The Taipan Group's 247profits e-Dispatch
Baltimore, New York, Chicago, Berlin, Bonn, London and Paris
August 20-23, 2004
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***The astonishing application of the "Greater Fool" Theory
***Three rules of picking an index option� why in-the-money options are
less risky then out-of-the-money options� and much more below!
***Eleven days ago, Bryan Bottarelli alerted his subscribers to six
new "All Star" opportunities on the S&P 500. Today, one of these plays
is showing a 62% gain. The others will soon follow. It's still not too late to
get in if you act today. But timing is critical. Please take five minutes and read
the following report�
http://www.youreletters.com/t/47996/3785361/560/70/
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>From the Desk of J. Christoph Amberger
Dear Friend,
"The stockmarket as of this writing is at historic highs both in absolute terms
and as measured against the earnings of the underlying companies. It is, by
most calculations, overbid, and is sustaining its record prices through an
astonishing application of the 'Greater Fool' Theory. With interest rates the
lowest that have been seen in years, bonds are in great danger, as their value
will fall as interest rates rise, and interest rates have nowhere else to go."
I admit that I like picking up investment books that are a bit long in the tooth.
The quote above is from the classic "The 16% Solution" by Joel Moskowitz,
which, according to the front matter of the book, was updated in 1992,
1993, and 1994.
Ten years ago, of course, in the Year of Our Lord 1994, the "overbid" Dow
was bouncing around between 3,500 and 4,000. Which makes me wonder
who exactly the greater fool was: Could it be those who cashed out and
missed out on the market doubling and even tripling by 2000 for the sake of
perceived safety?
***I admit that's all hindsight. But how is one to know who'll end up
wearing the fool's cap in sweet retrospect?
We do our best to forecast the short- and medium-term outlook on the
markets. Sometimes we miss� but frequently our predictions are
astoundingly accurate. Each member of our Dynamic Market Theory team
uses different techniques, different constellations of indicators, and different
vehicles to safely play the dynamic movements of the markets.
The WaveStrength team under Adam Lass and Bryan Bottarelli likes to use
index options. So how do they pick the right options to go with their
prognoses?
***Bryan writes: "The first rule of picking an option: Make sure that you
expect a move of at least 5% (either up or down) in the underlying asset.
"As you know, options (by definition) are deteriorating assets. They all have
expiration dates, which means the moment you buy, the clock is working
against you. Therefore, you want your underlying asset to move - and move
quickly. If not, you're stuck holding a deteriorating asset with no movement,
and you'll lose every time. Generally speaking, a 5% move will equate to an
options gain of at least 20% to 25%. And that's even in the most low-
volatility situations. Typically, a 5% move can lead to 50% profits or more
with options. Of course, this all depends on the strike price you choose,
which brings me to Rule #2.
"The second rule: Know how to select the right strike price for your risk
tolerance. Conservative traders should pick the closest 'in-the-money'
strike. Speculative traders should pick the closest 'out-of-the-money' strike.
Super-speculative traders should pick the second or third 'out-of-the-
money' strike.
"For clarity, an in-the-money put option has a strike price higher than the
underlying price and an in-the-money call option has a strike price lower than
the underlying price. (Simple example. You own the right to buy MSFT for
US$20 a share. MSFT currently trades for US$24 a share. Your calls are
US$4.00 in-the-money. On the flip side, you own the right to sell MSFT for
US$30 a share. MSFT currently trades for US$24 a share. Your puts are
US$6.00 in the money. The opposite goes for out-of-the-money puts and
calls.)
"Here's what is important. In-the-money options are less risky then out-of-
the-money options. As a result, in-the-money options do not increase in
value at the same rate as out-of-the-money puts and calls. Why is that? Well,
the more risk you take, the more reward you get if you are right. For
example, someone who buys the right to buy 100 shares of MSFT for
US$30 a share when it's currently trading for US$24.00 a share pays a very
low price for that right. After all, why not just buy the shares on the open
market for US$24? Perhaps this option to buy shares for US$30 will be
worth a premium of US$0.25.
"The reasoning is that if MSFT rallied to US$32 a share, your calls that gave
you the right to buy shares for US$30 are now US$2.00 in-the-money.
Your US$0.25 calls (which were out-of-the-money selling for US$0.25)
would now trade for at least US$2.25, an amazing 900% gain. Of course,
your risk is that MSFT does not rally and you lose the whole premium you
paid. That risk-reward scenario is what speculators (and ultra-speculators)
live for. That's why I recommend they use out-of-the-money options
anywhere between one and three strike prices away from fair value. For
conservative options traders, I prefer using slightly in-the-money options.
They don't gain quite as much as out-of-the-money options, but they're safer
and typically more liquid to trade.
"The third rule of picking an option: Pay close attention to the price of time.
If possible, always buy as much time for as little money as you can.
"Reasoning: Two are two extrinsic factors that make up an option's value -
volatility and time. Theoretically speaking, a call contract that gives you the
right to buy 100 shares of MSFT for US$24 (when MSFT is trading for
US$25) should be worth US$100. (Math: the calls are US$1 in-the-money.
You own the right to buy 100 shares. 100 x US$1.00 = US$100.) But
rarely are options priced at fair value like this, because traders factor in time,
volatility, and their own spread premiums. But sometimes you can select
market situations that enable you to buy time super cheap. For example,
RTH is the Retail Holder's Trust. It's made up of the top retail stocks on the
market. A few weeks ago, there was virtually no price difference between
RTH September calls and RTH December calls. Absent an added time
premium, always buy additional time. (Simply calculate the option's fair value
like I showed you above and subtract if from the actual price. That will give
you the time premium and the volatility premium.) If you can get similar time
prices for September options versus December options, always buy more
time!
"It may seem confusing. But when you put these rules into action, they work
beautifully. For example, I just finished selecting a new series of six call
options on the best stocks on the S&P 500. I call these my 'All-Star' picks.
Using options, I'm currently showing my readers how to control hundreds of
shares in these stocks for literally pennies on the dollar. One of my All-Star
picks, for example, is up a whopping 38% just today. In the last eleven days,
these calls showed a 62% gain. In the weeks to come, I expect all six of
these plays will show gains similar to this."
I asked Bryan and he believes that there's still time to get in on these plays. If
you'd like to learn more about his latest picks, follow this secure link:
http://www.youreletters.com/t/47996/3785361/560/70/
Earnings Announcements for Monday, August 23, 2004:
Aeropostale Inc., American Healthways Inc., Barnes & Noble Inc., Boca
Resorts Inc., C&D Technologies, Finlay Enterprises, Foot Locker Inc.,
Hastings Entertainment, ID Biomedical Corp., Semtech Corp., Stein Mart
Inc., Toys R Us Inc., and Williams-Sonoma Inc. are some of the companies
releasing earnings.
***Not Everybody is Getting Battered in Today's Market
If you followed the EVS team's advice in their "Year of Profits" report,
you'd be sitting on 460% gains in just three weeks!
This same team just made investors aware of the opportunity to make 15%
and 20% in mere hours, 111% and 37% gains in less than a month, two-day
35% gains and another 44% in less than a week.
Trade on News Before Anyone Else Get It:
http://www.youreletters.com/t/47996/3785361/644597/70/
***Quote of the Day:
"The most primitive response to risk is risk avoidance."
--Joel S. Moskowitz
***WORLD OF PROFITS***
*** "The indicators now signal a full-blown trend reversal: expect the week
to end with loss of up to 1.5%."
The Hang Seng finished the week moderately in the red at 12,376.90, down
19.77 points (0.16%) for the day� after posting an intraday low at
12,320.4.
The indicators continue to oscillate in negative territory for Monday. Look
for a breakeven to mildly bearish start of the week at minus 0.3%
*** "Despite its proximity to 11,000, we think we'll see a contraction of
0.5% before the index crosses this magic mark."
The Nikkei 225 closed at 10,889.14, down 14.39 points or 0.13% for the
day, having fallen as low as 10,837.01.
The indicators appear to be stagnant, indicating that trading will take place in
tight rails of +/-0.5%.
***DESK OF DENHOLM***
This just in from Taipan's resident Editor-at-Large, Martin Denholm:
*** "Real Recovery" Leads to Forecast Hike: According to the current
European Commission forecast, the Eurozone economy is projected to grow
1.7% this year. But all that could be set to change if Economic and Monetary
Affairs Commissioner Joaquin Almunia gets his way.
Citing a "real recovery" among the 12 euro-sharing nations, Almunia said he
hopes to raise the forecast in October and stick to next year's 2.3%
estimate.
Although the second quarter saw both the German and French economies
expand for the fourth straight time, their growth was hardly astounding. And
just a few days ago I reported that Germany's economy - the largest in the
Eurozone - is expected to slow for the rest of the year as a dearth of
consumer spending finally overpowers strong export growth. With Italy's
economy plodding along meekly at 0.3% from April-June, oil prices over
US$49 per barrel and high regional unemployment, I don't see where the
additional growth that would lead the EC to up its forecast is going to come
from.
***Back to Buying: Just when you thought that British consumers are
beginning to feel the Bank of England's five recent interest rate hikes, news
comes to blow the theory out of the water.
The Council of Mortgage Lenders said today that lending and remortgaging
climbed to �29.2 billion in July - a 3.5% increase from June. Over half that
figure - a record �14.7 billion - came from 131,000 loans approved for
house purchases.
The numbers seem to suggest a growing appetite for house purchases, as
opposed to remortgaging, as the summer comes to an end and activity picks
up again. The percentage of remortgaging approvals fell from June's 44% to
39%.
***Boozy Bear: After another tough week, let's end with something
amusing. And I defy you not to smile at this.
Picture the scene: you're enjoying a nice camping trip at the Baker Lake
Resort in beautiful Washington state and decide to go off for a hike one day.
Upon your return, you find all your beer cans strewn over the campground
and a black bear passed out nearby. It's not difficult to come to the following
conclusion:
That bear is smashed!
To me at least, there's something amusing about the thought of a two-year-
old black bear passed out like some over-exuberant reveler at a festival.
Apparently, the suds-loving bruin had slugged an extraordinary 36 cans of
beer! But he was also something of a connoisseur. Not satisfied with the
mainstream Busch, the CNN story reports he switched to locally brewed
Ranier Beer instead. (I suppose the only thing more perfect would have been
if it were Labatt Blue!) The crafty beggar used his claws and teeth to prize
open the cans before descending into a drunken stupor.
Perhaps he's an alcoholic, because he returned the very next day. But I
guess he's now in the bear's version of Alcoholics Anonymous, since wildlife
folks relocated him after trapping him using doughnuts, honey and� you
guessed it� two cans of Rainier Beer as bait!
I don't intend to knock back that much this weekend. But I do intend to
enjoy the break. You do the same� and I'll talk to you Monday.
***TAIPAN TIDINGS***
***Exclusive Video-on-Demand on Bush's Secret Revenge
Only available here: exclusive video reveals nanotech profit bonanza. This
short video by stock guru Christian DeHaemer tells you everything you need
to know about how you could get filthy rich on a "private fund" of nanotech
stocks.
For an exclusive look at the interview, go to this link:
http://www.youreletters.com/t/47996/3785361/644626/70/
Or, to read Chris's latest report, visit:
http://www.youreletters.com/t/47996/3785361/378/70/
J. Christoph Amberger
Executive Publisher
and The Taipan Group's
247profits e-Dispatch Team
P.S. Not Everybody is Getting Battered in Today's Market
If you followed the EVS team's advice in their "Year of Profits" report,
you'd be sitting on 460% gains in just three weeks!
This same team just made investors aware of the opportunity to make 15%
and 20% in mere hours, 111% and 37% gains in less than a month, two-day
35% gains and another 44% in less than a week.
Trade on News Before Anyone Else Get It:
http://www.youreletters.com/t/47996/3785361/644597/70/
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