Usually, my Sunday night posts are random incoherent ramblings and opinions. This Sunday it will be a tad different in a sense of an application to my rambling opinions.
I would like to focus on the Options market. I like the options market, it allows one to invest small amounts of money for greater profits, but of course greater risks are attached. Ok, I want to get straight to the point, tired of attempting to explain things to my readership that most likely know more than me anyways. I’ll ramble in the end, and get on my soap box for the people that miss that part.
Here is a supposed rebounding stock that I talked about on Thursday, ADBL. Looking at its options chain today the last strike price on Friday was 8.89. OBQAU asked for 1.60 and 7.50 was the strike price. By the looks of this, one may say hey this guy can make a profit of .21 cents per share or 2.36% profit at the end of the month when the option expires. That sounds pretty decent right? Well, here is a cardinal opinion (rule) of mine with options trading. VOLUME. ADBL has a volume of 101,400 on Friday. That literally scares me. And looking at its history, you probably have a better chance of winning the lottery than gambling with 10.00 with OBQAB at the end of the month. Although, you’ll have a nice return of 14.17% at the end of the month, but its too emotional. Taking emotions out of the trade is what professionals do. Be a pro. Anyways, we shall see at the end of this month. Will the gamblers win with the strike price at or higher than 10.00 or would the conservatives win at the strike price of 7.50 or higher.
Alright, here is another exact same kind of stock DYAX. Friday’s last strike price was 3.59 with DQAAZ at 2.50 asking price of 1.20. Good idea? I’d so no, but we’ll paper trade anyways. Again, reason is volume of trades raises a red flag for me. Although the profit would be roughly 2% gain, which ain’t that bad. (as they say it in the south)
Next, I’ll bring up IOC, which was talked about on Friday. I feel IOC is a lot better example for the strategy I’m talking about today. It has a higher volume of trading and I believe it has hit its support point for now, and likely going up a bit before coming back down. Again, we’ll see on January 25, 2008 right?
IOC had a last strike price of 19.69. IOCAW had a strike price of 17.50 asking 3.20. Therefore, the potential gain here is 1.01 per share or 5.12%. Now we’re talking, right? (5.12% return on investment!) But still, would I buy it? I’d say no. Again, here is another cardinal opinion of mine that separates amateurs from pros. Never ever buy a stock from a company you don’t understand. You might understand InterOil Corporation like the back of your hand, but I sure don’t. I’ll even admit I don’t understand the sector it is in. Always research and understand how the company is making their profits and what the hell do they do. Is what they do good or bad? Who is there competition? How the sector the company belongs in is doing? Etc... I would hate to see you invest in a company only to see them file chapter 11 the next day, believe me if you think no luck is that bad, I seen it happen and it ain’t pretty.
Anyways, I’m off my soap box, you get the point. We’ll see what happens with IOC on the 25th for the people that do understand this company. Nothing wrong with some good old fashion paper trading.
Okay, let’s look at PCR. I know more about this company than IOC. The sector it’s in is coming under heavier scrutiny recently. (Congress is pissed at Halliburton Company and others) But I speculate a potential rebound with this on going war that seems to be growing, and constant military build-up. So if the sector rebounds PCR should be looking prettier than now. But I still wouldn’t buy, because I don’t know enough about the company. So lets paper trade. Alright, last strike price of 42.89 was observed at closing. PCRAH was at 40 with asking of 4.30. This shows a potential profit of 1.41 per share or 3.28%. Again, I’m concerned about the low volume of trades. I also wonder if 40 is a low enough support to speculate. Historically, it would seem a potential rebound, but with all this talks of recession will this company or even sector rebound? Only time will tell.
So everyone these days is speculating whether or not 2008 will bring us to a recession or not. I would like to speculate it is a good time to buy. Now I don’t mean buy blindly and wherever, obviously. But I do believe there are some key sectors that are down and just going through the economic cycles. (Namely, housing, lending, and insurance companies.) If you haven’t noticed by now, you’ve been living under a cave. And by the looks these sectors could take a bigger hit on 08 or potential climb and then drop or a climb and no recession. And with that, I will just stop there. I could go in with greater detail and speculate which companies, like Citigroup, Countrywide, Beazer Homes, and etc… And what strategies to take in a particular sector… (Sorry, I know some people enjoy reading my weekly articles about the market, but this week is a big no.) But I won’t at this point I feel this subject has been beaten to a bloody pulp, I am sick and tired of reading, hearing, and talking about it. I refuse to add any good insight to this topic.
But I will get on my soap box today in an attempt to persuade you to be a professional investor. Because every rule I state will be what the professionals do in an attempt to maintain consistency in the dynamic market.
A professional never focuses on gains. They always focus on what are my potential losses, and calculate the risk of it happening. I can’t stress this enough. I only talk about gains, is because that’s what everyone wants to hear. And we’re paper trading for crying out loud. No one is bleeding at the end of the day. But you better believe, if I was actually trading, I will be researching the likelihood of loss over gains. A gain is a gain big or small; no one is ever pissed about gains. It’s the losses.
Don’t buy stocks you don’t understand. I already stated this topic earlier. You get the point. Go back and read that paragraph if you don’t.
Sell when you’re making too much too fast. WTF??? Yeah, I just pissed everyone off with this one. But it’s true, even professionals struggle with this one. You have to learn to take emotions out of the trade. When you trade with emotions you will make a bad decision. When you trade rationally you make better decisions. You have to watch out if you are making too many risky emotionally charged decisions. If you treat it like gambling, guess what, the house always wins and you’re not the house. Making too much too fast, beating the market daily. Sell!!! Get out quick, before you lose, and rethink your strategy.
Never buy before or right after a quarterly reports. Alright if the last one didn’t piss you off, I’m sure this one did. Speculation emotion more speculation = gambling = no money. I don’t know how to put it any easier than that. Let’s stop here for a moment and see what you as a single investor is up against. Before the quarterly reports, you are probably researching off your ass trying to speculate Wall Street expectations. (If not, you’re already knocked down they just haven’t killed you yet.) You in take plenty of propaganda about the company from many “established figures” of that sector. Little do you realize, these figures can care less about one little small investor, you. They care about themselves, their company, and their big money making client portfolios, again not you. They can ramble bullshit to push prices up knowing damn well quarterly earnings are going to make prices fall. Okay, let’s say you were somehow able to assess the risk on all the propaganda and come up with a nice speculation. Once the quarterly earnings report is out, you have to deal with an army. (If you plan to ride the wave...) A sole you vs. an army I wonder who would win? When I say army I mean, companies like Merrill Lynch, Charles Schwab, Morgan Stanley, Goldman Sachs, and etc… The same people that were giving you propaganda before the report was out are now working at the speed of light against you. Each of these companies have teams and teams of people getting paid more than a $100,000 a year with bonus checks upwards of $100,000 a year for the sole purpose of analyzing the quarterly earnings reports the very second they become public and coming up with a speculation at light speeds. Then beating you with a speculation that is 1,000 times more precise, and deciding whether to invest with boatloads of money that will force a trend in any direction. And by the time you realized that they did all this? They pulled out their money and taken their profits. And you retain nothing. As much as people keep saying the playing field has become more and more even today than years past. I find that hard to believe, these big companies will always have leverage over a single investor. They have money, manpower, experience, and political power. You can’t win. And all they care about is more money for them. You lose your retirement in the process of trying to ride with them tough luck. I’d say the risks outweigh the gains heavily. I’d wait until the quarterly earnings reports are realized then make an educated decision on whether the company is worth investing in. If this company really is good no quarterly earnings report will affect the long run performance of the company stock.
Alright, I will get off my soap box finally. So yeah, I was still able to rant as usual on Sundays. But I was also able to have some Thursday fun, and analyze stocks too. As you can see I’m really passionate about my rules. I developed them through experience and observing others. Hopefully these same rules will benefit you.
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