300K Target=$26 Stop=$30.05
POSITION: UUG WF - Nov. $30p (-62 delta)
http://www.investmenthouse.com/cd/tues.html

Continuing plays that look ready:

Play Date: 08/28/2003
SPRT (Supportsoft--$10.8; -0.3; no options): Internet service and software
http://biz.yahoo.com/p/s/sprt.html
STATUS: Testing the breakout. SPRT jumped out of an 8 week ascending triangle mid-month and rallied to 12 on a super volume surge. It spent last week in the selling making a lower volume pullback to test the move, tapping the 18 day MVA (10.16) on the Thursday low, but rallying back to close over the 10 day MVA (10.69). A very orderly test of the breakout, selling on lower volume, refusing to give up big chunks of ground. It may settle back a bit closer to the 18 day MVA before it is ready to bounce. When it does we will be looking for a nice volume increase to go along with the move.
Volume: 663.676K Avg Volume: 713.11K
BUY POINT: $10.28 Volume=910K Target=$12.35 Stop=$10.06
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/cd/sprt.html

Continuing plays that still look good: ORCC; SWIR; TLCV

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SUBSCRIBER PORTFOLIO: These are stocks subscribers suggest by vote that we put in a portfolio to track and move into the stocks if they set up well. Right now they are not performing too well with the exception of AVID.

AVID, DIS, GTRC, KKD, LPNT, OCR, TGT, UTSI

AVID 08/09 Test 18 52.1 -4.7 0 0 1M 0 0
After a nice run up the 10 and 18 day MVA, AVID is breaking lower, falling through the 18 day on a strong volume surge. A nice leader, it now looks as if AVID is going to test the 50 day MVA, and that could set up the next buy point for this stock. We will simply have to see how it reacts at that level.

OCR 08/09 Test 50 34.92 -0.6 0 0 675K 0 0
Jumped off the 50 day MVA Tuesday and in the late week selling edged back off the highs a bit but on much lower volume. It looks now as if it is forming the handle to an 8 week cup base. That could develop into a good buy point late this week or next.

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End Part 2 of 3

us stock market
trend trading stock