Welcome to TheStreet.com

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2 Welcome to TheStreet.com When I started TheStreet.com back in 1996, I wanted it to be a place at which the ordinary, casual investor could get the same level of research and commentary that the big boys on Wall Street -- with fat budgets and huge research staffs -- have long had at their disposal. Six years later, that desire has been realized in ways I couldn't have imagined. TheStreet.com always has been a place that sided with regular investors. Before the big media outlets caught on, we were writing about how analysts were torn between their roles as analysts and their need to bring in huge investment banking fees (we were disclosing those relationships long before it was popular). Our writers have always dug into a company's financials to reveal warning signs, as well as potential opportunities. While some reporters merely piggyback on someone else's research, our writers are encouraged to provide their own findings on a company -- research that we give you for free. And because we're on the Web, you don't have to wait until the next day to find out what your favorite stock is doing. Along with our stable of reporters who break this news, our commentators are vocal in praising, and damning, stocks. (One of my favorite taglines in the early years was that we were "opinionated as hell" -- that hasn't changed!) But we're not only about stocks. Our markets staff doesn't just tell you the Dow or Nasdaq is up or down -- we tell you why it's down or up, and what it might do later that day, the next day, or that week or year. We also offer personal finance stories to help you plan your financial future -- and also how to spend the money you've worked so hard to earn. In this Bonus Report for registering as part of TheStreet.com community, I offer several primers on trading principles and ideas. Use these a starting point, and keep coming back to TheStreet.com to learn more about the markets and put yourself on the same playing field as the big boys of Wall Street.

3 The Long and Mostly Short of It We are back at school and now we are going to learn about shorting stock. When you want to make a bet on a company you buy the company's shares. But how about when you want to make a bet against a company? Just flip the equation: sell the firm's shares. Yeah, I know, where are you going to come up with the shares when the clown who bought them demands that you fork over the stock? Brokers, you will be glad to know, have thought of every contingency. They will loan you the shares to sell! That way you can send the borrowed shares to the new buyer and never have to own it yourself. That's called short-selling. Okay, so let's say you hear that company XYZ might be having a tough quarter. Maybe you hear that a particular XYZ product line isn't selling well. How do you profit from it? You can sell XYZ short, say at $30 a share where it is currently selling, and bet that it falls to, say, $25 when the bad news comes out. You then pick up the five points difference. Had you done it a thousand times you would have made $5,000 betting against XYZ, quite a handsome return for your negativity. Of course there is a set of rules that must be followed that are particular to short-selling. You need what is known as an uptick, meaning someone has to pay a higher price for the shares than the last sale. So if that company's stock is at $30, you can't just bang the shares out short, you have to wait until someone pays higher than the last sale to get the trade done. I know that seems unfair. But in the bad old pre-sec days, bears used to maul stocks by conducting bear raids, destroying stocks by getting short and then knocking them down by selling shares they did not own. The government took that edge from short-sellers by making them wait until someone is willing to pay up. The practical effects of this rule is that when you know it is going to be really ugly in the market, you can't just come in and get short. On big down days nobody is paying up from the last sale for anything, except stuff that you will lose your shirt on if you short anyway. That's why many people buy puts instead of going short: because the impracticality of shorting on really ugly days cannot be stressed enough. One other arcane rule: you have to be able to borrow the shares to begin with. Some stocks are unavailable for borrowing, either because too many have borrowed them already or because the shares are held in a few hands, none of which keep their shares with brokers. You don't want to short those stocks anyway, because they can rocket higher if someone buys them aggressively, triggering what is known as a short squeeze, the most dangerous aspect of short trading. 1

4 What Are My Options? The first thing you've got to know about buying options is that you are expected to lose money. It's like the slot machines at the casino. Some people hit; most people lose. Just like in slots, you don't think you should be a loser. This piece is about how I turn the odds more in my favor, how I make it more of a game of blackjack than of one-arm banditry. I know what you are thinking: Cramer can't be telling us anything worthwhile, because he's not asking for thousands of dollars in seminar payments and video tapes. Cramer can't know anything, or he would be insisting we meet in the Felt Forum for a closed-circuit lesson at $200 a pop and aggressive follow-on lectures by Cramer minions for $2,500 a year. Damn that stuff makes me sick. I see guys charging fortunes for lectures that I could give in my sleep, and I would if they weren't wrong and worthless. The guts of these charlatans. I am one of the best options traders on Wall Street but no way would I ever make the kinds of promises these guys make, and let me tell you, I would trash these guys in any trading contest. Options, common, you name it. So what's my angle? Same as ever. I want to help you make money. I want you to be happy subscribers to TheStreet.com and rave to all of your friends what a bargain this is. I will derive a tremendous amount of achievement and pride if I can make TheStreet.com successful beyond anybody's wildest dreams. If that means I give up some options secrets, so be it. I give them up fully knowing that you have read my options abyss piece from the other day. (For that story, please click here.) I give them up with the understanding that you are going to trade them whether I say you should or shouldn't, and for the record, I say you shouldn't. When you trade options you are trading against guys like me, and I have a whole army's worth of data, machines and material to play with. I know those are not good odds. (Just the other day I received an saying that I had cavalierly recommended using options without giving accurate risk factors, which just shows that, given I have laid out millions of reasons why options are dangerous, you can't caution enough.) First, the biggest choice you have to make is why bother to buy an option at all? Why not buy common stock? Why put a gun to your head and give yourself that kind of pressure? There is no good answer to this question. You should buy common stock. You should not put a gun to your head. You should not get caught up in buying something that has a short fuse. 2

5 But you've come to me now because your mind is made up. You want to parlay that limited amount of capital into something bigger and you think you are willing to risk it all. May I make a suggestion? Cut in half the amount of money you intended for options. Don't make yourself sick with worry if your stock goes down after you bought calls. Don't get fired from your day job because you keep checking how your net worth of 200 AMAT calls is holding up. Second, don't buy out-of-money calls. Those are for suckers. Buy calls that are a proxy for common. So you think National Gift Wrap and Box Company, currently at $45, is going to $50 in two weeks. Don't buy the February 50s for 3/8ths of a dollar. You could be right and make nothing. Don't buy the February 45s for $1.75 and run the risk that the stock goes up two points and you make nothing after commission. Don't buy the February 40 calls, either. You could be dead wrong about the time frame and be faced with taking in common in two weeks, a decision that may eat up all of your capital. Go out to March. Buy the March 40 calls. They probably are going to be at $5.85. You will get a one-for-one move about $46. That means if the stock goes to $50 in two weeks you will make four bucks on a $5.85 investment. That's a great rate of return. If the stock does nothing in two weeks, you've got another five weeks where it might do something. If the stock does nothing in 7 seeks, unlike the March 45 calls, which might have cost you about $2.5 and been a wipe out, you can sell the call and say you gave it the old college try. So, lesson one: if you have a hunch that something good is going to happen that will move a stock ten percent in two weeks, presume you are wrong about the time and go further out. Presume you are wrong about the thrust, and don't gamble on the out of the monies (the 45s). And presume that when the stock get to where you think it is going to go, it will go no further, and don't be wiped out on the 50s. Now you are already ahead of the game. 3

6 Avoid the Sector Trap To be offensive or defensive, that is the question. At least that is the question in the minds of a lot of portfolio managers I talk to. To me, the whole debate is a canard, a sideshow that will keep you from developing a diversified portfolio, that will keep you out of trouble in bad times and in black ink in good times. Understand that when money managers say "given the expected bounceback in the economy from all of these easings, you should be buying cyclicals and tech," they are simply talking their positions. They want you to buy these stocks so they will go up. I don't play that game. I want to buy stocks that are cheap and sell stocks that are dear. Some of the dear stocks are tech. Some of the cheap stocks are food and health care. The trick is to find quality stocks that are selling at a discount regardless of what sector they are in. Let me explain. Take Heinz (HNZ:NYSE - news - commentary - research - analysis). I was looking at Heinz this morning because it yields 4%, already a positive in my mind because of the low cash rates. The stock dropped precipitously on Friday. That seemed wrong to me. I thought it might be part of a rotation out of safety into aggressive stocks. Nope. The stock is going down because Heinz has expanded its food service business to restaurants. That area, once viewed as the more cyclical kicker to Heinz, is now a liability because people aren't going out as much since Sept. 11. That means the very thing that the "top-down" folks might like about Heinz -- that it has some cyclicality -- is what makes me suspicious of the company's ability to make its earnings. Similarly, I want very much to buy tech stocks that are cheap, but it is hard to find cheap tech stocks because the earnings estimates and the P/Es are still too high. Portfolio managers, of course, have to buy. I don't. I can wait until I find something that is intrinsically cheap. But I am not going to get caught up in the sector trap -- thinking that a sector is so cheap that I can buy anything in it. The moment you do that is the moment you buy a stock that has a shortfall coming. So don't be confused by these people who come on television or in magazines and say "that sector is too cheap." You are buying individual stocks, not sectors. You pick the wrong one in a so-called "cheap" sector and you are going to lose a lot of money. 4