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Case in point. With my GM puts, although they were up at one point 35% (my target was a 50% gain), I ended up selling out at a 40% loss when I got stopped out (normally I’ll set my stop-losses on options anywhere from 25% to 40%). Had in not been for private equity firm Cerberus acquiring DaimlerChrysler, I believe I would have hit my 50% gain as news of that acquisition caused an about-face in the price behavior of GM shares. Now while I still believe GM is a terrible company run by incapable management, the people that influence the sheep-herd do not, and that is all that counts in the short-term game that is the option game. Again, knowing something and having the share price of a company act accordingly on a short-term basis does not always happen due to the irrational thinking that permeates the investment industry. No doubt what helped turn around GM shares is the fact that it was upgraded by several analysts after the DaimlerChrysler deal.

Most analysts are among the most incompetent of all industry professionals yet the sheep-herd follows their advice as if they were oracles. Every week you will see a company get upgraded by an analyst after their earnings quadruple or downgraded by an analyst when their earnings tank. Well that’s something a six-year old can do but still millions of the sheep herd follow analysts like robots. Upgraded? I’ll buy, downgraded? I’ll sell is the typical sheep herd thought process. Occasionally, analysts will upgrade a company or downgrade a company in the face of all logic and contrary to all evidence. And still, the sheep herd will follow. Upon the Chrysler news, Lehman Brothers upgraded GM because of “an increased possibility of GM taking a tougher stance in upcoming union negotiations.” Lehman Brothers further “noted that GM’s disappointing quarterly results may lead to a tougher negotiating stance.”

When I read that, my response was ??? So the fact that a company’s awful situation is now a little less awful is a reason to upgrade the company? I guess these highly-paid analysts took a different logic class than I did. In any event, some of you may ask, “If you really think GM is such a terrible company, why not hold on to your puts and hope that the bump in price was temporary and that the downward trend will resume shortly?” I didn’t because that would violate the number one rule when it comes to investing in options, and that is, don’t let hope ever influence decisions. Because so much irrational behavior influences stocks in the short term (and consequently option prices), you should always adhere to pre-determined price points for exiting gains as well as losses. Occasionally, as in the case of my BIDU options, doing so will cause you to leave further gains on the table, but when an option has turned and has started to run away from you, more often than not, doing so will also prevent a loss from becoming an even greater loss.

Technorati Tags: investment strategies, options, general motors

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J.S. Kim is the Founder and Managing Director of SmartKnowledgeU™, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.

As I said now, the historical pattern of Marvel shares has been well publicized, even being written up in major financial magazines such as Forbes. And if it appears in Forbes, that is about as mainstream as you can get. Time and time again, I advocate that the best way to make money (which I teach people how to do in my online revolutionary investment education course) is to uncover assets and stocks ignored by the masses that present phenomenal low risk- high reward setups. While the Marvel put options presented a low risk-high reward set up (just read my analysis in previous blogs), it hardly presented an “ignored” play. Unlike BIDU, where hardly anyone was engaging in BIDU calls, everyone and their grandmother seemed to know about these Marvel puts and the interest in them has been huge.

The market makers (option traders on the floor) can see this, and often, they try to turn the tide and shake people out of the market by doing so. So far, open volume on June puts has been very light while interest remains intensely high. With volume so light but interest so high, the market makers for these options have been able to control prices and are definitely trying to shake people out of the play. After all, who is going to take a loss on a position that should be showing a profit? When is the last time you saw a put option decrease sharply in price when its underlying stock dropped by almost 3% as happened with these Marvel Puts yesterday?
Just as with stocks, prices turn on volume, not interest. 100 million people can be interested in a stock, but if only 100 actually buy, the stock’s share price will not move much. The same is true of options. So for now, everyone in Marvel Puts is waiting for history to repeat itself and for the share price to tank, no one is closing out open positions, AND this is a very rare case where the market makers for these options all know what every investor who bought this option is thinking. Thus, they have been able to successfully squeeze the prices on these options. In fact, as I mentioned, they may even be engaging in trades to purposely manipulate the prices of these options as well just to shake investors out of their positions. Option traders that work on the floor are similar to hedge fund managers. They know almost nothing about the economy, the stock market, and they don’t care. They just play trends, and this is one trend that they spotted from miles away. Still, if share prices continue to fall, the options traders can’t keep up this game forever and they can’t fight a turning tide, so I hope that this is what eventually happens.

In this case, it’s just going to take more downward selling pressure on MVL stock and a heavy volume trading day in these options to get them turned around. I’d hate to have to execute a stop loss on this trade when it should, in theory, be in the black already. But then again, maybe this is a good lesson for me not to break my own rules of never purchasing anything (options included) that the thundering sheep herd already knows about despite how promising the setup appears to be.

__________________

J.S. Kim is the founder and Managing Director of SmartKnowledgeU™, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.

In pre-market trading, the shares are trading all over the place. However, the key will be not necessarily how it opens up and how it even trades during the course of the day but where it ends up closing. Hopefully we can get some sustained downward pressure in the general market index that can dampen some of the enthusiasm for the great earnings news. If the shares can’t rally on such good news, and we can manage not to get stopped out today, then obviously the outlook for these puts will be bright. Today, I think I’ll just keep a mental stop loss on this position and watch it closely.

7 May, 2007- I decided to re-write my article about Marvel Puts this week before the market opens tomorrow because there is an important lesson in my reasons for buying the Marvel June 25 Puts last week even if this play doesn’t turn out to be successful. And though I normally don’t blog about options as I only utilize options to supplement income every now and then, I’m writing some more today because of the lesson this particular case has to impart about building wealth with stocks.

To summarize why this put option was even on my table, Marvel stock had a history of running up in share price before both of its last two Spiderman premieres and then taking a hard fall immediately after Spiderman 1 and Spiderman 2 had premiered. This pattern alone made Marvel put options a compelling play but NOT a compelling enough buy unless some other things first fell into place. Over the past week or so they fell into place. My rationale for entering this position last week as is follows:

(1) Many retail investors in the U.S. were waiting for Spiderman to open in the U.S. and for reports of U.S. box office receipts before deciding whether or not to buy puts but this was entirely unnecessary as Spiderman 3 had already opened months ago in Australia (it was already playing in theaters in February when I was in Australia) and premiered in Tokyo on April 15^th. In fact, in anticipation of its Tokyo premiere, Marvel shares spiked $1.50 a share higher just days prior.

(2) Since that time, Spiderman 3 has broken every box office record for single-day receipts all across Asia. According to the BBC,” in Japan its opening-day sales of 415 million yen (£1.73m) ranked as the biggest for a Tuesday, according to Sony. Films in Japan normally open on a Saturday.

In South Korea and Hong Kong, it set new marks for the biggest opening day, taking in 3.2bn won (£1.7m) and $HK7.5m (£481,000), respectively. Sales in Singapore, the Philippines, Malaysia and Thailand were the highest for any single day, opening or otherwise. Taiwan sales were the biggest for any weekday.” This story was reported on Wednesday of last week.

However, I am sure that many American investors couldn’t decide what to do about Marvel until weekend U.S. box office receipts were finally reported yesterday. When it comes to investing, if it doesn’t happen in the U.S. or is not reported in the U.S., then to many Americans, it never happened at all. I say this somewhat facetiously but there is a serious undercurrent to this statement as well. I know that this doesn’t apply just to Americans but to people everywhere across the world. People have such amazing short-sightedness when it comes to investing that even today, I am still amazed. When I researched newsletters when developing my SmartKnowledgeU business model, I discovered time and time again that the “mark of death” for newsletters in the U.S. was to discuss foreign stocks traded outside of the U.S. Americans just weren’t interested in buying foreign stocks even though the bulk of foreign stocks worth buying can still be purchased on American exchanges. But you see this same pattern everywhere. Japanese investors invest primarily in Japanese and U.S. markets, Chinese investors invest primarily in Chinese and U.S. markets, Brazilian investors invest primarily in Brazilian and U.S. markets and on and on (the U.S. markets, due to its prominence in financial media reporting, will always remain in the mix of retail investor considerations. However try to get any retail investor to dump 30% of their portfolio in any foreign market other than the U.S. and it’s like pulling teeth).

Just as the majority of retail investors ignore the majority of the world’s markets, those sitting on the fence about Marvel refused to take action last week simply because they couldn’t incorporate already existing news into their decision merely because this news had been reported in foreign markets and they had no idea that it existed. As I said before ,to most investors, if the news is not reported in their domestic major media, it’s like it never happened at all. Not only is that ridiculous but it is also one of the top reasons why the retail investor will always fail to build wealth in stock markets.

But before I continue, let’s finish the reasons why I decided that Marvel puts presented a compelling enough play to enter last week.

(3) If you look at the price chart action, after Marvel shares spiked on the anticipation of a huge Tokyo opening, the huge Tokyo opening happened, but yet Marvel shares failed to go any higher. Not only that, despite record openings in almost every major Asian market, Marvel shares still failed to break significantly higher above a ceiling of about $30 except for April 30th when it reached $30.22 a share. However, even that day, Marvel still closed below $30 at $29.53.

(4) It didn’t take much foresight to predict, based upon Asian box office receipts, record earnings when Spiderman 3 premiered in the U.S. The chances of Spiderman 3 flopping in the U.S. was about zero. Just as Marvel shares spiked higher in anticipation of the Tokyo opening, there should have been an even greater spike in its price in anticipation for a much surer thing, a wildly successful U.S. premiere. However, this didn’t happen. We did experience a fairly decent rally after a down day in Marvel share price before the U.S. premiere, but the important detail to note was that its share price still failed to significantly break above $30 a share.

Given findings (3) and (4), I concluded that if Marvel could not break significantly higher above $30 a share given record earnings of Spiderman all across Asia and Australia and even in anticipation of record U.S. box office receipts, then it may have found its short-term ceiling in share price. Therefore, buying puts last week was not a bad risk given the potential reward.

That said, this is still not nearly a strong play in my mind as the BIDU calls and GM puts I previously wrote about. There are no technical ceilings of resistance in play such as a 50-day or 200-day SMA at $30 a share, and there’s always a possibility it could still go wrong. Yesterday during market hours, there were at least two solid hours, if not longer, where Marvel June 25 puts came down to the same price I paid last week at $0.40 a contract. Though this play is much more speculative than the BIDU calls or GM puts, much of its speculative nature is mitigated by the reasons I outlined above, and though it is rare that I enter a play of a more speculative nature, in this case, I decided to give it a go.

I’m not saying that this position will turn out to be a huge winner, and I will always employ strict stop loss points. Obviously I believe the chances it will turn out positive are better than 50/50; otherwise I wouldn’t have entered it last week. However, the greater reason why I decided to re-write this entry when it got wiped out yesterday was to emphasize a very important fact that severely hurts the ability of the retail investor to build wealth. No matter how this play turns out, the fact is the information was there by mid-week to make a call on whether to enter this one or sit it out. It was absolutely unnecessary to wait until this week to make your decision.

It is quite apparent that investors still overwhelmingly overlook any information about foreign markets that can critically improve their decision making process. Furthermore, millions of investors today flat out just ignore stocks if they are not traded in their domestic markets. Because a great deal, if not most of the best performing stocks in the world will always reside outside of your domestic market, this attitude is self-defeating.. The time to adjust one’s perspective to a more global one was not even today, but over a decade ago. If you don’t adjust to a more global thought process, you can be 100% certain of only one thing – you will continue to leave enormous gains on the table.

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J.S. Kim is the founder and Managing Director of SmartKnowledgeU™, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield high double-digit, triple-digit, and greater annual returns.

Let’s just say that this play is not nearly as low risk as the BIDU puts and the GM calls I discussed earlier, and that though those two option plays were 100% my idea, that the idea for this play came from numerous stories in several financial publications about the historical patterns of Marvel stock behavior. However, the rationale for entering this play was 100% mine, and I have yet to see anyone discuss the reasons I have for making this play. Of course, I just wrote all the reasons but my entire post was wiped out when I went to post this article. Perhaps, when I’m not so annoyed anymore, I’ll repost my original article that I finished this morning at market opening. However, right now, I’m way too annoyed. Furthermore, trading volume right now is still way too light to determine if weekend box office receipts of Spiderman will cause any significant price appreciation in this stock today. Perhaps if by the end of the day this is still worth talking about and I didn’t get stopped out of my positions, I’ll rewrite this blog entry.

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J.S. Kim is the founder and Managing Director of SmartKnowledgeU™, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.

This just in…GM Reports Earnings. Last week, I wrote this about GM puts:

“My thinking behind making this transaction was as follows. I admittedly missed out on some potential huge gains by not playing put options on subprime lenders during the subprime lending fallout. However, I don’t believe that the fallout is yet over,and accordingly, I searched for ways to still capitalize on the continuing fallout. GM was a company with four factors working against them.”

(1) significant subprime lending exposure;
(2) cloudy, convoluted direction and statements from management (never a positive thing);
(3) a business on the downturn; and
(4) a clearly formed bearish wedge in the midst of a downtrend.

Though I couldn’t figure out the reason behind the single day rallies behind GM’s stock, sometimes the market acts irrationally and there is nothing you can do to stem irrational behavior, especially in the short term. Sometimes, it’s as simple as traders trying to manipulate rallies for the mere purpose of shaking the shorts (those shorting the stock) out of their position. So had GM rallied today and hit my stop loss points even though everything tells me GM was heading for a fall, I still would not have abandoned my discipline. However, just as I suspected, in a story out of New York, this was reported minutes ago:

“General Motors Corp Thursday reported a sharp contraction in quarterly profit that was far below analysts’ estimates, due in large part to its financial services unit’s exposure to the non-prime sector of the residential mortgage business.”

In pre-market trading, GM is sharply down $0.84, or 2.59%. So given that the stock shouldn’t rally on such dismal earnings, it appears that we will be able to hold on to these options for the next week or so and see what develops.

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J.S. Kim is the founder and Managing Director of SmartKnowledgeU™, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.

So now that that issue is cleared up, let’s take a look at GM’s behavior. As you can see from the chart above, GM’s 50-day SMA is right on the verge of crossing its 200 day SMA in a downward trend. If this happens, this is a very bearish signal and on top of our 50%, 85% and 400% gains on BIDU May 100 calls that we told you about right here, we may end up with very positive gains on our GM June 30 Puts as they never hit our 40% stop loss position even with the strong upsurge in share price that you can see on the chart above two days ago when it clearly broke about the 50-day SMA. All in all, I think we’ll get that break to the downside today and hopefully it will give us the sustained momentum to the downside that I’ve been looking for. Of course, should the pattern somehow reverse to the upside, I’ll keep my same stop loss in place.

By the way, I’ve reverted back to using the charts above in my blog posts as they give a static view of the chart on the day I post. Though the date stamp of April 25th is on the original post about BIDU calls and GM puts, with the charts I employed on that blog entry, they continue to update every day and it’s a little confusing as to what the charts looked like on April 25th at the time I posted the blog.

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J.S. Kim is the founder and Managing Director of SmartKnowledgeU™, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.