EOT Position Update – August 20, 2008

| August 20, 2008

August 20, 2008

Market Snapshot

The Dow Jones Industrial Average just closed at 11,417.  With most of the big money managers on vacation, the volatility is really interesting.  Hundred point market swings seem to be the norm these days.

The big news this week.

The US Dollar run has been strong.  Against some currencies the Dollar’s appreciated more than 10% (Sorry Australia).

Genentech (DNA) turned down the $44 billion buyout offer from Roche.  Apparently the thought of selling out for a mere 10% premium was too low.  It’ll be interesting to see how Roche (DNA’s biggest shareholder) responds.

Inflation reared its ugly head in the US of A.  Latest reports indicate we’re now at inflationary levels not seen since . . . well . . . almost 2 decades ago.  The most obvious problems were cited – food and fuel.

Shares of Fannie Mae (FNM) and Freddie Mac (FRE) were crushed this week as talk of a government takeover continued.

Lehman Brothers (LEH) continues to get whipsawed by the street.  Who knows, this may be a historic buying opportunity . . . or a warning to get out while the getting’s good.

Now for the trade updates.

Position Updates

 JCP January 2009 $30 PUTS (JCPMF)
This is a new trade alert we issued this morning!  Check your email for all the details on this new opportunity.  Support is at $35 and $30.  Resistance will be at $45 and $48.

 CSCO January 2009 $27.50 Calls (CYQAY)
CSCO traded up late last week moving over $25 before falling a bit in the last few days.  We have lots of time on this trade.  Support is at $22.50 and $21.  Resistance will be at $27 and $28.75.

  CLHB January 2009 $95 Calls (QPBAS)
CLHB continues to retry the $80 level.  Once we get a solid breakthrough I’d expect the stock to run.  We’re still early in this trade.  Resistance will be found near $85 and $90.  Support will be at $72 and $68.

  ROST November 2008 $42.50 Calls (REQKT)
ROST fell today on the company’s earnings announcement.  As we expected, Q2 profits were up 40%!  The stock should have run . . . but management opened their mouths.  They gave a cautious outlook for the rest of the year, throwing a wet blanket over all the excitement, and sandbagging no doubt.  Resistance is 40 and 45. Support levels are 34 and 31.50.

Parting Shots…

New Subscriber Question:   I’ve received a number of questions from subscribers on the buy-up to price.  I’ve answered some of these in the past, but let’s recap so everyone’s on the same page.

First, what does the option buy-up to price mean?

The buy-up to price is simply the suggested maximum amount to pay for the option. We provide this level as a guide to help everyone determine an appropriate entry point.

Is it okay to pay more than that price for the option?

That decision is really up to you.  But I like to pay less for things . . . not more!  Really, you can pay anything you want for the option.  But in the long run, you’ll be better off buying these options for less than the buy-up to price.  Check out the section on Market and Limit Orders (see page 16) in our Operating Manual.

How is the buy up to price determined?

When we identify potential trades, we look for options that are undervalued.  This gives us an edge when it comes to turning profits with our strategy.  When determining the buy-up to price we look at a number of factors.  Everything from price volatility to time decay, and even directional movement are taken into account.

Why can’t you just tell me what price to pay for the option?

Remember the options market is like the stock market.  Prices are constantly changing. One moment they may be moving higher and a few hours later they may be trending lower.  By giving you a buy-up to price, this allows you to determine a reasonable entry point for your investment.  In the end, you’ll be better off not chasing these options above the buy-up to price.

I hope that helps.

Category: EOT Update

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