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Make 10 Times as Much as the InsidersBy Graham SummersWednesday, May 2, 2007 You can make a lot of money following insider trading.
Few things are as compelling as seeing the guys in charge put their money alongside their shareholders'. And, after all, corporate insiders have a competitive edge over individual investors...
You and I can analyze a company for weeks, but we still won't know what inspired a CEO to buy millions of dollars worth of his company's stock. And unlike America's executives, you don't have load of stock grants coming to compensate you should your analysis prove wrong and your initial purchase come at a loss.
However, there's a means of leveraging insider information to supercharge your investment gains. You may not know as much as the company's insiders, but you can make 10 times as much on your purchases as they can.
Just buy options as well as the company's stock.
If you're unfamiliar with stock options, they essentially grant you the right to buy or sell a company's stock at a particular price sometime in the future. If the options grant you the right to buy the stock, they're called "calls." If they grant you the right to sell the stock, they're called "puts."
To make this easier, think of calls as similar to going long a company's stock. In contrast, puts are similar to shorting a company's stock.
Options are famously volatile: Investors are basically trying to calculate where a company's stock will be trading sometime several months even years away. That's why a 10% jump in a company's stock can result in a 100% jump in call prices.
Because of the short swing profit rule, insiders cannot sell the shares they purchase for a minimum of six months. So whatever development they expect to cause a share price jump will likely occur six months or so after they purchase their shares.
Buying options that are scheduled to expire around that time gives you the best chance to see your calls pop.
We've had a great deal of success with the formula in my Inside Strategist advisory. Most recently, subscribers stopped out of Titanium Metals (TIE) for a 17% return in five months. Now that might not seem like a tremendous gain, but back in November, we'd already nearly doubled our money on Titanium Metals calls in one week's time.
Similarly, we're now up nearly 15% on private equity firm American Capital Strategies (ACAS) since we bought mid-March. However, we've already closed our American Capital calls for gains of 66% in one month.
We might not be overpaid executives... but we can use insider tips (you can look up insider buys and SEC filings on Yahoo Finance) to generate far greater profits in a fraction of the time.
Sure beats having to attend all those boring board meetings, doesn't it?
Good trading,
Graham
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