My dentist's assistant is a very happy young lady. She owns two shares of Google, and Google has been on a tear lately. It's gone from $403 per share to $485 over the last month for a nifty gain of $82 per share or 20.3%. A certain patient of the same dentist is also very happy. He owns 10 Google Dec 400 Call option contracts. The price of each contract, which controls 100 shares of Google, went from $3,781 to $8,920 over the same period for a gain of $5,139 per contract or 135.9%. But wait. There's more to it than that.

Being a cheapskate, this old guy doesn't like to pay the full amount for option premiums. So he sold enough out-of-the money Google Put options to halve the cost of his Calls. Normally, he would have sold 10 Google Dec at-the-money Put options to off-set most of the cost of the Call options, but he didn't want to take the risk. Of course there are ways of off-setting some or all of the cost of Call options without increasing risk, but they all result in a reduction in the potential reward. The thing this old guy loves about trading options is the ability to balance risk and reward. Actually, he also loves the idea of spending as little money as he can to make as much as he can. So he likes to fashion Combo trades that give him a better-than-even chance of winning at a reduced cost.

Long-term subscribers to VectorVest know that I have written about options trading on many occasions. The last time I cited the use of options was in my essay of 09/01/06 called "Risk, Reward and Patience." Prior to that, I wrote about buying nine-month, at-the-money Call Options in implementing the Summer Hiatus strategy. As noted in that essay, buying Call Options instead of the actual stock whenever possible greatly reduces the money one has at risk. This subject was discussed at some length in a very important essay I wrote on 02/17/06 called "Albert's Gift to VectorVest." It's well worth reading.

There's another relatively sophisticated option trade that's worth considering for long-term Bullish positions. This trade offers an investor unlimited upside potential with a relatively moderate maximum loss. If done properly, it even offers the opportunity to make money if the stock price crashes to the downside. In many ways, it's a better trade than a Long Call, a Bull Call Debit Spread or a Synthetic Long Stock. It's called a Call Ratio Back Spread.

For example, the old man could have simultaneously sold 20 GOOG Dec 400 Calls @ $37.80, have $75,600 credited to his account (not counting commissions), purchased 30 GOOG Dec 430 Calls @ $20.90, and paid $62,700 from his account for a net credit of $12,920. According to the VectorVest Options Analyzer, his maximum loss of $6,750 would occur at expiration at a stock price of $410 per share. His upside breakeven stock price would be $417 and his downside breakeven stock price would be $406 per share. At yesterday's closing price of $485.10, his profit would have been $65,790. Not a bad deal if you're interested in Low-Risk, Leveraged Investing.

WARNING:
DO NOT TRADE OPTIONS UNLESS YOU HAVE BEEN TRAINED TO DO SO, FULLY UNDERSTAND THE RISKS WHICH MAY BE INVOLVED AND KNOW WHAT YOU ARE DOING. YOU MAY RECEIVE A FREE INTRODUCTION TO OPTIONS TRADING AT THE VECTORVEST UNIVERSITY, PURCHASE THE VECTORVEST OPTIONS COURSE ON CDs OR ATTEND ONE OF OUR LIVE OPTIONS COURSES.

The Mighty Dow closed above 12,000 yesterday, but the celebrations were muted. Is there doubt about where it's heading?

Our valuation model says The Mighty Dow, a.k.a., DJIA, is currently worth 17,012. Yes, you're looking at the right number. As shown in the Valuation Section below, there was a 1,036 point increase in the VVIA from last week's level of 15,976 due to the huge drop in the CPI inflation rate which was reported on Wednesday. The VVIA crossed above the actual DJIA way back on June 7, 2002 at a level of 9,576 and has stayed there ever since.

You may see a graphical display of the underlying data for the DJIA and VVIA by accessing the DJ Industrials WatchList, clicking on the Summary Row at the bottom of your screen; then clicking on Graph on the Local Tool Bar. The "All Weekly" graph of Price and Value shows how these variables have fared over the last eleven plus years. Note that the sums of the Prices and Values shown in the WatchList need to be divided by a Divisor to convert them into Indexes. The Divisor as of today's close is 0.12493117.

Now what's the point of all of this? The point is that the VVIA generally leads the direction of the DJIA. While you can see this on the graph on your computer, we use a "Doing the Dow" graph covering 36 years in our seminars which illustrates the same thing over a much longer time period. A 110-year graph of the DJIA was published in today's Wall Street Journal along with an interesting article and notable landmarks. Of course, it doesn't show the VVIA.

In addition to our valuation comparison, I expect the Mighty Dow to soar because the investment climate is similar to that of June 5, 1995 when I wrote an essay called "The VectorVest Rocket." Moreover, we have entered the juicy part of The Presidential Cycle, which is the fifteen-month period beginning in early October, two years before the presidential election and lasting until early January of the election year. (See Chapter 19 of Stocks, Strategies & Common Sense.)

So put on your seat belt and hold on to your hat, we're heading to Dow 17,500.

Three weeks ago, I wrote about the Investment Climate and how we track the key factors affecting stock prices. Then I wrote about the Truth Chart and the role that The Fed plays in deciding the fate of the economy and the Investment Climate. Two weeks ago, the Truth Chart said we were in a Case (2) Bull Market Scenario, the most desired Investment Climate. This combination of factors, in which earnings rise while inflation and interest rates fall, is often called the Goldilocks scenario.

Now we need to see whether Dr. Bernanke does, in fact, lower interest rates in time to sustain a Bull Market Scenario or whether he waits too long and allows the economy to go into the tank. I believe he will lower interest rates soon simply because of the Presidential Election Cycle. Nevertheless, what is the factor in the Investment Climate that will signal to us whether Dr. Bernanke has done his job or not?

It's the earnings trend. The Truth Chart shows that earnings must be rising in order to have a Bull Market scenario. In other words, the market will be in a Bull Market scenario as long as the earnings trend indicator is above 1.00 and a Bear Market scenario when it is below 1.00. So does this mean that the earnings trend is the only thing we have to watch?

No, not at all. As noted in my essay of 03/28/03, the only difference between Case (1), Bull Market Begins, and Case (4), Bull Market Ends is that interest rates were falling in Case (1) and rising in Case (4). Currently, the market is in a Case (3) scenario. It attained a Case (2) scenario three weeks ago, after being in a Case (4) scenario for months on end. It is very difficult to avoid a Bear Market scenario after being in Case (4) for a long time. That's why it's important to watch the earnings trend so closely. There are several ways to do this.

The easiest way is to simply go to the Investment Climate section of these Views and read what it says in the row marked S&P Earnings. Another way is to click on Graphs on the Main Tool Bar and Market Climate Graph. Once you have checked S&P Earnings and S&P Earnings-VV, you'll see that while earnings have been rising smartly for over three years, its trend indicator peaked at 1.19 in mid-2004 and has now fallen to where it was three years ago. A third way to see S&P earnings is to click on WatchLists on the Main Tool Bar, click on Stock WatchLists, click on S&P WatchLists, click on S&P 500, click on the data row at the bottom of your screen and click on Graph on the Local Tool Bar. Use the Edit Field List to chart EPS.

The sum of all this is that earnings are still rising, but the rate of increase has been diminishing. Nevertheless, I don't expect to see a Bear Market scenario soon. In any event, we'll let you know when we get a change in The Bull/Bear Market Indicator.

While it seems like a lifetime ago, it was only on June 9, 2006 that I wrote an essay called "Summer Hiatus." It described a strategy of rebalancing high VST-Vector stocks that produced a phenomenal gain of 911.9% from January 5, 1996 to June 8, 2006 with 66.1% winners and a maximum drawdown of only 21.43%. I said I would use this strategy to invest $100,000 of my own money starting on October 6, 2006 and the following week I described how I would do it in an essay called, "My Game Plan."

Well, October 6, 2006 is here, so it's time to get started. In accordance with My Game Plan, I'm going to buy the top five VST-Vector stocks on Monday which were shown as of today's close. I don't know what stocks they will be, but I will make sure that no more than two are assigned to the same Business Sector. If the stocks are optionable, I will buy the 9-month, at-the-money Call Options instead of the stocks. To help defray the cost of the options, I may sell out-of the money Puts on the underlying stock to create synthetic long-stock positions. I'll repeat this process in each of the next three weeks so that I'll have 20 positions in all. I will hold these positions until July 6, 2007 when I'll sell all 20 positions.

For your information, we will establish a $100,000 portfolio in our corporate account which will hold the same 20 stocks but no options. This will allow you to see exactly what happens to the all-stock portfolio. It will make its first appearance on Monday and be called Summer Hiatus - 2006.