Developing The Box Theory For Option Market Predictions

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The Nicholas Darvas Option Market Predictions Success Story (part 19)

After my frightening experience with JONES & LAUGHLIN, and my more fortunate option market predictions experience with TEXAS GULF PRODUCING, I sat down to assess my position. By now I had been scared and beaten by the market enough to appreciate that I should not regard the option market as a mysterious machine from which, if I were lucky, fortunes could be extracted like the jackpot in a slot machine. I realized that although there is an element of chance in all option market predictions, I could not base my operations on luck. I could be lucky once, maybe twice - but not constantly in my option market predictions.

No, this was not for me. I must rely on knowledge. I must learn how to operate in the market. Could I win at bridge without knowing the rules? Or in a chess game without knowing how to answer my opponent's moves? In the same way, how

And so I started. First I examined my past experiences. On one hand, using the fundamental approach, I was wrong. On the other hand, using the technical approach, I was right. Obviously the best method was to try to repeat the successful approach I had used with my TEXAS GULF PRODUCING STOCK MARKET PREDICTIONS.

It was not easy. I sat with my option market predictions for hours each evening, trying to find another option like it. Then one day I noticed a option called M & M WOOD WORKING. None of the financial information services could tell me anything much about it. My broker had never heard of it. Yet I remained obstinately interested because its daily action reminded me of TEXAS GULF PRODUCING. I started to watch it more carefully than my other option market predictions.

In December 1955 the option rose from about 15 to 23 & five eighths at the year end. After a five-week lull, its trading volume increased and its price resumed its advance. I decided to buy 500 shares at 26 & five eighths. It continued to rise and I held on, watching its movement intently. It kept moving upward and its volume of trading was consistently high. When it reached 33,1 sold it and took a profit of $2,866.62.

I was happy and excited - not so much because of the money but simply because I had bought M & M WOOD WORKING, as I had bought TEXAS GULF PRODUCING, purely on the basis of its action in the market unlike my other option market predictions. I knew nothing about it nor could I find out very much. Yet I assumed from its continuing rise and high volume that some people knew a lot more about it than I did.

This is one of my option market predictions that proved to be correct. After I had sold it, I found out from the newspaper that the steady rise had been due to a merger, which was being secretly negotiated. It was eventually revealed that another company planned to take over M & M WOOD WORKING for $35 a share, and this offer was accepted. This also meant that although I was in complete ignorance about the behind-the-scene deal, I had only sold out 2 points under the high. I was fascinated to realize that my buying, based purely on the option's behavior, enabled me to profit from a proposed merger without knowing anything about it. I was an insider without actually being one. This proved much more successful than my other option market predictions.  


This article is actually only a small snippet of Nicolas Darvas' work...

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