Incometrader Financial Newsletter

Q Put

Purpose: The purpose of this section is to educate our members by offering them the ability to profit from the experience that our professional traders share. Our traders will show you a real working order that was placed in one of their own accounts, or a trading idea from this newsletter. Our goal is to educate you the reader on how and why these trades are initiated so you will receive the basic thought process behind each trade. You'll learn why we choose these option trades and the strike prices involved. We'll teach you the thought process of successful trading while showing you a real trade. Here, we will introduce you to a new world of information; ideas, strategies, stocks and options that you can use to become a successful investor. By learning these strategies for yourself, you will then begin to see opportunities you never thought possible.

The Strategy: In a down market, a very popular and widely used option trade is a simple put option. A put option gives the buyer the right, but not the obligation, to sell a stock. When you purchase a put option you will need to know three things: The price at which you want to purchase the stock at (strike price), which month you want the option to expire in (expiration month), and how much you are going to pay for the option (the premium).

Long Put (Debit)

Strategy: Buy a put option. This is a debit trade when opened.

Outlook: Expecting a moderately bearish to bear market, with an increase in the option price of the underlying security below the breakeven point.

Profit: Unlimited, at least until the underlying security reaches zero.

Risk: Limited to the premium paid for the put option.

Breakeven: Strike price minus the premium paid for the put.

Pro's: High leverage, with the potential for large profits.

Con's: High risk, the market must move lower or you will lose your premium. Time decay works against you.

Original Order: We have placed an order and have been filled buying 10 contracts of the Dec 15 puts on Q at a limit of $2.55 for the day to open. The stock is currently trading at 12.60 making the breakeven point at 12.45. The Telecoms have been one of the worst performing sectors over the past 6 months with Q losing money and burning through cash. Support should be just above 9.00 as the stock looks like it has hit resistance in its downward trend. We will place our initial GTC to sell at 3.60. Also the Dec 12.50 - 15.00 Bear Call Spread is paying $0.65 per share for a 35% profit.

The Trade: This order was placed on 11/28/01 as the stock was trading at a price of 12.60 and originated from a WritingPuts.com email. Figure 1 is a daily chart of Qwest Comm. Intl. Inc. [Q]. The chart says it all! With the stock hitting trendline resistance one more time, we can expect prices to roll over and continue to channel between the established support and resistance trend lines. Also, the stock has reached a resistance area near the 30-dma, adding further resistance to any upward movement in prices.

One of the basic theories with regards to volume is, "A bullish market rises on expanding volume and declines on contracting volume." With the sharp drop off in volume as prices move higher, we are given a clear indication that the stock is headed lower. The MACD supports this as the histogram starts to roll over, signally additional weakness.

As the markets have been climbing steadily back above old resistance levels, the DOW above 10,000 and the NASDAQ above 2,000, Qwest (belonging to a weakening Telecom Sector) continues to move lower. So, fundamentally and technically the stock is weak and a "put" play is secured.

Risk and Rewards: (Use the Credit Spread Calculator on the home page of IncomeTrader.com). Before entering any trade you should know the risk/reward characteristics of the trade. You can get option quotes for the stock or index you are looking at from CBOE.com. http://www.cboe.com/delayedQuote/QuoteTable.aspx

If Trade Is Held Until Expiration:

Technical Editor chris.coval@incometrader.com