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Daily Newsletter, Monday, 01/22/2001

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The Option Investor Newsletter                   Monday 01-22-2001
Copyright 2001, All rights reserved.                        1 of 1
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        01-22-2001        High      Low     Volume Advance/Decline
DJIA    10578.20 -  9.35 10634.40 10509.90 1.13 bln   1610/1241
NASDAQ   2757.91 - 12.47  2789.63  2722.96 2.04 bln   1992/1813
S&P 100   703.17 -  2.06   710.35   698.39   totals   3602/3054
S&P 500  1342.90 +  0.35  1353.59  1333.84           54.1%/45.9%
RUS 2000  490.15 +  2.06   490.69   485.99
DJ TRANS 2969.85 + 16.56  2983.01  2933.37 
VIX        25.94 -  0.35    27.38    25.83
Put/Call Ratio      0.46
******************************************************************

Another Warning Digested

The broader market averages spent the day in consolidation mode
despite another earnings warning from the tech sector.  The
action felt as if the majority of market participants were on the
sidelines, waiting for this week's round of earnings reports and
guidance from Mr. Greenspan.

Dell Computer (NASDAQ:DELL) warned this morning that its fourth
quarter profits would miss estimates by as much as 30 percent.
The direct seller of PCs blamed its shortfall on the economic
slowdown and the company's strategy to cut prices in an attempt
to gain market share.  The news from Dell was not all that
surprising, and many market participants had already discounted
the earnings miss into Dell's share price.  We can conclude this
much because Dell's stock didn't blowup this morning in the wake
of the warning.  In fact, shares of Dell finished just -0.13
cents lower at $25.50.  Over the last several weeks, it's been
interesting to witness the market's reception to earnings
warnings and the distinct shift in sentiment.  It was not too
long ago that the Intels (NASDAQ:INTC) and Dells of the world
would blowup after warning of lower profits.  However, the shift
in market psychology, thanks in part to the Fed's cut earlier
this month, has allowed for the market to digest bad news fairly
regularly and easily.

Nevertheless, Dell's earnings miss does reinforce the fact that
risk remains in certain areas of the tech sector.  Although its
stock didn't get taken apart by the bears, Dell's warning can
serve traders as a reference point when forming their top-down
or macro views and opinions.

Although Dell's warning didn't inflict widespread damage in
the tech sector, it did help to spur a rotation back
into the defensive sectors of the market including drug,
insurance and energy names.  That rotation back into the blue
chip, defensive names helped to support the Dow Jones Industrial
Average (INDU) despite a poor forecast from American Express
(NYSE:AXP).  The financial services firm met Wall Street's
consensus estimates when it announced profits this afternoon,
during normal trading hours, but guided analysts to expect
earnings growth at the lower end of its estimates for 2001.  As
a component of the INDU, AXP did add extra volatility to the
blue chip index this afternoon, but its losses were offset by
gains in energy and cyclical components.

The near-term resistance level to be cognizant of for the INDU
is 10,800.  Bullish earnings reports from the drug companies
and energy firms would help drive the INDU past that level this
week.  If the INDU does break above 10,800, we're likely to see
an advance to 11,000.  On the flip side, if the INDU sags, we're
likely to see a retest of support near the 10,300 - 10,400 range.
The buyers have been showing up around those levels, and barring
any major blowup, should continue to do so.  If the buying-near-
support-levels pattern continues, traders can use any pullbacks
in their favorite INDU components to add bullish exposure.


 

The ongoing rotation in the broader market is causing the INDU
to churn, and churn.  The blue chip index continues to find its
way back to the 10,500 level, which is becoming an extremely
efficient area.  What that means is it's difficult for traders
to game the INDU's direction because of all the time and
volume that has been working around the 10,500 level.  Think
about this: the INDU has been rotating around 10,500 for
almost two years.  That's a very, very long time to spend
consolidating.  One might speculate that once the INDU is ready
to breakout it's going to BIG!  But the question remains when
exactly that breakout finally materializes.


 

As I previously wrote, Dell's warning did cause a bit of
trepidation among tech investors and traders.  However, the
Nasdaq Composite (COMPX) finished lower by only -12.47 points on
very light volume.  The bulls will argue that today's session
served the purpose of consolidation.  After all, the COMPX has
rallied over 10% thus far in 2001.  And as every steer knows,
pullbacks on light volume are a natural part of every bull
market.  The bears, on the other hand, will continue to point
to the deteriorating fundamentals in the tech sector as seen
in none other than Dell.  However, the Fed is on the side of
the bulls, which is why I feel the path of least resistance
for the COMPX is to the upside.  And if the COMPX can close
above the 2,800 level in the coming days, then I feel 3,000
will be reached in short order.


 

The Conference Board, a business research network, released its
Leading Economic Indicators for the month of December.  The
leading indicators are designed to forecast economic activity
about six months out.  The index of leading indicators fell by
0.6 percent during December, while estimates called for a lower
0.3 percent decline.  Yet another data point for the Fed to
examine at its meeting next week.  Before the Fed decides on
the size of its rate cut, it will need to digest the Employment
Cost Index (ECI) report scheduled for release Thursday morning.
The estimates call for a 1.1 percent rise.  Remember, the Fed's
reason for raising interest rates last year was to prevent
inflation, and the ECI is the best measurement of inflation
in the labor market.  A stronger-than-expected ECI number could
lead to the Fed dropping rates by only 25 basis points, instead
of the full 50 basis point cut which has already been factored
into the Fed Funds Futures.

Greenspan will be testifying to the House Budget Committee this
Thursday but is unlikely to hint ahead of next week's meeting.
Nonetheless, traders should be aware of the Doc's testimony
Thursday and its implications on Bush's proposed tax cut along
with future Fed policy.

To come full circle, it seems appropriate to end with dismal
earnings news, but not from Dell.  After the bell, Texas
Instruments (NYSE:TXN) reported fourth-quarter profits that
missed estimates by two pennies and the chip maker warned of
lower revenues in the first quarter of 2001.  Shares of Texas
Instrument dipped almost three dollars in the after hours
session and weighed on the Nasdaq futures, which were down
-23 points at time of writing.  However, many analysts felt
estimates for the chip maker were too high and expected Texas
to report near the low-end of the range.  That said, tomorrow
morning's open in Texas, the broader chip sector and the
Nasdaq will depend upon how much discounting the market had
already done.  The way we filter out the noise is to pay heed
to price action, regardless of the news.

Trade smart and manage risk!

Eric Utley
Assistant Editor


************************************
Spring Options Workshop and Bootcamp
April 5th-9th, Denver Colorado 
************************************

OptionInvestor is proud to announce our third annual Spring 
option workshop in Denver Colorado. This power packed five-day 
event is structured to fully educate you on advanced option 
strategies and will make you a better and more profitable trader. 

If you attended the March Denver Expo last year and thought it 
was the best function you had ever attended..... You haven't seen
anything yet! Great food, entertainment, education and just 
plain fun in sunny Denver. The biggest complaint in March was 
the massive weight gain experienced by the attendees from the 
gourmet menu. We know how to put on a function. Ask anyone who
came last March! 

We guarantee the speaker lineup to be second to none. In the 
October seminar not only did we have Jim Brown and over 15 of 
the OIN staff but Steve Nison, the father of modern candlestick 
charting. Also, Dick Arms, creator of the Arms Index or the Trin
Indicator, Gregory Spear, author of the Spear Report, Stan Kim, 
founder of the Snail Trader System and Jim Crimmins, president 
of TradersAcounting.com. We promise the lineup this April will 
exceed your expectations again!

This is not a beginner seminar but if you feel the need to brush 
up on the basic trading strategies then we have an optional boot 
camp the day before the four day seminar begins. If you have 
traded options before and you are comfortable with the basic 
strategies then this seminar will take you to a new trading 
level. If you have been trading options for sometime and are 
ready to broaden your knowledge and improve your trading results 
in all kinds of markets then this is for you. Meet and interact 
in a small group setting with the writers you have seen in 
OptionInvestor for the last four years. 

We are starting the seminar with an optional one day boot camp 
which will cover all the basic strategies, calls, puts, leaps, 
covered calls, naked puts, spreads, straddles, etc. This will 
help investors not familiar with all the basic strategies get 
up to speed before the intensive education and the advanced 
material in the main seminar. The boot camp will be 8 hrs of 
personal instruction by the OIN staff.

The main seminar will begin with a reception, dinner and 
entertainment on Thursday night and continue non-stop until 
noon on Monday. We mean non-stop. We don't quit until you do 
and many optional sessions last until 10:PM or later. 

The detailed schedule will be posted in about two weeks. There 
will not be individual breakout sessions during the day. Each 
topic will be covered in 1-2 hr general sessions taught by one
or more OptionInvestor staff and presented on three giant screens.
In the evening we will offer five of our popular chalk talk 
sessions for that personal question and answer interaction. 

The list of instructors is led by Jim Brown and will include 
many OIN staff with outstanding guest speakers during lunch 
and dinner each day. The Spring Denver Expo seminars fill up 
fast and seating is limited! SIGN UP NOW or risk missing out 
on this opportunity. 

Unlike other seminars with only two or three instructors, you 
will get in-depth knowledge from many different instructors 
who are experts in their field. 

The cost for the four-day workshop, April 6th to 9th is only 
$2995 (spouse only $1495). This includes breakfast, lunch and
supper each day. All course materials, a CD of all the 
presentations and a professional video package of the entire 
seminar so you can review the material at home in the comfort
of your living room.  There is also a $500 discount if you
have attended a prior OIN seminar. 

This is not a prepackaged presentation that gets repeated over 
and over with stale information. This is a one-time production 
and everything is fresh, live and as current as we can make it.
The videos will have your real time questions and answers and 
not some from a prior class. Where else can you get intensive 
yet personalized options education like this? 

Do not delay as seating is very limited. 
We guarantee you will not be disappointed! 

You can pay for your education one bad trade at a time or you 
can invest less money one time to learn how to do it right. 

Click here for more info
https://secure.sungrp.com/workshop/april01/index.asp


If you have not been to one of our Denver Expo seminars before 
here are some comments from previous attendees: 


The words herein are totally inadequate to express what I am 
feeling about you and all the OptionInvestor organization. But 
this medium is all I have. Thank you more than these few simple 
words can say. 

Wow, what a seminar! In my 25 years of investing I have attended 
many instructional conferences, but I have never, never experienced
one like your Options Expo. The instructors were absolutely tops. 
Subjects, generally were on target. Especially for me, the Skybox, 
index funds/options and the early morning strategies and trading 
were particularly great. The attention to the many details and 
nuances were especially evident, and I guess most of the credit 
that area goes to your great support team. 

Now, the real challenge is to apply and implement the powerful 
knowledge I was exposed to. 

Sincerely and warmly, 
Kevin Hughes, Denver 

************

Jim & Staff,

I am sitting in the hotel room after a great 3 days in your 
seminar. I can't tell you how pleased I am and want to thank 
each of you for a job well done. Having been responsible for 
events like this, albeit on a much smaller scale, I can recognize
all the hard work that went into the seminar. Each member of the 
staff is to be congratulated!! The seminar confirmed my belief 
that the OIN staff really cares about the success of their 
subscribers. Jim, you all should be proud of the work you do to 
enrich the lives of so many people. It is one thing to amass a 
personal wealth. It is a much higher calling to help others meet 
their goals in life. I was very impressed that you were emotional 
in your closing remarks. You have so much to be proud of -- helping 
people fish all over the world! Thanks again and I look forward 
to attending another seminar in the future.

My best reagrds,
Jim Boettcher
Austin, Texas 

**************

I must say, that your seminar was outstanding!!! Sign me up for 
next year. It is rare that a person of your position would share 
so generously your knowledge of his trade. I hope that I will be 
able to put into place much of what you taught. Every aspect of 
the seminar was first class, from the hotel, to the food, the 
instructors and the luncheon speakers. One of the biggest 
surprises was your generosity in handing out material, and gifts. 

Two weeks ago I attended a competing option seminar in Chicago 
and all I got from the was coffee at the morning break, No 
handouts, no food and half of the final day was promoting their 
web site and additional classes. I must say your seminar far 
exceeds what I got from them.
 
Sincerely yours,
Mike Lillis 

***************

Please pass on my thanks to the entire OIN group for a fabulous 
EXPO. The seminar far surpassed any expectation that I would have 
fathomed, had I attempted to! OIN has the right attitude and the 
obvious ability to be a leader and I look forward to many years 
of positive experiences with you folks.

Kind regards,
Gwen Richardson 

****************

GREAT JOB TO EVERYONE!

I described this event to my friends as a life changing event! 
(options aside) ,the quality of people, dedication, sacrifice 
of their time (the second 40+ hours a week they don't have to
work but do) they do this because they care, wanting to help 
others change their life dramatically (My wife thinks I was 
oxygen deprived up there !) I came back a different person for 
those who know me that says a lot. Now for the options side
I have to admit there was so much info to absorb, most of it 
came to me on the 2000+- mile ride home it all started to fall 
into place I feel Very confident (yes Jim this can be bad but 
I know this now!) Notice the patience here guys! that's one 
change I have a plan to stick to !
 
THANK YOU !!!
Allan O'Neill 

**************

Need we say more? If you want to learn how to be a better trader, 
making more and losing less then you should come to this seminar. 
We guarantee you will not be disappointed! 

For more info: 

https://secure.sungrp.com/workshop/april01/index.asp


#!!!AD23!!!#


*************
NEW CALL PLAY
*************

AETH - Aether Systems $51.94 +2.88 (+2.88 this week)

Positioned to profit from the proliferation of handheld
computing devices, AETH provides wireless data services,
systems and software enabling people to use their handheld
devices for mobile data communications and real-time
transactions.  Current services include TradeRunner, a
real-time wireless trading and financial information service
offered to the online customers of Morgan Stanley Dean Witter
Online, and the Reuters MarketClip service for financial market
price quotes, alerts and information.  Through recent
acquisitions, the company has expanded its services into the
healthcare, sales force automation and transportation logistics
and delivery industries.

The past 7 months have been painful for AETH investors as they
have watched their beloved stock decline from its lofty heights,
north of $200, all the way to the pedestrian sub-$30 level in
late December.  As the NASDAQ has begun to firm and actually put
on a good impression of a rally, our new play has emerged from
its month-long consolidation between $33-42.  Helping to
motivate the bulls has been a recent string of product and
service enhancements, but the real kicker was the positive
analyst comments last Tuesday.  Banc of America Securities
upgraded the stock from Buy to Strong Buy.  Finally breaking
above the $42 level late last week, AETH rode the upper
Bollinger band and broke above the long-term descending
trendline (currently resting at $46).  Continuing to distance
itself from this level in today's trading, the stock looked
strong, trading nearly 150% of the ADV, despite the fact that
the NASDAQ couldn't put together another positive close.
Finding resistance today near $54, our new play will likely
need the help of a positive market in order to scale this level.
AETH has only broken above this trendline once since last
summer, and then it rolled over at the 50-dma.  Since patterns
tend to repeat, the 50-dma ($59.25) looks like it will be the
next serious resistance as the bulls attempt to maintain the
rally into the FOMC meeting on January 31st, and then the
company's earnings report on February 7th.  While a little bit
of profit taking could be looming on the horizon (due to the
tightly stretched Bollinger band), any pullback should be
contained by the intraday resistance at $48, and then $46.
Since we are looking to jump into the play and enjoy the upward
momentum while it lasts, we are placing our stop just below, at
$45.  Aggressive players can target shoot intraday dips to
support, so long as it is followed by strong buying action,
while the more conservative approach will be to wait for AETH
to break free of the $54 resistance level before playing.

BUY CALL FEB-50 HIZ-BJ OI=435 at $ 8.50 SL= 6.00
BUY CALL FEB-55*HIZ-BK OI=149 at $ 6.38 SL= 4.25
BUY CALL FEB-60 HIZ-BL OI=393 at $ 4.75 SL= 3.00
BUY CALL MAY-55 HIZ-EK OI= 72 at $13.50 SL=10.25
BUY CALL MAY-60 HIZ-EL OI= 79 at $11.88 SL= 8.00
BUY CALL MAY-65 HIZ-EM OI= 42 at $10.38 SL= 7.50

SELL PUT FEB-45 HIZ-NI OI= 70 at $ 3.50 SL= 5.50
(See risks of selling puts in play legend)

http://www.premierinvestor.com/oi/profile.asp?ticker=AETH


************
NEW PUT PLAY
************

CCU - Clear Channel Communications $59.38 -2.38 (-2.38 this week)

Clear Channel Communications, Inc., is a global leader in the
out-of-home advertising industry with radio and television
stations and outdoor displays in 40 countries around the world. 
The Company began its operations in 1972, and became a publicly
traded company in 1984.  Including announced transactions, Clear
Channel operates 900 radio and 19 television stations in the
United States and has equity interests in over 240 radio stations
internationally.  Clear Channel also operates more than 700,000
outdoor advertising displays, including billboards, street
furniture and transit panels across the world.  The Company is
headquartered in San Antonio, Texas.

Fears over declining advertising revenue played a significant
role in CCU's downturn last year.  Businesses faced with rate
hikes and a slowing economy in 1999 had to lower costs and one of
the first things to go was ad spending.  The surprise 50 basis
point rate cut by the Fed early this year gave the stock a boost
but ever since failing to break above its 200-dma (currently
sitting at $64.80) last week, traders have been tuning out the
bullishness on shares of CCU.  While the stock has enjoyed a nice
rally so far this year, it appears that the upward momentum that
had driven the stock up over 35 percent in two weeks is now
waning.  Connecting the lows since the beginning of this year
reveals an upward trending channel, one which was broken to the
downside with today's close.  In doing so, CCU also put itself
below support at $60.  Look for this level to provide resistance
going forward, allowing aggressive traders to enter on failed
rallies.  Moving average resistance from the 5-dma at $62.13 and
the 200-dma could also provide target entry points but make sure
that the stock closes below our protective stop price of $64, and
confirm a rollover with selling volume before taking a position. 
For a more conservative play, look for downward momentum to take
CCU below its 10-dma (now at $59.15) on volume before jumping in,
but only if competitors INF and VIA confirm negative sector
sentiment.  From keep an eye on support at $58, the 100-dma at
$55.23 and the 50-dma at $52.71.

BUY PUT FEB-60*CCU-NL OI=197 at $4.00 SL=2.50
BUY PUT FEB-55 CCU-NK OI=125 at $1.75 SL=1.00

http://www.premierinvestor.com/oi/profile.asp?ticker=CCU


*****************
STOP-LOSS UPDATES
*****************

No stop-loss updates today


*************
DROPPED CALLS
*************

BRCM $128.81 -1.25 (-1.25) Broadcom makes frequent appearances on
our play list, and for good reason.  As a fundamentally strong
company that makes volatile moves in both directions, we have
been successful in capturing substantial gains in the numerous
forays we have made into its stock.  Our most recent call play is
no exception.   Capturing over $35 of its upside move these past
two weeks, BRCM has been nicely consolidating its gains in a
tradable range of over 15 points.  It appears that a major move
is coming and with earnings tomorrow after the close, it could go
either way.  As per our policy, we are selling too soon ahead of
the report but rest assured, we will be watching this one closely
for future plays.

LRCX $21.75 -1.00 (-1.00) Despite the recent trend of stocks
rising post-earnings, we are sticking to our principles and
taking profits on our call play in Lam Research ahead of its
report after tomorrow's close.  As options traders, part of a
successful strategy is to seek out plays with high odds of a high
return while minimizing chances for loss.  The potential for a
large gain in LRCX following its announcement could result if a
strong rally ensues but with that increased potential for gain
comes an even greater potential for loss.  With the risk profile
now greater due to that uncertainty, we are dropping coverage of
this play.

MER $75.13 +1.25 (+1.25) With the next Fed meeting rapidly
approaching, and the bond market pricing in a high degree of
probability that we could receive another 50 basis point rate cut
at that time, shares of Merrill Lynch rallied, gaining 1.69
percent.  Volume was lower than average, about 80% of ADV.  This
is not surprising considering that the company will be announcing
its earnings tomorrow after the closing bell.  Those who know our
Top 10 Rules for Option Trading know that Rule #2 is, "Never hold
a position over an earnings report."  True to our word, we are
taking our money off the table before that time arrives.

ORCL $31.81 -2.75 (-2.75) It appears that we will be dropping our
call recommendation on B2B Gorilla Oracle a little earlier than
expected.  Having initiated coverage this past weekend, we had
designed an entry strategy with confirmed bounces off the 5 and
10-dma and a stop price of $32.  Gapping down at the open, the
stock fell on high volume right through moving average support,
ending the day below our stop price.  Rumors of the company
restating earnings were being circulated, leading to today's
price action.  Whether or not they are true, they have had a
material effect on the stock's technicals, so with our conditions
for entry unmet, we are closing out this play.

ATHM $8.59 -0.09 (-0.09) After breaking above the 50-dma near
$7.31 early last week, the bulls are starting to look tired, and
ATHM is rolling over.  Stochastics are weakening, volume is
dropping off, and it looks like the enthusiasm that was driving
Internet and Telecom stocks has waned.  Although our stop is
still intact, with earnings coming up on Thursday unable to
motivate buyers, we'll take our leave of ATHM while the getting
is good.

C $53.88 -0.50 (-0.50) It's hard to get excited about C's
performance over the past 2 weeks, as it continues to trade in
an ever narrower range.  Although it looked like it might be
getting close to breaking out of its neutral wedge to the
upside, bearish guidance from AXP today seems to have given the
bears the upper hand.  Despite a slight gain for banking stocks
today, C posted a fractional loss and even though our stop is
still intact, it looks vulnerable.  Rather than wait for it to
be violated we will take our leave of C tonight.

COMS $10.06 -0.06 (-0.06) What started off as a promising rally
has fizzled into a boring decline in shares of COMS.  After
pulling back from the upper Bollinger band early last week, the
bears have been whittling away at the stock, taking back the
bulls' hard won gains a little bit each day.  With Networking
stocks beginning to show signs of weakness, and the NASDAQ
following suit, it seems foolish to keep our COMS play open,
even though it has yet to violate our stop.  Stochastics are
rolling over from the overbought zone, and volume is drying up;
not exactly the ingredients we want to see in a call play.

Q $43.31 -3.19 (-3.19) Weakness across the Telecom sector today
accelerated the rollover on Q, and dragged the price below the
$44 stop, spelling a premature end to the play.  While we were
hoping that the move through the 200-dma last week, would spell
an end to the months-long downtrend, the bears had other ideas,
whacking the stock for a nearly 7% loss today and keeping the
downtrend intact.  There's no sense in bucking the trend, and
with the oscillators all rolling over, that trend is now clearly
to the downside.


************
DROPPED PUTS
************

No dropped puts today


**************
TRADERS CORNER 
**************

Proper Account Management
(Through Good Times & Bad)
By Austin Passamonte

Each of us at one point or another have or soon will take a
trading account and grow it large. Favorable market conditions,
blind luck or some combination of the two eventually prevails.
How we manage to deal with the other side of that coin makes all
the difference in career longevity.

The financial world is littered with carcasses of dead accounts
that once sported five, six, seven, eight and nine-digits to the
left side of any comma. From the greenest of dumb to a number of
famous, revered gurus there lays a trail of fortunes lost and
dreams broken.

Mathematicians and statisticians are quick to tell any who listen
that total loss is inevitable. Trading is no more than playing
odds and odds always prevail. The game is rigged against us with
bid/ask spreads, commissions and other costs that inevitably
sends us to ruin.

I've seen, read and been told countless times that anything other
than selling option premium is a road to financial failure. My
reply: HOGWASH!

First of all, there are traders in this world who've profited
over time buying option premium. That proves it is possible
beyond shadow of doubt. Naysayers would be quick to point out
that given enough time these traders will bust out too. Really?
And how long would that take? 50 years? 100 years? I expect
they'll be retired before then.

In actuality, sellers of naked premium play with statistical
fire. Natural laws of random chance and chaos order will see to
that. Even those who sell premium on the "blue chip" stocks
(Nasdaq:MSFT, Nasdaq:INTC, Nasdaq:CSCO, NYSE:NT) can wake up to
disaster one not-so-fine day. Does that mean option trading is no
more than a fool's game?

No. Not at all. The secret to survival is quantifying risk and
managing it in efficient manner. There are various ways to do
this and most of them work, but we'll continue from where I left
off before the last three of four holiday Mondays squeezed our
space.

I can tell you with 100% certainty no matter how bad a losing
streak I'm in, my trading account can never go to zero. That's
real good news for me this month as I've been mired in one of the
worst personal performances in my career! Oh, I have all kind of
excuses; markets didn't favor my approach, a move across country
took its toll, etc., etc. Bottom line is my account doesn't care.
It doesn't measure excuses, it measures performance. Thank
heavens the yard-stick can be kept short!

A methodology using stops AND smaller trade sizes after each
losing trade keeps us alive to play another day. If we happen to
start with a string of losing trades, at least our account won’t
be decimated.

First, let’s look at the performance of Swing Trade plays after
these past few weeks. For detailed statistics on each of the
indexes from September through December as well as the specifics
of this analysis, see previous articles in the Trader's Corner
archive section. We begin with the following assumptions:

Account Value  $100,000
Risk Level           5%

Stop/Sell Amount
----------------
Week 1  25%/35%
Week 2  25%/35%
Week 3  30%/50%
Week 4  50%/100%

Here is the performance through most of January's expiration
cycle for QQQ, OEX and SPX:

Initial Value     $100,000
Ending Value         QQQ           SPX             OEX
               Value   %Chg    Value   %Chg   Value    %Chg
September     121,800   22%   112,600   13%   121,650   22%
October       133,879    9%   147,491   24%   168,738   28%
November      171,692   22%   175,270   16%   188,062   10%
December      235,506   27%   256,745   32%   258,132   27%
January       229,259   -3%   266,580    4%   208,882  -24%
-----------------------------------------------------------
Overall Growth         129%            167%            109%
Win % January           33%             36%             29%
Win % Overall           52%             58%             51%

Two very important lessons can be drawn from this information.
First, managing trades based on percentage of account rather than
number of contracts protects the downside. Secondly, religious
use of stop losses keeps losses at bay.  Let’s take a look at
some details to see what happens.  

First the Qs.  Below is the detailed accounting of the trades:

 

We'll restate these trades based on the same $100K initial
account and compare results to typical trading methods using a
static number of contracts every trade. Here’s the same trades
entering with $100,000:


 

The account beginning at the first part of January expiration 
cycle has a net value of $97,386. That’s a loss of -3%. This is 
important. It does not matter what size account, loss level is 
the same. Now let’s look at the same trades using 50 contracts 
every time:


 

As you can see we’ve lost a net of -7% instead of -3%. Scale up
the numbers and it gets worse. For example, run these trades at
100 contracts. The net value would be $86,800 or a net loss of
over -13%. This is the reason we manage trades by percentage of
account instead of an arbitrary number of contracts.

As the account grows its value grows IN PROPORTION to its size.
As the account shrinks its shrinks IN PROPORTION to its size.

Next stop: the SPX trades. It really underscores the benefits of
this approach and highlights both stop loss management and trade
size management. Here are the trades:


 

Things to note in this table:

1 - Cutting losses through standard stops and active use of
trailing stops keeps loss percentage small (SXY-AJ, last trade).
Even a couple of opening gaps or after closing bell traps can’t
keep a good account down.

2 - A string of several losses in a row (last three in the table)
did not wipe out the progress thus far in the month.
	
Once a model is found that consistently produces profits under
proper conditions for that model AND provides good downside
protection during adverse conditions we have an approach that
should allow us to consistently profit over time.

In my opinion it is impossible to trade financials in any form or
fashion over time without experiencing a string of losses. Even
credit spreads or some variation of selling premium with downside
risk defined and odds of probability for success will suffer
occasional series of loss. Using methods that allow us to 
quantify downside risk and sensible account management make these 
experiences irksome, frustrating but never financially lethal.

To recap, regardless of our trading method or approach we will 
always buy (or sell short) the number of option contracts our 
stopped-out loss would result in a 5% or similar fixed percent 
draw down of our account.

The second part of this equation is adjusting the stop-loss 
percentage according to its underlying play risk/reward. Volatile 
trades demand wider stops and less volatile ones permit tighter 
stops. Here's what we mean:

High-Volatility Plays
I'll repeat the stop loss figures we use for very short-term 
trading the QQQ, OEX and SPX markets. Other more volatile equity 
options might require wider stops and stodgy, slow-moving equity 
options could use tighter as we discuss later.

Risk Level: 5% of total account balance
Stop/Sell Amount
----------------
Week 1  25%/35%
Week 2  25%/35%
Week 3  30%/50%
Week 4  50%/100%

During the first two weeks of an expiration cycle, time premium 
is high and it takes larger index move to push those percentages 
than the last two weeks of expiration. Therefore, using our 
sliding scale of capital at risk we would have more exposed to 
catastrophe early on than later.

Trade target: QQQ 60 Put @5.00
------------------------------
Week #1: stop loss @3.75 (25%)
Week #2: stop loss @3.75 (25%)
Week #3: stop loss @3.30 (30%)
Week #4: stop loss @2.50 (50%)

Trading a $10,000 account, we are prepared to risk 5% or $500 on 
a stopped out trade. With $500 representing 25% of the trade's 
cost, we would spend $2,000 on five of the above QQQ 60 put 
option contracts. 

That is actually risking far more than 5% overall if things go 
wrong in a hurry. Open put options during an unexpected interest-
rate reduction about 1:15pm EST comes to mind. What then?

Well, drastic as that would be (was) to those holding open puts, 
time value will not go to zero this far from expiration. It might 
go from 5.00 to 1.50 in a flash, but not zero. The net result is 
an actual loss of $1,750 instead of $500. We may be shocked but 
not destroyed. That's about as extreme a move against us as any I 
can imagine. We still have $8,250 left to work with in normal 
market conditions.

Should that happen during week #4, we would only have five of 
those contracts but the price would be much less due to lack of 
time premium. More like 2.00 instead of 5.00. Total cost would be 
$1,000 of which we would risk 50% (our $500 limit). A gap-move up 
like we saw in the same scenario would shrivel them from 2.00 to 
0.06 "bid" in the blink of an eye. We lose our entire $1,000 in 
one sharp move. Now what?

Now we trade! We still have $9,000 or 90% of our account balance 
left after the worst calamity possible. If lightning strikes 
again the next day, so be it. We'll lose another $1,000 and go 
from there. How often can these disasters occur? Not counting 
overnight gap moves I cannot remember one worse than that since 
late fall in 1998. Those are odds I can live with.

Low Volatility Plays
It gets better. Traders who forego front-month options and buy 
more time-premium could stick with a 25%/35+% risk-reward combo 
or something similar as familiarity with those targets proves 
best.

Stock or share traders could opt for a strict 5%/10+% stop/sell 
ratio or likewise also. Again, getting to know your target's 
average daily range is critical for fine-tuning stop usage.

Key Points To Remember
This simple system works for a few reasons. It ensures we are 
always using near-optimum amount of our capital to work while 
immune from devastating loss. 

Our balance is always scaling up at greater multiples after the 
first win and scaling down in lesser multiples after the first 
loss. Random chance dictates wins and losses happen in strings 
over time instead of win, loss, win, loss, win, loss. 

By asking for greater gain than total amount risked, we are 
always levering higher & faster to the upside and lower, slower 
to the downside.

Use of disciplined stops and risking no more than 5% of total 
account balance on any similar play is paramount for success over 
time. Larger accounts can certainly take more heat, but it is 
impossible to trade any account down to absolute zero in this 
fashion. At some point it could no longer afford to buy any 
options at all, but the balance would be greater than zero.

Small accounts always have less staying power than bigger ones, 
but I believe this is among the best ways to protect downside and 
permit upside to prevail when time takes over.

If you've been immune to streaks of losing trades and draw down in 
your career, keep up the excellent work! For the rest of us, a 
method of capital defense is objective #1 before offense has a 
chance to take over. Modifying this or a similar approach to suit 
your style of trading can surely help you on the path to success 
over time.

My personal thanks and great appreciation for Bill Kadlec at 
IndexSkybox for compiling the charts & data within for our use.

Best Trading Wishes,
austinp@OptionInvestor.com


#!!!AD24!!!#


**********************
PLAY OF THE DAY - CALL
**********************

CIEN - CIENA Corporation $100.88 -3.94 (-3.94 this week)

Helping to satisfy our insatiable demand for bandwidth, CIEN
makes dense-wavelength division multiplexing (DWDM) systems for
use with long-distance fiber-optic communications networks.
CIEN offers optical transport, intelligent switching and multi-
service delivery systems that enable service providers to
deliver and manage high-bandwidth services to their customers.
The company’s MultiWave DWDM systems allow optical fiber to
carry up to 40 times more data and voice information without
requiring more lines.  CIEN's customers include long-distance
carrier, competitive local exchange carriers (CLECs), Internet
service providers and wholesale carriers.

Most Recent Write-Up

Positive earnings reports this past week have kicked the
Networking sector (NWX.X) into a sustained rally that has helped
CIEN to finally clear its descending trendline.  Resting at $99
now, the fact that the bulls were able to scale this level on
Thursday and then hold onto those gains, marks an important step
in our new play's move out of its 12-week downtrend.  The first
sign that things were on the mend was on Wednesday, when the
stock cleared its 50-dma (then at $89.63), and the icing on the
cake was the additional $7 gain in the last two days of the
week.  Closing near the high of the day on Friday, CIEN has now
climbed 46% in the past 6 trading sessions.  Can you say profit
taking?  Sure you can, and it could be lurking just around the
corner, now that CIEN is resting right up against its upper
Bollinger band and stochastics have moved into overbought.  It
wouldn't surprise us to see some profits come off the table
early next week, but this will likely give us just the entry
point we are looking for.  With resistance looming near $106,
the overbought condition of the stock could open the door for a
quick drop to support near $100 or even the level of our stop at
$94.  But with the returning strength of the Optical stocks,
prompted by strong earnings from the likes of NT and AMCC, and
the Fed likely to drop rates again by the end of the month, any
such drop is likely to be short-lived.  Aggressive traders can
target shoot any such dip, so long as the bulls step in to
support the price above our stop.  Continuing strength in
Networking stocks could even give us a decent entry if it
produces a volume-backed move above Friday's high of $106.  For
you stock split hounds out there, CIEN announced on Friday that
there will be a special shareholder meeting on March 14th.  On
the agenda will be a proposal to increase the number of
authorized shares from 460 million to 980 million.

Comments

CIEN's action Monday exemplifies the meaning of consolidation.
The high-flying Nasdaq superstar traded in a narrow range on
light volume and a return of the tech bulls Tuesday could lead
to profits for call traders.  As for execution, pullbacks to
support levels at $100 or lower near $95 would provide solid
entries.  Conversely, a breakout over resistance at $105 on
heavy volume would provide another entry possibility.  Either
way, confirm direction in the Nasdaq before entering new plays.

BUY CALL FEB-100 UEE-BT OI=2496 at $12.75 SL=11.25
BUY CALL FEB-105*UEE-BA OI=1119 at $10.38 SL=10.25
BUY CALL FEB-110 UEE-BB OI=2364 at $ 8.63 SL= 8.25
BUY CALL FEB-115 UEE-BC OI= 723 at $ 7.00 SL= 6.25
BUY CALL APR-110 UEE-DB OI=1736 at $16.25 SL=13.75
BUY CALL APR-115 UEE-DC OI=1401 at $14.75 SL=12.50

http://www.premierinvestor.com/oi/profile.asp?ticker=CIEN


#!!!AD25!!!#


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