8-10-09

The Big Money   

          "The big money, the rich-man's money, the institutional money, must be sitting on its hands and watching from the sidelines. If the smart money was piling into this market, we'd know it from volume indications." -  Richard Russell.

            Good news. For months now, I've been explaining how the biotech industry was about to break to highs and it's happening. In fact, the biotech index is even outperforming the larger stock market rally. AND, unlike the rest of the stock market, this is justified.

            With stem cell research being endorsed by the government and the pharma giants' lucrative patents expiring (and thus looking to snap up biotechs), the stage is set for a huge rise of hundreds of percent. Indeed, as I've said before here in this column, I believe biotech to be the new 'big thing' that will lead us out of darkness. Biotime is one stock I follow and has leapt 50% in these past weeks alone.

            Don't approve of stem cell research? Maybe, maybe not. Your dollars don't care- they will flock to where they're appreciated.

            Similarly, alternative energy is something you may or may not think is a good thing. Your dollars don't CARE what you think. Solar and wind frankly have a long way to go, but as I've said a couple of times here in this column, GEOTHERMAL could be huge very soon. I'm following a company called Polaris Geothermal which has risen 25% this last month.

            By the way, Geothermal power is produced by drilling into the ground and tapping the energy produced by steam under the Earth, simple and unlike other alternative energies, very effective. Much like the Internet bubble, when this plays out to conclusion, the real businesses will be left standing and geothermal is the real deal.

            Alternative energy is POLITICALLY CORRECT. It's that simple. That's enough to propel things higher and dollar bills will go there, regardless of what you think about it.

            As investors, we have to try and remove any personal opinion. For example, don't buy a stock just because you happen to like their product. One of the craziest things I see (and I see it a lot) is buying shares in the company you work for. Why? Because if the company gets into trouble, you not only lose your job, but your stocks too!

            Another energy which is clean is natural gas. As you know, I've been a fan of this lately as the price is currently below what it costs to extract the stuff and we've got hurricane season approaching.

            And so, the stock market continues higher. And, barring down-days along the way, the imminent path is upwards further.

            But it's still a bear market rally, so beware.

            There is no foundation to this meteoric rise, but that doesn't mean it can't continue higher for now. But look around. Do you see these green shoots the government propaganda machine keeps blaring out??

            I sure as hell don't. But I do see a stinking great lawnmower headed this way in the form of reality.

            Anyway, one thing I keep saying here is that you can make money on the downside as well as the upside on everything, but I haven't explained how to go about this exactly...

How to Buy and Sell Options

            There are two types of options. The first is a CALL option and the second is a PUT option. In this case we will be buying a CALL option and a PUT option. Here is what that means exactly.

             A Call option is the right but not the obligation to buy the underlying investment. This means that YOU have the right to buy or sell crude oil at a predetermined price (the strike) price, by a predetermined date (the expiration date) if you choose to do so, Hence, the risk is only limited to what you have invested because you are NOT OBLIGATED. A Call option is bought if you think the underlying vehicle is headed higher. It is quoted just like stock options and stock prices. It has a BID and an OFFER. The BID is the price that you can sell at and the OFFER is the price at which you can buy at. Of course, you can always try to buy or sell in between the BID/OFFER spread. The OFFER is also referred to as the ASK price.

              For example, you buy a CALL option on oil with oil being the underlying investment. The price of oil might be at $50. You buy a call option on oil that has a strike price of $50 and expiration of one month. The Call option may cost you $1 per contract (each contract represents a certain amount of the underlying investment). Let's say that oil moves to $55 by expiration. In that case your profit is figured out as follows: $55 minus $50 = $5. $5 is your gross profit. Your net profit is $5 minus $1 (the amount you paid for the option) or $4. If oil were to move to $40, you WOULD NOT LOSE $10 because you were not obligated to buy oil at $50, you had the choice to buy it there. In this case you would lose only your investment or $1 per contract.

              PUT options are the right but not the obligation to sell the underlying investment at a specific price (strike price) by a specific time (expiration). Again, like call options, your risk is limited to how much it cost you to buy the Put option. Put options are bought in anticipation of the underlying investment going down. The value of a Put option increases as the price of the underlying investment decreases. The mechanics are exactly the same as the call option mechanics discussed above.

              For example, let's say that you thought oil prices were going lower. They are at $50 for this example and you think the price is going to $40. A $50 (strike price) Put option with expiration in one month may cost you $1. If oil went to $40 by expiration, you would make a gross profit of $50 minus $40 or $10. Your net profit would be $10 minus $1 (your cost) or $9. If oil moved higher to $60, you would still only be face a loss of $1 at the most because you had the right and not the obligation to sell oil at $50.

              The term "right but not obligation" is your ultimate safety net when buying Put or Call options. Your liability is limited only to what you put up as risk capital.

Until next time...

               Mark Patricks

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