by YoTuT

High Probability Trading pt2

Daily Stock Report for Friday Morning, March 19, 2010 pt2

Summary Opinion

The Russell 2000 (small caps) and Nasdaq Composite (Techs) have exceed the January 2010 highs, establishing this as a bull market that is resuming after a pullback. When the Dow30 and S&P 500 exceed the January 2010 highs, stocks should move higher.

Calendar (All Eastern times)
Monday, 830am, Empire Mfg Survey, 21.45.
Monday 915am, Capacity Utilization, 72.6%
Monday, 915am, Industrial Production, 0.0%
Tuesday, 830am, Building Permits, 602K
Tuesday, 830am, Export Prices
Tuesday, 830am, Housing Starts, 570K
Tuesday, 830am, FOMC Rate Decision, 0.25%
Wednesday, 830am, Core PPI, 0.1%
Wednesday, 830am, PPI-0.2%
Wednesday, 1030am, Crude Oil Inventories, 0.2%
Thursday, 830am, CPI, 0.1%
Thursday, 830am Initial Claims, 450K
Thursday 830am Continuing Claims, 4500K
Friday, 1000am, Leading Indicators, 0.1%
Friday, Quadruple witching, S&P Index rebalancing.

Follow-up notes:
SWIR, Sierra Wireless has been on the Stock Table for the last couple of weeks and has been acting weak until the last three days in which it has moved up 13% from .00 to .05 and looks like it is going higher. If you are still long, consider holding until you get a sell signal on the 15 min, 5 day chart.

CNAM, China Armco Metals is still dropping and closed down 3.3% today (Thursday). REPEAT: Congrats if you are still short. Many times these bullshorts can have a swing to the downside that is exaggerated the same way it did going up. Consider covering anytime but watch it like a hawk now because these things have a nasty habit of going up sharply when they are near that target price to cover. Don’t give up much of your profits earned already.

Focus chart: (Worden Stockfinder chart)

AIG, American Int’l Group is starting to move up now and any put options are lowering in value after today’s small rise of 0.67%. It doesn’t take much movement in AIG (or any stock) to change the value of the options held long, in this case an April 40 put.

REPEAT:. Anyone with a April 40 call short, that were over .50 at one point when the stock was near last week could easily hold those short unless you wanted to unlock all the buying power the brokerage firm is required to hold using strategy #2 below. This stock idea is essentially over now.

REPEAT: Remember that if you own the put options that you purchased on Thursday, you want to sell them as soon as possible because the time value (premium) will erode through time.

If you took the 2nd strategy outlined below, you want to have time go by while the stock stays below and the time value erodes, which gives you lower prices you can buy to close those calls sold naked. Don’t open any more options or stock on this idea, it is too late. The train left the station last Thursday. The only transaction remaining on this idea may be intraday trading (scalping) OR a closing transaction of a short position of stock or for stock options.

REPEAT from Thursday: Today (Thursday) was likely the peak and although this may have a slight rebound tomorrow, today’s high was probably the high for this cycle and likely goes lower. Even though AIG stock did not reach the price, either strategy listed in last night’s report was still working today. I personally like the #2 option below but requirements for having enough experience, option approval and larger account size make it impractical for most people.

REPEAT from Wednesday.: This is developing into a bullshort that people have been speculating that the government is going to restrict people from selling this stock short (and other stocks the government owns). But there is another way to profit from this without shorting the stock.

This is for experienced and aggressive investors with high risk tolerance. This involves stock options and make this position really small, please. Don’t get heavy or over-weighted with this strategy. This is high risk. This involves stock options and the two ways you can do this is outlined below:

Before you attempt this, wait for AIG stock to move higher, preferably over . It looks like it has more upside to it after being up 10.6% today (Wednesday). Somewhere around would be where I’d consider opening a very small opening position but it could easily go higher.

1 You can buy put options LONG with, let’s say, a strike price of and an expiration month of April. The root option symbol for AIG’s April 40 put would be IKG PH (verify this on your own). Currently the quote is bidding .80 and offering .00 and the AIG stock price is .00. As the AIG stock goes up, this option price would go down and you goal is to buy this put option at the lowest price when AIG’s stock peaks, whenever that is. It could be anywhere from -41. You don’t want to buy the March puts, you won’t have time for this to mature in your favor. If you do buy these, the ideal scenario is the stock drops quickly and you take profits quickly, perhaps in a few days. The longer you wait to sell, the faster the value of this option premium will drop (the 6.80 x .00 right now).

2 This strategy is extremely dangerous and requires a lot of money in your account. It also takes special approval in your brokerage account to do this, what most brokerage firms call option approval level 3. Please don’t use this technique unless you have already traded a lot of options and fully understand the risks. Theoretically this has unlimited potential for loss. And again, don’t build a big position in this, it could tie up your whole account in buying power and you could easily get margin calls or be forced to sell some contracts if you build too big of position in relation to the account value. This isn’t just a disclaimer, this is really advanced stuff and high risk. So you may ask, why am I even discussing this? Because it is really effective technique I use with bullshorts but you have to understand what you are doing first, OK? It’s usually very profitable but at least watch this on paper without you trading it, it’s a great tool to have in your bag.
So let’s say the stock moves up and peaks at in the next few trading sessions. You sell the calls naked calls (same as selling the calls short) and the ideal scenario is you sell them when the stock is at its high. You would sell the April 40 calls, IKG DH at the highest price you can get. Currently they are bidding .05 and offering .14.

If AIG’s stock moves up to for example, this option would probably be about .75 x .80. And if you sold 10 contracts, you would get 1,000 x .75 = ,750 (1 contract controls 100 shares) and this would be credited into your brokerage account as soon as you sell them. If the stock drops as we expect AND stays below the strike price at the expiration date (3rd Friday of April or April 16, 2010) you would get all the ,750 and you would not even have to buy them back to close the option position. They would expire worthless and you get the whole premium. You can also trade them and buy them back before expiration like you would a stock. You can even work with the April 45 calls, IKG DI if the stock, AIG, goes up a lot more than we think, like near .

Well, there is a quick lesson on options. It is complicated, especially #2, and I expect you to fully understand this in the next 48 hours, lol!

Mitch King is the founder of TradeStocksAmerica.com. All material presented herein is believed to be reliable but we cannot attest to its accuracy. All material represents the opinions of Mitch King. Investment recommendations may change without notice and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Mitch King and/or the staff at TradeStocksAmerica.com may or may not have investments in any stocks cited above before or after this newsletter is prepared. Use the stock table above as a model portfolio of ideas that look attractive at the time of the writing. Comments can be hypothetical in nature. Opinions expressed in these reports may change without prior notice. Disclaimer – Stock investing or stock trading has large potential rewards, but also large potential risk. There is risk of loss as well as the opportunity for gain when buying or selling stocks, bonds, option contracts or engaging in any strategy listed in the Daily Stock Report, The Wizard Training Course, The Trading Room and our seminar or workshops. You must be aware of the risks and be willing to accept the risks when investing or trading in any financial markets. Don’t trade with money you can’t afford to lose. This website is neither a solicitation nor an offer to Buy/Sell stocks. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.

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