Anatomy of a Winning Trade:
122 Percent in Seven Days

By Rick Pendergraft

Dear Reader,

Last Thursday, my colleague Chris Johnson talked about market timing.  Chris wrote how market timing isn’t an evil thing.  In fact, he suggested that it is one way to boost your returns and have your portfolio outperform that of the average investor.  Just by sitting on the sidelines from time to time, you can get significantly higher returns than the old buy-and-hold strategy.

I am an options guy and I have been for almost 20 years now.  I love the leverage that options provide, and I love the ease with which you can place a trade to profit from a downturn.  Now if your return can improve just by sitting out when there is a downturn, just think how much better it can perform by making money on the downturn.

That is just what the members of the K.I.S.S. investing program did last week.  I recommended puts on the AMEX Diamonds Trust (DIA) on Wednesday, February 27.  Here is what the trade recommendation looked like:

Over the course of the next seven days, the Diamonds dropped just over five percent.  As the Diamonds dropped, I recommended taking profits along the way.  The first third of the trade was closed out on Friday, February 29 (79-percent gain).  The closeout for the second third was sent later the same day (114-percent gain).  The closeout recommendation for the final third was sent on Tuesday, March 4 (173-percent gain).

The drop on the Diamonds was only five percent, but when you add these three returns up, the overall return on the trade was 122 percent. 

Now if your portfolio outperforms the average portfolio just by sitting out and not taking a five-percent hit, imagine what it can do when you have 122-percent winners intermingled in there. 

Granted, options trading should not be all you do.  I have always recommended that no more than 20 percent of your total portfolio be dedicated to options.  But the funny thing is that even with only that 20 percent, options trading can make you a ton of money and really increase your overall portfolio return.

Good luck and good trading,

Rick

P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

Market Watch

Inflation and Retail Sales Highlight
This Week’s Calendar

By Rick Pendergraft

After two incredibly busy weeks for economic reports, this week slows.  But only a little.  The two biggest reports for the week will be retail sales for February and the Consumer Price Index for February.

The retail sales report is expected to show slight growth of only 0.1 percent.  This is after an increase of only 0.3 percent in January.  I have mentioned how I don’t think the economy rebounds until housing rebounds, but the second area that needs to show some growth is retail.

The Consumer Price Index for February is due to be released on Friday and you can bet it will get the attention of Wall Street.  With everyone starting to focus on the possibility of stagflation, the inflation numbers become just as important as the economic growth.  Analysts expect a moderate increase of 0.3 percent for February after an increase of 0.4 percent in January.

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