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Investing Strategies

The Smart Profits Report: Issue #408
Friday, March 30, 2007

Investing Strategies: Enjoy The Pleasure Of Option Investing Without The Pain Of Speculating
By Karim Rahemtulla
Investment Director, Mt. Vernon Research

I’ve got one simple question for you: Are you an investor or a speculator?

From talking to subscribers and attendees at the many investment conferences I speak at, I can usually tell which side of the fence a person falls on. There are a few major differences between these investing strategies:

• The Speculator: Risk means little to this guy. His aggressive approach means he makes a ton of money… but can also lose a lot of money. Trading is a thrill for him and he loves the adrenaline rush. Don’t be fooled, however. He’s usually very knowledgeable and his success is based on a strong system - and his success clearly separates him from regular investors.

• The Investor: Most people fit into this category. The investor makes a lot of money, too. But he’s more aware of the risks involved and takes time to understand the various investment strategies and why they work. The pure investor is more patient and isn’t necessarily looking to crush home runs in a short period of time. He allows more time for his trades to work in his favor. He’s well-diversified and follows the rules.

But when it comes to investing strategies in options - one of the fastest-growing areas in the financial world - the rules change a little. This area can provide an exhilarating, yet painful experience. Here’s how to maintain the thrills, but reduce the spills…

Lift Your Leverage… And Look To The Long-Term

Part of the allure that comes from options investing strategies comes from the fact that you can boost your leverage. However, the more leverage you employ, the lower your chance of huge returns.

One dilemma you face is trying to figure out which strike price and which expiration date to choose. And this is where your decision boils down to whether you’re an investor or a speculator.

If you’re speculating heavily, you might as well choose an out-of-the-money option that costs you very little money. While this kind of option does promise some pretty healthy gains, it holds more risk and a higher chance of you coming out on the losing end, so it’s often not worth risking too much money.

However, the bottom line with options is that you’re essentially speculating in some way or other. You’re expecting some kind of catalyst to occur that will allow you to rake in the riches. And those catalysts can be short-term or long-term in nature.

But outside of an iron-clad, hot tip from your brother-in-law’s third cousin, once removed, most retail investors prefer to steer clear of the short-term rollercoaster ride and focus on the intermediate to longer-term outlook.

So if you’re willing to tie up your money for longer in hopes of reaping a reward, how do you tackle this? Here’s my advice for the longer-term speculator…

How To Enjoy The Pleasure Without The Pain

If anyone asks you why you’re investing strategy focuses on the long-term picture, your response should be simple: It gives you that precious commodity: Time. Time for something to happen.

And in this case, you’re looking to buy longer-dated call or put options (depending on your directional bias) - and buy those that are deep-in-the-money.

The reason is simple: Deep-in-the-money options allow you to pay the least amount of premium to participate. In other words, you want the highest Delta (a gauge that tells you how much the option will move in relation to the underlying stock) at the best price possible. This way, you get a similar move in the option from the movement in the underlying shares.

Here’s an example of what I mean…

Investing Strategies: Going For Gold

Let’s say you like gold and think it’s going higher. To take advantage, you can buy one of the sector’s top companies, Newmont Mining, today for $43 in anticipation of that move.

• The Short-Term Investing Strategy: If you expect the move to occur in the next two or three months, you want to buy a cheap option that is out-of-the-money - let’s say a $45 call option. This way, an underlying move in Newmont will have a nice percentage gain on the option. And if you lose, you lose little.

• The Long-Term Outlook: On the other hand, if you believe gold is in a long-term bull market and have set your sights on $1,000 per ounce in a couple of years, you have two choices: Either buy Newmont shares, or buy LEAPS options on Newmont.

If you want to control 1,000 shares outright, it will cost you $43,000 for the trade.

But if you want to control 1,000 shares via deep-in-the money LEAPS instead - let’s say the Newmont $30 calls - you will pay about $15 per contract. That’s an investment of $15,000 for two years - much better than coughing up $43,000. Your premium on this option would be about $2 ($43 minus $30 minus = $13 (your intrinsic value), plus $2 in premium for time and risk).

If Newmont moves to $50, you will make $50 minus $30 (your strike) minus $15 (your cost) - or about $5 in profit. If you owned the shares, you would make $7 - but remember, you invested almost three times as much.

But let’s say gold prices don’t rise as much as you think. In two years time, Newmont shares have gone nowhere, and remain stubbornly around $43. You would now only lose $2 - the premium paid, since the strike price was $30, your intrinsic value did not change - it is still $13.

There is one more important investing strategy component involved here…

If you bought 2-year LEAP options on Newmont with a $45 strike price, you would pay about $6.50. In this case, you’d need Newmont to close above $51.50 before you make a dime. And if Newmont stayed at $43, you would lose 100% of your investment.

(Please note, the above trade is an example only, not an actual recommendation).

Investment Vs. Speculation: Know The Difference

While the degree of speculation varies, all investments, aside from CDs and T-bills, are essentially speculations, separated by semantics and degrees of risk.

And with options offering many prices and expiration dates, knowing how to differentiate between an investment and a speculation will determine which option you should use and which investing strategy to employ.

With options, however, you can speculate using leverage as a powerful tool that gives you the chance to ramp up your investing strategy’s returns.

Great trading,

Karim Rahemtulla

Today’s Smart Profits Cribsheet

• Investors and speculators alike could be facing increasingly sluggish stock market returns. In its latest report on the health of the U.S. economy, the Commerce Department said on Thursday that GDP growth rose at a mere 2.5% annual rate during the final three months of 2006. For 2007, economists now project full-year economic growth to hit 2.7% - which would be the slowest in four years, and well below the economy’s average growth rate of 3.25%.

• However, it doesn’t mean you have to sit on the sidelines and wait for profits. In fact, our own options and commodities expert Lee Lowell believes this represents a great chance for you to use the decline to buy quality stocks at deeply discounted prices - and get paid for it while you wait. It’s one of the most powerful investment strategies to use when you think a stock will fall and want to own it at a lower price. For more information, click this link.

Related Articles:

• Leverage Investments: How To Use Options Delta To Vanquish Volatility 010207
• Stock Option LEAPS: Buying LEAPS Or Stocks… What You Should Do 062404
• Deep-In-The-Money Covered Calls: How to Beat Stocks with Less Risk 013105

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Housing Starts

The Smart Profits Report: Issue #407
Tuesday, March 27, 2007

Housing Starts: The 16-Year Real Estate Party Is Over… More Woe In Store For Real Estate
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

This time last week, the market just capped off a solid day, following news that February housing starts climbed 9%.

On the face of it, that’s all well and good. But for me, the data wasn’t a cause for celebration.

While 9% was a solid rise, the improvement was calculated from figures in January - numbers that were 9-year lows! After taking a massive swoon, a reverse move upward is expected.

This got me thinking about the housing market in general. And having plowed through the data and charts, it seems to me that this is a “house of cards” (pun intended) that could get much worse before it gets better.

So let’s look at some key indicators out there and devise a plan for dealing with this huge economic driver…

After A 16-Year Run, The House Party Is Over

If you take a look at the charts below, first showing the figures for housing starts and permits from January 1991 to January 2007, then a closer look at the numbers for the past year, you can clearly see the current trend.

When you take the broader perspective into account, it’s tough to interpret the small rise in February housing starts. Additionally housing permits fell again in February - an issue that was overshadowed by the better-than-expected housing starts number. And the data on sales of new homes in February that came out yesterday was less encouraging.

Beware The Biased Reporting

There’s no question that commercial and residential real estate makes up a huge part of the U.S. economy. But because so many people are now feeding at the real estate trough, it’s tough to find unbiased comments about the market - especially when almost everyone has a vested interest in a continually rising real estate market.

Just about every word on the housing market that is printed or spoken in the media is put through that biased filter. That means even the smallest victory is celebrated when it may not actually be good news for the real estate market.

There are some new wrinkles in the real estate market that make the housing bubble “different this time.” While we (and other countries) have witnessed normal housing boom and bust cycles over the years, there are two huge mitigating factors that accompany this one:

• Not Learning From 1929: Failing to take a lesson from the 1929 stock market crash, regulators have allowed lenders to extend unprecedented leverage to real estate buyers. We have seen what may be only the tip of the iceberg with the problems in the sub-prime lending market.

• Public Company Pressure: Because there are a large number of homebuilders listed on the stock market, these companies have keep chalking up consistently good results - both for the good of the market, as well as their shareholders. And when they can’t (like now), their shares get crushed. In the past two weeks alone, Lennar was the second company to put up earnings that were way down - some 70-80%, and to cap it off, then guide lower for the rest of the year. Result? Lennar dropped from a close of $45.58 last Friday to an intraday low of $42.64 today, before closing at $44.50.

With these two big problems, more trouble is looming…

New Home Starts Up + New Home Sales Down = Investor Beware

As the numbers showed, new home starts in February rose solidly - albeit from very low levels.

But new home sales declined by 4% - below the consensus estimate of almost all analysts. This is the news that had the stock market reeling on Monday - and is another warning sign.

But here’s an even more disturbing sign in the new home sales: There were big downward revisions for the last three months of data. This shows that the market may be even weaker than first imagined.

So given this data, what’s a prudent investor to do?

I strongly suggest that you not try to catch a falling knife in the housing market. Just last weekend in Denver, I spoke about investing principles at a predominantly real estate conference… and I heard one horror story after another from both brokers and investors.

No matter how good the bargain looks, it’s always wise to look for solid proof on the price charts that the market has really turned from down to up before jumping in.

Great trading,

D. R. Barton, Jr.

Today’s Smart Profits Cribsheet

• Early Tuesday morning, Standard & Poor’s added to the real estate market’s woes, with numbers that showed the average price of a single-family home dropped 0.7% in January, compared with January 2006. It was the worst performance for the S&P/Case-Shiller index - a measure of real estate growth in 10 major metropolitan areas - since January 1994. On a broader scale, the S&P/Shiller 20-city gauge showed a 0.2% decline. According to Robert Shiller, MacroMarkets Chief Economist, the data demonstrates the “dire” state of the real estate market across America.

• When a crucial market like housing turns volatile, you can either wait patiently for the storm to pass… try to time your investments (a risky proposition)… or look overseas for better opportunities while the U.S. market corrects itself. And today, the best opportunities are increasingly found abroad, not in the U.S. In a recently-published report, you’ll find out five advantages of international real estate and three ways you can profit. Even better… the report includes 31 other top investing and wealth-building secrets from the world’s foremost moneymaking experts, who boast over 480 years of experience between them. Find out how to consistently dodge the stock market’s bullets and book gains of 119%, 190%… all the way up to 4,001% a year. For more information.

Related Articles:

• The Continued Erosion Of The Housing Market: 3 Reasons Why Real Estate Will Crumble In 2007
• Stock Market Investing: 3 Things Investors Must Master To Improve Their Trading
• Using LEAPS: These Options Are Set to Run Full Tilt

The Chart of the Week

While the market has been chopping around, we find strength among one of the typical safe havens - utilities. The S&P Select Utilities Spider (AMEX: XLU) is almost back to it’s all-time highs from late February.

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Greed and Fear

The Smart Profits Report: Issue #406
Monday, March 26, 2007

Greed & Fear: Gauge The Fear And Greed Factor To Boost Your Investment Success
By Mark Whistler
Small-Caps Specialist, Mt. Vernon Research

Greed and fear.

Two very powerful emotions that, when applied to investing, are two main factors that drive the stock market. Or so the old adage goes. To a large extent, the emotions of greed and fear do drive the buying and selling actions of investors, traders, hedge funds and institutions.

The fear aspect comes from investors who sell because they’re afraid of giving up gains in an existing trade, or simply afraid to lose money at all. But fear also triggers greed. The fear of missing out on gains and the desire to increase wealth and grab profitable opportunities while they exist is a powerful emotion.

But emotions are tricky - no matter who you are. And when your hard-earned money is riding on the emotions of millions of others, the situation can become even more complicated.

However, as I’m about to show you, this doesn’t have to be the case - and once you see the true “emotion of the market,” you’ll become a savvier, more intuitive investor. Let’s see how…

Why Greed Is Actually Fear In Disguise

Greed is generally defined as an urge to obtain substantially more than an individual needs. But really, greed is a manifestation of fear - the fear that you won’t get enough of something that you want.

A major motivation is that when people dream of having an abundance of wealth, they think they’ll be free of worries. For example, if you know you have one million dollars stashed away, you have no more worries about paying the mortgage. But the only way to amass such a large amount of money is to build wealth.

And because most people don’t want to feel fear, the greed can kick in as a way to overthrow it.

In the investment world, it boils down to this:

• When buyers are coveting stocks, their greed is really fear in disguise.
• Buyers are afraid that if they don’t get in, they will miss the chance to be in a stock that’s going up.
• And if the opportunity is missed, abundant wealth will not be gained.

Google (Nasdaq: GOOG) is a great example of this. There are thousands of people who didn’t invest in the stock because they believed it was overbought and primed to fall back. But the stock defied the odds and rose another couple hundred dollars. It was the fear of not being along for the ride that prompted investors to drive the stock higher and higher.

So what do you do when you’re sitting on the sidelines, watching the stock market or a company rise quickly? And how do you combat being caught in a falling stock? Let’s see…

How Understanding Fear Can Help You Combat A Losing Trade

If you’re holding a stock that is dropping, take a step back and ask yourself two key questions:

• How worried am I about losing a lot of money?
• How fearful is the rest of the market over the stock’s prospects? (You can get an idea by looking at the volatility level on the stock’s options - a subject we’ve discussed in this column before).

In posing these questions, you can not only evaluate your own tolerance to risk, but also the market’s perception.

For example, if you can stand to lose a little on the trade, and the broader market sentiment doesn’t think the stock is going to plunge overnight, you can probably hold the position for a little longer (as long as it hasn’t hit your pre-determined stop-loss point, of course).

What you’re essentially doing is stepping away from the market and making a decision based on the perceived fear of the broader market.

To Buy Or Not To Buy? Gauging The Greed Factor

So what about situations like the Google example I mentioned a moment ago? If you’re thinking about purchasing a rising stock in a rapidly ascending market, there is obviously greed factoring into your desire to make money.

But more importantly, there’s a good chance that you’re also fearful that the market and stock will go further without you being on board for the ride, if you don’t get in now.

Again, when weighing your decision whether to buy, step back and ask yourself two questions:

• How fearful am I of missing this opportunity to make money?
• How fearful is the rest of the market about missing this opportunity?

If you conclude that the rest of the market could be equally fearful of missing the opportunity, you’re using market momentum and sentiment to rationalize your decision. And momentum and sentiment are two pretty powerful forces.

It’s important to remember that gauging the market’s emotions when making investment decisions should be done in tandem with fundamental and technical research.

By doing so, you’re able to not only crunch the numbers, but also evaluate other influential events, and make a clearer decision for more profitable trades.

Good investing,

Mark Whistler

Today’s Smart Profits Cribsheet

• After a 7-month market rally from July 2006 to February 2007 that saw stocks barely pause for breath (the biggest pullback was just 2%), volatility is now back in the market with a vengeance. Investors are more nervous, which means higher levels of fear and greed. A great way to gauge the mood of the market and investor sentiment is to look at the CBOE Volatility Index - commonly known as the VIX. This index measures the level of fear or complacency in the market, and is a valuable tool that helps you pinpoint the best time to buy and sell.
• Despite the mass of fundamental, technical, and quantitative research tools available to investors these days, it’s an undeniable fact that basic human emotions play a huge part in the behavior of the market and stocks, too. You have two choices. You can either let the emotions of others dictate the way you trade in a negative way… or you can use emotions like fear and greed to your own profitable advantage. To help you achieve the latter, an elite group of professional traders, investors and money managers have written the ultimate investing guide - including a section on “how human emotions can drive stock market prices.” These 31 proven “secrets of the masters” will give you a critical edge over the investment crowd, showing you the tips and wealth-building strategies you need for success. Follow this link and harness the power of 480 years of expertise today.
• As a successful licensed trader for over a decade, Mark Whistler is well-qualified to pass on the skills you need to trade confidently and profitably in an increasingly popular, but volatile, market climate. Having worked with some of the most respected traders in the world, Mark has built up an impressive level of expertise, and honed the professional investment strategies that allow you to make the most money in the fastest time. In his second book, Trade With Passion And Purpose, Mark outlines the qualities that separate ordinary investors from the top traders. This includes not just subject-specific knowledge, but also the core psychological, philosophical, personal and emotional strengths that will help you overcome stress and setbacks and improve your chances of success. For more information, please visit this link.

Related Articles:

• Investing In The Fear Effect: How To Buy Bargain Stocks When There’s Blood In The Streets
• The Market Volatility Index: Using The VIX To Straddle And Strangle Stock Options
• Sentiment Analysis: Incorporating Contrarian Investing in Your Trading & Financial Endeavors
• Investor Sentiment & Market Behavior: Seven Tips For A Profitable Downside Bias

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Stock Market Direction

The Smart Profits Report: Issue #405
Wednesday, March 21, 2007

Stock Market Direction: This Volatile Market Can Eat You Alive… Here’s What To DoBy D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

The stock market direction, in an extraordinary upward climb from July 2006 to February 2007, was a wonderful rally.

But it was ever so uneventful. In the end, it became almost boring, shooting straight up with very little volatility. The biggest pullback during that time was a measly 2%.

Today, however, that’s all changed… and the stock market is at one of its most interesting junctures in a long time. It’s frothy. It’s volatile. And its next directional move is a bit of mystery.

Hmm… volatile markets that can’t decide which way to go. That’s either a recipe for disaster - or for huge profits. Let’s see how to avoid the disaster part and concentrate on the profits…

Make A Plan… And Dodge Disaster

Simply put, the only sure recipe for disaster here is indecision.

If you keep trying to go short every time the stock market breaks down, then go long every time it pops back up, a volatile non-directional market like this current one will eat you alive. It will take a pound of flesh a day (or more) if you let it.

So how do you combat the inclination to chase volatile moves like a dog chases its tail?

The answer is to adopt a market model or belief about how the stock market direction works. Then make a plan based on what the model tells you - and stick with it.

Two weeks ago we talked about Fibonacci retracement levels. This is based on the work of a 13th century Italian mathematician called Leonardo Fibonacci. In the investment world, these levels are usually 38.2%, 50% and 61.8% of an index/stock’s major move - and give us an excellent model for understanding this stock market direction. Let’s quickly revisit the theory to see how you can approach this new situation…

Leo’s Tri: How Three Numbers Can Clear A Path Towards Profits

Take a look at the S&P 500 chart below, which shows the three longer-term Fibonacci retracement levels drawn.

As you can see, despite the big down day we had on February 27, we still haven’t quite retraced 38.2% of the move up that began in July 2006.

This basically means that if the bull run is to resume strongly, then this major support area at 1,370 should hold. If it doesn’t, then we can expect a continued move down to the 50% retracement level around 1,340 area.

However, we can’t get too excited about the upside until the old highs are broken at around 1,460.

The Shorter-Term View of the Stock Market Direction

If you want to make investment decisions in a shorter time frame, the retracement levels from the S&P 500’s February highs around 1,460 to the March 14 low of 1,363 give us a useful model. Let’s turn to the charts again:

Here, you can see that the price has already broken through the 38.2% retracement level several times, but the 50% level is holding firm.

That means the 1,411 area now becomes very important. Bulls cannot get too excited until we have a close or two above that level. And bears have to hold fire until we get back below the March 14 lows, too.

This is just one model you can apply to your investment decision-making process. But you can see how merely having a theory makes the process easier - and lessens (or eliminates altogether) the need to chase every volatile move.

My tip for now is to plan for a volatile sideways stock market direction until the price action tells us that it’s moved into a new, more significant range that matters.

Great trading,

D. R. Barton, Jr.

Today’s Smart Profits Cribsheet

• Wednesday sees the Federal Reserve make its latest interest rate announcement - with the bankers widely expected to leave rates unchanged once again. Although these announcements occasionally have an impact, they’re usually minor market disruptions. They’re really much more important for the media than for investors. But it’s worth having a plan in order to mitigate any potential price upsets - especially if you’re a short-term trader or swing trader - so you don’t get caught on the wrong side of a market reaction to the announcement.

• Negotiating your way safely through the stock market can be a tough task - even at the best of times. But when the market turns volatile - as we’re seeing today - the decisions you make become even more crucial. That’s where the proven expertise of an elite group of former money managers is invaluable. Armed with over 480 years of experience between them, the 31 secrets they reveal will show you exactly how to consistently dodge the stock market’s bullets and book gains of 119%, 190%… all the way up to 4,001% a year. The research is now public, so for more information, click on this link.

Related Articles:

• Leonardo Fibonacci: Predicting The Stock Market’s Next Move With The Fibonacci Sequence
• Fast and Furious Volatility is Back in a Big Way: How To Profit Using Leg Spreads & The VIX
• Trading Index Options: Two Ways To Profit

The Chart Of The Week

While the broader stock market has taken a beating, the telecom sector has shown amazing resilience. This chart of the Telecom Holders (AMEX: TTH) shows that the drop in the sector was less severe and the recovery was faster than for most other sectors. If we break to the upside in the general market, look for the telecom sector to be a leader.

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Stock Market Milestone

The Smart Profits Report: Issue #404
Monday, March 19, 2007

Stock Market Milestone: Here’s Its Spring Synopsis… A 30-Point Range Holds Key To Next Move
By Jim Stanton
Technical Analyst, Mt. Vernon Research

We’ve just hit another stock market milestone…

It began in March 2003 and has galloped all the way through to the present day. But to see and hear the way some traders, investors, and the blowhards on television have reacted recently, you’d think the world was coming to an end.

But when you take a moment to think about it, the truth is… a four-year bull market is a pretty good thing!

And that’s exactly what we’ve had on the S&P 500.

If you take a look at a chart of the index, dating back to March 2003, you’ll see a strong bull market over that time, interspersed with five healthy corrections along the way. The longest pullback lasted about five months - from March 2004 to August 2004.

But right now, everyone is asking the same key questions: What does the recent market volatility mean? And is it the trigger point for another one of those “healthy corrections” - or something bigger?

Let’s turn to the technicals for some clues about this stock market milestone…

A 7-Month Party Leaves The Market With A Hangover

When the market began rising in July 2006, not many people thought it would blast its way through to the end of February.

Most economists believed the correction (which began in May 2006) would cruise through the summer months into what are historically the weakest months of the year for the market - September and October. And especially given the markets traditionally experience a down cycle during mid-term elections.

But after bottoming out, the S&P 500 bulldozed into mid-October - and ended up exceeding its May 2006 highs, along with the Dow Industrials and Nasdaq indexes.

Capitalizing on increased liquidity from hedge funds and private equity funds, the overbought market continued to rise through the end of 2006 and into 2007. During this impressive 7-month rally, the Dow Industrials, Dow Transports, and all the small-cap indexes made new all-time highs.

But the party couldn’t last forever…

Forget March Madness… The Market Started In February

A 9% slump in China’s Shanghai Composite Index triggered a mass selling spree, with the ripple effect felt around the world.

In just three days, the Dow, S&P, and Nasdaq indexes gave back all their gains for the year. Since then, they’ve sprung back and forth between gains and losses.

So what next? There are two scenarios from here…

A Short Slip Or A Drawn-Out Decline?

There are three indexes that didn’t toss all their gains away during the market’s swoon: The Russell 2000… the S&P Small-Cap… and the S&P Mid-Cap. As I write, all three are clinging onto modest gains.

• Scenario #1: If they can stay above their 2007 lows, this correction could be short-lived.

• Scenario #2: If the small-cap indexes sink into negative territory for the year, we could be set for a lengthy correction, or a consolidation period within a long-term bull market.

I’ve illustrated the outlook for the S&P 500 on the chart below.

Chart Courtesy of Trade Navigator Software: http://www.genesisft.com

The upper blue line is drawn from the highs of March 2004, and you can see the highs from May 2006 touching it. The lower blue line is a trendline drawn off of the lows in March 2003. The red line represents the 200-day moving average.

As you can see, the S&P 500 blasted through the upper trading channel last October, before retreating back to test it just a couple of weeks later. The index then took off again, making a series of successive new highs.

But when the market collapsed at the end of February, the S&P plunged back down to the top of the trendline.

This means we’re now at a decision point…

Because the trendline has proved to be pretty solid support for the index since October 2006, it’s possible that the bull market can resume from here. However, the February selloff inflicted a lot of technical damage, and there’s probably more to go on the downside.

Stock Market Milestones: A Key 30-Point Support Range

Simply put, to confirm that the indexes have further to go on the downside, they first have to close below the lows posted during the brutal week of February 26 to March 2. That would put the S&P 500 back inside the trading channel - and then we’ll be looking at the next area of support for a potential reversal.

But before we start thinking about that scenario, there’s a key 30-point support range that you need to keep an eye on.

My colleague D.R. Barton, Jr. and I have written here about the proven predictive power of Fibonacci retracements. As a quick refresher, Leonardo Fibonacci was a 13th century Italian mathematician who popularized a string of inter-related numbers called the Fibonacci Sequence. In investment circles, this tool is used to gauge support (downside) and resistance (upside) levels where markets and stocks could head next. Following a major move, there are three main retracement areas - 38.2%… 50%… and 61.8%. And once you identify these, it allows you to time your investments better, since you’re able to pinpoint the best times to buy and sell.

So here’s what Senor Fibonacci is telling us right now for the S&P 500…

A 38% retracement from the July lows comes in at 1,370.

The 50% retracement is at 1,341. And the 200-day (40 week) moving average is currently around 1,350, so we have a cluster of support within that 30-point range.

If the major indexes drop below their March 5 lows, the best case for the bulls would be for the S&P 500 to drop down into that range and consolidate for a few weeks before reversing to the upside again.

As I’ve shown on the chart above, the trendline coming off of the March 2003 lows moves up to 1,320 over the next few weeks. This is a critical technical level, as it represents about a 62% retracement off of the July 2006 lows.

• Bottom line: If the S&P tests that level, it must hold in order for the long-term bull market to stay intact. If the index drops below that mark, it would be bearish over the longer-term.

We’re Headed Higher Eventually… But Beware Of Volatility

However, with the Dow Industrials, Dow Transports and all the small-cap indexes having all notched up new all-time highs over the impressive 7-month market rally, my pattern recognition system has projected higher targets.

And although these stock market milestones have yet to be reached, my intermediate to longer-term analysis tells me that the February highs will eventually be taken out.

The key question is “when?” This answer is a little more uncertain right now - and with the market having found some real volatility for the first time in months, this is not the time to be pumping too much money into an unpredictable market. Keep some powder dry for now, and remain patient until we see some signs of a bottoming process.

Good trading,

Jim Stanton

Today’s Smart Profits Cribsheet

• In addition to fears over the strength of the U.S. economy, one of the main drivers of current investor anxiety is the chaos within the U.S. sub-prime mortgage industry. Just a few days ago, the NYSE took the extraordinary step of suspending trading activity in New Century Financial, the sector’s second-largest company, as the company’s shares slumped almost 80%. And when the Financial Times says the company “teeters on the edge of bankruptcy,” with the mess potentially spilling over into the rest of the $8 trillion mortgage industry, you can see why stocks are under pressure.

• While the broader stock market was tanking, you could have enjoyed gains of up to 37% in less than 24 hours, as one flourishing small-cap company released major news that gives it an unhindered path to the front of a revolutionary industry. With its groundbreaking technology reaching into lucrative industries such as video gaming, telecom, casinos, automobiles and healthcare, this is one company poised for major upside. Find out more…

• As an investor, timing your trades is one of the hardest things to do. After all, knowing when to get in and out of a stock is the critical element to successful investing. So, how exactly do you work out where a certain stock’s support and resistance points are, alerting you to the best time to buy and sell? There are a number of ways to do it, including moving averages, trend lines and historical support and resistance levels. We focus on buying stocks on pullbacks using retracement levels in Smart Profits #313, Fibonacci Retracement Levels: Let “Leo” Calculate Your Support and Resistance.

Related Articles:

• Leonardo Fibonacci: Predicting The Stock Market’s Next Move With The Fibonacci Sequence
• Continuation Patterns: Cashing In On Technical Analysis
• Stock Market Trend: Stock Market Enters The Danger Zone With 4 Significant Trend Warning Signs

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Corn Commodity

The Smart Profits Report: Issue #403
Wednesday, March 14, 2007

Corn Commodity: Cashing In With Sales Up 170% On The Government’s Best-Laid Ethanol Plan
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

When I saw the number yesterday, it struck me as a VERY large increase. A massive 170% jump in sales… To put it in perspective, a 70% rise in sales of a new product or hot retail item is impressive - but not unusual. Getting 70% more laundry detergent for the same price is a pretty nice bonus, too.

But we’re not talking about a 70% rise. We’re talking about 170% surge over last year’s number. And it came in one of the most basic creations on earth: good ol’ corn commodity. Why is this important to us as investors and traders? Simply because it provides two lessons - one in macroeconomics and one in microeconomics. Let’s take a look…

Corn’s Meteoric Climb

The agricultural extension of Virginia Tech reported that seed corn sales in the eastern part of the state are running 170% higher than last year’s levels.

To be fair, Virginia is America’s 23rd largest producer of corn. But farmers are farmers - and when given the chance to choose how to plant their land, like any business person, they will take the most profitable route. (Thanks to our friend Dennis Gartman and his eponymous daily letter for reporting the story).

And a 170% pop is a huge jump for a commodity product that is produced in such a large quantity.

And since so many people are thinking about ethanol and ethanol-oriented investments, the topic is certainly worth a look.

The Unintended Consequences Of The Government’s Best-Laid Ethanol Plan

When oil prices skyrocketed, public outcry turned into political action. And the government leapt on the ethanol story with gusto. Ethanol incentives are all the rage.

It’s a popular story - a home-grown fuel alternative that will help the farming community. But it also created some unintended negative consequences.

All the good intentions had (and still have) ethanol distillers popping up like daffodils in the spring. But last year, those distillers hadn’t had time to bring extra capacity online - so corn farmers saw very little benefit from the government’s ethanol incentives.

When the reality hit home - that you do, in fact, need corn to make corn-based ethanol - corn prices doubled in exactly six months.

This put a margin squeeze on the distillers. And if there’s one thing us chemical engineers (I was a former chemical engineer at DuPont) know how to do, it’s how to ramp-up to take advantage of economies of scale.

So distillers are growing bigger, and the cycle is likely to repeat.

Cotton, Soybeans, Or Corn?

So if you’re an American farmer figuring out what to plant, you have a decision to make…

• Cotton? It’s up a little since last year.

• Soybeans? The market has enjoyed a good run - up 50% since last fall.

• But then there’s corn. It’s up 100% - with many prognosticators saying there’s no end in sight to the meteoric rise. Guess I’ll plant some corn then.

And with seed corn sales up 170%, plus a solidly bullish industry forecast, it looks like there will be fewer acres of soybeans and cotton planted.

So come harvest time this fall, we could see the biggest unintended consequence of all. Representatives are worried that the corn price frenzy has farmers planting it without doing appropriate hedging. And if farmers across the U.S. are planting at rates grossly above the norm, we could see a glut of corn - with the potential for higher volatility.

And with the farmland being used to over-produce corn, shortages in other commodities like soybeans or cotton could follow.

The Corn Conundrum

If the Virginia market is at least partially indicative of the national picture, then the corn-soybean spread is bound to tighten (as will the corn-cotton spread, though that relationship is less direct).

So what can we do in our portfolios?

First of all, be wary of getting carried away in the wave of corn speculation. It’s not a game for the faint-hearted.

Pick your ethanol distillers judiciously. While corn prices remain high, margins will be squeezed. Don’t get me wrong… there is still upside left in this sector - but only if crude oil prices remain relatively strong.

It’s also tough to speculate in soybeans after the strong run they’ve had. But a spread that is long soybeans and short corn might have merit.

Great trading,

D. R. Barton, Jr.

Today’s Smart Profits Cribsheet

• There are currently 107 grain ethanol refineries in the U.S., with the capacity to produce 5.1 billion gallons on ethanol per year. There are a further 56 construction projects underway, which will add 3.8 billion gallons of capacity in the next 12-18 months. And because pure ethanol uses 30% less energy per unit than gasoline, the goal is for ethanol to gradually relieve consumer dependence on the 150 billion gallon per year market for gasoline.

• Having spent six years as a market-maker (the guys who set and control the prices) in the commodity trading pits at the New York Mercantile Exchange, you’d be hard-pressed to find a more informed authority on commodities than my friend and collegue Lee Lowell. In his new book, Get Rich With Options: Four Winning Strategies Straight From The Exchange Floor, Lee reveals the “insider” secrets that only a select few people know about, and shows you how to execute the four investment techniques that he uses to make money. For more information, find it here.

• While many investors jumped blindly on the ethanol bandwagon and lost money on the new companies in what is still an evolving and volatile industry, Xcelerated Profits Report readers are currently up 30% on a well-established, well-diversified company making great strides in the ethanol industry through one of its key holdings. What’s more… two company insiders just loaded up, buying over 60,000 shares. Find out how you can join the Xcelerated Profits Report and claim your share of profits.

Related Articles:

• Ethanol Investments: Two Ways To Profit from the Shift Towards Ethanol
• Commodities: How to Create Your Own “Mini Hedge Fund”
• Option Strategies: The Solution To The Most Dangerous Investment Paradigm Today

The Chart Of The Week

The corn price chart shows its amazing run, accompanied by a huge increase in volatility.

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The VIX and VXO

The Smart Profits Report: Issue #402
Thursday, March 8, 2007

The VIX and VXO: How You Could Have Predicted The Market’s Recent Meltdown
By Lee Lowell
Futures Options & Commodities Specialist, Mt. Vernon Research

Well, it finally happened… After a 7-month rally that saw the stock market shoot up without stopping for breath, it was inevitable that the continual upmove would produce the thrashing that we’ve seen over the past week or so. Investors were asking for it.

Why do I say that? Simply put, it’s because investors were so complacent. They got so used to the market rising, they expected it to just continue heading up in a straight line. But that never happens without some kind of big reversal. And if you follow this key gauge, you could have predicted the move. I’m talking about the two volatility indexes - the VIX and VXO. So let’s dig into these revealing indicators…

Follow The Volatility… Gain An Advantage

Want to know why options traders often have a forecasting advantage over their stock investing counterparts? Because they follow these two indexes closely, since volatility has a direct effect on options prices.

But here’s the thing: Even if you’re not a regular options trader, you can still easily track these indicators, so you have an idea of where the market could be headed next.

Simply put, the VIX measures the volatility of the options that comprise the S&P 500, and the VXO measures the volatility of the options that comprise the S&P 100.

And when we got a spike higher on both these indexes, it meant the markets were finally making a large move. That’s because when the VIX or VXO spikes upward, that’s usually an indication of the stock market dropping in price.

But that’s not all these indexes show us…

Watching the VIX or VXO: From Calm Complacency To Ferocious Fear

Not only does a spike in the VIX or VXO mean that the market is moving, but it also means options prices are getting more expensive as well. This is because volatility is one of six factors that determine an option’s price, and plays a major role in the market.

If you look at the chart of the VXO below, you’ll see how it channeled along at a very low level for months and months. That was an indication that investors felt very comfortable with the market and that big moves were not in the cards.

But just look at the huge spike upwards over the last few sessions. That was a direct response to the downside plunge in the stock market - and subsequent fear it created.

If you’re an option seller, you need spikes like this, which inflate the prices of the option you want to sell.

If you are an option buyer, volatility spikes will cause your long option to gain in value too.

So increasing volatility is usually good for everyone. I say “usually” only because if you sold options while the VXO was in the 10% range, then your options probably spiked higher against you temporarily. Now that the market is currently retracing some of its downmove, the VXO has retraced as well, bringing option prices down with it.

So exactly how does volatility impact option prices so directly? Let me show you…

How Volatility Has A Direct Impact On Option Prices

Take a look at the two charts below, showing a typical option calculator.

In the first example, we’ve priced out the theoretical value for the at-the-money April 2007 OEX 640 strike calls and puts. We’ve inserted 10% volatility on the left-hand side. The value for the call and put are on the right-hand side at $9.11 and $8.75 respectively.

But let’s see what happens when we bump up the volatility to more current levels at 14%.

The volatility input on the left-hand side is the only number we’ve changed. But look how the option prices have increased to $12.63 and $12.26 respectively. Having left all the other inputs unchanged, the only reason for the spike in option prices is due to the change in volatility.

So why is this volatility change so important?

Volatility Is Your Friend When Using the VXO

Simply put, as active option traders, our decisions are based on where volatility is currently trading compared to its past history. With the VXO trading at the 10% level, that meant option prices were the cheapest they’ve been since the VXO was established.

So if you were trying to sell options at that point, you were taking a very big risk that volatility could spike higher on you at any moment.

Personally, I like to check to see where volatility is on an historical basis so I know whether I’m going to be buying or selling options when volatility is cheap or expensive, based on its past levels. Then I’ll try to tailor my option strategies to wherever volatility is at that time.

News Breeds Volatility: Key Events That Can Vault The Volatility

Usually, volatility doesn’t just appear from nowhere. And just by keeping an eye on key events, you can project when it might rear its head and have an effect on option prices.

For example, if you’re an options trader, watch the market during the days leading up to quarterly earnings reports. You’ll often find that uncertainty over what a company will say will lead to option prices spiking temporarily until the report is released. This is due to the option market-makers protecting themselves in case the announcement has a major impact on the stock price.

Once the report has been made public, the option prices will have the air taken out of them and return to more normal levels. So don’t be surprised if that call option you bought before earnings actually goes down in price - even though the stock may be trading higher after earnings are released. This is due to the fact that the drop in volatility has overpowered any effect that a positive move in the stock has contributed to that option price.

My advice here is to keep an eye on volatility, using the VIX or VXO, on an historical basis so you’ll know whether you’re buying or selling options at a period of high volatility or at a period of low volatility. And there’s an easy way to check on the volatility of any stock you like. Simply go to http://www.ivolatility.com.

Good trading,

Lee Lowell

Today’s Smart Profits Cribsheet

• Simply put, volatility indicators measure the two most important market sentiments: Fear and greed. Here’s the basic equation: When volatility is falling: It implies that investors are complacent and not too concerned about a market correction. This is what we saw before the big selloff at the end of February. When volatility is rising: This suggests investors are fearful about a selloff. The first chart in today’s message demonstrates this perfectly.

• Just a few hours ago, Lee wrapped up an interview with Matt Krantz for Friday’s edition of USA Today. Be sure to check it out tomorrow. As a Smart Profits Report reader, you can also read what Lee has to say in his new book Get Rich With Options: Four Winning Strategies Straight From The Exchange Floor. Visit this page for more information.

• Volatility doesn’t have to wield a negative impact on your investments. If you pay attention to volatility indicators, as well as news that can drive stocks higher or lower, you can use it to very profitable advantage. At the Xcelerated Profits Report, we recently benefited from “positive volatility” in a major way when a groundbreaking small-cap stock in our portfolio released news that immediately makes it the leading player in an industry that we believe will form one of the next technological revolutions. To find out more, visit this link to read our special report.

Related Articles:

• The VIX Index: Instant Access to the World’s “Best Contrarian Indicator”
• The Market Volatility Index: Using The VIX To Straddle And Strangle Stock Options
• Market Volatility: How to Pay $27 For A $50 Stock

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Leonardo Fibonacci

The Smart Profits Report: Issue #401
Wednesday, March 7, 2007

Leonardo Fibonacci: Predicting The Stock Market’s Next Move With The Fibonacci Sequence
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

There’s nothing like a one-day, 400-point freefall for the Dow Industrials to shake up the faithful among the perma-bulls. But to be fair, those on the bearish side don’t have a whole lot to cheer about just yet, either.

So in the bull vs. bear battle, which side has it right? Is this just a little hiccup amid the third-longest bull run in market history? Or is all the bullish work of the past few months about to be unwound in a sustained move down?

Well, it’s said that a picture is worth a thousand words. So let’s look at a revealing chart that should shine some light on the current situation and give us a better idea of where to position ourselves going forward with the help of Leonardo Fibonacci.

Fire Up The Fibonacci Numbers

While a 13th century Italian mathematician named Leonardo of Pisa might not mean much to you, he’s more widely known as Leonardo Fibonacci. His work had been a mystery to the general public until it was popularized in the controversial book “The Da Vinci Code,” where his Fibonacci sequence was used in the clues of the book.

But long before the book (and subsequent hit movie) came out, many traders and investors were already familiar with Fibonacci’s work, as it offers key clues as to where indexes and stocks might be headed.

Interestingly, Leonardo Fibonacci did not actually invent the number sequence, but he is credited with popularizing it.

The sequence starts with 0 and 1, with the current number simply being the sum of the previous two numbers in the sequence. Thus, the sequence goes:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, etc.

There are many trading applications of this number sequence, but the most used is the concept of the “golden ratio.”

A quick check of the numbers in the sequence will show that dividing any smaller number in the sequence by the next larger number yields the ratio of 0.618 and that dividing the larger by the next smaller number gives 1.618 (the smallest few numbers in the sequence only approximate this ratio).

Leonardo Fibonacci Cracks The Market Code

Traders use Fibonacci ratios to project potential retracements of market moves to find logical turnaround points. And the key retracement levels that many traders look at are 0.382 (38.2%), 0.50 (50%) and 0.618 (61.8%).

The question is… what does the Fibonacci sequence reveal about the current market pullback, and how far will the market decline before it resumes its upward movement? Let’s turn to the chart…

3 Numbers That Will Determine The Strength Of This Market Correction

Take a look at the S&P 500 chart below, which shows the index’s impressive upward run from the July 2006 lows to the February 2007 highs.

As you can see, by using Leonardo Fibonacci’s ratios, there are basically three major Fibonacci retracement points on the chart. Here’s what they reveal:

• If The Pullback Is Weak: You’ll see the S&P edge down to the 38.2% retracement level at 1,371.18

• If The Pullback Is Normal: In this case, you’d see the index retrace to the 50% level at 1,343.26

• If The Pullback Is Strong: If we’re set for a more severe correction, then the index will slide back to the 0.618 retracement point (61.8% of the price move being measured) at 1,315.34. This would be the last area of support before the trend would be considered broken.

Decision Time For The Market

If this pullback is only a mild one, then the area around the 0.382 retracement line on the chart should hold and prices on the S&P 500 cash index shouldn’t close below the 1,370 area.

But a close below that area would mean that a move down to 50% retracement level at 1,343 is expected. And if you look at Monday’s closing price, as well as today’s opening price, you’ll see that the market was a mere three points from testing the 0.382 retracement level.

Bottom line: If that level isn’t pierced, it’s good news for the bulls. If it breaches that point, and closes below it, then more downside is probable.

While no analysis can be correct every time, learning from Leonardo Fibonacci and watching retracement levels can give you a key edge in your investing strategy.

Great trading,

D. R. Barton, Jr.

Today’s Smart Profits Cribsheet

• The Fibonacci sequence is a proven analytical investment tool that gives you specific upside and downside levels. Simply put, when a bullish stock pulls back near its support level, it’s a good opportunity to buy. When a bearish-looking stock rallies up near its resistance point, it’s a good opportunity to short it. The more support there is around these retracement levels, the higher the odds that you’ll see a reversal.

• At the Xcelerated Profits Report, we’ve applied Leonardo Fibonacci’s tried-and-tested formula to a stock that’s well on the way to shaking off its “small-cap” status - particularly after news last week vaulted it firmly to the front of an industry that we believe is poised to lead one of the next technological revolutions. Find out more about it here.

• As an investor, timing your trades is one of the hardest things to do. After all, knowing when to get in and out of a stock is the critical element to successful investing. So, how exactly do you work out where a certain stock’s support and resistance points are, alerting you to the best time to buy and sell? Get the details, through Mt. Vernon Research’s Jim Stanton, on buying stocks on pullbacks using Fibonacci retracement levels in Smart Profits #313, Fibonacci Retracement Levels: Let “Leo” Calculate Your Support and Resistance.

Related Articles:

• Technical Analysis: Two Simple Tools for Spotting a Technical Trend
• Timing Your Trades: Two Ways to Expand Your Thinking And Your Profits
• Technical Analysis Indicators: Harness The Power Of Leading Indicators And Bollinger Bands

The Chart Of The Week - “Pat On The Back” Edition

In last Tuesday’s “Chart Of The Week,” I showed Google (Nasdaq: GOOG) moving down toward gap support - as shown in the chart above from last week.

And sure enough, within one week, GOOG has already moved down and hit the lower line on the chart above (although it was bouncing up yesterday).

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Penny Stock Options

The Smart Profits Report: Issue #400
Monday, March 5, 2007

Penny Stock Options: The New Pricing System Push Towards Pennies Means The Odds Even Out… And Puts More Cash In Your Pocket
By Karim Rahemtulla
Investment Director, Mt. Vernon Research

The profit party for options companies and market makers is over… but for investors like us, it’s only just beginning.

That’s because at long last, the Securities and Exchange Commission (SEC) is changing the rules and modernizing the way options are priced. This is a great development that truly evens the odds for us - and one that will allow us to claim greater profits with the advent of Penny Stock Options. Let me explain how it works…

The Push Towards Pennies

It’s no secret that the options market is the fastest-growing investment area.

But it’s a sad fact that options often take second place to the stock world when it comes to new changes or improvements. Let me give you an example…

Back in the 1980s, long before the investment arena became fully computerized and high-tech, the archaic systems that brokerages used often meant that stock quotes were inaccurate and didn’t reflect the best bid and ask price (at least not on the Nasdaq). By quoting the average prices of bids and offers, the spreads were very wide.

Needless to say, the market makers had a field day and made money hand over fist. But as trading activity has exploded since the early 1990s, increased volume and competition has resulted in smaller gaps between bids and offers and tighter spreads.

In 2001, the SEC allowed stocks to be quoted in pennies - a move that has greatly benefited investors.

But it wasn’t until early last year that I noticed the SEC trying to do the same thing for the options market - a full five years later. At that time, some options trades were being executed at odd prices. Not in the 5-cent increments that are commonplace, but at numbers like $1.62, when the bid and offer were quoted in round numbers.

It’s taken them a while… but today, the SEC has finally got around to implementing this change in the options world.

Why Penny Stock Options #13 Is The Option World’s Lucky Number

On January 26, the SEC kicked off a six-month pilot program that started pricing certain companies’ options in penny increments (you can find a link to the SEC announcement that officially launched the program in our Cribsheet below).

The test began with Whole Foods Market (Nasdaq: WFMI) and has since expanded across the six options exchanges that prices 12 more of the most widely traded, diverse stock options in pennies. For example, heavyweight companies like Microsoft and General Electric now quote their options in penny increments.

Exchange-Traded Funds (ETFs), like the Nasdaq-100 Trust, also trade in penny increments.

This major move marks the first time that options have been quoted this way, and the SEC expects the pilot to provide valuable information about the impact of pennies on spreads, transaction costs, and quote volume.

And while there are arguments both for and against the penny proposal (which you can read about in more detail in our Cribsheet below), the knowledge acquired during the pilot will be essential to the SEC’s future decisions regarding penny stock options.

Here is a full list of the options currently trading in pennies (in addition to WFMI):

• General Electric Company (GE)
• Microsoft Corporation (MSFT)
• Agilent Technologies, Inc. (A)
• Advanced Micro Devices, Inc. (AMD)
• Caterpiller Inc. (CAT)
• Flextronics International Ltd. (FLEX)
• iShares Russell 2000 Index (IWM)
• Intel Corporation (INTC)
• Nasdaq-100 Trust Shares (QQQQ)
• Semiconductor HDLRs (SMH)
• Sun Microsystems, Inc. (SUNW)
• Texas Instruments Incorporated (TXN)

The question is: What does this intriguing new development mean for you?

Smaller Spread = Larger Profits

Simply put, being able to buy stock options in penny increments means you’re going to record better profits.

Think about an option trade where the quote is $0.25 by $0.30. That means you buy at $0.30 and you can sell at $0.25. That’s a full 20% spread - ridiculous!

When you want to buy an option and see a big spread, the breakeven risk often isn’t worth it. You see, when purchasing an option, not only do you have to predict the direction of the stock or index, you also have to time the purchase well, and have a good idea when it will move in your direction. That in itself is a tough job. But when you also have to overcome a huge spread, it lowers your chances of success even more.

But if the new penny stock option system is implemented across the board, that same option may be quoted as $0.25 by $0.27 - “only” an 8% spread. So you can achieve your profit target more easily - and your losses should also be smaller because of a better fill.

This bodes very well for us in our Xcelerated Profits Report newsletter, where we like to lower our risk and cost by writing covered call trades that involve selling options. By being able to sell in a much tighter market and get filled at much better prices, we’re likely to see our returns enhanced. This applies to spread trading, too.

There is no downside to this latest move. But it sure took us a long time to get to this point!

Don’t Let Brokers Pinch Your Pennies

If your broker won’t allow you to trade in pennies, let him know that you’re aware that some options are now being traded in penny increments.

In fact, there are a few brokers who will allow you to place orders in penny increments today for any option. One of them is Interactive Brokers (www.interactivebrokers.com), which has allowed its customers to place orders in penny increments since October 2006.

Even if the particular option that you’re looking at does not “officially” trade in penny increments yet, I bet my bottom dollar that if you were allowed to place penny orders, you would stand a good chance at being filled

So if your broker won’t let you, need to get an answer. If you go to the Interactive Brokers website, you’ll see that the company has no qualms about entering penny orders for you. So if your broker is “penny pinching” (literally!), perhaps forwarding the link to him would light a fire and change the practice of nickel and dime trading in options even faster.

If you’re a short-term options trader, stick with options that are liquid and have tight spreads (such as the QQQQ’s). This means if you’re wrong, you can exit quickly and minimize your loss. If you’re a longer-term player, buy in-the-money options with very little time premium, so you can let the trade work and not worry about time decay.

Options market growth is measured by contract volume. And the new move to penny increments - which I predict will encompass all companies by the end of 2007 - means options volume will soar. So get ready for another exciting and profitable chapter in options trading with penny stock options. Now all we need is a 24-hour market!

Good trading,

Karim Rahemtulla

Today’s Smart Profits Cribsheet

• Over the first six months of 2006 (the latest data available), global options activity jumped by $72 trillion to $370 trillion, compared with $298 trillion at the end of 2005, according to the Bank for International Settlements. That’s a 24% increase in just six months. But here’s the kicker: As recently as 1999, global options activity didn’t even total $72 trillion.

• After a five-year legal battle with a global giant who’d infringed on its iron-clad patents, a company we’ve tracked since 2004 just achieved the outcome that now allows it to vault to the front of a $500 billion market. In fact, its groundbreaking technology is so important… it even inked a new deal with the firm it was suing. In addition to existing gains, Xcelerated Profits Report subscribers just banked another 37% gain on the news in 24 hours… even as the market endured another heavy fall. And with the technology already used in a wide range of industries, this up-and-coming industry leader is poised to move higher still from here. To learn more about the firm behind this technology, read this report today.

• Here’s the link that was mentioned above about the SEC kicking off a six-month pilot program pricing certain companies’ options in penny increments. And here are arguments both for and against the penny proposal in PDF format.

Related Articles:

• The Options Bid: “The Bid, the Bid, Always the Bid”
• Option Market Makers: Beating the Market Makers on Price
• Risk In Investing: Don’t Take Insane Risks When You Have Options

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