EOT Position Update – May 28, 2008
May 28, 2008
Market Snapshot
Today the Dow Jones Industrial Average closed at 12,594. It’s hard to believe that just 7 trading days ago we were above 13,000. It looks like the Dow has formed a short term consolidation pattern. It’ll be interesting to see which way it breaks.
This week the news has been focused on beer. Not necessarily a bad thing. I was focused on beer myself over the Memorial Day weekend.
The rumors are running rampant that the most American of American brands Budweiser may be sold. It’s all speculation at the moment, but the thinking is that European beverage giant InBev is going to make a $46 billion offer for Anheuser-Busch (BUD). Anheuser produces beer at 12 US breweries and packages the products under more than 100 brands.
This is what happens when we have a weak dollar. Our valuable assets go on sale to the rest of the world.
Oil seems to have peaked out, at least in the short term. The biggest sign of a top? When CNBC started showing the “Oil Crisis in America” banner all day long. They had entire days dedicated to oil and related topics. This is making me question the short term sanity of the market. Honestly, this isn’t a crisis. We’re not waiting for hours at gas lines to fill up. . . Not yet anyway.
Oil’s destruction of the airlines also made the news. The airline industry is so hobbled that even the low-cost airlines are feeling the pain. Jet Blue decided to delay the delivery of more than 20 jets from Airbus. Who knows how long the delay may last . . . initial estimates put the delay at 4 years. Ouch.
More pain to come in the airline industry . . . that’s what I say.
Rounding out the major news, more bad economic data on housing. Really, who doesn’t realize the housing sector’s in a slump? People are still walking away from their houses. Foreclosures and bankruptcies are up and expected to grow. Credit’s wound so tight you’d be lucky to borrow money from your kids, never mind qualifying for a home mortgage.
Now for the trade updates.
Position Updates
NGS July 2008 $30 Calls (NGSGF)
Last week NGS pushed through our first resistance level. We’ve since pulled back a bit. We still have some time on the option. Resistance is 35. Support is 25 and 23.
DSX June 2008 $35 Calls (DSXFG)
DSX pulled back earlier in the week. Today they are putting up quite a rally in spite of the choppy market. We’ve already crossed the first resistance level. Next resistance is 42 – an all time high. Support is 27.50 and 24.
EXM June 2008 $50 Calls (EXMFJ)
Last week the stock broke through both resistance levels. Gains were over 300%. Congratulations to everyone on a great trade.
UAUA June 2008 $15 Puts (UALRC)
UAUA set new lows last week. Congratulations to everyone who closed out of the trade. Peak gain in the options is 264%
Parting Shots…
More Subscriber Questions: This time on stop losses.
What’s a stop loss?
A stop loss is an order you place with your broker to automatically sell one of your securities at a predetermined price. For example if you buy an option for $5.00 you can enter a stop loss at $2.50. If the option trades to that level then the order is triggered and your option is sold. Stops are often used by investors as a form of risk control.
Setting a stop loss is really a personal decision. I’ve seen some people use stop losses on stocks as little as 8% (meaning if the stock they own falls 8% the broker automatically sells the position). Others use 10%, 15%, 25%, or even 50%.
Deciding where to put a stop loss often depends on the volatility of the security. A tight stop loss – meaning close to where the stock is trading – might cause you to get pushed out of volatile position prematurely.
One word of caution. If you use stop losses I recommend you make them mental stops. Market makers have been known to push around a stock and option prices to take out stop losses on their books.
Do you recommend using stop losses?
I think every investor needs to determine an exit strategy prior to making a trade. If using a stop loss is one of those tools you need, then absolutely use them.
I will caution you. Using stop losses on options is very different from stop losses on stocks. Options are very volatile. I’ve seen options loose more than 50% of their value in a week . . . only to be trading higher by 50% a few days later.
That’s why in our Elite Option Trader service we don’t necessarily suggest the use of stop losses, and we don’t provide any guidance in their use.
How do I put in a stop loss order?
Stops are easy to put into place. The actual process you need to follow varies by broker. If you are interested in using stop options I recommend contacting your broker directly. They can explain to you all the benefits and risks of using stops in your trading.
Category: EOT Update
