In our electronic mutual fund world, it seems only logical to trade index options instead of stock options.  I honestly think some people believe that they have some kind of diversification that really does not exist. 

When I trade options that are highly volatile and close to the expiration, I closely watch the Dow and the S&P 500.  It is the movement of 30 stocks that moves the Dow, as we all know.  And - of course - it is the movement of 500 stocks that moves the S&P 500.  Often the “broader markets”, as your tv commentators will call them, effectively MOVE stocks you are active in.  If you are not watching the Dow, you should not be day trading.  You have to see that the broader market is starting to tank.  This tells you to close out a shaky position and wait for an upswing.  It starts to move up, and  you know that your position is likely not going to be pulled down by external forces.

Now, what are you supposed to look at while trading index options?  Other indexes?  Which ones?  Are you supposed to keep your eye on all stocks included in that index?  And if one starts to tank, you are already affected as this is not a lagging effect. It is immediate.  If you are doing options and you are watching the broader markets, you can get a cue quite easily and you will have time - in most cases - to protect.  Sometimes it is just pulling back an order.  That lag time between the index and stocks outside of the index is more than enough time if you are watching what you are doing.

I stay away from index options because I see a huge potential to make money because the broader market gives you a clue. 

Look at this:

Google is not a Dow stock, but you can see how closely if follows.  You will note that when the Dow changes direction, GOOG follows shortly after that.  Traders are watching - and making huge decisions once they see the market move.   

You would be a fool to not watch the Dow if you are playing Google.  When you see the Dow start to slip, you pull back from risky orders.  If you see the down reverse course, you can be more comfortable that Google will. 

Check out stocks you like historically for how they compare to indexes they are NOT a component of.  You are benefiting from the lag that traders watching the entire market see.

 First, MER and LEH are still great shorts.    I think each will see $30 soon… at least for enough time to cover a short position.  Both are trading at about the same level.  Cramer may tell you different, but I would not listen to him on the financial sector.  They are his buds.

TECH… CSCO still has a huge intermediate and long term story.  If you just want to put some money is a solid company, this may be the one.  AAPL I think is going to rise soon.  You need to buy only at the low right now, as it does have a downside.  Look at a couple of trading days and try to buy near the lowest point.  Do not over pay. 

GOOG - I should disclose I have a few 440 March Calls.  Let’s hope I can catch up to even on those before the market close tomorrow!  I see the stock as unsettled right now. I am playing both sides of the fence here.  I think we will see $390 before we will see $490 again.  I am seriously looking for low priced April and June Puts in the near future.  Lowe priced, but achievable. 

SIRI / XMSR - Forget about them.  I do not think the deal will happen.  I see no great action here.

YHOO - Something is going to happen within a week or two that is likely to move this up or down sharply.  I think up, as I do not see MSFT lowering its offer.  YHOO is showing great value.

 MSO - Still a short. See my most resent post on it.

 Merrill riskiest after Bear Stearns, says Wachovia
Reuters(Tue 9:45am)

Merrill Lynch riskier than Lehman, analyst says
at MarketWatch(Tue 9:12am)

 I am seeing it up sharply despite that news.  I am doing the APR 35 PUT.  It is very risky in that the stock has not traded in that range in YEARS.  However, I think it is a great play for a few days.  When the market dips, I think MER will be going back with it.

 Good luck to all!

http://www.bloomberg.com/markets/stocks/wei.html

Let’s hope we see nothing like this in the morning!

Drudge and just about everyone is putting a negative spin out there.  Greenspan says its the worst mess since WWII.

What I plan to do in the morning is to look at my favorite stocks I believe are already undervalued and have a huge upside, and then get ready with APRIL calls.  This week is way too risky to be doing calls on in an environment like this.

 I would sit back and wait the first thirty minutes, watch the overall market, then make a limited move.  Do dive in feet first or you will be taking a bath if it gets ugly.

 If we see more than a 300 point dive in the morning, sit the day out.  We could be looking at a blood bath if this does not settle quickly.

http://www.stockguru.com/john/?p=27

I posted that Tuesday intraday, and it was up as much as 157%.

 There were opportunities most of the week to get out with no less than a 60% gain. 

If you checked out my Publisher’s blog on Tuesday I gave you the exact contract to buy for an APRIL contract.  We are not talking a risky 10 day remaining stategy, but rather a simple long option play with about 40 days to expiration.

I recommended buying at or near 2.80 and putting in a gtc sell order at 5.60.  If you did just that, you make 100% less commissions.

ALSO IN THE BLOG:

A YAHOO PLAY

Why Cisco is an absolute buy

Why MSO is a short… and it has FALLEN since I said that!

I do not typically email out the publisher’s blog.  I will be creating a list you can join just to get these kinds of picks.  If you have an rss reader, just go to this address:

http://stockguru.com/blog/wp-rss2.php

Thanks,

John

Look at this:

Microsoft, Yahoo Execs Finally Meet
Saturday March 15, 1:56 am ET
By Michael Liedtke, AP Business Writer 
Microsoft, Yahoo Executives Meet for First Time About Takeover Bid

http://biz.yahoo.com/ap/080315/microsoft_yahoo.html

The funny thing about big deals is that there are emotions in play.  People start to give up.  Like those that are waiting on the SIRI/XMSR deal.  They give up and sell; good news comes out and they buy again; somebody says something negative and another sell-off.

I think the Microsoft deal to acquire Yahoo is not simply hot air.  Microsoft is going to do it, as I see it.  Some are suggesting that since there are few other qualified suitors, the price of the offer will fall.  I really think that MSFT is in a much more stressed out situation to get the deal done than others might realize.

They are talking.  It is really being discussed.  They met just this past Monday, March 10th. 

I think we are going to hear more.  Perhaps MSFT steps up to the plate and puts more on the table? 

I suggested there is money to be made:

http://www.stockguru.com/john/?p=28

I say get ready.  I am shocked with myself for NOT buying on Friday.  I did buy some shares long and took a very modest profit Thursday.  I watched this fall, and I think the reason I held back was I thought it was going to drop another buck.

I bet we get above $29 in the first hour of trading Monday.  If there is more on this meeting - especially something official like an 8K - then this could see some real action.

Really there is one reason I believe holding this for the long term will really, really pay off.  That is this is the leading company in hardware that keeps the internet’s capacity constantly increasing.  I linked this article on the blog a few days ago:

SEE NY TIMES ARTICLE HERE

What you see is the anticipated growth in internet traffic and the fact that like it or not, many companies are going to have to start some serious spending to keep up.  CSCO is a truly great company that has what is needed to make this

Look at their products:

http://www.cisco.com/en/US/products/index.html

Look at their solutions:

http://www.cisco.com/en/US/netsol/index.html

Fundamentally, the company is where it needs to be to be ready to meet the needs.

Let’s look at the chart:

That is the past two years.  We are at nearly the lowest price in a year.  The chart shows it starting a slight up trend.  This is a beautiful chart, and it says to me we will see recovery.  I am starting to do options on the upside.  I will likely move personal funds into the stock long in the near term.

I see this as a several year hold, and a great intermediate term play.   I see $30 coming back very, very soon.

What about the downgrades last month?  I think they are wrong.  Look at what most analysts think:

http://finance.yahoo.com/q/ae?s=CSCO

Increasing earnings, low PE ratio, the EPS trends. 

Again – to summarize – I see $30 within 90 days and I see it breaking to new 52 week highs within six months. 

Option plays:

This stock does not have a lot of volatility.  What that means to me is I can catch some calls when it falls back, and generally it will not search for a new low.  It will instead recover.  There are a lot of chances to make 25% to 50% on very simply long calls. 

Disclosure:  I currently hold some CSCO Apr 25 Call OPRA: +CYQDE.  I buy and sell options all of the time, so just realize that I will be in and out of this many, many times over the year.  That is regardless of what you see me pick.  If I buy long - which I have not yet done so on CSCO this year - I also may buy and sell it at any time.

 I immediately see this as huge for CSCO.

 READ THIS ARTICLE and tell me you could pass on Cisco!  I don’t think you can.  I am going to get serious about CSCO over the next few weeks.  I am not looking at it as an options play, but rather a long term hold. 

 There are many others that will fit into this same boom in meeting the needs of our beloved Internet!

Buying an option long is like buying anything you intend to resell.  You want to buy low and sell high.  I am not going to write a bunch of cliché’s, so do not panic that is all the meat here.  There is real opportunity in the first minute or two of trading that does not exist the rest of the day.  Every single day on a high volume and volatile stock, the open is a crap shoot.  “Where is it going to open tomorrow?” is the big question on the internet message boards such as Yahoo.

Many people are ready to take profits at any cost, and it is done at the open.  Many people are ready to cover losses at any cost, and they do it at the open.  Many panicked players see the market going against them, and they put in really stupid sell orders.  Many people have their stop loss orders in too close to the market and they get hit.

What I like to do is look at a stock like GOOGLE.  This chart shows you what it did Wednesday, March 12, 2008. 

SEE LARGE VERSION OF THIS CHART HERE
The open was $440.01.  The high was $447.88. The low was $438.07.  This is nearly a $10 swing. 

I saw momentum changing from a negative sell-off two days earlier to a positive loading up on this in the prior trading session. Things EU approves Double Click deal, and the deal gets done.  The stock was horribly undervalued.  It was time for a move up.

Look again at that open.  Look at the volume bars.  This was a huge open.  Someone with the right option strategy could have had open orders at the open to buy calls at maybe a 35% discount to the close for the options on Thursday, and possibly get executed in those trades in the very early minutes.  Then you flip those options back to the market in the first half hour of trading for a very quick 25% to 50% profit.

The risk?  It is very real risk.  This particular stock was trading way below just two days earlier.  However, options are all about risk.  You can do this strategy with a number of rather stable stocks.  You can see their premarket news before you EVER place that trade. Then in the minutes before the market  opens drop a few calls in on several issues.  If something dips, perhaps you can catch your ALREADY DISCOUNTED PRICE to buy.  If it reverses, you have profit.  If the stock stays down, you paid a lesser amount than the prior day’s close for that option so you are much more limited in taking losses.

Back to the Marines… if you live in the central, mountain or west coast time zones, you did all of this before 9am.