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Option Investing: Laugh while they cry

Today's Financial News - Posted August 17, 2009

The markets are having a bad day, but savvy options investors are celebrating over a stack of profits. If you don’t like it, you had better get used to it.Better yet, join them.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): Big change in the markets today. After a week or so of threatening to pull the plug and sink the summer’s rally, the market finally went ahead and made its move.

With earnings season all but over, the market is forced to make good on the Street’s raised expectations. So far, the data has been an utter disappointment, especially when it comes to anything consumer related.

The market reacted accordingly.

The negative action started in Asia, where China’s market was down the equivalent of about 500 points on the Dow after investors began to ponder if near-double-digit growth was a reality.

Japan’s less-than-expected GDP figures did not help raise the mood. Without American consumers opening their wallet and buying imported goods, Asia’s growth expectations are getting a thorough re-examination.

Here at home, Lowes (NYSE:LOW) is getting lots of attention, all of it negative, after releasing details of a downright scary second quarter. The building-supplies company watched its sales drop to $13.8 billion from last year’s $14.5 billion and its profits reduced to $759 from $939 a year ago.

The news sent shares of the company down by more than 10% in the session.

Even worse for an economy looking to repress the memory of a real estate bubble and horrific economic downturn, Lowes announced it is slowing its previously disclosed growth. The company’s store-expansion plan has been reduced and so has the number of new properties Lowes plans to purchase in 2010.

None of this is good news for the bulls, but it is great news for smart-moving options investors.

Laugh while they cry

For proof, all we have to do is turn to my favorite indicators, the CBOE Volatility Index (VIX). The key measure of the price spread between put and call contracts is soaring today (up by 16% at the moment) as Wall Street ungulates violently.

The move signals many investors believe more bearish days are ahead.

For TFN Strategic Trader subscribers it is fantastic news. As you may have notice from my tone over the last couple of months, I have not bought into this earnings-fueled rally. The markets were merely getting flooded with capital from the sidelines and were surging because analysts at set the profit bar entirely too low. It led to an over-fueled, over-hyped rally.

During the last two months, I have advised subscribers to stock up on put options. Right now, our portfolio has more bets against the market than it ever has before.

And boy are they paying off today.

I am not about to give away my exact picks, but I will give a few hints.

We have a cruise operator that is down by over 5%. Our options are up by 23%.

We have a gun manufacturer that has plummeted by 7%. In the last week, it is down by 11%. Our options are up by 50% so far today.

There is also a bet against a major oil producer.  Its shares are down by two percent, adding to our put option gains.

Also in the portfolio is a major outdoor retailer. It shares have plummeted since I recommended going short. Its shares are down by 5% today, putting significant upward pressure on our options.

We even have a major biotech player in the portfolio. The underlying stock is down by just 1.5%, but our options are up by 12% so far today.

If you do not believe in the power of options and their utter importance in any investor’s portfolio, today’s action will prove its worth. The TFN Strategic Trader portfolio alone should prove it.

Let’s face it. The American economy is built on shaky ground, leverage and political promises. It is going to swing like a wild pendulum for the next 24 months. The best way, and likely the only way, to take advantage of such action is through the options market.

If you want to learn how to use the leverage of options or want to join the action, read this report.


Next Article: Bad day for solar stocks: A taste of things to come?

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Posted by Andrew Snyder · Filed Under Featuring..., Options 

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