The Tycoon Report

How to make MONSTER MONEY: Black Gold Profits.

Tuesday, December 6, 2005 | Teeka Tiwari

For those of you who pulled the trigger on the OSX trade I  spoke about two weeks ago, things sure looked ugly when the  OSX took a quick trip to 174, giving us a fast $700 beating on our options. 
 
What we were seeing was a classic “shake out.” 
 
This is where they give the stock or index a quick clobbering to “shake out” all of the nervous nellies, day traders and various other short term ne'er-do-wells. 
 
Shakeouts are normally very sharp, very fast drops, which is exactly what this was. 
 
Very often you’ll get a shakeout right before a major move to a new high, and that’s exactly what happened. 
 
Since then, the OSX has rallied quite smartly to a new all-time high, and as of this writing is currently trading up over 185. 
 
I cannot overemphasize how bullish you need to be on the oil service stocks. 
 
If index options aren’t your cup of tea, there are many, many high quality individual stocks in the sector that are screaming buys right now. 
 
I think the biggest mistake you can make in these stocks is selling them too early. You’ve got a solid three year run or more in these things. 
 
We need to talk about how important it is to hold on to your winners and sell your losers. 
 
Most people are loath to sell a stock or option that they are down on, but will happily sell a stock showing them a profit. 
 
STOP! 
 
Don’t do that!! 
 
If you can force yourself to do the exact opposite, you will have taken a huge step in securing your financial 
future. 
 
The only way that you can participate in a 10-bagger stock is to be in it. 
 
Sounds silly right? 
 
I guess it does, but so much of what it takes to make money in stocks is just simple common sense. 
 
Like 'keep your losses small.' Anyone remember that one? 
 
It’s okay to be wrong on a stock.
 
Most pros will tell you that they have more losers than winners. 
 
What separates the pros from the crowd is that they know it’s not okay to stay wrong. 
 
These people put their egos aside, admit they’re wrong and exit the trade. They keep their losses small and let their profits run. 
 
Individual investors seem to have a much harder time with this concept. 
 
Don’t be one of them. 
 
Put your ego in the drawer and be quick to admit you’re wrong. 
 
The quicker you can admit you’re wrong, the quicker and fatter your investment account will grow. 
 
When I trade, I use two approaches: short term trading and longer term trading. 
 
My short term trades consist of using a technical analysis system that I have developed over the last 15 years. 
 
It gives me fantastic 'buy' and 'sell' signals that I use to scalp quick 10%-20% profits, usually within a week. 
 
(BTW, Scalping, for the uninitiated is the process of trading stocks or options for quick, small moves.) 
 
When I’m putting on scalp trades I usually trade options because I get fantastic leverage. 
 
I’ll give you an example. 
 
A couple of weeks ago my system kicked out a short term buy signal on a company called Weatherford International Ltd. (WFT). 
 
The stock was trading at about 67 (it has since split two for one) and the system said it was good for a three or four point move. 
 
Now here’s why I love options: if I bought the stock at $67, and it moved up three bucks, I make 4.47%. 
 
Not a bad return in a week but still, nothing to brag about to the boys back at the club. 
 
So what I did was buy the May 2006 $60 calls for $1,020 per option contract. 
 
Each option I purchased gave me the right, but not the obligation, to buy 100 shares of WFT at $60. 
 
The stock as I said was at $67, so why did I buy options so deep in the money? 
 
Here’s why: most newcomers to the options market don’t realize that “at the money options” (these are options with a strike price that is equal to the stock’s current price) do not move dollar for dollar with the stock.  In fact, if you buy “at the money” options, for every dollar the stock goes up, your options will only increase by 50 cents. 
 
It won’t start moving dollar for dollar with the stock until it gets about five points into the money. 
 
That’s why I typically only buy options with at least five points “in the money,” so I can get a dollar for dollar move on my options. 
 
Anyway, long story short, within two trading days WFT was at $70 and I blew out of my options at $1,320 for a quick 28% in profits vs. 4.47% if I had bought the stock. 
 
My rate of return with the options was almost seven times that of the underlying stock!! 
 
That’s the beauty of options.
 
Now, I love those types of trades, but you can only throw so much money behind them. 
 
Where I’ve made my really big money (and by the way, so can you) has been in identifying multi-year bull trends in sectors, and not buying the stock but buying the LEAPS. 
 
This is such a powerful way to make bucket loads of money that I’m surprised more investors aren’t aware of it. 
 
For those newcomers out there, LEAPS are long term options with expirations as much as two years into the future. 
 
These are a great way to play multi-year trends and still get fabulous leverage without the time risk inherent in shorter term options. 
 
It also takes the pressure off you having to be exactly right on your entry price. 
 
So for those of you interested in making a serious long term play in the Oil Service Sector, take a look at the LEAPS on the Oil Service market leaders. 
 
Buy them at least five points in the money and as far out into the future as you can. 
 
Don’t panic if the shares undergo a 10%-20% shake out correction; that’s very normal for stocks undergoing multi-year runs, so sit back and let those options go to work for you. 
 
One quick warning: when you see these options double and triple, you’re going to be very tempted to sell them. 
 
Don’t do it. 
 
Hang in there, and you will be positioned to make 5x-10x your money over the next two to three years.




Teeka Tiwari
Chief Investment Officer
ETF Master Trader