The Best Way To Protect Your Stocks Investment

Shoeless Joe Jackson: The first two were high and tight, so where do you think the next one's gonna be?
Archie Graham: Well, either low and away, or in my ear.
Shoeless Joe Jackson: He's not gonna wanna load the bases, so look low and away.
Archie Graham: Right.
Shoeless Joe Jackson: But watch out for in your ear.

―Field of Dreams


Volatility may be a trader's best friend, but for the average investor these days, it is more like the guest that wouldn't leave. After a few nights on the sofa, the wild twist and turns have made themselves quite at home.

That has left more than a few retail investors wondering exactly where the next pitch will be.  

And for all of them, guessing correctly will mean the difference between the thrill of victory and the agony of one in the earhole. Or in this case, either sadness or euphoria.

One, of course, is much more preferable than the other.

Needless to say, that makes for a pretty tough investing environment ― especially when you just can't decide whether it is green shoots or the ghost of Tom Joad.

However, that doesn't mean for a second that investors ought to simply roll the dice in these markets and hope for the best.  That's not exactly a winning strategy.

Instead, what every investor should be doing is using a combination of Stop/Loss Orders to protect their portfolios from the inevitable wild pitch, since failure to do so could cost them dearly.

Here's how stop/loss orders work.  

Taking the Mystery Out of Stop Loss Orders

Simply put, a stop/loss order is what stands between your portfolio and the danger of losses that are simply too big to face ― kind of like an insurance policy you hope you'll never need.

Also known as a "stop order" or "stop-market order," it's an order placed with your broker to sell a security once the hot stocks for 2010 has hit a certain price. And once your predetermined stop level has been reached, your order goes "live," and the shares you hold are liquidated.   

No fuss. . . no muss.

For example, let's say you just loved the Kindle and established a position in Amazon stock (AMZN) for $80.00 a share. To protect yourself against a wicked downdraft in that position or in the broader markets, you would simply follow up that buy with a stop/loss order you could live with if the markets suddenly turned against you.

For instance, if a 10% loss is all you can handle then your stop/loss order in this case would be set to execute once the price reached $72.00. That would save you the agony of much steeper losses if the sell off were to continue. Moreover, it eliminates the emotions that often turn investors into "trapped longs," which is something that can take years to recover from.

And if you don't believe me, just ask those "buy and hold forever" types how they're riding out the current downturn. The odds are they wish they got stopped out a year ago.

That being said, there are two types of stop/loss orders, and it is important to know the difference.

One is a stop market order, which automatically sells the allotted shares at "the market" once the order is activated. In short, it is the equivalent of a market order, meaning your shares will be sold at the bid until they have all been sold. The price you sell your shares for can sometimes fall below your stop price, especially in fast-moving markets or thinly traded hot stocks for 2010.

The other type is a stop limit order, which also activates a preset level. However, in this case the order combines the features of a stop order with those of a limit order. As such, once activated, your shares will be liquidated at limit price or better. The downside, of course, is that if the stock keeps falling then your limit will not be reached, exposing you to further losses.

Lock in Your Profits with Trailing Stops

However, as important as stop/loss orders are, preventing big losses isn't the only way to use them. That's because savvy traders also use them on occasion to "lock in profits," once again taking the emotion out of the trade.

Doing so, they employ what is known as a trailing stop.

Here, the stop-loss order is set at a percentage level below the current market price ― not the price at which you bought it originally. As such, the price of the stop/loss actually adjusts as the stock price of 2010 fluctuates from day to day. It is used in cases when the share price has turned green, ensuring gains during a pullback or a deeper correction.

The bonus is that using a trailing stop allows you to "let profits run" while at the same time guaranteeing at least some realized capital gain. 

Continuing with our Amazon example from above, say you set a trailing stop order for 10% below the current price. Meanwhile, the Kindle turned out to be the game-changer you thought it would be, and shares of Amazon were hitting $150.

Your trailing stop order would then lock in at $120 per share ($150 - (10% x $150) = $120). This is the worst price you would receive, so even if the hot stocks for 2010 takes an unexpected dip, your profits of $40/share would be "locked-in."

Of course, keep in mind the stop/loss order is still a market order, so the price of your sale may be slightly different than the specified trigger price.

So, while the markets are still as volatile as ever, using stop/loss orders is still the best way protect to your portfolio from the ravages of the worst case scenario.

Because let's face it, green shoots are nice, but I wouldn't rule out one in the ear, either ― not by a long shot.

Top Stocks For 2010: Las Vegas Sands Corp. (LVS)

While many consumer-driven sectors of the market are struggling amid the global economic downturn, the so-called "sin sector" is back in style. Since the beginning of the year, the International Securities Exchange (ISE) SINdex (SIN) has soared more than 35%, easily doubling the broader S&P Retail Index's (RLX) gain of about 15% for the same time frame. What's more, SIN has outperformed the S&P 500 Index (SPX) by more than 40 percentage points on a relative-strength basis during the past 60 trading days.

Gambling has long been a staple of the sin sector, and few gaming stocks for 2010 have performed better than Las Vegas Sands Corp. (LVS) in 2009. The equity has soared more than 50% on a year-to-date basis, due in large part to LVS' massive 513% surge from its March 9 low. As a result of this impressive technical prowess, the security has outperformed the SPX by more than 275% on a relative-strength basis during the past 60 trading days.

The 2010 best stock's rally has found unwavering support from its 10-day and 20-day moving averages, below which LVS has closed only one session since March 12. The equity has also toppled potential resistance in the 9 region, which is home to the security's Jan. 6 peak. The shares are currently pulling back to this area, creating a potential opportunity for a long position on LVS.

Daily chart of LVS since March 2009 with 10-day and 20-day moving averages

Options traders have warmed to LVS' impressive price action. The 2010 best stock's Schaeffer's put/call open interest ratio (SOIR) of 0.50 indicates that calls double puts among options set to expire within the next three months. Additionally, this ratio ranks below all but 35% of those taken in the past year.

Despite the elevated bullish sentiment toward LVS, options traders' hunger for call options has not abated. Specifically, data from the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE) indicates that nearly four calls have been bought to open for every one put purchased on LVS during the prior two weeks. What's more, traders have pursued these bullish bets at a faster pace only 26% of the time in the prior 52 weeks.

Digging into the 2010 best stock's open interest configuration reveals that peak call open interest resides at the out-of-the-money June 10 strike, with almost 25,000 contracts in residence. By comparison, put activity has been pretty paltry, with 14,391 contracts representing peak put open interest at the out-of-the-money June 7.50 strike.

But bullish sentiment stops at the option pit's door. Short sellers have placed heavy bets against LVS, with more than 23% of the 2010 best stock's float sold short, despite a 6.6% decline in short interest during the most recent reporting period. Should the equity extend its strong price action, we could see more bears abandon their short positions, thus providing additional buying pressure for LVS.

Finally, Wall Street analysts don't think very highly of the company at the moment. Currently, 10 of the 11 brokerage firms following LVS rate the shares a "hold" or worse. Any upgrades from this bearish bunch could be quite beneficial for the equity.

To take advantage of a continued rally in LVS shares, investors should consider a 9-strike call option - the July call (premium is 20% of the stock price for 2010) or September call (premium is 27% of the stock price for 2010).

Central European Distribution Corp. (CEDC)

Central European Distribution Corp. (CEDC) distributes more than 700 brands of beer, spirits, and wines, according to Hoovers. The company offers spirits made by Bacardi and Diageo, as well as well-known name brands including Corona, Jim Beam, and E&J Gallo wines. The firm also distills vodka under the brands Absolwent, Zubrówka, Bols, and Royal.

As another strong performer within the sin sector, CEDC has outperformed the SPX by more than 160% on a relative-strength basis during the prior two months. The best stock of 2010 has nearly quadrupled in value since tagging a low of $5.97 per share on March 3, riding support at its rising 10-day and 20-day moving averages. Furthermore, the equity has pulled its 10-week and 20-week trendlines into a bullish cross - a technical formation that often precedes additional gains for the security.

One caveat to this strong technical backdrop is potential overhead resistance from CEDC's declining 10-month moving average. This long-term trendline is currently perched in the 25 area, and could prove troublesome for the equity. However, there is plenty of potential sideline money that could help pressure CEDC past this hurdle.

For instance, there is a growing acceptance of the 2010 best stock's uptrend in the options pits. The ISE/CBOE 10-day call/put volume ratio of 3.24 indicates that more than three CEDC calls have been bought to open on these exchanges for every one put purchased during the prior two weeks. What's more, this ratio ranks above 74% of all such readings taken in the past year, underscoring this rising bullish bias.

But the long call trade is far from crowded, as CEDC's SOIR of 0.70 ranks near the midpoint of its annual range. As more options traders join the bullish bandwagon, it could provide additional lift for the security.

Elsewhere, short sellers are growing increasingly nervous. During the most recent reporting period, the number of CEDC shares sold short plunged by more than 12%. Still, roughly 11% of the 2010 best stock's float remains sold short, providing ample fuel for a short-covering rally should the equity make a break with potential resistance at its 10-month moving average.

Analyst coverage is thin on Wall Street, with only five brokerage firms covering CEDC. Among those, three have issued "buy" ratings, while two have doled out more cautious "holds." Despite the bullish slant to this coverage, there is still room for upgrades or additional coverage to help usher CEDC steadily higher.

Philip Morris International Inc. (PM)

While the market has been kind to gaming and alcohol companies, the tobacco group hasn't enjoyed the same kind of success. Philip Morris International Inc. (PM), for example, rests on a year-to-date decline of about 2%. The best stock of 2010 has rallied alongside the SPX since the March bottom, but the shares have been unable to topple technical resistance in the 43-44 region. This area held PM largely in check between October 2008 and January, allowing the shares only one weekly close to the upside during this time frame. With the stock's 50-week moving average descending through the 44 level, another rejection in this area seems increasingly likely.

Unlike its fellow SINdex members, PM has attracted a wave of optimism from the investing public. The stock's SOIR of 0.69 indicates that calls easily outnumber puts among near-term options, while eight of the 10 analysts following the shares rate them a "buy" or better. If PM is rejected once again by technical resistance in the 43-44 region, we could see this bullish sentiment unwind in the form of additional selling pressure.

Finally, short interest accounts for a miniscule 1.65% of the 2010 best stock's total float, providing very little in the way of potential short-covering support in the event of a sell-off. What's more, the number of PM shares sold short rose by more than 3% during the most recent reporting period. These bears could gain confidence and double down on their positions if the equity fails to overcome technical hurdles.

Pessimism Surrounds P.F. Chang's China Bistro

Brief Summary:

This article observes that many restaurant chains have struggled amid the ongoing recession, but notes that P.F. Chang's China Bistro (PFCB) appears to be thriving. In addition to a 38% improvement in first-quarter profits, the Chinese restaurant also improved its operating margins. What's more, says the author, the best stock for 2010 has doubled from its November 2008 price.

In this upbeat commentary, PFCB's notable outperformance is attributed to deft management. "The company has avoided wholesale restructuring and panicky discounting," observes the author, explaining that management has instead introduced a few carefully chosen lower-priced menu options, and scaled back its expansion plans. In short, concludes the article, the Chinese chain has succeeded "by focusing on process improvement rather than helter-skelter growth."

Contrarian Takeaway:

PFCB's price action has been impressive, with the best stock for 2010 vaulting 40.8% higher year-to-date. A recent pullback was contained by support at the security's 10-week moving average, which hasn't been violated on a weekly closing basis since early March.

Despite this uptrend, pessimism remains heavy toward the shares. The restaurateur's Schaeffer's put/call open interest ratio (SOIR) weighs in at 2.26, with puts more than doubling calls among options set to expire within three months. Meanwhile, short interest accounts for a remarkable 36.7% of PFCB's available float.

Analysts are also crowded onto the bearish bandwagon, with Zacks reporting that 10 out of 14 analysts maintain a "hold" or worse rating on the outperforming stock of 2010.

Considering PFCB's solid technical performance, it seems likely that these skeptics will soon be forced to capitulate to the stock's strength. As this bearish sentiment comes unwound, look for the shares to continue their journey up the charts.

Highest Option Volume for the Week Ending Tuesday, May 26, 2009
Ticker Symbol Call Volume Put Volume Total Volume* Put/Call Ratio
Spdrs(SPY) 383,554 529,410 912,964 1.38
Bank of America Cp(BAC) 311,240 184,687 495,927 0.59
General Motors Cp(GM) 318,720 135,778 454,498 0.43
Citigroup Inc(C) 278,944 150,276 429,220 0.54
S&P 500 Index(SPX) 138,691 166,963 305,654 1.20
Nasdaq 100 Index Trckng Stck(QQQQ) 95,729 201,592 297,321 2.11
Ishares Russell 2000 Index(IWM) 45,040 113,993 159,033 2.53
CBOE Market Volatility(VIX) 92,322 13,017 105,339 0.14
Ishares Msci Emerging Markets(EEM) 34,867 60,497 95,364 1.74
Streettracks Gold Trust(GLD) 74,807 15,099 89,906 0.20
Highest Option Volume Compare to Average Volume
for Week Ending Tuesday, May 26, 2009
Ticker Symbol Call Volume Put Volume Total Volume* 5-week Avg Volume Volume Ratio Put/Call Ratio
Computer Sciences Cp (CSC) 5,252 6,558 11,810 4,524 0.80 1.25
Citrix Systems Inc (CTXS) 54,260 6,889 61,149 20,229 7.88 0.13
Dicks Sporting Goods Inc (DKS) 10,870 5,127 15,997 5,781 2.12 0.47
Ishares Msci Canada (EWC) 3,883 6,422 10,305 3,914 0.60 1.65
Hsbc Holdings Plc (HBC) 552,147 21,009 573,156 190,872 26.28 0.04
Infosys Technologies Ltd (INFY) 14,488 13,214 27,702 10,006 1.10 0.91
Invesco Plc (IVZ) 9,269 4,627 13,896 4,344 2.00 0.50
Progressive Cp (PGR) 3,707 8,401 12,108 4,132 0.44 2.27
Regional Bank Holdrs Trust (RKH) 7,910 44,117 52,027 19,388 0.18 5.58
Tenet Healthcare Cp (THC) 22,472 4,097 26,569 9,009 5.48 0.18