Disclaimer: Please note that I do not necessarily purchase, own, or partake of any of the securities or other financial instruments mentioned in this article. I also do not take any responsibility for any actions resulting from any actions taken by anyone who reads this article. You are responsible for your own finances - no one else. Do your yown due diligence when researching financial matters.

The SMP (Stock Market Plus) Stock Valuation Model is founded on the idea that in any market, on average, an investor will beat the market by purchasing undervalued securities at bargain prices. The model suggests building a diversified portfolio of securities that will (theoretically) surpass their current value even in a dismal bear market over a period of 10 years. The SMP Model is extremely sensible. It takes a stock’s NTA (Net Tangible Assets), factors in projected growth, and flavors the results with a little market pessimism for good measure. The model is simple enough, but requires research that you can’t obtain with your average stock screener.

How do I know that the SMP Model works? In early 2004, tired of my losses that arose from trying to play the market’s short-term ups and downs, I came up with an idea for long-term investing. I reasoned that a security’s intrinsic value was its current NTA per share, plus its projected Earnings Per Share (EPS) growth, year-over-year going forward, tempered by the realistic possibility of an extended bear market. Those stocks that could come out ahead of their current prices over time, even in a bad market, were the ones that I wanted to consider. I cut the projections off at ten years, because that provided me with a realistic long-term timeline to watch the stocks under consideration. This idea about stock valuation is probably not unique, and I do not claim to be the first person to ever think of stocks in this light. What I like about the model is that it takes away the guesswork. You plug in the numbers, and let the projections speak for themselves.

What kind of performance has the Model returned? In February, 2004, I started tracking a portfolio of 10 stocks, selected by the SMP Model. By April, 2005, that portfolio had produced over a 17% gain, in a little over a year. Now, again, if you’re looking for 200% gains, go try Vegas or the racetrack. Realistic, long-term gains are slow and steady, and require diversification of assets for self-preservation. By, comparison, the stock markets have been pretty even (zero gain) over that time, with the S & P outperforming the Dow and Nasdaq.

What kind of stocks does the model like? Well, I’ll share some that it doesn’t like…Walmart, Microsoft, Gateway, EBAY, Oracle…some real heavyweights. Now, for ones that the SMP Model projects to be worth more than their current prices in ten years…Providian, Washington Mutual, LJ International, Ford, General Motors. I’ll give you a larger list later. But, now, I want to give you the formula for the SMP Model so you can build a sensible portfolio today…

First, a couple of definitions:

NTA = Net Tangible Assets = (Total Assets - Intangible Assets - Liabilities)

EPS = Earnings Per Share = Total Net Income/Outstanding Shares

EPS(0) = EPS(current year) = projected EPS (current year) * discount rate (I use .12)

GRW = Projected EPS Growth Rate (use 5-yr or 10-yr if available)

Now here’s the formula…

SMP(value) = current NTA/share + EPS(0) + [EPS(0) * (1 + GRW * discount (.12))](= EPS(1)) + [EPS(1) * (1 + GRW * discount (.12))](= EPS(2)) + [EPS(3) + EPS(4) + … + EPS(10)

OK, the formula’s a little nasty, but if you plug it in to a spreadsheet, it works quite well. Just so you know that you’re on target with your math, here’s a sample computation for (WM) Washington Mutual (these numbers may be slightly different than current values):

NTA = 13.951 (in billions) Shares = .873 NTA/Share = 13.951/.873 = 15.98 (that means WM has current NTA of $15.98) EPS = 3.70 GRW = .10 Discount rate = .12 (using such a high rate builds in the possibility of a bear market/inflation)

EPS(0) = 3.70 * (1 - .12) = 3.26

EPS(1) = 3.26 * (1 + .10 - .12) = 3.19

EPS(2) = 3.19 * (1 + .10 - .12) = 3.13

…

EPS(10) = EPS(9) + (1 + .10 - .12) = 2.71

NTA/Share + EPS(0…10) = $45.76

So, we arrive at a SMP Model value for WM of $45.76, with the current share price around $39. Thus, WM would pass the SMP test, and I would recommend this stock as part of a diversified portfolio.

As a side note, I am not seeking any kind of contribution or fee for this knowledge. I hope it benefits you as I think it will.

Prosperous investing to you!

http://www.stockmarketplus.net

I am in my mid-thirties and have a Bachelor’s Degree in Accounting, with a minor in Decision Science. I entered the accounting field ten years ago, when I started working for a software company, where I stayed seven years. I am now the Inventory Control Manager for a large winery. My experience in the financial markets includes both personal and business endeavors.

Quick, look out the window. It’s raining. No, the sun’s out. No, it’s cloudy. Wait a second, it is changing again, but I can’t tell what it is going to do.

Kinds like the stock market. Up one day, down the next, then goes sideways. That stock I bought is not acting right. Maybe I should sell it, but I’ll wait another day. My broker (the weatherman) says it will go back up.

At the beginning of every year we hear stock market forecast (whether we want to or not) and every one of the “experts” is about as accurate as our TV weatherman. Be sure to take your umbrella. Every year the Wall Street Journal surveys more than 50 economists and every year about 1/3rd of them are right. A weatherman can do better than that. The analysis of these birds seems impeccable and when you hear them speak so confidently you are sure they are right. He must be right – he’s a broker/economist/financial planner and they know everything. Well, at least a lot more than I do – maybe.

Having owned a brokerage company and hired about 300 brokers I can assure you they don’t know any more than you do. It just sounds that way. The one question you should always ask any broker before you give him your money is if he had a winning year last year. The market was down overall about 25%. If he lost more than 5% you don’t want to know him. And if he says he made a bundle you had better question him carefully and ask for proof.

For the last 3 years almost everyone lost money. But this year it will be different. My broker said so. Only once before did it ever go down 4 years in a row and the odds of it’s happening again are astronomical. Now that’s logic for you. If you want to know what the weather is you look out the window. This same logic goes for the stock market. It is going down except for brief periods. As long as the major trend continues it would be wise NOT to buy anything.

Now that President Bush has given us his “stimulus” package and the Democrats have countered with theirs I wonder how long they are going to fight over how much and who gets what. It could be months before we see anything definitive from Washington. And that means you and I won’t be getting any relief until then.

Tell those guys in the Beltway that it’s raining and we need an umbrella – NOW!

Al Thomas

Author of "If It Doesn’t Go Up, Don’t Buy It!"

Never lose money in the stock market again.

http://www.mutualfundmagic.com

Using Swing Trading Strategies and Technical Analysis when Trading Stocks to Make Consistent Trading Profits.

This article is one small part of a series of lessons using Swing Trading Strategies and Technical Analysis developed by WD Gann which are designed to show how anyone can build a profitable Stock or Commodity trading business from scratch.

The lessons are available for you to study here at StockTradingReview.com

Swing charts can be a valuable technical analysis tool in determining the trend of any market or Stock and assisting with entry and exit levels for your trades.

Please follow along on the charts below as we go through this lesson. Charts available at StockTradingReview.com.

Firstly some basic ground rules for those of you who are unfamiliar with swing charts and swing trading.

WD Gann is credited with bringing swing charting methods into prominence may years ago, and he used swing trading extensively along with his forecasting skills to profit from the market.

Please study the first chart below. I have drawn the swings of the market over the bar chart so you can see how a swing chart is drawn. Charts available at StockTradingReview.com.

The line on a daily swing chart goes up to the highest point of the daily bars each day until a daily low is broken, then goes down to the low of each bar until a daily high is broken. Pretty simple.

An inside day has no effect on the swing chart - the swing line simply stays where it is until a daily high or low is broken.

An outside day affects a swing chart in different ways, depending on the price action of the market.

If the price rallies first, making a new daily high, then falls and makes a new daily low, the swing chart goes to the top of the high bar first and then to the low of the day.

If the price first goes down and breaks a daily low, then rallies to make a new daily high on the same day, the swing chart goes down to the low of the day, then goes up to the high of the day.

An outside day that is with the trend is usually a very good trend continuation signal - traders tried to change the trend of the market early but were overwhelmed by the other market participants.

You can see examples of outside days in the chart above.

Now, lets have a look at how to use this trading method in a Stock.

Looking firstly at the first chart of UNH below, we can see that the Stock is making higher tops and bottoms, therefore the trend is obviously up.

At no stage has there been any reason for a trader to do anything but buy this Stock or trade it in that direction using Derivatives. If you have charting software and would like to follow along with this trade, please do so now.

If you do not have charting software, consider subscribing to Incrediblecharts or you can go to Bigcharts and use their free charting software. If you use Bigcharts, select ‘Java Chart’ with the code UNH and you will be able to scroll back and follow the prices as we go through them.

The fact that this Stock was in an uptrend prior to this area of the chart gives us a clue as to which way the trend is likely to go in the future. Trends usually continue for far longer than most traders think they will.

The 30 day simple moving average (the blue line) will be our final trend filter for determining trend direction - we will not take a trade against the direction of the 30 day moving average.

WD Gann placed major significance on the fact that strongly trending Stocks or Commodities usually had reactions to the main trend of 3 days or less. Therefore, we will define a strong uptrend by the following rules -

The price bars are predominately above the shorter term (7 day) moving average

There are more up days than down days - in other words, more blue bars than red bars on our chart

The reactions to the main trend are 3 days or less

We need a higher swing high first, then a higher swing low before we can enter an uptrend

Assuming that we are just starting to trade this Stock and it looks promising as a candidate because it has been trending consistently higher for several weeks, how do we find an entry signal using swing trading rules and strategies?

After the 5 day reaction that ended on December 10 (near the bottom left had side of the chart above), the Stock advanced for 4 days up to what could have been a double top.

Because the trend is up, double tops often fail, but many traders think it’s the end of the run and naturally sell, often resulting in a 1 or 2 day reaction. As the top is taken out, the majority of these traders will buy back their sold positions, giving additional strength to the uptrend with their buy orders.

This is what happened here - there was a 1 day reaction and then the Stock rallied straight to a new high for the move, indication great strength in the uptrend and possibly short covering as well.

Our buy signal is as soon as price trades 5 cents above the high of the lowest day any the reaction.

Once we are in the position, we place a stop loss order several cents below the swing low formed by the reaction in case the trend fails to continue - if this occurs we will be safely taken out of the trade with a small loss.

The low of the 1 day reaction at $52.55 failed to make it down to the previous swing high at $51.79 (note the horizontal line drawn across from this top), leaving a gap in price of 76 cents.

This subtle signal is often a sign the market is giving us that it is about to start a strong move higher. The sellers failed in their attempt to push the Stock price lower - This means we should BUY!

By taking out the old high and a potential double top within just one trading day, the Stock is telling us that there is a good chance of further gains. If it had taken several days to take out the old high, the risk is that the move higher has a greater probability of failure.

So, we are now in the trade with a stop loss order in place below the swing low. The Stock had another day up, then another 1 day reaction, then rallied to another potential double top, had an inside day and one day down, then to another new high.

The formation of another higher swing low gives us another opportunity to compound our position as soon as the price trades above the high of the low bar (turning our swing chart up again) and then we place our stop loss orders safely a few cents below the higher swing low.

The Stock again left a gap in price between the swing low and the previous swing high and made a double bottom at $55.51 and $55.54 - this is a very powerful continuation signal.

The Stock then rallied for 5 consecutive days. Things are looking great, then suddenly, in one day, the price falls right back down, through the previous swing lows, and stops us out.

This is a problem if we keep our stop loss orders close below the swing lows. For this reason, it pays to back test how far a Stock you are interested in trading usually goes through swing lows before recovering.

Some Stocks will trend well for months, then break a swing low by 20 or 40 cents, only to then continue on with the trend. If a Stock routinely goes 40 cents, we want to put our stop loss orders at least 50 cents below the most recent swing low, so we are not stopped out prematurely. How far below the swings is something you will be able to work out by back testing the Stocks you trade.

By doing your own research and finding how the Stocks you trade usually react around swing lows, you will be able to place your stop loss orders a safe distance below the swings (or above the swing highs in a downtrend) and ride the big moves without being stopped out.

Of course, some Stocks do not lend themselves to swing trading, so just don’t use this strategy on those Companies. Use another method more suited to those particular Stocks.

UNH continued to rally after this selloff, making higher swing highs and lows, then breaking the lows occasionally. The 30 day moving average continued to move higher, so the way to trade this Stock was to keep looking for buying opportunities off each of the higher lows within the trend.

This is one of the drawbacks of swing trading - often very good trades will be interrupted by you being stopped out. Then, you have to wait for a higher swing high, then a higher swing low before you can enter again.

While this is annoying, there are many times when a Stock will trend upwards for many weeks and not break a swing low. There are periods when Stocks will trend lower for weeks or months and not break a swing low.

You cannot know beforehand what will happen with any particular trade, so you just have to take them all and roll with the punches as they occur.

Over time, if you are trading Stocks that trend well and don’t consistently break swing lows or highs by more than a few cents, you will do very well using this method.

If the Stocks you trade do not trend, this strategy will cost you a lot of money.

Therefore, look for Stocks that trend and trade only those. The Charts below show some more example of strong trends with the swing chart overlayed over the price bars. Charts available at StockTradingReview.com.

All it takes is a few of good strong trends like those above each year to make a lot of money trading. Unfortunately, many people fight the trend and sell too early or even short sell Stocks that are in strong uptrends, thinking they have picked the top, only to see the Stock continue to rally further immediately.

By the time the buyers are exhausted, these traders have spent their monetary and psychological capital in a futile attempt to pick the top of the market.

Swing charts give us a mechanical indicator to use for entries and exits and take a lot of the guess work out of our trading. Along with the 30 day moving average, it was very hard to argue that the trend was anything but up at any time here by simply looking at the higher tops and bottoms on the chart and the trend of the blue line.

Losses on some trades are inevitable, as we cannot know for sure what the market will do. It only takes one person somewhere in the world to invalidate your perfect trade set-up and send the price of any Stock in the opposite direction to what you were certain was going to happen.

All our analysis can do is alert us to probabilities - there are no certainties in financial markets. This is the hardest thing for most traders to accept. We all hate to be wrong, but that is the nature of the Business.

All we can do is take every trade and see what happens. The better our analysis and our system, the more likely our trades will produce profits.

Every one of us must develop our own system of analysis that we are comfortable with, based on what we learn from other traders, and then we must take every trade that system signals. If we start to second guess our system, we may as well throw it away and just stick with our day job.

Make a decision to develop a system you are happy with, whether it involves the Swing Trading methods I have shown you in this lesson or not, and commit to taking 20 trade set-ups no matter what, firstly on paper until you gain confidence, then if you are making paper profits, using real cash.

Then follow your rules to the letter. This will give you an objective measure of how profitable your system is and whether it is right for you.

If you can enter a trade and hold a position overnight while still being able to sleep, your plan is sound. If not, you may need to reduce the size of your position or adjust your plan is some other way.

The large profits come from identifying a strongly trending market and taking multiple positions with that trend. This naturally involves holding overnight, sometimes for many nights.

We hope this lesson helps you in your understanding of Swing charts and Gann’s Swing Trading methods and how to use them. If you have any questions, please email us by using the form on the Contact Page and we will try to answer them for you.

If you feel you have benefited from this article, and would like to learn more about Swing Trading, then please feel free to subscribe to our Free Newsletter "The Stock Trading Review", for stories on how other traders use Swing Charts and Swing Trading Strategies to make profitable trades in the Stock market.

Visit the website at, StockTradingReview.com for more lessons and articles on Swing Trading that will help you become a better, more consistently profitable trader.

To Your Trading Success,

Tony Spann and Stock Trading Review Team

Stock Trading Review is dedicated to helping you succeed as a trader by sharing with you simple and easy to follow tips and techniques.

Discover more insider secrets and the exact proven strategies to trade stocks profitably: http://www.stocktradingreview.com

Copyright(C)2005 Stock Trading Review

Have you ever thought of investing? Do you have a family that you would like take care of? Does the idea of making money with stocks, bonds, mutual funds and real estate interest you?

Investing is essential to making money. Whether it be stock investing, investing online, real estate investing, finance investing, investing in bonds, investing in mutual funds. All are essential in helping secure your finances, and financial stability for you and your family. If you are interested in investing, continue reading about ways to make money. We will briefly discuss the concepts of investing with stocks and mutual funds, investing with real estate and investing online.

Stock & Mutual Fund Investing

The stock market is a great place to make money. If you intend on investing with stocks and mutual funds, we highly suggest that you first do research on the companies you wish to invest in. Although the stock market is a great place to make money, there is also a degree of risk involved.

Real Estate Investing

Investing in real estate is safer than the stock market. A lot of people purchase homes that need are in need of remodeling, and can make a lot of money by fixing them up and selling them. Be advised that it isn’t as simple as buying a house, painting it, and then selling it. There are a lot of factors that you should consider before you attempt to invest in real estate.

Online Investing

Another fast growing way to invest is through trading online. Traders have the capability of doing research, buying and selling and making money with their investments all with the simplicity of sitting in front of a computer. It’s amazing at how easily you can work your finances online, and make money without even leaving the house!

If you plan on investing, make sure you educate yourself in the market or means in which you wish to proceed. Whether it be investing with stocks, investing with mutual funds, investing with real estate or investing online, do your research and make some money! If you are looking for a resource to help you with investing, you can visit our website and you will find ample information about investments, and how to make money.

Brian M. Gardner is the Founder of Financial-Articles.com - An Online Money Making Resource. Learn how to make money and acquire wealth by investing in stocks and mutual funds, as well as how to be successful in sales, marketing and advertising.

Visit Brian’s website at http://www.financial-articles.com

Exchange Traded Funds (ETFs) are growing. Investors are choosing low annual expense and market return over high annual expense and promised performance.

Total ETF inflow is growing faster than Mutual Fund inflow. ETF inflow grew from $42.5 billion in 2000 to $54.4 billion in 2004. In contrast, mutual fund inflow fell from $309.4 billion in 2000 to $180.3 billion in 2004. Standard & Poors Depositary Receipts Trust (SPY) is the largest and oldest ETF. From the one fund SPY started in 1993 the number of ETFs has grown to 150 in 2004.

Growth of ETFs is fueled by investors searching for market performance. About 20% of conventional mutual funds do beat the market. The puzzle is which funds will win, in the future. ETFs, on the other hand, have a reasonably good record of matching the performance of their underlying index. For instance, in 2004, SPY value grew 10.92% and the value of the underlying S&P 500 index grew at 10.88%. The promise of the conventional mutual fund is that it will deliver superior results. The promise of the ETF is that it will match the performance of its underlying index.

Expense for ETFs is less than for conventional mutual funds. A prime reason for the mutual funds’ higher expense is that pros perceived capable of superior results are more expensive than technicians paid to duplicate the holdings of an index. ETFs are passive investments and don’t require the active management of pros. Investors moving money from mutual funds to ETFs are trading promised performance and high expense for market returns and low annual expense. ETFs generally have expense ratios below 1. SPY’s expense ratio is .12. Expense ratio is percent of assets consumed by fees annually.

Investors sticking with mutual funds have a couple of things going for them. Eliot Spitzer has used his New York State Office of Attorney General to scare/shame mutual funds into minding fiduciary duties to their investors. The growth of ETFs is pressuring mutual funds to reduce their expenses and to introduce ETFs mimicking mutual funds. Investors sticking with mutual funds might benefit from the growth of ETFs. However, mutual funds might have a hard time delivering. Slowing growth or actual decline in fund size will make it difficult to reduce their expenses enough to keep investors happy. The more investors defect the fewer left to share the expense.

ETFs trade like stock equities. They can be bought and sold whenever the market is open. They can be shorted, purchased on margin, and optioned. Most brokers charge a commission for every buy and sell transaction. This can be a problem for small investors building a portfolio with monthly contributions. There is at least one broker that charges an annual fee rather than per trade commissions.

ETFs are passive. They only trade when changes are made to the composition of the underlying index. Fewer trades mean less tax consequence. Mutual funds often have taxable capital gains, sometimes even in years when the fund has declined in value (sell winners and hold losers).

That 20% of mutual funds beat the market is a premise. It assumes multiply years and a market defined as the S&P 500. Meg Richards writing for The Associated Press reported that for 2004:

- The S&P500 bested 61.6% of actively managed large-cap funds.

- The S&P400 bested 61.8% of actively managed mid-cap funds.

- The S&P600 bested 85% of actively managed small-cap funds.

The probability of a mutual fund having beaten the market in 2004 is low. Of course, relative performance changes from year to year. Relative performance, of active versus passive management, changes. Relative performance, of individual actively managed funds, changes.

The best ETFs strategy for small, beginning, busy investors is to ‘buy and hold’ SPY. If you are bigger, experienced, or have time on your hands you can try a more active strategy. A strategy that beat the S&P500 over the last three years is to hold equal amounts of five large diversified ETFs and rebalance weekly. This strategy is in some ways just an expansion of our definition of ‘the market’ beyond the S&P500. This strategy since inception 3 years ago has beaten the S&P500 just over 1% annualized. This small gain means rebalancing weekly is only viable when it is without trading cost. A more aggressive strategy is to monitor 50 ETFs and hold the most oversold, rebalancing weekly. This strategy since inception 2/27/04 has beat the S&P500 by 16%.

Remember. ETFs’ popularity is on the rise. They trade like stocks. They have lower annual expense than mutual funds. Their objective is to mimic the performance of an index. They don’t beat or lose to the market, they are the market. It is usually best for low maintenance, ‘buy and hold’ investors to define the market as broadly as possible.

Lyle Wilkinson, investor, trader, author, MBA Helps individuals learn to self direct their stock portfolios. Book, e-book, PowerPoint "DIY Portfolio Management” http://www.diyportfoliomanagement.com lyle@diyportfoliomanagement.com

The Shadow knows. There used to be a radio program called The Shadow where the hero, Lamont Cranston, the Shadow, would overcome the shadowy forces of doom by clouding the vision of those around him. “Who knows what evil lurks in the hearts of men” was their intro line. They were great shows and you can still find them on the Internet.

The stock market is kind of like the shadow. As you walk along with the sun at your back you cast a shadow. No matter which way you move the shadow stays ahead. Fast, slow, right, left. It doesn’t make any difference.

An equity market is the shadow of the economy staying out in front following every twist and turn. Depending upon the height of the sun the shadow may be long or short. You can see it either as a long term or short term prediction of the passage.

If you did not know what a shadow was you would not realize it is telling you something about where you are going. If you see the shadow fall across a hole you know you must step over or around it depending upon its width and depth. The path of our economy is predicted by the direction of the stock market. When things are good and everyone is making money the shadow seems to go up and when the economy slows (for whatever reason) the shadow darker and heads down.

At this time (11/04) the sun is shining brightly and the shadow stretches out long and friendly before us. The stock market is going up and everyone is feeling good, but we also know that tomorrow storm clouds may appear making our shadow seem to be a monster black image that hides the potholes in our path.

When that occurs we must be ready to put on our raincoat to protect what we carry through life. One of the most important is the money we have put aside for the time we wish to depart the path, sit by the road and contemplate all the beautiful things we have brought. That means we must guard against losing what we have created and not let the shadowy rain cloud wash them away.

That raincoat for your investments is an exit strategy for your portfolio. Without a plan to protect your assets it will be too easy to seem them washed away. This does not mean diversification which is what brokers want you to do. It means a plan to exit (sell) stock and mutual funds that are going down. This can be done with a simple percentage stop-loss order for your stocks and a mental stop loss for funds.

Brokers never want you to sell even though there may be a commission involved because once you money is in a money market neither they nor the brokerage company makes any money. You and only you care about your money so you must protect it. Think about an exit plan now and put it into place.

Do not become a victim of the dark shadow.

About The Author

Al Thomas

F*R*E*E investment letter www.mutualfundmagic.com

Author of best seller "IF IT DOESN’T GO UP, DON’T BUY IT!" Never lose money in the market.

Copyright 2004 Albert W. Thomas All rights reserved.

Former 17-year exchange member, floor trader and brokerage company owner.

Options trading can increase the profits you make when trading Stocks if you understand how to use them and know what you are doing. Options can be a very useful tool that the average investor can use to enhance their returns.

This article - Options Trading Basics, looks at what options are and discusses some of the options trading strategies traders can use with these versatile instruments.

Options - An Overview

Options give the buyer the right, but not the obligation, to buy (a call option) or sell (a put option) the underlying Stock or futures contract at a specified price up until a specified date.

In other words, options are like tradable insurance contracts.

An investor can purchase a Put option as insurance against a decline in the Stock price or a Call option in case the Stock rises. Buying an option gives the purchaser time to decide whether they will buy or sell the underlying Stock. The price is locked in until the expiry date, which in the case of LEAPS can be years into the future.

Options trading has several advantages that every Stock Market investor should be aware of, such as high leverage, lower overall risk than owning the physical security, more versatility and the ability to generate extra income from a current Stock portfolio.

An option’s value fluctuates in direct relationship to the underlying security. The price of the option is only a fraction of the price of the security and therefore provides high leverage and lower risk - the most an option buyer can lose is the premium, or deposit, they paid on entering into the contract.

By purchasing the underlying Stock of Futures contract itself, a much larger loss is possible if the price moves against the buyers position.

An option is described by its symbol, whether it’s a put or a call, an expiration month and a strike price.

A Call option is a bullish contract, giving the buyer the right, but not the obligation, to buy the underlying security at a certain price on or before a certain date.

A Put option is a bearish contract, giving the buyer the right, but not the obligation, to sell the underlying security at a certain price on or before a certain date.

The expiration month is the month the option contract expires.

The strike price is the price that the buyer can either buy call) or sell (put) the underlying security by the expiration date.

The premium is the price that is paid for the option.

The intrinsic value is the difference between the current price of the underlying security and the strike price of the option.

The time value is the difference between current premium of the option and the intrinsic value. The time value is also influenced by the volatility of the underlying security.

Up to 90% of all out of the money options expire worthless and their time value gradually declines until their expiry date.

This clue offers traders a very good hint as to which side of an options contract they should be on…professional options traders who make consistent profits usually sell far more options than they buy.

The option contracts that they do buy are usually only to hedge their physical Stock Portfolios - that this is a powerful distinction between the punters and small traders who consistently buy low priced, out of the money and close to expiry puts and calls, hoping for a big payoff (unlikely) and the guys who really make the money out of the options market every month, by consistently selling these options to them - please think about this as you read the remainder of this article.

The seller of the option contract is obligated to satisfy the contract if the buyer decides to exercise the option.

Therefore, if he has sold Covered Call options over his Shares, and the Stock price is above the option strike price at expiry, the option is said to be in-the-money, and the seller must sell his shares to the option buyer at the strike price if he is exercised.

Sometimes an in-the-money option will not be exercised, but it is very rare. The option seller (or writer) has to be prepared to sell the Stock at the strike price if exercised.

He can always buy back the option prior to expiry if he chooses to and write one at a higher strike price if the Stock price has rallied, but this results in a capital loss as he will usually have to pay more to buy the option back than the premium he received when he originally sold it.

Many option writers simply get exercised out of the Stock and then immediately re-buy more of the same or another Stock and simply write more call options against them.

The buyer of an option has no obligations at all - he either sells his option later at a profit or a loss, or exercises it if the Stock price is in-the-money at expiry and he can make a profit.

The vast majority of options are held until expiry and simply decay in price until there is no point in the hapless buyer selling them. Very few options are actually exercised by the buyer. The vast majority expire worthless.

Having said all this, lets look at an example of how to use options to gain leverage to a Stock price movement when the trend does go in our favour…

For this example we will use MSFT as the underlying security. Let’s assume MSFT is trading for $24.50 a share and it is early January. We are bullish on this Stock and based on our technical analysis we think that it will go to $27.50 within two months.

In this example, we will ignore Brokerage costs, but they do have an effect on the percentage returns. The prices and price moves of the Stock and the options are hypothetical - they are intended as a guide only.

Buying 1000 physical shares will cost $24,500 and if we sell our position at $27.50 a share, we will make a profit of $3,000 or a 12% return on our capital. We will have $24,500 at risk if we take this position for a potential of 12% or $3,000 profit.

Instead of using cash to buy the physical Stock, we can buy 10 call options with an expiration that is at least three months into the future and a strike price that is close to current price of the underlying security.

10 contracts represents 1000 shares of the stock, a call option is bullish, three months until expiry gives us some time for a quick move, and buying an option with a strike price that is close to the current price of MSFT allows us to get the full potential of the intrinsic value.

We buy 10 MSFT $22.50 April Call options. These options are currently selling for $2.80 and they are in the money.

$24.50 (the current price of the Stock) minus $22.50 ( the strike price) is $2.00, which is our Intrinsic value. $2.80 (the option premium) minus $2.00 (the Intrinsic value) gives us $0.80, which is the Time value.

If the price rallies to $27.50, as we believe it will, the intrinsic value of these same options at that point will be $5.00 ($27.50 - $22.50). That means that if the Stock gets to $27.50 a share, our option premium would be at least $5.00 plus a small amount of time value, depending on the remaining time until expiry.

Ten option contracts will cost us $2,800 ($280 times 100) and if MSFT goes to $27,500, we could sell our option contracts for at least $5,000 ($500 by 10 contracts), maybe more.

We will have $2,800 at risk if we take this position, rather than the full price of the Stock ($24,500) for a potential of 80% or $2,200 profit, plus whatever time value is left in the option, probably another $100.

Our options buying strategy gave us a much larger percentage profit with a much smaller potential risk. Don’t forget though that, for us as the buyer, these options will expire worthless if not sold or exercised by the expiry date.

The option seller or writer simply has to sit back and wait until expiry to see if he is going to be exercised. If the Stock price is below the strike price at expiry, he keeps the premium and can write another option over the same Stock.

If the Stock price is above the strike price, he will most likely be exercised and will have to sell his Shares if he doesn’t exit the position by buying his options back on the open market (quite often at a higher price than he originally sold them for).

The downside of buying the option over the physical Stock is that if you bought the Stock itself, even if the price had not moved, you would still own it, but by buying the option, if the price doesn’t move in the desired direction, you lose part of your trading capital.

To make options trading work, the underlying security must move fairly quickly in the direction you expect, or you will lose money at an ever increasing rate as the expiry date draws nearer.

As you can see, options strategies can offer much higher percentage returns with less risk for the same trade. The majority of your cash is still safely in your trading account rather than being exposed to the market.

This is just one example of using options trading to increase your Stock Market returns. There are many more strategies and ways to use options and I encourage you to explore them further.

All options expire worthless if they are not in-the-money at expiry, so the buyer must close out or exercise his position on or before the expiration date or he will lose the entire premium.

The time value portion of the option premium decreases gradually until expiration date. The closer to expiry, the faster the time value reduces, as there is less time for the option to move in the desired direction for the buyer.

For buyers, top traders advise never to hold an option with less than 30 days to expiry due to the exponential rise in time decay during this period.

For sellers, it is usually most profitable to write options that have 30 days or less to expiry, due to this same time decay effect…the buyer of these options has the odds stacked against them and will require a large price movement in his desired direction to make a profit - remember, the vast majority of options expire worthless - so this is the side of these instruments the wealthy usually find themselves on - just a thought…

There are many other intricacies of options trading that investors and traders should be aware of. This article is only an introduction to options trading and there is a lot more information for you to learn.

For a more in-depth look at the various Options strategies available, visit AcornTrader.com.

This page has a series of articles on options trading and outlines some of the strategies traders can use to profit from these extremely flexible vehicles.

We encourage you to study these instruments carefully if you decide to trade them. Then use the trend trading strategies outlined in these stories and articles to position yourself on the right side of the market - whether as a buyer or a seller.

To Your Trading Success,

Tony Spann and Stock Trading Review Team

Stock Trading Review is dedicated to helping you succeed as a trader by sharing with you simple and easy to follow tips and techniques.

Discover more insider secrets and the exact proven strategies to trade stocks profitably: http://www.stocktradingreview.com

Copyright(C)2005 Stock Trading Review

‘Sector funds are too risky.’ ‘I doubled my money with Fidelity Select Technology in 12 months!’ ‘Avoid sector funds.’ If all of this sounds confusing, you are not alone. Sector funds are among the more misused and misunderstood investments. So, how should you use sector funds?

Before looking at one of the uses of sector funds in detail, let’s review what sector funds really are: Sector funds confine their investments to a particular sector of the economy. Fidelity Select Healthcare (NDQ: FSPHX) is an example of a sector fund. By focusing on stocks of companies in the healthcare sector, the price moves of this fund are more dependent on factors that impact the healthcare sector rather than the economy as a whole. Demographic change, such as increasing age of the population, is an example of a factor that particularly drives investments in healthcare. By diversifying its assets across over 60 companies within the healthcare sector, Fidelity Select Healthcare provides investors with the opportunity to benefit from secular trends driving the demand for healthcare while mitigating company-specific risks such as failure of clinical trials conducted by a particular company.

Let’s now look at a high-potential approach of using sector funds.

Using sector funds to create a diversified mutual fund portfolio By allocating assets across a group of sector funds, investors can effectively create a diversified mutual fund portfolio using sector funds. This approach gives the investor flexibility to over-weight or under-weight certain sectors versus broadly diversified indexes such as the S&P 500®.

To implement this active approach to money management, it helps to have a diverse group of sector funds to choose from. Fidelity Investments manages 41 sector funds under the Fidelity Select Portfolios® umbrella which makes this family of sector funds well-suited for this purpose. By dividing assets across, say, 8 sector funds in the Fidelity Select Portfolios, e.g., Fidelity Select Biotechnology (NDQ: FBIOX), Fidelity Select Computers (NDQ: FDCPX), Fidelity Select Energy Service (NDQ: FSESX), Fidelity Select Home Finance (NDQ: FSVLX), Fidelity Select Medical Delivery (NDQ: FSHCX), Fidelity Select Multimedia (NDQ: FBMPX), Fidelity Select Retailing (NDQ: FSRPX), and Fidelity Select Wireless (NDQ: FWRLX), one can build a customized diversified portfolio. With each of the sector fund managers actively scouting for the best investment ideas within their sectors, this cluster of Fidelity Select Portfolios packs a lot of power into your diversified portfolio.

Other mutual fund families that provide a relatively wide choice of sector funds include ProFunds and Rydex Funds. Exchange traded sector funds such as Select Sector SPDRs, iShares, and Sector HOLDRS, that trade on the American Stock Exchange, can also be used to construct diversified sector fund portfolios.

The wide selection of sector funds available provides you with the ability to take advantage of changing market conditions and continually optimize the risk-reward characteristics of your diversified portfolio. To employ this approach effectively, you need to understand and follow the dynamics of the individual sectors. You must also be able to make informed decisions on sectors to select and sectors to avoid. At the end of the day, you should be right more often than wrong with the sectors you select.

AlphaProfit.com’s research suggests that by constructing diversified mutual fund portfolios using sector funds, investors have the potential to outperform the market averages on the basis of relative returns as well as risk-adjusted returns. The track-record of AlphaProfit’s model portfolios indicates the potential of this approach.

A Caveat

Diversification is one of the cornerstone principles of mutual fund investing. Sector funds that focus on high-growth sectors or narrow niches of the economy tend to be volatile. It is generally not advisable to commit a substantial portion of your total assets to a single sector fund. Maintaining adequate diversification across sectors in your overall mutual fund portfolio is good investing practice.

Key Points to Remember

1. Sector funds are investment vehicles that focus their investments on a particular sector or industry group. Sector funds provide investors with an opportunity to profit from trends impacting a particular sector or industry while reducing company-specific risks.

2. High-potential diversified portfolios can be constructed by dividing assets among a group of sector funds. This active investment approach requires investors to make informed decisions on sector selection. The power-packed cluster of sector funds may offer investors the potential to outperform the market averages.

3. Diversifying mutual fund portfolios across sectors is good investing practice.

Notes: This report is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice. This report does not have regard to the specific investment objectives, financial situation, and particular needs of any specific person who may receive this report. The information contained in this report is obtained from various sources believed to be accurate and is provided without warranties of any kind. AlphaProfit Investments, LLC does not represent that this information, including any third party information, is accurate or complete and it should not be relied upon as such. AlphaProfit Investments, LLC is not responsible for any errors or omissions herein. AlphaProfit Investments, LLC disclaims any liability for any direct or incidental loss incurred by applying any of the information in this report.

The third-party trademarks or service marks appearing within this report are the property of their respective owners. All other trademarks appearing herein are the property of AlphaProfit Investments, LLC. Past performance is neither an indication of nor a guarantee for future results. No part of this document may be reproduced in any manner without written permission of AlphaProfit Investments, LLC. Copyright © 2004 AlphaProfit Investments, LLC. All rights reserved.

About The Author

Sam Subramanian, PhD, MBA is Managing Principal of AlphaProfit Investments, LLC. Sam developed the ValuM™ Investment Process for managing investments. He edits the AlphaProfit Sector Investors’ Newsletter™. For the 5 year period ending December 31, 2003, AlphaProfit model portfolios increased by up to 288%, a compound annual return rate of 31%. To learn more about AlphaProfit and to subscribe to the FREE newsletter, visit: http://www.alphaprofit.com

You’ve decided to try your luck at trading stocks or commodities, but so called experts tell you that you need to determine your trading objective. What exactly does that mean and why is it so important? Well, it’s really a question of your trading philosophy. A trading objective basically identifies the horizon on which you’ve chosen to trade. For instance, a day trader will have totally different set of objectives and goals than will a long term investor. They look at the market through different sets of glasses and it can be very dangerous to your trading account to try to mix and match trading styles.

Let’s first look at the most common trading objective – long term investing. Long term traders are usually more concerned with company fundamentals such as earnings, annual growth, and sales to name a few. They may use some technical indicators such as price charts and graphs to help time their entry points, but fundamentals are generally more important to them. Long term traders are looking for that home run trade that will pay very large profits. Therefore, they can be right as little as 20-25% of the time and stay earn a nice profit. They have been known to hold a given stock for several years.

The other end of the trading objective is the day trader. Day traders go into the market each day looking for quick small moves of less than a point – known as “scalps”. They use technical charts exclusively and typically buy large positions which they often sell within minutes. Their profits on a given trade is much smaller than those a long term investor would generally make, so therefore day traders must have a very high winning percentage of trades – usually 60% or more to be successful.

These trading objectives are two extremes and are discussed here to illustrate a very important point. If a day trader takes a position based on short term indicators from a chart or other technical indicator, it would be a huge mistake to change that trade into a long term investment because the trade setup wasn’t based on a long term trade. Inexperienced traders will often do this when a short term or swing trade goes bad. Instead of cutting their losses by simply selling the position, they change it into a long term trade hoping that the position will become profitable. DO NOT change your trading objective – stick to you trading plan. This rule will protect your account.

Chuck Cox is a Technical Writer and Industrial Scientist by professional with a background in statistics. He has used mathematical and statistical methods to invest and trade in the stock, futures, and options markets. Chuck has owned various businesses and presently operates several websites. To investigate and learn more about trading stocks, visit his website, http://www.earncashathometoday.com/trading-stocks.htm

An investor can find and research the best stock on the market, one with huge potential but if the general market indices are negative, it will most likely be the wrong time to buy. A stock with tremendous accelerating earnings, rising sales, an up-trending chart pattern and a strong industry group may sound excellent to buy but will mean absolutely nothing if the market is positioned to move in the opposite direction of your expectations. As soon as a stock is purchased, the time comes for an investor to make a decision to hold or to sell. If the position shows a profit, hold as your judgment is correct. If the position shows a loss, cut it quickly and don’t rationalize the situation before it doubles in size. Timing will play an important role in determining if you are right or wrong.

Losers must be cut quickly, long before they materialize into enormous financial disasters. They company and stock may not be a loser but rather your timing may be premature to a strong movement, forcing you to sell on a pullback. After a stock is cut from your portfolio, the transaction must be forgotten about and eliminated from your subconscious mind and/or emotional bank. The trade must be studied to capture the true essence of your mistake but the specific security involved must be blocked from any sentimental attachments, allowing you to consider reinstating the position at a higher level. This repurchase may take place immediately or well into the future but the important fact is that you were wrong with the timing on the initial position. The timing, also known as the ‘M’ in CANSLIM by William O’Neil, may have been wrong even though all fundamental and technical criteria related to the individual stock seemed to be perfect.

A quote from the great Gerald Loeb: “Cutting losses is the one and only rule of the markets that can be taught with the assurance that it is always the correct thing to do.”

The wisdom shared by Loeb is easier said than done. Humans like to take profits and hate taking losses or admitting that they were wrong. Pride and ego distorts the clear thinking process that every investor must posses when following clear cut rules that provides insurance to their cash stake. Even tougher, humans refuse to repurchase anything at a higher price that they sold it previously. As Loeb states, only logic, reason, information and experience can be listened to if failure is to be avoided.

It is advisable to make a “test buy” in a shaky or unstable market which allows the investor to assess the general conditions with minimal risk but still maintain an emotional attachment. If the position goes bad, a small loss will be realize but the damages will be limited and the investor’s pride and ego can be repaired rather quickly. In a sense, the investor was half right by only initiating a partial position also known as a “test buy”. If the market was trending up, a “test buy” would not have to be established as the market direction would have been clear from the beginning.

When it comes to timing, an uneducated investor may realize better gains during a solid bull market based on pure luck than a seasoned investor will return in a sideways or unstable market. Following the trend will be the most successful route to consistent profits over the long haul. By watching the general market indicators, such as price, volume and daily new highs, an investor should know exactly what type of environment they are trading. The most important factor weighing on the stock market is the presence of public psychology, even more so than any fundamentals that the most intelligent academic analyst can compute. Technical analysis along with confirmation of the market trend allows us to see the combined thought process of the general public and tells us if the timing is right to buy or short a specific stock, regardless of the fundamentals.

In conclusion, we must understand that certain situations are only applicable during specific times. Buying leading stocks during a down trend is a sure way to multiple losses that are cut quickly. Shorting stocks during a raging bull is another sure way to financial disaster and margin calls. Don’t get discouraged if you take a few small losses consecutively as this is your rules telling you to stay out of the market at this time. The timing may be off even though the stock and research is favorable. Why would you swim upstream to reach your destination if you could jump in a boat and row downstream with the current another day? Before you ever start to immerse yourself into researching a stock to purchase, make sure you know the exact environment of the market and determine if it coincides with your objective. If it doesn’t, get ready to get slaughtered, especially if you don’t follow strict rules to cut all losses quickly.

Chris Perruna - http://www.marketstockwatch.com

Chris is the founder and president of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.