by Ken Trester 06/26/08
After you've been trading stocks and options for as long as I have -- which is some four decades -- you come to recognize trends in stocks. You get to see how they behave at certain times of the year, and you learn whether or not they stay strong when the broader market enters a period of weakness.
I'm a statistics guy at heart. I've perfected my own proprietary system throughout the years -- I call it the Power-Plus Profit Tracker -- to run an exhaustive battery of data analysis on stocks every week to see where they're heading in the coming weeks.
From there, I select the stocks with the most momentum -- to the upside or downside; it doesn't matter, just as long as they're on the move! -- and pore over their option chains.
If the options look overvalued (that is, they don't have much room in them to make a move), I immediately disqualify them from my short list of potential trades to recommend to my subscribers. Unless there's that magical combination of a low price and big potential movement, I'm not interested in them!
You may be wondering what stocks I'm looking at, at any given time. All of them, really, but I give special emphasis to those that are breaking out of tight trading ranges. If a stock has seemingly been stuck for a while but is starting to climb to new levels, it's worth a second or even a third glance from me.
Whether stocks have been quiet for a while or even if they're trading maniacally, something else that I look for is how the stock trades around earnings and other events like new product releases and industry conferences.
Seasonality is a historical indicator that gives you a pretty good idea of how a stock is going to trade in the next quarter or two. And if a retail stock tends to go up before the holiday shopping season, for example, it usually holds true that its options will be making a move right along with it.
Historical information is only part of the story for a stock, particularly when it comes to volatility. Seasonality shows us when shares typically pick up in volume and momentum throughout the calendar year, but volatility can crop up quite unexpectedly, too.
Surprise volatility can happen when a stock receives an analyst upgrade/downgrade or when a major hedge fund or institutional trading group decides to pile into/out of a stock, which oftentimes leads many individual traders to follow suit. The trick is to be positioned before such a move takes place, and the payoff can be incredible when it happens!
Bottom line: Stocks in motion equal options in motion. If you're new at this or if you're ready to start trading options right, the ride may be a little quicker than you're accustomed to with straight stock investing. But if you're ready to see what all the fuss -- and fun -- is about, then establish an online trading account (if you haven't already) or set up a paper-trading account, and get prepared for the ride of your life.
Picking stocks and funds to add to your retirement account might be time-consuming, frustrating and even a hassle, but trading options is something that you can have a lot of fun doing.
Once you've seen how quickly a trade can take off and keep on going, you'll find that the rush is addictive. Believe me, I know -- I've been doing this for decades, and plan to keep on doing it as much as I can!
If you enjoyed this article, check out Ken's "Leverage Your Options Investments" and "Generate Substantial Returns with Smart Bets."
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