Ken Trester

Bargain Hunters Beware

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Since Nov. 7, the Dow has lost nearly 4.5% of its value, but we've banked triple-digit winners in two weeks or less.

In fact, just a few weeks ago, I recommended a Texas Instruments (TXN) put option to my Fast Options Profits subscribers. We bought our puts when TXN traded at $17 and change, nearly a 50% discount from its price at the beginning of the year.

Sure, the stock looked cheap at $17, but it's now hovering around $14. Does that make buying it now really cheap … or just a bad idea?

So, while long TXN investors lost about 15%, we made 130% in just 14 days, thanks to our put option. If that doesn't make the case for staying away from cheap stocks, I don't know what will.

Pay Attention to the 'Dirt' Part of Dirt Cheap

The popular bullish argument is that stocks are "cheap." But are they really?

By recent historical standards, they probably are. But recent history is not the best guide.

We believe we are in a paradigm shift in which valuations used during the past 10 years or more are no longer valid.

Leverage is being drastically curtailed, and China is no longer in a pre-Olympics building boom. So, two key drivers of growth during the past decade are no longer present.

As long as sentiment remains on the negative side -- and except for some "long-only" institutional investors, that is where sentiment currently is -- option buyers should continue to lean toward buying puts, which is one of the most effective ways to make money on the downside.

To lean more about Ken Trester, read his bio.