Smart Trade DIGEST January 2008 - Volume 4 Number 1

Editors CORNER Stock CORNER QUICK PICKS - click on a symbol

THE VIEW FROM MY SEAT STOCKS
Happy New Year! Notice anything
different? That’s right- we decided PEIX PEIX CVV.V
• The stock market’s technical underpinnings continue to deteriorate as market
on a sleek new look for 2008. One breadth is weak. USBE CPST URZ
of our resolutions was to make your INOD GMC.V BRP
• The bear market in the U.S. dollar is picking up where it left off. Further rate cuts
online reading experience a little to counter recessionary conditions may be unavoidable. VCGH ORM.V DE
more enjoyable, and we hope that
this new format does the trick. In-
• Crude oil and gold are testing new all-time highs; however, commodity stocks are DAIO SRM.V BUCY
vulnerable to a falling stock market. BLDP PIK.V MTW
side you’ll still find all your favorite
experts from Price Headley to Mar- • The Dow Jones World Stock Index is forming a massive head-and-shoulder for- TEC HW ATU
tin Pring plus new contributors like mation, a precursor to a bear market. When the bear comes to eat, there will be
WVCM ITF.V
Deron Wagner and Mike Paulenoff. no place to hide.
We’ve also included a sneak peek STOCK OF THE MONTH:
at chapter six of George Fontanills’ Company: Terra Industries Inc. (NYSE: TRA) OPTIONS
new book, Option Spreads Made Market Cap – $4.3 billion ZGEN PBW
Easy, which covers channel strate- Shares Outstanding – 95 million CREE
gies (to be continued next month). Buy Below – $49/share
LINE
Our mission is to help you become Company Profile
better traders. Look out for more Terra Industries Inc. (TRA) is a leading North American and U.K. producer and
features, new perspectives, and marketer of nitrogen products, serving agricultural and industrial markets. In
picks to make this year’s Digest the addition, TRA owns a 50% interest in Point Lisas Nitrogen Limited (PLNL), an
best ever. Happy trading! ammonia production joint venture in the Republic of Trinidad andTobago.TRA is
one of the largest North American producers of ammonia, the basic building block
of nitrogen fertilizers. The company upgrades a significant portion of the ammonia
it produces to higher value products that are easier for distributors and farmers to
transport, store and apply to crops than is ammonia.
TRA owns nine manufacturing facilities in North America and the U.K. capable of In this issue
producing nitrogen products. TRA’s business is organized into a nitrogen business STOCK CORNER
OPTIONS CORNER
segment and a methanol business segment. The methanol segment has become less COMMODITIES CORNER
Comments? Suggestions?
significant to the company’s business since the closing of the Beaumont, Texas, ASTRO CORNER
Email us: twocents@smarttradedigest.com
facility. Nitrogen is both a global and a local commodity: global because it is pro- ETF CORNER
duced and traded in almost all regions of the world; local because fertilizer custom- TRADER EDUCATION CORNER
Traders’ Library
9002 Red Branch Road CURRENCY CORNER
Columbia MD 21045

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Distributed by Traders’ Library®

ers display preferences for nitrogen in
one of four basic forms based upon local
conditions. The principal forms of glob-
ally traded nitrogen fertilizer are ammo-
nia (82% nitrogen by weight) and urea
(46% nitrogen by weight). Ammonium
nitrate (AN; 34% nitrogen by weight)
is traded in international markets. Urea
ammonium nitrate solution (UAN;
28% to 32% nitrogen by weight) is
used principally in North America
and has only recently been traded in
international markets to a lesser extent.
UAN’s high water content and need
to be transported in tankers can cause
transportation costs per ton of nitrogen
to be higher than those of other inter-
nationally traded nitrogen products.
Because transportation is a significant
component of a customer’s total prod-
uct cost, a key to competitiveness in
the nitrogen business is proximity to
the end user, which allows a supplier to
have the lowest delivered cost for the
customer’s product of choice. In addi-
tion, a supplier must provide a reliable
source of product. (Source: Company’s
10-K filing.)
Why I Like It
With the passing of the Energy Inde-
pendence and Security Act of 2007,
America is now focused on increasing
its energy security and reducing its de-
pendency on foreign oil. The expanded
mandate for corn-based ethanol means
there is a huge demand for ammonia
nitrogen fertilizer products. This is the
time when agricultural retail chains,
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farm cooperatives, independent dealers
and industrial customers are buying
their nitrogen fertilizers to get ready for
the start of the spring growing cycle.
TRA has tremendous upside potential
and is a company that is well posi-
tioned to benefit.
Projection
According to my numbers, this is a
stock that should be selling in the $80
range over the next three to five years.
It is currently trading in the high $40
range, so TRA has a large upside poten-
tial. Place a sell stop at 25 percent be-
low your entry price. As the stock rises,
continue to raise your stop so that you
are trailing the Friday close by 25%.
Contact Information:
600 Fourth Street
City: Sioux City, IA 51102
Phone: 712-277-1340
www.terranitrogen.com
Slothower Report - Dennis Slothower,
www.stealthstocksonline.com,
800-524-4832,
support@StealthStocksOnline.com
in this issue quick picks
STOCK DOUBLERS
1. Pacific Ethanol Inc. (NASDAQ: PEIX) – $8 — produces and sells ethanol
and its co-products and provides transportation, storage and delivery of ethanol
through third-party service providers in the western United States, primarily in
California, Nevada, Arizona, Washington, Oregon, and Colorado.
2. US Bio Energy Corp. (NASDAQ: USBE) – $12 — is a producer of ethanol
in the United States. The company’s primary products are ethanol and distillers
grains, which it derives from corn.
3. Innodata Isogen Inc. (NASDAQ: INOD) – $5 — is a provider of business ser-
vices. The company provides content-related business process outsourcing (BPO)
services and content-related information technology (IT) professional services.
4. VCG Holding Corp. (NASDAQ: VCGH) – $13 — owns and operates nightclubs
that provide live adult entertainment and food and beverage services.
5. Data I/O Corp. (NASDAQ: DAIO) – $6 — designs, manufactures, and sells
programming systems used by designers and manufacturers of electronic products.
Slothower Report - Dennis Slothower, www.stealthstocksonline.com, 800-524-4832,
support@StealthStocksOnline.com
Stock Updates — Cautious Buying
By Christopher Mistal
Ballard Power (BLDP – Jun 2005) Buy Limit 4.50 JP Morgan has initiated cover-
age on BLDP and other fuel cell makers. Although their neutral rating means little
for BLDP in the short term, merely covering the industry is a positive development
that confirms that fuel cells merit a closer look.
Teton Energy (TEC – Jun 2006) Buy Limit 4.50 Persistently soft natural gas
prices remain a drag on junior producers and TEC is no exception. As detailed
in last issue’s update TEC appears to be shifting away from production and more
heavily into exploration and development. TEC has acquired additional D.J. Basin
acreage. The added land is in close proximity to its existing projects and near exist-
ing oil and gas production making the acquisition relatively low risk.
Wavecom (WVCM – Nov 2006) Buy Limit 18.00 Shares continue to drift lower
on light volume. Seasonal factors cited in Q3 earnings should be abating soon and
the dollar appears to be firming, or at least its decline is slowing. As the dollar sta-
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bilizes WVCM’s customers that serve
U.S. markets may be more inclined to
build inventory.
Pacific Ethanol (PEIX – Dec 2006)
Buy Limit 7.00 It may be a bit pre-
sumptuous to say we just saw the bot-
tom back in November, but evidence is
amassing. The entire sector just an-
nounced that it is scaling back expan-
sion plans and Congress is busy work-
ing on a new energy bill that is likely to
mandate even higher levels of ethanol
use. The supply-demand balance ap-
pears to be shifting back in favor of the
producers.
Capstone Turbine (CPST – Feb 2007)
Buy Limit 1.10 Mayor Bloomberg of
New York City (NYC) recently an-
nounced that his city has implemented
the first standard for the installation
and use of microturbine technology
in the U.S. The new rule is aimed at
assisting NYC in achieving its goal of
lowering greenhouse gas emissions by
30% by 2030 by encouraging the real
estate and construction sectors to build
greener projects throughout the city.
Barriers to the residential market for
CPST are beginning to fall.
Geovic Mining (GMC.V – Jun 2007)
Buy Limit 2.00 The venture stigma has
been shed and GMC is now trading on
the Toronto Stock Exchange however,
GMC’s feasibility study appears to have
put a damper on the festivities. Overall
the study was positive, but plans to be-
gin major construction have now been
pushed back to mid 2008. This pull-
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back can be used to add to or establish
a new position.
Oremex Resources (ORM.V – Jul
2007) Buy Limit 0.45 No longer satis-
fied with merely prospecting for silver,
ORM has agreed to acquire the Cuyo-
aco Gold and Base Metal property in
the state of Puebla, Mexico. The total
purchase price of US$3 million can be
paid over four years using a combina-
tion of cash and stock. With progress
stalled at the Tejamen Property, new
exploration opportunities are welcome.
Shear Minerals (SRM.V – Jul 2007)
Buy Limit 0.60 A total of 337 carats
were recovered from the Kahuna bulk
sample. The largest diamond recovered
was 5.43 carats and was announced
just as the November issue was going
to press. With bulk sample results in,
SRM will now focus on estimating
diamond value. Once an initial esti-
mate has been completed the next steps
for the Churchill diamond project can
be evaluated. At current levels SRM is
attractive. Any positive news regard-
ing Churchill could quickly generate a
sizable gain.
Peak Gold (PIK.V – Aug 2007) Buy
Limit 0.60 Third quarter’s results
failed to inspire and gold’s advance has
fizzled. This combined with further
dilution created by a $110 million pri-
vate placement has weighted heavily on
shares over the last several weeks. Com-
bined mine operations are cash flow
positive and it appears management is
gearing up for an acquisition.
Headwaters (HW – Sep 2007) Buy
Limit 14.75 Absent from the newswires
over the last month, HW may be form-
ing some support around current levels.
Poor housing sector performance looms
like a dark cloud over shares, but HW’s
alternative energy endeavors are the
silver lining yet to be fully realized.
Freegold Ventures (ITF.V – Nov 2007)
Buy Limit 1.45 Recent weakness in
gold failed to provide us with a buying
opportunity. Following the brisk run
up that occurred just after our recom-
mendation a quick pull back is still not
out of the question. We are going to
remain patient.
CanAlaska Uranium (CVV.V – Dec
2007) Buy Limit 0.40
Uranerz Energy (URZ – Dec 2007)
Buy Limit 2.75 Last issue’s speculative
uranium plays have come under heavy
fire in recent days as the broad mar-
kets and small caps in particular have
slipped. Our country’s desire for energy
independence and our insatiable ap-
petite for energy have not diminished.
Shares can be accumulated at current
levels.
Disclosure Note: At press time, officers of
the Hirsch Organization held positions in
CPST, GMC.V, HW, PEIX & PIK.V.
STOCK TRADER’S ALMANAC INVESTOR -
Jeffrey A. Hirsch,
www.stocktradersalmanac.com,
service@hirschorg.com,
1-845-358-4220
in this issue quick picks
No Bottom Yet...
According to
Intermediate Charts
By Mike Paulenoff
A relatively impressive recovery rally
during the final 30 minutes of trading,
or was it?
In fact, based on the pattern carved-
out by the Q’s, no upside reversal was
recorded.
The Q’s certainly “looped” down again
to retest this morning’s low at 47.43,
which held the onslaught (at 47.47),
and which has helped turn the price
structure to the upside for another run
at key near term resistance at 48.50/65.
But unless and until that resistance area
is hurdled, I will not venture into the
long side of the Q’s. Why?
Because my work is warning me that
despite what appears to be an intraday
Double Bottom amidst improved RSI
momentum readings, the intermediate
term technical work likely is calling the
directional shots here. In other words,
until my intermediate term work shows
signs of bottoming, it is just too risky to
establish counter-trend long positions
based on my near term work.
Looking at the S&P 500’s equivalent
ETF, the SPY, the current very negative
juxtaposition of the 9 & 20 day AMAs
shows a “Double Negative Crossover”
for the first time during the entire year-
long “topping” process in the SPY. By
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that I mean that since the Oct. 11th
high at 157.52, the 9 day AMA has
crossed below the 20 day AMA twice
without confirming an intervening
positive crossover rally phase.
This “double negative” juxtposition
of the AMAs argues for more acute
weakness than the prior declines in
www.traderslibrary.com
July-Aug and in Oct- Nov. My optimal
next target zone for the SPY decline is
136.20-135.80—if the current decline
holds equidistance in comparison with
the Oct-Nov decline (16.86 points).
Let’s notice, however, that the target
zone is beneath a 10-month support
plateau, which could be extremely
in this issue quick picks
problematic for would-be bulls look-
ing to establish long positions into an
intermediate-term swing objective.
Mike Paulenoff is author of the MPTrader.
com, a real-time diary of his technical
analysis on equity markets, futures, met-
als, currencies and Treasuries. Sign up for a
free 15-day trial to Mike’s ETF Trading Diary
today.
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New stock trade RECOMMENDATION
Buy Brasil Telecom ADR (BRP) at the market. Target 92.30, with an intra-day
stop of 71.89. The dip we’re seeing today (Thursday) is just a break in a long-term
uptrend, so we’ll jump in at a good price. The sector and the region have both been
hot, and we’re seeing support at all the meaningful moving average lines.
Brasil Telecom ADR (BRP) - Weekly
NetLetter - Price Headley, www.bigtrends.com, 1-800-244-8736
www.traderslibrary.com
in this issue quick picks
Commodities CORNER
Our Inflation Barometer (chart 33) rallied slightly in December because the
monthly average of the S&P Composite moved .4% above its 12-month MA.
However, it would not take much to push it into bearish territory. That’s because
two key commodity indexes, the CRB Spot Raw Industrials (504) and the Jour-
nal of Commerce ECRI Industrial Products series (140.77) are just above their
triggering points at 494 and 139.5, respectively. Right now several indexes are
experiencing short-term rallies, but when those advances terminate we believe that
a primary trend top will be in force.
That view is based on a combination of technical and economic indicators that
have consistently signaled peaks in industrial commodity prices. Chart 34, for
instance shows that the 12-month ROC for the CRB Spot has decisively broken
below its overbought zone. The vertical lines show this has consistently signaled a
top in the Index. Two exceptions developed in 1987, when the signal was early and
2004 when only a small consolidation followed. A diffusion indicator measuring
the percentage of a basket of commodities and indexes is close to a record level.
In this respect the bottom panel in Chart 35 shows that this series may be in the
process of reversing. This indicator also has a consistent but not perfect record of
identifying tops.
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 in this issue quick picks

Economic indicators are also consistent with a peak. Chart 36 displays an oscil-
lator constructed by dividing a 3-month by a 24-month MA of the Conference
Board’s LEI. This series goes bearish for commodities when it falls below zero. As
you can see, it has not only moved to negative territory but has violated a secular
up trendline. A declining KST for the corporate yield curve also signals weakness.
The vertical lines show that when it falls to the +300 level commodity prices have
either peaked or are in the process of topping. Please note there are no exceptions!
If you look to the right of the vertical lines you will also notice that Coincident
Indicator (which includes Non Farm payrolls) momentum is usually in a bear
market trend of some kind.
This month we concentrate on the JOC ECRI Industrial Products Index because
it is very close to its 12- month MA. Chart 38 shows that it has marginally broken
below its 2003/07 up trendline. All three ROC’s have also penetrated trendlines.
When it is possible to observe the simultaneous violation of a number of momen-
tum trendlines this reflects the peaking out of a number of different time cycles.
This principle of commonality emphasizes the bearishness of such a situation.
Chart 39 shows that on a weekly basis the Index is lying on the 6-year up trend-
line and 65-week EMA. Since both KSTs are declining an imminent violation is
likely. There is one ray of hope, and that comes from last Friday’s small hook in
the short-term KST. However, since the long-term series (not shown) is bearish we
do not give much brief for a meaningful rally.

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www.traderslibrary.com
 in this issue quick picks

Agriculture remains an area of strength
in the commodity markets. Chart 40
features the Dow Jones AIG Commod-
ity Index, which has a 39% agricultural
weight. Recently it broke out from
a trading range and has experienced
a situation where all three KSTs are
positive. This suggests that over the
near-term at least this index is headed
higher. The symbol for the ETF that
tracks this index is DJP and the upside
objective is just above 200.
Pring’s Intermarket Review - Martin Pring,
www.pring.com, webmistress@pring.com,
941-926-9664

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www.traderslibrary.com
 Options CORNER
INDEX OPTIONS &
VOLATILITY SKEWING
Charts 1 and 2 are based on $OEX
options. They show that implied
volatility has moved higher, but not by
much – similar to what $VIX has done.
However, chart 3 shows stock options.
They are the most expensive we’ve seen
them so far. The average stock’s options
are in the 91st percentile of compos-
ite implied volatility. Not only that,
there is not one stock – not even some
strange outlier – in the 0th percentile,
while almost 9% of all stocks’ options
are in the 100% percentile. This is
as expensive as these ever get, and it
reflects the fact that stock charts are as
ugly as we’ve ever seen. Obviously, if a
market bottom is forming, the sale of
puts on these stocks would certainly be
worthwhile. Such puts would not neces-
sarily have to be sold naked; they could
Chart 3
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in this issue quick picks
be part of put ratio spreads, similar to CHART 1
the strategy we use for S&P futures
puts, although the ratio strategy should
mostly be reserved for situations where
there is a skew in volatility (i.e., the
out-of-the-money puts are trading with
a higher implied volatility than at-the-
money puts).
But even if the market isn’t bottoming,
the sale of expensive puts on underly-
ings that have “somewhere to roll to” is
also attractive, for the investor can play
defense if he has to. Along this line,
there are several indices with expensive
puts, have some chart support below
the current price, and have somewhere
to roll to: Russell 2000 ($RUT; IWM), CHART 2
S&P 100 ($OEX), S&P Midcap 400
($MID), Oil Service Index ($OSX),
Cyclical Index ($CYC), and iShares
FTSE Xinhua Index (FXI). We already
have positions in FXI and IWM.
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Position I319: S&P Put Ratio Spread
Sell 3 $OEX Jan 635 puts
at 1.10 or more
$OEX: 665.64 Jan 635 put: 1.10
Allow $6,400 as the expected invest-
ment per naked put. A put spread
might theoretically have a better
expected return, but you would have to
buy a put with a striking price of 580
or higher for 0.05 – and they are not
offered there currently. This position
cannot be duplicated with an ETF
(OEF is the ETF for $OEX), so there
is no alternative recommendation here.
Follow-Up action: should $OEX trade
at 635, roll down and out to the Feb
put with the lowest strike that can be
rolled to for a credit.
Separately, volatility traders may want
to look at call backspreads in Lehman
Bros. (LEH) (B 2 Apr 60’s; S 1 Feb 45)
since there is a large volatility skew
between the calls. However, given the
problems we had with similar positions
in BAC and BSC, we are not making
this an official recommendation.
Volatility Trading
We are keeping an eye on a number of
eventdriven situations. One is Progen-
ics Pharm (PGNX), which was due for
an FDA meeting by Jan 30th. That
meeting has been extended to April
30th. Another imminent one, though,
is Zymogenetics (ZGEN). Its FDA
hearing date is still Jan 17th. In theory,
we could buy the Jan straddles, since
expiration isn’t until the 18th, but that
www.traderslibrary.com
in this issue quick picks
might be cutting it too close. If there is Straddle Buy
positive news, it often pays to have op- Position E747: Linn Energy (LINE)
tions with some additional time value. Buy 5 July 22.5 calls (QGJGX) and Expected Market Volatility:
So we’re going to buy Feb straddles: Buy 5 July 22.5 puts (QGJSX) short-term statistical volatility
For a debit of 5.25 per has remained at 19% for
Position E745: straddle or less. the major indices, so with the
ZGEN “Event” Straddle LINE: 22.87 July 22 call: 2.15 Dow at 12,850 one could expect
Buy 6 ZGEN Feb 12.5 calls (GZUBV) July 22 put: 3.10 the Dow to be up or down 105
and Buy 6 Feb 12.5 puts (GZUNV) The Option Strategist - Larry McMillan, points, intraday, on average.
For a debit of 4.60 or less. www.optionstrategist.com, 800-724-1817,
info@optionstrategist.com
ZGEN: 11.99
Feb 12 call: 2.10 Feb 12 put: 2.50
If the news moves the stock more than
New Option trade RECOMMENDATION
4.60 points, sell out the losing side and Buy PowerShares WilderHill Clean Energy ETF (PBW) March 22 calls (USTPL)
half of the winning side immediately. at 3.80 or lower - good till canceled. Target 8.00, with an intra-day stop of
We will address the remainder of the 2.90 (based on ask). This is a pretty speculative trade, but the high potential of
position on the next available hotline a short-term bounce makes it worth the risk. To offset that risk, we’ve gone deeper
after that. in the money than usual. Basically, we’re planning on a reclamation of the ground
lost over the last week and a half. The long-term relative strength has been great
Position E746: and getting better.
CREE Dual Calendar Buy 6 CREE June
PowerShares WilderHill Clean Energy ETF (PBW) - Weekly
30 calls (CQRFF) and Sell 6 CREE Feb
30 calls (CQRBF) and Buy 10 CREE
June 22.5 calls (CQRFX) and Sell 10
CREE Feb 22.5 calls (CQRBX) for a
total debit of $1800 or less.
CREE: 26.44 June 30 call: 2.40 June
22 call: 5.50 Feb 30 call: 1.10 Feb 22
call: 4.50
This is an interesting situation. First,
there is a steep skew between Feb and
June – over 15 points of volatility,
because earnings are due on Jan 22nd.
But the puts on CREE are trading with
much higher vols than the calls, prob-
ably indicating that the stock is hard to
borrow. So we are implementing this
spread with all calls. It is still a dual cal-
endar and has the familiar profit graph. NetLetter - Price Headley, www.bigtrends.com, 1-800-244-8736
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Trader Education CORNER
The following excerpt was taken from
George Fontanills’ new course book, Op-
tions Spreads Made Easy. George Fontanills
is the founder of www.optionetics.com and
is a best-selling author of numerous titles on
options and stocks. His new book is available
now at Traders Library.
Taken from Chapter 6:
Spreads for Different Markets
Channel Strategies
We’ve reviewed option strategies, most
of them involving option spreads, for
both bull and bear markets. I’m refer-
ring to the market in which you’ve
decided to trade—that thanks to the
likes of financial futures and indexed
funds, can be as broad a trading market
as you like.
Now let’s look at some strategies for
markets that, according to your fore-
cast, are unlikely to move significantly
up or down anytime soon, but will
instead be trading in a relatively limited
range or channel.
Long Straddle
Let me start by defining straddle in
terms of trading parlance. A straddle
is the purchase or the writing of both
a put and a call, for the same stock or
commodity, at the same strike price (at
or near the money), and with the same
expiration date. Buying the put and
the call is called a “long straddle,” and
writing the put and the call is called a
“short straddle.”
With a long straddle, you’re positioned
to play either side of the market, long
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or short. This is a play for a market
that, by your forecast, could go either
way. Because the theta factor is work-
ing against you, the market should be
showing some volatility, some signs of
life that might result in a significant
move in one direction or the other
before your options expire.
If such a move occurs, your active op-
tion (the call if the move is up and the
put if the move is down) will increase
in value, and you may profitably exer-
cise or liquidate it. The possible profit
is theoretically unlimited in the case of
a call, and theoretically substantial in
the case of a put—though not unlim-
ited, because there is a limit to how low
the underlying asset can fall in price.
The other option would of course
expire worthless.
Your net profit would be reduced by
the premiums you paid for the options.
This would also be your maximum risk
if the market makes no significant move
and both options expire worthless.
Short Straddle
A short straddle is a distinctly differ-
ent trade in this case because you are
writing, not buying, options. It consists
of writing a put and a call for the same
underlying asset, at the same strike
price (at or near the money), and with
the same expiration date.
Because you’re on the hook to cover an
option either for a significant upside or
for a significant downside move, your
hope in putting on this trade is that
no such move will occur, and that the
options you wrote will expire worth-
less. Therefore, this strategy should be
limited to relatively stable, channeling
markets with low volatility. The ideal
situation is one in which the market
is just coming off a period of higher
volatility, because then the premiums
you receive will likely be higher than
otherwise.
If indeed this happens and the options
expire worthless, your profit is the
premiums you paid for them. If instead
the market makes a large move, you
will need to cover the affected option,
which is the call for an upward move
and the put for a downward move.
Unless the option is otherwise covered,
such as by owning enough stock shares
to cover a stock call, you will need to go
to the market to buy or sell the underly-
ing asset and cover the option. Your risk
of loss is therefore significant—theoreti-
cally unlimited for a naked call, and
limited to an underlying asset price of
zero for a naked put.
The main point in your favor with this
somewhat risky strategy is that the
theta factor is your friend. And because
most options expire worthless, most
short straddles over time will yield you
a profit of both premiums. Because
you’re writing two options, however,
you’ll be required to keep substantial
margin cash in your trading account.
in this issue quick picks
Long Synthetic Straddle
Now that we’ve covered the basic
long and short straddles, let’s explore
synthetic straddles, which are a bit
more complicated. In a long synthetic
straddle, you combine options and the
underlying asset—either a stock or
commodity—to create a delta-neutral
trade. This can be done either with
calls or puts. The best market for this
is a volatile one, with a significant price
move likely. If you can manage it, the
best time to buy your options is at the
end of low market volatility period
when the premiums you pay are most
likely to be low.
Consider a case using puts. Here you
would buy two ATM puts and enough
shares of the stock to cover one of them
(100 shares). You can trade with more
stock and puts. Just use a similar ratio so
that you keep one or more puts in excess
of the equivalent stock. If the stock price
moves up significantly, your gain on the
stock will outweigh the cost of the op-
tions. If it drops sharply, you can expect
the cost of the options and the drop of
the stock price from the purchase price
to the strike price to be more than offset
by the gain in value of the extra put(s).
The drop in stock price below the put
strike price will be covered by one or
more of the puts you bought.
Consider another case using calls. Us-
ing the simplest example of two calls,
you would put on this trade by buying
two ATM calls and shorting, in effect
selling, 100 shares of the stock—
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enough to be covered by one of the two
calls. The theta factor works against
you in this strategy, so your main risk
will be if the market goes nowhere be-
fore your options expire worthless. Your
loss would then be the premiums you
paid for the calls.
Your hope here, as with the long syn-
thetic straddle with puts, is that the
market will move from a state of low
volatility, and relatively cheap options,
to one of high volatility in which the
stock price makes a significant move
up or down. If the stock moves up, you
will use one of your ATM calls to cover
the shorted stock and make a tidy profit
from your other call. Of course, such a
profit is lessened by the premiums you
paid for the calls. If the stock falls, your
calls will expire worthless, but you will
profit from the shorted stock (net of
the premiums paid for the calls). Your
brokerage firm will require you to put
up margin on the shorted stock.
Short Synthetic Straddle
We’ve discussed the crucial differences
between buying and writing options.
Those differences come fully into play
when we compare the long synthetic
straddle to its short cousin. In a short
synthetic straddle, you do one of two
things:
• You buy 100 shares of the stock and
write two ATM calls on it, OR
• You short 100 shares of the stock and
write two ATM puts on it.
www.traderslibrary.com
Because you’re writing options in either
case, the theta factor is your friend.
You should therefore consider putting
on a short synthetic straddle only if
you forecast a relatively quiet market
with little chance of the stock making
a major move in either direction before
the options expire. If you’re right, you
can get out of the stock with little
gain or loss from its price change, and
pocket the premiums from the op-
tions. If the market is volatile when you
write the options, but quiet afterward,
the premium profit will likely be at its
maximum.
Make no mistake though; this is a risky
strategy. If the market moves against
you, you could take a substantial loss by
having to cover the options you wrote.
You need to watch the market carefully
and be prepared to act if an adverse
move begins. You can also expect to
have to put up substantial margin for
the written options as well as for any
stock you short. In most cases, you will
be better off using one of the many op-
tions strategies that limit your risk.
Long Strangle
A strangle is a type of straddle that
involves buying or writing differing op-
tions for the same underlying asset and
with the same expiration date, but at
different strike prices (usually OTM).
Strangles are most effective in markets
that are quiet when you buy the op-
tions, but that you forecast to become
very volatile suddenly.
in this issue quick picks
In a long strangle, you buy a higher- other will become more valuable. If it
strike OTM call and a lowerstrike is exercised, you will need to honor it,
OTM put. No margin cash is required. possibly at a substantial loss.
Because you’re holding the options, the
You can also expect to be required to
theta factor is working against you. If
put up a good deal of margin cash to
the market meanders between the strike
write options in both directions.
prices until the expiration date, you
simply lose the premiums you paid. On (…to be continued next month)
the other hand, if the market spikes up
or spikes down, you profit by the appro-
priate option: the call if the move is up,
and the put if the move is down.
You can liquidate the option for a
higher premium or, if you prefer, you
can exercise the option and take posses-
sion of the underlying asset at a better-
than-market price. Your profit will be
reduced by the two premiums you paid.
The option left behind by the market
move will expire worthless.
Short Strangle
In a short strangle, you write an OTM
call and write an OTM put. The theta
factor works in your favor here.
Ideally, just after a period of volatil-
ity when you write the options, your
hope would be that the market will be
relatively calm until the options expire.
If that happens, you simply keep the
premiums you were paid. As is gener-
ally true with writing options though,
your possible profit is limited but your
risk is not—except for a falling asset,
which can only fall as far as zero. If
the market makes a significant move
before the expiration date, one of your
options will become worthless but the
11 ➽
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 Astro CORNER
GET IN AT THE START ON THE NEXT
MOVE UP.
We have an opportunity to get in on
the next price increase of the stocks that
will do well in 2008. Since we know
stocks that are in leading sectors do
well, we want to identify which sec-
tors will outperform in a new cycle. A
new cycle began in December 2007 as
Jupiter moved into the sign of Capri-
corn (12/19/07-1/6/09). And just as
the 2007 transit of Jupiter in Sagittarius
gave rise to the Gaming/Leisure sector,
sports, import/export, transportation
and the Higher Education sector, this
new cycle will relate to Capricorn-con-
nected areas. Some of them are: bank-
ing, investing, home repair, restora-
tion construction, heavy equipment,
building materials, reconstruction of
infrastructure, discount stores, practical
clothing, the environment, food prod-
ucts, family-style restaurants and farm
equipment. Also included are basic
materials that include aluminum, cop-
per, steel, etc. and health-related stocks
particularly companies that produce
products and services for senior citizens.
Since cycles repeat we can go back
twelve years to the last Jupiter in
Capricorn cycle (1/5/96-1/22/97) and
see which sectors were outperforming
back then. The top 12 sectors were:
Consumer Hardware, Specialty Retail,
Energy, Electronics, Financial Services,
Real Estate, Banking, Aero/Defense,
Diversified Services, Drugs, Computer
www.traderslibrary.com
Software & Services and Consumer
Non-Durables.
In this cycle, the price of commodities
such as wheat may rise because of short-
ages that could be related to weather
conditions.
DEERE & CO.
DE/NYSE $92
52wk high/low 92/45
Group: Farm Machinery
Deere & Co. manufactures tractors,
combine/sugarcane harvesters, sprayers,
mowers and backhoe loaders. Apr. 25,
1958, 10:00AM, Dover, DE, 75W31,
39N09. Source: Michael Munkasey.
June 29, 1933, 10:00AM, New York,
NY, 74W00, 40N43. Source: Mi-
chael Munkasey. Favorable Jupiter and
Uranus transits in months ahead with
Buying opportunities on Pullbacks
(Saturn transits) 1/16/08, 8/1/08 and
10/13/08. Investor’s Business Daily
rating: Relative Strength 96, Earn-
ings Per Share Rank 93, Timeliness A,
SMR B, Return on Equity 25% and
Sales for the last four quarters average
15%.
BUCYRUS INTERNATIONAL
BUCY/NAQ $97
52wk high/low 104/44
Group: Machinery-Constr/Mining
Bucyrus International manufactures
draglines, electric mining shovels and
rotary blasthole drills used for sur-
face mining. Incorporation Nov. 3,
in this issue quick picks
1927, 1:00PM, Dover, DE, 75W31, ACTUANT CORP.
39N09. Source: Michael Munkasey. ATU/NYSE $33
July 23, 2004, 11:55AM, New York, 52wk high/low35/22
NY, 74W00, 40N43. Source: Mi- Group: Machinery-Tools
chael Munkasey. Favorable Jupiter and
Actuant Corp. manufactures special-
Uranus transits in months ahead with
ized, high-force hydraulic and electrical
Buying opportunities on Pullbacks
tools/supplies and engineered motion
(Saturn transits) 2/12/08, 7/17/08,
control systems. Oct. 26, 1910, time
10/15/08, 10/28/08 and 11/15/08. In-
unknown, Madison, WI, 89W24,
vestor’s Business Daily rating: Relative
43N04. Source: Michael Munkasey.
Strength 97, Earnings Per Share Rank
Aug. 4, 1992, 9:30AM, New York,
98, Timeliness A, SMR A, Return on
NY, 74W00, 40N43. Source: Mi-
Equity 27% and Sales for the last four
chael Munkasey. Favorable Jupiter and
quarters average 73%.
Uranus transits through the year with
Buying opportunities on Pullbacks
MANITOWOC CO.
(Saturn transits) 2/18/08, 7/43/08
MTW/NYSE $48
and 10/5/08. Investor’s Business Daily
52wk high/low 51/25
rating: Relative Strength 88, Earn-
Group: Machinery-Constr/Mining
ings Per Share Rank 90, Timeliness C,
Manitowoc Co. manufactures cranes SMR A, Return on Equity 25% and
and related lifting equipment for Sales for the last four quarters average
the energy, petrochemical, construc- 22%.
tion and mining markets. July 15,
Astro Economics Stock Market Newsletter
1920, time unknown, Madison, WI,
- Grace K. Morris, M.A., 815-464-8200,
89W24, 43N04. Source: Michael astro@astroeconomics.com,
Munkasey. May 27, 1993, 9:30AM, www.astroeconomics.com
New York, NY, 74W00, 40N43.
Source: Michael Munkasey. Favorable
Jupiter and Uranus transits throughout
the year with Buying opportunities on
Pullbacks (Saturn transits) 2/15/08,
4/15/08, 7/08/08 and 7/15/08. Inves-
tor’s Business Daily rating: Relative
Strength 93, Earnings Per Share Rank
96, Timeliness A, SMR A, Return on
Equity 27% and Sales for the last four
quarters average 33%.
12 ➽
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 ETF CORNER
Throughout most of the session, it
looked as though stocks would contin-
ue to build on recent losses, but a swift
rally into the 2:30 pm reversal period
provided welcome relief. The Nasdaq
Composite snapped its eight-day losing
streak by reversing a 1.3% intraday
loss into a 1.4% gain. The S&P 500
also advanced 1.4%, as the Dow Jones
Industrial Average rallied 1.2%. Rela-
tive weakness in small and mid-cap
stocks remained. The Russell 2000 and
S&P Midcap 400 indices were higher
by 1.0% and 0.5% respectively. For the
first time since December 26, all of the
major indices closed at their best levels
of the day.
One of the most positive things about
the reversal day was that turnover rose
as well. Total volume in both the NYSE
and Nasdaq came in 9% above the
previous day’s levels. Combined with
the main stock market indexes finish-
ing at their intraday highs, the increased
trading activity tells us institutions were
at least nibbling on the buy side. Across
the board, advancing volume exceeded
declining volume by a modest ratio of
just 3:2. However, declining volume was
outpacing advancing volume by 3 to 1
when stocks were at their lows. Market
internals therefore rapidly improved in
the final ninety minutes of trading.
In yesterday’s commentary, we dis-
cussed the prior lows of August 2007
as being major areas of support in the
S&P, Nasdaq, and Dow. We also went
on to say that, “A retest of the August
www.traderslibrary.com
in this issue quick picks
2007 lows in each of the major indices
is now virtually assured.” Though we
didn’t necessarily expect it to happen
the same day, a test of the August lows
is exactly what happened during the
mid-day weakness. A test of such a ma-
jor support level on the weekly charts
was undoubtedly the main impetus for
the late-day rally. If traders and inves-
tors were looking for a relatively “low-
risk” place to begin bargain hunting
operations, support of the August lows
provided the perfect excuse for doing
so. The charts on this page and page
10 take an updated look at the weekly
charts of the Dow, S&P, and Nasdaq.
Of the “big 3” main stock market
indexes, only the Dow actually violated
its August intraday low yesterday, prob-
ing 17 points below that level before
reversing. Still, the S&P came within
just 8 points (0.6%), and the Nasdaq
came within 21 points (0.8%). On the
weekly chart of the S&P, notice how
the August low also converges with sup-
port from the lows of March 2007. This
makes support of the August 2007 low
even more significant now, as a clean
break below that level would instantly
lead to a new 52-week low, as the Rus-
sell 2000 has recently done. The Au-
gust 2007 lows in the Dow and Nasdaq
are a bit higher than their March 2007
lows, so they have a little more “wiggle
room” before being in danger of fresh
52-week lows.
The question on everyone’s minds right
now is the actual significance of yes-
13 ➽
➽

terday’s rally. While we obviously have
no way of knowing how far the bounce
will carry us, yesterday’s intraday price
action was bullish overall. Specifically,
it was positive that the mid-day losses
undercut the previous day’s lows before
stocks rallied to new intraday highs.
Had the major indices held above the
prior day’s lows the entire time, yester-
day would have been an “inside day”
instead. Such action would subsequent-
ly have had a greater chance of its lows
being tested again today.
Yesterday, we said that a tradeable
bounce for short-term traders would
eventually come. Based on key support
of the August 2007 lows and yesterday’s
bullish intraday price action, it appears
that time is now. Because of the relative
www.traderslibrary.com
strength it showed in the final hour,
we bought the beaten-down Financial
SPDR (XLF) for a short-term momen-
tum play. Although we would never
buy a strongly downtrending ETF with
high expectations of an intermediate-
term hold, we are merely looking to
capture a quick gain on a bounce from
“oversold” conditions over the next sev-
eral days. If it begins to falter or show
weakness before then, we’ll quickly bail
out and close the trade for a scratch or
small gain. Regardless of which stocks
or ETFs you might buy right now, we
suggest keeping this proactive, short-
term mentality as well. There is way too
much overhead supply and technical
damage on the charts to expect any-
thing more than a near-term counter-
trend retracement. As this bounce plays
in this issue quick picks
out, we’ll simultaneously be searching
for low-risk short sale entries so that
we are prepared if the well-established
primary downtrends continue longer.
Open ETF positions:
Long - XLF
Short - (none)
NOTE: Regular subscribers to The Wagner
Daily receive daily updates on the open
positions above, as well as new ETF trade
setups, including trigger, stop, and target
prices. Intraday e-mail alerts are also sent on
as-needed basis.
Deron Wagner is the head trader of Mor-
pheus Capital Hedge Fund and founder of
Morpheus Trading Group (morpheustrading.
com), which he launched in 2001. Wagner
appears on his best-selling video, Sector
Trading Strategies (Marketplace Books, June
2002), and is co-author of both The Long-
Term Day Trader (Career Press, April 2000)
and The After-Hours Trader (McGraw Hill,
August 2000). Past television appearances
include CNBC, ABC, and Yahoo! FinanceVi-
sion. He is also a frequent guest speaker at
various trading and financial conferences
around the world. Wagner is currently
working on this third book, scheduled for
publication in early 2008.
For a free trial to the full version of The
Wagner Daily above, which includes detailed
ETF trade setups and daily position updates,
or to learn about our other newsletters, visit
morpheustrading.com or send an e-mail to
deron@morpheustrading.com.
14 ➽
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 Currency CORNER in this issue quick picks

U.S. dollar: Renewed

weakness
The U.S. dollar is again on the decline
following its brief rebound rise. The
rebound didn’t last long and it ended
rather abruptly. There were a number of
reasons why…
First, the suicide bomb attack which
killed Benazir Bhutto affected many of
the markets. Oil moved sharply higher,
stocks fell and gold rose as well. That
put downward pressure on the dollar,
especially combined with weak eco-
nomic news and low U.S. interest rates. the general mood of nervousness and new positions in the Swiss, yen and the
uncertainty over the housing, credit, euro. Don’t buy the British pound. It
A MOVE TO SAFETY stock and economic situations. Tech- has become the weakest major currency,
These factors also made investors less nically, they’re also looking good and primarily because the U.K. housing
inclined to go for risk and more prone lately they’ve been among the stronger market continues to worsen and it’s
toward safety. When all is said and currencies. So we now recommend buy- now starting to break down. Interest
done, the Swiss franc is still considered ing the Swiss franc and Japanese yen. rates are also declining (see Chart 10).
a safe currency and it benefited from Continue to hold your other positions.
The euro is actually our favorite cur-
the nervousness in the markets, rising
Even though the Singapore dollar is at rency (see Chart 12). It’s currently the
strongly. The Japanese yen rose too (see
a 10 year high and the other “dollar” strongest one, it’s near a record high
Chart 11).
currencies are holding up fine, we’d buy and it’s not as volatile as some of the
As you know, these two currencies other currencies, it has room to rise
have been held down for quite a while further, it’s become somewhat of a safe
because of the carry trade. In other haven and it is clearly the offset curren-
words, investors have used these cur- cy to the U.S. dollar. So if the dollar is
rencies to buy riskier or higher yielding headed lower, the euro will steadily go
investments. But as investors became higher. And it still looks like the dollar’s
more risk adverse this past month due going much lower, despite what interest
to international tensions, falling stock rates may do.
markets, slower growth and so on, the
DOLLAR’S BIG PIC: Bearish
carry trades started unwinding, and the
You can see on Chart 13A that the U.S.
Swiss franc and yen headed higher.
dollar has been in a huge long-term de-
We believe these currencies will con- cline since the early 1970s. It’s also been
tinue to do well this year, considering trading in a giant down channel and it’s

15 ➽
➽
www.traderslibrary.com
 in this issue quick picks

tended to go from the top of this chan- the dollar and they reinforce this sce-
nel to the bottom of it every decade or
so (see numbers 1, 2 and 3).
nario. The same is true of interest rates.
Looking at the differential or spread
Trade Options Like Velez
between short and long-term interest
rates, you can see that it’s been declin- and Fontanills
ing since last year and it’s currently Two of the most successful traders of our time have disclosed their
at a three year low (see Chart 13B). personal option trading strategies. If you’re serious about trading
That’s because T-Bills have dropped far options, then owning these new coursebooks is a no-brainer.
lower than the 30 year yield and this is
important. Let Velez give you his proven approach to
options trading that will work for you in up,
Note that when the spread peaked down, or sideways markets.
in the past and started to decline, it
preceded a steep fall in the dollar (see Take Fontanills’ clear explanation of option
vertical lines; 1980 was a lagging excep- spreads and start using the approach that has
tion when interest rates reached nearly made option trading explode in popularity.
20%, throwing things out of whack).
For now, it looks like the current situ-
ation will be similar to 1973, 1989 and
2000. Again, this too coincides with
In the current #3 decline, the dollar our outlook for an ongoing dollar de-
reached a peak in 2000, at the top of cline to far lower levels in 2008. And if
this channel, and it’s been falling ever that proves to be the case, then the euro
since. We believe the dollar will con- and the other currencies will continue
tinue to fall until it reaches the lower to be good investments and good places
side of this massive down channel. to park your cash as this new year
unfolds.
Now, that’s the big picture based on the
technicals. The fundamental factors, as The Aden Forecast, Pamela & Mary Anne
you know, are also very bear bearish for Aden, www.adenforecast.com,
info@adenforecast.com, 1-866-301-2933 GO TO: www.traderslibrary.com
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16
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