The Option Investor Newsletter Wednesday 08-08-2001 Copyright 2001, All rights reserved. 1 of 1 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/1136_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 08-08-2001 High Low Volume Advance/Decline DJIA 10293.50 -165.24 10479.64 10267.97 1.11 bln 1193/1885 NASDAQ 1966.36 - 61.43 2038.64 1958.67 1.64 bln 1224/2447 S&P 100 607.53 - 11.18 619.86 606.36 totals 2417/4332 S&P 500 1183.53 - 20.87 1206.79 1181.27 RUS 2000 472.62 - 7.71 481.73 471.54 DJ TRANS 2882.04 - 39.42 2931.05 2876.98 VIX 24.36 + 1.71 24.62 22.54 Put/Call Ratio 0.55 ****************************************************************** Beige Blues Cisco's (NASDAQ:CSCO) report didn't do much to inspire the bulls. But the Fed's Beige book certainly piqued the interest of the bears. Make it four in a row for the Nasdaq. Cisco's conference call Tuesday night and its CEO's subsequent appearance on CNBC did little in the way to appease market participants. The company delivered results that were dismal and offered guidance that was equally dismal. Bulls had been betting on Cisco to deliver the catalyst that would perpetuate the Nasdaq's advance up through last week. OI was in on that bet, playing Cisco last week as it advanced above the $20 level. But the company's failure to deliver the proverbial shot in the arm to the tech sector resulted in a loss of bids Wednesday. In addition, analysts across the Street who'd been itching to upgrade the stock instead opted for reducing future revenue and earnings estimates. The ramifications of Cisco's failure to deliver were spread from shares of its suppliers such as Xilinx (NASDAQ:XLNX) to its competitors such as Lucent (NYSE:LU) and Nortel (NYSE:NT). Referring to the latter, Cisco chief, John Chambers, made it clear that his company was flush with cash and steadily taking market share from its competitors, which makes Cisco a long-term winner. In the meantime, the consensus among market participants is that there's no real compelling reason to buy the stock at current levels. The market's inability to hold onto its gains early Wednesday, in the wake of the Cisco effect, was made worse following the Fed's release of its Beige Book. The Beige Book is in essence a nationwide survey of the economy that is released eight times per year. The Fed's report revealed further deterioration in the manufacturing segment of the economy, along with continued sluggishness in the retail sector. The latter of which is most disconcerting because the U.S. consumer has been adopted as the backbone of the economy. Even Chambers commented Tuesday night on the need for the U.S. consumer to continue spending in order for the economy to stay afloat. The Beige Book reported that weakness was seen across the broader spectrum of the retail sector, with discount merchants fairing marginally better. Furthermore, some reported that orders for inventory were running lower than last year due to lower forecasted demand during the holiday season. The Beige Book's suggestion of a weakening consumer was enough to scare the bulls and inspire the bears Wednesday afternoon, which was part of the reason for the rapid sell-off across the broader market averages Wednesday. One needs only to look at an intraday chart of bond yields to gauge the rapid flight from equities following the release of the Beige Book. Granted, there was an $11 billion government offering of 10-year notes Wednesday that received the most investor interest witnessed in eight years. The demand for the new issue, in turn, precipitated a large short covering rally in bonds. And some of that capital to cover bonds could've come from the equity markets, exacerbating the slide in stocks. Moreover, the underlying theme of tame inflation as reported by the Fed also contributed to the rally in bonds and the inverse decline in yields. With that all being the case, perhaps the most disconcerting aspect of the bond market rally Wednesday was that is suggested market participants are growing increasingly risk averse. (Of course that much is only disconcerting to the bulls in stocks.) Short covering, huge demand for new issues, and falling yields all point to market participants' preference for bonds over stocks, at least over the short-term. On the other hand, the one positive that can be taken away from the Beige Book and, indeed, the bond market rally Wednesday is that inflation remains a moot point. And because of that along with the continued deterioration of the U.S. economy, the Fed may be more willing to lower rates beyond 3.5 percent, which seems to be the current consensus for the final resting place of Fed Funds during this cycle of benign monetary policy (Fed Funds are currently 3.75 percent). As we approach the August 21 meeting, the topic of further rate cuts could act as a catalyst. Then again, up until this point, the Fed - and its rate cuts - has been a moot point. Investors' collective aversion to risks in equities was furthered with Merrill Lynch's downgrade of several European telecom carriers, including heavyweights Deutsche Telecom (NYSE:DT) and France Telecom (NYSE:FTE), both of which trade as American Depository Receipts (ADRs) on the NYSE. The downgrade, on top of the Cisco impact, resulted in continued selling in those stocks closely tied to the telecom business. In other tech-related mishaps, Emulex's (NASDAQ:EMLX) warning Tuesday night impacted shares of data storage companies, ranging from the 600 lb gorilla in Emc (NYSE:EMC) to software maker Veritas (NASDAQ:VRTS). And Nortel announced after the bell that it would sell $1 billion in convertible notes, which should pressure shares as arbitrageurs take hold. But not all news was of the negative nature Wednesday. Waste Management (NYSE:WMI) reported numbers that were more or less inline with estimates. Analysts voiced concerns over the impact of a slowing economy on Waste Management's revenue growth, which may have attributed to its shares modest dip. But I see an awful lot of those big green and yellow trucks driving around the streets of Denver, so maybe Waste Management will continue to deliver solid earnings. At any rate, its stock has performed relatively well recently, up about 30 percent from its April lows. Despite the Beige Book's suggestion of a weakening consumer, there were a handful of retail stocks that reported otherwise. Land's End (NYSE:LE) recorded 10 cents per share in profits, while consensus estimates had the company pegged to earn 1 cent per share. The finished almost 5 percent higher. And, Ralph Lauren (NYSE:RL) reported numbers that were inline with estimates in addition to reaffirming its previous guidance. Shares of Ralph Lauren finished over 8 percent higher. But despite the positive reports from the two aforementioned retailers, the Retail Sector Index (RLX.X) finished lower by more than 1 percent. In fact, of the 25 sectors I follow on a daily basis, only one finished in the green Wednesday: Gold and Silver Sector Index (XAU.X). The widespread weakness across the vast majority of narrow based indexes caused the major market averages to fall below key support levels. For its part, the Dow closed below 10,300 and has support below around 10,230. The Nasdaq closed below the psychologically significant 2000 level, but bounced from its support zone around 1950. Traders will be watching that general area closely Thursday for further signs of weakness in the tech laden index. What's more, the internals of both the NYSE and Nasdaq markets echoed the negative price action of the indexes. And volume increased with Wednesday's weakness, which can be viewed as a cause for concern. As Jim suggested Tuesday, the Nasdaq will remain in a basing mode as long as the 1950 level holds. And that in itself could be enough for the bears to capitulate. Otherwise, a retest of April's lows could be in the cards. Without a compelling reason to buy stocks, the market averages could be headed for further weakness in the short-term as the economy continues to churn through this period of post excess. Eric Utley Option Investor **************** MARKET SENTIMENT **************** The Old One-Two Punch By Jeffrey Canavan Cisco delivered a left hook to market's chin right at the opening bell. The market was a little dazed and confused, but managed to stay on its feet. Stocks even managed to fight back, and deliver a few bullish blows themselves. But then they looked down for a second, and the Fed landed a haymaker that knocked stocks to the canvas. The Fed's haymaker was the latest edition of its beige book, which is a survey of economic conditions that the Fed uses for setting interest rates. The gist of the book is that this economic downturn is going to make the great depression look like a picnic. Okay, it wasn't nearly that bad, but when investors are as nervous as a long-tailed cat in a room full of rocking chairs, it doesn't take much to start a selling spree. The Fed basically said that manufacturing continues to weaken, that weakness is starting to spill over into other sectors, and retail sales are sluggish. For the full story go to: http://www.federalreserve.gov/fomc/beigebook/2001/20010808/default.html If retail sales were in fact sluggish, we should find out tomorrow when July retail sales are released. Should the numbers confirm that consumer spending is waning, retail stocks, and the rest of the market, could be in for a rough day. Retailers weren't the worst sector today, but the Retail Index did lose 2.5% in the last two hours of trading. What was the worst sector of the day was oil service, followed closely by software, networking, and semiconductors. Internet and biotechnology was also bruised and battered, and the only sector left standing at the end of the day was gold and silver. So is the market down for the count? It might need a standing eight count, but there are a lot of rounds to go. The question is whether the market has the chin of Rocky Balboa or Trevor Berbick. After suffering a second round knockout at the hands of Mike Tyson, Trevor Berbick was asked by a report what he thought of the fight. His response was, "I like eggs." Hopefully the market can take a punch better than that. ***** We are continually looking for ways to improve upon our product. In that vein, we'd like to hear from our readers about what they'd like to see in the Market Sentiment section of the newsletter. Questions, suggestions, and complaints are encouraged: eutley@OptionInvestor.com *************************Sector Watch**************************** Weekly Daily Overbought Support Resistance Trend Trend Oversold DJIA Bearish Bearish Neutral 10,200 10,600 NASD Bearish Bearish Neutral 1,940 2,125 S&P 500 Bearish Neutral Neutral 1,170 1,240 Rus 2000 Neutral Neutral Neutral 465 495 The daily trend of DJIA and NASD have been changed to bearish after dropping below their 25-day moving averages, and breaking their up trends. Overbought/Oversold status is neutral, but rapidly approaching oversold. Weekly Daily Overbought Support Resistance Trend Trend Oversold Semis Neutral Neutral Neutral 535 660 Biotech Bearish Bearish Oversold 490 550 Internet Bearish Neutral Overbought 140 170 Networking Bearish Neutral Neutral 300 365 Software Bearish Bearish Oversold 180 200 Banking Bullish Neutral Overbought 640 675 Retail Bullish Neutral Neutral 875 920 Drugs Neutral Neutral Neutral 380 410 Keep and eye on software and biotechnology tomorrow. Both sectors are sitting right at support. Semiconductors broke through their support level today. Internet and networking continue to trade sideways, thus their neutral trend ranking. Percent Change Last Last Last Rel Strength Point and 5 Days 10 Days 30 Days vs S&P 500 Figure Signal DJIA (0.6%) 2.1% (0.4%) Neutral Buy NASD 0.0% 3.5% (1.1%) Neutral Sell S&P 500 (0.6%) 2.8% (1.2%) N/A Sell Rus 2000 (0.9%) 1.3% (0.8%) Neutral Sell Semis 1.5% 12.1% 2.1% Positive Buy Biotech (3.0%) 3.6% (11.6%) Neutral Sell Internet 4.1% (1.1%) (16.2%) Negative Sell Networking 2.0% 8.8% 0.3% Neutral Buy Software (1.0%) 4.8% (11.0%) Neutral Sell Banking 1.0% 4.1% 2.8% Positive Buy Retail (1.0%) 2.6% 3.8% Neutral Sell Drugs (1.2%) 3.3% (0.5%) Neutral Buy ***************************************************************** *********** OPTIONS 101 *********** More on Entry Points - The Covered Call By Mark Phillips As the month of August meanders along, it is becoming increasingly clear that we are in an ever-tightening rangebound market. Either we will continue along the current sleep-inducing course, or we will break out of the pattern. Profound, huh? If I were an analyst for Merrill Lynch or Prudential, that insightful statement would earn me a fat 6 or 7-figure salary. In all seriousness, the rangebound market has to break eventually -- the question that is on all of our minds is WHEN? If we knew that, we could move our investments into cash, take a relaxing vacation until just before the glorious day arrived, return and make a killing. Hmmmm...have you noticed the anemic trading volume lately? Maybe that is precisely what the pros have done this month...just a thought. But as long as this rangebound market endures, conservative strategies like writing covered calls are likely to shine for us. But when the market or stock we are following trade in such a narrow range, entry points must be precise and well-considered. To that end, we spent our time together last week detailing the ingredients necessary for opening the long leg of our LEAPS covered call position. Using the recent LEAPS Portfolio entries in Cisco Systems (NASDAQ:CSCO) and Sun Microsystems (NASDAQ:SUNW) as examples, I think we built a model of how we can play even beaten down Technology stocks profitably. In a nutshell, we wait for weekly and daily Stochastics to bottom in oversold and for the daily Stochastics to emerge from oversold as the stock bounces from major support. Sounds simple, huh? Actually it is, as we showed last week, but it requires patience, a quality in short supply (at least in my house) as we wait for our entry parameters to be satisfied. If you missed last week's article, I would recommend taking a look before proceeding with the remainder of tonight's article. It can be accessed from the following link: More on Entry Points Proving its utility, the daily Stochastics gave us solid long-term entries on both CSCO and SUNW, letting us into the plays at $16 and $14, respectively. Then all we needed to do was wait for the daily Stochastics to rollover from overbought territory, accompanied by price weakness. With plenty of time available in our 2004 LEAPS, we are in no hurry to initiate the sale of the near-term calls and can wait for conditions to be right. We got a decent opportunity on CSCO last Monday as the daily Stochastics rolled down out of overbought territory, but a look at the big picture would have kept me on the sidelines for a wee bit longer. Although the price was showing some weakness, I had my eye on the company's earnings report set for yesterday. I was looking for one more push higher before the much-awaited announcement and was rewarded 3 days later on August 2nd. The price spiked through $20.50 before the sellers emerged and they stepped up their efforts earlier this week ahead of the company's earnings report. That gave us an aggressive entry (labeled:A) on the daily chart, and shown with multiple possible entries on the hourly chart. The high odds (read:conservative) entry would have been to wait for the rollover to commence before selling our calls and that event occurred this Monday as the price dropped back under $20. By that time, we could see declining peaks on the hourly stochastic, confirmed by the daily stochastic dropping out of overbought territory. So now that we are ready to sell those calls, the big question is "which ones to sell?". AUG or SEPT? $20 or $22.50? While there is obviously more premium available in the $20 strike, we need to keep in mind that we don't want to have to worry constantly about whether our sold call is going to expire in the money. That is enough to push me out to the $22.50 strike, as it appears highly unlikely (especially so, now that we have seen the market's reaction to the company's earnings report) that CSCO will move above that level in the near future. But looking at the current quotes (as of Monday), there just isn't premium in the AUG contract as there is less than 2 weeks until expiration. So by default, we find ourselves pushed into using the SEP-22.50 Call. Checking the quotes, we find that we can sell the calls for $0.65. Not a fortune, but it is more than 10% of what we paid for the 2004 LEAP and the first step on our long path to getting those CSCO LEAPS for free. In hindsight, we can see that we would have done much better selling the AUG-20 calls, but that was a more aggressive posture than we are currently targeting in our discussion here. In the end, strike selection comes down to a matter of personal preference. Since we are covering the details of entry points, let's move on to our next example and see what other lessons we can learn. SUNW also gave us a great long-term entry, when it fell to and bounced from the $14 level a couple weeks ago. This popular Tech stock helped to lead the NASDAQ on its recent assault on the 2100 level, and gave us a couple chances to sell covered calls this week as well. Note that the one-day dip last Monday wasn't severe enough to drag the daily Stochastics out of overbought territory, thus preventing us from taking a premature entry. But since then, the picture has improved significantly for call-sellers, giving us an aggressive entry last Thursday/Friday. A more conservative opportunity materialized today as the NASDAQ rebound fell apart and SUNW rolled over once again. After pushing through the $17.50 resistance level last Thursday, bulls starting hoping for the NASDAQ to continue its rebound through 2100. Aggressive traders could have sold calls on that late-day spike (circled on the hourly chart), but the conservative approach would have been to wait and see whether the stock was able to power through the next level of resistance at $18.25. Prices fell back at the open on Friday, but those aggressive traders had to sweat a little bit as the stock consolidated above the $17.50 level. This week has seen several attractive entry points, with the pullbacks from the $17.50 level early on Monday and Tuesday and the rollover today from just below $18. With the daily Stochastics in full roll now, we could have used any of the hourly stochastic rollovers as an opportunity to sell our calls. Obviously, today's rollover provided the best balance of risk and reward...isn't hindsight great? More than likely, I would have been in the play on Tuesday's morning rollover, so would have had to endure a bit of nervousness as prices surged ahead of CSCO's earnings report last night. Again, we have to go through the strike selection process and have almost the same limitations faced in the CSCO trade - namely August strikes have too little time premium to allow us to collect any meaningful premium without selling a strike that would be in danger of expiring in the money. But let's approach this one from the more aggressive perspective for educational purposes. Since time is on our side with only 2 weeks until expiration, let's target a near-the-money strike in August. Checking our quote service, we find we can sell the selected option for $0.60 as well, taking the first step towards financing that LEAP we bought a couple short weeks ago. While there are quite possibly better plays out there and many of you might have eked out a better entry than the potential ones I have outlined here, I think it should give you a good idea of what we are looking for in terms of entries for both legs of our LEAPS Covered Calls positions. We'll revisit both of these paper trades in the future and see how we fared in the light of history. It's hard to apply pure directional strategies in a rangebound market, but hopefully I've shown you how to use the tools at your disposal to carve out a modest profit center while we wait for the days of trending markets to return. The specific trades I have outlined in recent weeks are not really the important point. I really feel like I've accomplished something when I hear stories from you detailing how you have taken the lessons I provide and used them to create your own profitable trades. When you can do that consistently on your own, you will know you have graduated to the level where you are well equipped to direct your own financial future -- and that is a truly liberating place to be. Learn the lessons, do the research and then take the trade with confidence. Mark Contact Support ************* NEW CALL PLAY ************* No new calls tonight ************ NEW PUT PLAY ************ No new puts tonight ***************** STOP-LOSS UPDATES ***************** ADBE - put Adjust from $37 down to $36 CHKP - put Adjust from $46 down to $43 ************* DROPPED CALLS ************* JBL $29.11 -2.39 (-3.88) Investors ran from JBL Wednesday as the tech sector sank. The stock dipped below our stop at $31 early in the day and proceeded to trade and close below the $30 level. If its slide below $31 didn't allow for exit points, bullish traders with open positions should use any strength above $30 Thursday to get out of call plays. LXK $45.50 -3.71 (-1.13) Our recently added play on LXK didn't even get a chance to work for us. The stock gapped lower Wednesday morning and continued to trade lower throughout the day, ultimately closing below our stop at the $46 level. We actually would've liked to hold the play if it would've stayed above $36, in an attempt to gain a favorable entry point. But the fact that it closed below our stop is reason enough to drop coverage this evening. ************ DROPPED PUTS ************ JEC $55.17 +0.87 (+0.27) JEC managed to buck the broader market weakness Wednesday. The stock edged above our stop at the $55 level near the close of trading and, as such, we're dropping coverage on the play. Bearish traders who didn't get out of put plays Wednesday can use any weakness below the $55 level early Thursday to exit plays. ********************* PLAY OF THE DAY - PUT ********************* CHBS - Christopher & Banks Corp. $24.24 +0.72 (-0.51 this week) Formerly known as Braun's Fashions, Christopher & Banks is a Minneapolis-based regional retailer of women's specialty apparel. CHBS sells sportswear, sweaters, dresses, and accessories in nearly 250 stores, spread over 27 states, mostly in the northern U.S. The company is currently expanding its offerings for larger women with a new store format - C.J. Banks - which will carry plus-size apparel. The C.J. Banks concept is expected to launch with 20 stores by the end of 2001. Most Recent Write-Up The decline has lost some of its momentum in recent days, but CHBS continues to be a favorite of the bears. Driven by the fledgling rollover in the Retail index (RLX.X), shares of CHBS fell through the $24 support level on Monday and despite a modest recovery in the RLX today, the stock posted another fractional decline. The bulls managed to reverse the opening drop this morning, but then the stock spent the rest of the day in slow descent, unable to reclaim the $24 level. Use any weak intraday rallies to $24 or $25 as attractive entry opportunities and lower stops to $26. Alternatively, wait for selling volume to pick up, pushing the stock below $23 before adding new positions. Comments CHBS got a bounce from some favorable earnings news from the retail sector Wednesday. But the enthusiasm may be short lived following the Fed's findings in the Beige Book. Bearish traders can monitor the Retail Sector Index (RLX.X) for signs of weakness early Thursday and consider entering new put plays if CHBS rolls over near $25. Additionally, a breakdown below the $24 level may offer momentum traders entry points if the broader markets and RLX are declining. ***August contracts expire in less than two weeks*** BUY PUT AUG-25*URH-TE OI=318 at $1.80 SL=1.00 BUY PUT SEP-25 URH-UE OI=159 at $2.70 SL=1.50 Average Daily Volume = 554 K ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Stocks Retreat Amid Concerns About The Slumping U.S. Economy... By Ray Cummins The major equity averages retreated again today after a sobering report on the sagging manufacturing sector increased investor's worries over the future of corporate profits. The recent bearish activity in the market has generated some familiar questions among our readers and today's narrative concerns a popular subject; exits and adjustments in credit spreads. Dear OIN: I am currently participating in a bullish credit spread offered in one of the previous editions of the newsletter. If the issue turns bearish or the technical outlook becomes unfavorable, what are my alternatives for closing (adjusting) the play? Thanks SD Regarding exit strategies with credit spreads: As far as (put) credit spread adjustments, the most important fact to remember is that any action relative to an exit/roll-out strategy needs to be initiated when the issue is near (or moves through) the sold strike. After that, the alternatives are few. The simple options are: close the spread near maximum loss; roll it down and forward to a future spread or naked put; sell the long option for the current premium and accept assignment of the underlying shares in anticipation of future upside activity (or writing covered calls); or simply wait for a potential recovery. The most common methods used by experienced traders to exit or cover a losing (put) credit spread include "legging-out," rolling down and out to a longer-term spread or "shorting" the underlying issue to cover the sold Put. First, you can simply close the position at a debit and register the loss. There is also Jim's popular technique; covering the short position as the stock moves through the sold strike. This is a great method for bailing out on an issue that has unexpectedly reversed course, but you must also be prepared to buy it back in the event of a recovery. You can also buy an "in-the-money" put (a put-debit spread), if you anticipate additional downside activity but prefer not to short the issue. Another option is to "leg-out" of the spread for a small profit (or at least a break-even basis). To leg out of a credit spread, place an order to close the short position anytime the stock trades (and preferably closes) below technical support or an established trend line (or moving average) on heavy volume. There are other, more precise exit signals that can be used to initiate the trade but this technique is based on the historical probability that once a primary trend is reversed, the issue will continue to move in the new direction for at least a short period. After the sold (short) position is repurchased, wait for the stock to lose momentum and sell the long position to close the entire play. It is a difficult technique to perform when emotion enters the formula but it works well once you become experienced with it. The key to success is using the method at known support levels or after obvious reversal signals. Otherwise, you are really just speculating about the stock's next move. Of course, there are other, more complex adjustment strategies but they usually include too much downside risk (or too many trade/commissions) to warrant their use. In all cases where an attempt to recover a losing play is made, you must be prepared for further draw-downs and have thorough knowledge of the strategy. As with any technique, it must also be evaluated for portfolio suitability and reviewed with regard to your specific experience level and trading style. Good Luck! Summary of Previous Candidates: Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield MSCC AUG 50 46.00 65.67 $4.00 7.1% Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield MXIM AUG 40 39.45 47.00 $0.55 9.3% NVDA AUG 70 69.20 86.25 $0.80 7.9% MU AUG 33 31.95 39.25 $0.55 7.3% GMST AUG 35 34.40 35.93 $0.60 6.2% * BRL AUG 65 64.10 80.40 $0.90 5.0% TARO AUG 38 36.88 37.60 $0.23 3.0% Adj 2-1 Split * * GMST is apporaching a Key moment - the May and June lows. * TARO is a looking worrisome now that the up-trend has been broken and the stock has made a "lower" low. Positions closed: PLMD Sell Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield IMCL AUG 35 33.85 44.50 $1.15 11.5% IMCL AUG 60 60.80 44.50 $0.80 8.3% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield ENZN AUG 75 75.90 64.96 $0.90 10.0% BBOX AUG 70 70.60 51.45 $0.60 5.3% NVDA AUG 100 100.80 86.25 $0.80 5.1% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status STJ $69.94 $63.30 AUG60p/65p $0.60 $64.40 ($1.10) Closed SZA $57.49 $53.14 AUG50p/55p $0.70 $54.30 ($1.16) Closed TEVA $68.79 $68.77 AUG60p/65p $0.80 $64.20 $0.80 ALERT! ADI $50.00 $46.00 AUG40p/45p $0.75 $44.25 $0.75 Exit? BRCM $46.23 $42.79 AUG35p/40p $0.75 $39.25 $0.75 ALERT! HIT $88.30 $89.40 AUG80p/85p $1.25 $83.75 $1.25 Open AHC $76.73 $75.10 AUG85c/80c $0.80 $80.80 $0.80 Open Debit Straddles: Stock Position Debit Target Value Gain Status DST AUG55c/55p $5.75 $7.19 $7.19+ $1.44+ Closed * CVS AUG40c/40p $3.25 $4.06 $4.06+ $0.81+ Closed * EMR AUG55c/55p $4.35 $5.44 $2.30 ($2.05) Closed * SNE SEP50c/50p $5.75 $7.48 $5.15 ($0.60) Open * The DST straddle traded over $9 and the CVS straddle traded as high as $5. The EMR straddle offered an acceptable exit after the Tuesday morning (AUG 7) earnings report and with no additional news-driven impetus prior to expiration, it was time to go. New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations *************** COCO - Corinthian Colleges $49.79 *** Smart Trading? *** Corinthian Colleges (NASDAQ:COCO) is one of the largest private, for-profit, post-secondary education companies in America. The company currently operates 45 colleges in 18 states and they offer a variety of master's, bachelor's and associate's degrees and also diploma programs through two operating divisions. The company's Corinthian Schools division operates diploma-granting schools in the healthcare, electronics and information technology fields and seeks to provide its students a solid base of training for a wide variety of entry-level positions. The company's Rhodes Colleges division operates degree-granting schools mainly in the business, healthcare and information technology areas and provides its students with professional education to succeed in today's competitive workplace. We searched far and wide for an issue that might avoid some of the selling pressure in the NASDAQ and we may have found a viable candidate in this stock. Corinthian Colleges is a unique educational institution serving the large and growing segment of the population seeking to acquire career-oriented education to become more qualified and marketable in the current demanding environment. The collective colleges recently reported record growth in total student population and student starts for the fourth quarter and fiscal year and in the second half of fiscal 2001, they acquired three campuses, opened three new branches and integrated the campuses acquired in the second quarter into their operations. COCO officials expect these investments to achieve their full earnings potential in upcoming quarters and investors are apparently optimistic about the company's future share value as they recently propelled it to a new, all-time high. COCO - Corinthian Colleges $49.79 PLAY (conservative - bullish/credit spread): BUY PUT SEP-40 UCS-UH OI=1 A=$0.60 SELL PUT SEP-45 UCS-UI OI=2 B=$1.40 INITIAL NET CREDIT TARGET=$0.90-$1.00 PROFIT(max)=21% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=COCO ****** NKE - Nike $48.00 *** Retail Sector Rally! *** Nike (NYSE:NKE) designs, develops and markets quality footwear, apparel, equipment, and accessory products. Nike is the largest seller of athletic footwear and athletic apparel in the world. The company sells its products to almost 20,000 retail accounts in the United States and through a mix of independent distributors, licensees and subsidiaries in approximately 140 countries around the world. Virtually all of its products are made by independent contractors. Most of its footwear products are produced outside the United States, while apparel products are produced both in the United States and abroad. Retail stocks rallied today as hopeful investors energized the group on the eve of the July sales reports. Over the last few sessions, a number of top companies have reported an increase in comparable store sales for the most recent period and traders are speculating that much of the tax rebate checks arriving this week will be spent in America's most popular retail outlets. In addition, Adidas-Salomon AG recently reported second quarter net profit of $21.1 million, up 22.2% from the same period last year. Adidas is the world's #2 sportswear and equipment maker by sales after Nike and the company said second quarter sales rose 10%, beating analysts' expectations. Adidas also reiterated that it expects 2001 sales growth of 3-5% and 15% growth in earnings. Traders who agree with a bullish outlook for stocks in the retail apparel and footwear industry can profit from that activity with this conservative position. PLAY (very conservative - bullish/credit spread): BUY PUT SEP-40.00 NKE-UH OI=0 A=$0.45 SELL PUT SEP-42.50 NKE-UV OI=84 B=$0.75 INITIAL NET CREDIT TARGET=$0.35-$0.40 PROFIT(max)=16% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=NKE ****** PDLI - Protein Design Labs $55.79 *** Entry Point? *** Protein Design Labs (NASDAQ:PDLI) is engaged in the development of humanized monoclonal antibodies for the prevention and basic treatment of disease. The company has licensed certain rights to its first humanized antibody, Zenapax, to Hoffmann-La Roche and its affiliates, which markets Zenapax for the prevention of kidney transplant rejection. The company is also testing Zenapax for the treatment of autoimmune disease. In addition, PDLI has several other humanized antibodies in clinical development for autoimmune and inflammatory conditions, asthma and cancer. The company has fundamental patents in the United States, Europe and Japan, that cover many humanized antibodies. Eleven companies have licenses under these patents for humanized antibodies that they have developed. The company receives royalties on sales of the three humanized antibodies developed by other companies that are currently being marketed. Protein Design Labs recently reported mediocre second-quarter earnings amid higher costs and lower royalty revenues, but said it expects nearly break-even results for full-year 2001. The company said it posted net income of $3.1 million, or $0.07 per share, compared with net income of $5 million a year ago. The revenues for the second quarter rose to $21.6 million from $20.4 million in the same 2000 quarter and the total includes $12.7 million in royalty revenues from sales of products using patents licensed from the company. Analysts say the level of operating revenues combined with the fact that there are no major catalysts for the stock in the next few months have conspired to keep its share value relatively low. The next key event for PDLI will be the unveiling of clinical trial results for its experimental leukemia and lymphoma treatments later this year and the expected approval of Genetech's asthma drug Xolair, the sales of which are eventually expected to generate royalties for Protein Design. PDLI's current price is near the bottom of a recent trading range and the target position offers a discounted cost basis in the issue for traders who are bullish on the outlook for the company. PDLI - Protein Design Labs $55.79 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put SEP 40 PQI UH 238 1.00 39.00 5.7% *** Sell Put SEP 45 PQI UI 2233 1.95 43.05 10.0% Sell Put SEP 50 PQI UJ 1017 3.50 46.50 12.1% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=PDLI *************** Neutral Plays - Straddles & Strangles Readers have been asking for more debit-straddle candidates. In today's search, we identified a number of favorable issues for short-term positions and based on analysis of the historical option pricing and technical background, these stocks meet the fundamental criteria for potential straddle plays. As with any recommendation, each position should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****** CLS - Celestica $45.16 *** Big Mover! *** Celestica (NYSE:CLS) is a provider of electronics manufacturing services to original equipment manufacturers worldwide. The company targets OEMs primarily in the computer and communications sectors. Celestica provides a variety of products and services to its customers, including the manufacture, assembly and test of complex printed circuit assemblies, and the full system assembly of final products, primarily on a build-to-order basis. Celestica also provides a broad range of EMS services, including design, product selection and procurement, prototyping, product assurance, assembly, test, failure analysis, full supply chain management, worldwide distribution and after-sales support. Last year, the company acquired Primetech Electronics, an provider of electronics manufacturing services based in Kirkland, Quebec. CLS - Celestica $45.16 PLAY (speculative - neutral/debit straddle): BUY CALL AUG-45 CLS-HI OI=1525 A=$1.90 BUY PUT AUG-45 CLS-TI OI=921 A=$1.75 INITIAL NET DEBIT TARGET=$3.45-$3.60 TARGET PROFIT=15% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=CLS ****** LLTC - Linear Technology $44.15 *** Volatile Sector! *** Linear Technology (NASDAQ:LLTC) designs, manufactures and markets a line of standard high performance linear integrated circuits. Applications for the their products include telecommunications, cellular telephones, networking products and satellite systems, notebook and desktop computers, computer peripherals, video - multimedia, industrial instrumentation, automotive electronics, factory automation, process control, and military/space systems. The company emphasizes standard products to address larger markets and to reduce the risk of dependency upon a single customer's requirements. Linear Technology targets the high performance segment of the linear circuit market. LLTC - Linear Technology $44.15 PLAY (speculative - neutral/debit straddle): BUY CALL AUG-45 LLQ-HI OI=3056 A=$1.35 BUY PUT AUG-45 LLQ-TI OI=3286 A=$2.35 INITIAL NET DEBIT TARGET=$2.50-$2.70 TARGET PROFIT=15% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=LLTC ****** VIA - Viacom $49.69 *** Probability Play! *** Viacom (NYSE:VIA) is the number one platform in the world for advertisers, with preeminent positions in broadcast and cable television, radio, outdoor advertising, and online. With its varied programming content, Viacom is a leader in the creation, promotion, and distribution of entertainment, news, sports, and music. Viacom's well-known brands include CBS, MTV, Nickelodeon, VH1, Paramount Pictures, Infinity Broadcasting, UPN, TNN, CMT, Showtime, Blockbuster, and Simon & Schuster. VIA - Viacom $49.69 PLAY (speculative - neutral/debit straddle): BUY CALL AUG-50 VIA-HJ OI=179 A=$1.05 BUY PUT AUG-50 VIA-TJ OI=551 A=$1.30 INITIAL NET DEBIT TARGET=$2.20-$2.25 TARGET PROFIT=15% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=VIA *************** BEARISH PLAYS - Naked Calls & Combinations *************** IVGN - Invitrogen $63.99 *** Range-Bound? *** Invitrogen (NASDAQ:IVGN) develops, manufactures and markets more than 10,000 products for the life sciences markets. The company's products are principally research tools in reagent and kit form, biochemicals, sera, media, and other products and services, which they sell to corporate, academic and government entities. IVGN focuses its business on two principal segments: Molecular Biology Products and Cell Culture Products. This play is based on the current price of the underlying stock and its recent technical history. Invitrogen's short-term rally appears to be failing at resistance near $70. In addition, the weakening technical indications and inability of the stock to sustain an upward movement suggests further consolidation or a test towards support near $55 will be required before the issue can return to a bullish trend. IVGN - Invitrogen $63.99 PLAY (conservative - bearish/credit spread): BUY CALL SEP-80 IUV-IP OI=80 A=$0.70 SELL CALL SEP-75 IUV-IO OI=2160 B=$1.30 INITIAL NET CREDIT TARGET=$0.70-$0.75 PROFIT(max)=16% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=IVGN ******************* 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. 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