Today, I’m going to reveal the biggest secret of them all. And perhaps the one and only reason you should start trading options right now – if you like making a lot of money, fast! It’s a simple strategy that you can use to squeeze penny stock sized gains out of even the biggest blue chips.

It’s why market legend Paul Sarnoff (Steve’s dad) said options are: “The best… Perhaps on the only way to get rich very quickly.”

I’m talking about the secret of “Super-Leverage.”

In a nutshell, “Super-Leverage” allows you to turn a small upfront investment into a potentially life changing payday.

Let me show you how…

When you buy an options contract you are buying the right (not the obligation) to buy 100 underlying shares at a specific price. But, you don’t pay anywhere near what those 100 shares might cost on the open market.

For example:

Steve recommended buying Navistar January $20 calls for $120. At the time, the shares were trading for $16.92.

His charts couldn’t have been more on the money. By the end of that week, the shares were up to $19.59 — a 16% jump.  When it was all over, by the first week of December, the shares topped out at $29.55 a share.  And the options he had recommended were worth $1,150 — an incredible jump of 858%.

You could have bought 10 options for $1,200, and less than two months later, you could have cashed out with $10,300!

That’s the power of “Super-Leverage.”

Can you see why options and “Super-Leverage” can make you rich, quick? Limited risk with unlimited gain is the perfect recipe for explosive profit.

And that’s why, especially now, I urge you to add options to your trading arsenal if you haven’t already. With the market the way it is now, “Super-Leverage” allows you to get in on the action without, gambling your life savings.

Before we wrap up I have one last thing to share. Or rather, options expert Steve Sarnoff does… It’s a FREE ($47 value) report fresh off the press!

It’s called “The Lazy Way To Pick Profitable Options Trades,” and you can download a copy instantly simply by clicking here. (You don’t have to give your e-mail address or anything, just click the link to get the report straight away.)

Cheers,
Jonas Elmerraji

October 16, 2009

Is This the Only Way to “Get Rich Quick”? was originally featured in the Penny Sleuth.

I firmly believe it is my job to be as blunt about that as possible. The potential rewards of options are very tempting, and anyone who forgets about the potential downsides is toast.

Unfortunately, those stark warnings also scare away people who could benefit from options. People who have built solid portfolios… and can easily afford to speculate a bit. They’re the complete opposite of traders who blindly rush in focused on the gains. Instead, they only see the potential losses…

That’s why I offer a simple suggestion — try options trading for yourself. With just a few minutes a day, you can learn how profitable options can be, without risking a single cent.

In the old days — as little as a decade ago — the best way to do this was by paper trading. As the name suggests, it doesn’t involve any real money… or even a broker. Instead, you simply chose an option and kept track of it each day. With a few simple calculations, you could see how you would have done if you actually made the trade.

There are still plenty of good things to say about paper trading. For one thing, it forces you to work — tracking down prices and calculating potential profits. If you’re going to put that much time into an activity, you might be more inspired to do well. It’s a good trait to have if you ever decide to trade for real.

“Virtual Trading” Is the Road to Real Profits

Still, the pen-and-paper method is a little outdated now. Today, lots of websites offer “virtual trading” — free computer programs that let you practice trading without putting any money at stake. Most require you set up an account… not an actual brokerage account, but a membership account — containing basic information like your age and interests.

When you sign up, you’ll get a username and password to get to your account. You’ll also get a small sum of virtual money to start trading with. (Beware of a site that offers to give you more fake money in exchange for real money. The point is to avoid spending ANY out-of-pocket cash.)

I must be honest, I haven’t signed up for many virtual trading accounts — so I can’t honestly compare and contrast them all for you. However, a colleague recently opened up a mock account on the Chicago Board Options Exchange (offered by Options Monster)… so I can tell you all about that.

The CBOE virtual trading site starts you off with virtual money that you can use to simulate trading any of the securities the CBOE tracks — from stocks to options, even some futures.

The Web site does its best to make the trading as realistic as possible. Price quotes are based on the actual prices seen on the exchange. When you wish to buy something for your virtual account, you are given the same kind of choices that you’d face if you were actually buying a real security.

You can dictate limit and stop orders. You can make day orders or standing “good to cancelled” orders. You can even choose to write options or use covered calls.

After you make your virtual order, the software does the rest. If you placed a market order, the security is added to your virtual portfolio. If you used a limit order, the program won’t place your order until the real market hits your limit price.

Everything you need to know is spelled out for you — the program even levies a virtual commission charge on each of your trades.

After that, it’s just a matter of logging in to see how you’re doing. You can also set sell orders, even trailing stops.

Programs like this can be a very useful tool for gauging how well you’d do in the options market — making any lingering fears disappear.

Of course, there are some important differences between real investing and virtual investing that you need to keep in mind.

It’s a lot easier to trade when you’re not spending real money. But virtual trading is so lifelike, you might actually lose sight of that when you really start trading. This is especially true since actual trading will involve money you can afford to lose. If you’re not careful, it will all seem like a game… and in games, taking unnecessary risks is part of the fun.

The solution is to treat your virtual account as actual money. Don’t make crazy trades just because you can. Instead, only make trades you’d make in real life. It’s not only the best way to get a feel for how you’d actual do with options, but it’s also the easiest way to transition from virtual trading to real trading.

Once you see how much money you’re missing out on by not using real money, it won’t be long before you’ll want to try your hand at actually trading options.

Picking the Right Virtual Trading Platform

Here’s a rundown of several of the free virtual options trading platforms you can sign-up for right now…

paperTRADE
This full-featured trading platform from tradeMONSTER offers newbie options investors the chance to experience options trading on a realistic trading platform.

CBOE Virtual Trade Tool
While not as robust as other trading platforms, this simple options trading tool still gets the job done without the advanced tools that some beginnings may find confusing or unnecessary.

Trade Smarter Options
This innovative binary options platform isn’t as realistic as the other offerings, but this website shines by simplifying the options investing process to limited outcomes. If you’re having trouble grasping options concepts, this site may be a good intermediary step for you.

PaperMoney
thinkorswim’s virtual trading system is simply their award winning real-time trading platform with virtual money. This system offers investors the advanced features you’d expect from a real options broker.

Sincerely,
Steve Sarnoff

October 15, 2009

Perfect Your Options Trades for Free with “Virtual Trading” was originally featured in the Penny Sleuth.

They’re the tools I’ve turned to for decades to maximize my gains as an options investor while keeping my risks tolerable. My Options Hotline readers have used these rules to maximize their options gains over the years too, and now, I’m passing them on to you…

Speculators get a bad rap. The very word conjures up pictures of some carefree playboy throwing money into any crazy investment — not really caring if they win or lose.

It’s not a flattering picture. And that’s why conservative investors shy away from anything “speculative” — lest they be called speculators, too.

Well, I’m here to tell you “speculating” isn’t a dirty word. You can be a conservative investor and still enjoy that chance at phenomenal profits that speculating can bring.

I learned that lesson from my father, Paul Sarnoff. He was one of the first people to offer an options course — introducing novice investors to the concept of Superleverage (more on that on Friday). But he also had a strong conservative streak. In fact, he was an avid fan of precious metals, advocating that they should be at the core of every solid investment portfolio. He even wrote books on gold and silver investing.

My father proved that even cautious investors can benefit from speculating. But as he always stressed — and as I still stress today — the key to being successful was to have a complete plan of action. You never, ever throw your money around casually… even if it is money you can afford to lose. And you must take steps to make sure you never get in over your head.

Of course, that’s easier said than done. That’s why my father developed six simple strategies for keeping a level head when speculating. They may sound common sense, but I’ve spent enough time in the markets to know that common sense isn’t that common when money is involved.

So, if you’re thinking of dipping your toe into the speculative markets, here are a few proven ideas to keep in mind:

1. Create a sound money-management strategy.

This one flies in the face of the conventional image of a speculator. But believe me, all consistently successful speculators start with a plan. It doesn’t have to be anything too involved — just make sure you’re clear on your objectives, and set some guidelines for yourself. Figure out your entry and exit strategy for each play, starting with how much to invest, how many open positions you plan to have, how you will monitor positions, what kind of stop-losses you will use to preserve capital, etc.

A sound money management strategy is the most important factor in successful speculation and it allows you to stay in the game.

2. Know your broker and monitor your investment.

When choosing a broker make sure to ask as many questions as necessary and that you get the appropriate answers before simply giving over your money. If you are a beginner, find out about the broker’s history and references, and speak to them frequently to establish a relationship. Make sure that either you or your broker will be constantly monitoring your investment — today’s markets are very volatile and with options the price can shoot up 30% or more in just a few hours… so it is necessary that your broker is able to see the option is performing and be able to execute an order in a timely manner, to ensure that your capital is protected.

With so many discount Internet brokers out there, it seems like more and more people aren’t doing their homework before opening an account. It’s OK to try and go it alone… unless you don’t know what you’re doing. In that case, it’s well worth the time and money to explore more experienced flesh-and-blood brokers.

And if you want a hand in selecting a broker, make sure you check out the Penny Sleuth’s Discount Broker Guide…

3. Stick with your exit strategy if a trade goes against you.

With a good money-management plan, there should never be any surprises. No matter what price your trade is at, the action you need to take should be clear.

That doesn’t mean you have to be inflexible, however. Just because an option has met your profit target, you don’t have to automatically sell. But there has to be a compelling reason to stick with the trade — something more than a feeling that the trade will continue climbing above your target price. (After all, you selected that target price for a reason.) And always use a stop-loss or a trailing stop order to make sure you’re ready for any reversal that might pop up.

For a losing trade, however, you need to be a little more harsh. Options are wasting instruments, and their value dies a little each day. Sometimes it’s better to stick to your strategy and settle for a loss than it is to wait it out and hope for a miracle. That’s money you could be plugging into another play.

4. Always, always, always, ask questions.

The Internet age is creating a generation of independent investors. But some are still too proud to admit that there are things they don’t know. In the speculation game, what you don’t know can hurt you.

If you’ve taken my advice about finding a good broker, you’ve already got a ready source of info to turn to. Dozens of Web sites also offer complete details on options trading. So there’s just no excuse for ignorance any more… and losing money because of ignorance makes even less sense.

5. Learn from your mistakes.

Find out what works for you. There will be losers along the way — but just make sure you know what you did wrong in previous trades (e.g. you set a stop loss of 15% and were stopped out too early and the option rebounded to 56% profits). Take every trade as a lesson and use it to improve as you continue trading.

6. Remember that knowledge is power.

You can never know too much… strive to learn as much as you can about options and their inner workings, strategies, fundamentals, everything… so that you will be better equipped to profit with options trading.

As I’ve said in the past, options trading is more accessible than ever before. And the profit potential hasn’t diminished a single cent. Going out of your way to learn the myriad of ways they can boost your bottom line is the easiest way to discover what works for you.

These are the six strategies that drove my father to success… and they’ve led to fantastic wins for my Options Hotline readers over the years. Now, hopefully they’ll help spur your success, too.

Sincerely,
Steve Sarnoff

October 14, 2009

Maximize Your Options Gains with These Six Trading Secrets was originally featured in the Penny Sleuth.

That kind of talk is just plain dangerous.

Despite my success with options, I would never be vain enough to call my work “investment advice.” When you’re dealing with options, you shouldn’t use the word “investment” at all. It’s speculating. And if you don’t understand the difference, you’re setting yourself up for a massive failure.

You “invest” in things like stocks, bonds, mutual funds, even real estate. You focus on the long-term. Successful investing is like planting acorns and watching them turn into oak trees.

Speculating, on the other hand, is like playing with fireworks on a rainy winter’s evening. You light the fuse, and seconds later, it’s either fizzled out or a huge colorful explosion high up in the sky has illuminated the whole world.

It may sound like gambling. And for people who don’t know what they’re doing, it usually is. But smart traders know how to bend the odds in their favor. Doing that means having a healthy respect for a speculator’s best friend — and worst enemy — leverage.

Leverage is the magic that turns small price movements into large profits…or losses. It is found in many different guises, but the fundamental design is always the same. The leveraged speculator uses OPM (Other People’s Money) in an attempt to make more money than would otherwise be possible with nothing but his own funds. In other words, you augment your position with borrowed money.

It sounds dangerous…and if not managed prudently, it can be bad for your wealth. BUT, if leverage can be applied to situations with strictly limited risk, it takes on a more sensible aspect. It becomes…superleverage.

Superleverage is the art of profiting from changing prices, with limited risk. No margin calls, no demands for additional funds, no forced liquidations.

The instruments of superleverage are exchange-traded stock options.

Options are tradable contracts that give you the right to buy or sell a specific underlying instrument at a specific price within a set time period. Their value closely follows the ups and downs of the stock they cover… yet they usually sell for a fraction of the stock’s price.

That means a small move in the stock’s price can become a huge move in the option’s price.

On the downside, options are wasting assets. They have strict expiration dates. And if the underlying security doesn’t move enough to give you real value, your options will expire worthless. That is your risk.

It was once calculated that 90% of all options expire worthless. That doesn’t mean you have a 90% chance of losing money…a winning options trader will offset one or two spectacular winners against eight or nine losers…and still have money left over. The trick to always coming out ahead is to develop a strategy and stick to it.

My dad, legendary options trader Paul Sarnoff, explained it best: “Every trader with imagination and talent goes into a specific commodity armed with a trading plan.” With his help, I developed a system I call my Complete Game Plan for Trading Success. Followed correctly, it can be a powerful tool to make sure you don’t get in over your head.

It starts with some simple calculations Just ask yourself the following questions before you risk a single cent:

1. How much am I willing to pay for the option? As I said, you can lose 100% of the money you put into an option. So never bet more money than you can afford to lose. Once you’ve set your limit, stick to it. Don’t chase an option that’s more expensive than you want to pay. Either wait for the price to drop, or look for another one to buy.

2. What will I do if I’m right? Have a profit target in mind for each option you buy, and an idea of how long the move will take. Be realistic — what you honestly think will happen, not what you hope will happen. (If you can’t do that, don’t buy the option.) Again, stick to your plan — give the option some time to reach your goal. If you meet your goal, sell right away.

3. When will I get out if I’m wrong? This one’s tough. No one wants to admit they’re wrong. And everyone hopes they’ll eventually be proven right. But that’s where another benefit of options trading comes in — with options, you have always known and strictly limited risk. Or, said a different way, you never stand to lose more than you put up. If you invest in stocks, you may have to worry about where to set stop losses so that you don’t lose your fortune. But with options, your stop loss is already built in. They’re the only sensible way to speculate.

You should always speculate based on what you can lose, not what you can gain. Be prepared to handle trading losses. Never add to a losing position. That is how many players get knocked out of the game. You want to be in there when the market goes your way. You, or your broker, must monitor your positions closely. They don’t ring a bell when it’s time to get out, so make sure you have an exit strategy in place for each trade.

It may sound like a lot of work — but believe me, it’s worth it. I’ve seen options skyrocket 210% in three weeks…472% in less than a month…even 260% in eight days…

Of course, I’ve also seen a good number of trades go nowhere. But following the Complete Game Plan for Trading Success, the odds are good you’ll still come out ahead.

Just never make the mistake of thinking that you’re “investing.”

Sincerely,
Steve Sarnoff

October 13, 2009

The Three Questions You MUST Ask Before Trading Options was originally featured in the Penny Sleuth.

Every day, scores of novice options investors get burned. It’s not because they’re bad investors, it’s simply because they’re not following the rules. There’s no question that options are tricky – it can take years to learn precisely how options work – but that doesn’t mean that understanding the options game is out of reach, or that it’s relegated to the big guys on Wall Street.

Despite their complexity, there’s plenty of reason to pay attention to options. Options provide incredible amounts of leverage with relatively limited downside. That leverage means that a relatively small increase in a stock’s share price can turn into a potentially huge gain in an option for that same stock. Just look at shares of the ProShares Ultra S&P 500 ETF (NYSE: SSO), a 5.3% climb in that stock over the course of just two days in July turned into a 28% profit for investors who bought one strike of that fund’s September call options.

Put these three must-know rules into play, and your chances of booking profitable options plays increase exponentially…

1. Think About Value, Not Just Price

Most people think that options prices (also known as premiums) are tied to the prices of their underlying stocks, but that’s not entirely true. Like stocks, options trade on the open market, which means that technically, options investors themselves set the prices of options through their bid and ask prices.

That doesn’t mean that you’ll see an option trading way out of line with its underlying, but it’s certainly not uncommon to see examples of options prices that don’t mesh with what their values should be.

That’s because unlike a mutual fund or ETF, which is priced based on the value of its assets right now, options take extrinsic variables, like the time value of money into account. There are a number of ways to value an option, including the Black-Scholes model and the Monte Carlo method, but if you want to avoid the mathematical formulations, most financial websites and trading platforms can come up with an option value almost instantly. Use that price as a starting point when you decide if an option is worth your time.

2. Don’t Get Greedy, Use Goals

“Hogs get slaughtered.” No, that’s not some sort of farmyard to-do list, it’s a phrase Wall Streeters use to remind each other – and themselves – that greed is the fast track to serious losses. It’s all too common for investors to hang onto a winning position too long, hoping for a few extra points, only to see those gains reverse themselves. That’s especially true of options, where a position can swing from a double-digit gain to a serious loss overnight.

Now, that doesn’t mean that you should sell your positions off as soon as you’re up more than 5% — goals are the secret to beating this pitfall. Get a grip on greed by setting your target gains before you enter a position, and stick with them unless something fundamentally changes in the underlying stock.

3. Take One Play a Week

The only way to make money on options is to play them – and to keep making options plays, even if you’ve just picked a loser. After your first bad trade, it’s incredibly easy to give up and just stick to stocks. But that’s a huge mistake. The only way to learn how to use options profitably is to use them often, so always try to make a new trade every week.

If money’s the issue, it shouldn’t be. There are scores of “paper trading” platforms out there – many of them free to use – that let you make hypothetical trades without risking your real-life capital. Trading paper for a while can help build your options investing skills until you’re ready to put your cash back on the line.

When deciding on which paper trading platform to use, it’s best to go with a broker. Many brokerage firms (including Thinkorswim, Scottrade, and optionsXpress) will let you test-drive their actual trading platforms with a practice trading account. Using the real platform means that the gains you get in the virtual world will mirror the gains you can expect when you switch to real money – and it also means that you’ll get used to your broker’s software and tools.

You Have Options

There’s no question that investing in options comes with a steep learning curve. That said, profitable options plays don’t have to be a faraway goal. Invest in options using these three rules and you’ll be well on your way to seeing profits from your calls and puts.

Cheers,
Jonas Elmerraji

September 17, 2009

Three Must-Know Rules to Profit from Options was originally featured in the Penny Sleuth.

As you can see, stocks are on a roll. In fact, from a low of 667 in March to a recent price of 944, U.S. stocks are up a mind-blowing 41%.

That’s a ton of upside action in a relatively short amount of time. And while I anticipate the typical 3-5% pullbacks along the way, there’s little doubt this market is headed higher in a strong and decisive way.

In fact, while I’ve told you here many times that I was confident this market was going to head higher, I’m impressed by how solid and steady that uptrend has really turned out to be.

But that’s not all…

The market has powered above the 930 resistance level – set during the beginning of last month – like a walk in the park. That level should now become a solid support level for more movement to the upside.

But here’s where it gets tricky: If you take a long, hard look at a daily chart of the S&P 500, you’ll quickly realize that the near-term 930 level actually balloons to include a range extending all the way to 944. And since that level was established on a medium-term high in January, we’re really looking at resistance in the 930-944 range.

In other words, for the market’s recent action to really get legs, I’m looking for a decisive move above 944, not 930. And since we just pierced 944 this week and have yet to establish support, don’t be surprised if we get some lower prices in the days and weeks ahead.

Now, if you listen to the pundits and talking heads, you’ll probably hear that the move in the broader markets that I’ve been predicting and talking about for months doesn’t have any fundamental power behind it: It’s all just smoke and mirrors.

I love it when I hear stuff like this.

In fact, using many of the so-called experts in the investment field as contrary indicators – in other words, buying when they say sell and selling when they say buy – has put cash in my subscribers’ pockets time and time again.

You can mark my words: When everyone says it’s time to get into this market for good, you can bet your bottom dollar the market’s big moves will be history. It’s just a fact of life that you can’t wait for the herd; you have to take reasonable chances, and you have to have vision of what’s going to happen, not what’s already in the hopper right now.

And while there’s no doubt the broader fundamentals aren’t rosy, they’re certainly on the mend. And the biggest one – recovery in the real estate sector – is beginning to show more life:

• Existing home sales in April jumped an impressive 2.9%, to an annual rate of 4.7 million units. Plus, distressed properties – read: foreclosures – continue to be cleared from the market, a big key for price stabilization down the road

• Interest rates are at record lows, home prices are super-attractive and first-time homebuyers can enjoy an $8,000 tax break. In my book, those are all positives.

And it’s not just real estate fundamentals that are on the mend. I’m also seeing upticks in industrial production, consumer spending and consumer confidence.

Best wishes,
Wayne Burritt

June 5, 2009

Searching for Decisive Market Moves was originally featured in the Penny Sleuth.

Just as I predicted, the broader U.S. stock market continues to surge higher. Take a look at this daily chart of the S&P 500:

The S&P 500 is a good proxy for the broader U.S. stock market. And as you can see, stocks continue to march higher. In fact, from a low of 667 on March 9 to last Thursday’s high of 889, U.S. stocks have shot up a mind-boggling 33%.

But that’s not all. Take a gander at the large arrow on the left of the chart. It marks the summit of the market’s last upside run. Because the market reversed course to the downside that day (Feb. 9) and at that level (875), that peak is called – in technical parlance – a “resistance” level.

The market also failed to penetrate this resistance level just a few trading days earlier, on Jan. 28. All told, that means 875 is a pretty tough point for the market to get above.

That’s why the market’s most recent action is more significant than most investors and traders are thinking: It smashed above key resistance at 875 like a walk in the park. No doubt about it, that shows uncommon technical upside strength.

Here’s the best part: When the market breaks through resistance – especially after failing to do so in previous attempts – that resistance level has an excellent chance of becoming a stopping point when the market decides to turn down again.

In other words, strong resistance – once defeated – becomes solid support for future price action. So when the market pulls back – and it surely will – it’s very likely to not fall too much below 875. And I don’t have to tell you that can be very reassuring.

There’s more good news. Just as I thought, the most recent run continues to be backed by higher average volume. And on the chart, that’s marked by the upward sloping average volume line near the bottom of the pane.

Significant? Certainly. When strong upside runs – especially when they include breaks above strong resistance levels – are powered by increasing average volume, it’s a clear sign that higher prices are attracting more investors and traders. And they’re buying more and more shares to prove it. That means lots of upside pricing pressure in the days and weeks ahead.

But before we start the big celebration, take another look at the chart. Notice that while the market has surged higher, it’s done so with very few significant pullbacks.

In other words, the market’s most recent run since the beginning of March – including a staggering 33% pop in prices – has been practically straight up.

I don’t have to tell you that’s a ton of upside action in a short amount of time. And for someone who’s been around the block a time or two like me, that’s a red flag.

Why? Because like many things in life, markets don’t go straight up for very long. And if they do for a while, it only makes sense that they’re going to pull back and take a breather.

Plus, big run-ups mean some traders are likely sitting on some juicy profits. So when they take some of that money off the table, that selling pressure will cause prices to drop.

Here’s what I’m looking for: Over the course of the next few months, we’ll likely see a significant pullback in the 10-15% range. On the S&P 500, that means a drop of 90 to 134 points.

Now, it probably won’t happen violently and quickly. I think there’s just too much investor optimism for that. But it could easily happen over a few weeks, with downdrafts in the 1-3% range.

Best wishes,
Wayne Burritt

May 6, 2009

Why You Should Remain Cautiously Optimistic As the Markets Surge Higher was originally featured in the Penny Sleuth.

The market has also bounced on higher average volume, which is indicated on the volume section of the chart by the black line. Significant? Certainly. When market moves to the upside are driven by higher-than-average volume, it’s a clear sign that bullish investors are getting involved and are willing to buy shares to prove it.

But that’s not all. To find a similar bounce to the one we’re in the midst of right now, I have to go all the way back to last November. Then, the S&P surged from a low of 741 to 944 in January. That translated to a 203-point upswing, or a whopping 27% upside run.

My take: A bounce similar to the one we’re in right now ignited a move of nearly one-third in U.S. stock prices just a few months ago. Considering that we’ve moved 23% in just a matter of days, my thoughts are the recent surge has decent legs.

Sure, we’re not out of the woods yet, not by any stretch of the imagination. But facts are facts, and the recent market action bears that out: We’re moving in the right direction… especially in one of the most important sectors – real estate.

Ever since the financial crisis began, I’ve said that one of the big triggers of a decent, well-founded recovery – in the economy and the stock market – will be an improvement in the real estate sector. And while the latest news isn’t mind-blowing, there are a few positive morsels.

Remember, I’m looking for positive moves in real estate for a simple reason: Improvement in this sector means increased sales and stabilization in prices. That, in turn, will ignite new lending. After all, with reliable prices and positive sales movement, homebuyers know what they’re buying won’t get crushed. And lenders know what they’re lending will likely be paid back.

Now, even when the real estate market recovers, we’re not going to see the surge in prices and buying that started one of the biggest asset bubbles of all times. A ton of that was fueled by under-qualified borrowers and downright lousy lending practices. And while banks have short memories, they aren’t that short.
Rather, the recovery in real estate will begin with baby steps: small moves in the right direction. And the latest news is just that. Take a look…

As you can see from this chart, existing home sales in February jumped to the upside. In fact, compared with January, home sales were up 2.6% in the West, 6.1% in the South and a whopping 15.6% in the West. All told, existing home sales in the United States increased a solid 5.1%!

The news gets better. Sales comparisons with the same period last year – which tend to be less volatile than month-over-month numbers – show some huge bright spots. In fact, while overall home sales in the United States were down 4.6% in February compared with last year, sales in the West were up a stunning 30.4%.

That’s right, February home sales in the West – which includes the super-important Southern California and Las Vegas real estate markets – rose nearly a third compared with last year. Plus, it marked the eighth straight month of year-over-year increases for the region.

Now get this: With the real estate market in the West generating a whopping 1.2 million units in annualized sales, sales activity is now a staggering 38% above its cyclical low point of 870,000 units marked in October 2007.

That means – from a sales angle – a market bottom in this key real estate region is way, way in… and has been so for months.

So what’s driving the bullish numbers in real estate sales? No surprise here: The median home price in February was just $165,400, 15% below its year-ago level.

Sure, we want to see these prices stabilize. But the fact is with 45% of home sales distressed – either in foreclosure or in short sales – these prices are going to take a hit. And while the process is painful, the market needs to clear off unwanted inventory before it can really begin to get back on its feet.

But mark my words: Lower prices aren’t going to last forever. And it’s not just because sales activity is beginning to accelerate. See for yourself…

As you can see from this graph, the National Association of Realtors says housing affordability is rising fast. In fact, at a current level of 167, home affordability is now 25% easier than the year-ago 133 level.

So what does a Housing Affordability Index (HAI) level of 167 really mean? It’s pretty straightforward. An index level of 100 means that the typical family earning the median income in the United States has exactly enough income to qualify for the average mortgage.

So with the HAI at a whopping 167, the average family in the U.S. has 167% of the income necessary to buy an average home. Talk about buying power!

Bottom line: The stock market is in the midst of a solid bounce. Plus, the real estate sector – a big key to a sustained recovery – is showing signs of life, especially in the important West region of the United States. Together, these factors point to more bullish action for stocks down the road.

Best Wishes,
Wayne Burritt

April 1, 2009

How to Play Real Estate’s Recent Moves was originally featured in the Penny Sleuth.

– John Kenneth Galbraith

The year of the American Contagion, the year of chickens coming home to roost, the year of the bailout, 2008, went into history as a momentous time of tumultuous market moves in: stocks, commodities, currencies, and interest rates.  The year witnessed the onset of a worldwide economic panic with an assault on the global economic system and our form of democracy.  The forces of deflation and inflation continue to slug it out in a titanic struggle for dominance.  We’ve managed to navigate the stormy seas with a steady hand on the tiller.  One of the keys to our success is keeping a sense of perspective.  As my Options Hotline is in its twentieth year of advocating sensible speculation, I’d like to share some seemingly impracticable musings you may find useful.

In 2008, volatility skyrocketed beyond belief.  Most market participants, even professionals, were caught by surprise.  Big money was made and lost, both up and down, with astonishing speed.  It’s long been known speculators make their fortunes from changing prices and leverage is an important tool for speculators.  Leverage involves using OPM (Other People’s Money) to try to make more money than you can with your own funds.  Using OPM may augment your reward when you are right; but it may also greatly accelerate the risk of additional loss when you are wrong.  That’s the aspect of leverage that so many forgot during the heady times of money trees growing to the sky.

Even some of the market’s smartest participants are done in by blind arrogance.  The famous story of the 1990s rise and fall of hedge fund giant Long-term Capital Management, excellently chronicled in Roger Lowenstein’s When Genius Failed, comes to mind.  That cautionary tale is particularly apropos to today’s financial crisis.  Successful trades blinded the firm’s brilliant partners to the possibility of failure, ultimately sealed their fateful demise, and threatened the stability of the entire financial system.

In this business, I believe you are better served by checking your ego at the door.  Having a complete game plan includes preparing for the worst in every trade.  Remember to always speculate based on what you can lose, not what you can gain.   Applying sound money management principles (such as never adding to a losing trade) and utilizing the tools of Superleverage (buying exchange traded options) allow you to stay in the game and avoid being knocked out through inevitable times of losing trades.   If you have anticipated the possibility of loss, and are prepared to withstand it, no matter the severity, because you positioned with always known and completely limited risk vehicles; never be surprised when the market moves against you.

Over the years, I’ve compiled an impressive record of forecasting the twists and turns of market price.   The publisher is happy to provide you with every trade I’ve ever recommended, since taking the helm in October of 1999.  People invariably ask me what I think the market is going to do.  I always say that if I knew what the market was going to do, I wouldn’t have to work.  Use technical levels of support and resistance to set your exit strategy for each trade.  Make sure that you, or your broker, monitor your positions closely.  The market doesn’t ring a bell when it’s time to get out.  Have your plan in place ahead of time and you can smile, laugh, take your profit a step ahead of the crowd, and enjoy your accomplishment with a sense of wonder.  No matter your success, always be surprised when the market goes your way.

So, like me, never be surprised and always be surprised.  Don’t forget that forecasters, even those with good reasoning and strong opinions, are practitioners of uncertainty.  That view will serve you well.  I hope you found the abovementioned thoughts helpful and wish you all good fortune as you vie for fun and profit for the rest of 2009.

Sincerely,
Steve Sarnoff

March 13, 2009

Profiting from Superleverage was originally featured in the Penny Sleuth.

As you can see from this graphic, from a high of 14,198 last October to 7,885 this October, the Dow has lost a staggering 6,313 points. That translates to a whopping 44% loss and a boatload of pain for just about everyone out there.

It gets worse. For the Dow to recover from its low of 7,885 to its high of 14,198 — in other words, to regain all of its recent losses — it would have to book an 80% gain. That’s nearly twice the size of its original loss and a mammoth amount of upside action.

But if you think now’s the time to throw in the towel, think again: While stock owners are taking it on the chin, option players are faring much, much better. Take a look…

This is a chart of the VIX index from the Chicago Board Options Exchange, the granddaddy of all options exchanges. Without getting into a bunch of mathematical jargon, the VIX measures the volatility — or expected price changes — in the broader U.S. stock market. And because volatility leads to uncertainty and uncertainty leads to fear, the VIX is sometimes called the “investor fear gauge.”

As you can see from the chart, the VIX is through the roof. In fact, at a level of 76, the VIX over twice the threshold of 30, a key level that indicates skyrocketing fear and uncertainty. And this is good for options traders for two big reasons…

First, high levels of volatility and uncertainty mean the time value part of your options’ prices are likely headed way, way up. Why? Because with time comes uncertainty. And as an options owner you’ll be compensated — often handsomely — for bearing that uncertainty.

But that’s not all: With the VIX at these nosebleed levels, market sentiment is so uncertain, so negative that there’s no way a recovery can be too far off. In other words, a high VIX level can indicate a contrarian move in the market is very, very likely. And in our case, that contrarian move would be to the upside.

Best wishes,

Wayne Burritt
November 4, 2008

P.S.: I started Easy Money Options to open the lucrative options world up to everyone. It doesn’t matter if you never traded a single option in your life or you’re a seasoned pro, my service is right for you.

How to Hedge Your Penny Stock Plays was originally featured in the Penny Sleuth.