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Next Week Could Be the Most Profitable of Your Life

By Jeff Clark
Thursday, March 12, 2009

Next Friday, March 20, is option-expiration day. All March put and call option contracts expire on that day.
 
If you believe, as I do, the rally that began on Tuesday will continue for at least a few more days, then there's a ton of money to be made. But you won't make it by betting on the upside. You need to bet against the downside.
 
Let me explain...
 
Option premiums are huge right now. Anyone buying calls and betting on the upside needs to see their stocks rally by 5%-10% over the next week in order to profit on their trades. While that's possible, it's a low-odds bet.
 
Betting against the downside makes more sense. In other words, I'm more inclined to sell put options than to buy call options.
 
Selling put options obligates you to buy the underlying stock at the agreed-upon price. And it pays you upfront for that obligation. For example, if you want to bet Yahoo (YHOO) will rally with the stock market over the next week, you can sell the YHOO March 13 put options (YHQOM).
 
These puts are selling for about $0.45. So you'll receive $45 per contract and you'll be obligated to buy 100 shares of YHOO at $13 per share if it closes below that level next Friday. This is the equivalent of buying YHOO at $12.55 per share ($13 minus the $0.45 premium from selling the put option).
 
This trade is profitable as long as YHOO closes above $12.55 per share next Friday. It closed yesterday at $13.39.
 
In other words, you'll make money on this trade if YHOO goes up... if it stays the same... and even if it falls a bit. In fact, the only way you'll lose money on this position is if YHOO drops below $12.55 – a decline of 6% – by next Friday.
 
Of course, you only want to sell puts on stocks you'd like to buy anyway. After all, if the market drops significantly, you'll end up buying the shares. But, you'll get paid handsomely upfront by agreeing to do so.
 
Check with your broker before you try to do this the first time. Brokerage firms have varying requirements for selling put options.
 
This is one of my favorite strategies. And with put premiums as high as they are right now, the next week may be the most profitable week of your trading career.
 
Best regards and good trading,
 
Jeff Clark




In The Daily Crux
Market Notes
The world's largest copper stock, Freeport-McMoRan, hits three-month high... buoyed by Chinese demand.
 
Do-it-yourself bull market continues... O'Reilly Auto and AutoZone up double digits this year to new highs.
 
Microcap LDK Solar at a new low... solar stocks in freefall.
 
Earnings today... Arena Pharmaceuticals, Luxottica, Smith & Wesson, Smithfield Foods.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%