Jody Osborne, Optionetics.com
October 23, 2002

During the past six weeks we have been following a mock trade on Millennium Pharmaceuticals (MLNM) using a condor strategy. There is good news and bad news to report on this trade, depending on when you exited the strategy. Last Friday was October options expiration, meaning this trade was coming to an end whether or not you wanted it to. On Tuesday of last week, MLNM hit a high of 10.54, closing the session at 10. If profits would have been taken sometime during this session, the gains would have been very respectable, between 30-45 percent. The question is why we would want to have taken profits that day. The answer is because the stock had an earnings report scheduled for that night.

In hindsight, taking profits definitely would have been the best thing to do, as the stock was pummeled after its weak earnings release. Since we were using a strategy that benefits from a lack of movement, it would make sense that we should avoid holding it over a very volatile event like earnings. However, good earnings could have been released as well, sending the stock into the profit zone. Nonetheless, the fact is that we saw MLNM fall sharply, yet we still had opportunities to make a profit. We saw both the good and bad of a condor trade. The good thing is that the profit zone is very wide; the bad is that the risks can outweigh the rewards in some situations.

Now, this week I want to discuss a way to find stocks to trade. George Fontanills has an easy way to do this called the “5-Minute Success Formula.” I want to go over this formula this week and then next week we will choose a stock to trade that we found using this method.

One of the biggest questions asked by option traders is how to find the appropriate stock. This can be a difficult process, considering there are literally thousands of stocks to choose from. For those that hate spending time scouring charts to find the appropriate stock, you may find the “5-Minute Success Formula” a great tool. This formula consists of eight steps, but ones that are very easy to follow and result in finding a stock or stocks to possibly trade by using less than five minutes each day. Let’s go through each step.

Rule 1: Stock Price +/- 30% or greater

There are many ways to find these stocks, but the easiest may be using the Optionetics.com website. Under the “Market Data” tab, traders can choose to see stocks that had the largest percent moves in both directions. These can also be sorted using only optionable stocks. From this list, we can see if any stocks meet our Rule 1 objective. The larger the move, the better.

Rule 2: Volume Greater than 300,000 shares

This is very easy to see by just looking at a quote of the stock. These quotes always list volume for the day. The higher the volume, the better.

Rule 3: Find Out Why Stock is Moving

Search the news on the stock to find out why the stock is seeing such a drastic move. It could be earnings related or caused by an analyst upgrade or downgrade. There are numerous reasons why a stock moves, but Rule 3 says to find the reason.

Rule 4: Find Out if the Stock has Options

If we use Optionetics.com to find these stocks, we already know they have options. However, it still is a good idea to check open interest and volume.

Rule 5: Look for Block Trades

Block trades show that large investors are participating in the move. This can be found by looking at the size of trades on your real-time quoting service or by asking your broker. Look for stocks that have seen 10 or more block trades, which is a trade of greater than 5,000 shares.

Rule 6: Apply Low-Risk Trading Strategies

There are numerous strategies that can be used depending on the market. Your job is to decide which type of market environment we are in. Below is a list of the strategies that can be used depending on you view of the market: 

1. Sideways markets
         Butterflies
         Condors
         Iron Butterflies
         Calendar Spreads

2. Bullish markets
         Bull call spread
         Bull put spread
         Call ratio backspread
         Straight call purchase

3. Bearish markets
         Straight put purchase
         Bear call spread
         Bear put spread
         Put ratio backspread

4. Non-directional strategies
         Straddles
         Strangles
         Long synthetic straddles

Rule 7: Place Order Carefully

This is self-explanatory, but is important.

Rule 8: Establish Exit Strategy before entering Trade

Set a point where you will exit this trade. It may be based on time or a price, but have an exit strategy in place to take the emotion out of the trade.

This formula helps narrow down the universe of optionable stocks to a couple a day. The best time to search for these stocks is 30-minutes after the open and 30-minutes before the close. Most of the time, we will find stocks to trade the in last 30 minutes of trading. Next week we will choose a stock by using this formula and then track it using a strategy that we feel fits best, given the market environment.


Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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