Good Afternoon Traders,

Option4Options, LLC trusts that you are having a great trading day and we hope you will find our weekly newsletter educational and informative!  Today's Newsletter will discuss the following:

 

Market Outlook, Briefly Speaking!

Propaganda! Learn to profit from Half Truths

Options Strategies

Money Management

 

 

Market Outlook, Briefly Speaking!

The past eight weeks could be described as a tug-of-war won by the bulls. The Dow is up eight straight weeks; the S&P has moved higher for seven of the last eight weeks. The S&P has closed solidly above the 1,200 level and we have had the highest weekly trading volume we've seen since December.

The S&P RSI index is at its highest level since December of 2006. The Relative Strength Index (RSI) measures a stock or index against itself rather than against other stocks. The more overbought the index, the higher the reading and for the second time in the last five years, the RSI is over 75. This type of overbought condition only comes along once every few years. While the market seems to have been strong, pressure on the market builds and we are reaching a point where a pullback is needed. 390 of the 500 stocks in the S&P are showing a slow stochastic reading above 70. The slow stochastic indicator is another overbought/oversold indicator. The Federal Reserve meeting on Wednesday and the first quarter GDP report on Friday should prove to be interesting and could move the markets in a different direction.

Rather than share a lot of our thoughts, we want to refer you to another source we believe did a good job showing you where we are in this current market environment.

"Money managers are always looking for an advantage to help them better understand the market and get an edge in their stock selection process. The Applied Finance Group's (AFG’s) Market Forecast Project(MFP) has served that purpose for over 300 investment professionals that participate, and it continues to grow. The 9th issue of the MFP identifies the favorite long and short equity ideas from participants, trends in the movements of investor sentiment over the last 9 surveys, as well as other key topics affecting the economy and the markets."

This month’s survey contains questions on topics such as:

• Is the level of systemic market risk increasing or decreasing?

• Would adding a VAT to our existing tax structure help or hurt the economy long term?

• Will Obama push for immigration reform in 2010?

• President Obama announced plans in early March to double the US exports in 5 years. Do you think it is feasible?

 

 

Propaganda! Learn how to profit from Half Truths

I want to tell you about one of my fun option trades that you might get a kick out of. By sharing our experiences together we can learn to use options more effectively and profit from Propaganda.

I enjoy drinking a couple of cups of coffee early in the morning with my wife. We use that time to talk and reflect on things to come for our day. While watching TV and jumping from channel to channel, I always look to pick up on ridiculous statements and stock movement at that time. If you are like me, my brain is freshest in the morning.

One morning I noticed (LVS) Las Vegas Sands was showing about a $20.00/share jump on the pre-market ticker at the bottom of the TV screen. Nothing was mentioned on TV about it by anyone but it just kept sweeping across the screen. It started bugging me so I got on my computer to check out any information I could find. There were several press articles all leading to the same information.

Las Vegas Sands was announcing to the public that they now had completed architectural plans to build condominiums in Las Vegas. They planned to start taking bids and hoped to start construction on the complex over the next year. Their preliminary estimates indicated that there would be more than a billion dollars in profits on the sales of their future condominiums. While reading the articles I kept thinking "That’s it?"!

With having a degree from the School of Architecture in Building Sciences, an active Real Estate Broker's license, and a mortgage broker’s license in the past, my building and development experience goes on and on. It was all too obvious to me that this construction project would not start for at least one year. Construction would take 2-3 years and not one unit was even sold at the time. On top of that, the country had already started a major real estate pull back. Here on the Gulf Coast and throughout the USA, condominiums were at best way over-built at the time.

Apparently, the possibility of making more than a billion dollars in profit on this project sent the stock soaring. This is classic propaganda. Therefore, I checked things out a little further and could find no more news. My mind was thinking "Puts, Puts, Puts"! I bought a nice put option on LVS that day. In less than two days, when the news wore off and reality set in, the stock price re-acclimated and I sold that put for about a 100% profit on my investment. That was fun! We want to do that over and over!

James Glisson, Contributing Editor

If you have a success story you would like to share or if you know of a similar situation progressing now then please share it by emailing us at newsletter@option4options.com .

 

 

Option Strategies

The Covered Call -(one possible strategy)

Example: Purchase 100 shares of ABC stock which is trading at $20.

Outlook: You are neutral to moderately bullish on ABC stock over the next few months and are looking to generate some income.

Strategy: Sell one contract (100 shares) 45 day ABC 22.5 strike call at $1.85.

*All values shown are at the time of expiration.  Commisions and other trading fees are not included.

Stock	Long Stock Profit/(Loss)	Short Call Profit/(Loss)	Net Profit/(Loss)
15	($500)	$185	($315)
20	0	$185	$185
22.5	$250	$185	$435
25	$500	($65)	$435
30	$1000	($565)	$435

At Expiration:

Maximum Profit = Stock Sale Price + Call Premium Received - (Stock Price)
$435 = ($30 x 100) + (($1.85 x 100) – (7.5 x 100)) - ($20 x 100)

Breakeven Stock Price = Stock Price - Call Premium
$18.15 = $20 - $1.85

Maximum Loss = Significant with stock ownership

Investment = Stock Cost – Call Premium

$1,815 = ($20 x 100) – ($1.85 x 100)

Max ROI over 45 days = Max Profit/Investment x 100

23.96 % = $435/$1,815 x 100

(Do this successfully 5 times per year and you will own the stock free.)

In Summary: Sell out of the money call options on a share for share basis to generate income in a stable market on a stable company stock.

 

 

 

Money Management

 

Many believe that proper money management is the most important and most ignored consideration to investment success.  Options traders should have a firm grasp of the statistical probabilities involved in the principles of money management.  In his esteemed book, "Trading for a Living", Dr. Alexander Elder sums up the importance of this concept in a word-innumeracy.  According to Dr. Elder, "Innumeracy"-Not knowing the basic notions of probability, chance, and randomness- is a fatal intellectual weakness in traders."

Traders can be successful with a winning percentage of fewer than 50 percent.  While we all strive to exceed a 50 percent trading success, your option trading success can be greatly affected by your money management.  Traders should be very careful to place a limit on their losses and let their winners run up when possible.

Traders can be successful with a winning percentage of fewer than 50 percent. While we all strive to exceed a 50 percent trading success, your option trading success can be greatly affected by your money management. Traders should be very careful to place a limit on their losses and let their winners run up when possible.

Always know that losing is part of any business. Coping with an extended losing streak can be very upsetting. The ultimate goal of achieving profitability will remain out of reach unless great care is taken to control the amount of capital allocated to each trading position. Proper money management techniques allow traders to live for another trading day in spite of the inevitable losing trades.

The allocation of your risk capital is critical in your money management with regard to each trade. Each trader must decide their dollar amount to trade and this decision should take into account their overall profit goals and costs of trading including commissions.

One good method to consider is a percentage allocation to each trade which represents a set percentage of your total account. For example, let's say you have $25,000 available for options trading and you wish to allocate 10 percent of your total account to each trade. You would therefore trade $2,500 for your first trade. Assume the trade gains 40 percent, or a $1,000 profit. Because your account size is now $26,000, your next trade would be for $2,600 (0.1*26,000). In the other event, say your first trade lost 40 percent or $1,000. Your account would now stand at $24,000, meaning that you would allocate only $2,400 to your next trade. Notice how this differs from a fixed-dollar strategy in which you would invest $2,500 in each trade. This percentage will vary according to a trader’s tolerance to risk.

Never let your allocation dictate what option you will purchase. For example, say you have $2,500 for a trade and your trading system calls for higher-premium in-the-money options. If you are looking at an option priced at $6 (four contracts, or $2,400), don't opt for a cheaper out-of-the-money option priced at $5 (five contracts, or $2500) just so the total trade meets your allocated amount. In other words, don't compromise your trading system for the sake of meeting your allocation.

A consistent money management discipline will improve your trading psychology, help reduce losses and increase your ability to make money. You will need to assess your portfolio on a regular basis to make sure that your money management approach is working and adjust the percentages you allot to each trade to fit your comfort level.

Good Investing!

 

Option4Options, LLC

 

 

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