My friend and trader Tim Sykes is a big fan of ignoring blue chips in favor of more volatile penny stocks -- many of which he admits are outright frauds, but can still serve as vehicles for profitable speculation.

In a recent post, he mentions the huge losses shareholders have been handed at the following companies: Merrill Lynch & Co. Inc (NYSE: MER), The Bear Stearns Companies (NYSE: BSC), Citigroup Inc (NYSE: C), MF Global Ltd (NYSE: MF), E*Trade Financial Corp (NASDAQ: ETFC), Sirius Satellite Radio Inc (NASDAQ: SIRI), Bank of America (NYSE: BAC), Washington Mutual Inc (NYSE: WM), Thornburg Mortgage Inc. (NYSE: TMA), Alcatel-Lucent (NYSE: ALU), Sprint Nextel Corp. (NYSE: S) and Intel Corp. (NASDAQ: INTC).

But there's something fascinating about the names in that list: They are exclusively banks and tech companies. I have to wonder then -- how many of the investors who lost money on those stocks read and understood the risks disclosed in the SEC filings, particularly those pertaining to to loans and accounting?

My bet is that none. It seems that the people who did the in-depth research to really "buy what they know" on the financials ended up shorting. William Ackman's brilliant bets against bond insurers come to mind.

Bottom line: Looking at some ratios and then buying a stock because it has a good dividend, high ROE and low P/E does not constitute buying what you know. The people who lost money on these stocks, I would argue, had no idea how the companies they were investing in really earned their money. They weren't buying what they knew after all!

Yahoo! (NASDAQ: YHOO) implied volatility elevated at 40. YHOO is recently down 37 cents to $22.95. YHOO overall option implied volatility of 40 is above its 26-week average of 35 according to Track Data, suggesting larger risk.

Microsoft (NASDAQ: MSFT) implied volatility elevated at 40. MSFT is recently down 19 cents to $27.91. MSFT overall option implied volatility of 40 is above its 26-week average of 23 according to Track Data, suggesting larger risk.

Amgen (NASDAQ: AMGN) implied volatility elevated at 34 after restructuring. AMGN is recently down $1.57 to $49.02. Goldman Sachs says: "Sales and costs in line. Maintain estimate and intrinsic value of $45." AMGN September option implied volatility of 34 is above its 26-week average of 26 according to Track Data, indicating larger risks.

Cisco Systems (NASDAQ: CSCO) implied volatility elevated at 34. CSCO is recently up 9 cents to $30.01. CSCO will be holding an analyst meeting on September 5 in San Jose. Jeffreies has a Buy rating on CSCO. CSCO September option implied volatility of 34 is above its 26-week average of 28 according to Track Data, suggesting slightly larger risk.

Volatility Index S&P 500 Options-VIX up 2.68 to 33.35.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

When I look for value, I generally look for deep value, such as stocks trading near or below their liquidation value, or companies with assets that are understated on the balance sheet. But a piece in today's New York Times talks about the more common kind of value stock: companies with above-market dividend yields and low price/earnings ratios. Standard & Poor's investment strategist Sam Stoval says there is great value to be had in some of America's best-known blue chips, such as Citigroup Inc. (NYSE: C) and General Electric Co. (NYSE: GE).

Oppenheimer's chief investment strategist, Michael Metz, has an interesting explanation for the value some see in blue chips: The recent run-up has been driven by hedge funds and buyouts, neither of which have much interest in companies of that size. With the market soaring to new highs, it seems that blue chips are a little bit boring for many investors, and value investors may be moving in to seize the opportunity.

Investors are feeling good right now because everything's going well. When people are optimistic, they tend to shy away from defensive investments. But if the market takes a turn for the worse, scared investors may seek refuge in companies like Citigroup and General Electric. If they do, investors buying those stocks now could look pretty smart.

"As a professional trader, there's nothing I like more than going with the odds," says Keith Fitz-Gerald, who also says that the odds are calling for as much as a 50% gain in the next 12 months. The reasoning behind this bullish forecast is one of the market's most consistent seasonal patterns, the Presidential Effect.

He explains, "Since 1933, no single third year 12-month period in a presidential term beginning in October has registered a loss, the average total return has been 28%, and the worst positive return has been 6.6%."

To clarify, the one-year period that runs from the current month through the end of next October represents the third year of the Presidential Cycle. The following 12-month period ending at the 2008 elections will be year four. "I'm licking my chops in anticipation of the Presidential Effect."

For his stock selections, Fitz-Gerald uses a system that he pioneered known as non-linear analysis, which applies pattern recognition to historical and current market data. And while his trading and hedging services are limited to institutions and high net worth clients, his stock advice is easily accessible through The Skeptical Investor newsletter.

And while his system will frequently uncover small, lesser known stocks, today it's pointing to some of the biggest players around – Microsoft Corporation (NASDAQ: MSFT) and General Electric Company (NYSE: GE), a pair "beaten down true blues that I think are poised for serious gains in the months ahead -- perhaps as much as 20%–50%."

GE ended the day at $35.02, up 17 cents or about 0.49%. With gas prices dropping blue chip and manufacturing heavy companies like GE might start looking a lot more attractive to investors. Today's blip upwards could be a result of that. But it could also be renewed confidence in GE's traditionally dragging NBC/Universal division as articles like this Reuters article point out that NBC is looking like it has a somewhat decent Fall schedule lined up.

GE may be rolling out a whole new program investing in Australia and bringing its principles of ecomagination there, but investors will be a lot more interested in seeing NBC pull out of its ratings slump to give GE a shot in the arm.