Testing the Market: An Option in GMCR

I wanted to post a few charts online today, but the service I use for my premium charts is Daily Graphs, which is provided through Investor's Business Daily, wasn't working today. This happens sometimes, unfortunately. Their product is indispensible, and the only other charting service I use is a program provided by Tradeguider, which allows investors to draw any number of trend lines and other tools on their charts. Unfortunately I'm having a technological calamity at the moment, and my Tradeguider software is locked away in a hard drive for my main trading computer, which failed.

So we move on today without charts. Try trading without a working chart program - how did they ever do it in the old days? Jesse Livermore actually hired a staff who charted quotes from the ticker tape onto a chalk board. But I digress.

Even without my charting programs, I dipped my toe in the market by purchasing an option in GMCR that was in the money. GMCR broke out of a flat base today on very strong volume. Buying a small option rather than the actual stock is sometimes my way of testing the market to decide if it is worth jumping into.

Rather than tie up some money in a stock, an option allows for tremendous leverage, and depending on your tolerance, without offering up too much risk. So if you use a small (by your own standards) option order that you don’t mind losing a substantial amount of, but see strong potential for upside, the option allows you to have some meaningful skin in the game, which is important for keeping your interest and focus up.

IBD suggests as a way to test the market buying a smaller portion of your regular position in a stock, such as a half or third, and if it goes higher and the market proves itself over the next several days, buy more. One problem with this approach is that in reality good stocks often just gallop away from you and your decision time is a very tight window. Buying a stock and waiting to see if it goes higher can happen over a few hours rather than a few days. Buying an option at least allows decent profits if the stock does go higher quickly when you haven’t fully committed to the market.

Assuming this position is a winner, one can then keep an eye on other stocks that are looking ready to break higher to the path of least resistance. If it’s a real rally, there will be time to find some good stocks even though oftentimes many of the best lead the way from the outset.