The Option Investor Newsletter Thursday 03-29-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/032901_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 03-29-2001 High Low Volume Advance/Decline DJIA 9799.10 + 13.80 9882.800 9687.60 1.24 bln 1486/1563 NASDAQ 1820.57 - 33.56 1876.74 1802.76 2.07 bln 1471/2137 S&P 100 584.90 - 3.41 592.66 577.75 totals 2957/3700 S&P 500 1147.95 - 5.34 1161.69 1136.26 44.4%/55.6% RUS 2000 441.53 - 0.67 446.01 439.91 DJ TRANS 2753.43 - 11.65 2777.59 2749.50 VIX 33.83 + 0.61 34.51 32.16 Put/Call Ratio 0.91 ****************************************************************** Window Dressing That Looks More Like Striptease! If this is window dressing then I don't want to be in the markets when the clothes come off. The Dow rambled 100 points on either side of the flat line to end only barely positive. The Nasdaq fought off continued tech warnings to close only 28 points from a new low. This is about as exciting as a root canal! Fund managers are faced with no targets to buy which will make them look good and a flood of companies they need to sell to keep them from looking bad. This may be a good news bad news joke. Fund managers may be dumping tech stocks to avoid having investors wondering why they were still holding a company that is down -75% for the year. Next week they may be buying those same companies back because they are still the best prospects for profits when the markets recover. While most funds are already done with this end of quarter slight of hand, there is still the fear that Friday could be a flush day. With the Nasdaq closing near a new low investors that usually dump tech stocks in April and buy them back in October may decide to quit early and avoid the rush. This may not be a factor considering the $3 trillion in cash on the sidelines but still something we need to watch. The tech warnings from earlier in the week are giving way to a rash of non-tech warnings. Ryder, Delphi, Coca Cola Enterprises, International Paper, Federal Mogul, Ingersoll Rand, to name a few. Everyone knew techs were suffering from the economic slowdown but the non-techs have been fairly quiet. Today's wake up call by IP, IR and CCE shows that everyone is being impacted. The tech giants are still painting a grim picture. INTC says no improvement for 18 months. CSCO says no improvement for at least three quarters. Others simply say they see no end in sight. Where is the reason to buy? Would you want to buy a company today because it appeared cheap only to have them warn next week that earnings would really be double digit losses? Several have said that this week. Your cheap company suddenly became much cheaper. First call said tech warnings are already up over +81% for this quarter and the worst period for warning is still ahead of us. Over 210 S&P-500 companies have pre-announced and 150 of them warned of earnings problems. According to First Call this is already the worst quarter on record for warnings. The economic picture is suddenly looking worse. The fourth quarter GDP came in at a revised +1.0% and the worst number since 1995. Estimates going forward range from a minus -.3% to +.8% and continuing to decline. The good news is simply the bad news cannot get much worse. There are still over valued stocks although not many. Downside risk is minimal for many stocks. CSCO, ORCL and SUNW at $15 and LU at $9 for example. Even the networkers have finally broken down with CIEN and JNPR the last to fall now trading near $40. When the generals finally fall the end is near. The trouble becomes "who is left to buy them?" The retail investor has become so frustrated that there is little or no interest in the markets. The day trading boom has bust. Ameritrade and E*Trade for instance are heading for penny stock status. This is a glaring example of the mood change for investors. The good news, those of us still in the market have some really good values to buy right now. When we were buying BRCM, ITWO, CMRC, JNPR, CIEN at $200, a normal day could produce $15-$20 swings. Today CSCO, SUNW and ORCL cost less than the intraday swings we were accustomed to trading. I can't tell you how many options I bought and sold that cost more than the stock for these companies sells for today. If the Nasdaq goes to 1700 or even lower it would be impossible to lose a lot of money on these stocks. Leaps on the QQQ are very cheap. The Jan-2002 $45 calls are only $5.40 and the upside potential is incredible. The Jan-2003 $50 leaps are only $7.10. Will tech stocks recover? Absolutely! The only question is when. The markets and talking heads are building a wall of worry that the markets must hurdle. Good! That makes longer and stronger rallies. The current administration will get a tax cut passed. They will press for economic relief. The Fed will continue cutting rates. The roadmap is in place and real investors will profit possibly more than in the 1999 rally. The choices to buy are smaller with many companies heading into oblivion. The quality companies, which can be numbered on both hands, will receive huge amounts of money once the buying begins again. Dot.coms with no game plan and no earnings will be acquired or simply fold. That limits the number of stocks available and forces money into tighter and tighter groups. The broad market rally from 1999 will be a memory and we will see a very narrow rally in 2001 but in my opinion one with very high velocity. The major problem we still face is timing. Nobody knows when we will turn the corner and start building on the future. It could be next week, next month or even after the summer. The trigger will be the same as it has been for as far back as markets have memory. Evidence of a rising economy and increased earnings. Once investors see even a glimmer of hope in those areas the gold rush for 2001 will be on. Until then we still need to watch and wait. The put/call ratios are rising (.91) and the VIX is climbing again. This would indicate that there may be another dip in our future. Trade the bounces with the emphasis on TRADE. As option investors the only long position I would take with the intention of holding would be 2003 leaps. Everything else is a very short term trade. Enter passively, exit aggressively! Jim Brown Editor If you have not reserved your seat at the Spring Trading Expo here in Denver on April 5th-9th then you are missing the best seminar we have ever held. This power packed four-day event is structured to fully educate you not only on advanced option strategies but stock analysis as well. This will make you a better and more profitable trader. ************************************ TOPICS and SPEAKERS 3rd Annual Trading Expo April 5th-9th, Denver Colorado ************************************ Jeff Bailey, Editor, PremierBriefing.com Learn the basics of Point and Figure Charting while analyzing how supply and demand on an institutional level affects the markets and the stocks you want to trade. Mark Skousen, Ph.D., Editor, FORECASTS & STRATEGIES The Global Economy and its Impact on Us. Learn from a professional economist who turns his understanding of economics into highly valuable investing advice. Harry Browne, Author of Fail-Safe Investing Sixteen Golden Rules of Failsafe Investing. A powerful session that translates the essence of the book into guiding principles. Jim Brown, Founder, OptionInvestor.com Austin Passamonte, Editor, IndexSkybox.com Jeff Bailey, Editor, PremierBriefing.com Preparing for Battle. This is a very popular session where multiple speakers team together offering insights on: planning your trades and the combination of research, market factors, and choosing your hot list. Tom DeMark, Author of three books on DayTrading Options Day Trading Options. An extremely popular subject taught by one of the world's foremost authorities on chart analysis. Tom wrote the book on day trading options, literally. Steve Nison, Author, Japanese Candlestick Charting Techniques Candlestick Charting. Is that a doji or an evening star formation? How can this benefit your trading success? Candlestick chart analysis is another hot topic that traders are always eager to learn. Nison is internationally recognized as the "Father of Candlesticks" and has written two books on the subject. Austin Passamonte, Editor, IndexSkybox.com Buzz Lynn, Contributing Editor, IndexSkybox.com Beating the Market with Indexes. This is another tag team event where you'll hear from two of our staff from IndexSkybox.com as they discuss topics like: Don't Pick Stocks, Pick Markets; and Market Timing Equals Sector Profits. Rance Masheck, President, SpreadTrader.com Calendar Spreads & Bull Call Spreads. Some of the first strategies a beginner will encounter in spread trading are these two spreads. Both simple and effective they continue to draw experienced traders over and over again. Mark Skousen, Ph.D., Editor, FORECASTS & STRATEGIES Scrooge Investing - The Best Bargains in Beaten Down Stocks for 2001. This is a great topic and Mark's background as an economist really offers some new insight into the challenge of choosing your investments. Jeff Bailey, Editor, PremierBriefing.com Calculating the Bullish Percent. Applying your new knowledge in Point and Figure charting to decipher how many stocks in a sector are showing buy signals. Jim Brown, Founder, OptionInvestor.com Austin Passamonte, Editor, IndexSkybox.com Pre-Market Analysis. A very popular session where multiple speakers team together offering insights on: Pulling the Trigger, Amateur Hour, and Market Hype. Dick Arms, Inventor of the Arms Index, Founder, ArmsInsider.com Increase your profit potential with Equivolume Charting, volume adjusted moving averages and the TRIN Derek Baltimore, Co-Editor, IntradayTrader.com Risk Management in a declining Market Buzz Lynn, Contributing Editor, IndexSkybox.com Sector Trading with IShares. You may know of DIAMONDS for the Dow Jones, SPDRs for the S&P 500, and the QQQs for the NASDAQ but there is a growing list of IShares and HOLDRS that offer great trading potential. Jon Najarian, Founder, Mercury Trading, Floor-Trader CBOE Successful Option Trading. "Doctor J" is the name and options is the game. Jon has twenty years of experience as a professional option trader. His firm makes markets in over 90 high-tech and biotech stocks and trades up to 40,000 options per day. Matt Russ, Editor, OptionInvestor.com How to Profit from Option Pricing, Market Making and Volatility Rance Masheck, President, SpreadTrader.com Straddles. An excellent strategy for today's markets. Traders should be very familiar with the proper execution of a straddle to benefit from expected volatility. Jeff Wright, Preferred Trade Understanding Option Basics and the roll of an options floor trader. Buzz Lynn, Contributing Editor, IndexSkybox.com Slump Busting. Are you on a losing streak? Learn what you need to do to BUST out and break the pattern. Jim Brown, Founder, OptionInvestor.com Big Cap Strategies, Naked Puts, Zero Risk Trading, Making Dollars not Dimes. Jim Crimmins, President, TraderAccounting.com Tax Strategies for the Active Trader. It's that time of year again and Uncle Sam wants a cut of your trading profits. Let Jim offer some advice on how traders should handle such taxing issues. Molly Evans, Writer/Trader, IndexSkybox & OptionInvestor.com The Organized Trader. Rance Masheck, President, SpreadTrader.com Five Point Star Trader System. Learn what you need to know about a stock before making a decision to trade. Austin Passamonte, Editor, IndexSkybox.com Swing Trading & Day Trading Index Options. Many consider Index option trading to be the pinnacle of equity options. Learn more about the do's and don'ts for Index Option trading. Eric Utley, OptionInvestor.com & IntradayTrader.com Psychology of trading and the Importance of the top down approach to trading. Buzz Lynn, Contributing Editor, IndexSkybox.com Trading with Qcharts. Learn how to properly set up, use, and deploy the best features and techniques. Derek Baltimore, Co-Editor, IntradayTrader.com Exit Strategies, knowing when to quit Tim Taylor - Preferred Trade Using Direct Access Trading Platforms Each topic will be covered in 1-2 hr general sessions taught by over 20 professional traders 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. 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 ************************Advertisement************************* What will your strategy be for 2001? The VRTrader.com Annual Forecast Model Your road map to the 2001 market! Forecast is prepared by Mark Leibovit, the #1 market timer in the nation. Mark is Chief Market Strategist for VRTrader.com, a Premier Investor Network website, a technical consultant and former 'Elf' on Louis Rukeyser's Wall Street Week for 7 years. His Annual Forecast Model has been subscribed to by Wall Street's most elite. Mark is presently ranked #1 timer in the nation by TIMER DIGEST and #2 on AmericasBestTimers.com. Order your today! click here: http://www.sungrp.com/tracking.asp?campaignid=1938 ************************************************************** **************** MARKET SENTIMENT **************** Windows Are All Broken By Austin Passamonte Forget window dressing for the end of this quarter: fund managers should be concerned about repairing the glass. What panes weren't broken by Tuesday's close have mostly shattered since then. As stated on Tuesday, we were left scratching our heads on the short-squeeze rally prompted by a strong consumer confidence report. Our opinion was then that investors were simply tired of selling and wanted any excuse to buy. Twisting the logic of confident consumers, strong economy worked very well for exactly six hour's time before reality sank in like a pick-axe. The corporate economy stinks, no one made any money, most will miss their earnings and we're about to see the extent of that between Tuesday last and the end of April. Remains to be seen where this takes us but a lasting trip up the charts may be asking a bit much until May. There isn't much we can use to measure downside support right now, but let's begin with daily-chart Bollinger bands. Using the lower two-standard deviation extreme from the 20-day moving average for downside and 20-day MA for upside, the following points could be considered potential targets the next several sessions: Possible Resistance SPX: 1184 OEX: 605 NDX: 1750 SOX: 598 DJIA: 10,073 Compx: 1984 Potential Deep Support SPX: 1089 OEX: 551 NDX: 1490 SOX: 531 DJIA: 9182 Compx: 1500 Of great interest to us will be Friday's public release of the COT report at/after 4:00pm EST. We really want to see what S&P 500 commercial traders did by Tuesday's close. Further short covering on Tuesday's rally could tell us that much of the final washout is behind us. If they continued to short Tuesday's action we might interpret that as indecision on their part as the scaling process unfolds. We'll wade through the data as usual and post it here in Market Sentiment in plenty of time for all to act on it. We compile this from several fee-based sources for those who wonder and include it here as part of our service to you. Not much left to say except Friday may be a volatile day but what's new? Next week is anyone's guess. Keep in mind that we've had few positive closes on Friday since mid-December and odds aren't good for another. Food for thought if we witness any mid- day rallies that look vulnerable into the close! ******** VIX Thursday 03/29 close: 33.83 VXN Thursday 03/29 close: 73.22 30-yr Bonds Thursday 03/29 close: 5.50% Support/Resistance Indicator **************************** The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. A reading above 10.00 is considered viable resistance or support respectively within that general strike price range. Thursday (03/29/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 625 - 610 7,891 2,311 3.41 605 - 590 10,831 8,578 1.26 OEX close: 584.90 Support: 580 - 565 2,541 10,473 4.12 560 - 545 983 7,713 7.85 Maximum calls: 600/ 5,189 Maximum puts : 520/ 8,585 Moving Averages 10 DMA 585 20 DMA 605 50 DMA 655 200 DMA 732 NASDAQ 100 Index (NDX/QQQ) Resistance: 48 - 46 190,006 47,246 4.02 45 - 43 214,343 141,303 1.52 42 - 40 140,045 108,771 1.29 QQQ(NDX)close: 38.95 Support: 38 - 36 5,676 68,443 12.06 35 - 33 6,786 50,043 7.43 32 - 30 948 14,905 15.72 Maximum calls: 45/131,912 Maximum puts : 43/76,928 Moving Averages 10 DMA 41 20 DMA 43 50 DMA 52 200 DMA 75 S&P 500 (SPX) Resistance: 1225 6,066 7,072 .86 1200 11,854 14,559 .81 1175 8,211 6,799 1.21 SPX close: 1147.95 Support: 1125 1,662 8,497 5.11 1100 1,361 21,411 15.73 1075 259 13,776 53.19 Maximum calls: 1275/25,117 Maximum puts : 1100/21,411 Moving Averages 10 DMA 1147 20 DMA 1184 50 DMA 1266 200 DMA 1379 *********** CBOT Commitment Of Traders Report: Friday 03/23 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Spec Commercials S&P 500 (Current) (Previous) (Current) (Previous) Open Interest Net Value +70479 +78245 -69490 -94842 Total Open Interest % (+38.13%) (+29.35%) (-9.63%) (-11.74%) net-long net-long net-short net-short DJIA futures Open Interest Net Value -2516 -1981 -2696 -1491 Total Open interest % (-19.73%) (-15.88%) (-11.17%) (-4.35%) net-short net-short net-short net-short NASDAQ 100 Open Interest Net Value +3555 -8928 Total Open Interest % (+21.46%) (-12.57%) net-long net-short What COT Data Tells Us ********************** Indices: For the second week in a row the Commercials have reduced their net-short positions on the S&P 500. In addition, Commercials have added substantially to their net-short positions on the DJIA. Currencies: Commercial traders continue to build net-long positions in the Japanese Yen Metals: Commercials in the silver market are near a five-year net long extreme. COT/CRB: This commodity index measures the entire spectrum of commodities in overall bullish or bearish outlook. It is now at a one-year high for commercial bullishness, meaning the outlook for commodities is long-term positive while equities as a mirror are considered long-term negative. Data compiled as of Tuesday 03/20 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/032901_1.asp ************** TRADERS CORNER ************** Beating The Bid/Ask Spread By Austin Passamonte Beating the spread. A frequent question that leads our topic here for the next few sessions. Talk of day-trading options and buying below prevailing "ask" while selling at "ask" has generated more than a little interest. Shall we dive right in? Here's the email question, edited for brevity: "Dear Austin, My question has to do with bid-ask spreads. Until I read your article on SPX day trading I thought you bought at "ask" and sold at "bid." I am just paper trading now but need to know a few things to keep it as accurate as possible. In the SPX, if you have a spread of 1.5 points like 11 bid and 12.5 ask, if I were to put in a buy limit of 11.8 which is about 55 percent between bid and ask would I get filled 9 out of 10 times like you said? I understand that market conditions can change things. I have been trying your system of 10/5 charts with the bull and bear crosses of stochastics along with the Bollinger bands and it is working like you described. Out of 14 trades risking 2 points to get 1.5 I am 10 and 4. If I risk 1.5 to get 1 I am 12 and 2 because 2 trades went to 1.4 above entry before falling back. I can see why splitting the bid-ask price is 75 percent of your approach and is pretty smart. Another question I have is the bid-ask spread on the SOX and BTK. I like to work off the 60/30 charts on these indexes because they have good playable moves of 20 to 30 points and you can pick off 5 or so points. Now here is the question. If the spread is 3 points like 12 bid and 15 ask what are my chances of getting filled at 13.6 or 13.7? Now I am talking about strike prices that are OTM but have open interest albeit in the tens or hundreds of instead of the thousands like the SPX. The last question for this email is this. My studies show that a 20 point move in these underlying indexes produce a 4 or 5 point move in OTM strikes between 12 and 17. If I bought a contract for 13.6 on the SOX and set a sell limit of 17, what happens if the "ask" moved to 16.7 and the index seemed to stall? If I wanted to sell too soon and I set my sell limit to just under "ask", would it get filled? Thank you. (BW)" Alrighty then. BW raises a few solid questions we'll address and no telling what rabbit trails that will lead us down. First, part is a quick review of the bid/ask process. Options are priced by market makers and originate from them. Sold by them to us at the "ask" price or bought back from us by them at the "bid" price. Get it? We the retail public buys "ask" price and sells "bid" price. And that's what most traders do. Retail traders have almost no fiscal advantages over floor traders I can think of except maybe one: the guarantee of first rights for certain orders to be filled. If we're trying to buy or sell 20 or fewer current-month index option contracts (5 distant- month option contracts) our orders get precedence above all. Isn't that nice? If we have a resting order in the market and buy/sell activity takes place, we get first dibs. I have no idea if the same number of contracts apply to equity options or not, best to check with your specific broker for those who are interested. One very important factor in this equation is liquidity. High volume and open-interest means there are plenty of buyers and sellers at any point in time. This keeps bid/ask spreads narrow due to all the action. Low volume and open interest means a market is illiquid and bid/ask spreads wide. It's just you & the market maker in there with his deck to stack. Now for the process. Let's say we want 10 contracts of XYZ option contracts and the current bid/ask spread is 9.00 bid - 10.00 ask. Must we pay 10.00 to get filled? Maybe, maybe not. If market action is slow and/or we don't want in terribly bad, a buy-limit order for 9.50 - 9.75 will fill on liquid markets far more times than not. Keep in mind that hundreds or thousands of other traders are out there and believe it or not, some of them see things the exact opposite we do. I like to call traders on the other side of my plays "constant winners." Just kidding. I think. The market maker set prevailing bid at 9.00, ask at 10.00 until we came along and made the new bid for ten contracts at 9.50 buy- limit. He's willing to buy from others for 9.00 and we're willing to pay them 9.50, a premium offer. Who do you think sellers want to do business with? Now the market maker has choices. He can leave our new best bid in place and let us fill if & when someone sells. He can fill just to get us out of the way, which we'll talk about later. Or he can raise his bid above ours, in this case 9.60 to squeeze us out for the time being. Let's dissect each scenario. If the market moves slightly against us and that happens all the time, the market maker will probably move his ask down from 10.00 to 9.50 as well. If an order to sell 100 contracts comes in at 9.50 sell-limit or market order, our ten-lot gets filled and he books the other ninety contracts. If another ten-lot comes in, we get the whole thing ahead of him. If a five-lot comes in for sale, we get a partial fill. Had we simply entered a market order to buy he would have hit us for 10.00 and immediately moved "ask" down to 9.50, sometimes before our fill even confirms! On ten contract lots that's $500. Not a big sum by any means but turn a few trades like this and it all adds up. But there is a downside, too. While we play around trying to shave spreads wild markets can run away on us and turn savings to great loss. That 9.00 bid - 10.00 ask can pop to 10.00 - 11.50 on the OEX, SPX and many active stocks in one move. Instead of simply buying at 10.00 before, our buy-limit order for 9.50 is toast while the market rapidly moves away. Penny-wise, rally foolish. How do we know when to do what? Simple. Play around during slow markets but just get in during fast ones. This holds especially true for getting out, but we'll hammer the sell side much harder than buying later. Buying is easy: selling for profit is all the work. A market maker may choose to fill our tiny little ten-lot just to move us aside. Let's say our order hits just before a block trade of 1,000 contracts comes in to sell. He will buy us out ASAP in order to drop his bid lower for handling such bulk. What's our little $500 stipend to him when a 0.50 drop on the bid without us means $50,000 difference for the next trade? We got lucky this time. The market maker's other choice is to simply nudge up his bid above ours, offering best price to sellers. We edge ours up, he edges his up until we reach what used to be "ask". Then he fills us at that price and immediately drops the bid back where he wanted it in the first place. Essentially, we bought the "ask" even though he moved it to make us feel better. Tricky little devils. Wonder how they afford those mansions in the Hamptons? Who pays for all that? Does it seem to you like we just get cookin' in here and our allotted space runs out? Nevertheless, we must adjourn this topic until next week. See you here Thursday next for Part II on beating the spread! Best Trading Wishes, austinp@OptionInvestor.com *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1951 ************************************************************ PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** No dropped calls tonight PUTS: ***** GENZ $92.50 +2.71 (+8.25) Despite widespread Technology selling yesterday, the Biotechs came through relatively unscathed, and we saw GENZ creep a bit higher by the close. The buyers came out in earnest this morning, shooting through the $91 level in the first few minutes of trading, never to return (at least not today). After running as high as $95, the bulls took a break, allowing the price to fall back a bit towards the close. But that doesn't matter now. After piercing our stop today, and on volume that more than doubled the ADV, we are clearly bucking the trend here, a clear cause to drop GENZ tonight. LLL $77.50 +1.04 (+2.50) Added to the playlist to jump into the rapid downhill slide, LLL has been a disappointment. It seemed the ink was barely dry on that first play writeup and the stock managed to find support. Over the past four sessions, resistance has begun to solidify near $78, but support is also firming up in the vicinity of $75. Our stop has not been violated, but LLL is not performing as we initially expected. Rather than sit and wonder why, we'll drop the play and get out of the way. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1961 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: advertising@OptionInvestor.com
The Option Investor Newsletter Thursday 03-29-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/032901_2.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1952 ************************************************************ ******************** PLAY UPDATES - CALLS ******************** PMI $63.70 +0.80 (+3.82) After moving to $64 on Monday this week, PMI experienced consolidation on Tuesday, which brought the stock to strong support at $60.50, a level which had been resistance for weeks. On Wednesday, PMI rested at a higher support level at the $62 level, like a coiled spring waiting to snap again. However, it took broad strength in the insurance sector to propel PMI all the way up as high as $65 on Thursday, during the brief market rally which occurred in the morning. IUX.X cleared resistance at 700, and reached 710 before pulling back later in the day. If this week's pattern of higher lows and higher highs continues, the stock should be able to break above $65 and stay there at some point in the near future. Traders could take positions at a pullback to support at $63, or upon a move above the $64 level with strong volume. Continue to monitor IUX.X, as well as MTG, and move stops to $62. We will exit positions if PMI closes below this level. ERTS $56.13 +0.25 (+4.13) Shares of leading computer game maker Electronic Arts continues to display unusual relative strength, as a triple digit down day for the Tech index was not enough to dissuade buyers from picking up ERTS on Wednesday. Closing up $1.13 or just over 2 percent, volume was heavy, clocking in at 2.75 times the average daily volume. Today, the stock continued to push higher, adding fractionally to its gains on about 1.6 times the ADV. Having how broken $55 resistance, look for this level to act as support, along with the 5 and 10-dma (at $54.10 and $51.78 respectively). Look for pullbacks intra-day to these levels for aggressive entries. For the more risk averse, wait for ERTS to take out $57 resistance with conviction before taking a position. Keep an eye on competitors ATVI and THQI to confirm movement and direction. Please note that to protect our profits, we are moving our closing stop up from $51 to $54. FDC $60.19 -0.32 (+1.61) FDC fell to a low of $58.80 today on profit taking, and promptly rebounded toward the close. Volume has been higher during rallies over the last week, and FDC's strong showing in today's weak market indicates that the stock might be able to muster up enough momentum to reach the 52-week high of $64.10 in the near future. Today, PMI released news that their subsidiary Western Union signed a multi-year agreement with Publix Markets to offer the Western Union Money Transfer Services at 650 Publix locations throughout Alabama, South Carolina, Florida and Georgia. This agreement was reached after a successful pilot program was launched at Publix stores in Atlanta and Miami. Traders could take positions at current levels, or possibly at another pullback to $59. If FDC can clear $62.50 with strong volume, it should be able to move up to $64, and conservative traders might want to wait for this type of breakout. Continue to monitor others in the sector, like ADP, and keep stops at $58.50. We will close positions if FDC closes below this point. MO $46.83 +0.42 (+3.43) This consumer product stock consolidated its trading at the higher levels of $46 to $48, holding its own against the broad selling that effected nearly all the sectors. Today's move through the unyielding 30-dma line, currently at $47.55, also offers a hint of better things to come. Conservative types should look for a convincing break through the immediate resistance, in an advancing marketplace, before jumping into this play. The more enterprising traders might find profitable opportunities on intraday bounces from the 5 & 10 DMAs, near our $45 closing stop mark. Expect some opposition as MO moves through the $50 level and approaches $52.04, the 52-week high set on March 9th. And mark your calendars too; the company has a confirmed earnings date of April 17th. This event could generate some of its own momentum over the near-term. ******************* PLAY UPDATES - PUTS ******************* AETH $13.44 +0.88 (+3.00) A down day for the NASDAQ was enough reason for the bears to hit the sell button on AETH yesterday, as the stock lost $2.44 or over 16 percent of its value on strong selling pressure, over 1.6 times the ADV. While AETH managed a bounce today in the face of another red-letter day for the NASDAQ, moving up just under 7 percent, volume to the upside was weak, less than 88% of ADV, which suggests a lack of conviction on the buyers' part. For aggressive traders, failed rallies above resistance at $14, the 5-dma at $14.60 and our closing stop price of $15 may provide potential targets of entry, but wait for sellers to return before jumping in. A bearish plunge below the $13 price level may allow for an entry on weakness, but be aware that AETH may find support at $12. Confirm entries with strong downside volume and sector sentiment by tracking peers CMVT and OPWV. DPMI $43.23 -1.52 (-6.75) Weakness in the semiconductor sector which has occurred over the last three days has led to selling in DPMI, which took the stock below support at the $45 level this afternoon. With a grim projection for earnings weakness, and a product demand cycle which lags the semiconductor industry by several quarters, there is simply no near term catalyst to rally shares of DPMI. Since this is a thinly traded stock which averages only about 400,000 share a day, traders should be careful with the wide intra day spikes. For example, on Thursday DPMI moved from a low of $42 to a high of $46.80 before collapsing. Aggressive traders could take positions upon a failed rally past the $44 level. Alternatively, a drop below $41 on strong volume would likely lead DPMI to the 52-week low at $39, and possibly even lower. Continue to monitor SOX.X for weakness, and set stops at $46. We will close positions if the stock closes below this level. OPWV $16.25 -2.60 (-8.31) Since dropping below $20 on Wednesday, OPWV has been acting like the orphan nobody wants. OPWV sold off again today on volume which was 25% higher than the average daily volume of approximately 6 million shares. JP Morgan lowered their revenues and earnings estimates for the first quarter to $597.3 million from $640.6 million and 40 cents per share from 45 cents per share. The report stated that the weakness is a result of weak subscriber growth from carriers like Nortel and Verizon, and investors dumped the stock to a new 52-week low of $15.96. Heavy spikes of volume toward the close indicate that OPWV may very well hit yet another 52-week low tomorrow, depending on market conditions. Another failed attempt to rally past $17 would be a good entry point for aggressive put players. Alternatively, a break below $16 on heavy volume could lead OPWV to the $15 level, and would be an entry point for conservative put players. We are moving stops to $20, so close positions if OPWV closes above this level. NSM $28.05 +2.05 (-1.60) The semiconductor sector was mixed in today's session, with some stocks claiming modest gains ahead of Micron's (MU) earnings release today. The small wave of anticipation brought NSM off its lows, but the uptrend didn't create the dynamism to crest our $29 protective stop, neither intraday or on the close! This is definitely a bearish sign; however, make note of the firm support NSM found at the $28 level in late afternoon trading. Tomorrow's trading could be impacted by Micron's earnings results. The company was expected to lose three cents a share for the 2Q, but came in this afternoon with only a $0.01 loss. Ultimately, the analysts' interpretation of the whole package of numbers will dictate near-term sentiment. Therefore, keep a close watch on the Philadelphia Semiconductor Index (SOX.X) to provide overall guidance going forward. A breakdown below 550 would provide ideal confirmation of the sector's weakness. Before adding aggressive positions, look for NSM to rollover from its current perch at the 5-dma line on robust volume. If you're especially conservative, wait for an unmistakable slide through the $26 level before jumping into the decline. ADBE $32.57 -1.40 (-3.12) How about those Software stocks? After a few days in the sun, it is back in the deep freeze for them, along with just about every other Technology-related stock. The NASDAQ is running to new lows, and ADBE looks poised to go there with it. Helping the stock along today was weakness in the Computer Software index (GSO.X) and VRTS, another Put Play. For its own part, ADBE has the odds stacked against it after rolling over right at the 5-month descending trendline, then at the $36-37 resistance level. Then we have the daily Stochastics rolling over from the overbought region, giving the ADBE bulls a tough row to hoe. The penetration of the $33.50 support today, opens the door for a similar test of the $32.50 level tomorrow. If this level fails, it will be a good signal for conservative traders to initiate new positions. We are using the descending trendline (currently $35) as a backstop for our play, setting our stop at that level. We would also target aggressive entries on a bounce that fails to penetrate $35 on a closing basis. Watch for continued weakness in the Software sector before playing. ENE $55.31 -2.79 (-4.09) Conveniently obeying its descending trendline this week, ENE looks like it will head down to test last week's lows in the near future. Weakness abounds in virtually every sector right now, and until some leadership emerges, expect stocks, good and bad, to continue their descent. After failing to hold above the $60 support level, our play quickly declined over the past 2 days, ending today's session just fractionally above last Thursday's closing low at $55.02. Without even reaching the overbought zone, the daily Stochastics oscillator is rolling over, and its next trip into oversold should drag the stock down to new yearly lows. We are ratcheting our stop down to $57, near intraday resistance, and aggressive traders may want to consider new positions on a failed rally near this level. The more conservative approach will be to wait for intraday support at $54-55 to fall to the bears assault. VRTS $43.04 -4.46 (-10.84) Conservative bears got their wish during yesterday's Technology selloff, as VRTS finally fell through both the $52.50 intraday support level, and then last week's lows near $49. Picking up right where they left off yesterday, the bears went to work on the stock again today, whittling the price ever lower throughout the day, finishing just off the lows of the day near $42. This marks another 52-week low for the stock, so support levels are a bit difficult to gauge. Look for $40 and then possibly $34 (support levels from late 1999) to provide some respite for the weary bulls. Today's close is actually below the lower Bollinger band and daily Stochastics are once again in oversold, indicating we could see an oversold bounce in the near future. On the bearish side, the stock dropped nearly 10% today on volume 50% above the ADV. There sure doesn't appear to be an overabundance of buying volume. We've moved our stop down to $48, and aggressive traders will want to consider new positions on a failed bounce that can't get through this level. More cautious players will want to watch today's lows for an entry. As selling volume picks up again, step into new positions when VRTS falls through the $42 intraday support level. Watch the Computer Software index (GSO.X) for confirmation of weakness in the sector before playing. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1962 ************************************************************** ************** NEW CALL PLAYS ************** AGGRESSIVE: UVN - Univision Communications $39.45 +0.66 (+3.33 this week) Based in Los Angeles, California, Univision Communications Inc. is a Spanish-language television broadcaster in the United States. The company's network provides the Univision affiliates with 24 hours per day of Spanish-language programming with substantially all new programs. Univision's Network, which is the most watched television network (English- or Spanish-language) among Hispanic households, provides the Company's broadcast and cable affiliates with 24 hours per day of Spanish-language programming with a prime time schedule of substantially all first run programming (I.E., no reruns) throughout the year. For reasons both fundamental and technical, we are initiating coverage on UVN. It has been said that television is the drug of a nation. While this reference was meant to illustrate the almost addictive qualities of TV, the comparison works on a number of levels. Like drug stocks, earnings for cable companies are fairly stable and predictable, which makes this sector a potentially attractive play for defensive traders. The concept of affordable luxury also comes to mind, as even with a slowing economy and necessary cutbacks in spending, consumers are unlikely to give up their cable television. What makes UVN especially attractive amongst its peer group is its demographics. Recently, census data revealed that the Latin community has now become the largest minority group by population in the United States. As UVN holds the major market share of this lucrative customer base, this puts gives the company a unique competitive advantage when negotiating ad revenues. The technical picture confirms the fundamental strength, as the stock has been trading in a upward trending channel all month long in the face of a weak market. Having just taken out its 50-dma near $39, a bounce off this moving average as well as the 5 and 10-dma (at $38.37 and $38.22) may provide ideal targets for aggressive traders. Just make sure the stock continues to close above our stop price of $38. Conservative traders may want to wait for UVN to break cleanly through resistance at $40 before jumping in, confirming strength by monitoring rivals COX and CVC. BUY CALL APR-35 UVN-DG OI= 31 at $5.50 SL=3.50 BUY CALL APR-40*UVN-DH OI=172 at $2.40 SL=1.25 BUY CALL APR-45 UVN-DI OI= 22 at $0.75 SL=0.00 BUY CALL MAY-40 UVN-EH OI= 0 at $3.60 SL=2.50 Wait for OI!! BUY CALL MAY-45 UVN-EI OI= 29 at $1.75 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=UVN ************* NEW PUT PLAYS ************* AGGRESSIVE: SONS - Sonus Networks $19.78 -3.22 (-8.22 this week) Sonus Networks furnishes the voice infrastructure solutions that let public network providers -- long distance carriers, wholesale carriers, ISPs, and cable operators -- offer voice and data networks. Essentially, the company's hardware and software facilitates the voice transmissions and provides efficient routing. The rolling waves of selling hitting the technology markets have put SONS of the brink of ultimate destruction. If the brazen whispers effecting the sector don't let up, the historical support at $20 will crumble. SONS current price level provides aggressive traders with lucrative opportunities, assuming the play goes our way. We're looking for more technology weakness to knock SONS off its precarious pedestal as industry leaders like Ciena (CIEN) and Juniper (JNPR) drive the major index lower. Buying into high-volume declines and locking in gains quickly offers the least risk, but don't be fooled. This play is not for the conservative. Traders might also find enterprising entries if SONS makes a charge for the intersected 5 & 10 DMAs, just above $25, and then reverses course on increasing volume. This strategy portends high volatility and fleeting in-and-out scenarios; although the profits would likely be abundant. We're keeping a tight lease on SONS and will exit the play if the share price CLOSES above the $23 mark. BUY PUT APR-25 UJS-PE OI=1044 at $6.25 SL=4.25 BUY PUT APR-20*UJS-PD OI= 486 at $2.81 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=SONS ISSX - Internet Security Systems $26.81 -2.25 (-5.69 this week) Internet Security Systems is the leading provider of total information security management for networks, servers, applications and desktops. Not only does ISS offer market-leading, best of breed security management systems for security assessment, policy enforcement and intrusion detection - all built on the company's SAFEsuite security management platform - it also provides superior customer service, consulting and education offerings that significantly reduce the complexity and expense inherent in protecting online assets. ISS approaches Internet security through a complete lifecycle approach, offering a managed solution that covers the full continuum of Internet security needs. While the NASDAQ declined sharply in the month of February, it was surprising to see the Internet Security sector hold up, despite weakness especially in Software stocks. The general agreement on the Street on the part of analysts was that security is a cornerstone of a successful e-business strategy. As a result, this would make the sector less susceptible to decreases in capital expenditures, especially since the goods and services produced were considered necessities. The Bears' argument is that these were the same things that were said about the Storage sector, just before the sellers lowered the boom on the heels of profit warnings and lower than expected revenues from the likes of BRCD, EMC and VRTS. The subject of valuation is also a possibly valid point, as premiums built on the shaky foundation of high expectations are now being questioned. Since falling below the critical support level of $45 earlier this month, it's been all downhill for the stock. Connecting the highs and lows since the middle of February reveals that ISSX is trapped in the midst of a steep downward regression channel. The 5 and 10-dma, now converged near $31, have acted as formidable resistance throughout the stock's slide. Increased selling pressure leading to a rollover as ISSX approaches this level as well as horizontal resistance at $28 may allow higher risk players to make a play. Just keep in mind that we have placed a closing stop at the $30 mark. For the more risk averse, a break below $27 on continued selling may allow for an entry on weakness. Correlate entries with direction in sector peers CHKP and VRSN. BUY PUT APR-30*ISU-PF OI=275 at $5.38 SL=3.50 BUY PUT APR-25 ISU-PE OI= 92 at $2.38 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=ISSX ********************** PLAY OF THE DAY - CALL ********************** ERTS - Electronic Arts Inc. $56.13 +0.25 (+4.13 this week) Electronic Arts is the leading independent interactive entertainment software company that develops, publishes and distributes products for personal computers and advanced entertainment systems such as the PlayStation and Nintendo 64. Since its inception, EA has garnered more than 700 awards for outstanding software in the U.S. and Europe. Combining such diverse media as video, photographic images, computer graphics, and stereo sound with the work of professional story writers and Hollywood film directors, EA is breaking traditional boundaries and evolving into a 21st century high-technology entertainment company. Most Recent Write-Up Shares of leading computer game maker Electronic Arts continues to display unusual relative strength, as a triple digit down day for the Tech index was not enough to dissuade buyers from picking up ERTS on Wednesday. Closing up $1.13 or just over 2 percent, volume was heavy, clocking in at 2.75 times the average daily volume. Today, the stock continued to push higher, adding fractionally to its gains on about 1.6 times the ADV. Having how broken $55 resistance, look for this level to act as support, along with the 5 and 10-dma (at $54.10 and $51.78 respectively). Look for pullbacks intra-day to these levels for aggressive entries. For the more risk averse, wait for ERTS to take out $57 resistance with conviction before taking a position. Keep an eye on competitors ATVI and THQI to confirm movement and direction. Please note that to protect our profits, we are moving our closing stop up from $51 to $54. Comments ERTS has been trading as if the NASDAQ were non-existent. After Wednesday's break above $55 on high volume, buyers came back for more today. With a brief dip in the morning, ERTS consolidated along the $54.75 line throughout the session, supported by decent volume. Look for entry into this call play on a continued surge through $56.50 with convincing volume. Otherwise, wait for a pullback to support at $54.75 along with a a bounce, which would be the better risk-to-reward entry. A break below $53.88, today's low, would indicate profit taking. BUY CALL APR-50 EZQ-DJ OI=2802 at $8.38 SL=6.25 BUY CALL APR-55*EZQ-DK OI=2287 at $5.13 SL=3.25 BUY CALL APR-60 EZQ-DL OI=1304 at $3.00 SL=1.50 BUY CALL MAY-55 EZQ-EK OI= 71 at $7.38 SL=5.50 BUY CALL MAY-60 EZQ-EL OI= 162 at $5.13 SL=3.25 http://www.premierinvestor.net/oi/profile.asp?ticker=ERTS ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1971 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ Conservative Option Trading Strategies: The Review Continues By Ray Cummins One of the most popular delta-neutral strategies for new traders is the debit straddle. This neutral, low risk approach works very well when the underlying issue is expected to make a large movement in either direction. Before we can begin a discussion on the proper techniques for purchasing straddles, there are a few fundamentals that must be understood. Option Pricing: The primary influence on an option's price is the movement of the underlying security. The next important factor is time value. An option's price decays each day it is in existence. The closer the option gets to expiration, the faster it decays. There are other, less important factors that affect the price of an option including interest and dividend rates. Volatility: The volatility component of option pricing is a measure of the range the underlying security is expected to change over a given period of time. The actual measurement is the standard deviation of the daily price changes in the issue. Historical (statistical) Volatility: A measure of how quickly the underlying security has moved in the past. It is a mathematical definition based on historical prices. In most cases, the higher the statistical volatility, the more an option is worth. Implied Volatility: The market's estimate of future volatility of the underlying security. Implied volatility calculators start with the current option price and extrapolate the theoretical value of volatility. Even though it is a computed value, it is still just an estimate and is subject to errors (or irregularities) when the market performs unexpectedly. In general terms, implied volatility is the volatility value that makes an option's fair value equal to its actual market price. Debit Straddle: A neutral option trading strategy, which consists of purchasing both a put and a call, generally with the same strike and the same expiration month. The position will benefit from a large move in one direction or the other and based on the size and timeliness of the move, it can generate large profits. The risk, (if little or no movement occurs) is limited to the initial amount paid for the straddle. By carefully identifying undervalued options and making reasonable assumptions about future movements in the underlying security, this can be a profitable strategy with very limited risk. There are three rules to identifying favorable conditions for a straddle purchase. First, the trader should select options that are undervalued (cheap). Next, the underlying security must have the potential to move (high or low) enough to make the straddle profitable. Finally, the underlying stock should have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk/reward of the position. The first step is to determine how fairly the options are priced. This may be done with sophisticated pricing software or by simply comparing the current levels of implied volatility to past levels of implied volatility. In simple terms, when the relative implied volatility is low, options are effectively under priced. After identifying a series of inexpensive options, the trader must determine if the underlying stock has the ability to move to a profitable position in the required amount of time. A few months is usually the shortest recommended period for conservative debit straddles; shorter-term plays suffer from time decay too quickly. With a probability calculator, it is easy to estimate the chance of the underlying stock finishing outside the break-even points at expiration. But, one thing you must realize when using these tools is that historical volatility measures are generally based on 10, 20, 50 and 100 day statistics, thus it is important to use a conservative estimate so as to not to artificially inflate the probability of profit. The next step is to look at a price chart of the stock to see if it has a history of moving the required distance in the allotted time frame. The important thing to examine is how often the issue moves through the necessary profit range in each of the past four or five "target" periods. Again, simple option analysis software will do this automatically and more importantly, it will forecast the probability of actually profiting from the position. One thing to be aware of when buying any option is that time decay becomes greatest during the last month before expiration. A three month debit straddle will have lost approximately 50% of its value before the beginning of the worst erosion period even if the stock remains exactly at the original price when the position was opened. This makes it very important to use a mental loss limit (near 50% of the initial cost of the straddle purchase) to preserve capital in the event the underlying issue does not perform as expected. After the position is open and the underlying stock begins to make a move, it is necessary to decide whether to ride the trend to the break-even point or trade against the straddle. One technique is to hold the position until the value of either option pays for the whole straddle, then the remaining (long) option is risk-free with unlimited profit potential. A similar method bases the target exit on the sum total of both positions. When one position is worth the total initial debit, both positions are closed and the premium from the lower priced option is profit. The latter strategy works well when there is still ample time until the options expire. "Riding the trend" is considered the more profitable technique for directional traders but it involves additional risk and requires knowledge of basic technical analysis. The most common approach to this strategy is to monitor the underlying issue for a breakout or key reversal through a technical support or resistance level. When the new trend has been positively identified, the lower priced options (losing side) are sold along with one-half of the higher priced options (profitable side). The remaining position is held until a reasonable profit target is met and downside protection is maintained with a trailing stop. Advanced traders favor this follow-up technique because it is based on known technical trends and the action generally occurs near the position's break-even points. When one of these points is reached, two simple trades lower the overall cost basis while retaining a high probability of eventual profit. Determining how and when to exit a play is a matter of personal preference but in most cases, if the underlying issue performs poorly, the play should be liquidated before time value decay erodes the entire position significantly. As the last month of option life approaches, you should begin to plan an exit. Study the daily movement of the underlying issue and use it to your advantage to exit the position; selling each option for whatever you can get when the market (not emotion!) tells you it's right. It's very difficult to learn to close out losing plays early but the simple fact is; there is no reason to hang on to a losing position when there are so many other profitable plays that deserve your time and money. Accept the losses; learn from your mistakes; evaluate each one critically; then move on! Favorable debit straddles are relatively simple to uncover. The basic requirements are inexpensive options on issues that have proven historical volatility. The strategy is very simple and perfect for the novice trader providing he or she understands option pricing basics and follows a few simple guidelines. This type of strategy can generate excellent returns because losses are limited to the initial investment and profits are limited only by time and volatility in the underlying issue. Good Luck! Get 10 FREE Issues of Investor's Business Daily. No obligation. 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