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Investment Speculation
The Smart Profits Report: Issue #120
Tuesday, June 22, 2004
Investment Speculation: 6 Secrets to Creating a ‘300%-Return System’ Using Stock Options
by Karim Rahemtulla
Investment Director, Mt. Vernon Research
Everybody gets the urge to speculate once in awhile. Some people do it all the time. Unfortunately, investors who fall into the category of investment speculation generally don’t last very long. Unless they are using a system…
A quick example…
One of the companies that I follow closely, Hewlett Packard, was due to come out with quarterly earnings. The shares were stuck at $20, right at an available strike price, and the stock options were going to expire just three days after the earnings release.
The markets were swooning under interest rate concerns at the time. Still, the planets appeared to be lined up just right for some options speculation.
I had little doubt that that HP would report better-than-expected numbers. But, lately, even that was not enough. HP had to report blowout numbers, and the market had to turn at the same time. That was a tall order… and shows just how much must go right when you speculating on investments.
Investment Speculation & A System Nets Me 300% Returns - In One Day
The situation with HP was all very speculative, indeed. So even after deciding that the conditions were ripe, I needed one other requirement to be met: a low price. I didn’t want to spend enough to worry about a loss.
Fortunately, because of the overall market negativity, the options were cheap, and I bought in for just $0.25. The next day, HP came out with record numbers, the market did rally, and I cashed out at $1 for a 300% return.
Now, while I was speculating on this investment, I was doing so with several conditions in my favor. I was speculating using a system that required that:
- I was familiar with the company.
- The options were cheap.
- I was at or very close to the strike that would move the most (close to the current trading price).
- A major event that could affect the share price (earnings) was about to happen.
- The market was poised for a big turn.
- Most important, I was using money that I could afford to place at high risk, because the news - or the reaction to it - could have gone against me.
Investment Speculating: How to Lose 80% of the Time… Or Win 80% of the Time
So, if you are going to speculate on investments, use a system. It has to be objective, and based on facts and probabilities - not on hunches. (”This is a good company, it’s bound to go up,” is not a system.)
If you speculate without a system, then be ready to lose 80% of the time.
In my case, when I use investment speculation, it is for a short-term gain. I look for a quick “pop” predicated on a major event. In most cases, the only predictable major event is earnings.
I don’t speculate often, only on stocks I follow or know well, and only when I have a “reading” on market conditions.
That’s part of what allows me to have an 80%-plus winning percentage on my stock options trades over the last year.
Just remember, if you are going to investment speculate like Warren Buffett is doing in currencies, or George Soros is doing on the U.S. election, you must be able to justify your investment speculation by something other than a rumor or second-hand news.
Good trading,
Karim Rahemtulla
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Today’s Smart Profits Cribsheet
- Check out the Smart Profits Glossary for definitions of option terminology like “speculating” or “short squeeze.”
- For more on Speculating, check out Smart Profits #226, Hedging & Speculating: How to Enjoy Guaranteed Monthly Income With Options.
Related Articles:
- Technical Indicators: How to Overcome the “Evil Twins of Trading”
- Correlation Strategy: Identify the Tide And Ride It To Profitability
- Options Trading Experts: How to “Test Drive” an Options Trading Expert
