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Daily Newsletter, Thursday, 12/05/2002

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The Option Investor Newsletter                 Thursday 12-05-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three: 

Play of the Day: AIG - PUT
Traders Corner: Fundamental Trading for the Intellectually Challenged
Traders Corner: Wave patterns to trends – using “Elliott Wave” analysis; 
part 1
Futures Corner: Spread Trading
Options 101: Just Do It!  (Apologies to Nike for use of their slogan.)


*********************
PLAY OF THE DAY - PUT
*********************

AIG - American Intl. $61.15 -1.46 (-4.00 for the week)

Company Description:
AIG is the world's leading U.S.-based international insurance and 
financial services organization, the largest underwriter of 
commercial and industrial insurance in the United States, and 
among the top-ranked U.S. life insurers. Its member companies 
write a wide range of general insurance and life insurance 
products for commercial, institutional and individual customers 
through a variety of distribution channels in approximately 130 
countries and jurisdictions throughout the world. AIG's global 
businesses also include financial services, retirement savings 
and asset management. AIG's financial services businesses include 
aircraft leasing, financial products, trading and market making, 
and consumer finance. (source: company press release)

Why We Like It:
"Sell the news" has been the mantra for insurance investors 
following President Bush's signing of the Terrorism Insurance 
bill.  The legislation was largely seen as a boon for providers 
of property and casualty policies - so much so that some pundits 
criticized it as a handout to the large insurance companies.  But 
while stocks within the sector moved higher ahead of the bill's 
passage, investors have had a distinct sell-side bias ever since.  
The IUX.X insurance index has dropped to the lower end of its 
multi-week trading range and is now threatening to fall below the 
50-dma at 259.  On a similar note, AIG is in danger of breaking 
to relative lows.  The technical picture worsened considerably 
today after shares fell below the 50-dma ($62.10) and triggered a 
triple-bottom sell signal on the point-and-figure chart.  With a 
loss of 2.3%, shares showed relative weakness versus both the Dow 
Jones and IUX.X.  The descending oscillators don't lend much 
credence to the idea that AIG will rebound anytime soon.  Bears, 
however, will point out that the stock is resting just above 
bullish p-n-f support at $61.00, which also provided support 
during a pullback on November 1st.  Additional support lurks at 
$60.00, but we won't expect the bulls to put up much of a fight 
at this level if the IUX is breaking to new lows.  In terms of 
downside potential, AIG has a large "fast-move" region below 
$60.00. Conservative traders can target a move under $60 to 
initiate short entry, which will break both daily and p-n-f 
support.  Alternative entry would be on a bounce to resistance 
under $65. We'll be looking for shares to retrace the rapid gains 
from early-October and retest the $52.00 level.  Shorter-term 
traders could target a move to $55.  Our stop will be located at 
$65.51, slightly above the 200-dma.  Those who aren't willing to 
harbor as much risk could use a stop just above Tuesday's high of 
$63.71. 

BUY PUT DEC-65*AIG-XM OI= 6802 at $4.50 SL=2.25
BUY PUT DEC-60 AIG-XL OI= 6352 at $1.65 SL=0.80

Average Daily Volume = 6.45 mil



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**************
TRADERS CORNER
**************

Fundamental Trading for the Intellectually Challenged
By Mike Parnos, Investing With Attitude

Today, my dear CPTI students, we’re going to examine a whole new 
kind of analysis – fundamental analysis.  To fully understand the 
concept, let’s first take a closer look at the word 
“fundamental.”   Three simple syllables, that mean: a charity 
providing money for the intellectually challenged.  FUND – A – 
MENTAL.  Jerry Lewis is even thinking of having a telethon to aid 
investors who trade on news.

There are some aspects of a company’s books and public 
information that are worth a look – the P/E comes in handy when 
comparing it to a growth rate or other stocks in a sector.  
Insider trading and short interest can give you some insight as 
well.  Hell, when there’s nothing good on my 400 TV channels, 
I’ve been known to listen to company conference calls.  It’s 
laughable to hear those CEOs stroking the analysts and 
shareholders – answering questions they like and providing 
doubletalk for the ones they don’t.

At the Couch Potato Trading Institute we don’t gamble.  We are 
conservative.  We want to book everyone else’s bets because the 
casinos win most of the time and the retail investor is wrong 
most of the time.  It doesn’t get much simpler than that.  

Let’s Get Silly
Here is a perfect example of “fund-a-mental” analysis.  A story 
came out in the Wall Street Journal in September 10th.  It was a 
front-page story touting the benefits of Silly Putty.   
Apparently, it’s not just for children anymore.  Adults are 
buying Silly Putty in 50 and 100-pound quantities.

According to the article, heavy putty users say a “chunky 
handful, massaged and stretched and squeezed, is the perfect 
workplace stress reliever.”  Apparently, bouncing it off the 
walls and sculpting everything from animal characters to human 
body parts are among its most popular office uses.  I suppose 
it’s better for the Silly Putty to bounce off the walls instead 
of the executives.

Silly Putty costs about $7.50/lb. in 50-pound quantities and is 
manufactured by Dow Corning.  Remember Dow Corning?  It used to 
be a stock, but trades no more.  But this is great publicity.  If 
this “nugget” had come out on a stock that still trades, the 
retail news junkies would have raced to phone their brokers to 
throw their hard earned pesos into XYZ stock, because they’re 
certain that XYZ would go through the roof.  Silly Putty might 
stick to the wall, but believe me, it will never make it to the 
roof.

One of my clients, bless his heart, has owned a certain biotech 
stock since last May.  He bought 3,000 shares of it in the $40s.  
Today it’s under $15.  I started working with him recently and 
suggested that he dump the stock.  Remember, I’m suggesting this 
to a genius who has managed to turn $120,000+ into less than 
$45,000.

“Oh, absolutely not,” he bristled.  “The stock is coming back.”
“In this lifetime?” I asked sarcastically (is there any other 
way?). “What makes you think so?”  
 “I just read an article in the Wall Street Journal about the new 
drugs they’re coming out with,” he responded.  “They’re going to 
make a fortune!”
“Well, I don’t want to rain on your parade,” I said, “but, do you 
think they printed more than one copy of the Wall Street Journal 
that day?
“Sure,” he said.
“Do you think you’re privy to any proprietary information?”  
“Of course not,” he said.
“Well, take your head out from where the sun don’t shine.  What 
you know, everybody else knows!” I explained. “With all this 
glorious news, the stock is still trading under $15.  The news is 
already built into the stock price.”
“But the new drugs . . .” he insisted.
“The stock isn’t going anywhere real soon,” I continued.  The 
conversation continued for a while.  What will happen?  Who 
knows?”  You can lead a horse to water, but . . .    

I hope that one of this company’s new drugs is a cure for 
“stupid.”  Then, I’d even invest in that company.  Until then, I 
better go out and buy my client 50-pounds of Silly Putty.  Maybe 
that will keep him from turning his $45,000 into $10,000.  No 
more itchy trading fingers.  It will give him another option of 
something to do with his hands so he won’t go blind or lose more 
money.
___________________________________________________________

A Salve For Itchy Trading Fingers
We teach CPTI students to not have an itchy trading finger.  Why 
do people have to trade every day?  If you want action, go to 
Vegas or Atlantic City, yank on a slot-machine-handle and go 
through a few rolls of quarters.  Maybe that will get it out of 
your system.

We, however, can make plenty of money without risking the farm.  
And we’re not going to bet on a horse because it has the best-
dressed jockey – not if we want to end up in the winner’s circle.
____________________________________________________________

Do You Want Some Advice?
I get emails every day from readers asking what I think of one 
stock or another. They heard something on CNBC or read something 
that says . . . yada, yada, yada.   Those readers just want 
confirmation or approval to buy a put or to buy a call on the 
stock.  They won’t get that from me.  

You want to impress me?  Pick an index (or a stock if you must), 
give me your prognosis, select a strategy that you think would 
best take advantage of that scenario.  Send it to me and I’ll 
critique it for you – step by step.

We use strategies.  Strategy is defined as “a plan of action 
intended to accomplish a specific goal.”   A “plan of action” is 
more than reading IBD and hitting the “buy” button.
____________________________________________________________

CPTI Portfolio Update – As of Thursday’s Close.

BBH Iron Condor – Currently trading at $88.05
We want BBH to finish the December option cycle anywhere between 
$80 and $95.  We’re still looking good – right in the middle of 
the range.

TTWO Short Strangle – Currently trading at $28.87.
We want TTWO to finish the December option cycle anywhere between 
$22.50 and $35.00. Looking good!  We’re about halfway between the 
strikes.

IMCL Covered Call – Currently trading at $13.11.
We want IMCL to finish the December option cycle over $10 so it 
will be called away.  Looking good!  We had a 5-point cushion, 
but IMCL has retraced a little.  We still have a nice cushion 
with only two weeks to go.

QQQ ITM Strangle – Currently trading at $26.20.  Went as high as 
$28.75 recently.  The QQQs finally made its predicted 3-point 
move – and then some – it turned out to be a $4.25 move.  CPTI 
students, who were bullish and put on the $23/$25 strangle, could 
have sold the $23 call for $5.90 earlier this week.  The original 
total strangle position cost only $4.35.  The maximum profit 
here, so far, could have been $1.55.  Plus, you now own the $25 
put free and clear with 2+ weeks to go. Today, the QQQs traded as 
low as $26.13 and finished just off the low.  The $25 put could 
have been sold for $.55.  

CPTI students, who were slightly bearish and put on the $24/$26 
strangle could have recently sold the $24 call for $4.60.  That 
would have put $.25 of profit in their pocket and own the $26 put 
at no cost with 2+ weeks to go.  Today the market continued down 
(QQQs dipped to $26.13) and we could have sold the Dec. $26 put 
for $.90.  We’re still looking for the market to hopefully 
continue down for a few more days.  Hold on if you choose or, if 
you’ve been paying attention, you could have closed your trade 
and taken in substantial profits.  We’ve worked hard (ha ha) and 
waited patiently for these profits.  Don’t jeopardize them.  If 
you decide to hold on, keep close stops.  You gotta’ love it!  
Ain’t it sweet when things work out (at least so far)?  -- and we 
haven’t had to budge from the couch.
____________________________________________________________

Happy trading! Remember the CPTI credo: May our remote batteries 
and self-discipline last forever, but mierde happens. Be 
prepared! In trading, as in life, it's not the cards we're dealt. 
It's how we play them.
 
Your questions and comments are always welcome.
mparnos@OptionInvestor.com 


**************
TRADERS CORNER
**************

Wave patterns to trends – using “Elliott Wave” analysis; part 1
By Leigh Stevens
lstevens@OptionInvestor.com

OK, I’m going to bite the bullet and write a bit about Elliott 
Wave patterns and theory.  Nothing gets viewers more confused 
than to drop a bit about the wave pattern of a stock or index.  
On the other hand, no topic is surer to get me some e-mails on 
this subject (e.g.: “you’re an idiot, Stevens” or “the correct 
wave count of the chart you showed is actually ......”).

First - why the confusion?  Well, wave patterns, as in “Elliott 
waves”, are not discussed generally except by “practitioners” of 
this arcane art and it appears that only the “initiates” 
understand what the heck they (the practitioners) are talking 
about or think they do.  TOO BAD cause it’s a nifty tool to have 
in your technical toolbox.  AND, its not all that complicated, 
but a “language” is involved and a different way of “seeing” 
trends unfold so it takes a little bit of explaining and 
demonstrating.  

AND, not all patterns take on any obvious wave structure – I go 
for wave analysis as another technical tool WHEN I see certain 
obvious such patterns unfolding. Under such circumstances the 
theory is uncanny in predicting the unfolding trend – which, no 
doubt, it why the theory has many die hard adherents.  I preface 
this Trader’s Column on Elliott wave concepts by saying that I am 
NOT a “true believer” (in wave analysis).  

I will use anything that works in predicting an unfolding market 
trend, even if that indicator, pattern or theory doesn’t “work” 
all the time or at least obviously so.  Stochastics don’t “work” 
(i.e., they lack predictive value) all the time, nor does seeing 
an apparent double top always signal a downside trend reversal – 
however, such tools and ideas work very well enough often enough 
as an aid to trading the trend that they are part of my 
“checklist” in trading and trend analysis; e.g., what, if 
anything is the chart pattern, indicators or wave analysis 
telling me?

FIRST however, let me digress a moment and follow up on my 
Trader’s Corner article of two weeks ago and revisit an updated 
chart. In my column about the On Balance Volume (OBV) indicator 
– you can see this at: 
http://www.OptionInvestor.com/traderscorner/112102_2.asp 

I used an example of how OBV, like all indicators, should be 
considered to be a secondary consideration for the trend and that 
first and foremost is the study of price patterns.  In the 
example I used, that of Abbott Labs’ (ABT) chart below, OBV was 
trending higher – although this indicator had flattened out in 
the later days shown – but that this bullish consideration was 
“trumped” by the bearish rising wedge pattern.      



 

I indicated back a couple of weeks ago on ABT that “price action 
is far from bullish in that the stock has come right up to its 
down trendline. Moreover, the bearish rising wedge pattern would 
suggest that this rally is most likely going to fail”

Of potential interest is to revisit the updated chart of ABT and 
show you what happened next to the stock, given the bearish 
formation that had formed -  



 

Astute observers of other aspects of the chart above – beside the 
obvious downside reversal in ABT – will note the minor bear flag 
that formed over the few day period after ABT broke below its up 
trendline and that the top of that flag was at resistance 
suggested by a return to the previously broken up trendline 
(support “becomes” resistance).  

To mention again: more on the wedge reversal pattern is at an 
earlier Trader’s Corner article at – 
http://www.OptionInvestor.com/traderscorner/082902_2.asp

CONINUING ON ..... 
SOMETHING NEW: WAVE PATTERNS – 
I’ve been struck over the years by the tendency to make market 
analysis more complex than is necessary, perhaps due to the 
tendency to make some specialized analysis techniques an ideology 
out of methodology. This is especially true of Elliott wave 
theory and analysis. 

If you are like me you may come to agree, if you “try out” the 
principles, that the wave theory of Ralph N. Elliott is something 
that can lead to some profitable trading decisions.   A check of 
the price pattern will then come to include noticing the basic 
wave structure WHEN it is apparent or obvious. I emphasize this 
last point because I am not an Elliott wave “practitioner” so to 
speak.  That is, I have not joined the company of fellow 
investors and traders with a “technical” bent, that invest large 
amounts of time interpreting and re-interpreting the wave 
structure in detail at all times.

As I explain in my book, Ralph Nelson Elliott, referred to as 
“R.N.” Elliott (1871-1948), was not quite a contemporary of Dow 
(Charles Dow was born in 1851 and only lived to 1902), but he was 
influenced by Charles Dow’s theories on the behavior of the stock 
market. R.N. Elliott was not well-known as a hugely successful 
stock investor and speculator as far as I know. 

However, his “Elliott wave principle” is better known today than 
it ever was in Elliott’s lifetime, which is not to say that he 
didn’t attract significant notice among some important market 
advisors and professional money managers at the time he wrote on 
the market. Elliott had an accounting background and worked with 
the railroads, including in Central America where he contracted a 
severe illness in the late-‘20s. Due to this he spent his next 
several years bed-ridden but which gave his active mind much time 
to turn to a study of the stock market – hey, it’s like when 
you’re home sick and you have CNBC on all the time. Well maybe 
its not like that.

The build up and crash of the U.S. market over the 1920’s was 
something that Elliott knew well as he was an avid follower of 
the market. By 1934 and after, Elliott’s own comprehensive theory 
of market behavior became defined and his predictions at times 
began to amaze certain market professionals in terms of their 
forecasting accuracy.  By 1945 Elliott was operating his 
investment advisory service from a Wall Street office – “The Wave 
Principle” based on his ideas was also written.  

Distilling what you need to remember about Elliott wave analysis 
is the idea (as with Dow) of their being three components to a 
trend.  You will hear about “5” waves, but that is because a bull 
market is said to consist of 3 up waves or movements, interspaced 
by 2 corrective downswings.  The waves up are 3 “impulse waves”, 
which is another way of saying that they are the three upswings 
to a bull trend.  In a bear market, there are 3 part to a bear 
market trend - one of them is a corrective upswing. This (bear 
market) pattern is “down-up-down” in terms of the direction of 
the trend. 
 
The important thing to remember is that frequently, but not all 
the time, the wave pattern is clearly and easily seen – when it 
IS clearly and easily seen, you can better forecast how the trend 
is going to unfold.  For example, the first impulse wave in a 
bull market trend is the weakest, but after the corrective 
downswing following it concludes, the next impulse wave – wave 
three by counting the up move as “wave 1” and corrective 
downswing as “wave 2” – is the “MONEY” wave. That is, it’s the 
middle or SECOND rally, upswing or “wave” in a bull trend that is 
often the most powerful.  This insight might suggest, for 
example, going in more heavily in terms of trading index calls, 
on this second upswing. 

An example of a “3-wave” is the 1998-1999 Nasdaq advance which 
was a the strongest part of the 1990’s tech stock bull market – 
this of course is also an example of a mega-bull market, but 
within even a moderate bull market there will tend to be one 
stronger and longer advance that carries farther than the other 
secondary up trends.  

The duration and intensity of this second advance (wave 3) will 
often be the period of the biggest gains, in the most compressed 
time frame, of the entire bull market. In a downtrend also, it is 
the second downswing that tends to carry the farthest.  Accurate 
depiction of where one is in an unfolding price pattern that is 
cyclical in nature – having distinct components that comprise a 
beginning, middle and END – is extremely valuable as you can see 
more accurately what phase we’re in.

Fellow Market Technician Association member (and past president), 
Robert Prechter is the best-known of the market advisors and 
analysts that have made wave analysis popular from the 1980’s 
into the early new millennium.  As Bob has pointed out, like the 
other principles of technical analysis, it is not always 
necessary to understand WHY a technique works, as long as you can 
employ the technique to a profitable end. Hey, it works for me!

In a major bull market trend it is possible to count 3 up waves 
and 2 corrective down waves, for a total of 5 waves.  Waves 1, 3 
and 5 will be advances and are called “impulse” waves, with waves 
2 and 4 being counter-trend moves or “corrective waves”.  The 
totality of the component moves of a bull market may be referred 
to as 5 waves “up”.  

After the 5 waves of a major bull trend, a major bear trend, 
consists of 3 waves “down” --- however, each component move are 
not ALL down, only that they are part of the overall down or bear 
cycle.  The 3 components together of such a bear market trend 
“correct” or are counter-trend to the bull market that preceded 
it.  These waves are given the letters A, B and C, in capital 
letters, to distinguish between waves 1-5 that came before. 

The “A” and “C” waves are the declines, with the intervening “B” 
wave a corrective upswing. Note that the number or letter 
designation is put at the TOP of or at the completion of that 
wave -  



   
  
I am using an example of a stock here, but it could as easily be 
an index and the whole market. The entire bull market/bear market 
sequence is a 5-wave up, followed by an A-B-C down.  

Elliott talked about alternation in wave duration and strength.  
While wave three is typically longer and stronger than wave one, 
if it is of about equal length, wave 5 will tend to be the more 
prolonged advance.  Conversely, major bear market down wave “A” 
is usually of shorter duration, but if prolonged he would look 
for the down move “C” to be relatively shorter.  

As with other technical analysis techniques, a surge in average 
volume will help identify the strongest part of an overall move.   
Longer term charts, such as weekly are favored over daily charts 
in terms of seeing and defining the dominant wave patterns. 



       
   
The above charts are examples of bull and bear market trends that 
unfold with the “classic” (Elliott) wave structure of a 5 up-wave 
bull market and a 3 down-wave bear trend.  There are countertrend 
moves always. 

As a discussion of the countertrend moves adds another layer of 
complexity, I will save this for part 2 – maybe there will be a 
“part 3” also!  Looks simple so far and this is the first 
impression I want to convey of wave theory and patterns.  From 
California: surf’s up and the waves are good! While there’ll be a 
quiz later (kidding!) for now just enjoy the waves.


**************
FUTURES CORNER
**************

Spread Trading
By John Seckinger
jseckinger@OptionInvestor.com

When spreading one futures contract against the other, it really 
comes down to which one has a relative advantage.   Thanks to 
Point and Figure Bullish Percentages, we can greatly increase our 
odds for getting to that profitable answer.  

If not already familiar with the definition of a spread, it 
simply is the simultaneous purchase and sale of the same or 
similar commodity in the same or different contract month.  
Spread trading is usually considered to be a lower risk strategy 
than an outright long or short futures position, and therefore 
margin requirements are usually much less than being outright 
long or short futures.   This is because the gain on the long 
position would likely offset the loss of the short position, and 
vice-versa.   One side of the spread typically hedges the other, 
therefore the lower margin requirements.  Keep in mind that 
spreads are not guaranteed to be less risky; there is risk of 
loss in all trading.  This really is important to remember.  

The key to spread trading is following the relationship, or 
difference, between the contracts, without having to pick a 
market direction.  However, in this example, there is definitely 
a bearish bias, and that is fine since one contract is still used 
for hedging purposes.  The contracts in question are the Nasdaq 
100 and the S&P 500 Index.  According to the Chicago Mercantile 
Exchange’s site, www.cme.com, the initial and maintenance 
requirement for spreading the ES and NQ contact is 2,250 and 
1,800 for a speculator, respectively; $1,800 for both maintenance 
and initial if a hedger or member.  Remember: One point move in 
the ES contract is $50, while a point rise in the NQ is $20; 
therefore, a trader using a 1:1 relationship is not exactly 
hedged perfectly. 

One way of looking at spread trading is via Point and Figure 
analysis and the relationship between supply and demand.  It 
seems as though it would just make sense to look at both 
contracts (NDX and SPX) and simply buy the one that has a better 
looking chart; however, when spread trading, the advisable 
approach is to compare risk.  This is done via Bullish Percent 
analysis.  

Let us start with a P&F chart of the NDX, currently much higher 
than its bullish trend line (blue); however, the contract still 
appears to be trending up nicely.  Just looking at this chart, it 
seems to make sense to go long, right?  Well, not exactly.  Note:  
As a good rule-of-thumb, after a bullish signal is given (830, 
ending much higher at 950 and defining the objective), the first 
sell signal is actually a good buying opportunity.  

Point & Figure Chart of NDX


 

It is this next chart that really tells the whole story; The 
bullish percent index ($BPNDX).  Think of the BP as a football 
field, with 30 and 70 as the beginning of the end zone on opposite 
sides of a playing (trading) field.  Above 70, touchdown 
for bulls.  But what does that mean?  The Bullish Percent (BP) 
could go to 100, but the odds are that it will not.  Since it is 
all about the odds, there is a good likelihood that this BP will 
continue to reverse and pick up speed to the downside and back to 
the center of the field (50, or 50-yard line).  The word 
“continue” is emphasized because there already is some internal 
weakness going on (beginning of a correction phase to the far 
right hand side, defined by a series of O’s). Ok, now we need 
to compare this to the SPX.  

Nasdaq 100 Bullish Percent Index ($BPNDX)


 

A Point and Figure Chart of the S&P 500 Index is almost the 
reverse of the NDX.  The P&F chart has actually issued a sell 
signal at 910 and gives a bearish objective of 865.  However, 
note how close the SPX is to its upward trend line.  Not as much 
risk, right?  I expect bids to enter the index between the 895 to 
900 level, and traders could use a move below 885 area as a sign 
of more weakness to follow and a change to re-evaluate the 
relationship.  Also, a move back towards 925 (or 927 level) 
should signal the relative strength we expect.  

Point & Figure Chart of SPX


 

The following chart, when compared to $BPNDX, allows a spread 
trader the tools to make a decision between the two contracts.  
Could we have done this exercise without a chart of the NDX and 
SPX, and just used BP’s?  Absolutely, and that is part of this 
exercise.  Looking at the chart below, notice that there isn’t a 
column of O’s on the far right hand side of the chart yet?  
Exactly, relative strength.  Moreover, the BP isn’t near such 
lofty levels as the NDX, even though that can be relative as 
well.  

S&P 500 Bullish Percent Index ($BPSPX)


 

It seems so easy, yet there are some subtle caveats involved; 
looking primarily at BP charts being one.  I highly recommend 
going to www.stockcharts.com and using their FREE charting 
service.  Like on Thursday, when the ES and NQ settled basically 
on top of highly watched pivotal levels, using spreads can be 
extremely effective.  Slippage is usually less; however, traders 
sometimes get concerned about how to exit a spread.  As a rule-
of-thumb, start with a very small position and leg into a larger 
one if it becomes profitable.  If it is not profitable, exit 
based on financial loss.   Remember, there can be greater 
commission costs incurred since there is a good chance a larger 
position will be put on (since using two contracts instead of 
one).  

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 


***********
OPTIONS 101
***********

Just Do It!  (Apologies to Nike for use of their slogan.)
Buzz Lynn
buzz@OptionInvestor.com

Oh Boy - Back from a surreal Thanksgiving vacation!  It contained 
enough excitement and interesting observations about the 
"Glitterati" (famous people or celebrities who spend a lot of 
money) to fill a Michener novel.  

If you've never been, Hawaii is God's country (most of it anyway), 
no matter which island you visit.  It's also a great place to 
people watch and to see how others spend their money.  Aside from 
the top-notch golf courses, beautiful undersea life encountered 
while scuba diving or snorkeling, you'll encounter even more 
reality-defying stuff if you visit places where the rich and 
famous hang out.  That one dude flying in on his personal Boeing 
757 was a dead giveaway that I might have stumbled onto what will 
be known as the second Babylon in a few thousand years.

The astro-dollars spent on extravagance are beyond belief.  Can 
you imagine an ocean front lot - yes, LOT; no sticks, rocks, or 
plumbing - selling for $9.5 million?  Or how about combining three 
already expensive lots, which possess ocean views but lack ocean 
frontage, for a total of $21 million?  One of technology's elites 
strolled into town and recently did just that.  And he's not the 
only one.  Actresses and rock stars round out the balance of 
equally unbelievable stories.    If not in the stock market, the 
bubble is alive and well in resort real estate.  I guess it's 
pocket change to these folks.

Frankly, I could have stayed there another week. . .no wait, 
another month. . .OK, another year.  But then I'd have to figure 
out a way to pay the bill for all the decadence, which was plenty 
- even after just one week.  Aside from the occasional bout of 
motion sickness caused by unfortunately rough seas during a few 
boat outings, it was, as I noted above, surreal.  Neat!

But this isn't a book report on Buzz's Thanksgiving with the 
family.  We all know the feeling where the vacation was so great 
that all we do upon our return is daydream about the great time we 
had.  It's tough to get back into the swing of things; we can't 
get the lead out; work takes a distant second.

In fact, as you might imagine from your own experience of taking 
in surreal surroundings for almost a week, trading isn't going to 
be at the top of anyone's list of things on which to refocus.  
Personally, snapping out of "aloha time" has been one of the most 
difficult things I've had to do this week.  Focus has been out the 
window.

Focus?  What's that?  Oh yeah, FOCUS!  Ahem, yes, focus.  That is 
the key.  Don't get me wrong.  I like to play catch-up on the 
financial news by reading the business section of the newspaper, 
or take in a few business television segments, and even catch the 
2-minute business report on local radio.  Heck, we can even open 
up the charts.  That's easy.  But when it comes to the business of 
trading, my head is not there.  It's somewhere else.  I'll find 
anything else to do but face the business of trading.  Yes, 
sometimes we decompress a bit too much.  Right now I'm suffering 
from excess vacation, or more correctly stated, vacation excess.

Now for that "focus" part.  Sure, we can do it.  We can focus on 
it just like we focused on our golf swing.  But it's hard work, 
and we fudge along evading the reality that we just don't want to.  
"Just don't want to" is the real reason we are stuck.  

Let's examine that for a minute by revisiting an old theme.  
Ready?  Here it is:  People do things to derive pleasure or avoid 
pain.  That was pretty simple.  And if you acknowledge that all of 
our actions boil down to those simple motivators, it becomes clear 
that "we just don't want to" is really avoiding something that we 
perceive to be painful in some way.  Step back for a minute.  Is 
making money by trading really painful?  Heck no!  When we are in 
the zone, we love it.  And executed correctly, we can't get 
enough.  That's the pleasure.  But I'll be the first to admit that 
I'll avoid the pain first and seek the pleasure second.  Avoiding 
takes less effort.

But how do we recapture the "want to" when we are currently trying 
to avoid the perceived pain of the actions that get us the results 
we want?  The answer is - and get this if nothing else from the 
article - focus on the GOAL.  Somewhere along the line (probably 
Anthony Robbins), I learned that, "If you have a big enough "why", 
the "how" will take care of itself."  By that I mean that if we 
focus on our GOALS with special emphasis on WHY those goals are 
important, we internalize it and attach feeling to it.  

We think of things like the happiness on the kid's face when they 
meet Mickey or Minnie Mouse for the first time, not that we bought 
a trip to Disneyland.  We think of the euphoria we'd feel pressing 
on the accelerator of our new "super car", not that we just bought 
a new Porsche.  We think of the security we feel by having a 
year's worth of living expenses in the bank, come thick or thin.  
By internalizing it, we attach good feelings to certain outcomes 
that we desire.  

It 's all about attaching the good feelings to the goals, which 
creates the desire.  Desire is the result of attaching good 
felling to the big enough "WHY".  Did you get that?  An 
internalized, big enough "WHY" creates the desire to move forward.  
And so it is with trading too.  

Just today, I spent an intense amount of time focusing on the 
"why" and reattaching good feelings to trading.  For me, the big 
enough "why" is my nearly nine-year-old daughter.  I'm going off 
on a tangent here to try to explain the goal so that it provides a 
good roadmap for the thinking/feeling that goes into my actions.  
This my deal - only an example.  It doesn't have to be yours, but 
everyone needs to have a have a "why" in some way.

It's like this - when I was 30 years old and still deeply 
entrenched in the commercial real estate business, an extremely 
successful retailer-client of mine for whom I had a lot of respect 
told me that, "It will never matter how big your house is, where 
you vacation, what kind of car you drive, or how much money is in 
your bank account [I naturally frowned, for that was my reason for 
existence back then].  What matters is that five generations and 
beyond from now, the world will be a better place because you 
instilled good character and values in your kids, as you hope they 
will to theirs, and so on.  While you pass along your genes, your 
character now determines [if only in a small way] the fate of the 
world generations from now.  Be the father that you would want for 
yourself".  

Uh, OK, that was pretty heavy.  But I got his message loud and 
clear.  While it seemed superficial at first, I dwelled on that - 
unintentionally for the first two days, I might add - every hour 
of ever day (and night) for what must have been two weeks.  But it 
sunk in and permeated every aspect of my thinking.  For what were 
primal reasons, which some would consider arrogant - preserving of 
the species and all that - I began to act as though some small, 
but perhaps important part of the future, rested on my shoulders.  
No, I wasn't going to save the world.  But I sure as heck would do 
my part to make sure that I did everything in my power to raise a 
daughter and nurture any ability SHE might have to change the 
world with hope that she would, in turn, do the same, and so on.

Talk about wearing it on my sleeve!  How is that related to 
trading?  Pretty simple for me actually.  She is the "why" for 
most of my big decisions, including the decision to trade.  So in 
comparison, the distraction of my daydreams on Thanksgiving 
vacation is really trivial when I remind myself of WHY I trade.  I 
do it so I can spend time with my daughter, which I hope will help 
to create a few "Kodak moments" for us to remember along the way, 
and to make the world slightly better many years form now.  
Suddenly, trading is no longer something to be avoided, but to be 
embraced!  "Just do it!" is a whole lot easier.  No longer 
painful, trading is a pleasure for all the good it can bring to 
the world!  At least that's how I twist it in my mind to get re-
motivated.  How's that for a 180-degree turn?

Sure, it's a stupid brain trick, but it works!  Also, while I 
haven't spent any time on it today, a focus on the big enough 
"why" can almost instantly get you through any bouts of avoiding 
seemingly difficult tasks.  If we can focus on our goals and 
attach enough meaning to them - meaning that we give them - we can 
change any behavior within ourselves that we want.  With a big 
enough "why", working through any challenge isn't tough at all.  

As for trading, it isn't about getting all our facts down before 
we enter a trade.  It's about the frame of mind from which we re-
enter the trading world that determines our outcome.

Until next time, make a great week for yourselves!

Buzz


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