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Author: Mike Celeste Editor: Tony Ponzo April Circulation:

Stat Sheet Week Ending April 3rd 2010

ChangesWeeklyMarch1st QuarterYear to Date
IndexesPointsPercentPointsPercentPointsPercentPointsPercent
Dow+77.0+0.7%+532.0+5.2%+429.0+4.1%+499.0+4.8%
S&P+11.0+0.9%+62.0+5.6%+54.0+4.8%+62.0+5.6%
NAS+8.0+0.3%+160.0+7.1%+129.0+5.7%+134.0+5.9%

In this Issue---
Options---
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Just a quick mention of when to do what when dealing in options. It all depends on your goals. If you are looking for a profit on the options when you do not own the stock, you would do best to buy the option either a bit in the money on close to the strike price. If you think the stock has a good chance to go up (like we think about splitters), you would buy a Call. If the stock price, for example, was currently $41, you might buy the 40 Call, for the next expiring month or possibly a further out expiration if you expect the rise to be slow. If the stock was $44, you might buy the 45 strike price Call. If you think a stock is going down, you would buy a Put with a strike price near the current price of the stock. Again, a stock at $41 or $39, you might consider the 40 strike price on the Put.
Options that expire worth something are usually those that are purchased with strike prices close to the current stock price or in the money. However, you want to time your purchase so that you sell it before the expiration day or even expiration week so that you still have some time premium left. However, if the stock you purchased the option on has gone up far beyond the strike price, the time premium may not be much anyway but you will obvisouly have a great profit at that point and should pick your out target.

If you are looking for a "dividend" type return, it is best to go with a strike price that is as far away from the current price, but still satisfactory with the return if the strike price is not exercised. For example, POT closed Thursday at 117.51. If you owned the stock and thought that it would be a great buy at 105 because that might be a good support level, you could write/sell the April 105 Put for 28 cents. There is already a dividend paid, but only 10 cents per quarter. If you wrote the Put, you would receive 28 cents per share, and still get the 10 cent dividend (quarterly). If the stock drops 12 points in 2 weeks, you get to buy more of the stock at a very attractive price--less the 28 cents you already received. On the other hand, if you didn't want more shares at any price, you could go the other way---You own the stock, so you could write the 135 April Call for 20 cents. If the stock rockets up to that price by expiration day, you get a big profit on your stock, and you keep the 20 cents received when you wrote the option. If the stock doesn't get up to 135, you keep the 20 cents, for a 2 week period--and add it to the quarterly dividend of 10 cents. This method can bring consistent results when applied to strike prices that are distant from the current stock price, and with a relatively short time to expiration. Remember, about 80-90% of options expire worthless, so you want to be on the right side. The best percent of return on this method is when the strike is far from the current price, as we said. The closer you get with a strike price being close to the current price, the more chances there are that it will be exercised.

Our splitters would be an example of buying the stock and writing a Call with an exercise price close to the stock price. That way you are guaranteeing yourself a return on your investment. If the stock goes above the strike price, plus the amount received for the option, you don't make as much, but you do guarantee yourself a return that will most likely satisfy you. Of course, you can also buy the Call without owning the stock and the same reasoning would apply--best results from a strike price close to the current price of the stock.

Also remember that writing options is for experienced traders only and needs the approval of your broker. This method can also be applied to Strangles, which are discussed below in the Momentum section.

Momentum Plays---
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Because the earnings season for this quarter is basically over and because the volatility in this market is so low, we did not have any opportunity to make a play this week. This week we posted a number of unofficial strangles that we at SplitMaster played. In analyzing the low volatility we asked ourselves, how can we take advantage. The answer is writing strangles instead of buying straddle/strangles. The reason? With this low volatility what we have noticed is stocks not moving much after the open and after an hour or so, the option time premiums start to dwindle. That means that at some point we can buy back the strangle we entered for less than we sold /shorted it for thus creating a profit. And since options have Theta (an amount that is lost each day moving towards expiration) we even held a few over night with success. In the last week, all of the strangles we have shorted have worked out. Not always with a .40 or .50 profit but with profit nonetheless.

So we will be posting more of these in the coming weeks. We realize that not all members can do these kinds of writing or shorting trades but we want to start posting a variety of ways to approach things so during times like these, we have alternatives to work with and keep the action going.

Now for sure we have to be careful as at any time, the volatility can crank back up and then we would be looking more towards buying the straddle/strangles. Plus, we will write strangles on stocks that are not on the move and staying pretty stagnant. One good thing about the writes is we have time to watch them for awhile in the morning before going into them.

So members, don't think of this as a change but rather an alternative we can work with when the times call for it. This market has definitely gone through a lot of changes over the last two years and we have to find ways to keep up with it.

Indicators---
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We had no plays in the Indicator section this past week, but the market still is not behaving normally, so we are not missing much.

The Economy, The Markets & Commentary---
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The first quarter is over, and it has been a bang up quarter, to the positive side in the general market. You can see that from the stats above. Most of the economic reports have been to the positive side, along with sentiment and emotion. During this past week the market seemed to start looking a little tired, but Thursday, the last trading day of the week and the first trading day of the month, April, we saw the market again rally, with the Dow closing up 70 points---a good start for April. We are still a month away from that negative old time saying "Sell in May and walk away", so we can remain optimistic at this point.

The positive feelings are not to mean that we don't face some tough economic times ahead. The labor report on Friday was mixed, and we have to remember that when stimulus money is stopped, we have to sustain ourselves on regular business activity, even allowing that employment lags at both ends of economic ups and downs. For employment, the census is providing a boost for jobs, and they haven't hired the maximum yet, so there is more to come from this area. However, the census is a temporary boost to jobs, so we have to keep that in mind, too.

Oil prices broke above $85/barrel on Thursday, which did a great deal for energy companies, but the opposite for consumers who will face even more increases in gasoline prices. Those increases will take away from spending in other needed areas.

Inflation continues to accelerate, no matter that the "experts" are still saying there is no inflation. States and cities are in such bad shape that they are either increasing taxes or creating new taxes. Did you see the report of all the new taxes that are being considered--including even on haircuts. The federal level is also seeing many tax increases. The incoming taxes are way below normal due to lost jobs, etc., so then that is combined with the stimulus money being spent, our federal deficit can do nothing but go up--and will have to be reckoned with at some point. However, in the meantime, things look a lot better than they did a year ago, and the markets have shown that. How much longer this can continue is in question, but let's enjoy it while we have it. (And the 1st quarter earnings are expected to continue to be very good---watch for them, starting around the middle of April.)

To build even more confidence in the near future, we would like to see more split announcements. There has been a slight increase in the announcements, and that is encouraging, but we need more. We believe that splits are one of the best indicators of what is going on in the business world. Stocks split when the companies are doing well, and they don't when things aren't going well. Let's see those splitters keep increasing in numbers. The ones that have and have reached their split dates have done well, as expected, so we feel that backs up our belief.
There are 2 splitters coming up for consideration this coming week, one a 3-2 that will go on our Big Dipper list, and a 2-1 that will enter our Basic and Big Dipper list.

A special congratulation to a member that has been with us since our beginning--Stan. He had his biggest day ever and it was using options. Stan started knowing very little about stocks, but over the years has put in a lot of time learning and researching. What we especially like is that he absorbed our investing philosophy and has constantly come back with questions and comments. He was late getting into the options market, but after a good deal of prodding from us, he entered the fray and has been successfully trading them for quite a while now, both by buying the stock and writing options against them, or buying just the options. He picked the energy market as a sector to specialize in. A couple of months ago he told me he strongly believed that oil would hit $85/barrel pretty soon. That was when oil was around $70/barrel. Friday, oil closed above $85/barrel. His research took him to the major oil and natural gas fields here in the US and Canada. When a stock had holdings in these major fields, he dug further to see the internals of the company, etc. Friday paid off very handsomely for him, when his belief was justified by major up moves, because of a couple of things---upgrades and major hits in drilling. He didn't tell me exactly what his results were, but suffice it to say that he did indicate that he had hundreds of option contracts, purchased at 5 cents and 17 cents, and bought recently. On Friday they were 45 cents (9 times his purchase price) and 1.50 (almost 9 times his purchase price), respectively. I would also like to point out how nervous this made him, showing that emotion plays a strong role during both up and down moves--not just when a stock price is dropping. When the option price is moving up, we all know that there could be a sudden spurt of selling that can drop the option price in half, or less, during 1 day. Greed should not enter the picture. Stan also does his buying and selling in a workmanlike manner. After all his research, he doesn't enter a full position, but gets some in several different time frames. When selling, it is the same--very seldom is it a total sell, but in parts. He knows he doesn't get the top or the bottom, but he is happy with his average amount---and it has worked out very well. We are very proud of Stan, and hope he continues this incredible streak---it shows what hard work can produce. BIG CONGRATULATIONS to Stan !!!

Stay tuned..............these are interesting times.5

Today's Thought---
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Big sinking feeling - The moment during an argument when you realize you're wrong---

Mike

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