Newsletter Sample

Volume 14 Issue 160 March 1997
Next Publication date: April 21, 1997
Market Indicator Status: NEUTRAL

The Markets

Presently the market is consolidating its recent gains with the NASDAQ showing a more extensive correction. We should continue to see choppy action. Historically the market has rallied during a triple expiration week. But the following week has had a real negative bias in the past. The Lead Line is at 48%, the Lag Line is at 59%, and they are neutral. The Short-term Momentum Indicator is bullish with a reading of 46,645. It has been giving a weak buy signal every day but one since March 7. The Intermediate Indicator is bearish with a reading of -3. There are 50% bullish stocks and 50% bearish stocks.

In Search of a Broker

Most brokers that handle stocks can also handle stock options. But to survive in the options game you must get a discount on your commissions. In your search for a broker your top priority should be the minimum commission charged for options trades. You will be surprised how often the minimum commission will be invoked. One of the best discount brokers, Brown & Co. (800-225-6707), has a minimum commission of only $21. However, in exchange for this Brown only accepts experienced investors.

Most major discount brokers have minimums that start at about $40 per trade. Try to find a broker that only charges $5 or less per trade with a low minimum. For example, with Brown you can get your commission cost down to $3 per option, even with trades that involve only seven options.

The Advantages of Discounters

A big advantage of discount brokers besides lower commissions is the impersonal nature of your relationship. This is also true of "online" brokers. No single broker is likely to be following what you are doing. If you must take a loss on a position, no one is putting pressure on you or being critical of your actions. A personal broker may try to influence you to avoid taking a loss or a profit when you should do so.

In fact, it is important to keep your trading as private as possible. Then if you make some mistakes you will not be influenced by what your friends, relatives or broker might think of you. Another advantage of an impersonal relationship is that you will be more willing to ask for quotes or enter more exotic orders, when normally you may feel that you are imposing on your personal full-service broker's time. Just remember, when you deal with your broker, you are the boss! If your broker at times intimidates you, get a new broker.

When You Need a Full-Service Broker

If you are just starting to trade options or want to use spreads and writing strategies you may need some hand holding. Here a full-service options broker might help. But even here, you should always try to get a discount on your commissions. Most full-service brokers will negotiate and give you a discount if you ask. A broker that discounts commissions and also gives you some help is E D and F Man (800-837-6212, 312-663-7790).

Other Considerations

If you plan to write naked options or do ratio spreads, make sure your broker allows these trades. Some brokers do not allow naked put writing of any kind even when you are doing it to buy a stock (a strategy that is as conservative as covered call writing). Or some require very large accounts. So shop around for flexible brokers.

Another factor is the types of orders a broker allows. Most brokers do not accept contingency stop orders, which are important if you are doing credit spreads or option writing. E D and F Man is one of the few that accepts these orders.

Finally, to begin trading options you must be approved for trading. Some firms are very restrictive. Brown & Co., for example, will not accept you unless you show that you have extensive experience. But there are many firms that are more liberal, such as Charles Schwab. The bottom line is that the brokerage industry is very competitive, so it pays to shop around.

­ Ken Trester

We have reproduced one of six pages. For a complete free sample, call or write, or order direct on-line.

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Trester Flash Report
Date of thls report: May 12, l997
Next Flash Report will be transmitted: May 17

Market Indicator Status: Bullish

Our indicators continue to be quite bullish. As we mentioned last week, we're seeing a resemblance of a buying panic, which have a habit of lasting longer than most people think. The market is overbought and we could see some choppy action as a result, but we continue to be bullish.

Tbe Lead Line is at 91%, the Lag Line is at 81%, and they are bullish. The Intermediate indicator is bullish with a reading of+2. There are 71% bullish stocks and 29% bearish stocks. The Short-term Momentum Indicator is bullish with a reading of 43,436. It has been bullish since April 25.

Option to Write

Stock (Symbol) (Option Sym): Dell Computer (DELL) (DLQ)

Stock Price: 94 l/8

Option Order: Sell DELL Jun 70 Put

Minimum Option Price: 9/16

Stock Stop Loss: 77

Probability of Profit: 87%

When writing put options make sure to exit your position if the stock touches the stop loss. If you don't you may have to buy the stock for the strike price, even if the stock price is lower.

Debit Spread to Buy

Stock (Symbol) (Option Sym): Apple Computer (AAPL) (VAA)

Stock Price: 17-1/2

Spread Order: Buy AAPL Jan 1999 20 Call and Sell AAPL Jan 1999 25 Call

Max Spread Price: 1-5/8

Probability of Profit: 37%

Your maximum risk with this position is $163, and your maximum profit potential is $337.

How to take this position: Tell your broker to use a spread order to buy Apple Computer January 1999 20 Call and sell Apple Computer January 1999 25 Call, with a maximum spread of 1-5/8.

Undervalued Option To Buy

Stock (Symbol) (Option Sym): Riggs National Corp (RIGS) (RNQ)

Stock Price: 18-1/8

Option Order: Buy RIGS Aug 20 Call

Option Limit Price: 5/8

Option Target Price: 2-3/8

Probability of Profit: 32%

How to take this position. Tell your broker to buy Riggs National Corporation August 20 Calls, with a Limit price of 5/8.

Stocks to Consider for Call Buying

Tyco International (TYC), price = 63-1/4, volatility=24%, broke above resistance at 60 and should move higher.

Time Warner (TWX), price = 45-1/2, volatility=23%, has a bullish technical formation.

Stock to Consider for Put Buying

Qualcomm (QCOM) (QAQ), price = 50-1/2, volatility = 55%, has a bearish formation and a lot of resistance at 53.

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