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Taking Advantage of the Market Bounce

March 12, 2009

Dear Fellow Options Traders,

At Options Trader, our No. 1 goal is to help you to make big money in the options markets. Our primary methodology is following the big money -- the institutional dollars -- into highly leveraged, yet under-the-radar, trading opportunities.

While the market is reaching historically oversold levels, the institutional money is positioning itself to get paid if the market bounces. And when they get their payout, so do we!

The strategy we've followed in the past couple of weeks is selling out-of-the-money puts to pay for upside calls that we purchase. Buying call options and selling puts are both bullish strategies, but they have different risk-versus-reward setups, so we evaluate very carefully before deciding which strategy to use.

Technically, you can do either strategy. If we recommend selling a put, you could theoretically buy the call instead. But we strongly encourage you to follow our recommendations to a "T."

One reason is that you will be able to follow our Open Positions list to see how your trade is performing at all times. Another reason is that we are choosing the best way to make the biggest bang for your buck.

Essentially, the idea behind selling puts is to get paid to enter a trade -- that is, we collect our premium at the moment we initiate the trade, and we wait for the option value to drop to (or near) zero. This allows us to keep the money we banked. Or, if we want to close our short positions before they expire, we "buy to close" them at a significantly cheaper price and, thus, continue pocketing the bulk of our profits.

If the underlying stock, index or Exchange-Traded Fund trades up when we've got a bullish bet on the table, there are no limits on how much you can make. With the price of options today, you get paid well to sell puts and, if you end up being "put" the stock (which is always a risk when selling puts to open), it should be at an attractive entry price.

Even though this trading style may not be as simple as buying a put or a call, this way you get paid to enter the trade and you can still pocket some of the largest option profits you have ever experienced.

Let's look at an example.

Yahoo! Inc. (YHOO)

In February, we recommended you sell the YHOO March 10 Puts (YHQOB) for 16 cents and buy the YHOO March 16 Calls (YHQCQ) for 14 cents. When you put this trade on, you received a small credit of 2 cents per contract. MSFT and YHOO have publicly discussed an interest in renewing talks about a partnership now that YHOO has a new CEO.

The last time these companies considered a partnership, YHOO was valued at $30 per share. If, perchance, an announcement occurs before expiration than involves YHOO selling above $16 per share, your upside will be measured in the thousands of percent and your dollar gain will be substantial.

As it stands today, if you had executed 10 contracts per each side of this trade, you would have collected $20 upfront and an additional $110 if you sold as of yesterday's close.

The key point is you get paid to put the trade on and your potential upside has no limit.

This morning, we introduced a new strategy in this service, to recommend that you "roll out" and "roll up" your YHOO trade. That is, we recommended closing the March 10-16 spread and recommended opening an April 11-17 spread in its place.

Specifically, we recommended you sell to open the YHOO April 11 Puts (YHQPK) for 32 cents or better and Buy the YHOO April 17 Calls (YHQDR) for 22 cents or better to collect a net credit and leave yourself open to making big money profits if a deal is consummated.

This strategy helps us to buy more time for the trade to work out in our favor (by rolling "out" to a later expiration month) and gives us more leverage (by rolling "up" to a higher strike price).

What other trades have we recommended that are like the YHOO trade that you can buy now?

Alcon Inc. (ACL)

Our Alcon and Perrigo trades are just like the YHOO trade.

On March 4, we recommended you sell the ACL May 70 Puts (NOZQN) for $3.10 and buy the ACL May 105 Calls (ACLEA) for 45 cents. On a 10-contract trade, you would have collected $2,650 when you opened the position on March 4, and if you closed the position as of yesterday's close, you would collect another $1,200.

But it could be even better. ACL is a takeover target that analysts expect could be acquired for $125 or more per share. On a 10-contract trade, with an acquisition of the company for $125 per share before the May expiration, you would receive roughly $20,000 on an investment the market paid you to put on.

Although ACL has moved somewhat higher, you can put this trade on today and still collect a credit and have the same upside exposure.

Perrigo (PRGO)

On March 6, we recommended you sell the PRGO May 17.50 Puts (IQPQW) for 95 cents and buy the PRGO May 25 Calls (IQPEE) for 30 cents. Again, we collected money upfront to get into this trade.

We are seeing consumers shift to lower-priced goods whether it be McDonald's, Wal-Mart or store brands. And this company is the leading "store-brand" drug company. What this means is that they sell drugs for 30% below branded-drug prices.

This is a "what if the market bounces" type play -- a great company beaten down to a low valuation. If the market bounces and this stock goes back to where it was trading in January of this year, you will have made about $5,000 on those upside calls if you had purchased 10 contracts. Not to sound like a broken record, but remember you were paid to put on this position.

One last trade we really like that we recommend you look at right now.

Novell Inc. (NOVL)

On Feb. 19, we recommended you sell the NOVL Jan 2.50 Puts (WNNMZ) and buy the NOVL Jan 5 Calls (WNNAA). When we originally recommended this trade, it was for a small debit. Today, you can put this trade on and collect a credit. We really like this trade now.

NOVL has $3 per share in cash and is cash-flow-positive. The stock is selling slightly above its cash value. What if the economy starts to turn around in the second half of this year and quality companies selling at one times cash value begin to lift? Then if this stock goes above $5 sometime this year, the gains should be big.

In this market, we love this bull-credit spread strategy of getting paid up front to enter trades with some really attractive upside potential without capping this upside as can happen with some spread trading strategies.

And when you can do this in some very solid companies that should be worth owning over the intermediate term should the prices temporarily move against us, we hope you agree that the slight extra complication of executing these spread trades is well-worth the effort.

So please take advantage of the new Yahoo! trade and our reiteration of the Alcon trade now, and the additional credit-spread trades we anticipate bringing to you over the coming weeks.

Have a great day trading.



Nick Atkeson and Andrew Houghton
Editors
Options Trader