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Well, it was another wreck of a day for da bears (new high on the Dow, once again), so.......let's talk about something else, shall we? Seriously, one of the most frequent requests I have been getting in the comments section has been to talk a bit about options. So here we go.

Considering the market's behavior lately, let's make this a happy story and focus on a call option. In particular, a call option for a stock I suggested way back in an October 6, 2006 post. The stock was Immucor, symbol BLUD.

At the time, the stock was at about $25. Now let's suppose you had so much faith in this chart that you didn't just want to buy the stock, you wanted to buy the call option (in order to leverage your investment and possibly enjoy great percentage gains).

Well, let's slow down for just a minute and do the most important thing first: figure out a stop-loss price. In other words, figure out at what price we would consider our speculation incorrect. In the case of BLUD, the deepest point of the most recent dip in this chart was at $21.57, about $4 less than its current price. So we decide that if the price ever dips below this level, we will close out our position at once.

Next we have to pick an option - - we'll want a call option, of course, since we're bullish on the stock. I typically look for a number of properties in the option I choose:

• I'd like it to be a little in the money; so in this case, we'd want a $25 call, since the stock is a little over that amount
  
  
• I'd like the expiration to be at least two or three months down the road. If you get the "front month", the time decay will eat you alive. But if you buy an option that's a year down the road, the movement in the stock will have a very dampened effect on the price of the option. So right now it's January, and I'd be looking at Marches or Aprils (at the time of the BLUD suggestion, a January option would have been appropriate).
  
  
• I want to see relatively beefy volume and open interest. It's not easy to find with options (except for huge ones like the S&P 500).
  
  
• I want to see a bid/ask spread that's not big enough to drive a truck through. If an option is bid 5.30, ask 6.50, I'm not interested. Focusing on rule (3) will help get you away from overly fat spreads.
  

So, for instance, here's a chunk of an options screen showing the S&P options; the one I've highlighted is interesting since its volume and open interest stand out above the others, plus, it's in-the-money.

Once the order is placed, I immediately want to get a contingent order placed. This means that if the stock goes above (in the case of a put) or below (in the case of a call) a certain price, a market order will be immediately placed to close that position at the best available price.

Those are pretty much the steps. Once they are in place, one of several things can happen. The stock can move in the direction you anticipated, which will benefit the option even more. Or the stock can move against you, pushing past your stop price, and closing the position at a loss. Or the stock can just meander along, which isn't something you can tolerate for long because the option will expire at some point!

Now let's see the happy ending to this story. BLUD went up about 30% since the suggestion back in October. But the option went up hundreds of percent! That's the beauty of leverage. Now, I admit, this is a fairly idealized example. But the important things to note are: (a) some of the rules to follow (b) the importance of stops (c) the power of leverage, if things go your way!

 

I've shut off Anonymous comments again. It's not that I'm upset by the put-downs; believe me, I've got a thick skin. But some clown has become so abusive - without anything constructive to say - that I'm demanding a person at least show themselves to make a comment. I've had enough.

Most of the sniping has been about suggestions that didn't work out. That's what stops are for, people! And things aren't going to turn on a dime. Let me give you a specific example.

Almost exactly a month ago, I suggested Conoco (COP) as a short. If you look at the graph I posted, it seemed like it was at the top of a trading range.

I suggested the short when it was at about $71. The stock quickly climbed to $74.89, so yes, you could have laughed and thrown bricks at me for making a stupid suggestion. But after a few days of going up, it started descending, and now it's at $61. A 9% drop in a month really isn't shabby, even though I was "wrong" for the first few trading days. So excuse me if everything doesn't work out perfectly. I've drawn a green rectangle around the "Tim is an idiot" timeframe.

Today's action pushed the Dow to yet another lifetime, never-before-seen high. I took advantage of this to sell into the trading near the top of the day's range. I really like the look of the Russell 2000.

Take a closer look at the $RUT. I've drawn the lower highs and lower lows. Very attractive.

Just a couple of short suggestions tonight. One is AMLN. I can't say for sure that this isn't going to recover more. No promises. But this is a very toppy looking formation.

The other one is Camden Properties (CPT), which also is in recovery mode. I'm selling into the strength of this one.

Good-bye, anonymous posters. I really don't think I'll be letting you in again.

The most important fact of today's activity is the S&P 500 didn't breach 1400. The horizontal line you see below is substantial. For many weeks, it provided a formidable resistance to prices moving above it. Once clearly pierced, it transformed into support. This barrier is crucial......unless it is cracked soon, hope will fade (for the umpteenth time) for a meaningful drop in the market.

The NASDAQ has been especially strong recently. I'm sure Apple, Inc. (AAPL) can largely be credited for this.

Finally, the Dow Transports remain safely bearish, but if the downward sloping trendline is broken (which would be at about the point the arrow is pointing), that would be really bad for the bears.

Just a couple of stocks to mention today - one short and one long - - and both tech. The short suggestion is gigantic Microsoft (MSFT). Years ago, this stock minted millionares and billionaires. Now it's just a big, fat bore. But its recent rapid ascent makes for a nice shorting opportunity with very low risk, since the stop-loss point is to close.

On the flip side is none other than Sun Microsystems, which has been in the process of either getting blown to pieces of marking time since the turn of the millineum. It finally seems to have done something exciting, and there's no doubt that the burst above the huge area of resistance drawn here is unusual and meaningful.