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The Right Way to Pick Options

Written By Christian DeHaemer

Posted May 5, 2010

I think it’s fair to assume that you like money.

So do I.

We can buy things with it. It allows us to fantasize about what we could someday do, or own, or the faraway places we could go… It provides us with a sense of security.

But you know when I really love money? I love that you can make money — a whole lot of it — when the market burns.

I am overcome with sheer joy as the cash piles up while the sheep are bleating on TV, saying "Who could have known?"

I love it when all the spinmeisters pull out the "I told you so" and the fools who’ve been preaching doom from the elderberry bushes get their fifteen minutes of fame.

I get the same sense of satisfaction from making money while the market burns as I do when I’m driving and I merge in front of a Subaru in my bright yellow H1. When the lesbian behind the wheel gives me the finger, it just makes me happy. (This happened just this morning.)

Look, don’t get me wrong… I’m a live-and-let-live type of guy.

I like to smoke Cohibas that I brought back from Havana and drink scotch that’s old enough to drink itself. I prefer to drive a truck that chews through gas because it keeps me focused on my oil companies.

But I realize that not everyone is the same.

You might be one of those people who prefer to be wrong in a crowd than to be correct by yourself. Most people are — it’s human nature. Granted, I don’t understand that type of irrational thought… but I’ve lived long enough to know the vast majority of humans have it.

Then again, the very fact that you are reading this means you’re not among this majority; you’re not one of the herd. And perhaps, like me, you know the one sure way to make money in the stock market is to understand what the herd is thinking — and then go the other way.

Tell you what. Today, I’m feeling generous. I’m going to give you the five secrets to making money.

These five secrets led my readers — the few and proud 181 members of Crisis & Opportunity — to make $7,980 with just ten minutes of work and 13 trading days of patience.

Five Trading Secrets

Secret #1: The headlines are a rear-view mirror.

The fools on CNBC don’t want you to know this, but news doesn’t help you make money. In fact, when they get a bit too positive or negative, you should do the opposite. Check out the first three random headlines from a Google news search on "stocks" from a few weeks ago:

  • 5 Stocks to Buy in India TodayWall Street Journal, Apr 15, 2010‎
  • US Stocks Advance on Optimism About Earnings, Economy Growth BusinessWeek, ‎Apr 15, 2010‎
  • US stocks rise for a sixth day to fresh 2010 highs MarketWatch, ‎Apr 15, 2010‎

And here’s what they say today:

  • US STOCKS SNAPSHOT – Wall St opens lower on Greece debt fearsReuters, ‎26 minutes ago‎
  • Asian stocks hammered on Europe woesMarketWatch, ‎3 hours ago‎
  • US Stocks Decline on Concern European Debt Crisis Will SpreadBusinessWeek, ‎33 minutes ago‎

My point is that if you listened to the Wall Street Journal, BusinessWeek, or MarketWatch three weeks ago, you’d be sitting on losses.

That’s ok. It doesn’t bother me… My readers are sitting on 133% gains from QQQQ puts I recommended on April 16.

Buy fear and sell greed. It’s a simple system and it works.

Secret #2: Trends run three to five days before correcting.

When I put out my bet against the market, stocks had gone up for a month and a half. The markets were way overdue for some profit taking.




Secret #3: Know your resistance and support levels.

There is massive resistance on the NASDAQ going back 12 years. Resistance is easy to find; you just draw a line across the top of the last sell-off.

You can define resistance as the price level at which selling is thought to be strong enough to prevent the price from rising further. In this case, the QQQQ’s resistance is at $50.65, set most recently in May 2008.

It works because 60% of all trades are computer programs, and many set buys and sells at resistance and support lines.

Secret #4: Keep an eye on the insiders.

Two weeks ago, the cash injected into the market by insiders started to dry up.

Insiders sold $15 billion in stock for the year (up to April 16th) and bought just $831 million!

Why have insiders sold, despite the fantastic earnings that came in during the first quarter?

The answer is simple: They know the second half of the year might be difficult, and they are up 70% from the bottom.

Secret #5: Pick the right option.

Many people don’t trade options because they think it’s difficult, and they get confused by Delta and Black-Scholes calculators.

They are wrong. All you need to know is which way you are betting, and how to get there.

But there are a few basic guidelines…

Never buy an option in the current month. For instance, you don’t want to own options for May right now.

If you are buying a put — a bet that the stock will go down — pick an option price just above the support level. In the case of QQQQ, support was at 46; thus, I recommended buying puts with a strike price of 47.

Pick options with a lot of open trades. You don’t want to own the option that only traded five contracts. Liquidity is good.

And lastly, don’t be greedy. If you have a nice profit, take it.

And that’s how you can make $7,980 in ten minutes of work. This is all based on $6,000 invested at $0.60 and sold at $1.45.

If you’d like to be on the side that’s making money in this market, stop playing around and pull the trigger.

Start making money now.  


 christian dehaemer

Christian DeHaemer

Editor, Wealth Daily
Founder and Editor, Crisis & Opportunity

P.S. Tomorrow, my colleague Keith Kohl will be publishing his latest research on the Cardium oil formation. Trust me, you haven’t heard about this latest oil play — and you won’t want to be the last to know about it. Be on the lookout for it later this week in your inbox.