9:00am (EST)

The bulls made a run after two weeks of getting beat down as they pushed the major averages back near prior resistance.

The Dow zoomed higher by 173 points, or 1.6%, to finish at 11,181 and just below the 11,200 level.  This was prior resistance, which became support, and is now slight resistance again.  The bulls will shoot for 11,400 next week if they can clear 11-2 with an outside shot at making 11,600.  The index traded to a high of 11,199.69 yesterday. 

The S&P 500 followed suit and nearly matched the Dow’s impressive gain as it added 18 points, or 1.5%, to settle at 1,196.  The index triggered the 1,200 level but finished just below resistance or its 20-day moving average.

The Nasdaq soared 38 points, or 1.6%, to close at 2,514 and above the 2,500 level.  We have been mentioning this area time-and-time again as the pivot point for Tech.  As long as 2,450 holds and the index can build a base above 2,500 then we are easily looking at 2,600-2,700 by year-end with a shot at 3,000 over the next 3-6 months.

We wanted to take some time this morning to talk about options on stocks under $5.  “Back in the day” it was rare, if ever, you saw options trade on shares under five bucks.  We try to avoid trading options on stocks under $5 because sometimes it is safer to just buy the stock.  However, the market correction from a couple of years ago pushed some star names to single-digits and a few of them even went bankrupt (GM, Lehman Brothers, etc) which has opened up the options market to allow this kind of trading.

Our point is, although we have traded options on a few stocks under $10, it is important to allow yourself enough time for the options to move, especially under $5.  And even then, the options might not allow you enough time to make a profit.  In other words, the risk level goes up which is why buying the stock sometimes makes more sense if you think there will be a turnaround.

Case in point.

We mentioned Sirius XM Radio (SIRI, $1.40, up $0.05) last week and told you how the stock was at 12 cents back in February, 2009.  We don’t recall options trading on the stock at THIS level when the company was called XM Satellite Radio.  However, by August of that year, we thought there was a chance of a “breakout” and recommended some December 1 options when they were trading at 15 cents.  The stock was at 70 cents.

A 10 contract option trade would have cost $150.  It would have cost $700 to buy 1,000 shares of the stock or $70 to buy 100 shares.  The options would have been profitable if the stock would have reached $1.16+ by December and we gave the trade 4 months.  However, the options expired worthless as the stock stayed under a buck and was at 60 cents by Christmas.

The important thing to remember with this story is A) we only spent $150 and in your “high-risk” portfolio, you should trade a set amount of contracts for every trade or a fixed dollar amount on each trade.  This keeps you balanced and gets you through losing streaks.  And B) we would have been better off just buying the stock, which has doubled a year later because we had all the time in the world to wait for the company to get back on their feet, which we kind of felt they would.

Futures are lower this morning on fear China might raise interest rates.  Dow futures are off by 41 points to 11,135 while the S&P 500 futures are lower by 5 points to 1,193.  The Nasdaq futures are down 7 to 2,127.

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