Stock Option Trading Idea of the Week
An analogy - Checkers is to buying stock as chess is to trading options
Someone said that investing in stocks is pretty much like playing checkers. Any 10-year old can do it. You really don't need much experience or understanding. If you can read, you can buy stock (and probably do just about as well as anyone else because it's basically a roulette wheel choice in spite of the near universal belief that you are smarter than anyone else).
Options, on the other hand, is more like playing chess. It can be (and is, for anyone who is serious about it) a life-time learning experience.
You don't see columns in the newspaper about interesting checker strategies, but you see a ton of pundits telling you why you should buy particular stocks. People with little understanding or experience buy stocks every day, and most of their transactions involve buying from professionals with far more resources and brains (and for some reason, these professionals are selling the stock to them instead of buying it).
Option investing takes study and understanding and discipline that the purchase of stock does not require. Every investor must decide for himself or herself if they are willing to make the time and study commitment necessary to be successful in option trading. Most people are not.
It is a whole lot easier to play a decent game of checkers than it is to play a decent game of chess. But for some of us, options investing is a whole lot more challenging, and ultimately more rewarding.
Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.
You can see every trade made in 8 actual option portfolios conducted at Terry's Tips and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?
I look forward to having you on board, and to prospering with you.
Terry
Andy's Market Report
The market continued its 13-month rally this past week and as of Friday the Dow (DIA marked its longest winning streak in over six years). The blue-chip index has advanced eight straight weeks and 11 out of the last 12 trading days. The Dow (DIA) has advanced 8.5% during its two-month climb.
Analysts have been expecting a pullback for weeks, yet the short-term bearish move has yet to come to fruition.
"It's been quite a run," said Stephen Carl, head of equity trading at The Williams Capital Group in New York. Carl like other Wall Street analysts said momentum could be waning after stocks have been on a nearly unbroken path upward over the past two months. The advance has left the market in a precarious short-term 'very overbought' state and the technical state of the market has reached epic proportions.
"The market is trying to sort out how overbought it is," said Nick Kalivas, vice president of financial research at MF Global in Chicago. "That's left us in a choppy state."
As I have stated over the past few months, volume has been rather low during this rally which proves that investors are not fully confident that the advance has been built on a solid foundation. Nevertheless, the momentum has been, shall I say, historic.
Over the past two months, 31 out of the last 42 trading days have witnessed an advance. This is certainly a rarity as it has only been accomplished one other time in the last 15 years.
I recently came across a study that detailed such an advance since 1928 and what it meant for future gains. Here are the numbers:
So aforementioned numbers above tell us? They tell us that momentum in the market is a powerful force and once started it is like a moving train, it is very difficult to stop. In almost every case above it took almost two months before the momentum waned and by that point the market had gained on average another 10% before a 5% correction occurred.
However, over the short-term the market has still stretched out into historic short-term 'very overbought' territory. Furthermore, the unclosed gap in the QQQQ from 3/5 is still lingering which would mean a move back down to the $45.76 level or over 10%. At this juncture that seems a bit much, but one never knows what the market has up its sleeve. Just some food for thought I suppose.
Next week, the economic calendar is a bit light, but we do have a FOMC meeting scheduled for Wednesday which could potentially move the market and the advance GDP on Friday which could also be a market mover.
Andy
Overbought/Sold Condition Report
Overbought/Oversold as of April 24, 2010
Major Benchmarks
- S&P 500 (SPY) - 79.4 (overbought)
- Dow Jones (DIA) - 70.0 (overbought)
- Russell 2000 (IWM) - 87.9 (very overbought)
- NASDAQ 100 (QQQQ) - 86.3 (very overbought)
Testimonial of the week
At 55 years old, I've been "playing" with the stock market for years, mostly with very limited success. The majority of my life savings is in multiple mutual funds which, as we all know, are considered superior if they (inconsistently) have returns of 10-11%. After less than six months of investing some IRA funds into two Terry's Tips portfolios, however, you've caused me to believe that I really will be able to retire on a nice income - and, hopefully, in the not too distant future. Thanks for the spectacular returns and thanks for being willing to share your knowledge and insights.~Cliff Frish