Stock Market Tools

A new company called SmartStops (www.smartstops.net) will go live Monday with an advisory that will tell you when to bail out of a particular stock.

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THURSDAY, OCTOBER 23, 2008
THE STRIKING PRICE DAILY
Trust Options, Not Corporate America
By STEVEN M. SEARS
The activity of calls and puts is a far better gauge of a company's
health than a CEO's words.

FRONT-MONTH OPTIONS CONTRACTS are a stock investor's best financial
adviser.

The trading activity in calls and puts shows if sophisticated investors
are bullish or bearish about a stock, or even an entire market.

Even investors who do not trade options need to understand options to
better navigate this market. Depending on corporate executives for
straight talk is often a fast road to the poor house.

Options can help speak truth to power.

Executives of bankrupt Lehman Brothers, for example, asserted to the
bitter end that the bank was financially healthy, but the options told a
different story.

Wachovia, whose stock is down 85% this year, also offers a good lesson
in what happens to investors who rely too much on corporate executives.

In July, Wachovia (ticker: WB) prominently displayed on its corporate
home page, a video from Robert Steel, the chief executive. "So although
the nation's financial news lately has been a bit troubling, and
Wachovia certainly isn't immune, I want you to know that our company is on
exceptionally sound footing," Steel said.

Yesterday, Wachovia reported a $24 billion loss, and the stock has lost
87% of its value over the past five years. The only thing sound about
Wachovia is that it will, by year's end, disappear when its "take
under" is finalized with Wells Fargo (WFC).

When Lehman was trying to fast talk its way out of its latest mess, the
options market said Lehman would pull a Bear Stearns and take a dirt
nap in Wall Street's graveyard.

Lehman's implied volatility -- a measure of investors' expectations
about the severity of a stock's up or down movement -- was obscenely high.
Still, traders bought puts -- which increase in value when stock
prices decline -- despite their superhigh prices.

Juxtapose options trading with what former CEO Richard Fuld said on
Lehman's last conference call to discuss quarterly finances. "We have what
we believe will be a strong and clean balance sheet that will allow us
to serve our customer business," he said.

Options told the truth; Lehman did not. This story line emerges over
and over again. It's not always perfect, but it's safer to trust
options-activity trading than the soothing words of corporate chieftains.

Against this backdrop of dubious corporate assertions, Dow Chemical
(DOW) deserves credit for its most recent earnings report. Andrew Liveris,
chief of the nation's largest chemical company, minced no words in
telling investors that he expects a global recession through most of 2009.
Dow's products are in everything from plastic to fertilizers and seed
sciences, so Liveris likely knows what he's talking about.

Dow's stock is up 9.3% as sharp product-price increases lifted net
income 6.2% in the third quarter. With the stock just below $24, traders
are buying November 30 calls and selling November 22.50 and 25 puts.

...

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2009.07

if you looked at nothing but the lower panel of the chart, you could easily spot the trend days.