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January 1, 2002

Making Smart Decisions

By Vic Schiller

Did you ever loose a computer chess game? Don't feel sorry for yourself. The software isn't smarter than you, it just has a raw computational edge. It can process more possible moves and outcomes than you can. It thinks' ahead faster, and is more focused than a human brain.

What, you ask, does a computer chess game have to do with investing? Maybe more than you think. Are equity markets much different than chess? You make a series of decisions, moving in and out of securities, and, at month's end, you either win or lose.

To make investment decisions you look at a chess board of charts, news, indicators, etc. Similarly, your chess pieces are your capital and other liquid assets. Then, you decide which securities will benefit most and you make your moves.

Unbeatable Game

Back in the 1980s, I ran a software company that developed a computer chess game. Even though my sons' chess coach said the program was unbeatable I might remember a few tricks. My boys loaded up the game and pounded away.

The logic that drives computerized chess games is similar to the logic behind computerized investment decision support. For investment decision support, a high-speed computer constantly sweeps the market for the highest return investments. You can do this manually but a computer is faster, more accurate, and free of emotion.

Investment decision support technology can be demonstrated in the world of option investing. This landscape is shaped by time, trends, and probabilities. All dynamic variables the computer is meant to tame.

There are over 2,700 optionable stocks and more than 100,000 options available. Considering the various option strategies, that means at any second during the trading day over ten million possible option investments exist. Computers were made for this kind of computational nightmare.

Why should a trader care?

With a decision support system for hunting down covered call option investments, a trader can focus on evaluating opportunities with the highest return. Investments that meet the trader's criterion (on p/e, market cap, beta, in or out-of-the-money options, etc.) will rise to the top for him to evaluate as sound investments. The computer uses expected returns to identify the best investment opportunities.

Traders often put their limited capital into investments yielding half (or less) of what they could if a sophisticated decision support system were used to identify investment candidates.

These systems do not eliminate risk or make decisions, they only increase the number of high-yielding investments that can be evaluated.

You must still decide if the underlying company is solid. Still, with this type of system you save time since you don't wade through numerous low yielding and equally risky investments. You first focus on the highest yielding candidates.

Traders, brokers and hedge fund managers who use decision support technology are amazed at how many investment opportunities they would have overlooked without it.

A broker at a leading full-service firm uses this technology to satisfy customer requests for hedged collars (covered call option with a protective put to limit potential downside).

In moments, with a customer on the phone, he can generate a display full of investment opportunities to discuss. With investors unsure about the sustained market direction, this class of investments is gaining popularity.

Faster Computers

This technology was introduced in 1997 but now, with ultra high-speed computers to crunch vast amounts of changing data, it is easier. Internet-based equity options systems are available for as little as $10 to $40 a month.

Three rooms away, I can hear my sons yelling at the computer. After two hours, the score was Chess Program: 23 - Boys: 0. When I join them, they whine that the computer is unbeatable like their coach said. Even if it was more than 15 years since I worked on a chess program, I remembered how they think.' I sit down and, with my boys cheering for the machine, I beat it in twelve moves.

Computers are good for crunching the numbers at lightning speed. Still, even with decision support technology, a cool analytical human head is needed to make the final decision.

Victor Schiller is vice president of PowerOptionsPlus.com, a provider of SmartSearchXL decision support technology in Wilmington, DE.