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Thursday, March 8, 2007
The strategy that will help you win CNBC's new trading contest is not the same strategy that'll help you win in the real world...
The contest – CNBC's million-dollar portfolio challenge – started this past Monday and continues through May 25. Contestants are given $1 million in play money, and the trader who parlays it into the biggest pile of play money by the end of the game wins one million real dollars. (Okay, it's actually a $1 million annuity, so it's not quite as lucrative, but why quibble?)
But a real trader is not going to win this contest... a gambler will.
You see, the way to win short-term trading contests with play money is to make an oversized bet on a long-shot stock. If the bet fails, there's no harm done – after all, it was play money. But, if the bet is successful, you can double or triple your pile of play money in short order.
Real traders with real money would never do that. Real traders exercise risk management. They only trade when the odds of success are in their favor, or when the potential reward justifies taking a low-odds bet. They limit the size of their trades so that one loss doesn't wipe out a whole string of wins. And, perhaps most importantly, real traders understand the eleventh commandment of trading... "Risk not thy whole wad."
That kind of conservative approach doesn't work very well for winning trading contests on CNBC. But it's a terrific strategy for trading in the real world.
So, if you want to win CNBC's trading contest, then here's my advice...
Find a biotechnology stock that's scheduled to make a major announcement sometime in the next three weeks and bet the whole stack of play money on it. A good announcement will double or triple your stack and almost assuredly get you into the contest finals. A bad announcement will cut the size of your stack by 50%-75%. But who cares? It's not real money.
On the other hand, if you want to make money in the real world, then here's my suggestion...
Find that same biotechnology stock. Venture on over to the options market and craft a strategy that requires only a small amount of money and will turn a profit if the stock goes up, if it goes down, and even if it just stays the same.
As you may have guessed, I have found just such a stock, and I've crafted just such an options strategy. And I'll be sharing this trade with my S&A Short Report subscribers next Monday afternoon.
If you want to play games, then CNBC's portfolio challenge should be a lot of fun.
Best regards and good trading,
Big Oil rallies... ConocoPhillips up nearly 4% yesterday... Chevron up 3%... ExxonMobil up 2%.
Leading homebuilder Beazer Homes hits a new 52-week low.