The Option Investor Newsletter Sunday 09-16-2001 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/6078_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 9-14 WE 9-7 WE 8-31 WE 8-24 DOW 9605.51 - .34 9605.85 -343.90 9949.75 -473.42 +182.39 Nasdaq 1695.37 + 7.67 1687.70 -117.73 1805.43 -111.37 + 49.79 S&P-100 558.58 + 4.69 553.89 - 23.51 577.40 - 29.31 + 12.84 S&P-500 1092.54 + 6.76 1085.78 - 47.80 1133.58 - 51.35 + 22.96 W5000 10104.44 + 37.95 10066.49 -448.60 10515.09 -433.32 +188.32 RUT 440.73 - 4.46 445.19 - 23.37 468.56 - 12.25 + 5.16 TRAN 2676.49 - 36.65 2713.14 -100.27 2813.41 - 40.98 + 29.74 VIX 34.60 + .24 34.36 + 6.51 27.85 + 5.56 - 4.45 VXN 63.84 - 1.61 65.45 + 12.59 52.86 + 5.16 - 4.32 TRIN .68 1.25 .71 .70 TICK +100 -113 -74 351 Put/Call 1.01 .84 .82 .56 ****************************************************************** Market Meltdown or Explosion? by Jim Brown The damage has been done to lives and buildings. The damage to the stock market has yet to be seen. When the NYSE opens for trading on Monday it will not be without problems. Still the almost superhuman effort to reroute communications, occupy temporary office space, install and configure new computers, servers, routers, etc, will be tested under fire at 9:30 Monday morning. There is likely to be outages, bad ticks and massive failures as record volume hits the boards. Still America will be back in business but it will not be business as usual. There is a huge difference of opinion as to what will happen on Monday morning. There is a group of analysts that think the markets could easily drop 8-10% at the open, rebound slightly and then fall off the cliff to extreme levels. The bullish camp think that Americans have put on their red, white and blue trading caps and will rush in to buy America on sale on Monday and create a very strong patriotic rally. Reality will likely be something in the middle of both those extremes. The Fed is building a fortress around the U.S. stock market and the American financial system. They have injected almost $215 billion of liquidity into the system in the last three days. $90 billion of that was funding for foreign banks to prevent a cash drain as funds are shipped around the world when the markets open for business. The Fed Funds Futures are showing almost an 85% chance for a 100 point rate cut in the next 30 days. The educated bettors are expecting a 50 point cut before the market opens on Monday with another cut at the October 2nd meeting if the markets are still in the tank. The Fed action, if it comes, will provide a boost to the market, temporarily. Because it has been telegraphed all week much of the impact has already been dulled. Heaven help us if they do not cut or only cut a quarter. The biggest problems will come from the change in the world as we know it. Airlines for example are literally on the verge of bankruptcy from the already 50% drop in revenue over the next 90 days. Reservations are being cancelled daily, and new restrictions on travel are being added as well. The CEO of Continental said on CNBC that most airlines would not survive the next 90 days without intervention. The government is trying to rush through a $2.5 billion grant to keep them liquid over the next two weeks and then a $12.5 billion loan guarantee to prevent them from bankrupting over the next 90 days. Air travel as we know it has changed. The airline sector as we know it will likely change over the next 90 days as well. Expect smaller carriers with lower reserves to experience problems and become prey for the giants. The -50% drop in airline bookings will also impact hotels, restaurants, retail and the service industry. Consumers were already losing confidence in the economy as evidenced by the huge drop in the sentiment numbers on Thursday. The University of Michigan sentiment dropped to 83.6 from 91.5 in August and was far below the 90.8 analysts expected. This is what the Fed has feared for some time. Fueling this drop was the spike in jobless claims to 431,000. With a head start down the recession hill any pull back by consumers because of the fear of terrorism could grease the skids not only in the U.S. but globally as well. The state department has issued a strong caution for overseas travel and the bombs have not even started falling. Without the U.S. tourist as well as tourists in general there will be serious problems with the global picture. Local economists are painting a gloomy picture. First Union said on Friday that the drop in retail, restaurants, hotels and travel would be enough to push the U.S. economy into a full blown recession. The economist for Bank One was also negative about the possibility of avoiding a global recession. In reality market fundamentals have worsened. Before the attack the fundamentals were terrible and the markets were tanking as companies warned on a daily basis. Now that the fundamentals for a major portion of our economy have literally been cut in half how can the markets react positively? General Electric was the first major company to warn based on the attack. They said losses in their reinsurance company for claims on the WTC would knock four cents off their earnings for this quarter. AIG also said they would lose -$500 million for their part in the claims. These are only the first of many warnings but these warnings may be seen as one time charges instead of normal operating and therefore ignored. It still sets a tone for the markets that is negative. Ford said disturbance in supply lines would cause it to make fewer vehicles and they would miss earnings estimates. Multiply this by hundreds of companies and you can see what lies ahead. Contrary to all the negative issues I mentioned above there are also many positive benefits to the economy. The amount of replacement hardware for the ground zero businesses will be substantial but it will still only be a blip on the screen long term. What will help is the change in business climate nationwide. Many corporations will see the devastation and complete destruction and start thinking about what would happen if that happened to their building due to terrorism, fire, flood, hurricane, tornado, earthquake, etc. It makes you feel very vulnerable. There will be a rise in orders as thousands of companies beef up their disaster recovery plans. The security sector will undergo a complete makeover and literally hundreds of thousands of people could find employment there over the next year. As the counter attack progresses it will heighten awareness and increase the security level for all America. This wave of capital spending will take some time to be seen in sales and profits but it will happen. It will not happen in time to help the markets next week. What will help us next week is the relaxation of the buyback rules by the SEC. They normally prevent companies from buying back their stock in volume on the open market. This prevents companies from manipulating their stock price. With the relaxed rules companies have more freedom to buy larger amounts. Cisco has already announced a $3 billion buyback to begin next week. AIG, even after announcing a $500 million loss, has approved a 40 million share buyback. This will put a floor under their shares. CSCO at $14.47 could put out a blanket order for millions of shares at $13. This would allow some market movement but limit the downside. AIG at $74 could put in a limit buy at $69.75 and basically support the stock in a very bad sector while giving themselves a little breathing room. Monday is likely to be historic in more ways than one. Many analysts think we could easily see the biggest volume day ever. Some have said we could actually see four billion shares on the NYSE. While I doubt the four million mark it will be very heavy. The best guess for direction is a strong dip at the open followed by a patriotic rebound but ending negative for the day. The war between the bears and the bulls could be waged for most of the week. There is likely to be a struggle to rally which will end with the realization of the recessionary facts. Sentiment has taken a serious hit on top of the drop from the prior week. Earnings will continue to fall through the fourth quarter and any bounce from a new wave of capital spending will not be seen until next year. The Dow is going to face a challenge from Boeing, GE, GM, JPM, AXP, C, WMT and DIS. Boeing is rumored to be at risk to drop -15% to -20%. JPM, C and AXP could easily drop -10% to -15%. The Dow, which closed at 9605 last Monday, could easily hit 9300 or even 9000 on panic selling. The European/Asian markets have fallen close to -10% on the news and could fall more in advance of our market open on Monday. A 5% drop on the Dow would put it at 9124. A 10% drop would see 8644. The markets were already severely oversold from the prior week and even a 5% drop from here may be too much of a temptation for investors to resist. That is of course if there are any investors willing to buy the dip in front of a huge unknown. With comments in the media today that Bin Laden has over 10,000 trained soldiers at his disposal across several countries, the battle is shaping up to be long and arduous. Up to 50,000 reservists have been approved to be called into active duty. This is bound to weigh on investors and consumers. The threats of revenge are already being made by the Taliban and they have the resources to carry it out. This will not be a couple cruise missiles launched in the night. This is going to be a sustained conflict with a good possibility of a ground war. Russia spent years and lost thousands of soldiers in Afganistan. It is a very rough terrain and not conducive to a quick conclusion. Benjamin Netanyahu called the attack the "wake up call from hell." The threat has always been there but their technical ability to act on it was lacking. He said they are capable of changing the direction of history if they are not stopped soon. This type of information is being absorbed by investors and it will weigh heavy on the markets. I would love to tell you that the market will do thus and so on Monday and have you plan your trades accordingly. Unfortunately there is no human being with the ability to predict what will happen. We have spent the entire week producing special reports and analyzing the possibilities. We have received some great emails from our readers about these efforts. The sector analysis, trading tips and sentiment pieces were our efforts to equip you to make the right decisions on Monday. We have had some very successful put plays recently. Many of them could have been very successful on Monday as well. Because we do not want to look like opportunists trying to profit on the tragedy we are dropping all of them this weekend. BA, PGR, TSG, JPM, AIG, ACF and MER. How you continue to play these is of course up to you. We have been asked by many to suggest some plays that we thought would benefit from the money shuffle that will occur. We tried to find a couple politically correct companies that were not directly impacted but would benefit from a longer term outlook. We chose ATK, Alliant Tech Systems and NBR, Nabors Industries an oil driller that focuses on the lower 48 states. We also suggested a couple plays on the QQQ and DJX to benefit from any major dip and rebound. We will resume a regular play pick schedule on Tuesday after the smoke clears. If you are not in the markets currently I would be very careful attempting to trade them on Monday. Those readers who are long options and have seen time value evaporate over the last week would do well to monitor those positions closely. The Options Clearing Corp will not change the expiration date. Remember, for every holder of a long option who is wishing for another week of time to hopefully recover value, there is another writer of that option that wants it to expire worthless. Do not expect relief in that direction. I apologize! Apparently many readers took my comments from Thursday night incorrectly and not in the spirit given. I apologize for the misunderstanding. I fully support Bush and realize that plans for any military operation must be fully developed before being put into operation. That was never in question. The point I was trying to make was the tone of the delivery of every speech by Bush was so soft and lacking in emotion that I feared the leaders of the rogue nations would read it as weakness. I wanted to see him speak more forcefully and with passion. I never suggested he simply start flinging bombs with reckless abandon. The various speeches on Friday were delivered with much more confidence and determination. It was encouraging. I seldom use this venue to make political statements and I apologize for any misunderstanding. Check out the great strategy sections and special reports in this weekends edition of the newsletter. New articles as well as the articles from earlier in the week are being repeated and summarized for your trading education. Profit from it! Definitely, enter passively, exit aggressively! Jim Brown Editor ****************************************************************** In the wake of the Attack on America, Option Investor published several Special Report and Sector Impact pieces last week. If you didn't get a chance to read these articles last week, make sure to read them over the weekend. ****************************************************************** ============== SPECIAL REPORT ============== Historical Reaction to Terrorist Attacks In the midst of the confusion and suffering of today's tragic events, investors already made nervous about the recent bear market are questioning how the markets may react when they reopen. There is no precedent for an attack so directly upon the core of the US financial system; the headquarters of over 150 companies including major brokerages were in the World Trade Center complex. However from a historical perspective, in the days and months following large scale terrorist or military action the U.S. financial markets have proven to be resilient. http://www.OptionInvestor.com/traderscorner/091101_4.asp ============== SPECIAL REPORT ============== A Trader's Personal Defense: Definition of various stop orders by Jeff Bailey Over the past several months, investors have become very familiar with the usefulness of trailing stops and different stop loss orders that they can place on different trades they currently have open in their accounts. When the markets do open back up for trading, the type of "stop" order you may have placed on a trade should be understood. There are two different types of "stop" orders. Subscribers may want to reassess their current stop orders and understand their implications. Here is a description of the two most common stop orders. http://www.OptionInvestor.com/traderscorner/091101_3.asp ============== SPECIAL REPORT ============== How your brokerage account is insured by Jeff Bailey Many investors and traders may be trying to get information on how their brokerage accounts are insured and what type of protection they may have. Investors are never insured against stock price fluctuation, but their accounts are insured against a firm's inability to continue business. http://www.OptionInvestor.com/traderscorner/091101_1.asp ============== SPECIAL REPORT ============== Brokers Ready To Roll - But Check Your Orders! by Jon Farnlof Lower Manhattan will be spending many months, if not years rebuilding the financial and city infrastructure damaged by the destruction of the World Trade Center. One of the benefits of the large investments in technology by the brokerage industry was that they had disaster recovery plans and equipment in place for this kind of event. As a result, even firms directly affected by the attack have announced that all records are safe and they will be fully operational when the markets reopen. However, investors should contact their brokers to verify their readiness and perhaps more importantly, to understand how will they handle orders that were pending when the markets closed. http://www.OptionInvestor.com/traderscorner/091201_2.asp ============== SPECIAL REPORT ============== Foreign markets mixed U.S. markets remain closed today, but many foreign markets were trading after yesterday's attacks on the World Trade Center and the Pentagon. In brief, Gold, Oil and the Swiss Franc rose in price during and after yesterday's World Trade Center attack, as investors turned toward more defensive assets. http://www.OptionInvestor.com/traderscorner/091201_3.asp ============= SECTOR IMPACT ============= Spotlight on the Oil sector by Jeff Bailey Recent events in the U.S. have part of the world spotlight on the Oil sector. The reason this group of stocks has been pushed back into the spotlight is that there is speculation at this point that supply to the United States may be disrupted at some point should U.S. and Middle East tensions escalate. http://www.OptionInvestor.com/traderscorner/091301_4.asp ============= SECTOR IMPACT ============= Airlines and Aircraft Manufacturers Already battered by slumping business demand because of a weak global economy, the financial aftershocks of Tuesday's events are going through the aviation industry like a typhoon. Airlines generally operate with a tight 3-percent profit margin. Those margins are going to be under pressure as revenue and earnings take hits from the travel halt, disrupted flight schedules, higher fuel costs and insurance premiums, declines in overseas travel, increased security expenses and government regulation. The recent grounding of their planes alone cost the average major airline $43 million a day in lost revenue. http://www.OptionInvestor.com/traderscorner/091301_3.asp ============= SECTOR IMPACT ============= Insurance Companies Exposed to Significant Losses Damages from this week's attacks on the World Trade Center and Pentagon are expected to reach billions of dollars. Insurance claims for property, injuries, workers compensation, loss of life, and business interruption could reach $30 billion. http://www.OptionInvestor.com/traderscorner/091301_2.asp ============= SECTOR IMPACT ============= Playing Defense By Eric Utley Tuesday's tragic events forever changed the landscape and psyche of America. The ramifications of the terrorist acts will impact many things American. Preliminary statements from government leaders suggest that the U.S. defense sector is in store for further build out http://www.OptionInvestor.com/traderscorner/091301_1.asp ************************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 ************************************************************** ************** Editor's Plays ************** The Only Game In Town! There is only one game in town this week and it is indexes. The possibility of a major move in both directions IN EXPIRATION WEEK makes this a tremendous opportunity. Unfortunately the market may gap strongly down at the open on Monday and premiums will escalate quickly due to the volatility. Trading to the downside may not be possible so our targets should be any anticipated rebound. The newsletter profiled call plays on the QQQ and DJX today and IndexSkybox will be all over the SPX/OEX on Monday. I decided to pick one and suggest a strategy to capitalize on it. The one I picked was the DJX since the Dow is likely to be the biggest mover. The Dow closed at 9605 or 96.05 in DJX terms. 9100 is probably the best case for a bottom on Monday. Assuming that there is some patriotic sentiment that carries through to the markets then it is entirely possible that we could see a rebound back to close to 9500. Knowing that the best laid plans of mice and men always go astray, we could be left waiting if we simply set a buy order at 9100. The strategy I want to suggest is stepping into the position. Lets assume that the Dow gaps down -200 points to 9400 and then heads lower from there after some initial resistance. I want to average into a position that will get me 100% invested if we get to 9100 but does not leave me out if the Dow does not fall that far. Here is my plan, modify the quantities to fit your plan. 9400 Buy 10 Sept 94 calls DJV-IP 9300 Buy 20 Sept 94 calls DJV-IP 9200 Buy 30 Sept 94 calls DJV-IP 9100 Buy 40 Sept 94 calls DJV-IP Total calls purchased if the Dow hits 9100 = 100. If Sept calls scare you then use October. The listed price for these calls as of Friday night when I am writing this is $3.30. Using the DJX at 96.05 that would suggest the price would be $1.50 to $1.75 at 94, $1.25-$1.50 at 93, $1.00-$1.25 at 92 and $.75-$1.00 at 91. Using the high price on each range, 10 contracts would cost you $1250. 100 contracts as shown above $12,500. Using Preferred Trade you can enter contingent orders based on the price of the DJX for the entire trade and just sit back and watch. Using the same numbers and going backwards you can easily see where you would be profitable assuming the Dow went back to 9400 or higher. This is simply a trading play to capitalize on any bounce in investor sentiment and from a seriously oversold condition. The flaw in this play is of course a Dow that does not rebound. This is something every investor should consider before taking this risk. This is purely a speculation trade and should be treated as such. 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 **************** Economic Update By Jeffrey Canavan Now more than ever there is going to be a focus on the U.S. economy. It pales in comparison to the emotional pain and suffering we are all experiencing, but eventually we will rebound fiscally. An economic recovery, or economic counter-strike as some are calling it, may be delayed for a quarter or two, but I fell completely confident in the strength of American consumers and corporations to hold up during this trying time. The importance of economic and corporate data that has been released this week may be miniscule, but it will give us a yardstick to measure our country's financial performance going forward. The most encouraging news came from Cisco. Its board has approved a $3 billion stock buyback program to be implemented over the next two years to bolster investor confidence. According to CFO Larry Carter, "We think this is the right thing to do now for our shareholders." Pfizer also stated that it would continue its stock buyback program, and reaffirmed guidance for 2001 and 2002 earnings. "Pfizer, like America remains strong, and we continue to be confident in our future as a company and in the strength of the nation's economy and institutions," said CEO Hank McKinnell. The SEC is expected to temporarily ease restrictions on companies buying back more than a specific amount of their own shares to help inject money into the market. Oracle's thoughts were focused on their eight missing coworkers, not on company earnings, but the company posted a 2% increase in net income. Any conference calls and future guidance have been postponed until trading resumes. Airlines have eased back into operation, with 20% to 50% of daily flights operating. The airline industry has reportedly lost $40 to $60 million dollars per day during the travel stoppage. A measure currently in front of the House of Representatives would provide $15 billion in relief to the struggling airline industry. $2.5 billion of that would go to cover losses, and the remaining $12.5 billion would extend credit or guarantee loans. Not all news from corporate America is positive. Ford announced that they would cut production by 110,000 to 120,000 units, and third-quarter earnings would come up short of expectations. General Electric reported that they would cut their third quarter earnings by 4 cents per share due to $600 million in expected claims for its Employers Reinsurance unit. Semiconductor testing equipment maker Teradyne has eliminated 1,000 jobs, or 11% of its workforce, and warned that financial results would come in at the low end of expectations. One of the most closely watched economic indicators going forward will be consumer confidence. Before the affects of Tuesday's attacks were realized, consumer confidence dropped 7.9 points to 83.6. While these events could break consumer confidence, a Gallop Poll revealed that 6 out of 10 respondents do not plan to make any changes in their personal lives or activities to avoid being a victim. Count me in. Demand for homes and refinancing activity remains strong, but have come off their highest levels of the year. The Mortgage Bankers Association's index of mortgage applications fell 2.6% for the week ending September 7th, but that is still 18% above levels from four weeks ago. There are no significant signs of the housing market slowing. Industrial production continues to decline. After a slight improvement last month, industrial production fell 0.8% in August. Production has now fallen for eleven straight months. Announcements like Ford's may see this trend continue for a few months until rebuilding gets underway. The employment situation also continues to weaken. Initial jobless claims jumped 21,000 to 431,000, and continuous claims rose to 3,345,000. Disruptions to air travel and the normal flow of the economy could lead to further worsening in the employment situation in the short-term. The Economic Cycle Research Institute's Weekly Leading Index fell to 118.9 from 119.7 for the week ending September 7th. The decline in stock prices, one of the components of WLI, was the leading contributor to the decline, but labor data also added weakness. The indicator had been pointing to short-term weakness, but a slowly recovering economy. That recovery will most likely be postponed. The components of WLI include money supply, industrial markets price index, mortgage applications, bond quality spreads, stock prices, bond yields, and initial jobless claims. The above data will do little sway investors on Monday, but once Wall Street gets back to normal, or at least as normal as humanly possible, we will once again have to turn attention back to the economic and corporate outlook. In the meantime traders and investors will most likely break one the cardinal rules - trading on emotion. *************** ASK THE ANALYST *************** Vivacious Volatility By Eric Utley Editor's Note: In light of last week's terrible events, Eric will be publishing a special strategy column in the place of his normal Ask the Analyst piece this weekend. The CBOE Market Volatility Index (VIX.X) is often referred to as the fear gauge, and for good reason. Also known as the VIX, the value of the index is determined by the actions of market participants. The VIX reflects expected future market volatility and reveals the level of fear among market participants. Since investors are risk averse animals, their collective level of risk aversion can be measured through the level of the VIX. The VIX is calculated using weighted implied volatilities across several S&P 100 (OEX.X) call and put contracts. So when we're discussing the VIX, it's important to keep in mind that it's a measurement of fear within the S&P 100. Conversely, the Nasdaq-100 Implied Volatility Index (VXN.X) is a measurement of fear among market participants dealing in the Nasdaq-100. Also known as the Vixen, the Nasdaq-100 volatility gauge serves the same purpose of measuring fear among market participants. The history of the VIX dates back to early 1986, but the CBOE has been calculating it on a daily only since 1993. The VXN, however, has only been around since the beginning of this year. Through its history, the VIX has displayed extreme levels of fear during times of political instability, economic uncertainty, wild interest rate fluctuations, and times of war. During the October 1987 stock market crash, the VIX actually reached as high as 170. When Iraq invaded Kuwait in 1990, the VIX jumped to the 40 level, and revisited that level when U.N. forces invaded Iraq in 1991. More recently, the VIX spiked to the 50 level in late 1997 as the Asian Flu spread across the global economy. In late 1998, at the climax of the Asian Flu and in the midst of the Long-Term Capital blow-up, the VIX spiked as high as 60. During the current bear market, the VIX traded above 40 during the spring of 2000, and again during the spring of this year. Since the VXN is less than one year old, we don't have much history to draw any conclusions from. However, what we draw from the VIX can, I think, be applied to the VXN. In the greater scheme of things, the VIX's history back to 1986 isn't really that long. But, there are a few dynamics I'd like to pinpoint. For instance, the VIX spiked higher during times of economic uncertainty than it did during times of military conflict. Again, we don't have a lot of observations to draw that conclusion from, so take it for what it's worth. More importantly, however, is that the VIX has always reverted back to its mean after spiking to extreme levels, which is what I'd like to elaborate upon. Exactly what the mean of the VIX is depends upon a great deal of variables. For example, its mean during the early 90's is much different from its average during the late 90's. For our purposes, I'm going to use the VIX's 200-monthly moving average to define its mean. This is rudimentary, I know, but I think it serves this purpose. The level of the VIX's 200-monthly moving average is currently at 26. The VIX closed last Monday right around 34, which is quite a distance from its mean. It had already advanced ahead of last Tuesday's events, which I think was purely a coincidence. The market had been sliding and fear was growing, hence the VIX's rise over the past three weeks. Now, recall that during the most recent military conflicts that the VIX spiked to the 40 area. I think we'll see that spike again, perhaps even more fear. I spoke with a trader friend of mine on the Chicago Board Options Exchange who said he expected to see a significant spike in implied volatility Monday. I tend to agree with his speculation, and believe that fear levels will have risen from where there were since the VIX last traded. If the VIX does spike substantially higher, which I think it will, there's a couple of things that options traders should be aware of. First, a substantial spike in implied volatility should help to offset the loss of time value during the last four lost days of trading. Any spike in volatility won't completely offset the loss of time, but it should help to mitigate the loss somewhat, all things being equal, i.e. underlying stock price. Second, if a spike in implied volatility helps to offset the loss of time for those long theta, remember that it will also make the premium go up across the board. That means those looking for new trades in the options market early Monday should be concerned with high levels of implied volatility and the resulting impact on the price of options. In other words, a spike in the VIX will make options more expensive and create the need for a larger move in the underlying for any given contract to go in-the-money. Assuming I'm correct in that the VIX will spike higher, there arises a question of timing and duration. The VIX could very well gap higher Monday morning and begin to recede if fear levels lower. Then again, it could gap higher Monday morning and subsequently climb still higher. Also, it could gap up to the 40 area Monday morning and stay there for a month. In short, the scenarios are innumerable and will most likely be impacted by U.S. military action. So a trader needs to take into account what impact volatility is going to have on open options positions and how to trade around extreme levels of volatility. With that in mind, I'm going to give some options-related strategies that benefit from high levels of volatility as they relate to three different biases: bearish, neutral, or bullish. ***** BULLISH: If you're bullish on a particular issue, you obviously want the price of the underlying to rise. But, buying a call outright may not be the best thing to do when volatility is at extremes. So here are a few strategies to consider if you're bullish on the underlying during times of excessive fear. (Many of these strategies may not be suitable to certain risk preferences, so please consider your individual profile before employing any of the following strategies.) SELL NAKED PUTS BULL VERTICAL SPREADS: Buy In-The-Money CALL/SELL At-The-Money CALL Buy Out-Of-The-Money PUT/SELL At-The-Money PUT ***** BEARISH: If you're bearish, obviously the bias is for the underlying to fall in price. But, again, buying a put outright might not be wise if premiums are drastically inflated with a spike in implied volatility. SELL NAKED CALLS BEAR VERTICAL SPREADS: Buy Out-Of-The-Money CALL/SELL At-The-Money CALL Buy In-The-Money PUT/SELL At-The-Money PUT ***** NEUTRAL: If you're neutral, you're expecting no, or very little, movement in the underlying. This is an ideal situation for taking advantage of excessive levels of volatility. RATIO VERTICAL SPREADS SHORT STRADDLES SHORT STRANGLES ***** To reiterate, the aforementioned strategies are intended to take advantage of extreme levels of volatility. They may not be suitable for every reader, but there worth considering when going into next week's trading. Remember, the VIX has almost always reverted to its mean, whatever its mean may be defined as. The below chart, which was created using www.stockcharts.com program, displays the VIX's tendencies to revert back to its mean since 1995. Don't focus on its absolute levels; rather, notice that after a large move in either direction, the VIX normally reverts back to its average. Because it's difficult to say how long volatility will remain high, I think the more prudent course of action would be to use second or third month contracts with any of the above mentioned strategies, except maybe the shorting of straddles and strangles for those who are not as averse to risk. And selling calls against underlying stock positions might not be a bad way for traders to take advantage of an extreme increase in volatility. On a personal note, it's been a long week here in Denver during these times of uncertainty. Unfortunately, others' weeks have been much longer. My deepest sympathies go out to those who've suffered, in so many ways, from what happened last week. I hope all of our readers have a safe, peaceful weekend. ************************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 17, 2001 The government and most statistical organizations are planning to release economic reports as planned, however, any impact of this data will recede to the ongoing implications of Tuesday's attack. The following events could change or be cancelled without notice. Monday ====== Business Inventories Jul Forecast: -0.4% Previous: -0.4% Trade Balance Jul Forecast:-$29.8B Previous:-$29.4B Tuesday ======= CPI Aug Forecast: 0.2% Previous: -0.3% Core CPI Aug Forecast: 0.2% Previous: 0.2% Wednesday ========= Fed Beige Book 2:00 PM ET Forecast: N/A Previous: N/A NAHB Housing Market Sep Forecast: N/A Previous: 62 Oil/Gas Inventories 9/14 Forecast: N/A Previous:303.3MB International Trade Jul Forecast:-$29.9B Previous:-$29.4B MBA Mortgage App 9/14 Forecast: N/A Previous: 601.8 Thursday ======== Initial Claims 9/15 Forecast: N/A Previous: 431K Housing Starts Aug Forecast: 1.635M Previous: 1.672M Building Permits Aug Forecast: N/A Previous: 1.558M Philadelphia Fed Sep Forecast: -14.1 Previous: -23.5 Friday ====== Treasury Budget Aug Forecast:-$44.7B Previous:-$10.4B ECRI Wkly Lding Indx 9/14 Forecast: N/A Previous: N/A Week of September 24 ==================== Sep 24 Leading Indicators Sep 25 Consumer Confidence Sep 25 Existing Home Sales Sep 27 Initial Claims Sep 27 Durable Orders Sep 27 Help-Wanted Index Sep 27 New Home Sales Sep 28 Chain Deflator-Final Sep 28 GDP-Final Sep 28 Mich Sentiment-Rev Sep 28 Chicago PMI ************************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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 09-16-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/6078_2.asp ************************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 ************************************************************** ************** SPECIAL REPORT ************** Spotlight on the Gold/Silver sector By Jeff Bailey I will ask every subscriber to do this NOW! Before you read any further, what do you think gold stocks did after Iraq invaded Kuwait? After you finish reading this article, you will understand why it is so important Monday morning not to rush to judgment regarding any type of investment decision! In times of uncertainty, many market participants become interested in gold stocks. Over the past couple of months we've talked about the Philadelphia Gold/Silver Index ($XAU.X) and what it may have been trying to tell us about the economy, inflations or possible stagflation. The index by itself doesn't "tell us anything" with monitoring the bond market and certain sectors that are more economically sensitive. A quick review must be made here. First, understand that the XAU.X is a basket of stocks. One's first impression if they're looking for some type of defensive play here is this.... If the markets were halted, is this investment going to provide me the hedge that I was looking for? Sounds silly to even think that doesn't it? I remember all too well when I was sitting in my World Finance class in college that Professor Olinyk (I'm sure I'm butchering the spelling of his last name) asked the class if a gold stock was truly a hedge against currency crisis. The discussion began, but the prevailing answer seemed to be that the true hedge was gold bullion, not the stock. The reason for that answer was that if stocks exchanges were to halt trading under an extreme global crisis, then perhaps gold bullion would be a truer hedge. I think I asked the question.... "how many 7-elevens will let me shave off a sliver of gold to pay for my candy bar and soft drink?" I think I know why I didn't get an "A" in global finance. With that said, Gold stocks will undoubtedly be pushed into the spotlight in coming weeks. As I did last night with Oil stocks, we should take a look back in history at the Persian Gulf War and that time frame as it may give us the needed historical pricing to see how things trade for this sector in coming weeks and months. Historians will remember that there were tensions rising before the United States and its allies pushed back the assault on Kuwait from Iraq. It was on August 2, 1990 when Iraq invaded Kuwait, but it was not until January 16th of 1991 that operation "Desert-Storm" began. This may be an interesting time line to study. So far, the United States has not declared war on anyone. As I mentioned in yesterday's commentary. Current market conditions are vastly different, but perhaps the global impact is seen as similar and some of these similarities may present themselves near-term. One might argue that the world's confidence has been shaken under current conditions, compared to those events dating back to the Persian Gulf War. Gold/Silver Index (XAU.X) - before and after Persian Gulf War Now, how did you answer the question in the opening paragraph of this article? Surprised? I sure as heck am. I would have answered it as "significantly outperformed the market." From the looks of it, a "speculator" that dumped their entire account into gold stocks when Iraq invaded Kuwait may not have like the result. As the time line unfolds, tensions were unfolding and things were "getting worse" in the Middle East. There was great uncertainty. Note the date 01/12/01 on the above chart when Congress voted to allow US troops to be used in the Middle East. At the time of this writing, Congress has yet to approve any use of US troops in a war effort. There may never be a "war effort," but it does give hint of how much time has yet to pass since terrorist attacks on the WTC and the Pentagon. As you can see from the above chart, there were certain jumps and declines in the Gold/Silver Index (XAU.X) as it pertains to certain events that unfolded during the Persian Gulf War. While past performance is no guarantee of future results, the above chart truly drives home the fact that every trader and investor must monitor an investment not based on BELIEF, but on how the instrument performs. I've mentioned that saying before and I'll do it again.... "forget what you believe, trade what you observe." The commodity itself Now it's time to put some statement to the test that I wrote in the fourth paragraph as it relates to Professor Olinyk's question of "commodity or stock?" Jeff Canavan has gathered the following information during the same time frame on the commodity itself based on Comex Gold Futures. Comex Gold Futures 7/01/90 $361.96/oz. 9/28/90 $408.17/oz. 2/01/91 $379.20/oz. 3-month gain $46.21 12.77% 6-month gain $17.24 4.76% The q-charts symbol for this commodity is (gc01v), which is the October futures symbol. Some subscribers may want to monitor this to get a feel for the MARKET's perception to various currency risks. The best bet for investors looking for some sort of guidance regarding the future of the markets is to try and sit tight the first couple of days of trading. This will allow some trends to develop where we can better interpret what the market is saying. The first priority for many investors will be to protect/hedge their current investments in their accounts. I've said before, that it is very difficult to simply watch one index by itself and make any type of analysis based on how that index trades. For the Gold/Silver Index and gold stocks, this is very true. ************** SPECIAL REPORT ************** Options Issues: Update By Eric Utley It would appear that September options are going to expire on schedule. That is, the Saturday following the third Friday of the month. That means September contracts expire on their regularly scheduled date of September 22 - next week. It's not fair to those long theta, and I can only send my sympathies with our readers who are. I'm in the same situation. But all things considered, the loss of a little bit of time value is not nearly as devastating as what some people lost last week. In a correspondence from the Options Clearing Corporation (OCC) late last week, a spokeswomen relayed an excerpt from the Characteristics and Risks of Standardized Options that I thought I would pass along to our readers. The following rule appears in Chapter VIII, pages 49 and 50: "In highly unusual circumstances (e.g., where a brokerage firm is unable to receive instructions from its customers), a firm may be authorized under applicable rules to make an exception to its regular cut-off time. However, in order for an option to be exercised, the brokerage firm must in any event pass on its customer's exercise instructions to OCC before expiration. OCC may allow exercises for a limited time after expiration in the unlikely event that OCC is unable to follow its normal procedures for receiving exercise instructions from Clearing Members on the expiration date. Subject to that very limited exception, OCC has no authority to extend the expiration of any option. Once an exercise instruction is given by a Clearing Member to OCC, it cannot ordinarily be revoked except to correct a bona fide error that is specified in a request filed by the Clearing Member prior to a deadline specified in OCC's rules." ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* QQQ - Nasdaq-100 $34.10 (+0.40 last week) See details in sector list Call Play of the Day: ******************** DJX - CBOE Dow Jones Industrial Average $96.06 (+0.00 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 No Dropped Calls for the weekend. PUTS ACF $39.79 (-0.21) There is little doubt that Financial stocks will come under heavy selling pressure when the markets re-open on Monday. We are dropping coverage of our ACF play this weekend, not because we think the downward move is over, but because we do not want to profit from last week's tragedy. Our efforts can be better spent (and we'll sleep better too!) by focusing our efforts on stocks that are likely to benefit from the recovery following the disaster. AIG $74.26 (+1.11) Once again, AIG provided a profitable play for us, and odds favor a substantial selloff once trading resumes on Monday. In light of last Tuesday's tragic events, we are uncomfortable continuing to profile this stock to the downside. Each individual investor must decide what to do in the coming days, but we're dropping coverage of AIG this weekend. We don't want to profit from this tragedy and the incredible suffering that has come with it. BA $43.46 (-1.72) Even without the severe blow to the airline industry that occurred on Tuesday, BA's fundamentals had been weakening, yielding a very profitable put play for our readers. There is likely to be significantly more downside to the stock in The days ahead as air travel (and therefore orders for new airplanes) is likely to see a dramatic reduction. We'd be more than happy to continue riding this stock down, but not under these conditions. We aren't interested in gaining from the suffering of our fellow citizens, so we are dropping coverage of BA this weekend. JPM $37.26 (+0.26) The damage to the center of the Financial World will clearly have a deleterious effect on major Brokerage firms and the extent of the damage will be difficult to gauge in for some time to come. Rather than profit from the calamity, OIN would prefer to avoid such plays and focus our efforts on those companies that will likely benefit from their efforts to recover from the damage inflicted by this terrorist act. Accordingly, we are dropping coverage of JPM this weekend. MER $46.85 (+0.76) Determining the costs of the damage inflicted to the Financial infrastructure of the United States will take time to assess. While there are those that might look to profit from the disaster, we are not among them. We'll drop coverage of MER this weekend and look for plays that will move on their own merits, rather than suffer from the catastrophe foisted upon our country by those that do not understand the strength of our capitalistic system. PGR $124.43 (+3.94) Insurance companies across the board will suffer huge losses in the wake of Tuesday's terrorist acts, and PGR is certain to be among them. Gaining at the expense of others' suffering is not where we want to focus our efforts at this time of crisis and are dropping coverage of PGR this weekend. There will be plenty of opportunities to profit over the weeks and months ahead. We'll focus our efforts on locating these opportunities with a clear conscience. TSG $39.43 (-1.17) Americans, as well as citizens around the world, are expected to dramatically curtail their air-travel in the wake of Tuesday's terrorist acts. TSG will likely be hit hard by the cutback in travel plans and could fall sharply in the days and weeks ahead. Rather than exacerbate the problem by featuring the stock as a Put play, we'll drop TSG and look for other, more palatable trades. *********** 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 ************** QQQ - Nasdaq-100 $34.10 (+0.40 last week) The Nasdaq-100 Index Tracking stock encompasses the largest and most actively traded companies on The Nasdaq Stock Market. Its components include Microsoft, Intel, Qualcomm, Cisco, Oracle, and Amgen, among others. When trading opens Monday it's sure to be volatile and wild. The consensus among market participants going into next week's session is for a large gap lower on heavy selling pressure, followed by a large rebound. If that scenario unfolds, we're looking to play it through the QQQs. In the QQQ itself, we're looking for the contract to dip down to the $29 level then come back up through the $30 level. If that happens, we're looking to use the advance back above the $30 level to enter new call positions for a trade. However, some readers might use any such dip as an entry for longer term positions. If the QQQs only dip slightly then all bets are off for the aforementioned entry strategy. When looking for a reversal, bullish traders should keep close tabs on the large components of the QQQs, such as MSFT, CSCO, QCOM, INTC, and ORCL. The QQQs have short-term resistance at the 10-dma at $36, which may serve as an exit point. Because its price action is uncertain, we're not setting a stop in this play initially. Also, bullish traders should focus on the distant month contracts due to the expected increase in volatility next week. BUY CALL OCT-29 QAV-JC OI= 273 at $6.00 SL=5.00 BUY CALL OCT-30*QAV-JD OI= 1282 at $5.20 SL=4.00 BUY CALL OCT-31 QAV-JE OI= 1062 at $4.50 SL=3.50 BUY CALL OCT-32 QAV-JF OI= 4209 at $3.80 SL=3.00 BUY CALL OCT-33 QAV-JG OI= 5027 at $3.10 SL=2.25 BUY CALL OCT-34 QAV-JH OI=16581 at $2.60 SL=2.00 BUY CALL OCT-35 QQQ-JI OI=50943 at $2.15 SL=1.25 Average Daily Volume = 55.0 mln DJX - CBOE Dow Jones Industrial Average $96.06 (+0.00 last week) The DJX, which was developed by The Chicago Board Options Exchange, is an exchange-traded fund (ETF) that tracks the performance of the Dow Jones Industrial Average. Its components include General Electric, Intel, Citigroup, Walt Disney, Merck, and other blue chip American companies. With analyst reports suggesting that many Dow components could see significant selling, the index may be set up for a sharp drop when it reopens next week. But the buyers could very well step in following any big dip. Stocks such as Boeing, and even Citigroup and JP Morgan are expected to see heavy supply Monday morning. If the Dow does decidedly slip, we're looking to buy the proverbial dip. The index's March lows are between the 9100 and 9400 area, depending on which relative low is used. We're looking for buyers to step in around the 9200 level, and use the DJX.X tracking index to play any such dip. The options contracts on the DJX are adequately liquid and could provide a solid trade if the Dow rebounds from any dip. So our entry strategy is simple: Use a dip down to 9200 in the Dow, 92.00 in the DJX, to enter call plays. Exit points could been seen as low as 9400 to as high as 9600 over the very short-term. We'll refrain from using a stop initially, but might revisit using some sort of risk management strategy once we get a handle on next week's trading. BUY CALL OCT- 90 DJV-JL OI= 27 at $8.00 SL=6.50 BUY CALL OCT- 92*DJV-JN OI= 25 at $6.40 SL=5.00 BUY CALL OCT- 94 DJV-JP OI= 0 at $5.10 SL=4.00 Wait for OI!! BUY CALL OCT- 96 DJV-JR OI= 589 at $3.80 SL=2.25 BUY CALL OCT- 98 DJV-JT OI=2795 at $2.70 SL=1.75 BUY CALL OCT-100 DJV-JV OI=8178 at $1.80 SL=1.00 Average Daily Volume = N/A ATK - Alliant Techsystems $65.29 (-2.11 last week) Alliant Techsystems conducts business through three industry segments: Aerospace, Conventional Munitions and Defense Systems. Within these segments, Alliant has four business lanes: Propulsion and Composites, each of which falls within the company's Aerospace segment; Conventional Munitions, which corresponds to the Company's Conventional Munitions segment; and Precision Capabilities, which corresponds to the company's Defense Systems segment. The defense sector should see a boost in earnings over the next few months if some of that $40 billion makes its way into new defense spending. The sector could be set up for a short term trade higher in light of the proposed increase in spending. The traditional defense plays might not be as responsive to new spending because it's not really a traditional war that the U.S. is about to embark upon. As such, we've turned to a defense play that may benefit, but is still a relatively larger company. ATK is a relatively diversified defense company that could see its stock move higher over the short-term, or perhaps even the next several months. The stock pulled back during last Monday's session, but could rebound rather quickly Monday. Look for a bounce from the $65 support level for new entries or an advance above the $67.50 level on heavy volume. We'll look to set stops early next week once trading is underway. Finally, the irregular strike prices in ATK's options reflect a recent 3-for-2 stock split. BUY CALL OCT-60 AKA-JL OI= 60 at $7.20 SL=5.50 BUY CALL OCT-63 AKA-JW OI= 0 at $4.70 SL=3.50 Wait for OI!! BUY CALL OCT-66 AKA-JX OI= 5 at $2.95 SL=1.50 BUY CALL OCT-70 AKA-JN OI= 5 at $1.65 SL=0.75 BUY CALL NOV-70*AKA-KN OI=268 at $4.90 SL=3.50 Average Daily Volume = 152 K NBR - Nabors Industries $24.75 (+0.15 last week) Nabors operates in two primary business segments within the oilfield services industry, contract drilling and manufacturing logistics. The company provides drilling, workover, well-servicing and related services on land and offshore in the lower 48 states of the United States, Canada and Alaska, as well as international markets. The oil service sector has been on the slide since earlier this spring. But that may change in the wake of last Tuesday's terrorist attacks on the United States. NBR's daily chart pretty well sums up the price action in the group as demand has slumped and the price of oil has remained relatively low. But any military action in the coming days, weeks, or even months is likely to send the price of oil much higher. That, in turn, is likely to carry service companies higher, such as Nabors. It could turn out that this play is very short term in nature if signs of significantly slumping demand begin to show up. Nevertheless, the stock could work higher over the short-term if the price of oil does spike. Make sure to watch the Oil Service Index (OSX.X) when gaming this play. In terms of entries, look for NBR to clear its 10-dma at the $25.18 level for an entry point. Initially, we're not implementing a stop in this play. BUY CALL OCT-22 NBR-JX OI= 10 at $3.40 SL=1.75 BUY CALL OCT-25*NBR-JE OI= 32 at $1.90 SL=1.00 BUY CALL OCT-27 NBR-JY OI=567 at $1.00 SL=0.50 BUY CALL OCT-30 NBR-JF OI=139 at $0.45 SL=0.00 Average Daily Volume = 2.74 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 09-16-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/6078_3.asp ************************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 ************************************************************** ************** SPECIAL REPORT ************** Questions from readers By Jeff Bailey I have been inundated with subscriber e-mail regarding different questions and comments. The most reoccurring question is that of hedging as I had written an article on one way a trader might want to look to hedge. To quickly revisit the Hedging a Position article, click here: http://members.OptionInvestor.com/intraday/091301_4.asp Q: Isn't it to late to think about hedging? A: I don't know. No one knows for sure. Every investor must begin (if they haven't already) and search for that answer deep within them. Here's the process I go through. I go through this process BEFORE I ever buy/call a stock or short/put a stock. I ask myself. At what point are you going to sell for a profit? At what point are you going to sell for a loss? Now that the markets are halted, it is very much a possibility that a stock gaps below my previous stopping point. This is not a time that I throw my trading strategy and discipline out the window, but I MUST reassess the situation and have a contingency plan in place. This is where account management comes into play. How am I positioned? If I've been playing the market from both sides (bullish and bearish) then I will have some stocks that I'm short/put showing gains should the markets open lower. I may have some bullish positions turn against me. The IMPORTANT thing as it relates to investing is how your account performs over time. I would argue that the markets in the U.S. were not in the best of shape before the recent tragedy. Many of our subscribers that have been reading my intra-day market commentary were well aware of that. The ultimate question as it relates to investing/trading is "how is my account positioned?" Then.... at what point do I need to begin taking preventive action? A trader that is on margin in his/her account needs to take utmost care. Note: Nobody predicted or could have predicted recent events. I do feel a trader that is long a stock takes a "neutral" position once a hedge is established. A hedge is not necessarily established to totally eliminate losses! A hedge is designed to help lessen the blow should a decline take place or continue. Q: Jeff.... shouldn't a trader actually buy two put options on a stock with a high delta to hedge his/her position? A: Perhaps. The example I have was for shares of United Airlines (NYSE:UAL) and it has historically had less volatility associated with it. There will be different types of volatility associated with different stocks that traders may be looking to hedge. Traders have until Monday to do their research and put together their action plans to determine what (if any) hedge strategy is appropriate for their accounts. Q: If the market starts out free falling, how do you actually go about buying the put option before it is too late, that is, before the stock has fallen considerably? I am not sure how to make whatever put order necessary to execute. A: Since the markets are closed, we have not been able to buy a put option on any stocks traded here in the U.S. on our exchanges. I would argue that many institutions have created their hedges in foreign markets. For example... British Petroleum (NYSE:BP) trades here in the U.S. and well as in London. I'm willing to bet that much of the volatility we've seen in overseas markets has been a result of various hedge strategies taking place against those stocks to help hedge positions here in the United States. Depending on the investment that a trader holds, they should immediately establish a trading plan under three levels of what we will call conditions. Best case, the stock opens at or near where it closed on Monday. This would allow the trader to consider multiple hedging strategies if you predict weakness in the equity such as selling a covered call or buying a protective put (take into account, even if you are fortunate enough to have the stock open near where it closed on Monday option premiums are likely to be slightly inflated due to expected market volatility ..more specifically with the VIX being high, call premiums are going to be light. Bad case, stock gaps to a level where the trader on MARGIN now becomes at risk for a margin call. A trader that is on margin is currently in a tough position and they need to know at what level they may be subjected to a margin call. If you have not hedged a position prior to a margin call an can not meet your margin requirements the stock will be sold for you by your broker. Worst case, the trader is trading on margin and was already near margin call levels before Tuesday's events (this is assuming the investment is in a sector that will experience selling pressure). Any time a trader is met with a margin call it is a sign that some type of preventative action needs to be taken. Those unable to meet a margin call should currently be ranking their investments from weakest to strongest. Then the trader can decide on buy/sell decisions of these investments. This is what I would consider to be a "too late" scenario. The other way to view the reader's question is what happens if their stock ABCD that was trading at $30 on Monday gaps down to $25 on September 17th? That's a hefty loss and some investors may feel that it may be too late to purchase a "protective" put, especially now that put premiums have likely gone up. Unfortunately, investors need to consider what their total risk is in the stock investment. That $25 stock could go to zero. It is unlikely but consider this...prior to Tuesday's events, who could have imagined that a year ago, JDSU, which was trading near $120, would now be less than $7. Was it too late to hedge JDSU at $100, at $50...? Each individual trader has had to answer questions like these relating to JDSU and ABCD. It all depends on the trader/investor's risk tolerance. Q: Do you put an order into buy put at market instead of a limit price? A: This is a very difficult question. I prefer to place a LIMIT order. For example... let's say that the ABCD December $20 put option begins trading at $4 and I want to buy that put to create a hedge against my stock. A "MARKET order" could get filled anywhere in a fast market. I could conceivably get filled at $5 or $6. A MARKET order is an order to buy at the market and in a fast market that price can be wide ranging. What I will do with a limit order is this..... I will plan for the worst. Even though the offer is $4, I understand I may be in a "fast market" and place a LIMIT order for $4.50. This is an amount GREATER than the stated market price. I could get filled anywhere from $4 to $4.50, but no more. If a trader is able to watch the ticker in real time, they can better control and get a feel for how trading is taking place. If the premiums of a put option are considered by the investor as "too rich", then one could turn to a deep in the money call option (say the ABCD Jan $5 or Jan $10) and sell that call. The other alternative is to either hang in there or sell the stock. Only you the investor can know what is best for you. Selling call options on stock you own is considered a covered call but there is always a risk you can be called out of your position. You need to weigh the potential losses versus any capital gains you might have in the position if you did not plan to be called out (that is a buyer of a call option exercises their right to buy your stock you sold the options on). This would only be expected to happen if the stock price was above the strike price of the option you sold at or near the options expiration. However, investors should take note, most equity options are American-style which means you can be called out at any time before expiration but this is uncommon. Thus selling a deep in-the-money call has its own set of risks. Do you expect the stock to recover before the option expires? If you do choose to sell deep ITM calls then most of the premium you receive will be based on intrinsic value which should help offset losses in the stock price - the whole reason we're looking into this strategy to begin with. Selling out of the money calls would be "safer" but the premium you receive is likely to be a lot less, especially on a stock that is dropping. As you can see, there are several options that a trader has, but you'd better start planning now, not when the markets open for trading. Q: In recent example of United Airlines (NYSE:UAL), shouldn't we also ask ourselves, "How long will the stock trade below our theoretic purchase price of $35? What about selling call premiums? A: The subscriber has a point here, but selling an at the money or out of the money call option would not be considered a "true hedge." Even in my above example, selling a deep "in the money call option" is only a hedge until the strike price of that option is achieved (if achieved at all). Nonetheless, if a trader feels that a stock will not significantly violate a particular strike price, then the writing of a covered call may be a way to partially hedge a decline, but the trader must be willing to deliver the stock should he/she be exercised. These are just a few of the questions from readers that I am finding. The bulk of questions are regarding my recent hedge article. Hopefully some of the above answers are addressing these types of questions properly. Also... I want to take a moment to thank those subscribers that have taken time to write such wonderful and uplifting comments in recent days. It is often said that the Premier Investor Network think of its employees and subscribers as "family." Recent e- mails from our subscribers also give strong statement to the FACT that America is a family and will recover from recent events stronger and more united than before. Portions of reader e-mail. Comments and perseverance. ..... I am proud to be an American; I am proud of our President; I am proud of our financial system. You have stated how many of us feel at these difficult times. (Subscriber, individual) ..... Our only wish is that for all New York exchanges (NYSE, NASDAQ, AMEX) stay closed until after the weekend. Americans need time to absorb this before making rash stock decisions. Nobody will benefit from panic decisions in the next few days. The exchanges can help provide assurance to the US public - and not give a moral victory to "the enemy" - by not demonstrating a pricing rout. (Subscriber, individual) ..... Thanks for the uplifting editorial (Special Update) Wednesday. I just got around to reading it and found it extremely uplifting and showing a considerable amount of restraint and good taste. To avoid profiting from tragedy at a time when it is very tempting to make a buck any way possible is an admirable quality. I believe your editorial should be forwarded to the SEC, NASD, Department of the Treasury, Federal Reserve System, and many of the other major regulatory offices. This morning on CNBC Squawk Box I heard Vince Farrell echo similar sentiments about not taking profits from a tragedy. (Subscriber, individual) ..... Agree. Please pray for God's help at this time. For passing on if you wish. A fund has been established to aid the families of the firefighters who were killed. To donate, send checks or money orders payable to the fund to: New York Firefighters 9-11 Disaster Relief Fund c/o Firehouse.com 9658 Baltimore Ave - Suite 350 College Park, MD 20740 Please, do not send cash. The United Way of New York and The New York Community Trust have established a fund to help the victims of Tuesday's attacks and their families. Anyone wishing to contribute may call (212) 251-4035. You can donate securely online to the United Way: https://www.uwnyc.com/epledge/sept11.cfm (Subscriber, individual) I have been an avid reader of your work for many years now and do enjoy your writings. While today's article on hedging, puts and calls may be a valid "everyday trading" strategy, I would like to point out that, as we all know, these are not normal times. In view of the great tragedy that has swept the financial community, your readers, their families, and their loved ones: I would like you to ask your reader's, and all Americans the following: Let us not give into the aims of terrorists when markets reopen soon, let us not be fooled into panic selling! I am sure these terrorists would like for nothing more than to see us falling all over ourselves in an endless financial panic driving our markets and our economy into an emotionally, and evilly inspired meltdown. Let us stand together as investors from across America and around the world who will not be frightened by evil doers into panic selling, rather let us show our faith in America and BUY America shares tomorrow in our great economy. Let us put our wallets where our hearts are and thwart these terrorist's goals. Clearly some may have to sell for financial reasons, but let those of us who feed from the speculative trough take a break from our speculative natures and resist the temptation to sell short or engage in any unnecessary panic selling. Let us show the world we still believe in America and will not let these cowardly acts terrorize us into acting without reason. If we do this and rally our markets, we will not only have no reason to hedge, but we may help our nation avert a more serious financial crisis. (Subscriber, Member New York Stock Exchange) Personally, I think we have a great group of subscribers! Jeff Bailey ************** SPECIAL REPORT ************** A Survival Guide For Monday by Jon Farnlof Portfolios have already been hammered by the bear market and now...this. With good reason, many frightened investors are wondering whether to swallow losses by dumping long positions on Monday. They are concerned that short sellers and computerized program traders will push the markets into panic selling and a precipitant decline. However, before leaping, it may pay to understand the rules, conditions and historical precedents under which the equity markets will be operating when they reopen on Monday. It may also be useful to consider what trading strategies are available to you. Here is a summary of some items to consider: What To Do - Personal Strategy As far as existing long positions, if you think you are in a sector vulnerable to a significant drop, your options may be limited if you are on margin as opposed to owners of cash accounts. Once an investor gets a margin call, he/she will need to transfer new funds to cover the call or they may have no choice but to liquidate until they are in compliance with their broker's margin requirements. It may be a good idea to check with your broker a head of time to know exactly where you stand before being forced to make a snap decision. Owners of cash only accounts are more fortunate, they have four options: ride it out, hedge, set stops or sell outright. Riding it out requires nothing more then patience and a tolerance for pain. However, the others require a level of skill and forethought. For those of you who are fairly new or inexperienced to the gyrations of Wall Street, it is important that you have an understanding of the use of stop loss and stop limit orders in volatile markets. This may also be a good time to become knowledgeable about some of the hedging strategies used by the pros. Hedging a position reduces risk by enabling an investor to in effect buy a form of insurance to offset declines in long positions. Our master market strategist Jeff Bailey covered both these topics this week. Following are links to those articles: A Traders Personal Defense: Definition of various stop orders http://www.OptionInvestor.com/traderscorner/091101_3.asp Hedging a position http://members.OptionInvestor.com/intraday/091301_4.asp There was a swarm of reader emails following Jeff's original hedging article. You can read his responses elsewhere in this newsletter. As far as selling outright is concerned, traders need to be aware that there is no way to predict at what price market orders placed prior to the market open will be filled. Market makers will gauge order flow to determine the opening prices of shares. After that, your market order would be fed into a crush of orders and where it comes out nobody knows. It might be safer to stick with limit orders. Many investors will wait for 15 minutes to an hour after the opening bell to give the markets a chance to settle before making their sells. Historical Behavior Of Markets Following Crisis Events Unfortunately, this is not the first national tragedy that the markets have had to endure. Fortunately, if history repeats itself, after a sharp decline on Monday the markets will rebound within a short period of time. The day after the assassination of President Kennedy the Dow Industrials dropped 2.9-percent, but was up 12-percent after two months. The closest recent event in terms of affecting the price of oil and creating waves of travel cancellations was the Desert Storm war in the Persian Gulf. The DOW lost 4.3-percent in the weeks leading into the war, but regained 20-percent in the next two months. This pattern repeated itself following the terrorist attack on Pan Am #103, the 1993 bombing of the World Trade Center and the destruction of the Murrah Federal Building in Oklahoma City. In fact, according to markethistory.com, in the three weeks following 25 occurrences of US military action since 1941, the Dow Jones Industrial Average has risen by an average of 3-percent in 84-percent of those occurrences. Bullish Factors This crisis has exacted a terrible human cost, but it has not dealt a crippling blow to the US economy. After an initial negative reaction, the factors that influenced the market before the tragedy will likely reassert themselves as the primary arbiter of market strength or weakness. And even though we were knee deep in a deflating economy, signs were in existence that a bottom was in sight. Of great significance for Monday's trading, the SEC has suspended the rules that require companies to file before repurchasing its own stock. This means that attempts to short stock could be countered by companies buying their own stock to support their price. Woe to the company CEO whose shareholders discover he or she did not take advantage of this relaxation to do his or her patriotic and practical duty. A difficult factor to gauge will be old-fashioned patriotism. This pain has had a profound affect on even the most cold-blooded money managers. Many of the largest players have come forward to say they will restrain their short ways and not take advantage of the crisis. Will they? Or, if the markets begin to implode, will their fiduciary responsibilities overcome their patriotic intentions. In a bittersweet fashion, some of the expected declines may be mitigated by gains in the defense and security sectors. Bearish Factors These have been well covered elsewhere, but suffice to say the insurance and travel industries, in particular airlines, hotels and aircraft manufacture have and will suffer substantial financial losses as a consequence of last Tuesday. Trading Curbs and Circuit Breakers (Thank you to Buzz Lynn of our www.Indexskybox.com sister site for this information) For starters, it is important to realize that roughly 30% of all NYSE stocks traded each week on the NYSE, give or take a few percent, are traded by computer programs responding to volume and prices triggered by previous trades. Such is true when an index trades outside of fair value of its underlying securities. There is then an automatic computer-driven execution of trades by any number of financial institutions to arbitrage minute spreads between underlying stock values and the indexes they make up in a never- ending constant hedge. If an index exceeds fair value of its underlying stocks, stocks are purchased while the index is sold in order to re-create balance. Similarly, if fair value of an index becomes to cheap in relation to its underlying stocks, computers trigger the purchase of the index and sell the stocks in an arbitrage or hedged action until both arrive back at parity. However, in times of unbridled conviction or uncertainty, euphoria or fear, and extreme liquidity or panic, the system can go haywire as triggered orders heavily favored in one direction act in domino- like affect triggering yet more orders. Usually, the domino action takes place to the downside, but not always. It is for this reason that we humans need to have a method of pulling the plug on snowballing markets in either direction. That is where curbs come in. Curbs are designed to restore human thought to the selling or buying process, which theoretically allows cooler heads to prevail over meltdown (or melt up) market conditions. Here is how it works. No need to reinvent the wheel here. I have cut and pasted the exact language taken from the H. L. Camp & Company website and provided a link below. "A collar on program trading firms instituted by the NYSE is most commonly referred to on CNBC as "Curbs In". The Exchange applies program trading curbs whenever the Dow Jones Industrial Average moves 200 points higher, or 200 points lower than the previous day's closing price. The NYSE restriction on program trades stays in place until the Dow Jones returns to within 100 points of the previous day's closing price; or, until the end of the trading day at 3:00 CT. The restrictions will be re-imposed each time the Dow Jones advances or declines 200 points. NYSE Trading Curbs apply only to our firm's (and other program trading firm's) computer assisted program trades. The NYSE defines a Program Trade as: 1. A basket of 15 or more stocks from the S&P's 500 Index. 2. A basket of stocks from the S&P's 500 Index valued at $1 million or more. Once the NYSE program trading collar is in place, Program Selling can be executed only on an up-tick. That means that the last trade was executed at a higher price than the trade before it. Program Buying can be executed only on a down-tick. That means that the last trade was executed at a lower price than the trade before it. Program Trading "Circuit Breakers" If the Dow Jones Industrial Average falls 10%, trading is halted on the New York Stock Exchange for 60 minutes. If the Dow Jones rallies 10%, there is no restriction. Why? Because program buying and the accompany rally is always perceived as "good". If the Dow Jones Industrial Average falls 20%, trading is halted on the New York Stock Exchange for two hours. There is no trading halt if it rallies 20%, as that would be perceived as "very very good". If the Dow Jones Industrial Average falls 30%, trading is halted on the New York Stock Exchange for the day. There is no trading halt if it rallies 30%, as that would be perceived as "the best thing that ever happened in the history of the world". According to the NYSE the current 10, 20 and 30 percent decline levels, respectively, in the DJIA will be as follows: A 1,000 point drop in the DJIA will halt trading for one hour if the decline occurs before 2 p.m.; for 30 minutes if before 2:30 p.m.; and have no effect between 2:30 p.m. and 4 p.m. A 2,000 point drop will halt trading for two hours if the decline occurs before 1 p.m.; for one hour if before 2 p.m.; and for the remainder of the day if between 2 p.m. and 4 p.m. A 3,000 point drop will halt trading for the remainder of the day regardless of when the decline occurs. Point levels are set quarterly by using the DJIA average closing values of the previous month, rounded to the nearest 50 points. The percentage levels are adjusted quarterly on Jan. 1, April 1, July 1 and Oct. 1." For more information from HL Camp & Co. visit: http://www.programtrading.com/curbs.htm Add It Up These are by no means the only factors that will be making a taffy- pull out of trading sessions over the next few days. Futures traders are a real wild card. They have been sitting on short and long positions since last Tuesday growing increasingly anxious with every halted trading day. As they maneuver to extract themselves from positions, the market could react with a number of artificial bullish and bearish moves. No one of them indicative of a true market trend, but just the result of a technical move by a big money player looking to square a position. Given this level of volatility, for all but the most nimble and aggressive traders the best advice may be to trade lightly and not attempt to dance with the elephants. For more information that could aid you on Monday we encourage all of our readers to check out previous special reports on the site. You'll find additional links for them in a separate section of this email newsletter. ****************** CURRENT CALL PLAYS ****************** BRCM - Broadcom $30.59 (+0.82 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. The trading in BRCM - the volatile stock that it is - is going to be wild at the opening bell Monday morning. The stock had held support at the $30 level for the two weeks prior to last week's trading halt. However, its 10-dma had also kept a lid on shares. In fact, the 10-day, which currently resides at $32.34, has contained shares of BRCM since mid-August. The $30 level, however, may very well fail to support BRCM early next week. It's impossible to predict, with any certainty, how the market is going to react once trading resumes next week. If the stock is met with overwhelming supply, BRCM may not find support until down around the $25 level, or possibly even as low as $20 - its spring lows. If the stock does gap measurably lower, it may be a good strategy to wait for a reversal back above the opening price Monday morning. Conversely, if the market does stage a substantial rally Monday, look for BRCM to finally breakout above its 10-dma, which would signal that demand is overwhelming supply. We're choosing to remove our stop from the play because of the uncertainty around the opening of trading. BUY CALL OCT-25 RCQ-JE OI= 184 at $7.30 SL=5.00 BUY CALL OCT-30*RCQ-JF OI=1084 at $4.30 SL=3.50 BUY CALL OCT-35 RCQ-JQ OI=2377 at $2.35 SL=1.50 BUY CALL NOV-30 RCQ-KF OI= 441 at $5.50 SL=4.25 BUY CALL NOV-35 RCQ-KQ OI= 736 at $3.40 SL=2.50 Average Daily Volume = 10.2 mln IMCL - ImClone Systems $53.73 (+0.43 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. It remains to be seen how the biotech sector is going to react once trading resumes Monday. Our initial speculation is that the sector should be relatively immune from last Tuesday's terrible acts of terrorism. Then again, the sector may suffer from collateral selling pressure across the broader market if, in fact, that does occur. Again, it's very difficult to say which way the stock is heading over the short-term. As such, only those with the ability to actively trade should pursue new entries. For those with open positions, managing risk is also going to be difficult. We might look for IMCL to open around its 10-dma at $52 if the market gaps lower. But the stock did behave exceptionally well in last week's one day of trading, making a run on the $55 level. If the stock does get above that level early Monday, it may be a sign that IMCL is heading higher over the short-term, and allow traders to gain new entries on the breakout. It should also be noted that we have dropped our stop on IMCL in light of the uncertainty surrounding the opening bell Monday. BUY CALL OCT-50 QCI-JJ OI= 476 at $7.10 SL=5.50 BUY CALL OCT-55*QCI-JK OI= 671 at $4.30 SL=2.50 BUY CALL OCT-60 QCI-JL OI= 496 at $2.50 SL=1.50 BUY CALL NOV-55 QCI-KK OI=2966 at $5.90 SL=4.00 BUY CALL NOV-60 QCI-KL OI=1036 at $4.10 SL=2.50 Average Daily Volume = 1.34 mln TSM - Taiwan Semiconductor $12.67 (-0.27 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. Shares of Taiwan Semi lost finished limit down during its Asian session last Friday. The stock is listed on both the NYSE and the Taiwan Stock Exchange, and its shares on the latter fared poorly in the wake of last week's events. We expect a gap down in the stock once trading resumes next Monday, but it may be a good rebound candidate if the market does reverse course or is met with heavy buying pressure early Monday, thus our reason for maintaining coverage on the play. The trading in Asian and indeed European markets has been extremely illiquid, so it's hard to place much credence on TSM's price action in Asia. Nevertheless, we're cognizant of it and traders should take it into account when strategizing for Monday's opening of the U.S. stock market. The stock has major support below at the $12 level, but it could potentially fall as low as $10 before rebounding. If that does occur, an entry around the $10 might provide for new plays in this stock. Our stop has been removed in this play. BUY CALL OCT-10.0*TSM-JB OI= 25 at $3.00 SL=1.50 BUY CALL OCT-12.5 TSM-JV OI= 567 at $1.30 SL=0.50 BUY CALL JAN-10.0 TSM-JB OI= 53 at $3.50 SL=2.00 Average Daily Volume = 4.70 mln AMGN - Amgen $64.13 (+0.23 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. Before last Tuesday's tragedy, Amgen was one of the stronger stocks in one of the stronger sectors of the market. We'd like to think that that dynamic will remain once trading reopens next week. But, it's impossible to know exactly what's going to happen. One might assume that the biotech sector would be relatively unscathed, economically speaking, by what occurred last week. But again, that remains to be seen. In terms of technicals, AMGN has solid support down around the $61 level, which may be a site to look for a bounce if the market falls under heavy selling pressure early Monday. Conversely, resistance to the upside is located at the $66 level. If that level is broken above early Monday, it may very well signal that AMGN is heading higher over the short-term. In either case, make sure to monitor the AMEX Biotechnology Sector (BTK.X) for potential insights into AMGN's short-term price action. We had a stop in place for our AMGN play at $63.50, but are removing that stop this weekend and waiting to see how trading unfolds next week before initiating a new stop. BUY CALL OCT-55 YAA-JK OI= 8301 at $10.00 SL=7.75 BUY CALL OCT-60*YAA-JL OI= 6698 at $ 6.60 SL=4.75 BUY CALL OCT-65 YAA-JM OI=13212 at $ 3.50 SL=1.75 BUY CALL OCT-70 YAA-JN OI=21400 at $ 1.50 SL=1.00 Average Daily Volume = 3.13 mln BGEN - Biogen, Inc. $60.31 (-1.68 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. After inching higher since early July, BGEN was on the cusp of a breakout over the $62 level before the tragic events of last Tuesday. Monday's trading saw the stock fall back to the ascending trendline near $60, also the site of the 200-dma. Under normal circumstances, we would be looking for a bounce near current levels, but in light of the disruption to the Financial markets, we would expect to see greater volatility when trading resumes. Additional support exists near $59 and then $56.50 and a strong bounce from either of these levels could provide for an attractive entry for aggressive traders. It is hard to see how BGEN would be adversely affected over the long term by this disaster, so any dip should be short-lived. An alternative entry strategy will be to wait for signs of strength in the Biotech index (BTK.X) to propel the stock through the $62 level on continued strong volume. BUY CALL OCT-60*BGQ-JL OI=4676 at $4.20 SL=2.50 BUY CALL OCT-65 BGQ-JM OI=9792 at $1.90 SL=1.00 BUY CALL OCT-70 BGQ-JN OI=4749 at $0.85 SL=0.25 BUY CALL JAN-60 BGQ-AL OI=2009 at $7.50 SL=5.25 BUY CALL JAN-65 BGQ-AM OI=2366 at $5.20 SL=3.00 BUY CALL JAN-70 BGQ-AN OI=2594 at $3.50 SL=1.75 SELL PUT OCT-55 BGQ-VK OI=3772 at $1.45 SL=3.00 (See risks of selling puts in play legend) Average Daily Volume = 3.07 mln LH - Laboratory Corp. of America $74.17 (-1.03 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. Although it has failed to get moving yet, our LH play is still resting right on its ascending trendline near $74. Prior to Tuesday's disaster, the stock was looking like it was ready to stage a bounce-back rally, but now the future is less clear. Healthcare-related stocks should be relatively immune from any negative economic effects of the damage, and we could see the stock rally based on a flight to quality. Below current levels, there is support near $72 and then $70. An early dip and bounce from either of these levels could provide for attractive entry points into the play, although we would only recommend taking new positions if the buying volume is strong. Overhead resistance has been forming in the $76-77 area, and more cautious traders will want to wait for LH to clear that level on robust trade before committing to new positions. BUY CALL OCT-70*LH-JN OI= 4 at $6.70 SL=4.75 BUY CALL OCT-75 LH-JO OI= 23 at $3.90 SL=2.50 BUY CALL OCT-80 LH-JP OI= 22 at $2.00 SL=1.00 BUY CALL NOV-75 LH-JO OI= 55 at $5.20 SL=3.00 BUY CALL NOV-80 LH-JP OI=168 at $3.20 SL=1.50 SELL PUT OCT-70 LH-VN OI= 20 at $2.05 SL=3.50 (See risks of selling puts in play legend) Average Daily Volume = 559 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 09-16-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/6078_4.asp ************************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 ************************************************************** ***************** CURRENT PUT PLAYS ***************** CHKP - Check Point Software $32.99 (+2.42 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. Prior to last week's horrific events, we had been gaming the deteriorating fundamental picture of Check Point Software. The stock had steadily fallen to the $30 level before slightly rebounding last Monday on the heels of favorable comments. Some may disagree with OI's decision to maintain some of its put plays in light of last week's tragic attacks. But we feel that it would best serve our readers to maintain a balanced play list. In the end, it's up to the individual to decide whether or not to trade in either direction when the market opens. Check Point may see continued selling if it is believed that its fundamentals have not improved over the past week. Although it's an Israeli-based company, we feel that it is relatively independent of what took place last week. As such, we feel by maintaining coverage that we're not directly trying to profit from last week's events. To reiterate, we're simply trying to keep a balanced play list and serve our readers the best we can. With that said, perhaps the best strategy going into next week will be to wait for fundamentally weak tech stocks to rally up to resistance before looking for entry points. For CHKP, that means the $35 level. BUY PUT OCT-35*KEQ-VG OI=11985 at $5.40 SL=3.50 BUY PUT OCT-30 KEQ-VF OI= 3291 at $3.00 SL=1.50 Average Daily Volume = 10.5 mln GMST - Gemstar-TV Guide $25.44 (-0.20 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. Through last Monday's session, GMST had continued along its path of lower lows in its overwhelming descending trend. There's reason to expect that stock to continue lower going into next week's session independent of what took place last Tuesday. The company's fundamentals and the Justice Department's probe have weighed heavily on shares and would've probably continued to do so judging by the stock's trend. As such, we're maintaining coverage on the play this weekend, which may not be agreeable with some of our readers. We're by no means trying to profit from last week's events. However, we were gaming GMST's weakening picture prior to last Tuesday's events and we're gaming the same deterioration going into next week's trading. Traders with open positions should use any large gap lower Monday morning to book profits. In terms of new entries into the play, it'll be best to wait for the stock to advance up to a significant resistance level before engaging in new trades. That may take a few days to transpire, but look towards the $25 level, or higher around $30 for resistance. Our stop has been lifted in this play. BUY PUT OCT-30*QLF-VF OI=322 at $6.00 SL=4.75 BUY PUT SEP-25 QLF-VE OI=475 at $2.80 SL=1.50 Average Daily Volume = 3.70 mln VZ - Verizon $50.70 (+1.65 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. The broad deterioration of the telecom business was the premise behind our bearish play on Verizon when we initiated coverage. And it's the premise behind our maintaining coverage on the play going into next Monday's reopening of the stock market. The stock is technically weak and the company is fundamentally weak. Although, VZ did stage a rebound during last Monday's session, which will have us on alert going into next week. We're dropping our stop in this play in light of the uncertainty surrounding Monday's opening, but further strength above the $51 level might give us inclination to drop the play. If the stock does, however, advance all the way up to the $52.80 area, it might provide a relatively low risk entry into new put positions. That level is the current site of the stock's 200 day moving average. On the flipside, weakness down to the $48 level should offer those with open positions an opportunity to exit plays. BUY PUT OCT-55*VZ-VK OI= 5129 at $5.10 SL=3.75 BUY PUT OCT-50 VZ-VJ OI=13195 at $1.80 SL=1.00 Average Daily Volume = 4.40 mln HDI - Harley Davidson $44.18 (+0.25 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). HDI settled below its 200-dma a week ago, then retested that level during last Monday's session. The 200-day currently sits at the $44.70 level and might be a good site to watch for rollovers going into next week's trading. Then again, further weakness below current levels may also offer momentum traders new entries into put positions. For example, a volume-backed breakdown below the $43 level would signal further weakness over the short-term. Although momentum traders may pursue new entries on further weakness from current levels, the more prudent strategy might be to wait for a rebound up to significant resistance then watching for a subsequent rollover. As we mentioned above, the 200-dma may serve as significant resistance. But, if that level is broken, look for a rollover around $46 or higher up around the $47 level, which is the stock's 10-dma. Our stop was initially placed at the $46.50 level, but removing that stop in light of the uncertainty that lies ahead. BUY PUT OCT-50 HDI-UJ OI= 783 at $6.80 SL=5.00 BUY PUT OCT-45*HDI-UI OI=1221 at $3.60 SL=2.00 BUY PUT OCT-40 HDI-UJ OI= 133 at $1.50 SL=0.75 Average Daily Volume = 1.49 mln PHA - Pharmacia $40.15 (-0.12 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. Even before Tuesday's tragic events, PHA was having a hard time finding any buying interest. While the Pharmaceutical index (DRG.X) has been struggling to regain an upward trend, shares of PHA have been locked in a persistent downtrend since the beginning of the year. Fundamentally unchanged by the terrorist attack, our PHA play is looking attractive for fresh entry points right now. Daily stochastics began to roll over last Monday, and we would look for any continued weakness to provide attractive entries as the stock falls below recent support at $39.50. It is difficult to see whether Drug stocks will see strength or weakness next week, and any short rally could provide fresh entries on a rollover near the $41 resistance level. The prudent approach may be to stand aside until the dust settles a bit on Monday before venturing into new positions. BUY PUT OCT-40*PHA-VH OI=2234 at $1.90 SL=1.00 BUY PUT OCT-35 PHA-VG OI=2691 at $0.55 SL=0.00 Average Daily Volume = 4.67 mln QCOM - Qualcomm, Inc. $50.54 (+1.36 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. It is hard to ascertain how last week's tragedy might impact Technology stocks, which leaves us with the technical picture to focus on. And that isn't a pretty picture for QCOM. After falling precipitously during the prior 2 weeks, the stock has found some tenuous support near $48. The rebound was just getting started, and any nervousness could send the stock south again on Monday. But buying renewed weakness is not the high odds entry we want to focus on. Look for a short rebound to run out of steam near the $54 or $56 resistance levels. Should selling volume increase near either of those levels, it could provide an attractive entry for the next downward leg. A drop through the $48 support level will likely mean the bears have regained the upper hand again and will take a run at the April lows near $48. BUY PUT OCT-50*AAO-VJ OI=19694 at $5.30 SL=3.25 BUY PUT OCT-45 AAO-VI OI= 4390 at $3.20 SL=1.50 Average Daily Volume = 12.3 mln QLGC - QLogic Corporation $26.78 (+0.02 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. In the aftermath of last week's terrorist attack, we could actually see a bit of a bounce in shares of Technology stocks. If so, QLGC is primed for a bounce, and could be setting up to give the bears a fresh entry point. What we want to see in order to consider fresh positions is a rally that runs out of steam near the $30 resistance level. Nothing about the company's business or fundamentals has changed, and that means that odds favor a renewed decline after the initial volatility is shaken out of the stop. We could very well see shares of QLGC decline to challenge the April lows near $18, but rather than jumping into renewed weakness on Monday morning, the higher-odds approach will be to wait and fade the rally when it begins to weaken. BUY PUT OCT-30*QLC-VF OI=879 at $5.90 SL=4.00 BUY PUT OCT-25 QLC-VE OI=755 at $3.10 SL=1.50 Average Daily Volume = 7.35 mln SEBL - Siebel Systems $19.58 (+0.62 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. There hasn't been much positive to say about the Software sector (GSO.X) in the past 3 months, and shares of SEBL have reflected that weakness, recently declining to new 52-week lows. Despite the possibility that Technology stocks could see some buying next week, it is likely to be short-lived for stocks like SEBL, which are fundamentally weak. So we'll look for a brief rally that brings the stock up to resistance in the $21-22 or even $25. Such a move would likely be motivated by excessive optimism and put plays entered at that point could provide some easy profits. Clearly, nobody knows what to expect on Monday, and the prudent approach will be to watch the early trading and only enter new positions when the stock is moving in a manner that is consistent with a bearish strategy. BUY PUT OCT-20.0*SGQ-VD OI=1075 at $2.90 SL=1.50 BUY PUT OCT-17.5 SGQ-VW OI= 802 at $1.65 SL=0.75 Average Daily Volume = 14.3 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 ************************************************************** ***** LEAPS ***** Picking Up The Pieces... By Mark Phillips Contact Support Along with my fellow Americans and most other citizens around the world, I have spent the past several days in stunned and stupefied silence. Oh, I have had plenty to say, but it hasn't been fit for print, as I have struggled to come to terms with the anger I've felt in the wake of the despicable actions of a small band of small-minded cowards. Competing with my anger in recent days has been my intense pride at the actions of my fellow citizens and particularly the behavior of New Yorkers, as they have begun the long and painful process of recovering from this tragedy. Innumerable acts of individual heroism have had a profound effect on me since Tuesday morning and more than at any time in my life, I feel an intense sense of pride in calling myself an American. As has happened many times throughout history, the current tragedy has served to bring out the best in people, providing a stark contrast to the sub-human scum that perpetrated Tuesday's attacks. To all those that have given selflessly of themselves in recent days, I salute you. You are a living testament of what it means to be American, and more importantly, compassionate members of the human race. I had intended to write an article on utilizing LEAP Puts last Wednesday, but decided that doing so would be insensitive, inappropriate and tasteless. The series of Special Reports that were published in the newsletter after Tuesday's terrorist attack were far more timely, informative and important than any strategy-specific article I could have written. Reading these articles throughout the week provided me a powerful reminder of the integrity, dedication and professionalism of my fellow OIN writers. My intention is to still write the article, but only when I feel it is appropriate to do so. As we see trading return to some semblance of normalcy, I will feel much more comfortable discussing the use of specific strategies that can be applied to profit from falling stock prices. Although there has been very little market action since our last visit, the events of the past week have had a profound effect on our equity markets and have placed them at a critical juncture. Like the rest of my colleagues, I truly do not have any hard data on which to base a conclusion as to what to expect. Sure, I can see sectors that will likely suffer, such as Airlines and Insurers, as well as the likelihood that certain Defense companies will benefit from increased spending. But how is the overall market likely to respond. We'll probably drop at the open, but what to expect after that point is what is truly important. I've heard speculation from certain economists that this will be the catalyst to finally push the U.S. economy firmly into recession. I've also heard certain analysts, pointing to the severity of the current oversold market conditions, predict that the initial dip could be met with strong buying volume -- coming from patriotic individual investors, the massive influx of capital from the Federal Reserve and companies defending their own stock prices through massive share buy-backs. Which viewpoint will win out? I truly don't know, but allow me to share with you some of the factors that are helping to shape my opinion. Prior to Tuesday's attack, the Volatility Index (VIX) had moved as high as 37.25, and in the wake of the current market uncertainty, it is a foregone conclusion that it will run well above 40 once U.S. markets reopen for business. It is hard to predict how high it will move in the early going after trading resumes, but suffice to say that this rubber band will be stretched very tight and in need of release. The Federal Reserve is pumping enormous amounts of cash into the world economy and analysts expect significant interest rate cuts in the first few days of renewed trading. Additionally, red tape has been removed, allowing companies to vote with their own wallets buying back their own shares to support the price. Cisco Systems (NASDAQ:CSCO) was the first one to wade into that pool, authorizing a $3 billion share buyback over the next 2 years. I expect many other major companies to follow CSCO's lead in the days ahead. There are more and more reports from various analysts stating that the aftermath of Tuesday's events will push both the U.S. and global economies firmly into recession. Certainly, the outlook is grim for specific sectors of the market, but others will likely benefit. We have known that the markets would need a substantial wall of worry to climb before they would be able to stage a meaningful recovery, and it seems clear to me that we have that wall now. Will we rally straight up from here? Not a chance. But neither do I expect a dramatic and protracted broad market selloff. I have no doubt that we will see a sharp drop on Monday, but I expect a solid bounce-back in the markets, likely led by Defense, Consumer and Energy-related stocks. Turning to our current list of plays, I think we are well positioned for the days and weeks ahead, but only time will tell. Philip Morris (NYSE:MO) and Clorox (NYSE:CLX) have performed rather well in recent weeks and may continue to do so in the near future. Global Marine (NYSE:GLM) has been struggling of late, but concerns about the smooth flow of oil to our country may revive interest in the Oil Service sector, lending strength to our play. The Portfolio play that will likely run into problems in the days ahead is Walt Disney (NYSE:DIS), as leisure and travel activities are likely to see significant cutbacks in the near future, leading to significant pressure on profits. The extreme volatility that I expect to see next week could have an unfortunate effect on our plays with the stops that are currently in place. Accordingly, I am suspending the listed stops until we see how trading proceeds. Each investor must decide for themselves how to balance risk and reward. I expect a sharp drop in many stocks, which could be met with just as sharp a rise. I don't want to be stopped out of our Portfolio plays, only to watch them continue their upward trends. The Watchlist has several plays which could benefit substantially from trends that will begin to emerge after trading resumes; among these are Enron (NYSE:ENE), Calpine Corporation (NYSE:CPN) and General Electric (NYSE:GE). Inquiring minds will likely wonder why we didn't take a position in ENE last Monday. That's a valid question, and looking just at the chart, I should have taken the position. But after the dramatic events of last week, I felt the prudent approach would be to refrain from taking a position at this point and wait to see how things develop over the days ahead. It may turn out that I will have missed a good entry point, but I'd rather take that risk than the risk that certain readers would have blindly followed us into the position after this weekend's column without properly weighing the risks. Determining logical and prudent entry points at this juncture is a game of "Pin the Tail on the Donkey" at this point, as it remains to be seen how the investing public will actually react next week. Accordingly, I would be much more cautious about initiating new positions, until the dust begins to settle. I have left the entry targets unchanged and you can use the currently listed levels as reference points, but not as hard entry targets. Instead, I would recommend looking at historical price charts and looking for solid levels of support. If buyers emerge near those levels in the days ahead, I would consider that a viable entry point, provided we see the daily and weekly stochastics oscillators also recovering from oversold levels. Next week we will have price action to look at and I will be able to provide much better guidance as to where strength will likely be seen and what entry targets make the best sense. The week ahead will be fraught with peril and filled with opportunity. There will be winners and losers, and unless you like to live dangerously, I would caution patience and restraint. We are in this game for the long-term and the prudent approach will be to wait for some stability to enter the markets as well as the political scene before placing more money at risk in the markets. There will be plenty of time to position our Portfolio for profit in the weeks ahead, and I am content to stand aside until I see solid signs of strength. If conditions change sufficiently to warrant it, I will use my Wednesday column to provide updates to both the Portfolio and Watch List, as well as any significant changes to my perspective on the market. In the meantime, do what you can to help those affected by this tragedy and take the time to count the many blessings we all share and strive to protect in this great country. Best Wishes! 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 $ 8.60 40.98% $ 38 MO 07/30/01 '03 $ 45 VPM-AI $ 6.10 $ 8.00 31.15% $ 47 GLM 08/15/01 '03 $ 20 OML-AD $ 3.30 $ 2.65 -19.70% $ 14 '04 $ 20 KLW-AD $ 4.70 $ 4.20 -10.64% $ 14 DIS 08/30/01 '03 $ 30 VDS-AF $ 2.05 $ 1.80 -12.20% $22.50 '04 $ 30 LWD-AF $ 3.60 $ 3.10 -13.89% $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 $73-74 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 GD 09/16/01 $72-74 JAN-2003 $ 75 VJH-AO CC JAN-2003 $ 65 VJH-AM JAN-2004 $ 80 KJD-AP CC JAN-2004 $ 70 KJD-AN TYC 09/16/01 $42-44 JAN-2003 $ 45 VYL-AI CC JAN-2003 $ 40 VYL-AH JAN-2004 $ 50 LPA-AJ CC JAN-2004 $ 40 LPA-AH New Portfolio Plays None New Watchlist Plays GD - General Dynamics $75.97 In the wake of Tuesday's terrorist attack, it appears that there will be an intense and possibly protracted war against terrorism, and Defense stocks such as GD are likely to benefit from an increase in spending on the products the company provides. GD has been on a steady rise since early 2000, and while we may see some near-term volatility, the changes that are likely to materialize in the Defense industry should help the stock to continue its upward trend over the months ahead. The ascending trendline is currently resting at $72.50, and there is significant historical support in the $72-74 area. Depending on the market reaction next week, we could even see a test of lower levels of support in the $67-70 range. We are starting the play out with a target of $72-74, but keep in mind that we will only take a position on a strong (read:volume) bounce from this level. With the daily and weekly Stochastics now in oversold, the stock could be primed for a solid rally, as the fundamental picture has changed so dramatically. The prudent approach may be to wait until the early volatility begins to subside, and then target new entries after that. BUY LEAP JAN-2003 $75.00 VJH-AO BUY LEAP JAN-2003 $65.00 VJH-AM For Covered Call BUY LEAP JAN-2004 $80.00 KJD-AP BUY LEAP JAN-2004 $70.00 KJD-AN For Covered Call TYC - Tyco International $47.71 Although less prominent in most investors' minds than GE, TYC is another large and diversified manufacturing and service company. Involved in the manufacture of electronic components, undersea communications systems, medical supplies, electronic security systems and flow control systems, TYC sports a reasonable PE ratio (16) and a Return on Equity of better than 25%. As a testament to its strong growth, TYC has held up rather well in recent months, keeping its long-term uptrend intact. The ascending trendline is currently resting at $44, and this is backed up by the 200-week moving average at $42. Near-term volatility s likely to cause a test of these levels and possibly the April lows near $40. Add in weekly and daily stochastics that will likely be well into oversold in the days ahead and we could be looking at an attractive entry point. We're setting our entry target in the $42-44 range, but I feel the need to caution that any new positions in the next few days carry additional risk due to the expected market volatility. BUY LEAP JAN-2003 $45.00 VYL-AI BUY LEAP JAN-2003 $40.00 VYL-AH For Covered Call BUY LEAP JAN-2004 $50.00 LPA-AJ BUY LEAP JAN-2004 $40.00 LPA-AH For Covered Call Drops None ************************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 09-16-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/6078_5.asp ************************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 ************************************************************** ************* COVERED CALLS ************* The Numbness: When Does It Go Away? By Mark Wnetrzak I planned to offer a selection of plays this week but I cannot. The data available is pre-WTC and the next time the market opens will be post-WTC. Heck, there is a good chance that our military 'boys' will be in harm's way by Monday. Are we so callous that in the midst of destruction we can only look for ways to profit? I am sorry, but that is not my way. I take solace in the outpouring of support here in Anchorage and across America: the blood bank overwhelmed; a rally raising over $27,000.00 for disaster relief in just a few hours; the flags that have sprouted across the city. American patriotism awakens and will be needed for the task ahead. I am still waiting for the shock of what happened in New York to wear off. Mark SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield LCBM 6.35 10.55 SEP 5.00 1.75 *$ 0.40 13.2% RCOM 10.41 10.70 SEP 10.00 0.85 *$ 0.44 10.0% CCRD 10.20 10.21 SEP 10.00 1.15 *$ 0.95 9.1% UNFI 20.31 20.04 SEP 20.00 1.10 *$ 0.79 8.9% IMNX 17.83 18.01 SEP 17.50 1.00 *$ 0.67 8.6% NSM 31.61 31.05 SEP 30.00 2.60 *$ 0.99 7.4% AVIR 25.01 24.59 SEP 22.50 3.10 *$ 0.59 5.9% BPUR 22.36 21.18 SEP 20.00 3.10 *$ 0.74 5.8% GSPN 16.24 14.67 SEP 15.00 2.30 $ 0.73 5.7% FFIV 14.59 13.94 SEP 12.50 2.85 *$ 0.76 5.6% CCUR 11.60 10.62 SEP 10.00 2.15 *$ 0.55 5.1% SCTC 13.33 13.04 SEP 12.50 1.20 *$ 0.37 4.6% NMTC 28.87 25.10 SEP 25.00 5.10 *$ 1.23 4.5% NEV 18.05 18.30 SEP 17.50 0.90 *$ 0.35 4.4% ANSR 9.01 7.50 SEP 7.50 1.80 $ 0.29 4.4% DP 44.05 42.48 SEP 42.50 2.40 $ 0.83 4.3% NETA 16.36 14.86 SEP 15.00 2.45 $ 0.95 4.2% INTU 37.78 36.34 SEP 35.00 3.70 *$ 0.92 4.1% DAVX 10.26 9.80 SEP 10.00 0.75 $ 0.29 2.7% NTIQ 36.40 28.75 SEP 30.00 8.10 $ 0.45 1.2% ISSI 15.00 13.90 SEP 15.00 1.25 $ 0.15 0.7% CTIC 31.39 27.90 SEP 30.00 3.20 $ -0.29 0.0% PRGN 26.18 22.97 SEP 25.00 2.70 $ -0.51 0.0% SPCT 15.85 13.17 SEP 15.00 2.05 $ -0.63 0.0% GERN 16.01 13.49 SEP 15.00 1.60 $ -0.92 0.0% R 22.59 20.97 SEP 22.50 0.65 $ -0.97 0.0% PTEC 15.05 12.87 SEP 15.00 1.20 $ -0.98 0.0% WBSN 19.19 15.79 SEP 17.50 2.35 $ -1.05 0.0% PRIA 17.89 15.09 SEP 17.50 1.55 $ -1.25 0.0% ARTC 31.67 26.89 SEP 30.00 3.50 $ -1.28 0.0% HLIT 16.04 11.67 SEP 15.00 2.20 $ -2.17 0.0% PMCS 34.40 24.74 SEP 30.00 6.50 $ -3.16 0.0% *$ = Stock price is above the sold striking price. Comments: See Above. 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). NEW CANDIDATES ********* Due to the uncertainty in the markets and the lack of accurate option prices, there will be no candidates in the Covered-Call section this week. However, there is always an overwhelming desire for discussions on trading systems and for that reason, we have included an educational article on the subject. Trading Basics: A Plan for Success! By Mark Wnetrzak The recent volatility in the market has magnified the need for a well designed trading plan. As with any structure, the key to a successful system is in its foundation. In any approach to the financial markets, a number of issues must be resolved. First, how much risk do you want to incur? What ratio of success do you expect to achieve? What style or method of trading will you use to accomplish your goals? Do you plan to utilize technical analysis, trading ranges or trends? Will you focus on volatility or disparity in option pricing, selling premium when the market is active and buying potential when the trend is stagnant? These decisions will significantly affect the fundamental design of your system. As an example, if your stop-loss limits are relatively liberal, then your potential success ratio will be increased. At the same time, the possibility of substantial loss will also be magnified. The best way to find a happy medium is to start with realistic expectations and build a pattern of success before you worry about increasing the potential returns. Regardless of the type of markets you trade, the same fundamental approach can apply to a number of different systems. The basic requirements for a successful design are determined by its core objectives. With trading systems, you need an market outlook, a strategy with which to profit and a method for timing the entry and exit. Then you must decide on a money management system - a set of rules or guidelines for determining potential risk. Most experts suggest that ideally you should not risk more than 3-5% of your capital on any one trade, to avoid the possibility of a catastrophic loss. In addition to these details, you should also outline a stop-loss policy and a method to determine the correct position size for a particular transaction. The administration of stop-losses will often define the success of your system. In fact, the placement of the stop is vitally important, because if the stop is vulnerable, then so is the entire system. It would follow that the relationship between your entry point and profit target or exit stop is the key to profitability. Unfortunately, this is the essential element that cannot be reached simply by logic, rather it evolves through observation, critical study, and continuous testing and refinement. The ultimate arrangement will be strict yet flexible, with a plan for adjustments as the trade progresses. The ideal process entails far more than a mechanical system that simply follows the trend and waits for a stop to be hit. In every case, it should identify the proper entry point and manage the position for maximum profit. The first step in constructing a profitable system is observation. Study the rhythms and cycles of the market. Examine how specific stocks and sectors are behaving in the current environment and try to identify the best ways to take advantage of the activity. The simplest approach to directional trading is through the use of technical analysis. Identifying trading ranges and trends is a relatively easy task, but then you must define how to profit from them. With trading ranges, it's best to look for extremes and enter opposing positions when these peaks (or valleys) are reached. With trends, traders generally initiate new positions when a particular system indicates that the primary movement is well established and the correct bias is in place. Obviously, trends can be defined in a number of different ways but the most important aspect of this type of trading is selecting the correct time frame. After the time frame is identified, you can analyze the appropriate periods for specific trading signals. Long-term data is more stable and will provide very accurate indications with regard to primary trends or market direction. In contrast, most short-term statistics are generally better for entry and exit timing and strategies that profit from correctly identifying reversals or changes in momentum. Despite the shortcomings of each individual approach, traders have a variety of indicators with which to determine the future character of the market. The most difficult task is to choose those indicators that will best help achieve one's objectives. Good Luck! ***************** NAKED PUT SECTION ***************** Success Basics: Is It Time To Become An Investor? By Ray Cummins With the recent decline in equity values, many of the so-called market "gurus" have begun to proclaim the pitfalls of the "buy and hold" concept. Some hype the rewards of short-term, high profit trading strategies while discounting the advantages of long-term portfolio investments. Others try to convince you to avoid stocks altogether, comparing equity ownership to legalized gambling as they tout the returns in annuities and money-market accounts. Regardless of what these self-serving consultants suggest, there is merit to this type of investing when it is incorporated into a balanced approach to financial security. In addition, it is still the most (statistically) successful theory today in all of the financial markets. Most experts say that a combination of investments will provide the best balance of risk and reward in a long-term portfolio. A diverse group of long-term stocks is a good foundation for any novice investor and a qualifying retirement account can help defer capital-gains taxes. Investors who use the buy-and-hold approach should focus on selecting quality companies with current market values that are at a discount relative to their underlying economic value. By accumulating these issues selectively and maintaining a balanced portfolio, an investor can reduce trading costs and maximize the potential of long-term profits from the company's increasing share value. With the historic relationship between corporate earnings growth and share price appreciation, there is certainly wisdom in this methodology. Stocks can also be used to supplement portfolio proceeds and investors who need current income can choose from a vast number of dividend paying securities, many of which also have an excellent record of share price growth. Investors who choose to avoid specific types of business activity (based on ethical or financial principles) can find many value-based stocks that meet their personal criteria. Those who wish to achieve the same performance as an individual industry or sector can purchase stock indexes and other financial instruments that mirror specific groups of equities. "Diamonds" and "Spyders" allow traders to buy or sell entire indexes as a single share on the American stock exchange (Diamonds represent the 30 Dow stocks and Spyders the S&P 500) and WEBS (World Equity Benchmark Shares) permit investors to buy entire portfolios of stocks in foreign markets such as Japan, Canada, Germany, Spain, Hong Kong, the UK, and the Netherlands. More aggressive traders can apply value-investing principles to blue-chip issues; buying stocks that are undervalued and selling those that are overvalued. As a portfolio matures, investors can eventually diversify into bonds or treasury instruments to benefit from market and interest rates fluctuations. While strategy is important, it is also imperative to approach investment activities with the right attitude and expectations. Trying to achieve too much from a portfolio can put the account in the red quickly (greed can lead to terrible decisions!) and accepting returns that barely surpass current inflation rates will prevent a portfolio from growing. Although buy-and-hold has worked well throughout the last quarter of the century, the recent slump in corporate share values demonstrates the need to be proactive with your core holdings. While most investors who make the effort to learn about the financial markets are rarely satisfied to achieve the same return as the Dow or the S&P 500, others will actively seek mediocrity and history suggests that the general public is comfortable losing what the market loses and gaining no more than the market gains. That's surprising because the ease of access to global trading forums provide a vast number of profit opportunities and there are numerous stock and derivative strategies for the average investor. The key to success is to follow a carefully planned approach with precision and discipline. Some of you may be wondering what rate of return is a reasonable expectation? Most professionals who participate in historically profitable strategies will easily average 15%-20% return on an annual basis. Over the long-term, 10% per year is the typical return for broader-market stocks and Warren Buffett accumulated his fortune (Berkshire Hathaway is worth over a billion dollars), by focusing on a mere 15% annual return on assets. His primary goal however, was to maintain a substantial margin of safety in all of the portfolio's holdings. Based on the recent activity in the stock market, that approach is even more valid today and it's something to keep in mind when you start shopping for the new additions to your long-term portfolio. 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 BRCM 31.41 30.59 SEP 25.00 0.55 *$ 0.55 17.5% CTXS 31.48 30.48 SEP 27.50 0.60 *$ 0.60 14.2% FDP 15.18 15.30 SEP 15.00 0.40 *$ 0.40 13.8% ICST 19.00 17.30 SEP 15.00 0.25 *$ 0.25 13.4% SCTC 13.05 13.04 SEP 12.50 0.30 *$ 0.30 13.1% PPD 20.50 19.20 SEP 15.00 0.80 *$ 0.80 11.8% MDCC 20.50 23.61 SEP 17.50 0.95 *$ 0.95 11.2% GERN 14.50 13.49 SEP 12.50 0.55 *$ 0.55 11.0% CENT 8.98 9.41 SEP 7.50 0.35 *$ 0.35 10.3% HDL 15.46 15.50 SEP 15.00 0.40 *$ 0.40 9.9% PLXS 36.19 30.12 SEP 30.00 0.80 *$ 0.80 9.6% ALLY 18.23 19.00 SEP 15.00 0.50 *$ 0.50 9.5% Adj 2-1 split LBRT 14.32 13.64 SEP 12.50 0.25 *$ 0.25 9.1% KDE 28.00 26.25 SEP 25.00 0.50 *$ 0.50 8.7% ILUM 33.20 35.90 SEP 30.00 0.60 *$ 0.60 8.5% IMCL 53.30 53.73 SEP 45.00 0.50 *$ 0.50 8.0% LBRT 15.35 13.64 SEP 12.50 0.25 *$ 0.25 7.7% PPD 21.09 19.20 SEP 15.00 0.40 *$ 0.40 7.5% ISIL 39.20 34.12 SEP 30.00 0.90 *$ 0.90 7.5% SAGI 17.75 15.35 SEP 15.00 0.40 *$ 0.40 7.3% URBN 15.04 15.65 SEP 12.50 0.25 *$ 0.25 7.3% CTXS 32.95 30.48 SEP 27.50 0.35 *$ 0.35 6.6% NEM 21.48 21.15 SEP 20.00 0.55 *$ 0.55 6.2% ILXO 29.15 27.00 SEP 25.00 0.45 *$ 0.45 6.1% PRGX 13.75 13.86 SEP 12.50 0.30 *$ 0.30 5.7% IMCL 44.89 53.73 SEP 30.00 0.70 *$ 0.70 5.2% VPHM 35.59 28.94 SEP 30.00 0.95 $ -0.11 0.0% PPD 22.28 19.20 SEP 20.00 0.50 $ -0.30 0.0% TERN 7.01 7.10 OCT 5.00 0.30 *$ 0.30 12.8% *$ = Stock price is above the sold striking price. Comments: The stock indexes closed higher on Monday, the last day that equities traded in the United States and even with the brief respite, investors remain concerned over the economic outlook following the recent employment data and unfavorable consumer spending forecasts. Technology stocks were among the best performers due to a late session rally but the NASDAQ remains poised to test April's low near 1,619 unless there is a strong change in sentiment. Analysts say that uncertainty in the aftermath of Tuesday's terrorist attacks and concerns about corporate earnings will limit near-term upside potential. In addition, the latest jobs report showed another increase in unemployment claims and that data is likely to put additional pressure on stocks when the markets reopen for trading Monday. Most of the markets around the globe have stabilized following the initial reaction to the horrific events and although the delay in opening the U.S. markets may help dampen the bearish activity, the latest information suggests the American economy is on the verge of a recession. With that outlook in mind, it is imperative that you evaluate your long-term outlook for any portfolio positions and act accordingly. Plexus (NASDAQ:PLXS), ViroPharma (NASDAQ:VPHM), Pre-Paid Legal (NYSE:PPD) and Sage (NASDAQ:SAGI) are currently on the watch-list, but there are a number of issues that could suffer substantial losses in a broad market sell-off, so monitor your plays diligently in the coming week. Positions Closed: Powerwave (NASDAQ:PWAV), Advanced Fibre Comm. (NASDAQ:AFCI), Alamosa Holdings (NASDAQ:APCS), Standard Pacific (NYSE:SPF), and Geron (NASDAQ:GERN). NEW CANDIDATES ********* Due to the uncertainty in the markets and the lack of accurate option prices, this week's plays are simply list of candidates to supplement your search for profitable trading positions. No one knows how stocks will react when the equity exchanges open for trading on Monday, thus you must first evaluate the market activity and then decide if the selections meet your criteria for potential plays. In addition, we suggest you "target-shoot" the initial entry prices, allowing for ample downward movement in the event of an unexpected decline in share values. These positions will not be included in the monthly summary. Sequenced by Company ***** Stock Last Put Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ILUM 35.90 OCT 30 ILU-VF 0.55 11 29.45 35 5.3% IMNX 18.01 OCT 15 IUU-VC 0.30 242 14.70 35 5.8% LBRT 13.64 OCT 12.5 IEY-VV 0.80 40 11.70 35 13.6% MDCC 23.61 OCT 20 MCQ-VD 0.65 301 19.35 35 8.7% NTPA 5.85 OCT 5 NQD-VA 0.30 186 4.70 35 14.6% OEI 19.85 OCT 18 OEI-VW 0.45 279 17.05 35 6.5% PRGX 13.86 OCT 12.5 FPQ-VV 0.35 15 12.15 35 6.7% PROX 12.60 OCT 10 WQG-VB 0.25 5 9.75 35 7.8% Sequenced by Target Yield (monthly basis) ****** Stock Last Put Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ILUM 35.90 OCT 30 ILU-VF 0.55 11 29.45 35 5.3% IMNX 18.01 OCT 15 IUU-VC 0.30 242 14.70 35 5.8% OEI 19.85 OCT 18 OEI-VW 0.45 279 17.05 35 6.5% PRGX 13.86 OCT 12.5 FPQ-VV 0.35 15 12.15 35 6.7% PROX 12.60 OCT 10 WQG-VB 0.25 5 9.75 35 7.8% MDCC 23.61 OCT 20 MCQ-VD 0.65 301 19.35 35 8.7% LBRT 13.64 OCT 12.5 IEY-VV 0.80 40 11.70 35 13.6% NTPA 5.85 OCT 5 NQD-VA 0.30 186 4.70 35 14.6% 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). ***** ILUM - Illuminet Holdings $35.90 *** Break-Out! *** Illuminet Holdings (NASDAQ:ILUM) operates an unaffiliated Signaling System 7 network in the United States, and provides complementary intelligent network and SS7 services to telecommunications carriers. The majority of the company's products and services are directly related to its SS7 network, as either part of the connectivity, switching and transport function of the network or as intelligent network services. In addition, the company provides clearinghouse services and licenses specially designed software for measuring network usage. On July 19, the network services provider reported that second-quarter earnings more than doubled as core database and wireless roaming services business remained strong. Revenues rose 30% in the second quarter to $47 million up from $36 million a year ago. The company expects revenues to grow 23-25% year-over-year, with operating income margins of about 30% and they are comfortable with First Call's consensus estimate of $0.28 earnings per share in the third quarter. In addition, ILUM recently agreed to purchase BellSouth's International Wireless Services (BSI-WS) unit, which provides roaming services that connect wireless telephone carriers in 23 countries in the Americas and the Caribbean. The move to a recent high on heavy volume bodes well for the future share value of the issue. OCT 30.00 ILU-VF LB=0.55 OI=11 CB=29.45 DE=35 TY=5.3% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=ILUM ***** IMNX - Immunex $18.01 *** Low Risk Entry Point! *** 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. Use this position to establish a favorable cost basis in the issue. OCT 15.00 IUU-VC LB=0.30 OI=242 CB=14.70 DE=35 TY=5.8% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=IMNX ***** LBRT - Liberate $13.64 *** Telecom Sector *** Liberate Technologies (NASDAQ:LBRT) is a global provider of a comprehensive software platform for delivering content, services and applications to a broad range of information appliances. Information appliances, which include television set-top boxes, game consoles and personal digital assistants, are devices that are enhanced by Internet capability. Network operators, such as telecommunications companies, cable and satellite television operators and Internet service providers, can use the company's server software to deliver Internet-enhanced services to numerous information appliances and millions of consumers. Information appliance manufacturers can use its client software to enable their products for Internet use. Liberate recently signed an agreement to develop an interactive TV delivery system with an AT&T subsidiary and investors believe it will be the key to their success in the near-term. The deal opens the door for Liberate to power as many as 6 million digital set-top boxes already in the market, including AT&T's 3 million digital cable subscribers, and it also marks an opportunity in a highly competitive market that is expected to rebound up after years of dismal consumer interest. OCT 12.50 IEY-VV LB=0.80 OI=40 CB=11.70 DE=35 TY=13.6% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=LBRT ***** MDCC - Molecular Devices $23.61 *** Merger Target? *** Molecular Devices )NASDAQ:MDCC) is a developer of high-performance bioanalytical measurement systems that accelerate and improve drug discovery and other life sciences research. The company's systems enable pharmaceutical and biotechnology firms to leverage advances in genomics and combinatorial chemistry by facilitating the high throughput and cost effective identification and evaluation of drug candidates. Their instrument systems are based on an advanced core technology, which integrate the company's expertise in engineering, molecular and cell biology and chemistry. The company's systems are fundamental tools for drug discovery and life sciences research, and its MAXline series of microplate readers and its FLIPR Cell Analysis systems are well-known leaders in their respective markets. ABN Amro recently said Molecular Devices is a leader in the drug discovery tool niche, and forecast improvement in spending on labs in 2002 that could strengthen the sector's fundamentals. Analysts say other bullish factors are MDCC's new 1.5 million share buy-back and its attractiveness as an acquisition candidate. OCT 20.00 MCQ-VD LB=0.65 OI=301 CB=19.35 DE=35 TY=8.7% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=MDCC ***** NTPA - Netopia $5.85 *** Bottom Fishing! *** Netopia (NASDAQ:NTPA) develops, markets, and supports broadband Internet equipment and e-commerce Web platforms for small and medium-size businesses. The company's platforms are designed to enable carriers and service providers to create and offer value added, bundled service offerings for their small and medium-size business customers. These bundled service offerings often include digital subscriber line service bundled with back-up, bonding, virtual private networking, and Internet web-site and e-store hosting. NTPA will be showcasing its ADSL & G.shdsl broadband (an international standard and a new technology that provides more economical, higher quality symmetric DSL service) at the Networld+Interop trade-show in Paris this month. Investors are apparently interested and the issue is a great "bottom-fishing" candidate, based on its recent technical indications and the new buying support near our cost basis. OCT 5.00 NQD-VA LB=0.30 OI=186 CB=4.70 DE=35 TY=14.6% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=NTPA ***** OEI - Ocean Energy $19.85 *** Oil Sector! *** Ocean Energy (NYSE:OEI) is an independent energy company engaged in the exploration, development, production, and acquisition of crude oil and natural gas. North American operations are focused primarily in the shelf and deepwater areas of the Gulf of Mexico, the Permian Basin, Mid-continent, and Rocky Mountain areas. In the international segment, Ocean conducts oil and gas activities in Equatorial Guinea, Ctte d'Ivoire, Angola, Egypt, Tatarstan, Pakistan, and Indonesia. OEI is a solid company in the Oil and Gas Drilling sector and Deutsche Banc Alex. Brown recently said that it began coverage of the company with a "buy" rating and a $27 target on its share value. The brokerage noted, "OEI is a uniquely-positioned upstream player with multiple opportunities for meaningful growth." OCT 17.50 OEI-VW LB=0.45 OI=279 CB=17.05 DE=35 TY=6.5% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=OEI ***** PRGX - Profit Recovery Group $13.86 *** Entry Point! *** The Profit Recovery Group (NASDAQ:PRGX) is a provider of recovery audit, expense containment and knowledge application services to large and mid-size businesses having numerous payment transactions with many vendors. The company's specialists use sophisticated proprietary technology and advanced recovery techniques and other methodologies to identify overpayments to specific vendors and tax authorities. In addition, the specialists review clients' current practices and processes related to procurement and other expenses in order to identify solutions to manage and reduce expense levels, as well as apply knowledge and expertise of industry practices to assist clients in improving their business efficiencies. With the profit levels falling in almost every industry, PRGX has a unique product that can be used almost universally. The rally in August was probably due to the fact that the U.S. Trade Commission and the Justice Department have granted an early termination of the necessary waiting period with respect to PRG's planned acquisition of Howard Schultz & Associates International. Regardless of the reason, this issue appears poised for future gains. OCT 12.50 FPQ-VV LB=0.35 OI=15 CB=12.15 DE=35 TY=6.7% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=PRGX ***** PROX - Proxim $12.60 *** Wireless Networking *** Proxim (NASDAQ:PROX) designs, manufactures and markets performance wireless local area networking products and building-to-building network products based on radio frequency (RF) technology. The company focuses on supplying spread spectrum RF transceiver modules and wireless LAN adapters to OEM customers for integration into mobile computing platforms, handheld data terminals and portable peripheral devices. Proxim designs its products to be small, lightweight, cost-effective and power efficient. Top chip maker Intel (NASDAQ:INTC) recently outlined a broad strategy for the emerging business of wireless computer networking, joining the board of an industry group that backs one standard while unveiling plans for a line of speedier networking equipment using another standard; 802.11a, which can transmit and receive a heftier array of audio, video and other data. Proxim also offers that standard and experts say these systems can deliver more "bits per buck" by enabling up to five times more bandwidth. Investors are bullish on the company's future and traders can establish a discounted cost basis in the issue with this position. OCT 10.00 WQG-VB LB=0.25 OI=5 CB=9.75 DE=35 TY=7.8% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=PROX ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** There are no supplemental candidates this week. 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 ************************ The State Of A Nation: Our First Priority - Concern and Prayers! By Ray Cummins All of us at the OIN are deeply saddened and horrified by the recent unprovoked terrorist attack on America and our foremost wish is that prayers and assistance will go out to the victims, their families, and all the people who have been affected by this unthinkable tragedy. ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, September 14 The stock indexes remained closed Friday with Wall Street's work force battling numbing sorrow while trying to prepare the major exchanges for the expected opening on Monday of next week. The U.S equity markets have been idle since Tuesday morning, when an unprovoked terrorist attack toppled buildings at the World Trade Center and killed thousands of innocent Americans. The New York Stock Exchange, the world's largest stock market, remains closed and off-limits with the rest of lower Manhattan as rescue crews sift through the wreckage of the neighborhood where 50,000 people once worked. An untold numbers of victims, including economists, brokers, strategists and their support staff, are missing in the rubble. Despite the unbelievable carnage, officials at the NYSE, NASDAQ, and American Stock Exchange assured investors they would reopen on Monday if a series of equipment tests over the weekend are successful. Some local traders suggested that a resumption might not be possible so soon, due to the fact that the financial district is little more than a smoking ruin and even if trading begins as planned, there is still much apprehension as to how stocks will react to this national catastrophe. Most analysts predict a volatile opening session, as traders are caught in the battle between their knowledge of the bleak outlook for corporate earnings and a seemingly moral obligation not to sell the markets short when they eventually re-open. While no formal declaration has been made among trading firms, a quiet, unwritten commitment not participate in "unplanned" selling has circulated throughout the financial community and that unique form of patriotism may be the only thing that prevents a broad market sell-off when trading resumes. Last Sunday's new plays (positions/opening prices/strategy): Clorox (NYSE:CLX) JAN45C/35P $0.30 credit synthetic Chevron (NYSE:CHV) SEP85P/90P $0.60 credit bull-put Elec. Arts (NSDQ:ERTS) OCT70C/65C $0.55 credit bear-call Photon (NSDQ:PHTN) SEP30C/30P $4.40 debit straddle Broadwing (NYSE:BRW) SEP15C/15P $1.60 debit straddle Smartforce (NSDQ:SMTF) SEP25C/25P $0.00 debit straddle Our new credit-spread in Chevron provided an acceptable entry price and even though Electronic Arts plunged to a recent low in Monday's session, the position offered a reasonable opening credit for traders who are bearish on the issue. Clorox was a popular stock and our new synthetic position is off to a good start. In the Debit-Straddles group, Smartforce provided some excitement, plunging below $20 during the first few minutes of trading after being downgraded by Needham & Co. However, SMTF managed to fight its way back to positive territory, recovering to close virtually unchanged. The volatile movement prevented any logical entry in the play but it's safe to say the issue can be very active. Photon was also a big mover, trading in a $3 range throughout the day. The opening debit in Broadwing was slightly better than expected and that issue continued its volatile activity with a 10% price swing during the session. Portfolio Activity: There was little significant activity this week in equity share values, since Monday's trading was the only indication of market direction and the major indices ended that session relatively unchanged. Although the U.S. stock exchanges have been closed since the attack, trading in Europe and Canada has been active and investors are anxious to see how the recent horrific events will affect stocks when they begin trading next week. Analysts say there is little likelihood of a severe drop, but the damage done to the financial community along with the austere outlook for the economy may result in additional losses until confidence in the stock market is restored. The best suggestion I can make is to define your position limits and exit/adjustment strategies before trading resumes and monitor the market closely until it is obvious that equities have achieved a reasonable climate of stability. Only then will you be able to make a knowledgeable judgment about the future outlook for stocks and your portfolio. Questions-comments on Spreads/Straddles to Contact Support ****************************************************************** - NEW PLAYS - Tuesday was a terrible day for the United States and everyone in the investment community. The thoughts and prayers of all of us here go out to the victims and families of the tragic terrorist activity. Despite the loss of lives and property, and the utter feeling of despair, it's important that we focus on putting this country back in "working" order so the terrorists won't achieve any prolonged affects from their cowardly activities. With the lack of accurate quote data and the likely volatility that the markets will experience on Monday, it is not practical to offer any new combination plays this week. Instead, I have included a popular narrative regarding the fundamentals of option pricing. ****************************************************************** Buying the Right Option By Ray Cummins The last I time discussed this fundamental subject for option traders, some interesting comments emerged from the readership. Many of the replies were in regard to my statement that novice investors lose money not only because they "buy" options, but also because they pay little attention to the "fair value" of the position they are purchasing. Buying a call is the most basic option trading strategy an investor can utilize when he anticipates a bullish movement in a particular stock. There are different methods for choosing the underlying issue but in simple terms, when you buy a call, you expect to the stock's value to increase before the option expires. It's a great technique when used properly but many inexperienced traders don't realize how difficult it is to profit from the strategy on a regular basis. Buying options provides investors with leverage, as well as limiting the loss on the position to the cost of the option. This common method of directional option trading maximizes the trader's potential for profit and provides tremendous flexibility in managing the position for optimum performance. However, statistics reveal and most experts will agree that option buyers lose money the majority of the time. One of the primary reasons that traders fail to achieve a high rate of success in this strategy is they rely too much on market timing and too little on proper position selection. The concept most investors overlook is that the change in value of a given option is not always directly correlated to the price movement of the underlying security. As a result, even when a call option is purchased at the exact low point in the underlying stock's current trend, it is still quite possible that the eventual upside movement will not generate a favorable profit from the resulting change in the price of the option. The fact that the price of the underlying instrument and the value of option fluctuate independently, based on several unique components, is one reality that is often ignored by the novice trader. Understanding theoretical pricing and the elements that determine the fair value of a specific option can be very difficult for new investors. The primary factors that influence an option's value include the price and volatility of the underlying instrument, and the time remaining in the life of the option. These components can affect the price of the listed option substantially and it is important to determine whether they might reduce the potential for profit in a given position. Implied volatility is a fundamental element in the pricing of an option and traders should be aware of how a change in this value can affect the outcome of a position. In some instances, an issue that has been historically volatile may reach periods in which it is somewhat inactive, and conversely, stocks which are normally subdued in terms of volatility will suddenly rally or decline precipitously. These changes in price behavior will alter the influence of this factor on the option premium. Skilled traders know that when you buy an option outright, a subsequent decline in volatility can create a loss in the position, regardless of whether the underlying issue moves in the forecast direction. Ideally, an option buyer should focus on those situations where implied volatility is relatively low. Using that approach, one can profit not only from a bullish movement in the underlying issue but also from a favorable change in the option's volatility. There are other influences that can have an effect on the price behavior of a specific option. One important bias is the trend of the market. For example, optimism rises during a market rally and prices often become inflated as new interest in call options enlarges demand. Option premiums increase substantially during periods of bullish sentiment, and in many cases, theoretically expensive options emerge, regardless of the price movement of the underlying issue. Even during times when the market lacks a definite trend, public opinion and the current economic outlook can have an important effect on option price behavior. When the majority of investors lack interest in the market, or there is indecision on the part of analysts about future direction, option prices generally decline. The reason is simple; options need activity, either in the price movement of the underlying issue or in its potential (speculative) value, to maintain robust premiums. An experienced trader will use these market slumps to increase his potential for profit, opening new positions when the option premiums are at a discount. Another significant factor to consider when buying options is supply and demand. This element, along with liquidity, can have a material affect on the pricing of options. A lack of buying interest causes premiums to deflate, creating opportunities for traders who use strategies that profit from discounted prices. Liquidity relates to trading volume, and the ability to buy or sell an option for a fair price, at the true market value. As noted earlier, market rallies normally produce higher trading volumes and the bullish trend often carries over to derivatives, creating greater demand for listed options. The increase in liquidity attracts institutions, which in turn add to the trading volume. Surprisingly, institutions are primarily option writers, selling both put and call options to enhance the income from their stock portfolios. This lesser-known aspect of option trading can be a great benefit to investors who attempt to earn their profits through speculative (buying) strategies. While the appropriate price for a particular option is a primary factor to consider when participating in a directional strategy, the outlook for the underlying issue, its potential volatility and the overall character of the market and industry are also material considerations. As with any investment, the position entry is of utmost importance. It deserves one's best analysis and judgment. Correctly timing the purchase requires a thorough knowledge of charting techniques and market trends. In addition, it's important to make a few key decisions: What is your risk tolerance? What will you do if the trade goes against you? At what price and in which way are you going to exit the position? Are there alternative strategies that can help limit losses and increase profits? At times, it seems the most costly (and often self-taught) lesson is the value of an exit strategy however, the entire process is something you must completely understand because a successful exit is by and large the product of a proper entry. Good Luck! ************************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
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