The Option Investor Newsletter Tuesday 04-03-2001 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/040301_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 04-03-2001 High Low Volume Advance/Decline DJIA 9485.70 -292.20 9774.80 9428.10 1.37 bln 737/2356 NASDAQ 1673.00 -109.90 1759.01 1660.92 2.51 bln 800/3012 S&P 100 562.38 - 22.02 584.41 559.12 totals 1537/5368 S&P 500 1106.46 - 39.41 1145.87 1100.19 22.3%/77.7% RUS 2000 426.96 - 12.80 439.76 424.82 DJ TRANS 2680.57 - 64.45 2745.02 2671.08 VIX 39.33 + 4.58 40.70 36.96 Put/Call Ratio 0.99 ****************************************************************** Heavy Volume, Heavy Losses, Is The End In Sight? The Dow gapped down at the open on worries about Japan, China and the U.S. economy. A small +50 point bounce at the close brought it off its low of 9428. It was not a buying bounce but simply short sellers taking profits in case of a dead cat bounce at Wednesday's open or an unexpected rate cut by the Fed. The Nasdaq tried to rally at mid-day but continued negative news prevented bargain hunters from making any gains. Window undressing continued in earnest on Tuesday. Fund managers that bought stocks to dress up their quarter end statements were dumping those same stocks this week. How much worse can it get? Don't answer that! The Dow appears destined to retest the 9106 low set on March 22nd and the Nasdaq broke under support as well. The next Nasdaq support level is 1500 with major support at the low for 1998 of 1357. That low from October 4th, 1998 was the low for the year and you have to go back to May 1997 for support after that. Obviously nobody wants to even consider a Nasdaq below 1500, most of us are in denial that it is trading under 2000! The analysts are now echoing my statements from last week that there is no reason to buy stocks with the historical April drop in front of us. Thanks for reading guys! With the first quarter over the earnings warnings are coming fast. So far this week there have been over 35 with more in the pipeline. The B2B and Software warnings on Monday set the stage for a weaker Nasdaq as each sector shakeup rattles investors in the corresponding sectors. The Networking sector was hit very hard today with Nasdaq:CIEN losing -6.75 or -20% and Nasdaq:JNPR losing over -$5 or -15%. CSCO set a new 52-week low of 13.56. The software sector was killed with VRTS losing -7.50, CHKP -5.50, ADBE -3 and even MSFT -2.44. The semiconductor sector I wrote about on Sunday has lost over -10% in the last two days to a new 52-week low of 489. As the "head of the snake" it has helped lead the Nasdaq to new lows. If you took my editors play suggestion of SMH puts on Sunday then you should be very profitable. If you did not read that section on Sunday you should to understand the current market. The current round of tech warnings has started a new trend. Not only are tech warnings accelerating but each now has a new component, layoffs. RATL warned and cut -10% of their workforce, KEYN warned -13%, OYNX warned -20%, FIRE warned -650, KANA warned after previously announcing layoffs. AGIL warned today after the close as well as SYBS. We are entering a very perilous time in the markets. Earnings are weighing on stock prices producing a very negative sentiment. Add to this sentiment the crisis over the spy plane in China and the worry about Japan accounting methods changing and this negative sentiment is completely over powering the buyers. Add to these factors the advent of tax selling season for individual investors and you have the perfect storm in the markets. With tax day less than two weeks away investors are watching the prices of stocks they were going to sell to raise cash fall on a daily basis. The impulse to sell now and prevent a further cash loss is great. Also weighing on the street are persistent rumors of a big mutual fund that is in trouble. If investors are withdrawing money from funds to pay taxes or simply bail out of the markets, there is the possibility that a fund that is over leveraged and got caught in the down market could be failing. If that was announced publicly there would be a run on remaining funds like the bank panics in the depression. The Long Term Capital failure shook the markets but not as bad as a retail fund collapse would. LTC was a fat cat fund for very large institutions who knew the risks. A retail fund failure would be catastrophic. Another factor weighing on the tech sector is the true seriousness of the inventory problem which is slowly coming to light. Cisco is rumored to have as much as $1 billion in excess component inventory which is becoming more obsolete as each day passes. Rumors exist that this could be as much as 18 months of inventory at present sales levels. Even more rumors exist that CSCO is putting pressure on its suppliers to take components back and on wholesalers to take delivery of routers and switches they do not need to get the inventory off Cisco's books and hide the problem. Want to buy from us when the recession is over then take this inventory now, or else! Big guys become bullies when times get tough. The severity of the recession struck home today with PSIX saying they were on the verge of bankruptcy. If we see a rush by others to join them then we could see an entirely new leg down in the markets. The announcement rippled through the networking sector with major suppliers to PSIX trading lower on the possibility of payment problems. The biggest suppliers to PSIX are CIEN, JNPR, CSCO and NT. See a pattern here? Margin calls are again becoming a major problem. With each down leg investors averaged down thinking surely stocks like CIEN and JNPR would hold $50 or VRTS, CHKP and ARBA would rebound. When those events fail to occur the investor becomes trapped and each new drop creates a new wave of broker forced margin selling. The big downdrafts like today trigger margin calls which many investors will get tonight. This puts more pressure on the next days session. 29 of the Dow 30 stocks were down today with Home Depot the only survivor with a +.50 gain. Decliners on the NYSE beat advancers more than 3:1 and almost 4:1 on the Nasdaq. The real measure of the market internals was the volume. With 2.5 billion shares traded on the Nasdaq over 2.3 billion was down volume. Up volume accounted for only about 200 million shares. The VIX came very close to its 52-week high of 41.99 with a high today of 40.70. Fear is rampant in the markets as evidenced by the VIX and the put/call ratio which closed the day at .99 which indicates stronger put buying. The missing component with the -292 Dow drop today was the lack of a major bounce like we had on March 22nd. There were just no buyers and that was a concern for professional traders at the close. There were reports of institutional short selling in late afternoon which would mean the big boys are looking for even lower lows. In our pick meeting today there was a serious gloom. Do we buy puts on stocks down -$20 to -$30 in the last week? The risk/reward ratio for that type of play is slim. Do we try and pick a bottom on some stocks and play calls? Not when every indicator is pointing down. Good stocks are getting beaten almost as badly as the weak ones in this current sell off. The Nasdaq is now down -67% from its high last year and the Dow is down -19%. All the indicators are still pointing down but like in any major market move there should be a bounce soon. The market is very oversold again and there is a lot of money burning a hole in pockets on the sidelines. Dick Arms, (ArmsInsider.com) said on CNBC today that the TRIN index was at levels he had never seen before in the 32 years it has existed. The severely oversold conditions are pointing to a major rally soon in his opinion. We need a catalyst to make these people want to buy. With earnings, China, Japan, fund problems and taxes as the overriding worries about the only thing that could break this drop is another inter-meeting rate cut. The first three cuts have failed to work but at these levels another aggressive cut could be the right trigger. The Jobs Report on Friday is still my guess for a surprise announcement if one is coming. We know the Fed probably gets the data early so it is also possible on Wed/Thr. I am sure Bush has "suggested" to Greenspan that another rate cut to prop up the markets would be nice. Financials have started moving down again as recession fears create earnings worries for banks. If consumers are starting to feel the heat from the market and can't make car payments, house payments and credit card bills then more trouble is ahead for the banks. I know this sound very bearish. I want to be bullish but I cannot find anything bullish to write about. The fact that the Dow could be creating a double bottom by re-testing the March 22nd low of 9106 could be bullish. Of course at 9475 that means it could drop another -375 points during that retest. It could also rebound tomorrow but without an answer to the China crisis and good news from Japan it is not likely to happen. We could also take heart from the lack of warnings from any big cap stocks today. Of course big cap has taken on an entirely new meaning lately. CSCO hit $100 billion in market cap today, down from $500 billion in March of last year. So I repeat, nothing goes down in a straight line and I would expect a bounce soon. When and how far is a mystery to everyone. This is one of those days that it feels really good to be 100% in cash. You can watch the markets fall unemotionally and be ready to jump in when the trend changes. Enter VERY passively, exit VERY 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 **************** Broken Records By Austin Passamonte That could aptly describe historical lows for many stocks, groups, sectors and even broad indexes. Each rally buoyed by bullish hope continues to fail in true fashion of savage bear markets. How many tentative attempts to rally have we seen wiped out by one more deft swipe of negative news' clawed paw? Not the final one, that's for sure. It could also describe our current report in this section. Market neutral has meant downside expectations far longer now than actually recall. We continue to hear talking heads in the media attempt to call bottoms on tech indexes and broad indexes as well. Investors who listened to Abbey-Cohen & gang just a week or two ago bought that latest round of stocks at quite the premium to what they were fetching bids on today. Analysts who rose to fame during the great bull-run continue crumbling to ash on this side of the parabolic slope. Even veteran market timers trying to rely on historical oversold signals remain confounded at their continual failure time after time. What does all this mean? We haven't reached bottom yet although it could be soon. Bears Investors and traders are anxious to just wash it all out, end the nagging pain and get on with resumption of their bull market once again. If only it were that simple or easy. The most likely scenario is we are trapped within a sideways to lower trading range for months to follow. Not what most traders want to hear? Join the club, but pretending never made traders a single dime. It has cost them trillions but never earned anyone a dollar. Realistic traders have high-odds chance to profit and reality is, the trend and path of least resistance still points down over the medium future. Key for the tech indexes will be SOX holding it's 500 level. A break of 525 and 512, two key measures themselves was damaging. A close below the 500 level and further decline from there could find the next bounce near its 400 index level. NASDAQ indexes are on life support and approaching an ultimate bottom in our opinion. Will they bounce back +100% above closing levels today by/before year's end? That would be a major feat indeed. Long-term investors will and probably should be picking through the scrap heap in there for big caps & especially second-tier companies that have customers, earnings, a business plan and future. Which ones are those? That is up to each of us to decide for ourselves. Broad indexes may be another matter entirely. Downside targets for the SPX are the 900 area and Dow at 8,000. Those who find this absolutely incredulous need only reflect back on the thought of 9,100 when INDU traded at the vaunted 11,000 level. We found that just as mind-boggling ourselves, for sure. Yet we must remain cognizant of all possibilities. Bulls The VIX spiked to 40.00+ today as the trading world loads up on puts. Seldom do we breach this zone without a powerful short- squeeze to follow. S&P 500 commercial traders continue to scale out of their huge net-short position as we witness rising volume and falling open interest in the SP01M contracts over at the CME. This indicates further short covering since data was compiled last Tuesday. We interpret this as an indication of uncertainty on their part. They likely believe we have less downside risk than potential upside gain at this point in time. However, we expect them to cover shorts during subsequent declines and possibly open shorts on future rallies. This cost-average scaling process could continue until the economic future clears and a switch to neutral or especially net long would be our strong inclination to buy. Significant selling and downside profits unrealized could be locked in soon, firing up yet another short-squeeze rally. We can expect plenty of gap-open sessions ahead in either direction and impossible to forecast the night before. The power of rumor exists for Fed rate cut intervention before the May FOMC meeting. As shorts painfully learned on January 3rd, Greenspan can drop this bomb at almost any point in time and that will weigh heavily on those holding massive short profits as each session or week's end nears. What Next? Best guess? Retest of lows on the Dow and S&Ps with limited downside left in techs. The SOX will lead NASDAQ markets up or down considering there remains little if any other sectors capable of doing so at this time. We would trade the upside cautiously and downside a bit more aggressively while following the daily trend with care. Still a dangerous world out there, protect capital and take modest profits in either direction when offered! ************ VIX Tuesday 04/03 close: 39.33 VXN Tuesday 04/03 close: 75.12 30-yr Bonds Tuesday 04/03 close: 5.47% 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. Tuesday (04/03/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 600 - 585 12,206 8,727 1.40 580 - 565 2,843 11,281 .25 OEX close: 562.38 Support: 560 - 545 989 8,059 8.15 540 - 525 207 9,398 45.40 Maximum calls: 600/ 6,093 Maximum puts : 520/ 9,744 Moving Averages 10 DMA 582 20 DMA 596 50 DMA 647 200 DMA 729 NASDAQ 100 Index (NDX/QQQ) Resistance: 44 - 42 155,686 103,196 1.51 41 - 39 161,936 125,669 1.29 38 - 36 13,409 73,535 .18 QQQ(NDX)close: 34.66 Support: 33 - 30 870 25,992 29.88 Maximum calls: 45/138,619 Maximum puts : 43/73,609 Moving Averages 10 DMA 40 20 DMA 42 50 DMA 51 200 DMA 74 S&P 500 (SPX) Resistance: 1175 8,097 7,189 1.13 1150 16,717 19,853 .84 1125 2,024 9,486 .21 SPX close: 1106.46 Support: 1075 299 13,324 44.56 1050 404 16,460 40.74 1025 14 18,278 1305.57 Maximum calls: 1275/24,155 Maximum puts : 1100/20,804 Moving Averages 10 DMA 1142 20 DMA 1168 50 DMA 1253 200 DMA 1374 ***** CBOT Commitment Of Traders Report: Friday 03/30 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 Specs Commercials S&P 500 (Current) (Previous) (Current) (Previous) Open Interest Net Value +64946 +70479 -65571 -69490 Total Open Interest % (+30.79%) (+38.13%) (-9.15%) (-9.63%) net-long net-long net-short net-short DJIA futures Open Interest Net Value -3269 -2516 +3299 -2696 Total Open interest % (-24.49%) (-19.73%) (+14.22%) (-11.17%) net-short net-short net-long net-short NASDAQ 100 Open Interest Net Value +431 +3555 -4461 -8928 Total Open Interest % (+2.03%) (+21.46%) (-5.89%) (-12.57%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: Commercials took a breath this week with net-short positions on the S&P 500 remaining virtually unchanged. Commercials did reverse their positions on the DJIA as they are now net-long. 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 03/27 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/040301_1.asp *********** OPTIONS 101 *********** A Little Tight Around The Collar? By Lee Lowell Does it feel like your collar is squeezing your throat a little bit harder these days? Are you seeing open long positions bleeding away? Are you getting that sinking feeling that my net worth has evaporated? If so, then you're not alone. The carnage is everywhere. I keep reading about new layoffs everyday, companies filing for bankruptcy, retirees thinking about coming out of retirement, all because of the stock market. If you want to play the options market, it's apparent now more than ever that you must take control of the "limited risk" nature of options. It's true that when you buy options, your risk is limited, but that limited risk can take a big chunk out of your capital. Yeah, I can buy a LEAP call for 2003 and wait it out. I have two years to be correct. Well, look at all those LEAP calls on CSCO, EMC, SUNW, ORCL, JNPR, CIEN, etc, etc. They have all been sliced by about 75% or more of their original value and the outlook doesn't look so good for at least a few more quarters. It's limited alright, but by now those positions are probably only worth $2 each. I know some of mine are. So we have to take control of the situation and sell out the losers, (as painful as it may be) if you haven't already and work on the next strategy. It's hard to let go of a stock that you've felt will serve you well in the long run. It may have been good to you in the past, so you don't want to let go. Well, that's your decision, but do you think SUNW, CSCO, INTC care about how much money has been drained from your portfolio? Don't feel bad about selling stock. You'll not only make you wallet feel better, but also your psyche. Once you have the losers out of the way, you can think much more clearly. If you want to get back into these stocks in the future, then no problem. Buy them back when things look brighter. I'd like to discuss an option strategy that corresponds to the title of this article. It's called a "collar." This is a great very low-risk, or no-risk strategy to use with LEAP options. It's good for those long-term positions that you originally wanted to let sit in your account and not have to worry about. This is truly one of those strategies. A collar is constructed by buying the underlying stock, buying an ATM LEAP put and selling an OTM LEAP call. The put and call should be of the same expiration LEAP month. Because of the nature of long-term options, the calls will usually be priced higher than their equivalent puts. For this reason, the OTM calls can be used to totally offset the purchase price of the put and allow for some upside appreciation. Let's look at some examples. IBM is currently trading at $92.50. The Jan 2003 $90 put and the Jan 2003 $110 call are both trading for about $16.40. This means we can buy 100 shares of IBM at $92.50, and buy the put and sell the call for even money. Our risk/reward is easy to calculate. Since the options were done at zero cost, our upside is limited to the strike price of the call which is at $110. So if IBM were at $110 or higher at Jan 2003 expiration, we would make $1750 per spread. At $110 or higher, the puts would expire worthless and the calls will get called away. But either way, we make the difference on our long stock: $110 - $92.50 = $17.50 x $100 = $1750 Our downside is very limited. If IBM tanked to $50, our calls would expire worthless but we would exercise our $90 puts which would almost entirely offset the loss on our long stock. Since we bought IBM at $92.50 and exercised our put at $90, the most we would lose is $250. This is truly a limited risk, long-term strategy that is bullish in nature. We'll make money if IBM heads higher like we hoped and our loss is very minimal if IBM falls. This isn't the only way to construct a collar. You can vary the strike prices around and you can vary the position size of either the calls or puts. In terms of shifting the strike prices, you can substitute the IBM $110 call with the $100 call. This will give you a net credit when initiating the spread. The $100 call will trade at $20 and the $90 put still at $16.40, giving us an initial credit of $3.60. Since we have lowered the strike of the call, our upside is capped at the $100 strike which could theoretically give us a maximum profit of: $7.50 ($100 - $92.50) + $3.60 (initial credit) = $11.10 upside profit Our downside would even show a profit too now! If IBM went belly up and became a worthless company, we still could exercise our $90 put against our long IBM from $92.50. This would result in the same -$2.50 loss as before, but now we have our credit of $3.60 to cushion that loss too. So our downside is actually a positive $1.10 per spread. This is truly a "can't lose" position. We make money on the upside and the downside. How's that for a strategy? Our only drawbacks are the commission costs and the limited upside potential. But there's nothing that says you can't buy back the short call at anytime if you feel IBM is truly headed higher. Who wished they had executed some collars last spring right before everything tanked? I'll be the first to raise my hand. Here's a variation of the collar that I learned from a friend recently. Instead of doing the OTM/ATM version for the calls and puts, you can do them both ATM and use a different amount of options. We could buy 300 shares of IBM at $92.50, buy 3 $90 puts at $16.40 (total $49.20), and sell only 2 $90 calls for $24.60 (total $49.20). What we have done here is cut back on the amount of calls which would give us unlimited potential on the upside because we only covered 200 of our 300 IBM shares with the short calls. The prices of the options offset each other like before, so there's no cost for doing the options. Once again, our downside is limited to the -$250 loss, but we've gained the chance of unlimited upside potential. It truly is amazing what kind of strategies you can put together with options. There's one for every kind of scenario, you just have to create it. Take a look at the collar as it is a very powerful strategy. As we have all learned the hard way over the last year, it's good to protect your upside and your downside. Good luck. ************** TRADERS CORNER ************** Wall Street Limbo Contest: How Low Can It Go? By Scott Martindale How low can it go? Who is winning this limbo contest, anyway? If you have been staying short despite the VIX and VXN bullishly eclipsing the 40 and 75 levels, respectively, you are without a doubt cashing in big time. I have been somewhat distracted by other tasks lately, so I have been missing conservative entry points for shorting the indices (I don't want to chase them down at these levels). But with so many technical indicators screaming for relief, the only thing keeping the markets down right now is the buyer's strike. Every possible reason for this has been offered including assorted things like margin calls, taxes due, corporate earnings visibility, China confrontation...perhaps even my beloved Arizona Wildcats losing the NCAA basketball championship last night. No sector was spared today as even the current darlings in power production and utilities were hit. Gold stocks, anyone? I saw Tom Gallagher on CNBC last week say that he had never seen anything so bad since he began working on the Street back in 1964. As a comparative newcomer to the trading scene, my eyes have witnessed the kind of carnage that will shape my thinking forever. No more riding out downswings for fear of missing the "inevitable" rebound. JDS Uniphase (NASDAQ: JDSU) below $15? This is a company with a dominant industry position and a bright future, but with no earnings it's had no takers lately. Juniper Networks (NASDAQ: JNPR) below $30? Are you kidding me? This is a buyers strike of epic proportions. Perhaps President Bush is on the verge of putting the kibosh to this strike, too. We can hope. I have stopped out of many equity positions and written calls against others in my long-term portfolio to protect some gains, stem some losses, and reduce cost basis. But I just can't get myself to short this market at these levels. After today, I plan to stand pat with my remaining holdings to just ride it out from here into the next rally -- if and when it decides to come -- and then consider some shorts. My holdings include some lottery plays in new technology and biotech as well as a few big-cap techs and several names in energy, power generation, marine transportation, gold, high-yield stocks (such as natural gas royalty trusts), and REITs. What's a relatively safe way to play this market? Well, energy stocks, utilities, and power generation companies, despite recent weakness, are all strong performers with bright futures. When we see weakness like they have shown this week, it is a good time to consider writing at-the-money naked puts and put credit spreads. And then when they gain strength, write at-the-money or slightly in-the-money covered calls. Or you can simply buy and sell the shares. Indeed, these are true "rolling" stocks. With reasonable P/E's, strong current income statements, and steady projected growth, you really aren't risking much. Of course, you won't make a big killing either, but you can do surprisingly well over the course of a year by playing the cycle every one to three months. Let's look at Texaco (NYSE: TX) as an example. Over the past year, TX cycled between $50 and $60 for several months before moving up to a new range between $60 and $70. Whether you had been playing the stock or the options, you would have been selling at $60, including mid-October or mid-November. However, once it strongly broke up through the $60 level in late December, that was an indication that it might be ready to move up to a higher range after a normal pullback. The break back up through $60 in late January after the brief pullback was the buy signal. Today, I would be looking for technical indicators to flash a buy signal as the stock again cycles back down toward that $60 support level. Diamond Offshore (NYSE: DO) is another stable energy play that has cycled reliably three times over the past year between $35 and $45. Today it is again coming down toward the $35 level and I would be watching the technicals for a buy signal. Another way to go is the power generation and distribution sector, including Calpine (NYSE: CPN), AES Corp. (NYSE: AES), NRG Energy (NYSE: NRG), Reliant Energy (NYSE: REI), and El Paso Energy (NYSE: EPG). These companies have been cycling within an upward trend. Before I sign off for today, let's again look briefly at that basket of techs I've been watching that seem to have the greatest gains when the Nasdaq rallies and likely will lead the next sustained advance. BEA Systems (NASDAQ: BEAS), Human Genome Sciences (NASDAQ: HGSI), Juniper Networks (NASDAQ: JNPR), Mercury Interactive (NASDAQ: MERQ), and Ballard Power (NASDAQ: BLDP). Despite relatively high valuations, these high-volatility stocks had been managing to hold steady during selloffs and lead the rallies. However, with the sweeping market carnage over the past week, they are now being killed like everything else. Nevertheless, I will continue to watch these stocks closely once the markets appear to be turning. Unfortunately, I won't be at this week's OIN Seminar. I'm sure it will be fantastic, and I regret not being able to be there. But I plan to attend the next one -- hopefully this fall. *************************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: ***** PMI $63.70 -1.91 (-1.10) PMI has provided call players with Good opportunities since we picked it at $59.75. However, all good things must come to an end, and PMI is no exception. The IUX.X collapsed below support at 725 this morning, and PMI fell below support at $65, and then $64. While PMI is still in an upward trend, the stock closed below our stop at $64, and thus, we are taking our gains and dropping the position tonight. FDC $58.41 -1.38 (-1.05) FDC made another attempt to rally past $61 on Monday before the market collapsed in the afternoon. On Tuesday, FDC fell to support at $59, which held up pretty well during the carnage in the broad sectors. However, the selling took control toward the end of the day, and overwhelmed FDC. While the stock may likely recover in the near term, FDC closed below our stop level at $58.50, and we are dropping it tonight. MO $44.51 -1.68 (-3.24) The general premise behind our MO play was to play defense from the long side, as Phillip Morris is viewed as a defensive company in times of economic uncertainty and/or contraction. Although our premise was, and still is, correct, MO has slid lower as institutional investors have been raising cash through selling virtually all equities, including MO. As such, the selling continued during Tuesday's session and MO fell below our downside stop at the $45 level. Its violation of $45 has forced us to drop coverage on MO this evening. Use any pop back above $45 to exit any open positions if the break below our stop Tuesday didn't already. USAI $22.00 -1.44 (-1.94) USAI fell victim to widespread selling in equities Tuesday. On a side note, the sell-off in USAI came on relatively light volume, which lends to our market-related weakness hypothesis. Nevertheless, USAI did close below our recently-raised stop at the $23 level and we're dropping coverage tonight in an attempt to cut losses quickly and manage risk effectively. Use any rebound off the $22 level early Wednesday to exit any open positions. PUTS: ***** No dropped puts tonight ************************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. 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The Option Investor Newsletter Tuesday 04-03-2001 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/040301_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 ******************** COF $53.85 -2.30 (-1.65) Despite a steep drop in peer AXP yesterday due to an earnings warning, shares of consumer credit giant COF were able to end the day in the positive, closing up 1.17 percent on 1.65 times the ADV. There were two factors contributing to this. First of all, AXP's woes were due to junk bond losses, an area where COF has little if any exposure. As well, Lehman Brothers re-iterated their Strong Buy rating, citing that the company would generate higher than expected growth in loans during what is a traditionally weak quarter. With the broader markets in steep decline today, COF succumbed to the selling pressure, pulling back 4.1 percent. However, volume was only average and at present, its up-trend is still intact. Aggressive traders may look for bounces off support at our closing stop price of $53 as a potential entry point, but confirm with volume. A strong break above the 5-dma at $54.69 would allow more cautious traders to enter. Just keep an eye on other companies in the Financial sector such as C and PVN. WFC $48.95 -0.74 (-0.54) Amidst one of the worst sell-offs we have had so far this year, WFC held up comparatively well. News was released this week regarding Berkshire Hathaway's purchase of $3.4 billion worth of WFC helped, as well as an upgrade of WFC by Salomon Smith Barney. Salomon analysts stated in a research report that money center names should begin to strengthen in the next couple of months. WFC actually dipped to strong support at $48.24 in the late afternoon, but rebounded to close at $48.95, which is testimony to its strength. WFC is one of the few stocks which is still above its 200-dma of $46.83. A move above resistance above the 50-dma of $49.34 could be an entry point for conservative investors. Alternatively, traders could take positions at current levels if BIX.X is exhibiting strength. We are keeping stops at $48, so close positions if WFC closes below this level. ******************* PLAY UPDATES - PUTS ******************* OPWV $14.10 -4.15 (-4.87) A double top and subsequent failed rally at $20 on Friday and Monday correlated to a failed rally in the QQQs near the $40 level. When OPWV failed to hold at $18 on Tuesday, the stock collapsed as the major indexes sold off. Another failed rally past $15.25 towards mid-afternoon led to OPWV establishing a new 52-week low. At this point, the Nasdaq is heavily oversold and we may have a relief rally in the near future. Nonetheless, it will take more than a simple relief rally to salvage OPWV. Put players can continue to take positions from further failed rallies from the $15.25 level. A drop below $14 on heavy volume would be an entry point for more conservative put players. In light of market action, we are moving stops to $18 to protect gains. Traders should close positions if OPWV settles above this level. AETH $9.34 -1.66 (-3.66) It appears that no news is bad news in the case of AETH. Aside from Monday's release of its SEC Form 10-K and recent insider trading report, the company has been quiet so far this week. As mentioned in Sunday's write-up, a share lockup expiry in late February has resulted in an increase in float of 35 percent. In looking at the insider trading data, it is apparent that the sellers are wasting little time. This being the case, we could expect continued significant selling pressure ahead. The stock fell $2 or over 15 percent yesterday and while volume was about average, the bears picked up the pace today, dropping AETH over 15 percent again on almost 1.2 times the ADV. Now in the single digits, a break below $9 would allow for an entry on weakness while aggressive traders may target resistance at $10, $11 and the 5-dma at $11.86. Track sector sentiment by following peers CMVT and OPWV and make sure AETH continues to close below our lowered stop price of $11. ISSX $20.09 -6.63 (-7.27) Up until today, ISSX had been fairly quiet for the past few sessions, trading in a range between support at $25 and resistance overhead at $30 on relatively low volume. This sideways movement allowed enough time for the stock's short-term moving average resistance levels to catch up. ISSX closed down 2.34 percent on light volume yesterday, in continuation of the agreement formed between the bulls and bears as to a fair price for shares of the Internet security provider. However, with weakness in NASDAQ and Internet stocks today, ISSX plunged almost 25 percent on over three times the ADV, putting our put play deep into the heart of profitable territory. Further selling leading to a bearish plunge below the psychological $20 level would allow the risk averse to enter on weakness while bounces leading to rollovers at $22.50, $25 and our closing stop price of $26 may provide higher risk players with targets to shoot for. Correlate entries with movement in sector sisters CHKP and VRSN. DPMI $40.50 -1.42 (-3.04) DPMI had been making a pattern of lower highs for the last several weeks. A failed rally from $45 on Friday turned out to be an excellent entry point, as it coincided with a drop in the SOX.X below 550. When the SOX.X dropped below 500, DPMI dropped below $42, and has so far held at strong support at the $40 level. However, if we experience additional weakness in the SOX.X, $40 could very well collapse. Unless we have some positive news or visibility from some of the chip stocks, this scenario is possible. Conservative traders might want to wait for a break below $40 on heavy volume before taking positions. Aggressive traders could take positions upon a roll over from $42, if the Nasdaq and SOX.X are experiencing weakness. We are moving stops to $43, so exit positions if DPMI closes above this level. AMGN $54.69 -2.31 (-4.69) Our put play for Amgen worked out just as we planned it. On Monday morning, the BTK.X attempted to rally past 450 and collapsed with the broad market indexes. A downgrade of several biotech stocks by Lehman Brothers helped to initiate a sell off. Following this, AMGN attempted to rally past $58.63, and subsequently fell below $58 to support at the $56 level. On Tuesday morning, AMGN made a classic failed rally past a lower high at $58, and heavy selling followed. BTK.X fell all the way to 411 today, and made an attempt to rally toward the close. We will have to wait until tomorrow to see if the index can through. However, AMGN only reached $55 at the close, which does not bode well for the stock going forward. Aggressive traders could take positions upon a failed rally past $56. A fall below the $50 level would be very bearish, and could possibly take AMGN all the way down to $45. At this time, we are moving the stops to $58, so close positions if AMGN closes above this level. NSM $24.20 -0.06 (-2.55) The chip stocks were somewhat buoyed in Tuesday's session from what appeared to be short covering. For its part, NSM consolidated around above the $24 level in a tightening range into the close of trading. The stock's tightening range is a classic sign of consolidation and could very well portend another leg lower. The apex of NSM's consolidation is at roughly $24.25, which could prove to be an excellent entry into the play. For more conservative bears, wait for NSM to break below the $24 level on increased volume before initiating new positions. Moreover, confirm weakness in the SOX. We have lowered our stop on NSM to $25 in an attempt to lock in the gains we've earned since initiating coverage on the play at $26. SONS $13.88 -4.44 (-6.06) SONS was hammered in Tuesday's session in the wake of myriad earnings warnings and analyst downgrades in the networking sector. The stock plunged on heavy volume to a new 52-week low and appears to have more downside. While SONS has dropped to the low teens, and little juice remains in the stock for the shorts, it may work its way to the $10 level, which will provide existing put holders with additional profits. New positions may be added at current levels, but traders should be aware that the risk in doing so has increased after SONS' big drop Tuesday. Finally, we're lowering our stop on SONS to $17 in order to lock in gains, while giving the stock room to work lower. XLNX $31.44 -1.69 (-3.69) Although the broader chip sector traded relatively well Tuesday - all things considered - XLNX did continue to work lower on heavy volume. In fact, we're happy with the steady descending trend in XLNX and the heavy trading on which it's taking place. As just mentioned, XLNX is in an eight-day descending trend, with the upper range of that trading located around the $33 level and the lower end now established at $31. As such, traders can look for entry points either near $33 on a rollover or on a break below the $31 level depending upon individual risk tolerances. ************************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: AEP - American Electric Power $48.02 +0.41 (+1.02 this week) American Electric Power is a multinational energy company based in Columbus Ohio. AEP owns and operates more than 38,000 megawatts of energy, making it one of America's largest generators of electricity. The company is also a leading wholesale energy marketer and trader, ranking second in the U.S in electricity volume. AEP provides retail electricity to more than 9 million customers worldwide, and has more than $55 billion in assets, primarily in the U.S, with holdings in select international markets. Wholly owned subsidiaries are involved in power engineering, construction services, energy management, and telecommunications. While many of the traditional safe havens, like pharmaceuticals and consumer staples got slaughtered today, the electric utilities were one of the few positive sectors amidst the selling in the major indexes. Last Friday, the utility sector, UTY.X surged through its 50 dma of 359.86, while AEP powered through its own 50 dma of $45.37, and hasn't looked back since. Investors are currently realizing that the demand for energy in its various forms has never been higher. The California energy crisis has heightened the public awareness of the vast shortage in the supply of energy in certain states. In addition, several significant news items have been released in the last few weeks, which acted as additional catalysts to spur the sector to new heights. The governor of California has ordered an accelerated approval process for the development of new power plants in the state. Calpine corporation, an independent power producer, stated that their earnings would be above analysts expectations. On Tuesday, Berkshire Hathaway disclosed that they had purchased shares of GPU, a New Jersey electric utility. In addition, AEP shares rallied on the news released on Monday that Entergy and FPL, two rival electrical utilities, had called off their proposed merger, which could have been a potential competitor to AEP. AEP has formed a strong upward channel since March 22, and is now encountering heavy resistance at the $48 level, which it was unable to penetrate in December and February. A strong move above $48 with heavy volume would be a good entry point for conservative call players. Traders could also take a position on a pull back to $47.50, if UTY.X is rallying. Watch others like EXC and NGG for sector strength, and close positions if AEP closes below our stop level of $46. BUY CALL APR-45*AEP-DI OI=199 at $3.50 SL=1.75 BUY CALL MAY-45 AEP-EI OI=845 at $4.00 SL=2.50 BUY CALL MAY-50 AEP-EJ OI=437 at $1.05 SL=0.50 High Risk!! http://www.premierinvestor.net/oi/profile.asp?ticker=AEP EQT - Equitable Resources, Inc. $70.59 +1.33 (+1.59 this week) Equitable Resources is an integrated energy company with emphasis on Appalachian area natural-gas supply, natural-gas transmission and distribution, and leading-edge energy-management services. Equitable Resources, its divisions and its subsidiaries, offer natural gas products and energy services to wholesale and retail customers through three business segments: Equitable Utilities, Equitable Production and NORESCO. NORESCO provides energy-management services for projects across the United States and in selected international markets. The division focuses on energy infrastructure, performance contracting, and power quality related projects. In a market that seems bent on making new 52-week lows, EQT stands out as an exception, bullishly charging up to new all-time highs. One of the main reasons for this is the company's consistent stream of stellar earnings reports. EQT last reported in early February, with a 71 percent rise in EPS due to increases in production, energy prices and efficiencies in operation. During the conference call, the CEO offered optimistic comments going forward. At a time where lack of visibility seems to be the mantra on Wall Street, this news was warmly welcomed. Despite a downgrade last Thursday from JP Morgan from a Buy to a Long Term Buy rating, shares of the energy provider continue to move up on increasing volume. After struggling twice with formidable resistance at $67, it appears that the third time was a charm. With this level now breached, the stock will now likely find support at this point. It is here that we are drawing our lines in the sand, placing a protective stop. Make sure that EQT continues to close above this level. When considering an entry, track movement and direction in industry peers DYN and SRE to ascertain sector sentiment. Aggressive traders may target pullbacks intra-day to support at $70, the 5-dma near $69, $68 and the 10-dma just above $67. The more cautious may want to wait for buying volume to continue, taking EQT above $71 with conviction before taking a position. BUY CALL APR-65 EQT-DM OI=460 at $6.40 SL=4.50 BUY CALL APR-70*EQT-DN OI=111 at $2.75 SL=1.25 BUY CALL MAY-70 EQT-EN OI= 15 at $4.40 SL=2.75 BUY CALL MAY-75 EQT-EO OI=100 at $2.15 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=EQT LOW VOLATILITY: WR - Western Resources $24.15 +0.85 (+0.30 this week) As a consumer services company, WR primarily provides electric generation, transmission and distribution services to approximately 628,000 customers in Kansas and monitored services to approximately 1.6 million customers in North America and Europe. Rate-regulated electric service is provided by KPL, a division of the company, and Kansas Gas and Electric, a wholly-owned subsidiary. Monitored services are provided by Protection One, Inc., of which WR has an 85% ownership stake. Additionally, through its partial ownership of ONEOK, Inc., WR is involved in natural gas transmission and distribution services to approximately 1.4 million customers in Oklahoma and Kansas. The well-publicized energy crunch is having a deleterious effect on most sectors of the economy, with one exception; those companies involved in the supply of that energy to consumers. Utilities are one of the few sectors in the market that hasn't been decimated lately, and WR has been holding up nicely along with it. After a dip near $22 a couple weeks ago, the stock has been marching upwards, along with the strength in the broader sector. The plain and simple fact is that it provides two commodities that people are hesitant to cut back on, even in tough economic times; energy and security services. After confirming support near $22, WR has quickly come back up near the $24-25 congestion zone, and as investors look for a safe place to put their money in these perilous times, the stock seems to be attracting their interest. WR is a thinly traded stock, (with thinly traded options, to boot), but should provide some attractive profits in the current market environment. There was a bit of uncertainty after the company announced earnings last Friday, but the action this week seems to indicate that investors like what they heard. And why not? Earnings for the year ended December 31st, 2000, were $1.96, versus a paltry $0.20 in the year-ago period. Technically the stock is looking solid as well, with a nice cup-and-handle formation on the weekly chart pointing to a coming rally that should push through the $25 level in short order. Support at $23 (also the location of our stop) will provide attractive entries for aggressive traders should we get a mild pullback and bounce. More conservative traders may want to wait for a move through $25 before taking a position. Monitor the Dow Jones Utility index (UTY.X) for continued strength, confirming the strength in WR before playing. BUY CALL APR-22.5 WR-DX OI= 0 at $1.85 SL=1.00 Wait for OI!! BUY CALL APR-25 WR-DE OI= 10 at $0.35 SL=0.00 High Risk!! BUY CALL MAY-22.5*DD-EX OI= 29 at $2.10 SL=1.00 BUY CALL MAY-25 DD-EE OI=162 at $0.50 SL=0.00 ************* NEW PUT PLAYS ************* AGGRESSIVE: CMVT - Comverse Technology, Inc. $48.69 -6.49 (-10.20 this week) Comverse Technology Inc. is the world leader in multimedia telecommunications applications. Founded in 1984 and publicly-traded since 1986, Comverse Technology Inc. is based in Woodbury, Long Island, New York and is a NASDAQ-100 Index company. Through its Comverse Network Systems division, the market leader, the Company markets its Access NP and TRILOGUE Infinity Enhanced Services Platforms, which enable wireless, wireline, and internet companies to offer, to their residential and business customers, a growing range of revenue-generating enhanced services. Readers who have been following our highly successful put play in Aether Systems will no doubt have noticed that negative sentiment and selling pressure in the Wireless Software space has been formidable indeed. Slower than expected deployment of next generation wireless networks, continued concerns in the business models of firms in this sector and the extreme optimism that has now turned to pessimism have all played a role in the decline of CMVT. It appears now that the negative momentum is feeding upon itself, as even positive comments from analysts are not helping the stock to find a bottom. US Bancorp Piper Jaffray recently re-iterated their Strong Buy rating on CMVT, along with a $95 price target, citing new contract wins and continued traction for CMVT's products as reasons to like the stock. WR Hambrecht followed suit with Buy rating and a $75 price target. This led to a bounce last Thursday, upon which the bears sold deeply into what little strength the bulls could muster. Today, the stock plunged sharply, losing almost 12 percent on over 1.45 times the average daily volume. Further selling leading to a break below today's intra-day low of $47.61 could allow conservative traders to make a play, but confirm with volume. For higher risk players, oversold bounces leading to a rollover upon encountering resistance at $50, $51, $52.50, $55 and our closing stop price of $57 may provide potential entry points. Keep an eye on competitors AETH and OPWV to gauge possible movement and direction before jumping in. BUY PUT APR-50*CQV-PJ OI=3942 at $5.10 SL=3.00 BUY PUT APR-45 CQV-PI OI=1067 at $3.10 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=CMVT ********************* PLAY OF THE DAY - PUT ********************* AETH - Aether Systems Inc. $9.34 -1.66 (-3.66 this week) Aether Systems Inc. is a leading provider of wireless and mobile data products and services allowing real time communications and transactions across a full range of devices and networks. Using its engineering expertise, the ScoutWare family of products including the Aether Intelligent Messaging (AIM) software platform, and its network operations and customer care center, Aether seeks to provide comprehensive, technology independent wireless and mobile computing solutions. Aether develops and delivers wireless and data mobile services across a variety of industries and market segments both in the United States and internationally. Most Recent Write-Up It appears that no news is bad news in the case of AETH. Aside from Monday's release of its SEC Form 10-K and recent insider trading report, the company has been quiet so far this week. As mentioned in Sunday's write-up, a share lockup expiry in late February has resulted in an increase in float of 35 percent. In looking at the insider trading data, it is apparent that the sellers are wasting little time. This being the case, we could expect continued significant selling pressure ahead. The stock fell $2 or over 15 percent yesterday and while volume was about average, the bears picked up the pace today, dropping AETH over 15 percent again on almost 1.2 times the ADV. Now in the single digits, a break below $9 would allow for an entry on weakness while aggressive traders may target resistance at $10, $11 and the 5-dma at $11.86. Track sector sentiment by following peers CMVT and OPWV and make sure AETH continues to close below our lowered stop price of $11. Comments Unproven tech companies have been seeing the worst of the market selling. AETH happens to be one of them. Today marked an all-time low for AETH as the stock was introduced to single digits. While cheap, we still see the stock going to new lows and the next logical level would be $5. Entries can be attained on a rollover from $9.75, which was intraday resistance today. A breakdown through $9 on strong volume would also afford entry. BUY PUT APR-12.5 HIZ-PV OI=270 at $3.88 SL=2.25 BUY PUT APR-10 *HIZ-PB OI= 48 at $2.13 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=AETH ************************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: A Review of Strategies and Position Management By Ray Cummins The Options Market is unique because it offers a variety of ways to profit. At the same time, the risk in some positions can be substantial and as a trader, your primary goal must always be to maximize returns and preserve capital. The easiest way to achieve this objective is to become familiar with reliable strategies and acquire the knowledge to implement and manage them correctly. Defining Your Approach The principal requirement for profitable trading is the ability to achieve acceptable returns and control risk effectively. A thorough and deliberate approach to strategy selection is the first step in the process. After the principal techniques have been identified, it is crucial to execute them with discipline and consistency. Discipline in option trading is the ability to maintain self-control and implement a pre-determined plan. The most difficult skill that traders must learn is the ability to overcome human (emotional) impulses. When real money is at stake, the influences of greed and fear (of loss) will attempt to sway your judgment, hindering a rational thought process. If you can not overcome these effects, the chances of success are slim. In fact, that is the primary reason it is so important to utilize strategies that promote a mechanical approach to trading. These types of techniques offer little opportunity for indecision and generally provide more consistent returns as they are exposed to less risk than those with a high level of maintenance. Using a proven trading system is one of the best ways to become successful in the market. A plan of attack helps novice traders learn proper money management and the correct use of technical analysis in identifying precise entry and exit points. Trading in a systematic manner is far more likely to produce consistent profits than a scheme based on intuition, emotion or the trend of the day. The benefits to this approach are many but most importantly, you can eliminate the guesswork that comes from trying to manage an active position without realistic goals or loss limits. The targets and exit strategies are predefined, leaving no doubt as to when and how to get out of a position if the market moves against you. Potential risk is identified prior to beginning the trade, with a fixed limit on maximum losses and a formula for taking profits. There are no positions initiated without a complete assessment of the capitalization necessary to carry out the entire strategy, even in the worst case scenario. A thorough study of the underlying issue’s historical data is used to provide objective goals for future movement, based on expected volatility and technical indications. With all of these elements properly evaluated and arranged, you can develop an effective plan that contains a suitable risk-reward outlook based on appropriate strategies that are compatible with your personal trading style. A major stage in developing a practical method for participating in the market is to determine your comfort threshold and stress level. Think about the unique emotional effects of your trading activities and managing a complex portfolio. Are you ordinarily a cautious person or do you feel comfortable traveling at warp speed? How will a specific type of trading affect you mentally? Can you handle the volatility of day-trading options or are you happier with conservative, longer-term plays. After you identify the appropriate trading attitude, it is important to decide what type of market activity is most favorable to your personal style. Some traders prefer strategies that profit from trending markets such as those characterized by a sustained advance or decline. Techniques that benefit from this type of movement include Put or Call buying and high-potential spreads or combinations. Another tactic might be to focus on changes in volatility. Traders using this approach buy or sell premium in an attempt to profit from transitions in market character. Some utilize neutral positions such as calendar or ratio spreads when the technical outlook for the underlying issue is range-bound or static. Regardless of the method you prefer, each category of price action demands a unique type of trading system. The key to success is to specialize in a specific kind of market activity and utilize trading strategies that perform well in that particular environment. One of the most important steps in developing a profitable system is identifying the appropriate level of complexity when selecting trading techniques. The simplest approach is most often the best but every strategy has risk and it is impossible to classify any particular technique as the absolute perfect method. In most cases, there is more than one favorable technique and even though each strategy has different attributes, they can all be useful in a trader's arsenal at the proper time. The easiest way to become successful is to become completely knowledgeable of the mechanics of any technique that you are using and then construct a group of diverse candidates based on the correct market outlook. Of course, you must remember that the individual investment objectives are far more important than the merits of the technique itself. If a specific strategy is not suitable for you or your trading style then it should not be used, no matter how attractive it appears. In addition to selecting the proper trading techniques, you must also identify the appropriate time frame in which to participate in the market. Most investors are suited to longer-term plays as they require less attention and are easy to manage for those who have full-time commitments to work or family. Traders who have the temperament and resources to follow the markets at all hours should consider short term techniques based on intra-day data and momentum-based trends. Using the appropriate strategy when the markets dictates action is the fundamental step in developing the ability to trade in a disciplined manner. After you have identified the characteristics of the market and selected the correct technique to profit from future trends, the next task is to determine specific entry and exit points for the underlying instrument. In most cases, technical analysis should be used to ascertain the correct parameters for risk and reward. With this approach, a simple mechanism for money management is built into the initial position. Entry timing can be based on a number of different indicators and the criteria used to identify a trading opportunity is a personal choice. The great thing is, you don't have to open any position until you are satisfied with the probability of a profitable outcome. You can search through charts for the perfect pattern, perform extensive due-diligence, and wait for the best combination of technical indicators and favorable market conditions. In short, you can forego any trade until the number of reasons to participate becomes overwhelming. Remember, the market does not care whether you play along or sit on the sidelines. In addition, when you trade without a system, it's amazing how confusing the situation can become. Once you are committed, you are playing by the market’s rules, not your own. Strategy Selection Profitable trading strategies have a number of common traits; precisely defined principles, ease of execution and flexibility. However, the most important characteristic for the majority of investors is asset preservation. In the options market, the most successful systems are those which employ effective defensive measures. The ability to protect and conserve portfolio capital, while achieving consistent returns is a fundamental quality of any profitable technique. Fortunately, numerous option-trading strategies satisfy this criteria and our goal at the OIN is to help novice investors discover the most appropriate combination of trading techniques and provide them with the tools necessary to profit on a regular basis. The majority of option traders use derivatives to speculate on the directional movement of stocks. The appealing feature of option ownership is leverage with limited risk. If a trader correctly predicts the market direction and takes the appropriate position, he can expect to make a profit. Unfortunately, that technique has a relatively low probability of success. As all option traders quickly discover, owning the correct position (CALL or PUT) when the market moves in the predicted direction will not necessarily be profitable. The reason is, over short periods of time (while the trader is waiting for the option to rise in value), the position is at risk from a variety of changes in the market. One method that experienced traders use to overcome this problem involves simple combination positions or "spreads." Spread trading is one way to take advantage of mis-priced options and premium disparities, while at the same time reducing the effects of short-term changes in market conditions so that a position can be held to maturity. Most successful option traders engage in some form of combination, position or spread trading. The basic technique involves buying and selling simultaneous (but generally opposing) positions in different option series. The most common strategies are used to reduce the cost, and the risk, of a position while providing a higher probability of a limited return. Other, more advanced methods of spreading are based strictly on pricing disparities. Experienced traders know there is an identifiable relationship between various option series and when the relationship appears to be mis-priced, they will buy the under-priced position and sell the over-priced position. The spread will profit as the prices of the instruments return to a linear relationship. The wonderful thing about option trading is its diversity. There are an incredible number of strategies available, one for every type of market trend, character and outlook. Positions involving combinations of calls and puts, with different strike prices and expiration months, along with index and futures options offer the astute trader a variety of ways to participate in the market. This assortment provides even the most conservative investor the ability to construct positions with an acceptable level of risk and reward in almost any situation. In addition, students of option pricing theory can identify combinations with potentially superior returns when the relationships between the options are theoretically skewed. While there is no "perfect" position, successful traders learn to maximize profits and hedge their risk in as many different ways as possible, limiting the effects of short-term volatility and market gyrations. Obviously, there is no way to completely eliminate risk but you can reduce it much more than that of a inexperienced trader who does not utilize all of the available strategies. Good Luck! Get 10 FREE Issues of Investor's Business Daily. No obligation. 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