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Earning Our Trading Stripes

May 17, 2006

Dear Fellow Options Trader,

"There are no gains without pains." -- Benjamin Franklin

I'll bet you would have expected Arnold Schwarzenegger or some other bodybuilder-type to have said that quote, but growing pains, emotional challenges and other stumbling blocks can sometimes hurt just as much as -- if not more than -- physical exertion.

I doubt Ben Franklin pumped much iron, but he did understand a thing or two about work and pain and that both are part-and-parcel of learning. Or as the "Rogue Warrior" himself, Dick Marcinko -- whose achievements include serving as the first commanding officer and founder of two of the military's premier counterterrorist units, not to mention being decorated for his work in a number of highly classified operations as a Navy SEAL -- once said, "The more you sweat in training, the less you bleed on the battlefield."

Why all the references to bleeding and pain? Well, because despite some spectacular winners, our last couple trades haven't exactly been bell-ringers. I want to take the opportunity to talk to you today about those trades and to let you know that while I celebrate the winners right alongside you, I also hurt just as much over the ones that had so much potential but didn't manage to rise to the occasion.

CISCO

We thought we had the goods on Cisco (CSCO), as the stock ran up nicely into its quarterly report. But then it flamed out spectacularly when John Chambers, CEO of the networking kingpin, lowered guidance for the next quarter. That took our 35-cent investment (that had moved up to 50 cents) right back into the dumpster -- down at 10 cents on the bid and 15 cents on the offer.

While that's bloody, it's hardly bleeding. Luckily, as these are June expirations, we've got until the third Friday in June for CSCO to mount any sort of comeback.

EXPEDIA

Next, our HeatSeeker picked up unusual buying patterns in Expedia (EXPE), which just days ahead of its earnings gave off signals that we read as very bullish and we couldn't have been more wrong. We dived in with the EXPE June 20-22.50 bull-call spread for 70 cents and watched that evaporate like the Cubbies' prospects. Not fun.

The reason I bring up the painful memories of both is that the same work that led us into some terrific successes -- ITT Industries (an 82.61% gain), American Axle (a 137.50% winner), Waste Management (where we were up 63.16% and 84.21%, respectively, when we sold half the calls and sold the other half a week later) and Oracle (where we enjoyed a 122% profit on selling the first half of the position and another 200% win with the other half) -- also gave us great hope for CSCO and EXPE.

I've re-examined whether we did anything different with the latter two names, but I confirmed that we followed our usual protocol, only this time we were wrong about those companies' prospects. I'm not happy about it, but it does happen.

We're reloading right now, confident that this week's trade will be an improvement, but keeping in mind that no system -- HeatSeeker, stochastic analysis or any other kind of market forecasting method -- is perfect. However, our goal is indeed perfection, as this competitive edge is what got us into those big winners, so we'll keep refining our techniques and working to produce superior results and hope that this bleeding will not have been in vain.

TRADE OF THE WEEK UPDATE

Folks, I'm having a great time out here at the Las Vegas Money Show -- I truly enjoy the chance to meet with subscribers and share trading ideas.

As always, I am keeping on my toes and checking in on unusual activity in the options markets between sessions, and my eyes are peeled for a great trade to recommend. It won't come today, but know that when I find something that looks too good to pass up, you'll be the first to know. I'll also talk about our May expirations.

Good luck trading and remember -- pigs get fat, but hogs get slaughtered, so don't be a hog!


Jon "Dr. J." Najarian
Editor, ChangeWave Options Trader