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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: Vol who wrote (7830)7/6/1998 12:53:00 PM
From: Zach E.  Read Replies (1) of 14162
 
Now if someone could just tell me how to avoid the next VVUS or APM

Hey Vol,

Good to see you on the thread again. I can't say with any degree of
certainty how to avoid the next lousy stock. However, there are a few
things to watch out for.

One is short interest. I realize that this is a contrarian indicator
to some, but shorts do their homework so this should definitely be a
red flag. That short-covering rally that you're looking for may not
be for a long time.

An extension of the above is just to try to figure out the "bear case"
for your potential stock. If you can't think of one, you're not
looking hard enough. You can sometimes get this from the threads on
SI, and sometimes from the "Risks" section of company filings.

In terms of valuation, the current market doesn't care too much about
it. But, If your company has a low Price/Book (especially if a lot of
the Book is cash), and/or Price/Sales, you are generally more
insulated from a big fall than with stocks that trade at high
sales and book multiples. Earnings are a lot more suspect, as they
are usually more volatile and easier to fake than sales. Relative
Strength (as much as I wish this weren't true) also seems to be an
important indicator. O'Shaughnessy's "What works on Wall Street"
covers these aspects in much more detail.

Good luck,
Zach
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