The Rude Awakening
Wall Street, New York
Wednesday, May 17, 2006 ------------------------- - Prep your mind for some mathematically induced
contortionism of the mind – it's options time!
- The insider info on the Small Cap Insider,
- All the market data, the tumult of commodities and
plenty more...
------------------------- [Joel's Note: "Imagine if every time you bought a stock,
you knew exactly what the company's CEO, CFO, board of
directors and even its legal team thought about its
future." ~ James Boric Yesterday we announced the official launch of James Boric's
Small Cap Insider trading service. It's a service that
takes advantage of the kind of inside buying and selling
information that, until recently, was not available to
average investors. Unfortunately, this is an exclusive service and only a
limited number of positions are available. Below is a link
just in case you missed yesterday's alert. If you are
interested in employing this powerful trading tool, please
be aware that spots are filling up fast and you will need
to act quickly. You can find out all you need to know right
here: Small Cap Insider
http://www.isecureonline.com/Reports/SCI/ESCIG523 --- Special Investment Alert --- Revealed: The Investment Secret With the Potential to Turn
Traders into Millionaires – in Five Years or Less
"Compressed Investing" could help you ring in the New Year
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And that's only the beginning! In five years you could be
up $1.05 million or even more… Don't wait – (as link)
discover how to put this simple strategy to work TODAY http://www.isecureonline.com/Reports/OHL/EOHLG545
-------------------------
Running Naked
By Eric J. Fry "While awaiting that delightful Armageddon that might
propel gold to $2,000 or $3,000 an ounce," your editors
observed in last Thursday's column, "we gold bulls will
certainly endure a large number of 'down days.' We will
suffer through harrowing price declines that will produce
large mark-to-market losses...and anguish." One of those days has just arrived...The gold price tumbled
more than $50 from its high point last Thursday to its low
point on Monday. "The True Believers among us will 'buy the dips,'" we
remarked, "but many of our weaker brethren will panic and
sell. Happily, there may be a middle road: Selling naked or
'covered' options." In Thursday's column, we examined a couple of ways to sell
covered options. Today, we'll take a look at the much
riskier (but perhaps more timely) tactic of selling naked
options. But please remember, selling naked options can be
VERY DANGEROUS. Only the most seasoned and sophisticated of
options traders should consider engaging in this practice.
Selling naked options, to use the vernacular of Las Vegas,
is the same thing as "booking the bet." In other words, the
option-seller grants to the option-buyer the right to
exercise an option at a certain price on a certain date. If
the bet "loses," the option seller-keeps the bet. But if
the bet wins, the option-seller must pay it off, plus the
odds. On Wall Street, however, the odds aren't fixed in
advance; they are open-ended. Let's illustrate with a
hypothetical example. Let's imagine that I sell you the October 80 put option on
IBM for $2.00. Since IBM is currently $82.90, the stock is
$2.90 away from the "strike price." As long as IBM stays
above $80.00 between now and October, therefore, I get to
keep the $2.00. But if the stock fell to $70.00, for
example, I would be obligated to buy the stock for $80 from
the buyer of the put. Thus, I would incur a loss of $8.00.
(i.e., I would receive $2.00 for the put, but I would be
forced to pay $80 for a stock that is only worth $70). If
the stock fell to $60, I would lose $18, and so on. That's
why it is so dangerous to sell naked put options. Even so, if an investor really wanted to own IBM, selling
put options could be a very nice way to begin the process.
Using the identical example from above, if I simply bought
the stock, I would pay $82.90 per share. But if I sold a
naked put, and the stock fell, my effective purchase price
would be only $78 [i.e., I would pay $80, less the $2 I
received from the put-buyer]. On the other hand, if the
stock soared to $120 between now and October, I would have
wished that I had simply bought the stock. Net-net, selling
naked options functions best as a way to buy stocks that
you are worried about over the short-term, but that you
adore over the long-term, ...which brings gold stocks to
mind. Here at the Rude Awakening, we have been warning of an
impending selloff in all resource stocks. And so it has
come to pass. But our short-term angst does not diminish
our long-term affinity for resource stocks. So selling
naked puts seems like a reasonable – albeit frightening –
tactic. Let's imagine, for example, that a silver-loving investor
wished to own Pan American Silver (NASDAQ: PAAS). Tactic
#1: Buy the stock. Tactic #2: Sell naked puts on the stock.
Tactic #3: Buy call options on the stock. Using the October series of options, the nearby table
presents a sampling of outcomes under all three scenarios. 
As the table clearly shows, there is no "all-season" option
strategy. Obviously, the outcome depends entirely upon the
subsequent direction of the share price. That said, we
would offer a couple of observations. Under the first scenario – a naked sale of in-the-money put
options on PAAS and a purchase of out-of-the-money call
options – the stock would have to fall by more than 17% for
the put-seller to fare worse than the call-buyer. Alternatively, the stock would have to climb more than 40%
for the call-buyer to be better off than the put-seller. In
other words, the put-seller enjoys a fair amount of wiggle-
room, by virtue of the fact that he is RECEIVING option
premium instead of PAYING it. This hypothetical math becomes even more enticing when
dealing with out-of-the money puts on an even more volatile
stock – in this case, Pacific Ethanol. Under this second
scenario, we assume that PEIX is selling for $37.80, or
almost exactly between the September $35 put that we sell
naked and the September $40 call that we buy. Because the
option premiums on this volatile stock are so rich, the
option-seller receives an even bigger cushion than the
seller of PAAS options. PEIX shares would have to fall by
more than 40% for the put-seller to fare worse than the
call-buyer. Alternatively, the stock would have to climb
more than 37% for the call-buyer to be better off than the
put-seller. Despite these attractive economics, it bears repeating that
the seller of naked put options assume the entire risk of a
drop in the underlying stock, EXACTLY AS IF HE OWNED THE
STOCK ITSELF. Bottom line: Don't sell naked options unless
you want to want the stock. As we pointed out last week, option-selling strategies
function best amidst very volatile market conditions.
That's because high volatility produces high option
prices...and that's what we've got right now in the
resource sector. It's an option-sellers market. [Joel's Note: If you have been watching Kudlow & Company,
reading MarketWatch or ingesting any reputable commentary
about the recent commodity volatility, then you probably
already know Kevin Kerr. A savvy options trader, he revels
in turbulent markets and Mr. Kerr's readers have had no
complaints about the profits they've been stuffing their
pockets with by following big Kev's call and put
recommendations. If the healthy cash flow the current
resource markets are dealing out is just too much to
resist, you may want to read Kevin's next report right here
and join in on the fun. It only takes about four minutes a
week to run with this bull and it's about as easy as making
a deposit at the bank...and you'll be doing plenty of that
too. Read on right here: Four Minutes to Fortunes
http://www.agora-inc.com/reports/RTA/ERTAFB23 --- Special --- When the lights go out in Shanghai...
20 million people will cringe in the darkness, poking
around for damp matches and greasy candles.
On Oct. 26, 2004, a 578-page report revealed that China's
rabid growth could grind to a screeching halt without this
one ignored element.
Virtually no investors know about the $30 trillion that
must be invested in the "secret juice" that invigorates
China's rampant growth (hint - New York and California
can't live without it either...) Grab a piece of the hidden juice right now and my best
estimate is that you could easily double your returns. In
all probability, you're looking at as much as eight or nine
times your money. http://www.isecureonline.com/Reports/OST/EOSTG575 ------------------------- 
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