How to make MONSTER MONEY -- Turning $3,500 into $42,000
Tuesday, November 22, 2005 | Teeka TiwariRating:
In my investment life I’ve been called crazy once or twice. It takes vision and more importantly guts to make MONSTER MONEY from the market.
I’m talking about the kind of vision that can take $5,000 and turn it into $80,000.
Crazy, right?
Not as crazy as you think.
Take a trip back in time with me.
It’s early 1999, and the markets have just recovered from the nightmare that was 1998.
The same market that made me a small fortune on the short side in October and then put me in the poor house by December.
One of the markets I traded in was index options on the Semi
Conductor Index or SOX for short.
Anyway, the SOX had just completed a MASSIVE rally, roaring all the way up from 200 to over 400, and by early ‘99 it had backed off a bit and was hovering around the 350 mark.
At this point in 1999 I had been skinned alive by sticking with my short positions throughout the year-end rally we saw in 1998.
It was the most demoralizing time of my life but I knew I couldn’t allow myself to be defined by that one trading error. So I examined where I went wrong and reevaluated my trading decisions.
To prevent a systemic breakdown of the banking system (remember Long Term Capital Management's monstrously leveraged bond portfolios?), the Fed had to inject massive amounts of liquidity into the system.
The fate of the entire US financial system was literally at stake.
The mistake I had made was in underestimating how
accommodative the Federal Reserve would become with monetary policy.
I never imagined that they would lower interest rates as aggressively as they did.
The Fed of old didn’t give a hoot who got hurt in the stock market.
If they didn’t want to raise rates then they didn’t.
But this was a new Fed, a much more politically sensitive Fed.
After some serious reflection I soon came to the conclusion that the interest rate genie was now well and truly out of the bottle.
There was no going back for the Fed.
Once things stabilized, they couldn’t just roll back all of the interest rate cuts ... and these cuts were going to have a bigger impact than people could imagine.
It was then that I began to look at the semiconductor group with a completely fresh set of eyes.
I could now see that the NASDAQ was going to rip to the upside -- and the NASDAQ doesn’t go anywhere without the Semiconductors, PERIOD.
At that time the SOX Index had been trading essentially sideways since 1997.
It was locked in a range between 190 and 420 in 1999.
It seemed unable to move beyond the 350 to 420 range.
Using technical analysis along with my assumption that cheap money and low bond yields would spur massive investments into stocks, I came up with a scenario that had the SOX trading at 900!!
This was crazy.
There was no way that this index could appreciate by so much.
I checked and rechecked my method but the answer kept coming back the same figure: 900.
If I told you back in early 1999 that I believed the SOX was going to go up by over 500 points over the next 18 months you would have definitely called me crazy.
Many of my clients did.
By early 2000 the index was trading over 1,300!!!
I had UNDER ESTIMATED the move by a WHOPPING 400 points!!!
The point is, it takes vision to make big money in the markets.
You have to be able to envision the world different from what it is today and then back your judgment with money.
Seven times during 1999 the SOX made a stab at piercing 420 but each time it got knocked back down to the 350 area.
The Call options on the SOX were trading for about $5,000 a pop and would increase in value by $100 for every point the SOX went above the strike price.
Needless to say, when we saw the SOX approaching 420 we’d get really excited looking for the breakout, then we’d watch the index get slammed to 350 and I’d have to put on my selling shoes and hold everybody's hand (including my own! See what I mean about needing guts?).
Anyway, on the eighth time ... BOOM!!
She blew through 420 like a hot knife through butter and didn’t stop till she hit 470.
In short order the SOX was at 560 and those $5,000 contracts were now worth over $14,000 EACH!!
By the time the index peaked, 420 strike price SOX options were worth over $88,000 per contract!!
So why did I share all of this ancient history with you?
It’s because I’m buying CALL options on an index today that trades at 177 that I think goes to 600.
The options can be bought today for about $3,500 per contract (I always buy Index options DEEP in the money to protect myself in case the Index remains static like it did for half of 1999 on the SOX trade), and I think there is $42,000 in profits per contract to be had ... and I wanted to tell you about it without you thinking me a lunatic!
I’m buying options on the Philadelphia Oil Service Index, or OSX for short.
As I’m sure many of you know, Oil Service stocks are the companies that provide all of the ancillary services to the major oil companies.
They provide drilling rigs, helicopters, seismic surveys, well construction, etc ...
The Big Oil companies are currently sitting on over $100 billion in cash, and must put it to work or risk having Congress take it away from them.
Don’t think Congress can’t impose “windfall” taxes and price controls.
They did it in the ‘70’s, and aren’t above making the same mistake twice if the political heat gets intense enough.
Because of fear of collapsing oil prices, Big Oil companies have vastly UNDER INVESTED in finding and bringing on line new oil wells; but find more oil they must, or risk the wrath of Congress.
It’s this massive pent up exploration spending that is going to drive the oil service stocks through the roof.
Think about it logically. The OSX is trading at about the same level it was when it peaked back in 1997 and 2000.
Anyone remember what oil was trading for in 1997 and 2000?
It was $26 and $36.50 respectively!
That’s a heck of a lot less than today’s price of 58 bucks.
The OSX is a pressure cooker that’s about to EXPLODE PROFITS!!
FYI - Index options are INCREDIBLY SPECULATIVE. Let me say that again:
Index Options are INCREDIBLY SPECULATIVE AND YOU CAN LOSE YOUR ENTIRE INVESTMENT!!!
They are not for everyone and you shouldn’t buy them unless you’re a sophisticated, well heeled investor.
If you are, then this might be right up your alley
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
