This weekend I want to look at a few stocks that on the face of it look similar in their failure to follow through, but are radically different because of what brought them to this point. All of them had been big prior winners. Two of them are potentially great plays...one is to be avoided, so let's see if we can figure out the difference.

The first is CROX...the barnstormer of retail shoe stocks that has seen meteoric price gains over the last year and a half.

With ugly shoes that swept the nation by storm, this retailer saw 95% gains until the party was over. Then a dissapointing earnings and forward looking guidance release ended the party. I guess everybody who wanted a crock has one in the United States by now.

This is a case of a stock which was entirely momentum based, had no consolidations and was an obvious target for profit taking and panic selling. It as no redeeming value now until it restores confidence in future earnings, so this really is a good stock gone bad and deserves its trimming.

As an insight into the loss protections offered by options on a stock like this, If you had invested in 100 shares of stock in mid September at around $60, you would have been up by about 25% at the time of the selloff and promptly would have lost your original investment of $6000 plus an additional $600 even if you had been able to get out instantaneously when the market opened. If you had been less fortunate you could have lost an additionsl $700 by the end of the day for a whopping $7300 one day hit to your pocket book not even counting the 25% gain that you had in your pocket before the gap down.

Conversely if you had bought the same amount of options needed to cover the 100 shares, (1 contract) it would have been an initial outlay of $5.85 per share equivelent for a total of $585. On the day that CROX dropped the options traded at $2.40 at the open which would have been a loss of only 65.25% and even if you waited for the worst price of the day you would have sold at $2.15 ....still not a total loss and you only risked about 10% of your capital to do it. The balance of your capital was squirreled away in other holdings, money market, or that new jet ski in the garage. a $370 loss with the option vs a $7300 loss for the stock.

The real power of trading this way is in money management. In my mentoring course I show you how to get much higher rate of returns by placing 90% of your portfolio in "safe" (not dull) investments that protect your retirement while you "play" with only 10% of your portfolio, only putting 1% of your portfolio at risk in each position that you take. (By the way, this is true whether you trade stocks or options...makes no difference).

That way if you were to lose an entire position it could never represent more than 1% of your total portfolio. That is within the risk curve of any trader, I don't care who you are.

Now when I started I said that we had stocks that were victims but yet looked just like CROX just looking at a daily chart...

Let's look at one that I really owned (and still do) that did the same thing, but for an entirely different set of circumstances and why I believe it is an opportunity, not something to mourn.

SWHC is another of those storybook stocks with a meteoric rise from the ashes of reconstruction 3 years ago at $1.15 to reach the lofty heights of $22 before crashing last week. Up 982% over that period, it had done everything right in its recovery.

We were in it for one of its profit legs and re-entered a month ago when w had a breakout of one of my favorite and most predictable patterns the measured move. With a 98% success rate this one looked like another for the record books, but it was in that 2% group that failed.

If we had invested in the stock at about $20 we would have had a gain of 10% before the stock collapsed with a one day gap that trimmed its horns by 30% in one day but of course. By the end of the day the stock was down almost 39% from the open. A $2000 investment for 100 shares would now only be worth $1320. My options on the other hand were a total $360 for the right to control 100 shares of the stock. At the end of the day I would only have about $40 in value...a loss of almost 89% on the option investment.
BUT...remember, I only put up 1% of my total portfolio position into any one investment so even if I had lost it all I would only be down 1% and still with less than 1/2 the loss of a cash only portfolio position.

NOW...What do we do...we have a near worthless option and it will cost us probably $15 just to sell it, but it doesn't expire till April so I have a lot of time left. BUT IS SWHC still a good investment or is it another CROX story and doomed to failure?

The devil is in the details...CROX was a bad earnings future growth story...What happened to SWHC?
SWHC came out with earnings that beat the previous equivelent quarter last year by 54%....WHAT?...Yes 54%. Why then did the stock drop? It dropped because they reduced next years revenue projections from 335 million to 330 MILLION...yes a revision of just 5 million or 1.4% for the entire year. So the drop DOES NOT MAKE SENSE...What you had was an over-reaction by momentum players who started selling on the slightest bit of negativity on a storybook stock that still has good bones and a sound basis for continued gains.

I bought more options on Thursday that are up by 15% in just one day. If I am right in my supposition that this is all just a situation where the news was entirely misinterpreted then not only do I stand to make a lot of gain on my new options position, but will see the original options (now up to $75 from $40 on Thursday) to be black into the black with a handsome profit as well.

The main thing to be learned from this exercise is that by limiting overall risk we don't get devastated in selloffs like this even if they are not going to come back. Limiting your stock position exposure means you can sleep at night even if you take 2 or 3 of those 1% losses in a row.

The 3rd stock is another that has been battered over the last couple of weeks, had another big rally, and then a big down day Thursday and Friday selling off for the last 3 days of the week. I won't go into the math of the options vs stock or the 1% rule on portfolio positions...by this time you either get it or you don't.

This is another news related drop off of a stock that had and has great potential for continued growth as a market leader standing just about alone in owning its space. As such it has had good gains and great potential, wonderful earnings. This is just the kind of stock that analysts tend to start whispers about and hedge funds play momentum games with....
If not in already in, should be a good candidate again when it bottoms and bounces...