Options Trading: One of the Best Ways to Exploit Herd Mentality

Options Trade: One of the Best Ways to Exploit Herd Mentality   In 2005, 450 sheep jumped to their deaths.   One sheep dove.  Another followed.  All of a sudden, a flock of sheep began jumping off a cliff for no real reason. Shocked shepherds would watch as another 1,500 jumped.   Hundreds of sheep perished, as they got caught up in herd mentality.   Each followed and jumped simply because every other sheep was doing it.   And as uncommon as this may sound, it’s not.   In fact, this very same thing happens each and every day among traders and investors.   We buy because everyone else does.  We sell because every one else does.   But we never question what we’re really buying or selling, which can be quite costly.  Instead, we take the leap simply because every one else is doing it.   And if every one else is doing it, it must be right.  Right?  Well, not exactly…   In 2009, Kiplinger’s ran an article by Robert Frick, titled, “Don’t Trust the Crowd.”   It noted:   What’s scary about the herd mentality is how insidiously it gets you to see things differently. In fact,…

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The Newest Lesson on Options

Let’s return to basics. We received a number of queries of late from folks new to the game of options, many of whom would like to partake of the wonderful profits we at Normandy have been blessed with achieving over the years. It therefore behooves us to go over a few of the fundamentals of the game – good reminders, too, for those with substantially more options experience. One can never get enough of the basics. We’ll start with this – Your first concern as an investor in any asset class – stocks, bonds, commodities, options, etc. – is to be aware of the primary trend. The primary trend is the long term, multi-year direction of the market you’re trading, and by and large, it’s the side of the trade you want to be on at least three quarters of the time. That said, let’s delve a little deeper. We’ve posted a two year chart of weapons manufacturer General Dynamics (NYSE:GD) for illustrative purposes. Take a look – The primary trend (in red) is one of three trends active in the market at any given time. The secondary, or intermediate-term trend (in blue), runs counter to the primary trend and…

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Follow the Leader (HYG, FB)

We’ve got a hoard of trades to run down today, as last Friday’s options expiry ushered in a bevy of new results.  We start with our HYG trade from October. Sharpen your pencils and take out a fresh sheet of paper, ‘cause here we go… On the 27th of October we wrote a letter called Launch the Dirigibles! in which we urged you to consider buying a beaten-down junk bond sector. Specifically, we wrote – We say junk got smacked because an overly sensitive, Prozac-popping news-addicted investment community can’t see the big picture sufficiently to wait out these minor storms. Nor will they be sufficiently wise to get back in early enough to capitalize on a tremendous buying opportunity. Our recommendation is to buy the junk sector using CALLs on HYG and at the same time sell some premium to offset the cost. HYG is the iShares iBoxx High Yield Corporate Bond ETF and it trades on New York. When we recommended the trade, HYG had just bounced off its bottom. Have a look at the chart – Since then, there’s been little excitement in junkland. Our recommendation was to purchase the HYG March 94 CALLs for $0.55 and sell…

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How to Play the Last Burst of the Bull (DIA)

A wise man once said – There are two types of people in the world…  Those who divide the world into two types of people – And those who don’t. And while it’s not our intention to get overly simplistic about folk here, there’s often a lesson to be learned through dividing something into two parts. It struck us that when the final DIA market blowoff arrives and the averages start turning lower, there will be those who will be ready (more or less) to cope with the grueling times that lie ahead. And they’ll be an unfortunate mass of folks unprepared. And it will be equally the case that those who are not prepared will blame those who are for all the woes. Because that’s the way the world turns… Anyone, in fact, who accepts the new reality with any measure of composure will likely be targeted as responsible for it. This tells us that you, dear readers, should prepare yourselves for the many unhappy and disillusioned people who are headed your way. Because you’ll be fine. You know what’s coming. We’ve discuss it here in length. You know both in general and specific terms what to do… again,…

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Study to Win (AAPL)

Apparently our foray last week into the realm of options education was a smash hit, with millions more signing on – and a goodly number of those offering to sell their first-born into Normandy slavery should we continue the class. Not wont to disappoint (and in dire need of a little domestic help), we return today to the Options 101 tutorial, picking up roughly where last week’s lesson ended. Lesson #2 – Kicking Butt   Options trading is an exciting pastime precisely because it’s so outrageously dangerous. And it’s for that reason that it attracts so many skydivers and other thrill-seekers – warriors who like their pain at high speed. Unfortunately, these folk too often learn just how fast one can be separated from their savings. It’s the leverage inherent in options that gives investors such a joy-spasm. But before we get there, a quick round of vocabulary-building. Options Demo #1 Consider the case of ABC stock, trading at $100 a share. Then consider the ABC February 98 CALL option, currently selling for $4.50. Of that $4.50, $2.00 represents the intrinsic value of the option – the option, after all, is trading $2.00 in-the-money (100 – 98). The other $2.50…

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China Breakout Imminent (FXI)

We get questions now and again regarding the basics of options trading, but we generally don’t answer them. Not because we’re snobs or in any other way bovine – just that we don’t have the time or space for such matters. The market overall and the weekly trade itself occupy too much of our effort. Truth is, we’d love to delve into it and be the teachers we genuinely love to be, but a thousand word limit has a way of cutting a great swath of fat from the carcass – whether we like it or not. That said, we are going to pause a moment to introduce an idea or two here – and we hope to do more if and when time permits in the months ahead – even though our intermediate and expert readership might consider it a tad dull. From them, we beg indulgence and promise to keep it brief. Let’s start with just a word on option prices. The price quoted for an option is the cost of an option on a single share of the stock in question. So when you see us referring to ABC company’s option price as $1.35, it means the…

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