The Option Investor Newsletter Sunday 09-09-2001 Copyright 2001, All rights reserved. 1 of 5 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/7920_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 9-7 WE 8-31 WE 8-24 WE 8-17 DOW 9605.85 -343.90 9949.75 -473.42 10423.17 +182.39 -175.47 Nasdaq 1687.70 -117.73 1805.43 -111.37 1916.80 + 49.79 - 89.24 S&P-100 553.89 - 23.51 577.40 - 29.31 606.71 + 12.84 - 17.54 S&P-500 1085.78 - 47.80 1133.58 - 51.35 1184.93 + 22.96 - 28.19 W5000 10066.49 -448.60 10515.09 -433.32 10948.41 +188.32 -234.36 RUT 445.19 - 23.37 468.56 - 12.25 480.81 + 5.16 + .13 TRAN 2713.14 -100.27 2813.41 - 40.98 2854.39 + 29.74 - 36.12 VIX 34.36 + 6.51 27.85 + 5.56 22.29 - 4.45 + 3.93 VXN 65.45 + 12.59 52.86 + 5.16 47.70 - 4.32 + 3.50 TRIN 1.25 .71 .70 2.67 TICK -113 -74 351 201 Put/Call .84 .82 .56 1.07 ****************************************************************** Are We There Yet? by Jim Brown Surprise, surprise, surprise! You can just hear Earnest T. saying that after glancing at stock TV to see how his favorite stock (TR) was doing on Friday. Gee wiz Vern, this may not be a recession but it feels like it! Actually those comments came from SF Fed President Perry who also said "we should expect more tech weakness before it gets better." Gee thanks, any more insightful news? Perry made those comments along with other market movers like "the Fed is worried about consumer confidence after the jobs numbers today" and "we are still expecting a rebound somewhere in the fourth quarter." Now, let's see...would you buy a used car from this man? The Fed has been wrong for so long you wonder if they just don't get it or maybe they have just been misleading us to prevent an even worse market crash. The surprise of the day was of course the Jobs Report. The unemployment number soared over estimates of 4.6% with a jump to 4.9%, the worst level in four years. Jobs fell by a total of -113,000, more than twice the consensus estimates. Manufacturers lost -141,000 with retailers also trimming the ranks. August numbers tend to be volatile with the shift from college workers to permanent employees and the September report could see a balancing or smoothing of the numbers. Still the 4.9% headline number had analysts calling for an intermeeting rate cut and rumors abounded that the Fed held an emergency meeting and would announce a 25 point rate cut on Monday or Tuesday. The mainline analysts said don't hold your breath. There are enough indicators that the economy is bottoming that the Fed "should" not rush back into the market and risk scaring traders that things are worse than we know or just simply over cutting as things are starting to turn up. The consumer sentiment numbers took another blow with a warning from Circuit City. CC said same store sales fell -21% and expected a lost for the first half of its year due to soft computer sales and dropping out of the appliance business. Rival Radio Shack also saw sales decline due to slowing computer sales. Thursday Best Buy said it would exceed estimates but only due to DVD players, televisions and cameras, not computers. A survey out on Friday showed that PC sales could drop twice as much as was previously expected for the year. This is already the first negative growth year since 1987 and sales could drop as much as 15% from last year. The economy is continuing to impact other than tech sectors with the AMR warning today a prime example. AMR, the parent of American Airlines, said it expects to report significant losses in the third and fourth quarter due to the weak economy, high fuel prices and increased labor prices. They said revenue from business travel was "plunging". They are canceling options to buy new jets and taking older jets out of service earlier to reduce their capacity and expenses. May domestic travel fell -11.8% the biggest decline in two decades which was followed by June and July at -12% each. The drop in travel is producing a price war for the open seats and industry losses are expected to exceed $2.5 billion for 2001. We just can't seem to get any positive news for the markets. The global markets continue to fall with the Nikkei hitting another 17 year low. The FTSE also hit a 52-week low. Deep cyclicals like Whirlpool, Georgia Pacific, Caterpillar, United Technology and Boeing were weak as well as consumer cyclicals like BBBY, BBY, LOW, HD, S and FD. Auto makers were slammed as investors fled from high ticket sales. Consumers will buy food and clothes in an extended recession but automobiles will be put off until the economy improves and jobs are secure. GM, DCX and Ford all fell. Nortel, the poster child for earnings warnings in 2001, had their CEO, John Roth, say some bearish things. He said the next 12 months would be a drought and they were racing to downsize fast enough to simply break even. The stock finished slightly positive on rumors that Cisco was going to buy them given their severely depressed stock price of $5.00. Not that CSCO is doing much better at $14.25 but you have to admit it may be the bottom on NT and a good opportunity for Cisco. Are we there yet? I doubt it but we are getting to the point where you can see the destination just around the corner. The S&P-500 closed at a three year low of 1085 but showed no signs of slowing. The intraday low back on March 22nd was 1081 and that is just a heartbeat away. The consensus of opinion now is we will see a new low number and it could be weeks away. 974 is the October 1998 closing low and that is the first real support in sight. Traders are in denial that the markets can drop this far but without a final washout of the remaining bubble holders the institutional traders will not hurry back into the markets. The broadest market indicator is the Wilshire 5000 Total Market Index (TMW.X) and it is approaching historic lows. In March and April of 2001 the index bottomed at exactly 10,000, this is the TMW not the Dow, from a high of 14991. The index closed on Friday at 10,066, only 66 points away from either a successful retest or a total breakdown. It is not a simple coincidence that the index stopped EXACTLY on 10,000 twice before. Buy programs will kick in and the strength of the short sellers will be tested. Dow 10,000 was tested last week and failed. For five days the Dow traded back and forth across the 10K level as buyers and sellers fought for control. Sellers won and as evidenced by the lack of a bounce at the close Friday they are firmly in control. True support on the Dow is not until 9389. The Nasdaq is about to undergo a trial by fire as well. 1638 is the closing low from last April and that is only 47 points away. There will be a bounce at that number as bargain hunters try to buy the dip in expectation of a bounce but without some positive cash flow from investors the bounce will fail. If you remember I reported on Thursday that TrimTabs.com shows a -$10.7 billion cash outflow from stock funds for the week ended on Wednesday. That includes the day off for Labor Day as well. In all the last five weeks have seen -$25 billion in cash outflows. You cannot build a rally on that kind of negative cash flow. On the bright side the chip and chip equipment makers received several upgrades and buy recommendations on Friday. The Intel news as well as confirmations of estimates by companies like TQNT helped the SOX hold the 500 level for the last three days. There was a slight gain by many chip stocks on Friday but not enough to actually say a rally was forming. We all know that any tech rally must be led by the chip sector and any good news at this point could provide the spark that is needed to hold the Nasdaq at the 1638 level. Still, there are three major tech conferences next week and chip companies, computer and software companies will present and take every opportunity to hype their business. We can only hope that several will strike a bullish cord in the investor sentiment and help build a base at this level. As much as we want to see a bottom here there has not been any capitulation. Without the capitulation event we cannot build a successful rally. Look at the April capitulation event. From this level on March 21st there was a -500 point drop to the lows on March 22nd and then a rebound of almost 900 points over three days to 9947 on March 27th. This is the picture of a V bottom and what the markets want to see again. A successful repeat would be a huge buy signal and produce a monster short squeeze. The concept that investors would come back from summer vacation and the Labor Day holiday, flush with cash, and start picking up stocks at bargain basement prices like a blue light special at Kmart turned into a bait and switch. The better than expected NAPM report lifted investor outlooks and the Jobs Report promptly squashed them back into the dirt. Headlines in the Saturday papers will scream "high unemployment returns" and "is a recession in our future". Consumer confidence will evaporate. Instead of buying bargains investors are now considering the benefits of tax loss selling and buying puts on stocks they currently own. Funds are still liquidating and the rumor on Friday was that a big fund was having a cash run and was dumping $10 billion in equities. September is the end of the quarter and decorating balance sheets for the quarterly fund statements will be a challenge. October is typically tax selling season for funds but they may not have any winners left to sell if the current rate continues. Just another reason why this season of the year is called "fall". The strategy for the week would probably be sell the rally, again. Just like buying the dips worked so well before, selling the rally has been working well this summer. Eventually we will get the rally that sticks but until then, trade the trend! Look for a bounce at 1638 on the Nasdaq, 10000 on the Wilshire 5000, 9389 on the Dow or 975 on the S&P. Each is a critical support level which will trigger buy programs. Falling under those levels will trigger sell programs as nobody wants to be caught holding if those levels fail. This is a great time to be a day trader but unfortunately most of the prior graduates from Bubble University had to get a job! You are an elite group, now go make some money! How about that put play on Boeing this week. +400% gain on a $1.00 option! Definitely, enter passively, exit aggressively! Jim Brown Editor **************************Advertisement************************** MR. STOCK: Your Expert Guide to the Dynamic World of Options Trading Options aren't easy. We know. That's why, with over 20 years of trading experience, we've designed a website specifically for options traders. With fast executions, the ability to place complex orders online, and option trades starting at only $15.50, we have the tools you need to implement your strategies. To find out more or open an account, visit our site at www.mrstock.com. Click Here: http://mojofarm.mediaplex.com/ad/ck/565-1407-1875-1 ***************************************************************** ************** Editor's Plays ************** It is strangle time again! It is that time of the month again when premiums are cheap and indexes are moving by leaps and bounds. Since the high dollar players on the OEX/SPX already know this game I am going to illustrate the poor boy approach to playing the moves on the Dow and Nasdaq. The cheapest index options are on the DJX and the QQQ and you can buy at the money options for about a $1.50 going either way. The possibilities are endless for debit and credit spreads and simple long plays in either direction. Unless you absolutely know which direction the markets are going in the next two weeks I suggest you hedge your bets buy going both ways. You will lose on one but with September volatility you could easily more than double or triple your money on the other. ************ DJX (DOW) 96.27 (9627) Multiple ways to play: 1. Buy both positions at the open on Monday for a net debit of $3.60. Set a sell stop on the put at 94 to close the put for a profit. Set a sell stop on the call at 98 (or higher) to sell the call for a profit. Get stopped out of either side for a profit and the other side becomes a free play. The best scenario would be a sudden drop to support at 9389 in a washout capitulation event and then a sudden rebound back to the 10,000 level for a double on each side of the trade. ************ 2. Buy only the put option on Monday. Buy at the open if dropping or wait for the Dow to roll over if it is moving up. The higher the better because the put will be cheaper. After you buy the put set the sell stop at 94 to close the put play and set a buy stop at 94 to open the call side. It will be cheaper then than now. Once the call side is open set the sell stop at 98 and hope for a quick rebound. Using this method conserves cash and lets you leg into the play when it is most advantageous to do so. The odds of a major move off the 94 area is very good and the odds of a major drop below 94 are very slim. ************ Nasdaq QQQ Using the same strategy on the QQQ I would buy the call on the next dip. The strength of the Nasdaq on Friday would lead you to believe that we could be near a bottom on the techs. The April lows of 1638 are only a day away and we could see a couple point bounce. The Put side would then be opened if the QQQ traded under 33 in anticipation of a continued drop or on a bounce back over 36. $36 should be resistance and would make a good entry point on a bounce. If you bought the call at $33 I would place a sell stop at 35.75 to scalp a quick profit on any bounce. The QQQ option volume is extreme. I could not believe the number of option contracts traded on Friday. The call volume on Friday on the calls around 165,000 contracts. Obviously the bulls are alive and hoping since there were only around 49,000 contracts. Since the herd is normally wrong, what does that tell us about next week? ********** Trade the trend or do not trade at all! That would be my admonition for this week. Use any strength to enter plays going the opposite direction. September is far from over and we have no clue as to where it will end. Good Luck Jim Brown ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** Jobless By Jeffrey Canavan The unemployment rate jumped to 4.9%, and bears pounced. Tech carcasses were already picked cleaned, so bears wondered over to the Dow for a feast. Dow Jones Industrial Average Daily Chart The Dow started the day at 9,840, leaving plenty of room for bears to feed. Even though a 234 point chunk was taken out of the Dow, mostly cyclical components, the April low is still 500 points away. The Relative Strength Index (RSI) has touched oversold territory, so perhaps 9,535 will offer the spot for a bounce. S&P 500 Daily Chart The S&P 500's RSI touched oversold territory back on February 22nd, but proceeded to fall 171 points lower over the next month, so that alone is not a given. We now find ourselves back at April lows, and once again the RSI is oversold. There's no arguing we are in an oversold condition and overdue for a bounce, but we just keep getting more reasons to sell. The first part of next week is relatively light on economic news, with only consumer credit and wholesale trade due out, but several technology conferences offer companies the platform to spill their guts. ----------------------------------------------------------------- Market Volatility VIX 34.36 VXN 65.45 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total .84 823,753 688,842 Equity Only .70 643,535 448,464 OEX 1.14 31,260 35,487 QQQ .41 73,984 30,065 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 32 - Bear Confirmed NASDAQ-100 12 -2 Bear Confirmed DOW 28 -2 Bear Confirmed S&P 500 38 -4 Bear Confirmed S&P 100 30 -2 Bear Confirmed Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.43 10-Day Arms Index 1.47 21-Day Arms Index 1.41 55-Day Arms Index 1.30 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Advancers Decliners NYSE 883 2171 NASDAQ 1172 2383 New Highs New Lows NYSE 61 150 NASDAQ 18 222 Volume (in millions) NYSE 1,340 NASDAQ 1,872 ----------------------------------------------------------------- Advisory Sentiment Bullish Bearish Correction Net Bullish Change 43.9% 30.6% 25.5% 16.7% -3.4% A bearish reading of 25% to 30%, combined with a bullish reading greater than 55% is typically considered bearish by contrairians. A net percentage greater than 30% is also viewed as bearish. ----------------------------------------------------------------- Commitments Of Traders Report: 09/04/01 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. 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 tend to be wrong. S&P 500 Commercials increased their net bearish position, but not by any significant amount. Commercials Long Short Net % Of OI 8/21/01 342,332 416,372 (74,040) ( 9.76%) 8/28/01 342,742 421,868 (79,126) (10.35%) 9/04/01 350,626 430,613 (79,987) (10.24%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 41,144) - 5/1/01 Small Traders Long Short Net % of OI 8/21/01 134,280 58,785 75,495 39.10% 8/28/01 141,046 58,001 83,045 41.72% 9/04/01 147,080 62,004 85,076 40.69% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 The net bearish position of commercial traders increased, but that is subject to change weekly as institutions are having trouble making up their minds. Commercials Long Short Net % of OI 8/21/01 30,348 38,964 ( 8,616) (12.43%) 8/28/01 29,255 36,551 ( 7,296) (11.09%) 9/04/01 28,757 38,119 ( 9,362) (14.00%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: (1,825) - 1/02/01 Small Traders Long Short Net % of OI 8/21/01 10,499 7,576 2,923 16.17% 8/28/01 11,131 9,694 1,437 6.90% 9/04/01 12,341 9,806 2,535 11.45% Most bearish reading of the year: (1,028) - 1/02/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Institutions are the most bullish they have been all year. Commercials Long Short Net % of OI 8/21/01 22,710 14,625 8,085 21.7% 8/28/01 22,141 14,959 7,182 19.4% 9/04/01 23,459 14,099 9,360 24.9% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 8,925 - 9/04/01 Small Traders Long Short Net % of OI 8/21/01 5,059 10,410 (5,351) (34.59%) 8/28/01 5,240 9,835 (4,595) (30.48%) 9/04/01 6,952 12,744 (5,792) (29.41%) Most bearish reading of the year: (7,572) - 5/08/01 Most bullish reading of the year: 1,909 - 1/16/01 COT Commercial Net Position Charts *************** ASK THE ANALYST *************** Levity By Eric Utley Look, I realize that last week's decimation of the major market averages is not going to sit well over the weekend. Like I discussed with Faust last weekend, there's not a lot of good coming from this bear market. Unless, of course, you've been actively shorting stocks and/or buying puts. Fortunately, I have a few escapes from the market and...well... life, too. And I hope that you have a few, too! One of mine is fly fishing, another is reading. It was through the latter last week that I ran across something I'd like to share. In his fabulous book, The Art of Contrary Thinking, Humphrey B. Neill passed along a list that was published in 1930 by The Market Cynic. I hope you find it of some relief in the form of humor: Ten Ways To Lose Money In Wall Street by The Market Cynic 1. Put your trust in board-room gossip. 2. Believe everything you hear, especially tips. 3. If you don't know, guess. 4. Follow the public. 5. Be impatient. 6. Greedily hang on for the top eighth. 7. Trade on thin margins. 8. Hold to your opinion, right or wrong. 9. Never stay out of the market. 10. Accept small profits and large losses. Please send your questions and suggestions to: Contact Support ---------------------------- Verisign - VRSN Can you please give us your views on VRSN? - Regards, Sunil Thanks, Sunil In my mind, full-time short-sellers are the smartest of market participants. They have to be. Short-sellers have to swim against the tide, so to speak - the market's historical return of 11 percent annually. Of course the current bear market has made any run-of-the-mill short-seller look like a genius. But the good short-sellers, the ones who really know their stuff, are worth listening. And it is this trader's opinion that Manuel Asensio is one of those short-sellers who is worth listening to. For those who don't know, Manuel Asensio is President of Asensio & Co., a specialty investment bank, and author of Sold Short - a must read book in my opinion. Asensio is the antithesis of Wall Street in that he doesn't buy into the hype and hucksterism that is the world's largest salesman. So why am I praising this guy Asensio and what the hell does he have to do with Verisign? Good question. Asensio & Co. initiated a short sell recommendation on Verisign on May 3. He's done some pretty solid homework on the company, and I'd suggest reading his stuff through the following recent press release: http://www.asensio.com/VeriSign/VeriSign9.htm So there's your fundamental take on Verisign. As for the technical take, last Friday's rally smelled like short covering among the trader types. The stock could see upside to the $42 level, where it would become an excellent short/put entry point. Why $42? Because that level was previously a quadruple-bottom. So, all those who bought at that level will be eager to sell in order to breakeven on their losing positions, creating a large amount of supply. ---------------------------- Comverse Technology - CMVT What is your opinion of CMVT? Would you consider this stock oversold? Is it time to take a future call option? - Thanks, Reinhold I've read, heard, and researched the bullish arguments for Comverse Tech. And I just don't buy into. The company sells its service platform to major carriers such as Ma Bell, Deutsche Telekom, Bell Atlantic, BellSouth, Telmex, Sprint PCS, and others. How are these businesses doing? And anyone bullish on Comverse probably doesn't want to hear that the company sells to Lucent and CMGI. However, through its subsidiary Infosys, Comverse sells customer relationship management applications to enterprise customers such as Fidelity, TIAA-CREF, and Barclays Bank. But that business isn't compensating for its lines tied to telecom. Onto to technicals. I've been tracking Comverse, by hand, for quite some because it's a component of the Nasdaq-100. I noticed through August that the stock just could not breakout above its double-top at $30. Each time it attempted to print $31 it was knocked down, even when its sector and the NDX were advancing. As I noticed this peculiar pattern, I grew wary of the stock's prospects over the short-term. Its subsequent sell signal at $25 sealed the deal. Is the stock oversold? Yes. Is that a reason to be bullish? No! I don't prefer to buy charts like this: ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COMING EVENTS ************* For the week of September 10, 2001 A bleak employment report capped off last week's attempt at yearly lows for the major indices. Could upcoming events finally offer relief to the market? You won't bet the farm if you look at what economists are expecting. Monday ====== Consumer Credit Jul Forecast: $3.0B Previous: -$1.5B Tuesday ======= Richmond Fed Manu Surv Aug Forecast: N/A Previous: -14 Wednesday ========= Current Account Q2 Forecast:-$106.0B Previous:-$109.6B Oil/Gas Inventories 9/07 Forecast: N/A Previous: 302.5MB Thursday ======== Initial Claims 9/08 Forecast: N/A Previous: 402K Export Prices ex-ag Aug Forecast: N/A Previous: -0.5% Import Prices ex-oil Aug Forecast: N/A Previous: -1.0% Friday ====== PPI Aug Forecast: 0.2% Previous: -0.9% Core PPI Aug Forecast: 0.1% Previous: 0.2% Retail Sales Aug Forecast: 0.3% Previous: 0.0% Retail Sales ex-auto Aug Forecast: 0.3% Previous: 0.2% Industrial Prod Aug Forecast: -0.2% Previous: -0.1% Capacity Util Aug Forecast: 76.8% Previous: 77.0% Mich Sentiment-Prel Sep Forecast: 92.9% Previous: 91.5 Week of September 17 =========================== Sep 17 Business Inventories Sep 17 Trade Balance Sep 18 CPI Sep 18 Core CPI Sep 19 Fed Beige Book Sep 20 Initial Claims Sep 20 Housing Starts Sep 20 Building Permits Sep 20 Philadelphia Fed Sep 21 Treasury Budget ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** 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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The Option Investor Newsletter Sunday 09-09-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/7920_2.asp **************************Advertisement************************** MR. STOCK: Your Expert Guide to the Dynamic World of Options Trading Options aren't easy. We know. That's why, with over 20 years of trading experience, we've designed a website specifically for options traders. With fast executions, the ability to place complex orders online, and option trades starting at only $15.50, we have the tools you need to implement your strategies. To find out more or open an account, visit our site at www.mrstock.com. Click Here: http://mojofarm.mediaplex.com/ad/ck/565-1407-1875-1 ***************************************************************** ************** BROKERS CORNER ************** Sell Low Buy High! By Robert J. Ogilvie In a Bear Market, it isn't unusual to hit new lows on the broader indexes. Does this mean that everyone should buy puts? Maybe it does. But before doing anything, check the fear gauges. Is the VIX high? Is the VXN high relevant to its recent range? Are the Put/Call ratios high? If they are, what does all of this suggest? Only that a bounce is near. The unknown factors are from what level, when, and for how long it will last. I don't write about Bullish strategies because I am Bullish. I cover these different strategies in order to take advantage of the current market atmosphere. Would you rather buy low at oversold levels or high at overbought levels? I continue to write about various methods to make money in any market condition. Just because the markets are going down doesn't mean that one can't be profitable. The shorts are making a killing. "When the VIX is high, it's time to buy. When the VIX is low it's time to go." The important question to ask at these levels is whether or not to buy calls or sell puts in anticipation of a bounce up. If one buys calls with volatility premium high, the price paid for those options is generally higher. If a move up occurs, there is a chance that the under lying security may not be able to move up fast enough to compensate for the decrease in volatility premium. I disclose this not to discourage readers, but to caution that the volatility premium may decrease as the underlying security increases in price. This suggests that one may want to capture one's profits early. In short, when buying a call with a lot of premium, a security's upward price movement may cause a negative effect on the call option's volatility premium. Be careful and aware that this can happen. How do we take advantage of this volatility depletion? If one is permitted and has sufficient capital, one can sell naked puts on one's candidates. If the security move up sufficiently, selling the high premium can work to one's benefit in two ways. The first is the depletion of some of the volatility premium. The second is the negative delta factor on puts which refers to if a security moves up, the price of the put will theoretically decrease by the delta for every $1.00 the security moves up in price. The Delta also increases and decreases by a factor known as Gamma. Gamma represents the amount of acceleration or deceleration of the Delta. The higher the delta on the put, the faster it will depreciate in value if the underlying security moves up. The risk is that puts with higher deltas are in the money or slightly out of the money, which increases the chance of being assigned. Deltas also measure the likelihood the security will be at or above that strike price on expiration for a call or at or below that strike price if a put. Just imagine the market as the bookie and the Deltas the odds. The odds can change in a game just as they do in the market. Note that the measurements are based on theory. The strategy is simple. Look for the oversold security of choice with the best potential and find the option with the best premium and Delta combination. When the underlying security's price is low Sell the Put to open. And when the underlying security's price is higher Buy the Put to close. You have to use your own discretion on this. However, I will give you this one tip. Calculate the premium versus the intrinsic value on various strike prices. For instance, the QQQ's closed at 33.70 on Friday. The October 35 Puts are bidding 3.00 with a Delta of -0.55. The difference between 35 and 33.7 is 1.30. There is 1.30 of intrinsic value and 1.70 in premium. The Oct 34 Puts are bidding 2.55 with a Delta of -0.48. The difference between 34 and 33.7 is 0.30. There is 0.30 of intrinsic value and 2.25 in premium. The Oct 33 Puts are bidding 2.05 with a Delta of -0.40. The difference between 33 and 33.7 is 0.07. There is no intrinsic value and 2.05 in premium. Which option has the most premium? Which option has the best Delta? Which option has the least chance of being prematurely assigned? One could sell more time in order to collect more initial time premium while volatility is inflated. This gives more time to be right as well as more time to be wrong. Don't let the extended time until expiration trap you into staying in the position if it drops below support. Take the QQQ's again. The intraday support and new low is 33.35. If you sold the 33's, don't let it break the recent support. There's no telling where it can go from here. Remember that this is a short-term strategy designed to profit from the declining option value caused by the depletion of volatility premium and negative Delta effect on the price. You don't want to be assigned. You want to close the position out before it can come back down. Watch for the stock price to fight the resistance at either the middle line (usually the 20DMA) or the upper Bollinger Band, if it gets that high, for a signal to close out the position. Another exit point is when the Fast Stochastic line turns over to the downside. One more is the resistance at a specific price point. For instance, old support is new resistance. The question "where's the bottom" is being asked all over Wall Street and Main Street. CNBC has been covering the contrarian indicators everyday this week because they are peaking. It seems as though everyone is waiting for the "capitulation" to come and flush out the rest of the scared money. Most investors still in the market are in retirement plans. How many people do you know that are still trading? So if most of the volume in the markets is from Mutual Funds and Institutions, where will the capitulation volume come from? The smart money is shorting the market until they book enough losses from short covering rallies to make them shift sides. In addition to watching the contrarian indicators for signs of peaking fear levels, the smart money is watching the Economy for any signs of recovery. I urge you to read my recent articles Trade Smart, Hope Fear and Greed, and A Market Psychology Gauge to fully appreciate the dynamics of the sentiment indicators. Happy trading! Robert J. Ogilvie, ROP Cutter & Company, Inc. I am an Options Broker and ROP that trades for and educates investors on many strategies. Please contact me via email at Robert.Ogilvie@verizon.net if there are any questions. Neither Cutter & Company, Inc. nor Robert J. Ogilvie makes any representation as to the accuracy, reliability or completeness of any charts, formulas, and /or research opinions presented herein. This article is intended solely for educational purposes. Nothing herein should be construed as an offer or solicitation to buy or sell any securities. Cutter and Company is a Member of the NASD, MSRB, and SIPC. Please read the OptionInvestor.com's Disclaimer: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html. ************** TRADERS CORNER ************** Recognizing The Stage and Process of Capitulation By Renee White I remember a time when new "traders" came into this market, without any concept of how economics affected the stock market. Business cycles affect all industries. To be a business owner, without understanding where your particular business sits on that cycle, is akin to playing Russian Roulette. It does not matter if you trade full time, or have a commercial business, planning your business moves with business cycles in mind, can make the difference of boom or bust. If traders were not aware before how economics affects business cycles, they certainly have learned the hard way through a difficult 18 months. Most people who have kept up with the markets, have learned there are four clear cycles to a normal business cycle, which on a graph resembles a sin wave pattern: the rounded bottom, the ascent, the rounded topping out, followed by the descending bear which lands in the mud at the bottom again. Different sectors cycle at different times. Some businesses (or bonds) cycle up, as others (like tech), cycle down. Obviously, we have dealt with a severe descending market and softening economy for many months now. Bond yields are at there lowest levels, meaning bonds are selling at premium highs. Techs have been in a meltdown, while gold moved higher. People waiting to play the high-flyers again, have been trying to wait this pattern out, but it felt like many gave up finally jumping ship, this week. Thank Goodness! This was a long summer of watching the volatility index (VIX), sit in the mid 20's, knowing that meant the worst was yet to come. This has been a bad week, but I breathed a sigh of relief when the VIX moved pass 33. Come on Baby! Give me another 40 reading!!! Within each business cycle, mini stages occur. There are five stages to a bear market. It is the capitulation stage of this bear that we hear so much about these days. Many confuse a one day event with the whole capitulation stage of a bear. Just as business-cycle market tops, tend to lure the last people finally into the market & into starting businesses, ....so too will the capitulation stage of a bear market scare the devil out of people who really want to have faith and put money to work. It pays to be objective and to try to keep the emotionalism off of your trading finger. So with CNBC volume turned down, here are a few things for you to think about, as we work through this capitulation stage of a typical bear market business cycle. Naturally, as one would think, during early capitulatory stages, defensive plays become the hottest topic. Growth stocks are way out of favor and boring consumer cyclical and value plays out- perform the growth stocks. They slowly inch their way, quietly and consistently, to new highs. The large cap blue chips fall, as highly visible plays get hit hard. Small caps out perform large caps partly due to tighter financing, lowered expectations, smaller payrolls, and quieter visibility. During this time, the contraction in earnings affects all sectors except for the every day consumer staple goods, who normally get little coverage. As the Fed continues to push short term rates down, the fear of increasing loan default rates begins to affect commercial banks and finance companies. This interest rate environment typically helps the insurance and utility stocks, but then again, nothing has been typical since Y2K. It is important to know that capitulation is not necessarily a one day event. We have become so spoiled at jumping in and out of trades for short term gains, that I think it has poisoned our brains necessitating our thirst for adrenaline driven perfection of picking perfect tops and bottoms. A broader perspective is necessary to make objective decisions. This has been a long, difficult week. During weeks like this, I hate booting up because I will hear one alert trigger after another going off on my quote service, day after day. In our current bear market, if Wednesday is bad and Thursday is really breaking down, count on Friday to be even worse, with the possibility of falling off the cliff after the gap down on Monday morning....followed (HOPEFULLY), by a strong bounce. I don't like selling into bear explosions. So why listen to all those alerts? I do better clearing my head by avoiding the excitement, the noise, the emotion. Walking away from the markets, in order to clearly think without emotional bias is important and frequently I find that by Sunday, my perspective is very clear. Instead of watching scary charts on these type Fridays, a better use of my time is avoiding the market all together with a market review later in the weekend. I plan my moves for Monday after a clear head and thorough evaluation from different perspectives. Back to capitulation. I set several alerts for VIX readings between 38 and 45. Tapping 28 these days is not enough. My first alert is set for 30, then 35. Interest to me, comes above 38. I also re-set lower alerts, in case the VIX starts dropping due to a hard market bounce, while I was doing something else. So, if an alert goes off at 35, I set a lower alert for 33, along with checking my 38 level. As every one knows, a high VIX is a sign more fear is creeping into the market, like this week. Good! Fear brings capitulation. Fear brings the put/call ratio into a contrarian play. Fear makes people give up. Unfortunately, we can not dictate that fear lasts only one day. We may endure many days or even a couple of weeks of fearful selling, especially at this time of the year. This continued selling period escalates fear as the whole market sells off, even those boring defensive stocks that have out-performed the market for many months. Confusion erupts when everything sinks together. Red is not a comforting feeling. But a VIX around 40 with a hard bounce certainly can taste likes capitulation. Although more than one capitulatory feeling can occur, good returns can be achieved for both the long and short term trader, assuming the market is not cycling down for still another leg of the bear. Thankfully, capitulation eventually brings reversals. The market is on sale. Defensive stocks start to look shaky, as it becomes clear their best days are behind them for this cycle. People begin to take profits in bonds, bond yields begin to rise, as the price of bonds come down. The stocks that were decimated can become value plays and take on new position of being low risk trades. Average earnings stop falling in these groups, while cyclicals and old fashion value stocks take over as the favored sectors to trust. These are the guys to play on bounces here, for their yearly earnings comparisons will outshine their pre-bear market estimates. Techs will still be fighting with their 3rd and 4th quarter results to meet their already downward revised year long estimates. Once their average earnings stop falling, these benchmarks will be used as comparisons for next years gains, which should be easy once the slide itself is over. We are approaching this rare value oriented time in our markets. These periods never feel comfortable at first and typically find few buyers. They always come after massive pain. We are not completely there yet because usually at this point, interest rates have bottomed. This time around, we also have problems with the global economy to worry about. Unfortunately, things are never simple or clear cut. With eventual recovery, share prices rise in almost all sectors, as the normal ascending side of the business cycle returns to kill the bears. Value, cyclical, and small caps, can capture market leadership for long periods, while big caps repair, rebuild, restructure, and re-invent themselves or transform by merger activity. Although all stock prices start recovering, some will never return to their seat of power and prestige, having lost market share to the smaller, newer, and more nimble companies who are peddling the newest technologies. Well into the recovery, a new surge in tech will occur, as more and more of the new technologies surface to wake up our IPO markets. By that time, the bottom has been well behind us for some time. With new technologies, IPO's, and new toys on the market, money will pour back in and interest the public again. By then, more baby boomers will have more money to invest. Our wounds will be healed, though thickly scarred, and we will know we have learned a lesson of a lifetime. The average bear market in the S&P 500 from 1926 till May, lasted 11 months. The way I count, this one is extended. That should concern short sellers, and put buyers. How much further it has to go is anyone's guess. In the mean time, lets hope for a capital gains tax cut and for help from our government to encourage capital expenditures. ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* BGEN - Biogen, Inc. $61.99 (+1.63 last week) See details in sector list Put Play of the Day: ******************** PGR - Progressive $120.49 (-8.78 last week) See details in sector list ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS STJ $67.84 (-0.96) STJ pulled back in a big way last Friday thanks to the broader market. The broad selling finally dragged STJ below our stop at $68.25, and we're dropping it ahead of further weakness. ADVP $68.72 (-6.24) ADVP took it on the chin Friday morning and never looked back. The stock fell well below our stop at $71 and we're dropping coverage in light of its violation. VOD $19.60 (-0.55) VOD's weakness following the negative Journal article spilled over into Friday's trading. The weak market didn't help neither. The stock dipped below our stop last Friday but managed to climb back above it. We're dropping the play this weekend ahead of any future weakness. IBM $96.59 (-3.36) The oversold bounce we were looking for in shares of IBM never materialized last week. Although the bulls tried valiantly to hold the stock above the $98 support level, the abysmal Employment Report was too much to withstand on Friday and that support level crumbled. This just goes to prove that oversold can always become more oversold. With all the major indices looking vulnerable to more downside, the prudent move is to pull in our horns and move IBM off the play list this weekend. PUTS No Dropped Puts this weekend *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** BRCM - Broadcom $31.41 (-0.74 last week) Broadcom Corporation is a provider of highly integrated silicon solutions that enable broadband communications and networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies system-on-a-chip solutions for applications in digital cable set-top boxes and cable modems, high-speed local, metropolitan and wide area and optical networks, home networking, Voice over Internet Protocol (VoIP), carrier access, residential broadband gateways, direct broadcast satellite and terrestrial digital broadcast, digital subscriber line (xDSL), wireless communications, server solutions, and network processing. BRCM refused to go down last week, which is saying a lot for a chip stock. The Philly Semi Index (SOX.X) fell to its knees last week, while BRCM managed to form somewhat of a base off the $30 level. Its failure to fall may very well lead to a snapback rally next week if the SOX rebounds from its own support level at the 515 area. Indeed, BRCM's Stochastics reading on its daily chart crossed over late last week and moved out of oversold territory. While Stochastics is only one metric, it's worth noting nonetheless. With the Nasdaq finishing lower in each of last week's four days of trading, an oversold bounce is due. We think that BRCM could lead any such bounce due to its resiliency last week in light of heavy selling pressure. Its wedge on the 60-minute chart indicates that a break is coming, which if it occurs to the upside, would be confirmed with a strong advance above the $32 level. Should bullish traders use a break above $32 to gain entry, make certain to confirm strong volume on the move. For bounces, look towards the ascending trend line currently at $30.75, or lower at the $30 level. Our stop is initially in place at the $29.50, which is the site of BRCM's relative low. ***September contracts expire in two weeks*** BUY CALL SEP-30*RCQ-IF OI=6105 at $3.30 SL=1.50 BUY CALL SEP-35 RCQ-IQ OI=8687 at $1.30 SL=0.50 BUY CALL OCT-30 RCQ-JF OI= 227 at $4.90 SL=3.50 BUY CALL OCT-35 RCQ-JQ OI=1500 at $2.75 SL=1.50 Average Daily Volume = 10.2 mln IMCL - ImClone Systems $53.30 (+1.90 last week) ImClone Systems, Inc. is a biopharmaceutical company that is developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The Company focuses on three strategies for treating cancer, growth factor blockers, cancer vaccines and angiogenesis inhibitors. The Company's lead product candidate, IMC-C225, is a therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain solid tumors depend in order to grow. IMCL is another play on relative strength in an individual issue in a relatively strong group. The biotech sector, for the most part, has held up well relatively well. And IMCL is the epitome of a strong stock within that sector. It closed at its day high last Friday, which was a feat in and of itself considering the rampant weakness prevalent across the broader market. The stock faces resistance above current levels at $54. Thereafter, it should be a straight shot to its relative highs around the $56.25. For those traders entering new positions into strength, look for confirmation in direction in the Biotech Sector (BTK.X). The BTK has pulled back in recent sessions on what appeared to be market-related weakness. As such, bullish traders might consider waiting for the BTK to reverse course before entering bullish plays in IMCL. At the very least, look for the BTK to bounce from the 500 level. ***September contracts expire in two weeks*** BUY CALL SEP-50*QCI-IJ OI=11331 at $5.20 SL=3.50 BUY CALL SEP-55 QCI-IK OI= 4817 at $2.60 SL=1.50 BUY CALL OCT-50 QCI-JJ OI= 281 at $7.10 SL=5.50 BUY CALL OCT-55 QCI-JK OI= 473 at $4.30 SL=2.50 Average Daily Volume = 1.34 mln ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 09-09-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/7920_3.asp **************************Advertisement************************** MR. STOCK: Your Expert Guide to the Dynamic World of Options Trading Options aren't easy. We know. That's why, with over 20 years of trading experience, we've designed a website specifically for options traders. With fast executions, the ability to place complex orders online, and option trades starting at only $15.50, we have the tools you need to implement your strategies. To find out more or open an account, visit our site at www.mrstock.com. Click Here: http://mojofarm.mediaplex.com/ad/ck/565-1407-1875-1 ***************************************************************** ****************** CURRENT CALL PLAYS ****************** TSM - Taiwan Semiconductor $12.94 (-0.04 last week) Taiwan Semiconductor Manufacturing Company Ltd. is a dedicated semiconductor foundry. As a foundry, the Company manufactures semiconductor designs using its advanced production processes for its customers based on their own or third parties' proprietary integrated circuit. The Company offers a comprehensive range of wafer-fabrication processes, including processes to manufacture CMOS logic, mixed-signal volatile and non-volatile memory BiCMOS chips. For the most part, TSM spent last week moving sideways. After all, the stock only lost 4 cents in the last four trading sessions. But that's small in comparison to the damage across the broader market and indeed TSM's sector. Perhaps its basing action last week may portend a short-term rally if the SOX and COMPX rebound early next week. But we've been waiting for that rebound for quite some time now. And until any rebound materializes in the SOX and COMPX, it's probably best to wait on the sidelines in this play. But for those who are looking to trade TSM from the long side, perhaps the best strategy in light of current market conditions is to look for bounces from solid support levels. That way, bullish traders - Is that a misnomer? - can manage risk much more easily with ultra-tight stops. For its part, TSM seems to continue attracting bids around the $12.25 area, which may be a good site to look for entries in new call plays. Momentum types can look for an advance above $13.50 for new entries, although that strategy involves more risk. Because TSM is such a low dollar stock, its options are relatively cheap in terms of capital requirements. At the same time, contracts with lower deltas are subject to quick deterioration in premiums. Therefore, if you're looking to trade TSM, it may be more prudent to use a higher delta contract. ***September contracts expire in two weeks*** BUY CALL SEP-10.0*TSM-IB OI= 50 at $3.10 SL=1.50 BUY CALL SEP-12.5 TSM-IV OI=3082 at $1.05 SL=0.00 BUY CALL OCT-10.0 TSM-JB OI= 45 at $3.30 SL=1.50 BUY CALL OCT-12.5 TSM-JV OI= 563 at $1.45 SL=0.50 Average Daily Volume = 4.70 mln AMGN - Amgen $63.90 (-0.40 last week) Amgen is a global biotechnology company that discovers, develops, manufactures, and markets human therapeutics based on advances in cellular and molecular biology. The company manufactures and markets four human therapeutic products, Epogen, Neupogen, Infergen, and Stemgen. As Murphy's Law would have it, AMGN pulled back right on cue after we added that play Thursday evening. But its weakness may have offered a solid entry point during the pullback, as buyers pretty much propped the stock up around the $64 level for the better part of Friday's session. There wasn't any company specific news to induce the sell-off Friday. Rather, its weakness was most likely attributable to the gloomy view of stocks investors adopted following the Jobs report. Nevertheless, AMGN is one of the strong stocks in the Nasdaq market and if the market is going to rally, AMGN should lead any charge higher. With that said, it may be more prudent to wait on the sidelines before enter new call positions in this play. Ideally, we'd like to see the COMPX and BTK move higher in concert with one another. That would allow for positions to be taken around current levels in AMGN. If the COMPX and BTK do rebound early next week, AMGN could make its way above the $66 level, which would offer breakout traders a chance to gain entry into the play. However, if the stock continues pulling back from current levels early next week, look for bounces around the $63.50 level, where buyers stepped in last Friday. ***September contracts expire in two weeks*** BUY CALL SEP-60 YAA-IL OI= 4021 at $4.80 SL=2.75 BUY CALL SEP-65 YAA-IM OI=21529 at $1.65 SL=1.00 BUY CALL SEP-70 YAA-IN OI=12112 at $0.50 SL=0.25 BUY CALL OCT-65 YAA-JM OI=13111 at $3.50 SL=1.75 BUY CALL OCT-70 YAA-JN OI=21901 at $1.60 SL=1.00 Average Daily Volume = 3.13 mln BGEN - Biogen, Inc. $61.99 (+1.63 last week) Biogen is a biopharmaceutical company primarily engaged in the business of developing, manufacturing and marketing drugs for human healthcare. BGEN currently derives revenues from sales of its Avonex product for the treatment of relapsing forms of multiple sclerosis and from royalties on worldwide sales by the company's licensees of a number of other patented products. Other products include certain forms of alpha interferon, hepatitis B vaccines and hepatitis B diagnostic test kits. In order to maintain its leadership role in the industry, BGEN continues to have an active research and development program. Inching its way higher, BGEN is right on the cusp of a breakout, despite the broad-based market weakness last week. Even the Biotech sector (BTK.X) has been selling off, underscoring BGEN's impressive relative strength. While it hasn't been advancing by leaps and bounds, it has been reassuring to see the stock continue to hug its ascending trendline, currently at $60.50. It took some doing, but the bulls managed to push the stock solidly through the 200-dma (currently $60.25) and with Friday's closing high just below $62 on strong volume, it looks like the breakout is for real this time. Further strength in the stock will provide for fresh entries as the stock pushes through resistance (now at $62.50) on strong volume. Of course bargain hunters can still target intraday dips for initiating new positions, preferably on a bounce from the vicinity of the ascending trendline. A dip to around $59 (the location of our stop) is still buyable, but make sure the rebound comes on strong volume. ***September contracts expire in two weeks*** BUY CALL SEP-60*BGQ-IL OI=2913 at $3.70 SL=2.25 BUY CALL SEP-65 BGQ-IM OI=1275 at $1.10 SL=0.50 BUY CALL OCT-60 BGQ-JL OI=4687 at $5.30 SL=3.25 BUY CALL OCT-65 BGQ-JM OI=9892 at $2.75 SL=1.50 BUY CALL OCT-70 BGQ-JN OI=4722 at $1.20 SL=0.50 Average Daily Volume = 2.95 mln LH - Laboratory Corp. of America $75.20 (-2.70 last week) Laboratory Corporation of America Holdings (LabCorp) is the #2 clinical laboratory service in the world, behind Quest Diagnostics. LH performs 2000 types of tests for more than 100,000 clients, including health care providers, pharmaceutical firms, physicians, government agencies and employers. With 25 major laboratories and some 1200 service sites nationwide, the company emphasizes specialty and niche testing such as allergy tests, HIV tests, blood analyses, and substance abuse screenings. Still waiting. After dropping and bouncing right at the ascending trendline and 200-dma (currently $73.55) in the middle of the week, LH has seen its trading volume start to dwindle (now only running about triple the ADV) as the stock consolidates its recent drop. We're looking for the stock to stage a rally from current levels, and all we need now is a cooperative market. Anybody know where we can find one of those? Seriously, this is an aggressive play where we are looking for a bounce from the $74-75 level to launch the stock on its next upwards leg. And due to the aggressive nature, we're playing it with a tight stop at $73.50, just below the 200-dma. Stochastics are still buried in oversold and we'll need to see them return to ascent mode to confirm we're on the right side of the trade. The more cautious approach will be to wait for confirmation of emerging strength in the form of daily stochastics turning up and emerging from oversold with the price clearing resistance near $76.50. ***September contracts expire in two weeks*** BUY CALL SEP-75*LH-IO OI= 38 at $2.75 SL=1.50 BUY CALL SEP-80 LH-IP OI= 517 at $0.80 SL=0.25 BUY CALL OCT-75 LH-JO OI= 18 at $4.70 SL=2.75 BUY CALL OCT-80 LH-JP OI= 20 at $2.55 SL=1.25 BUY CALL OCT-85 LH-JQ OI= 28 at $1.25 SL=0.50 SELL PUT SEP-75 LH-UO OI=1000 at $2.20 SL=3.75 (See risks of selling puts in play legend) Average Daily Volume = 524 K ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 09-09-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/7920_4.asp **************************Advertisement************************** MR. STOCK: Your Expert Guide to the Dynamic World of Options Trading Options aren't easy. We know. That's why, with over 20 years of trading experience, we've designed a website specifically for options traders. With fast executions, the ability to place complex orders online, and option trades starting at only $15.50, we have the tools you need to implement your strategies. To find out more or open an account, visit our site at www.mrstock.com. Click Here: http://mojofarm.mediaplex.com/ad/ck/565-1407-1875-1 ***************************************************************** ************* NEW PUT PLAYS ************* ACF - Americredit $40.00 (-6.16 last week) AmeriCredit Corp. and its subsidiaries, including AmeriCredit Financial Services, Inc. (AFSI), operate in the automobile finance business. Through its AFSI branch network, the Company purchases loans made by franchised and select independent dealers to consumers buying late-model used and, to a lesser extent, new automobiles. The Company targets consumers that are typically unable to obtain financing from traditional sources. Funding for the Company's auto lending activities is obtained primarily through the sale of loans in securitization transactions. ACF closed below its 200-dma last Friday for the first time since late last year. The stock is under heavy distribution and appears to be headed lower over the short-term. The continued weakening of the economy is weighing heavily on the stock. Specifically, the potential for a drop-off in the consumer is wreaking havoc on shares, in addition to credit concerns. The stock has sold off heavily in recent sessions, so we're gaming its downward momentum at this point in the play. If the stock does rebound in coming days, in dead cat fashion, bearish traders could look to secure new put positions near significant resistance levels. The stock has an unfilled gap up at the $43.25 level, which could provide a solid entry point if ACF advances as high as that level. Further down, resistance could form around the $41.50 level. Additionally, entries could be had on further weakness below ACF's intraday low last Friday at the $39 level. ***September contracts expire in two weeks*** BUY PUT SEP-45*ACF-UI OI=1604 at $6.30 SL=4.55 BUY PUT SEP-40 ACF-UH OI=2229 at $2.85 SL=1.50 Average Daily Volume = 1.47 mln PGR - Progressive $120.49 (-8.78 last week) The Progressive Corporation is an insurance holding company. The Company has 76 subsidiaries and two mutual insurance company affiliates. The Progressive Corporation's insurance subsidiaries and affiliates provide personal automobile insurance and other specialty property-casualty insurance and related services throughout the United States. PGR had been one of the last remaining stocks to fall prior to last week's trading. It had maintained its lofty price above the $130 level for three months, prior to its breakdown last week. But with its breakdown last week, it looks like the downside momentum in shares is beginning to pick up. The Insurance Sector Index (IUX.X) is surely weighing on PGR, and bearish traders in this play might want to keep close tabs on that index going forward. PGR stopped right at the $120 level last Friday, during its big sell-off. Buyers may try to defend that level early next week, which may result in a bounce in the stock. If that happens, look for the sellers to return around the $122.85 level, or a little higher around $125, which is the site of our stop initially. Conversely, a breakdown below $120 could lead PGR to its 200-dma over the short-term, which currently lies at the $112 level. As such, the 200-dma will be the site of our short-term target. That's not to say we won't maintain coverage on PGR if it falls that low. It's simply our first level to turn for when looking for exit points. ***September contracts expire in two weeks*** BUY PUT SEP-130 PGR-UF OI=123 at $10.00 SL=7.50 BUY PUT SEP-125*PGR-UE OI=168 at $ 6.00 SL=4.25 Average Daily Volume = 338 K HDI - Harley Davidson $43.93 (-4.66 last week) Harley-Davidson, Inc. conducts business in two segments: Motorcycles and Related Products and Financial Services. The Motorcycles and Related Products segment includes the group of companies doing business as Harley-Davidson Motor Company, which are subsidiaries of H-D Michigan, Inc., and Buell Motorcycle Company. The Motorcycles segment designs, manufactures and sells primarily heavyweight touring, custom and performance motorcycles as well as a complete line of motorcycle parts, accessories and general merchandise. The Financial Services segment consists of the Company's wholly owned subsidiary, Harley-Davidson Financial Services, Inc. (HDFS). Shares of Harley took it on the chin last week. The stock has been a favorite among growth investors for quite some time. But its allure and luster may be wearing off. That's because consumers are losing their confidence, which translates into a decrease in their spending habits. Harley is most dependent on the consumer and its spending habits. Furthermore, the demand for its motorcycles seems to be diminishing as consumers opt for other recreational products. In terms of technicals, the stock closed below its 200-dma last Friday for the first time since April. A breach of that level can often induce heavy institutional liquidation. The stock did bounce from the $43.30 level last Friday, which may serve as an entry point going forward for those who prefer trading breakdowns. Also, entries can be taken at current levels if the SPX and Dow continue falling early next week. If, however, HDI rebounds early next week, bearish traders might look to initiate new positions around its 200-dma, which now sits at $44.72. A rollover near that level would allow for solid risk management in this play. If HDI does pop back above its 200-dma, look for resistance around $46 to $46.50. We've elected to set our stop at the $46.50 level initially, while readers may prefer to use a tighter stop initially. ***September contracts expire in two weeks*** BUY PUT SEP-50 HDI-UJ OI=4808 at $6.40 SL=4.55 BUY PUT SEP-45*HDI-UI OI=1575 at $2.55 SL=1.00 Average Daily Volume = 1.49 mln MER - Merrill Lynch $46.09 (-5.51 last week) Merrill Lynch & Co., Inc. is a holding company that, through its subsidiaries and affiliates, provides investment, financing, advisory, insurance and related products and services on a global basis. Merrill Lynch provides these products and services to a wide array of clients, including individual investors, small businesses, corporations, governments, governmental agencies and financial institutions. Merrill Lynch has three business segments, the Corporate and Institutional Client Group, the Private Client Group and Merrill Lynch Investment Managers. The Company provides financial services worldwide through various subsidiaries and affiliates that frequently participate in the facilitation and consummation of a single transaction. Judging by the price action in the Amex Securities Broker/Dealer Index (XBD.X) last week, the brokers are broken. The index took out its relative lows and is heading for its April lows down around the 390 level. If the XBD continues shedding points, MER is sure to follow. For its part, MER is already trading below its April lows, which is a testament to the stock's relative weakness. It broke down below the $50 level last Friday in spectacular fashion - a level that had supported the stock for nearly two months. MER's breakdown came on heavy volume, which reinforces its inclusion on the OI put play list this weekend. Momentum traders can look for entries on further weakness below the $46 level early next week. Confirming weakness in the Dow, S&P, and the XBD would serve bearish traders well in this play. If the stock does rebound, however, look for a rollover near the $50 level (old support), which is also the site of our stop to begin with. ***September contracts expire in two weeks*** BUY PUT SEP-50*MER-UJ OI=6824 at $4.70 SL=3.00 BUY PUT SEP-45 MER-UI OI=5055 at $1.70 SL=1.00 Average Daily Volume = 4.85 mln ***************** CURRENT PUT PLAYS ***************** CHKP - Check Point Software $30.51 (-1.48 last week) Check Point Software is the worldwide leader in securing the Internet. The company's Secure Virtual Network (SVN) architecture provides the infrastructure that enables secure and reliable Internet communications. CHKP continued its bouncing ways along the $30 level last Friday. The stock actually lifted in afternoon trading, as high as the $31.38 level, before falling back to earth in synch with the COMPX. The good news is that CHKP's highs continue getting lower. If this pattern of relatively lower highs persists, CHKP could rollover somewhere around the $33 level early next week if, and only if, it continues higher. It could very well breakdown below the $30 level if the GSO and COMPX continue experiencing heavy selling, which has been the case for quite some time now. Like we mentioned last Friday, if the pressure continues from the sell-side, CHKP will eventually lose the $30 level. And again, we'll allude to the fact that we've captured about $13 in this play since inception. So if you've got some decent gains built up, it only makes sense to take some profits off the table down here. For those not in the play, execution is critical from current levels. The ideal entry point would be a rollover near resistance, such as the aforementioned $33 level. If you're gaming a breakdown, however, make sure to confirm weakness in the GSO and COMPX before employing such a strategy. ***September contracts expire in two weeks*** BUY PUT SEP-35*KEQ-UG OI=5874 at $5.30 SL=3.55 BUY PUT SEP-30 KEQ-UF OI=4132 at $2.05 SL=1.00 Average Daily Volume = 10.5 mln GMST - Gemstar-TV Guide $29.66 (-3.25 last week) Gemstar-TV Guide is a global media and technology company focused on developing, licensing and providing products and services that simplify and enhance consumer entertainment. Many of the company's products have a special emphasis on television oriented technologies and services, in particular, program guidance products including those marketed under the TV Guide name. So, we're at the $25 level...now what? Hopefully, GMST's further weakness Friday allowed for bearish traders to book some profits in this play. After $10 to the downside, traders in this play should have some decent gains built up. At this point, those in at much higher prices should be thinking money management. In the end, it's an individual decision whether or not to take profits in a play. But, we don't like to see readers leave money on the table, that's all. Back to the play. GMST looks like it's going to retest its April lows, which would put the stock around the $20 level. That's about another $5 from current levels, and worth shooting for. In terms of new entry points, we'd ideally like to get a light volume, short covering rally back up to resistance around $29. From there, new positions could be taken with limited risk by way of a tight stop. Those favoring the momentum approach can enter new put positions on a breakdown below the $25 level, with the understanding GMST is oversold - just look at its Stochastics reading! ***September contracts expire in two weeks*** BUY PUT SEP-35*QLF-UG OI=1887 at $9.60 SL=7.75 BUY PUT SEP-30 QLF-UH OI=2363 at $4.90 SL=2.75 Average Daily Volume = 3.70 mln BA - Boeing $45.18 (-6.02 last week) The Boeing Company, an aerospace company, operates, together with its subsidiaries, in three principal segments: Commercial Airlines Operations, Military Aircraft and Missiles, and Space and Communications. Commercial Airplanes Operations is involved in the development, production and marketing of commercial jet aircraft. The segment also provides related support services, principally to the commercial airline industry worldwide. The Military Aircraft and Missiles segment is involved in the research, development, production, modification and support of military aircraft, including fighter, transport and attack aircraft; helicopters; and missiles. We could think of about a dozen different puns concerning BA and its crash landing last Friday. We could write about the failure of its landing gear and its lack of lift-off. But we won't. Instead, let's focus on the facts. In the holiday shortened trading week - a mere four days - following our initiation of coverage on BA, the SEP 50 puts went from being offered at $1.10 to being bid at $4.80 last Friday. You can do the math, but we'll emphasize that traders, for the sake of discipline, should book some of those gains early next week, if that hasn't been done already. While BA may be headed lower over the short-term, such a big gain over such a short period of time should be met with discipline. Don't let the excitement of a home run cloud objectivity! Volume last Friday felt a bit like capitulation in BA, so traders might want to keep an eye on BA's intraday low around the $45 level. It may well serve as support going forward. Conversely, continued weakness below that level on high volume would offer bearish momentum traders new entries. The stock doesn't have any resistance to speak of until up around the $48.50 level, so gaming rollovers near resistance may be a practice in patience. We're sliding stops down to the $50 level, which is rather liberal. Individual traders should take into account their specific entries and risk tolerances when determining their own stops. ***September contracts expire in two weeks*** BUY PUT SEP-50*BA-UJ OI=7995 at $5.10 SL=3.50 BUY PUT SEP-45 BA-UI OI= 312 at $1.50 SL=0.75 Average Daily Volume = 3.27 mln VZ - Verizon $49.05 (-0.95 last week) Verizon Communications Inc. provides communications services. The Company has four reportable segments, which it operates and manages as strategic business units and organizes by products and services. Domestic wireline communications services principally represent the Company's 16 operating telephone subsidiaries that provide local telephone services in over 30 states. Domestic wireless products and services include cellular, Personal Communications Services, paging services and equipment sales. VZ's out performance last Friday was a bit discouraging, at least for those of us on the bearish side of things. Albeit only a penny higher, the fact that VZ settled in positive territory when the Dow dropped 200 plus points has us on alert for further strength. Although VZ's strength may have been merely a product of short covering, noting volume, we're cautious nonetheless. Further strength, however, would allow for favorable entry points near resistance, such as the $50 level, or near the 10-dma around $50.20. While that may sound contradictory, here's the reasoning. VZ traded higher on a day that the market got hammered. If the stock rallied in conjunction with an advancing market, we wouldn't be so uneasy. And the difficulty lies in discerning whether or not its strength Friday was from short covering (Read: Artificial) or real buying (Read: Not Artificial). The only way we'll find the answer to that question will be through monitoring price action through the window of the broader market next week. ***September contracts expire in two weeks*** BUY PUT SEP-50*VZ-UJ OI=3213 at $1.70 SL=1.00 BUY PUT SEP-45 VZ-UI OI= 824 at $0.30 SL=0.00 Average Daily Volume = 4.40 mln AIG - American International Grp. $73.15 (-5.05 last week) Engaged in a broad range of insurance and insurance-related activities through its subsidiaries, AIG's primary focus is on its general and life insurance businesses. Additionally, the company is growing its presence in financial services and asset management. Other operations include auto insurance, mortgage guaranty, annuities, and aircraft leasing. With operations in 130 countries, AIG generates more than half of its revenues outside the United States. And the hits just keep on coming. Only 3 days old and our AIG play is performing beautifully, having solidly smashed the $75 support level. Talk of more layoffs sent the stock south on Wednesday, and despite an impressive recovery on Thursday, Friday's Employment Report was too much for the stock to bear (pun intended), and it fell back to once again test the $73 support level. Volume has been particularly heavy the past 3 days, giving the appearance that this could be a pivotal point for the stock. Either it will find support near current levels and recover, or it is getting set to break down in a big way. Only time will tell. With gains already built into our play, our advice is to tighten up those stops or even take profits near current levels and then wait for another failed rally in order to initiate new positions. Ideally, we'll get a rollover from below the $77 level, also the site of our stop and significant overhead resistance. Those looking to trade a continued breakdown will want to focus their attention on the $72.50 level. AIG has traced $72.65 three times now (March 22 and September 5 and 7) and if that level fails, it could be profitable for those who are ready to play, as it would open the door for a test of the $70 and then $67 support levels. ***September contracts expire in two weeks*** BUY PUT SEP-75*AIG-UO OI=14361 at $3.00 SL=1.50 BUY PUT SEP-70 AIG-UN OI= 3518 at $0.85 SL=0.25 BUY PUT OCT-75 AIG-VO OI= 1008 at $4.00 SL=2.50 BUY PUT OCT-70 AIG-VN OI= 812 at $1.70 SL=0.75 Average Daily Volume = 5.47 mln JPM - J.P. Morgan Chase $37.00 (-2.40 last week) JPMorgan Chase & Co. is a global financial services firm with operations in over 60 countries. The Company's principal bank subsidiaries are The Chase Manhattan Bank, Morgan Guaranty Trust Company and Chase Manhattan Bank USA, National Association. Its principal non-bank subsidiaries are its investment bank subsidiaries, Chase Securities Inc. (CSI) and J.P. Morgan Securities Inc. (JPMSI). The bank and non-bank subsidiaries of JPMorgan Chase operate nationally, as well as through overseas branches and subsidiaries, representative offices and affiliated banks. Weary bulls were glad to finally see JPM trace a green candle for a change on Friday. Of course, it was a small victory since the candle began a full dollar below Thursday's close and by the closing bell, the stock had only eked out a measly 6-cent gain on the day. Sure, volume was brisk, but that does little to mask the fact that the stock is now pinned under the $38.50 level, which had acted as support up until last Wednesday. Daily Stochastics are still diving into oversold, but the recent slide could have bulls considering a relief rally. So while we continue to pressure the downside, we need to protect our gains with a stop at $38.50. The increase in buying volume at the end of the day could be a taste of what's to come next Monday. Until proven wrong though, we'll continue to work the downside with gusto, buying puts on each failed rally as long as our stop remains intact. Momentum players will want to look for a drop under $36, which will be their cue to initiate fresh positions. ***September contracts expire in two weeks*** BUY PUT SEP-40*JPM-UH OI=27237 at $3.40 SL=1.75 BUY PUT SEP-35 JPM-UG OI= 3877 at $0.55 SL=0.00 BUY PUT OCT-40 JPM-VH OI= 4661 at $4.30 SL=2.75 BUY PUT OCT-35 JPM-VG OI= 6014 at $1.40 SL=0.75 Average Daily Volume = 6.54 mln PHA - Pharmacia $40.27 (+0.67 last week) Pharmacia Corporation is a pharmaceutical company that operates in three segments: Prescription Pharmaceuticals, Agricultural Productivity, and Seeds and Genomics. The Prescription Pharmaceuticals segment involves the business and activities engaged in, supporting or related to the research, development, registration, manufacture and sale of prescription pharmaceutical products. The Agricultural Productivity segment consists of crop protection products, animal agriculture and the environmental technologies business lines. It was starting to look like a couple of rogue bulls had invaded our camp early last week as PHA stubbornly rose in the face of broad-based market weakness. Fortunately, they were friendly bulls, just helping us to gain a better entry point into the play. They brought the price right up to the $41 level on both Thursday and Friday before heading out to pasture and then the rollover began. We're still waiting for the daily Stochastics to roll, but the price has already gotten started after unsuccessfully trying to clear the 10-dma (currently $40.69). Unless the markets decide to rally next week, PHA looks ready to head back down and test the $39 level. And now that the stochastics have been raised out of oversold, that should give the bears that much more room to work with. Another failed test of our $41.50 stop would be a great entry point for the ride down to $39, while momentum traders will want to wait for that level to be violated before venturing into new positions. ***September contracts expire in two weeks*** BUY PUT SEP-45 PHA-UI OI= 151 at $4.90 SL=3.00 BUY PUT SEP-40*PHA-UH OI=2141 at $1.00 SL=0.50 BUY PUT OCT-40 PHA-VH OI=2041 at $1.90 SL=1.00 BUY PUT OCT-35 PHA-VG OI=2691 at $0.55 SL=0.00 Average Daily Volume = 4.51 mln QCOM - Qualcomm, Inc. $49.18 (-9.67 last week) Based on its proprietary CDMA technology, QCOM is engaged in developing and delivering digital wireless communications services. The company's business areas include integrated CDMA chipsets and system software and technology licensing. QCOM owns patents that are essential to all of the CDMA wireless telecommunications standards that have been adopted or proposed for adoption by the worldwide standards-setting bodies. Currently, QCOM has licensed its CDMA patent portfolio to more than 80 telecommunications equipment manufacturers around the world. As one of the few stocks helping to keep the NASDAQ afloat (well almost) on Friday, QCOM actually managed to paint a positive candle. But it sure wasn't much to get excited about, coming in at a gain of only 67 cents. After dropping to major support at $48.50 on Thursday, and with daily Stochastics deep in oversold, a bounce was in order. Its just too bad it wasn't a little higher to give us a better entry for the next leg down. Hopefully you took our advice and locked in profits from the large decline the over the past week and are now on the prowl for fresh entries. We've got our stop ratcheted down to $54 and we'd use any rollover below that level to jump back into the play. A volume-backed drop through $48.50 can also be used to enter the play, but keep a tight reign on it (tighten stops) as the price approaches the April lows near $44. ***September contracts expire in two weeks*** BUY PUT SEP-50*AAO-UJ OI= 6570 at $3.80 SL=2.25 BUY PUT SEP-45 AAO-UI OI= 3396 at $1.85 SL=1.00 BUY PUT OCT-50 AAO-VJ OI=19504 at $6.10 SL=4.00 BUY PUT OCT-45 AAO-VI OI= 4342 at $3.80 SL=2.25 Average Daily Volume = 11.7 mln QLGC - QLogic Corporation $26.76 (-3.25 last week) Somebody has to make the equipment that lets your computer talk to all its peripheral equipment, and QLGC does it well. A leading designer and supplier of semiconductor and board-level input/output (I/O) management products, QLGC has been providing SCSI-based connectivity solutions to this market sector for over 12 years. QLGC's I/O products provide a high performance interface between computer systems and their attached data storage peripherals, such as hard disk and tape drives, removable disk drives and RAID (redundant array of independent disks) subsystems. The company is also the market share leader in Fibre Channel host bus adapters, a market segment that is receiving tremendous attention from investors. It's about time we got a little bit of a bounce in shares of QLGC to allow us another entry opportunity. Anemic as it was, the stock managed to post a 5% gain on Friday before it began to weaken near the $27 level. Ideally, we'd like to see more of a jump for initiating fresh positions, but in this negative market, we'll take what we can get. The descending 10-dma (currently $29.62) has continued to pressure shares of QLGC for the past month and is showing no signs of letting up. A rebound near $29 (also the site of our stop) would be great for new entries, but we may not be that lucky as the negative news regarding the economy in general and technology specifically continues to flow. Barring some really good news, QLGC looks destined to test its spring lows near $18, and we can also jump into fresh positions to take advantage of the slide if selling volume intensifies, driving the stock below the $25 support level. ***September contracts expire in two weeks*** BUY PUT SEP-30*QLC-UF OI=8822 at $4.60 SL=2.75 BUY PUT SEP-25 QLC-UE OI=1124 at $1.75 SL=1.00 BUY PUT OCT-30 QLC-VF OI=8822 at $4.60 SL=2.75 BUY PUT OCT-25 QLC-VE OI=1124 at $1.75 SL=1.00 Average Daily Volume = 7.25 mln SEBL - Siebel Systems $18.96 (-2.64 last week) Siebel Systems is a provider of eBusiness applications. The company's products enable organizations to sell to, market to, and service their customers across multiple channels, including the Web, call centers, resellers, retail, and dealer networks. SEBL's eBusiness applications are available in industry-specific versions designed for the pharmaceutical, healthcare, telecommunications, insurance, energy, apparel, automotive, and finance markets. Through SEBL's applications, companies can create a single source of customer information that sales, service, and marketing professionals can use to tailor product and service offerings to meet each of their customer's unique needs. Lately it has seemed like the Software sector (GSO.X) has been falling into a bottomless pit, making profits easy to come by in our SEBL play. Each day we witness a new yearly low in the stock with nary an attempt by the bulls to stop the bleeding. It has been a great play thus far, but we may be approaching the end of the line. The GSO, SEBL and the NASDAQ are all oversold and begging for relief. But without a strong positive catalyst, SEBL is likely to remain in a bearish trend a little while longer. The open interest on the SEP-17.5 strike has skyrocketed, and that level is likely to act as near term support next week. If you've got gains in the play we'd recommend harvesting some profits near that level or at least snugging up your stops. It would be a shame to give back those hard-won gains. With our stop now resting at $22, we would use any bounce and rollover below that level for opening new positions, but wouldn't recommend chasing the stock lower until some of the pent-up buying pressure is released. ***September contracts expire in two weeks*** BUY PUT SEP-20.0*SGQ-UD OI= 2590 at $2.20 SL=1.00 BUY PUT SEP-17.5 SGQ-UW OI=30240 at $0.90 SL=0.50 BUY PUT OCT-20.0 SGQ-VD OI= 1049 at $3.10 SL=1.50 BUY PUT OCT-17.5 SGQ-VW OI= 553 at $1.85 SL=1.00 Average Daily Volume = 14.3 mln TSG - Sabre Holdings $40.60 (-1.58 last week) Sabre Holdings Corporation markets and distributes travel through its SABRE computer reservations system (the SABRE system). In addition, the Company provides outsourcing and software solutions to the travel and transportation industries. The SABRE system creates an electronic marketplace where travel providers display information about their products, and warehouse and manage inventory. Travel agents can choose interfaces that range from simple, text-based systems to feature-laden graphical systems. The Company also has an approximate 70% ownership interest in Travelocity.com Inc., a provider of online travel services to consumers. Continuing economic weakness and rising unemployment isn't helping the travel industry, and with the almighty consumer weakening, TSG is bound to see a further erosion in the demand for its travel services. The month-long slide in the share price is showing no signs of letting up, despite the fact that the stock is now well into oversold territory. Support at $41 gave way on Friday and while there are numerous possible support levels below, the continuing deterioration in the Stochastics and RSI oscillators points to a long slow decline. Bounces are being contained by the 10-dma (currently $42.76) and a return near that level could provide for attractive entries. Of course, further weakness can also be used for opening fresh positions; just wait for the bears to push TSG under Friday's low ($40.41) on solid volume and step aboard. Our stop is currently sitting at $43. ***September contracts expire in two weeks*** BUY PUT SEP-45 TSG-UI OI=2553 at $4.80 SL=3.00 BUY PUT SEP-40*TSG-UH OI= 8 at $1.30 SL=0.75 BUY PUT OCT-45 TSG-VI OI= 17 at $5.60 SL=3.50 BUY PUT OCT-40 TSG-VH OI= 46 at $2.70 SL=1.50 Average Daily Volume = 706 K ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** Testing, 1-2-3, Testing... By Mark Phillips Contact Support The phrase "Retesting the Lows" has become as overused recently as "Stealth Rally" or "2nd Half Recovery". It seems everybody has been talking about the need to retest the April lows, with some saying it was inevitable, and others saying it just wouldn't happen. I've become more and more certain lately that we would in fact test the lows as the global economy has continued to weaken. The big factor that has had me leaning to the bearish camp lately was the lack of fear in the market, even as all the broad indices continued to decline. Fear, measured by the Volatility index or VIX just hadn't been tracking with the market declines, as I pointed out 2 weeks ago in my commentary: "Underlying market sentiment is really the key to my skeptical attitude. I've been watching the Volatility Index more than usual lately, because it really isn't acting the way it should in a market that is getting ready to post a sustained advance. Up days in the market give us sharp drops in the VIX (indicating a sharp increase in call buying vs. put buying), while market declines give us reluctant, and small increases in the VIX. I see a market (take your pick) that is still in trouble, but there is no fear, as measured by the VIX. That is not the sort of condition that will lead to sustained rallies. Investor's Intelligence's most recent survey shows 47% of investors lined up in the Bullish camp, with only 32% feeling Bearish. No wall of worry for investors to climb there. Case in point, the VIX dropped precipitously on Friday, losing 10.5% and closing at 22.29, it's lowest level since July 3rd." If a slowly declining market couldn't incite some fear in investors, it really was setting up to inject some serious fear into the complacent masses if the markets really started to sell off again. Well, the bull/bear debate has ended in favor of the bears as the S&P500 (INDEX:SPX)and NASDAQ-100 (INDEX:NDX) have now closed below the lowest close from April. On the heels of the abysmal employment report Friday morning, my expectations came to pass as the DJIA continued its fall from grace, falling as low as 9558 before some mild short-covering in the afternoon that brought the index above 9600. Over the past 2 weeks, the VIX has gone almost vertical again, just like it did last October and then again in March. Support levels have been falling left and right and investors are starting to get scared, as demonstrated by the VIX closing at 34.36 on Friday. And believe it or not, that's actually the good news! In order to effectively test the lows, it was necessary to shake out the weak hands and re-inject some fear into the market, because that will give the bulls a wall of worry to scale. While the VIX could still climb much higher, now that it is well above 30 again, the pressure will be building for a release to the upside As with any test, it is the result of the test that is important. And what we really need to see is whether current levels of support will hold, or if we are heading much lower. Although the SPX and NDX have now set new closing lows for the year, the bulls will be trying to hold onto the intraday lows as that last vestige of support before heading even lower. Here are the numbers for reference. The SPX hit an intraday low of 1081.19 on March 22nd and an intraday low of 1082.12 on Friday. Even with a mild afternoon recovery to 1085.78, the Big Index has very little wiggle room before the bears set their sights on breaching the 1000 level. There hasn't been as much pain experienced in recent days on the NDX, due to the fact that it has already fallen so far, but it is also balanced on that knife-edge. The intraday low on April 4th was 1348.52 and traded as low as 1339.89 on Friday before clawing its way higher to end another dismal week at 1354.27. Like the SPX, there is very little wiggle room before the Tech-heavy NASDAQ will be looking at current levels as resistance and focusing on 1260 and 1180 as the next possible support levels. What I'm trying to do here is divorce hope from reality and read where the market wants to go, rather than dictate where I want it to go. Because the market doesn't give one whit about what I think or want. But until the market tells us what it is likely to do next, the smart approach is to sit on the sidelines and wait. Difficult? Yes. Smart? You betcha! Notice that there are no new Portfolio plays this week? That should come as no surprise in such a negative week. We need some signs of bullishness at support to usher us into new plays, and we sure didn't get it this week. There were a couple plays that came close, but never gave us a convincing entry trigger. First up was Calpine (NYSE:CPN) which once again dropped into the $29-30 range on Friday. But it couldn't stage any meaningful rebound, leaving us to watch carefully for any substantial strength next week. If $29 fails to provide support, it looks like CPN could drop near $25 before the bulls really get interested. General Electric (NYSE:GE) is getting close to an entry now that it has closed below $40, but there is a warning flag that has now been raised. GE closed below its 200-week moving average for the first time...EVER! At least it hasn't done so for the past decade -- that's as far back as my charts go. So while I still like an entry at $38-39, the risk of the play has gone up due to this technical failure. We need a strong rebound above this level to prompt me to actually take a position in the play. With the continued deterioration in the price of Natural Gas, Enron (NYSE:ENE) has continued to fall, and we're more than happy to ratchet our entry target lower as well. This play should pay off nicely once we get a solid entry, but I for one am not going to jump the gun. Speaking of jumping the gun, you'll notice that even as the stock is approaching our previous target of $75-76, I have put Eli Lilly (NYSE:LLY) on Hold. Take a look at the weekly chart and I think you'll understand why. Stochastics are diving back to earth and it looks like we could see a violation of the $73-74 support level. I don't want to remove it from the Watch List, as I still like the long-term prospects for the stock. But I do want to wait for conditions to improve. I had a list of possible new Watch List plays put together early last week, but continued weakness had me pulling in my horns by Friday and opting to keep the Watch List free and clear. When we get some evidence that the bulls are alive and kicking again, I'll feel a lot more comfortable placing some new candidates on our list. Preserving capital is of paramount importance when trying to apply a bullish strategy (buying LEAPS Calls) in a bearish market. With that in mind, we really tightened up our stops on both Clorox (NYSE:CLX) and Philip Morris (NYSE:MO), both of which have gains that I am unwilling to give back to Mr. Market. I might miss out on the next upward move, but at least I won't have to worry about a winning trade becoming a loss. I think that is the key point I want to stress this week. Buying LEAPS calls is a bullish strategy, and as recent events have shown, to make money in a bearish market, we need to adopt a hit-and-run strategy, taking small profits on a consistent basis. My recommendation for the week ahead is to watch the bulls and bears battle it out, but remain on the sidelines until you can see the bulls gaining the upper hand. In the long run, one week isn't going to make that much difference in missed profits, but unnecessary losses would be a shame. I may change my tune soon, especially if the bulls can step forward to defend critical support levels. Otherwise, cash is the way to be. Remember, we only want to trade when it is profitable to do so. Don't forget to tune into my Wednesday column this week, as I'll be addressing the issue of LEAPS Puts, and how we can apply them for both bullish and bearish strategies. There are some distinct advantages to utilizing LEAPS Puts, although there are some unique considerations we need to be aware of. Until then, take care to protect your trading capital. Mark Phillips Contact Support LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP CLX 03/13/01 '03 $ 35 VUT-AG $ 6.10 $ 8.20 34.43% $ 38 MO 07/30/01 '03 $ 45 VPM-AI $ 6.10 $ 7.30 19.67% $ 47 GLM 08/15/01 '03 $ 20 OML-AD $ 3.30 $ 2.60 -21.21% $ 14 '04 $ 20 KLW-AD $ 4.70 $ 4.00 -14.89% $ 14 DIS 08/30/01 '03 $ 30 VDS-AF $ 2.05 $ 2.05 0.00% $22.50 '04 $ 30 LWD-AF $ 3.60 $ 3.40 - 5.56% $22.50 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CPN 07/08/01 $29-30 JAN-2003 $ 30 OLB-AF CC JAN-2003 $ 25 OLB-AE JAN-2004 $ 30 LZC-AF CC JAN-2004 $ 30 LZC-AF ENE 07/29/01 $29-30 JAN-2003 $ 30 VEN-AF CC JAN-2003 $ 25 VEN-AE JAN-2004 $ 30 LYN-AF CC JAN-2004 $ 30 LYN-AF LLY 08/05/01 HOLD JAN-2003 $ 75 VIL-AO CC JAN-2003 $ 70 VIL-AN JAN-2004 $ 80 LZE-AP CC JAN-2004 $ 70 LZE-AN GE 08/12/01 $38-39 JAN-2003 $ 40 VGE-AH CC JAN-2003 $ 30 VGE-AF JAN-2004 $ 40 LGR-AH CC JAN-2004 $ 30 LGR-AF PCS 08/26/01 $21-22 JAN-2003 $ 25 VVH-AE CC JAN-2003 $ 20 VVH-AD JAN-2004 $ 25 LVH-AE JAN-2004 $ 20 LVH-AD New Portfolio Plays None New Watchlist Plays None Drops QQQ $35.47 Well, I knew it was a risky shot, trying to game a bottom in the NASDAQ, and as it turned out, I should have left it alone. Support levels have been falling left and right, and the NASDAQ-100 and QQQ are both trading at fresh yearly lows as I write this. This is a perfect example of why it is dangerous to try to catch a falling knife...it can be very painful. That is why we have to have the discipline to stick with our stops. That's our insurance plan. And it did a good job for us. Our $36 stop was triggered on Tuesday, taking us out of the play with a 10-15% loss. That's a lot better than if we applied the wait-and-hope philosophy. That approach would have us sitting on a 25-30% loss this weekend with no indication of when things are going to turn around. There are a couple lessons here for the interested students. First, trying to pick a bottom is inherently dangerous and you can frequently get hurt. But more importantly, risk management through the use of stop losses is essential to your financial survival. Take advantage of my errors in judgment so that you can learn these important lessons without suffering the loss in your own account. ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 09-09-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/7920_5.asp **************************Advertisement************************** MR. STOCK: Your Expert Guide to the Dynamic World of Options Trading Options aren't easy. We know. That's why, with over 20 years of trading experience, we've designed a website specifically for options traders. With fast executions, the ability to place complex orders online, and option trades starting at only $15.50, we have the tools you need to implement your strategies. To find out more or open an account, visit our site at www.mrstock.com. Click Here: http://mojofarm.mediaplex.com/ad/ck/565-1407-1875-1 ***************************************************************** ************* COVERED CALLS ************* Market Analysis: Gauging Investor Anxiety With The VIX By Mark Wnetrzak One of our readers commented on the recent rise in stock market volatility, as indicated by the VIX and the VXN, and asked how these indices can be used to help determine market direction. The CBOE's Volatility Index is known by its ticker symbol VIX. It is a measure of the level of Implied Volatility and was developed by the CBOE in 1993. VIX measures the volatility of the U.S. stock market, based on S&P 100 Index, and it is updated throughout the day by the CBOE in real-time using OEX quote data. The VIX is calculated by taking the weighted average of the Ivs of eight OEX calls and puts with an average time to maturity of 30 days. VIX is therefore a measurement of 30-day index options. It is not a measure of the volatility of one individual stock or option and it does not measure the Implied Volatility of other indices. However, many traders use it as a general indication of Implied Volatility in equity options. In January, the Chicago Board Options Exchange launched a new volatility index to estimate the amount of fear in the technology market through the prices of a specific index options contract. Never one to be outdone, the American Stock Exchange also began its volatility index based on NASDAQ 100-related options. Index options on the NASDAQ 100, or NDX, trade at the CBOE, while at the AMEX, options trade on the NASDAQ 100 unit trust, or QQQ. The CBOE's technology volatility index has the ticker symbol VXN (called Vixen) while the AMEX volatility index has the symbol QQV. The demand for a VIX (a volatility index based on the S&P 100 or OEX options) style indicator for NASDAQ stocks has increased in recent years, in part because volume in OEX options has declined and because gauging the volatility in the technology segment has become more important to contrarian traders. Implied Volatility, a key factor in an option's price, is the annualized measure of how much the market thinks a stock or index can potentially move. It is a critical factor and generally measures uncertainty about the prospects for the underlying stock or index. The relative value of the VIX reflects the market's overall anxiety by rising when put-option buying increases on OEX options, thus reflecting an increasing desire to hedge for downside movement. Analysts interpret the VIX using a theory of inverse proportion, meaning low values on the VIX are bearish, while high values are bullish. Using the traditional analysis, there is an inverse relationship between the price of the S&P 100 Index and the OEX (and between the VXN and the NASDAQ 100). When the volatility in the gauge moves higher, the market is expected to fall. When volatility spikes to extreme highs, that usually indicates a rapidly falling market. It is a sign of panic and when the VIX finally reaches a peak, everyone who is going to sell has probably already done so, thus it is generally a good time to add to your portfolio. When the VIX reaches extremely low levels, it means that traders are complacent. Option buyers are timid while sellers are aggressive, and both for similar reasons: nobody is anticipating much movement in the market. Of course, when the majority of people agree on a particular outlook, the opposite generally happens and in this instance, upside surprises are a rare occurrence. Over the past few months there have been extremely large swings in the prices of stocks quoted on the major exchanges. Experts have tried to put forward theories to explain this phenomenon and more still have tried to use these rationale in order to predict future market character. As it stands, analysts cannot agree on whether or not it is economic or psychological realities that are the major cause of price fluctuations in the stock market. While it's important to be aware of the reasons behind this volatility, most investors would do better to simply understand the historical relationships between popular indicators and market direction, and use this knowledge to become a more successful trader. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield LCBM 6.35 9.04 SEP 5.00 1.75 *$ 0.40 13.2% CCRD 10.20 10.20 SEP 10.00 1.15 *$ 0.95 9.1% PRGN 26.18 24.47 SEP 25.00 2.70 $ 0.99 6.4% BPUR 22.36 20.85 SEP 20.00 3.10 *$ 0.74 5.8% FFIV 14.59 14.50 SEP 12.50 2.85 *$ 0.76 5.6% CCUR 11.60 10.35 SEP 10.00 2.15 *$ 0.55 5.1% SCTC 13.33 13.05 SEP 12.50 1.20 *$ 0.37 4.6% NMTC 28.87 25.20 SEP 25.00 5.10 *$ 1.23 4.5% ANSR 9.01 7.85 SEP 7.50 1.80 *$ 0.29 4.4% INTU 37.78 35.14 SEP 35.00 3.70 *$ 0.92 4.1% NTIQ 36.40 29.75 SEP 30.00 8.10 $ 1.45 3.7% NETA 16.36 14.67 SEP 15.00 2.45 $ 0.76 3.4% DAVX 10.26 9.81 SEP 10.00 0.75 $ 0.30 2.7% GERN 16.01 14.60 SEP 15.00 1.60 $ 0.19 2.0% R 22.59 22.16 SEP 22.50 0.65 $ 0.22 1.5% ISSI 15.00 13.99 SEP 15.00 1.25 $ 0.24 1.1% CTIC 31.39 28.45 SEP 30.00 3.20 $ 0.26 1.0% GSPN 16.24 13.80 SEP 15.00 2.30 $ -0.14 0.0% ARTC 31.67 27.90 SEP 30.00 3.50 $ -0.27 0.0% PTEC 15.05 13.27 SEP 15.00 1.20 $ -0.58 0.0% SPCT 15.85 13.00 SEP 15.00 2.05 $ -0.80 0.0% PRIA 17.89 15.29 SEP 17.50 1.55 $ -1.05 0.0% WBSN 19.19 15.00 SEP 17.50 2.35 $ -1.84 0.0% PMCS 34.40 25.60 SEP 30.00 6.50 $ -2.30 0.0% HLIT 16.04 11.21 SEP 15.00 2.20 $ -2.63 0.0% *$ = Stock price is above the sold striking price. Comments: Ok, we're getting what we "asked" for; a test of the April lows. The question is, do we rebound or fall over the cliff? If you believe the "Markets" (economy) are heading lower, exiting plays that turn negative will preserve capital. If you believe that the downside risk is now negligible, rolling forward and/or down may offer a profitable exit. I'll use the Netiq (NASDAQ:NTIQ) SEP-$35 position as an example, currently down about $2.35. If you believe the stock has little downside potential (it will hold support near $26), you could roll down to a January $30 call which would offer a new cost basis around $26.75. The January $25 call would offer even more downside protection (cost basis near $24.50) but with reduced profit potential. The April option series should also be considered, depending on your risk-reward tolerance. As this section is short-term oriented (and with regard to the time restraints in producing the summary), we will show the position closed. Network Associates (NASDAQ:NETA) appears to have failed to overcome resistance near $16 for the third time. Is a test of the July low next? Is it time to exit or adjust? Phoenix Tech. (NASDAQ:PTEC) is testing its April-July trend-line and it should be monitored closely, along with any other stocks that are testing key support areas,. Spectrian (NASDAQ:SPCT) is acting horrid and an early exit may be prudent as opposed to waiting for a violation of the July low. PMC-Sierra (NASDAQ:PMCS), Websense (NASDAQ:WBSN), Pri Automation (NASDAQ:PRIA), and Harmonic (NASDAQ:HLIT) are also testing key support areas. Adjusting or exiting these positions on any rallies may be prudent; again, depending on your overall outlook on these issues, their sectors, and the broader Market. To learn more on how to adjust covered calls, I suggest reading Lawrence McMillan's "Options: As A Strategic Investment." Positions Closed: Netiq (NASDAQ:NTIQ); SEP-$35, IGEN International (NASDAQ:IGEN), Photon Dynamics (NASDAQ:PHTN), Alamosa Holdings (NASDAQ:APCS) , Vical (NASDAQ:VICL), Integra LifeSciences (NASDAQ:IART), and Seachange International (NASDAQ:SEAC) - A Murphy's Law Candidate? NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield AVIR 25.01 SEP 22.50 QCV IX 3.10 148 21.91 14 5.9% DP 44.05 SEP 42.50 DP IV 2.40 141 41.65 14 4.4% IMNX 17.83 SEP 17.50 IUU IW 1.00 12042 16.83 14 8.6% NEV 18.05 SEP 17.50 NEV IW 0.90 12 17.15 14 4.4% NSM 31.61 SEP 30.00 NSM IF 2.60 4713 29.01 14 7.4% RCOM 10.41 SEP 10.00 RAU IB 0.85 157 9.56 14 10.0% UNFI 20.31 SEP 20.00 JQN ID 1.10 186 19.21 14 8.9% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield RCOM 10.41 SEP 10.00 RAU IB 0.85 157 9.56 14 10.0% UNFI 20.31 SEP 20.00 JQN ID 1.10 186 19.21 14 8.9% IMNX 17.83 SEP 17.50 IUU IW 1.00 12042 16.83 14 8.6% NSM 31.61 SEP 30.00 NSM IF 2.60 4713 29.01 14 7.4% AVIR 25.01 SEP 22.50 QCV IX 3.10 148 21.91 14 5.9% DP 44.05 SEP 42.50 DP IV 2.40 141 41.65 14 4.4% NEV 18.05 SEP 17.50 NEV IW 0.90 12 17.15 14 4.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** AVIR - Aviron $25.01 *** Hope Springs Eternal! *** Aviron (NASDAQ:AVIR) is a biopharmaceutical company focused on the prevention of disease through innovative vaccine technology. The company currently is focusing its product development and commercialization efforts on its lead product candidate, FLUMIST, an investigational live virus vaccine delivered as a nasal mist for the prevention of influenza. Aviron's goal is to become a leader in the discovery, development, manufacture and marketing of vaccines that are safe, effective and suitable for widespread use. The company's vaccine development programs are based on techniques for producing attenuated live virus vaccines and on its proprietary genetic engineering technologies. AVIR has once again garnered investor favor after the company said it can satisfy the concerns of U.S. regulators about its experimental nasal flu vaccine, FluMist, without having to conduct additional clinical trials. Aviron's stock lost almost one third of its value in late July after a federal advisory panel recommended against approval of FluMist, saying more safety data was needed. Reasonable short-term speculation with a favorable cost basis. SEP 22.50 QCV IX LB=3.10 OI=148 CB=21.91 DE=14 TY=5.9% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=AVIR ***** DP - Diagnostic Products $44.05 *** Blue Sky Territory *** Diagnostic Products (NYSE:DP) develops, manufactures and markets medical immunodiagnostic test kits that utilize technology derived from immunology and molecular biology and automated laboratory instruments that perform the tests. The company's products are used by hospital, clinical, veterinary, research and forensic laboratories, as well as doctors' offices, to obtain precise and rapid identification and measurement of hormones, drugs, viruses, bacteria and other substances present in body fluids and tissues at infinitesimal concentrations. No news on this issue since July when DP reported record sales of $72.8 million, a 14% increase, and earnings of $10.0 million, or $0.34 per diluted share, up 42% over the second quarter of 2000. We simply favor the bullish break-out above resistance and the move to a new all-time high. SEP 42.50 DP IV LB=2.40 OI=141 CB=41.65 DE=14 TY=4.4% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=DP ***** IMNX - Immunex $17.83 *** Bracing For A Rally! *** Immunex (NASDAQ:IMNX) is a biopharmaceutical company dedicated to developing immune system science to protect human health. Applying its scientific expertise in the fields of immunology, cytokine biology, vascular biology, antibody-based therapeutics and small molecule research, the company works to discover new targets and new therapeutics for treating rheumatoid arthritis, asthma and other inflammatory diseases, as well as cancer and cardiovascular diseases. Immunex's product revenues come from products in two major therapeutic classes, anti-inflammatory and specialty therapeutics, principally oncology and multiple sclerosis. Immunex continues to forge a Stage I base and the improving technicals suggest a bullish resolution. Immunex will present at the Bear Stearns Healthcare Conference on 9/14/01. SEP 17.50 IUU IW LB=1.00 OI=12042 CB=16.83 DE=14 TY=8.6% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=IMNX ***** NEV - Nuevo Energy $18.05 *** Oil Sector Hedge *** Nuevo Energy (NYSE:NEV) is primarily engaged in the exploration for, and the acquisition, exploitation, development and production of crude oil and natural gas. The company accumulates oil and gas reserves through the drilling of exploratory wells on acreage owned by or leased to the company, or through the purchase of reserves from others. Nuevo also owns and operates gas plants and other facilities, which are ancillary to the main business of producing oil and natural gas. The company also owns certain surface real estate parcels in California that are candidates for sale and/or development in future years. Nuevo has benefited from higher crude prices and has seen a rise in the value of a number of the company's thermal oil properties. Over the last two years, the stock has traded in a narrow range near $17 and this position offers a reasonable cost basis for those wishing to add the issue to their stock portfolio. SEP 17.50 NEV IW LB=0.90 OI=12 CB=17.15 DE=14 TY=4.4% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=NEV ***** NSM - National Semiconductor $31.61 *** Fishing For A Bottom! *** National Semiconductor (NASDAQ:NSM) designs, develops, manufactures and markets a wide array of semiconductor products, including a broad line of analog, mixed-signal and other integrated circuits. The company formed three organizational units: the Analog Group, which develops and manufactures numerous building block products; the Information Appliance Group, which delivers component and system solutions; and the Network Products Group, which offers a line of ethernet products that address a range of applications. On Thursday, National Semiconductor reported a fiscal 1st-quarter loss on substantially lower revenues, but forecast a modest rise in sales for the 2nd-quarter. The company's CEO stated that "the recent improvements in bookings suggests that the worst may be behind us." The semiconductor sector was relatively strong over the last two days and this position offers favorable short-term speculation on a potential rebound. SEP 30.00 NSM IF LB=2.60 OI=4713 CB=29.01 DE=14 TY=7.4% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=NSM ***** RCOM - Register.com $10.41 *** Rally Mode? *** Register.com (NASDAQ:RCOM) is a provider of Internet domain name registration products and services worldwide for businesses and individuals that want a unique address and branded identity on the Internet. The company also offers a suite of value-added products and services targeted to assist its customers in developing and maintaining their online identities, including real-time domain name management, Website creation tools under the name FirstStepSite, domain name forwarding and domain name re-sale services, such as auctions, through its subsidiary Afternic.com. RCOM directly registers domain names across the generic top-level domains .com, .net and .org, and registers names in over 240 country-code domains. No news to explain this week's rally, but the move back above a long-term moving average on heavy volume is interesting. Does somebody know something we don't? SEP 10.00 RAU IB LB=0.85 OI=157 CB=9.56 DE=14 TY=10.0% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=RCOM ***** UNFI - United Natural Foods $20.31 *** Earnings Rally! *** United Natural Foods (NASDAQ:UNFI) is a national distributor of natural foods and related products in the US. UNFI is the main supplier to a majority of its customers, offering high-quality natural products consisting of groceries and general merchandise, nutritional supplements, bulk and foodservice products, personal care items, perishables and frozen foods. The company serves more than 7,000 customers in 50 states, including independent natural products retailers, super natural chains and conventional supermarkets; and are the primary distributor to the two largest super natural chains: Whole Foods Markets, Inc. (Whole Foods) and Wild Oats Markets, Inc. (Wild Oats). Through its subsidiary, the Natural Retail Group, the Company also owns and operates 11 retail natural products stores located in the eastern US. UNFI reported on Thursday this week and said 4th-quarter earnings increased as sales growth exceeded expectations. The company also raised its fiscal 2002 forecast by about $0.03 a share for the year. A reasonable entry point into the bullish food sector. SEP 20.00 JQN ID LB=1.10 OI=186 CB=19.21 DE=14 TY=8.9% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=UNFI ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional 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 and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield EXTR 15.25 SEP 15.00 EUT IC 1.40 441 13.85 14 18.0% BRCM 31.41 SEP 30.00 RCQ IF 3.30 6105 28.11 14 14.6% CVAS 7.92 SEP 7.50 CUG IU 0.85 134 7.07 14 13.2% CNXT 10.45 OCT 10.00 QXN JB 1.50 9317 8.95 42 8.5% VIP 17.58 SEP 17.50 VIP IW 0.65 20 16.93 14 7.3% MOGN 15.75 OCT 15.00 QOG JC 1.95 189 13.80 42 6.3% CTXS 31.48 SEP 27.50 XSQ IY 4.50 327 26.98 14 4.2% ***************** NAKED PUT SECTION ***************** ***************** NAKED PUT SECTION ***************** Option Trading Mechanics: The Exchange System By Ray Cummins One of our new readers asked for an explanation of the terms "market-maker" and "specialist" with regard to option trading. In the U.S. equity markets, specialists are required to make a market in a stock when public orders to buy or sell the issue are absent. They will buy and sell from their own inventory to keep a position liquid. They also maintain the public book of orders (conditional orders to buy and sell at specific prices). When option trading began in 1973, the Chicago Board Options Exchange (CBOE) introduced a similar method of trading; the market-maker and board-broker system. Market-makers are floor traders who either are exchange members or rent their seats from exchange members. Their goal is to trade for profit without risk due to unfavorable price movement in the underlying issue. The CBOE has several market-makers for each optionable stock. They provide bids and offers in the absence of public orders. These traders do not participate in any retail trading; they buy and sell for their own accounts only. A separate specialist, the board broker, keeps the book of limit orders. The board broker cannot do any trading but he manages the book so other floor traders can see how many orders to buy and sell are near the current market (the highest bid and lowest offer). The CBOE system is very efficient because several market-makers compete to create the market in a single security. The "open book" method of public orders also provides an orderly trading forum. While the Pacific Options Exchange (PCX) and the CBOE utilize a competitive market-maker system, the American Exchange (AMEX) and the Philadelphia (PHLX) Exchange are "specialist" markets. These specialists are intended to have an exclusive franchise in the maintenance of a market, subject to the specialists' capital and inventory. In addition, the AMEX uses specialists for option trading, but it also has floor traders who function similarly to market-makers. Most of the regional option exchanges use various combinations of the two systems and in many cases, there are also traders referred to as "locals" that are funded by individuals or institutions. They buy and sell options for private accounts and are not allowed to execute orders on behalf of public customers. Since there must always be a buyer for each option sold (option purchases and sales must match at the end of each day), these locals help maintain liquidity and fair prices for retail traders. Option markets that use competitive systems are consensual, where the liquidity and capital is spread around to those in the crowd. The PCX and the CBOE place certain market-makers (The Lead Market Maker at PCX and the Designated Primary Market Makers at CBOE) in a quasi-specialist role. In exchange for assuming more marketing and customer service responsibilities, these market-makers enjoy a guaranteed order flow participation. The result is increased accountability with greatly enhanced customer convenience and the traditional benefits of the competitive system are maintained. The risk management strategies and floor mechanics are the most difficult part of exchange trading. Mistakes are expensive and repeat offenders are short-lived. Implied volatility and option pricing theory are the mathematical principles that a specialist must understand to be successful. Most floor traders participate in neutral combinations that don't require a specific movement in the underlying security to be profitable. They utilize the Gamma in options to create profitable positions. This type of trading is much different than our retail style of buying/selling options (or spreads) to profit from directional moves in the underlying stock. The concept involves being long or short Gamma in a class of options at the right time. Gamma is the ratio of a change in the option's Delta to a small change in the price of the asset to which the option represents. You might think of it as a desire to own options when there is a demand for them or be short options when they are in great supply and inexpensive to repurchase. The most unique tool of the professional trader is the electronic, hand-held terminal that brings computer support to specialists on the trading floor. These unique, state-of-the-art devices provide market-makers with automated trading data, maintaining intra-day positions with real-time risk assessment. The computers store all of the theoretical values and profit equations and offer portfolio management ability to the associated clearing firm. Those of you interested in more information on option trading at the exchanges should visit the CBOE or the PCX. The majority of specialists are very friendly and the lessons learned are a basic requirement for any option trader who is interested in becoming a successful, long-term participant in the derivatives market. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield PPD 20.50 19.05 SEP 15.00 0.80 *$ 0.80 11.8% MDCC 20.50 23.25 SEP 17.50 0.95 *$ 0.95 11.2% GERN 14.50 14.60 SEP 12.50 0.55 *$ 0.55 11.0% VPHM 35.59 30.15 SEP 30.00 0.95 *$ 0.95 10.7% CENT 8.98 9.50 SEP 7.50 0.35 *$ 0.35 10.3% PLXS 36.19 31.42 SEP 30.00 0.80 *$ 0.80 9.6% ALLY 18.23 19.06 SEP 15.00 0.50 *$ 0.50 9.5% Adj 2-1 split LBRT 14.32 13.23 SEP 12.50 0.25 *$ 0.25 9.1% KDE 28.00 26.55 SEP 25.00 0.50 *$ 0.50 8.7% ILUM 33.20 34.70 SEP 30.00 0.60 *$ 0.60 8.5% LBRT 15.35 13.23 SEP 12.50 0.25 *$ 0.25 7.7% PPD 21.09 19.05 SEP 15.00 0.40 *$ 0.40 7.5% ISIL 39.20 34.27 SEP 30.00 0.90 *$ 0.90 7.5% SAGI 17.75 15.41 SEP 15.00 0.40 *$ 0.40 7.3% URBN 15.04 16.35 SEP 12.50 0.25 *$ 0.25 7.3% CTXS 32.95 31.48 SEP 27.50 0.35 *$ 0.35 6.6% NEM 21.48 20.79 SEP 20.00 0.55 *$ 0.55 6.2% ILXO 29.15 27.29 SEP 25.00 0.45 *$ 0.45 6.1% PRGX 13.75 14.18 SEP 12.50 0.30 *$ 0.30 5.7% IMCL 44.89 53.30 SEP 30.00 0.70 *$ 0.70 5.2% GERN 17.40 14.60 SEP 15.00 0.45 $ 0.05 1.1% HDL 15.46 14.24 SEP 15.00 0.40 $ -0.36 0.0% PPD 22.28 19.05 SEP 20.00 0.50 $ -0.45 0.0% SPF 23.47 20.60 SEP 22.50 0.40 $ -1.50 0.0% *$ = Stock price is above the sold striking price. Comments: Higher unemployment figures fueled a broad sell-off in the market today with the S&P 500 Index ending at its worst levels since 1998. Bearish investor sentiment affected a number of industry groups including retail, biotechnology, financial, cyclical, drug and airline issues. Stocks in the Materials and Construction segment also slumped, a sign that investors are beginning to lose confidence in the housing market, which has been a bastion of strength in the weakening economy. Our position in Standard Pacific (NYSE:SPF) was hammered, and it is now a candidate for early exit. Handleman (NYSE:HDL) fell in sympathy with retail stocks and Pre-Paid Legal (NYSE:PPD) tumbled along with a number of issues in the Personal Service sector. Evaluate your long-term outlook for those positions. Concerns that future demand for personal electronic products will decline in the slowing economy have weighed on stocks in the semiconductor industry and positions in Sage (NASDAQ:SAGI) and Plexus (NASDAQ:PLXS) should be monitored for any further downside activity. Among the positions previously listed as possible "early-exit" candidates, Advanced Fibre (NASDAQ:AFCI), and Alamosa Holdings (NASDAQ:APCS) were closed while Newmont (NYSE:NEM), ViroPharma (NASDAQ:VPHM), and Geron (NASDAQ:GERN) remain on the watch-list. Positions Closed: Powerwave (NASDAQ:PWAV), Advanced Fibre Comm. (NASDAQ:AFCI), Alamosa Holdings (NASDAQ:APCS) NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield BRCM 31.41 SEP 25.00 RCQ UE 0.55 1453 24.45 14 17.5% CTXS 31.48 SEP 27.50 XSQ UY 0.60 5653 26.90 14 14.2% FDP 15.18 SEP 15.00 FDP UC 0.40 0 14.60 14 13.8% ICST 19.00 SEP 15.00 IUY UC 0.25 281 14.75 14 13.4% IMCL 53.30 SEP 45.00 QCI UI 0.50 1654 44.50 14 8.0% SCTC 13.05 SEP 12.50 YQS UV 0.30 10 12.20 14 13.1% TERN 7.01 OCT 5.00 TUN VA 0.30 656 4.70 42 12.8% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield BRCM 31.41 SEP 25.00 RCQ UE 0.55 1453 24.45 14 17.5% CTXS 31.48 SEP 27.50 XSQ UY 0.60 5653 26.90 14 14.2% FDP 15.18 SEP 15.00 FDP UC 0.40 0 14.60 14 13.8% ICST 19.00 SEP 15.00 IUY UC 0.25 281 14.75 14 13.4% SCTC 13.05 SEP 12.50 YQS UV 0.30 10 12.20 14 13.1% TERN 7.01 OCT 5.00 TUN VA 0.30 656 4.70 42 12.8% IMCL 53.30 SEP 45.00 QCI UI 0.50 1654 44.50 14 8.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** BRCM - Broadcom $31.41 *** Entry Point! *** Broadcom (NASDAQ:BRCM) is a provider of highly integrated silicon solutions that enable broadband communications and networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies system-on-a-chip solutions for applications in digital cable set-top boxes and modems, high-speed local, metropolitan and wide area and optical networks, home networking, Voice over Internet Protocol (VoIP), carrier access, residential broadband gateways, direct broadcast satellite and terrestrial digital broadcast, digital subscriber line, wireless communications, server solutions, and network processing. Chip stocks edged higher Friday, even as the broader market retreated and traders who believe the semiconductor group will lead the NASDAQ in its eventual recovery can speculate on that outcome with a position in this bellwether issue. SEP 25.00 RCQ UE LB=0.55 OI=1453 CB=24.45 DE=14 TY=17.5% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=BRCM ***** CTXS - Citrix Systems $31.48 *** Solid Performer! *** Citrix Systems (NASDAQ:CTXS) develops, markets, sells and supports comprehensive application delivery and management software that enables the effective and efficient enterprise-wide deployment and management of applications, including those designed for Microsoft Windows operating systems and UNIX Operating Systems. Their products operate by executing the applications on a multi-user Windows NT, Windows 2000 or UNIX server and provide end users access to the server from a variety of client platforms through the company's ICA protocol. The company's primary market for its products and services is large and medium-sized enterprises that require the ability to securely deploy, manage and access business applications across the extended enterprise. Citrix also targets application service providers that need products and technologies to deliver the largest number of applications to the broadest array of computing devices with minimum bandwidth requirements. Citrix is one of the smaller companies in the software industry but they are succeeding in the tough economy with a unique, diverse product line. Traders who want to establish a discounted cost basis in the issue should consider this position. SEP 27.50 XSQ UY LB=0.60 OI=5653 CB=26.90 DE=14 TY=14.2% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=CTXS ***** FDP - Fresh Del Monte Produce $15.18 *** Portfolio Hedge! *** Fresh Del Monte Produce (NYSE:FDP), a holding company, produces, transports and markets fresh produce worldwide. Del Monte is 57% owned by IAT Group, which is 100% beneficially owned by members of the Abu-Ghazaleh family. The company's products are sourced from company-owned farms, through joint venture arrangements and through supply contracts with independent growers in 15 locations in North, Central and South America, the Asia-Pacific region and Africa. The company's produce is distributed in North America, Europe, the Asia-Pacific region and South America. Del Monte's products, marketed throughout the world under the Del Monte brand name, which has been in existence since 1892, includes the majority of common consumable fruits and vegetables. The Food and Beverage sector is performing well and investors who want a solid company in the group for their long-term portfolio can use this position to target-shoot a favorable cost basis in the issue. SEP 15.00 FDP UC LB=0.40 OI=0 CB=14.60 DE=14 TY=13.8% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=FDP ***** ICST - Integrated Circuit Systems $19.00 *** Trading Range! *** Integrated Circuit Systems (NASDAQ:IDTC) was initially engaged in designing and marketing custom application specific integrated circuits (ASICs) for various industrial customers. In particular, the company focused on designing ASICs, which combined both analog and digital, or mixed-signal, technology. In 1988, the company adopted a strategy of developing proprietary integrated circuits to capitalize on its complex mixed-signal design technology and pioneered the market for frequency timing generators or silicon timing devices which provide the signals or "clocks" necessary to synchronize high performance electronic systems. More recently, the company has expanded into communications, by developing high performance clocking solutions supporting networking, telecom, workstation and server applications. ICST has a established a well-defined trading range and a solid support area that should continue to provide low risk speculation in the technology group. SEP 15.00 IUY UC LB=0.25 OI=281 CB=14.75 DE=14 TY=13.4% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=ICST ***** IMCL - ImClone $53.30 *** Rally In Progress! *** ImClone Systems (NASADAQ:IMCL) is a biopharmaceutical company that is developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company focuses on three strategies for treating cancer, growth factor blockers, cancer vaccines and angio-genesis inhibitors. The company's lead product candidate, IMC-C225, is a unique therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain solid tumors depend in order to grow. IMC-C225 has been shown in several Phase I/II trials to have acceptable safety, to be well tolerated and, when administered with radiation therapy or chemotherapy, to enhance tumor reduction. This issue has moved up and out of a recent trading range and the bullish technical indications suggest it has a high probability of remaining above the sold strike price. Traders who are interested in selling premium for credit using a popular biotechnology issue should consider this speculative position. SEP 45.00 QCI UI LB=0.50 OI=1654 CB=44.50 DE=14 TY=8.0% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=IMCL ***** SCTC - Systems & Computer Tech. $13.05 *** Record Sales! *** Systems & Computer Technology (NASDAQ:SCTC) provides technology and business solutions for higher education, utilities and process manufacturing. SCTC works collaboratively with its clients to deliver software and service solutions tailored to their needs. Industry expertise in each of the company's markets enables SCTC to maximize its clients' customer relationships and achieve significant, measurable improvements for their organizations. SCTC announced in July that it had achieved an all-time high in total revenue for the 3rd-quarter, which ended June 30, 2001. The education business unit had the highest 3rd-quarter ever in software sales and commissions, which included $2.7 million in shares of WebCT, earned by signing institutions with cumulative enrollments totaling one million students. We continue to favor the bullish chart, especially with the current market conditions, and SCTC appears relatively stable with buying support in the $11-$12 range. SEP 12.50 YQS UV LB=0.30 OI=10 CB=12.20 DE=14 TY=13.1% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=SCTC ***** TERN - Terayon Communication $7.01 *** Bottom Fishing! *** Terayon Communication Systems (NASDAQ:TERN) develops, markets and sells broadband access systems that enable cable operators, telco carriers and other providers of broadband services to cost-effectively deploy reliable voice, video and data services over cable, copper wire and satellite networks. Terayon sells its broadband access products through direct sales worldwide, and distributes its products via resellers and telecom systems integrators. Some of its major customers include Bell South, Qwest Communications, Verizon, Adelphia Communications, Rogers Cable TV, and Cox Communications. Terayon shares have rallied in recent sessions on news that CableLabs, a consortium of cable companies, will include Terayon-developed technology within its new cable modem standard that is expected to be completed by the end of the year. UBS Warburg, W.R. Hambrecht, Lehman Brothers, and Deutsche Banc Alex. Brown raised their investment ratings on the company and our cost basis offers a low-risk entry point in the issue. OCT 5.00 TUN VA LB=0.30 OI=656 CB=4.70 DE=42 TY=12.8% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=TERN ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional 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 and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield NFLD 15.97 SEP 15.00 DHQ UC 0.65 309 14.35 14 23.3% EXTR 15.25 SEP 12.50 EXJ UV 0.30 949 12.20 14 17.9% AMAT 40.28 SEP 35.00 ANQ UG 0.50 2606 34.50 14 9.6% LSCC 22.52 SEP 20.00 LQT UD 0.30 570 19.70 14 9.6% MOGN 15.75 OCT 5.00 QOG VV 0.35 100 4.65 42 7.2% INTU 35.14 SEP 30.00 IQU UF 0.30 2240 29.70 14 7.1% SEE DISCLAIMER IN SECTION ONE ***************************** ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Selling Climax Sends Stocks to New Lows! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, September 7, 2001 The stock market plunged to its lowest level in three years today amid new concerns over rising unemployment and falling corporate profits. Economically sensitive stocks were particularly weak, dragging the Dow Industrial Average down more than 200 points to 9,605. The NASDAQ Composite slid 18 points to 1,687 as software, networking and Internet stocks recorded additional declines. In the broader market, retail and airline stocks posted some of the worst losses, dragging the S&P 500 Index down 20 points to 1,085. Trading volume on the Big Board reached 1.41 billion shares, with losers beating winners 2 to 1. Activity on the NASDAQ was heavy at 1.7 billion shares exchanged, with declines doubling advances 2 to 1. In the bond market, the U.S. 30-year Treasury rose 19/32, pushing its yield down to 5.37%. Last Sunday's new plays (positions/opening prices/strategy): Whirlpool (NYSE:WHR) SEP75C/SEP70C $0.60 credit bear-call Centex (NYSE:CTX) SEP35P/SEP40P $0.60 credit bull-put Possis (NSDQ:POSS) JAN15C/SEP15C $1.10 debit calendar Prot. Des. (NSDQ:PDLI) SEP60C/SEP60P $7.25 debit straddle Nat. Semi (NYSE:NSM) SEP35C/SEP30P $0.05 debit synthetic This week's volatile market activity provided some excellent entry opportunities for our new combination plays however, the bullish candidates did not fare well in the current downtrend. Centex was strong until Thursday, when shares of homebuilders slumped as investors began to lose confidence in the housing market. While the latest housing figures show demand for new homes, and mortgages are cheap, investors questioned how long the housing market could stay strong as job losses mount and consumer confidence fades. The position is currently positive but any further downside activity should be seen as a potential "early-exit" signal. Our speculation play in Possis was also a disappointment as the issue retreated substantially from recent highs. The selling came on low volume but there is no reason for investors to support the current price until the outlook for the market improves. The big winner this week was Protein Design Labs. The debit-straddle candidate offered a discounted entry price on Monday and eventually achieved a 15% profit in only four days. Portfolio Activity: Stocks in the Spreads portfolio drifted lower in conjunction with the broader market this week as investors began to comprehend the reality that the economy is slowing and is not going to recover any time in the near future. The unemployment rate rose to 4.9% in August and analysts are now worried that the rise in jobless consumers will dampen public sentiment and force a reduction in retail spending. Consumer spending makes up over two-thirds of the U.S. economy and has been pivotal in keeping America out of a recession. Experts also believe the recent rise in unemployment necessitates another rate cut by the Federal Reserve and based on the view that "economic risks in the U.S. economy remain tilted toward weakness," the Fed will likely adjust rates prior to the next FOMC meeting. Regardless of the future effects of a rate cut, the current outlook for share values is less than favorable and that's the reason our bearish plays are performing so well. Positions in Best Buy (NASDAQ:BBY), Electronic Data (NYSE:EDS), Stericycle (NASDAQ:SRCL), Whirlpool (NYSE:WHR) and Shire Pharma (NASDAQ:SHPGY) are expected to expire at maximum profit. Among the bullish plays, Amerisource-Bergen (NYSE:ABC) and National Semiconductor (NYSE:NSM) are the only issues that have held up in the downbeat environment and even the rallies in Southwest Securities (NYSE:SWS) and Fifth Third Bancorp (NYSE:FITB) came to an abrupt end when the selling began in earnest. One of the top performing strategies this month has been the debit straddle and September's winners include Amdocs (NYSE:DOX), Protein Design (NASDAQ:PDLI) and Teradyne (NYSE:TER). Of the remaining neutral positions, Jacobs Engineering (NYSE:JEC) is again approaching a break-even exit and Serena Software (NASDAQ:SRNA) traded at a new low during today's session, suggesting that the position may yet become profitable. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** CHV - Chevron $92.40 *** Texaco Merger Approved! *** Chevron (NYSE:CHV) manages its investments in, and provides its administrative, financial and management support to, U.S. and foreign subsidiaries and affiliates that engage in integrated petroleum operations, chemicals operations, coal mining and other energy services. The company operates in the United States and approximately 100 other countries. Petroleum operations consist of exploring for, developing and producing crude oil and natural gas; refining crude into finished petroleum products; marketing crude oil, natural gas and the products derived from petroleum, and transporting crude oil, natural gas and petroleum products by pipelines, marine vessels, motor equipment and rail car. The Chemicals operations include the manufacture and marketing of commodity petrochemicals, plastics for industrial uses and fuel and lubricating oil additives. Chevron shares rallied late in the week amid speculation their acquisition of Texaco (NYSE:TX) would be approved. On Friday, the Federal Trade Commission cleared the $45 billion merger between the two companies, which creates the #3 oil producer in the United States and the world's fourth largest conglomerate in the oil industry. The transaction was approved only after Texaco agreed to divest its stakes in the two joint ventures with Royal Dutch Shell and relinquish its interests in certain natural gas processing and transportation facilities as well as a portion of its general aviation fuel marketing business. Shareholders of both companies are expected to approve the merger on October 9 in Houston. The combined company will be called Chevron-Texaco and the transaction is expected to achieve cost savings of at least $1.2 billion in the coming year. Investors are apparently happy with the FTC approval and traders can profit from future bullish movement in the issue with this combination position. PLAY (conservative - bullish/credit spread): BUY PUT SEP-85 CHV-UQ OI=1510 A=$0.20 SELL PUT SEP-90 CHV-UR OI=2934 B=$0.70 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=14% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=CHV ****************************************************************** ERTS - Electronic Arts $56.14 *** Technicals Only! *** Electronic Arts (NASDAQ:ERTS) operates in two principal business segments globally. The EA Core business segment comprises the creation, marketing and distribution of entertainment software, while the EA.com business segment is composed of the creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and Website advertising. Electronic Arts is old favorite in the Spreads/Combos/Straddles section and we follow the issue on a regular basis for potential portfolio plays. The stock has performed relatively well over the past few weeks, considering the broad-market slump but there is little indication that the range-bound trend will change in the near future. The issue appears to be forming a significant Stage III "top" and the recent chart pattern suggests the trend will continue with a neutral-to-bearish technical outlook. Past rallies have failed well below the break-even point in this play and with the current bearish environment, it appears the share value has little chance of reaching our sold positions before the October expiration. PLAY (very conservative - bearish/credit spread): BUY CALL OCT-70 EZQ-JN OI=358 A=$0.55 SELL CALL OCT-65 EZQ-JM OI=247 B=$1.15 INITIAL NET CREDIT TARGET=$0.75-$0.85 PROFIT(max)=16% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=ERTS ****************************************************************** CLX - Clorox $38.68 *** Reader's Request! *** The Clorox Company (NSE:CLX) is engaged in the production and marketing of non-durable consumer products sold primarily through grocery and other retail stores. These business operations are represented by the Company's United States Household Products and Canada, United States Specialty Products and the International segment. The United States Household Products and Canada segment includes the company's household cleaning, bleach and other home care products, water filtration products marketed in the United States and all products marketed in Canada. The United States Specialty Products segment includes their charcoal, automotive care, cat litter, insecticide, fire log, dressings, sauces, professional products and food storage and disposal categories. The International segment, which includes the company's overseas operations (excluding Canada), exports and Puerto Rico, primarily focuses on the laundry, household cleaning, automotive care and food storage and disposal categories. One of our readers commented on the increased bullish activity in the Consumer Non-durables industry and he submitted a number of issues for review. He requested that we identify some favorable spread positions in those issues and based on the recent technical indications, we feel that Clorox is one of the best candidates for future upside activity. A great way to profit from directional movement is the synthetic position and this play offers traders a way to speculate conservatively on the company's long-term share value. PLAY (speculative - bullish/synthetic position): BUY CALL JAN-45 CLX-AI OI=614 A=$1.00 SELL PUT JAN-35 CLX-MI OI=1924 B=$1.30 INITIAL NET CREDIT TARGET=$0.40-$0.50 TARGET PROFIT=$0.75-$1.00 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,250 per contract. http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=CLX ****************************************************************** - STRADDLES AND STRANGLES - Option premiums have increased slightly in recent sessions, but the current conditions still favor option buying strategies and we have some great straddle candidates for traders who like to participate in short-term speculation plays. These stocks have statistically undervalued options and the potential to move high or low enough to make the straddles profitable. In addition, the underlying issues have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk-reward of the position. As with any recommendation, each play should be evaluated for portfolio suitability and also reviewed with regard to your strategic approach and trading style. ****************************************************************** BRW - Broadwing $15.44 *** Looking For A Bottom! *** Broadwing (NYSE:BRW) is a unique full-service, local and national provider of data and voice communications services and a regional provider of wireless communications services. The company seeks to provide service on a national level by combining its nationwide optical network and Internet backbone, and its brand name and service in its local and regional franchise area. The company has principal businesses in four industry segments, Broadband, Local Communications, Wireless and Other. Broadwing Communications, a subsidiary of the company, is a nationwide provider of data and voice communications services. These services are provided over more than 18,000 miles of fiber-optic transmission facilities. PLAY (speculative - neutral/debit straddle): BUY CALL SEP-15.00 BRW-IC OI=0 A=$1.15 BUY PUT SEP-15.00 BRW-UC OI=555 A=$0.75 INITIAL NET DEBIT TARGET=$1.75 TARGET PROFIT=15-25% Note: There is currently no Open Interest in the call options so plan to target-shoot the entry to guarantee a good fill. If the call option is "in-the-money" at expiration but the bid/ask spreads are unfavorable due to low volume, simply exercise the position (and sell the stock) to lock-in the profit. http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=BRW ****************************************************************** PHTN - Photon Dynamics $30.10 *** Big Mover! *** Photon Dynamics (NASDAQ:PHTN) is a provider of yield management solutions to the flat panel display industry. The company's acquisition of CR Technology in November 1999 complemented its core capabilities of data acquisition, image analysis and systems engineering. As a result, Photon Dynamics also offers numerous yield management solutions for the printed circuit board assembly and advanced semiconductor packaging industries. The company's test, repair and inspection systems are used by manufacturers to collect data, analyze product quality and identify and repair product defects at critical steps in the manufacturing process. PLAY (speculative - neutral/debit straddle): BUY CALL SEP-30 PDU-IF OI=25 A=$2.40 BUY PUT SEP-30 PDU-UF OI=739 A=$2.20 INITIAL NET DEBIT TARGET=$4.25-$4.40 TARGET PROFIT=15-25% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=PHTN ****************************************************************** SMTF - SmartForce $23.97 *** Breaking Down! *** SmartForce plc (NASDAQ:SMTF) provides e-learning solutions that help businesses support their critical business initiatives and deploy knowledge globally across their extended enterprise of employees, customers, suppliers, distributors and other business partners. The company's hosted, scalable e-learning platform, e3, is an integrated, object-based e-learning architecture that allows the company to build e-learning solutions precisely targeted to an enterprise's specific business requirements. The unique platform combines a learning management system with access to an inclusive offering of learning events and resources comprising over 4,000 hours of e-Learning content, as well as 2,500 hours of localized content, online SmartSeminars, SmartMentoring, SmartSimulations, e-testing, articles, peer-to-peer collaboration and other online workshops. PLAY (speculative - neutral/debit straddle): BUY CALL SEP-25 QAG-IE OI=55 A=$1.40 BUY PUT SEP-25 QAG-UE OI=89 A=$2.55 INITIAL NET DEBIT TARGET=$3.75-$3.80 TARGET PROFIT=15-25% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=SMTF ****************************************************************** ************************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. 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