THE OPTIONS COURSE- Watch Television with an Investor’s Eye


Watch Television with an Investor’s Eye

Television is one of the best sources of beneficial investment ideas. Commercials can give you a greater awareness as to who is doing what, and who is competing with whom. Television is not just a source of daily entertainment; it is an exceptional medium for distributing information to the masses, much of which is useful for spotting investment opportunities. Specifically, you should watch commercials to discover which products you see over and over again and which products have been newly introduced. However, you can also use this powerful medium in other ways. CNBC and CNN Business are shown in many areas on cable. These are the primary channels watched by traders and investors throughout the trading day. 

CNBC was born from the Financial News Network (FNN), which was watched widely by the investment community. Before, during, and after trading hours, CNBC broadcasts market information on many issues, including stocks and futures. Expert commentators and guests give market summaries and opinions throughout the day. As a professional trader, I leave CNBC on with just enough volume to overhear any piece of information that might have a bearing on an investment decision. I typically do not watch any particular show unless something strikes me as intriguing, but I do listen to the commentary all day long. 

As with any news organization, they report on stories they believe to be interesting to their target audience—the investment community. They talk about what is hot and what is not. They focus on the most market-moving information they can find, because that’s the business they are in. What kind of information do I listen for? Extremely good news and extremely bad news. This is where you can make explosive profits. For example, one day CNBC reported about a company that had a drug use test using a strand of hair. My broker informed me the stock was trading around $6 per share. 

I bought some shares knowing the news would get out overnight and create buying interest in the stock. As I predicted, the shares opened the next day at around $9.50. I sold my shares immediately, because stocks with this kind of run-up often come down quickly. The shares closed that day at around the same level I bought in at, leaving me with a 50 percent profit on an overnight investment. To give you another example, CNBC reported about a stock that had dropped from around $12 per share to about $3.50 overnight due to “accounting irregularities.” I called my broker and found that there were options available on the stock to trade. 

Seeing less risk in the options than the shares, I bought out-of-the-money (OTM) call options at $50 each. These I sold 27 days later at $150 apiece for a 200 percent profit in less than a month. My mother used to complain that I watched too much television. Well, watching TV for me now has become a profitable experience. Looking at CNBC or CNN Business, one can have a 15-minute delay of price quotes all at the touch of a remote (some prices are actually real-time). But what does this TV ticker tape tell me? Let’s forget for the moment about the men and women at the anchor desks in the flashy studio, and concentrate on the bottom of the screen. This is referred to as a ticker tape.

Before the market opens, you will see a recap of stocks using the closing prices of the previous trading day. Also, futures prices are mixed in every few minutes. At 8:30 A.M., after a government or economic report, bond prices are shown in the lower right-hand corner for 10 minutes or so. Beginning at 9:30 A.M. and until 9:45 A.M. Eastern standard time (EST), the market averages run real-time across your screen. The top line usually represents the NYSE stocks, and from time to time futures will appear. The bottom line represents the AMEX and OTC stocks as well as real-time market averages that appear about every minute.

Throughout the day, from 9:45 A.M. until 4:15 P.M., stock prices are quoted on the screen. These are displayed as the ticker symbol, followed by shares traded, followed by the last trade and the change in price since yesterday’s close (on some stations)—for example: 

          IBM 10000.00 88 + .50

The stock symbol is IBM, which last traded 10,000 shares at $88 each, up $.50 from yesterday. If you see only the symbol and the price, then that was the last quoted price of the shares and no shares having been traded.

Averages that are quoted include the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 Cash Index (SPX), followed by the daily change of the index. This information is useful to anyone who has the time to watch the markets on a daily basis. There are many more examples of how I’ve been able to use television, especially CNBC, to make money. You can do the same. In some cases, I have been able to apply the contrarian approach to accelerate my profits even further.

Local television programming is certainly not as concise as CNBC; however, you can pick up information on local companies and futures markets that are pertinent to the local community. There are also several national television shows that have segments on investing and trading, such as CNN and the Nightly Business Report. Unfortunately, most of them lack a great deal of specialized information; either they do not focus on the investment community or they intersperse business news with general news stories.

Read Newspapers Attentively

The first task is to learn how to read a newspaper efficiently and intelligently. A successful investor can scan a newspaper in about five minutes and spot potential opportunities. You must be able to pass by all the fluff and get to the meat of the information. You can start by picking up copies of newspapers that specialize in financial news, such as Investor’s Business Daily and The Wall Street Journal. It’s also important to keep tabs on what is happening locally by scanning the local papers that highlight regional companies. This gives you an opportunity to get a better understanding of these potential investments. For example, if you live in the San Francisco Bay Area, you will find a great deal of news about the Silicon Valley companies (e.g., Intel, Oracle, Hewlett-Packard, Yahoo!, etc.). 

These companies employ a great many individuals in the region, so both good and bad news often leaks out. If you don’t live in the Bay Area, you can locate information about Silicon Valley’s high-tech companies by using the various resourcesSince local newspapers are in the business of finding and reporting news that has an impact on the people in the area, they look for any chance to report on developments both positive and negative on major companies. Therefore, you can usually find a much wider variety of pertinent information in local papers than in a national newspaper. It is a wise practice to research the major employers in your area and then look for news that can directly affect the performance of these companies’ stocks.

A number of periodicals and magazines are also available to help you spot good investment opportunities and educate yourself further regarding shares, options, and futures including Futures magazine, Technical Analysis of Stocks and Commodities, and Commodity Price Charts. However, make no mistake, both The Wall Street Journal and Investor’s Business Daily are essential weapons in the battle to locate investment opportunities. When looking at the first page of the Journal’s Money & Investing section, you can scan the left-hand side of the page to gauge what the markets look like. Focus on the interest and stock charts. See if they are moving in the same direction, or if interest rates are stable and stock prices are moving up, down, or sideways. See if the interrelationship follows what is expected.

In addition to reviewing the tables in The Wall Street Journal and Investor’s Business Daily, I like to look at the charts—graphical representations of price movement—found in the IBD. These charts are almost like looking at an electrocardiogram (EKG) of your heart. This EKG-like analysis does not require you to overstudy the chart. With a quick glance, a knowledgeable investor or trader can visualize the health or weakness of a stock or a commodity. New investors can look at a chart and easily ascertain one of three scenarios:

1. Is the price of the security (shares or futures) going up?
2. Is the price of the security going down?
3. Is the price of the security going sideways?

The best investments will have momentum. This momentum should be monitored over both a short and long period of time. You want to make short-term investments by looking at short-term price momentum (daily or weekly) and long-term investments by looking at the investment from a long-term perspective (each quarter or yearly). If a stock’s volume is low, it isn’t likely to go anywhere. Look for increasing volume in a stock to signal movement. The best investments will have a reasonable price-earnings (P/E) ratio compared to the industry average. All of this information can be obtained by studying the investment sections in The Wall Street Journal or Investor’s Business Daily, or by consulting your broker.

To locate the best potential investment opportunities in a newspaper, you should focus on the following information for stocks:

• Stocks with the greatest percentage rise in volume.
• Stocks with an increase in price greater than 30 percent.
• Stocks with a decrease in price greater than 30 percent.
• Stocks with strong (buying) or weak (selling) earnings per share (EPS) growth.
• Stocks with strong (buying) or weak (selling) relative strength.
• Stocks making a new 52-week high or new 52-week low.

Many people think that it takes years of practice to become a good chart reader. Some experts on technical analysis—the study of price movement through numerical analysis—tend to make the process look more difficult than it really is, so that many individuals give up in their quest to be good investors or traders before they have given themselves a chance to succeed. Many times, information from traders and analysts with accurate knowledge often gets lost in the abundance of useless investing debris. 

I have often mentioned that sometimes the best investment approach is to become a contrarian and do the opposite of what the crowd does. You may find local newspapers (depending on where you live) reporting on a number of issues that can affect commodity prices. For example, if you live in the farm belt of the United States, you will read many articles on the weather, crop expectations, and livestock outlooks. These tidbits of information get filtered to the investment community. Investors and traders then make investment decisions based on their perceptions of the impact of these tidbits of information on the prices of the various commodities. 

For example, on a trip to the farm belt, I noticed that everyone was talking about the skyrocketing prices of wheat and soybeans. I heard this in stores and restaurants, and it was front-page news in the local papers. I could tell—even though I wasn’t from the area—that there was a feeling of frenzy. No one thought prices could fall. When people who probably don’t monitor investment prices make them a topic of conversation, I sense a frenzy. That’s when I know the end is near for that movement. I sold both contracts, knowing that on a very fast move up in prices, on any sign of weakness all those who thought the markets were shooting up to the moon will realize the party is over and have to sell in a panic. 

The same holds true for markets that move quickly to the downside. Sellers will become panic buyers. One of the most successful trading techniques is to look for markets that have made very fast moves to the upside or downside and watch for the momentum to change. You can then place a trade that benefits from a reversal. This accelerates profits, as a frenzied movement in one direction will move even faster (in many cases) in the opposite direction when the move is over.

Look for Good and Bad News Concerning Specific Companies

Explosive opportunities can often be found when specific companies are the subject of extremely good or bad news. There is tremendous financial loss for millions of shareholders when stocks drop like a rock. When such a stock dropped to around $4 per share overnight from $12 (not to mention a previous high of $35 about nine months earlier), this signaled a buying opportunity. With the shares this low, I bought call options that would make money when the stock moved back up. They cost only $25 apiece, and they doubled in value in a day. I sold my position a few days later for a profit of over 400 percent. You can find extreme examples almost daily and super investment opportunities at least twice a week. 

If you wait for these opportunities, you can become much more successful. For example, keep an eye out for bad earnings reports or news from a company that the earnings will not be as had been expected. As mentioned earlier, the value of a company’s shares is determined by many factors. However, the most significant factor is expected future earnings as forecast by brokerage company analysts. If a company begins to give these analysts any information that is viewed as hurting a company’s next earnings release, then they will quickly downgrade their forecasts. This turn of events can trigger a major selling frenzy.

Back in August of 1996, the Medaphis Corporation, a leading provider of management services to physicians and hospitals, let out that there was a significant underperformance of the quarterly results compared to analysts’ expectations. The share price, which had been steadily advancing over the previous year and was trading at around $36 the day before, dropped overnight to around $12. That was a $24 drop—representing two-thirds of the value—lost overnight. If you owned the shares, how would you feel? Devastated. I would feel the same way. If I had invested $1,000 in this supposedly safe stock, I would have only $333 the next day. I would jump ship just like the other owners that day. 

However, after a fast move down like this there is usually a bounce back in price (which happened) for a short period of time. Then the shares usually continue down until a new support level is reached. After many years of trading, you learn that reactions are very similar in extreme situations. A good trader and investor will immediately react to this situation and place a trade that will benefit from this situation. What would I do? I’d buy out-of-the-money (OTM) calls and OTM puts—a spread—at a cheap enough price so that I would risk very little, with enough time for me to be proven right (three months or so).

Watch for New Product Developments

There can be numerous investment opportunities when pharmaceutical companies and biotech research and development companies announce successful trials of new drugs and approvals from the Food and Drug Administration (FDA). If you ask your broker to notify you of these types of situations, this alone can present tremendous opportunities.

Bet on Smart People

This is an easy one that many people overlook. Why not invest your money with smart, successful people? My theory is that someone who has been successful in the past will be successful in the future. There are many examples of this around you. Why not let a billionaire invest your money for you? Billionaires do not become billionaires without investing their money very wisely. Jump on the bandwagon and join them. Let Bill Gates of Microsoft invest for you. How do you do this? Just invest money in Microsoft shares.

Many of you may not know his name yet, but let me tell you, he can make you wealthy. I am referring to Wayne Huzienga. Perhaps you have heard of two companies—Waste Management and Blockbuster—he built and sold successfully. I am sure you have spent a few nights in front of a television set after visiting one of his stores. There are a number of other individuals you might want to follow. Guess where I put my longer-term investment dollars? I just ride the wave with other successful people.

Look for Low-Priced Shares

I define low-priced shares as those trading at $20 or less. It’s a lot easier to make a high return on low-priced shares than high-priced shares. If I buy a stock that is trading at $100 per share, how long will it take to double my money? Although anything can happen in this business, most likely high-priced shares like this could take years to double in value. In addition, there is a greater chance of losing a lot of money. If I take a stock that is $10 per share, how long might it take for this stock to double in value? Many times I have seen it happen in a day. Also, if the shares become worthless, I lose only $10. Bottom line: Placing a low-priced stock trade gives you the following benefits:

• You can make a high return faster.
• You have less money invested to lose.
• You can play more stocks with $100 (10 different stocks if they average $10 each).

This last point is very important. If I have $100 to invest, I will—in many cases—pick a few stocks that allow me to average my risk. This is referred to as a portfolio. A broad portfolio is the basis of a mutual fund. The basic theory is that a larger group of stocks will even out the chances of winning in the long run. This, in turn, reduces your risk.

If I put my $100 into one stock, there is a 50 percent chance of these shares losing money (50 percent up, 50 percent down). If I buy 10 stocks (average price of $10), then if one stock loses 100 percent of its value, I have nine stocks to carry the portfolio and can still make money. A mutual fund may have hundreds of stocks. Some may be terrible investments, but overall the fund may still do very well as it diversifies its risk.Let’s take another example: If I feel that a particular $100 stock may make a large move up in price, instead of buying the stock, I would buy a $4 OTM call option giving me control of 100 shares for $400. 

If the shares now move up from $100 to $105 (a 5 percent price increase), these options may go up 50 percent in price to $600, because a move in the price of a stock will typically have a magnified effect on the price of the options. This magnification is due to a number of factors, including the leverage the options provide you. Therefore, it’s a lot easier to make a 100 percent return on your money using options on stocks (as well as options on futures). However, I have to caution you: It is also easier to lose 100 percent of your investment with options. If you want to trade options, never underestimate how important it is to keep learning as much as you can about them.

Look for Price Increases or Decreases of More Than 20 Percent in the Past 60 Days

Momentum creates opportunities for both buying and selling. Momentum investors are very widespread; however, they are a very fickle group. When a stock (or future) gains momentum and then starts to lose momentum, there is usually a flurry of activity to take the market in the other direction. I like to invest when the momentum is strengthening or weakening, because these are the best short-term opportunities and they often create longer-term opportunities. Momentum investors are much shorter-term-oriented than mutual fund investors or money managers. 

A momentum investor may be looking for momentum over the next few seconds, minutes, days, weeks, or even months. This creates many different time frames in which investors and traders are viewing the markets. When a market starts to move quickly, then all these players may jump aboard. The momentum may last, but usually, on a short-term basis, prices will reverse as investors become disappointed when the market dies. How do I measure momentum? I look for a change in the price of the stock over the previous 60 or 90 days. 

I use this as my long-term indicator. If I am building a longer-term portfolio of stocks, I want stocks that are showing a minimum of 60-day strength. As previously mentioned, many technical analysts use momentum indicators. These indicators are very specific. They might show the change in stock price relative to a set prior period (i.e., five minutes, one day, etc.). Perhaps they use a moving average to locate a change in momentum. When the current price moves below the moving average, they sell; when it moves above, they buy.

Look for Price Increases or Decreases of More Than 30 Percent since Yesterday

This is the most important indicator I use for momentum investments. The 30 percent rule is the minimum. I prefer a much higher number to show even stronger momentum. Typically, the higher the percentage, the stronger the momentum. How does this work? You can either look at the price percentage gainers and losers lists from the newspapersIf you are receiving real-time or delayed quotes, then you can get this information from your data feeds during the day. When I look at the lists, I look for the stocks that have gone up the most in price over the previous day’s closing price—the basis for the percentage gain or loss. However, it is important to note that stocks with the highest percentages do not necessarily have the most interest or momentum. 

Sometimes a stock that was trading for only $1 moves up to $1.75. Although that’s a 75 percent increase, it doesn’t always mean high profits. In order to get a better understanding of a stock’s profitability, I also look at price range and trading volume. I typically trade only stocks starting at $5; however, sometimes I do trade lower-priced stocks if they show significant trading volume. Generally, I trade stocks that have increased in volume significantly. If a stock trades less than 300,000 shares a day, I avoid it. Maybe it will make a move, but there is not enough interest from other investors for me to believe the trade will be profitable. I like to see more than one million shares trading. This shows commitment on the part of the investors. 

Once again, the more volume the better. When buying shares, I want them to be on the price percentage gainers list. I consult the price percentage losers list to find shares that have made major moves down (30 percent or more) and then look for a rebound. This is when I find buying opportunities. This may sound strange, as most investors may think this shows more weakness coming, but remember that I like the contrarian approach. Also, understand that when a stock moves so far down so fast there is usually negative news regarding the company. Perhaps the quarterly financial results are disappointing Wall Street, or the company has presented information that future earnings will be disappointing. 

Most importantly, this usually creates a panic and what is called a blow-off bottom. This means that the fast move down has made every potential seller panic. After the sellers have all sold, buyers tend to produce a rebound. How often does this occur? Sometimes on a daily basis I find at least one stock that has dropped at least 30 percent (50 percent or more is even better). These declines appear to come in spurts, especially around the time in each fiscal quarter when companies are reporting earnings. When the market opens, I watch these shares closely and wait for them to start gaining momentum to the upside before buying. I wait for a movement of at least a 20 percent price move off the lows, with heavy volume of at least 300,000 shares. 

I like to see large blocks (5,000 shares or more) increasing, as this shows the institutions are buying. When this scenario occurs, I look to buy the shares, but prefer to buy the call options (if there are options available). Remember, I get more leverage with options and also have the benefit of limited risk. All I can lose is the amount I paid for the options. Let’s take an example of a trade using SyQuest Technology, Inc. SyQuest’s stock price was increasing on heavier-than-average volume and had an average daily volume of around 200,000 shares. One day, the stock price moved from $5 to $6 (a 20 percent increase) on volume of more than 1 million shares trading. This was an obvious clue that something was happening that was creating a great deal of interest. 

I contacted my broker to see if there was any news to account for this movement. There was none. The shares price had been much higher before dipping to trade just around $5 for the past few months. I considered buying it. However, 2,000 shares would cost me $12,000 (2,000 × 6 = $12,000). Instead, I decided to buy the 7.50 (strike price) call options at .875 each, making sure there was plenty of time left to expiration. I prefer to buy options with at least three months remaining, especially on momentum investments. Thus, I paid $87.50 for each option representing control of 100 shares of stock. In comparison, buying 100 shares of the stock would have cost $6,000.

Although the options did not represent the shares on a one-to-one basis, any move up in the price of the shares would double the value of the options quickly. Approximately four days later, the shares had doubled in value (a 100 percent move). This enabled me to sell each option for $537.50—a profit of $450 per option. My choice to buy call options instead of purchasing the shares straight out led to a 500 percent return in just four days!

              Let’s review this trade:
                                              Trade Initiation

              Current stock price:                            $6 per share
              Previous stock close:                          $5
              Percent increase:                                20 percent
              Average daily trading volume:         200,000 shares
              Most recent day’s volume:                1,000,000+ shares
              Margin required:                                Zero (cost of options)
              Option price:                                       $87.50

Note: I used a 20 percent rule in this example due to the dramatic increase in trading volume.      
                                       Trade Closing

              Shares price:                        $12
              Option price:                        $537.50
              Shares price up:                  100 percent
              Option price up:                  500+ percent

This simple technique can provide you with profits greater than you ever imagined could be made in such a short period of time.

Look for Shares Reaching New Highs or Coming Off New Lows

When used in conjunction with lists of price percentage gainers and losers, this is one of the most powerful indicators. When a stock is on one of the gainers lists and it’s making new highs as calculated over the previous 52 weeks, then it may be a buy (especially if it’s making new historical highs). Also, when the stock has made new lows and is coming off new lows, the blow-off bottom may have occurred.

Buy a Small Number of Shares or Contracts

Until you have the experience to make money consistently in the markets, start off as a small investor. Regardless of whether you have a thousand dollars or a million, until you really understand what you’re doing, you’ll be much better off with small investments. How small is small? This question is virtually impossible to answer. Just be cautious when you start out, until such time as you are a consistent winner. Then build up slowly.

Build Your Confidence

It is important to earn your confidence through winning investments. However, be vigilant that you do not build a false sense of confidence. Although I have been investing for many years, I still spend considerable time figuring out ways to improve my trading. If you develop a sense of temperate confidence, you will most likely be a survivor. That means you’ll actually be around to enjoy the benefits of this business.

Often, when a trader starts to make a little money in the markets, a false sense of confidence drives them to make much bigger trades. This is a big mistake. As they say on Wall Street, “Pigs get fat, hogs get slaughtered.”

When You Make a Good Return, Sell

What is a good return? Every trader or investor will probably tell you something different. I like to make 100 percent on my money when trading stock options, and a minimum of 20 percent when making commodity trades. With stocks you usually have to settle for a lower return (10+ percent). These are the numbers I use based on my experience with winning trades; however, these are benchmarks, not hard-and-fast rules. My exit strategies are usually based on momentum shifts, which means that some of my trades have returns much higher than 100 percent.

I also have losing trades (nobody’s perfect). However, a disciplined trader will get out of losing trades quickly and learn how to stay with the winners. It’s very much like being a surfer waiting for the big wave. A wave might approach that has the characteristics of a winner but then starts to look like a loser. Instead of wasting time riding the loser to shore, the experienced surfer will get off that wave and look for another opportunity. You too are looking for the big winners. So don’t forget to get out of the losers quickly so that you can use your capital in the most efficient manner possible.


Profitable trading opportunities come from an infinite number of sources. The trick is to foster the growth of your own personal trading antennae through cultivating a variety of sources. Remember, you will never have as much time as you would like to study the markets. You have to use your time efficiently to find the best possibilities for profitable trades. In many ways, the maxim “in on greed, out on fear” captures the essence of traditional trading methodologies by cutting through the hype and complexity that drives market momentum. This emotional motivation sets up quite a paradox. On the one hand, trading appears to be a very dry business. However, the emotions of hope and fear impel traders to place trades and exit them creating erratic market swings. 

These swings can be devastating to traders who simply buy stocks hoping prices will rise. In fact, directional traders are always at risk of losing money when markets reverse course in the middle of a trend. That’s because directional trends depend on trader optimism—as unlikely a source for stability as you can find, especially these days. As sellers scramble to exit a market, fear drives prices down until a new low inspires buyers to get involved again. This cycle feeds on itself—winners and losers trading back and forth at the whim of human emotion. Meanwhile, thousands of analysts spend countless hours poring over fundamental, technical, and sentiment data looking for clues to price movement. 

Analyzing markets can be overwhelming, especially to traders who are just getting their feet wet for the first time. To trade successfully, it is essential to develop comprehensive market insight and the moral conviction to stand strong against the mass psychology that drives market behavior. Market insight comes from studying market movement and a certain familiarity with trading strategies that take advantage of specific conditions. Market movement is an extremely complex subject. There seems to be an endless stream of directional analysis techniques. Each may offer a piece of the greater puzzle—but no technique holds all the answers. 

Trading might as well be a foreign country to the uninitiated. It has its own language and its own customs. It’s up to you to find your favorite haunts by exploring the territory and finding out what suits you best. If technical analysis feels comfortable and fits in with the rest of your lifestyle, then read all you can about it. Trading is a game of odds, and though no one can be 100 percent correct in their decisions, by using the data available and then placing hedged positions, traders can see nice profits without the risk of losing everything in their portfolios. Whatever you choose, make sure you dedicate yourself to really understanding it. Familiarity may breed contempt, but when it comes to trading, familiarity breeds prosperity.


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