The Option Investor Newsletter Sunday 09-30-2001 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/3593_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 9-28 WE 9-21 WE 9-14 WE 9-7 DOW 8847.21 +611.40 8235.81 -1369.7 9605.51 - .34 -343.90 Nasdaq 1498.80 + 75.61 1423.19 -272.18 1695.37 + 7.67 -117.73 S&P-100 533.10 + 41.40 491.70 - 66.88 558.58 + 4.69 - 23.51 S&P-500 1040.94 + 75.14 965.80 -126.74 1092.54 + 6.76 - 47.80 W5000 9562.93 +662.48 8900.45 -1203.9 10104.44 + 37.95 -448.60 RUT 404.87 + 25.98 378.89 - 61.84 440.73 - 4.46 - 23.37 TRAN 2193.99 +139.15 2054.84 -621.65 2676.49 - 36.65 -100.27 VIX 35.19 - 13.08 48.27 + 13.67 34.60 + .24 + 6.51 VXN 65.19 - 12.54 77.73 + 13.89 63.84 - 1.61 + 12.59 TRIN .73 .60 .68 1.25 TICK +995 +21 +100 -113 Put/Call .61 1.27 1.01 .84 ****************************************************************** Not Out Of The Woods Yet! by Jim Brown The Dow gained +611 points for the week and retraced 44% of the prior weeks loss but very few traders expect it to last. The Dow ended September with a +166 point Friday gain but a -15.7% loss for the quarter. This was the worst quarter since Q4 of 1987. The Nasdaq lost a whopping -30.7% for the quarter for the second worst quarter ever. The worst quarter was 4Q-2000 when it lost -33%. According to fund analysts over 95% of U.S. stock funds have lost ground with many down over -50%. The broad market, as tracked by the Wilshire 5000, lost $1.14 trillion in September and -$2.25 trillion in the third quarter. Can the markets still be oversold after a +44% retracement of the prior weeks drop? Yes, they can but that does not mean they are ready to rock next week. The rally on Friday was "reported" to be specifically from portfolio rebalancing. This is when funds which advertise certain percentages of cash, bonds and stock in their portfolios, must buy/sell to maintain those averages. A fund with a 70/30 mix of stocks/bonds could have seen its stock holdings drop significantly in the third quarter. If they had $10 billion under management that would equate to $3 bln of bonds and $7 bln of stock. If that stock position had fallen to $4 bln then bonds would have to be reduced and stocks increased. That would equate to selling $1 bln in bonds and buying stock with the cash. According to several analysts this quarter required more balancing than any other quarter in recent memory. The buying was widespread with small and mid caps getting special attention. Managers looked to them as not "highly visible global targets" likely to attract a terrorist attack. There were not a few big winners but more of a general broad market gain. Advancers beat decliners on the NYSE by almost a 4:1 margin and better than 2:1 on the Nasdaq. Volume was still anemic at 1.6 bln on the NYSE and barely two bln on the Nasdaq. There was no conviction and no "get me an at any cost" buying. The economic reports encouraged some traders to tip toe back into the markets but they were in the minority. The GDP report actually came in higher than expected at +0.3%. Most analysts expected a dip into negative territory and the first quarter of retraction in years. This is of course a picture of the 2Q economy, long before the WTC attack. 3Q capital spending continued the down trend from the 2Q and it is now almost impossible for anyone to expect a positive GDP in a post attack economy. Consumer sentiment also fell to 81.8 for the final September report which was only slightly below the 83.6 initial reading. Still it was significantly down from the 91.5 number in August. The sentiment number is closely watched by the Fed and is expected to fall even further. Critics are going to have a hard time building a case for rising patriotic sentiment when employers are handing out hoods, face masks, gloves and flashlights along with instructions on how to escape a disaster. These supplies and instructions are for the lucky employees who did not get pink slips instead. The government is now warning that travel overseas could be very dangerous, another U.S. attack could be eminent, U.S. planes can be shot down and biological/chemical attack concerns are increasing. How can that in any way build consumer sentiment? Still the Fed is likely to cut rates again on Tuesday in order to continue stimulating the economy. Also the Fed has increased the amount of liquidity they have been putting into the system in the last week. Initially after the attack there was a huge infusion but then they pulled back a little. Conditions must have gotten worse because the infusion rate jumped significantly on Thr/Fri. The liquidity may be used to hold off further problems in the brokerage community. Two brokers with over a 100,000 accounts were closed this week for failing to meet margin calls. The circumstances were exceptional with GENI stock being the primary cause. It fell from $18 to under $5 and trading was halted by the Nasdaq until the drop was investigated. Millions of shares of this stock had been borrowed by Miller Johnson from another unnamed broker on the East Coast and then reloaned to short sellers among their clients and other brokers. When the stock fell from $18 to $5 there was a sequence of margin calls which eventually fell on the first firm to cover. They were unable to produce the cash and closed their doors. That default then fell on Miller Johnson with a margin call for about $60 million. They had insufficient capital to cover the call and were forced by the SEC to discontinue operations. Customers could sell stocks they owned but could not open any new positions. The company is in talks with several larger brokers including Dain Rauscher and Fahnestock regarding a bailout. Miller Johnson oversees $12 billion in customer investments with over 100,000 accounts. This is exactly what the Fed is trying to prevent. A breach of confidence in the financial system which could cause a run on banks and brokers. Miller Johnson is not a high profile name but let this happen to somebody like Ameritrade and things could get worse quickly. There are undoubtedly many more "unreported" problems in the system that were caused by the recent market drop and the Fed is working behind the scenes to prevent a disaster. The SEC extended for the second time the deadline for allowing free market stock buybacks. The deadline is now Oct-12th. The fact that they extended it again is a warning to me that things are still risky. They obviously need the floor under the market that unrestricted buybacks provide. There is no doubt that they were instrumental in providing a positive stabilizing influence this past week. The last I heard over 200 companies were taking advantage of the relaxed rules and probably many more were simply unreported. The Fed meets on Tuesday and is expected to cut rates for the ninth time. They will be cutting not only for the U.S. economy but for the global economy. The title, "worlds banker", was never more appropriate. The global economy had been slipping into recession before the attack but almost every major country was betting on a quick U.S. rebound to pull them out of the drop as well. In a post attack economy they now realize that the U.S. is not going to be coming to their rescue with a massive rebound anytime soon. By all accounts it will easily be 2Q or 3Q of 2002 before the U.S. is going to be seeing aggressive growth again and this is the kiss of death for many countries that depend on us. Greenspan has to continue to act on the rate front to send the message to the world that he will get control of the problem quickly. What he is afraid of is an over stimulation event. Just like he went two rate hikes too far and created this problem he is afraid of going two cuts too low and creating rampant inflation and an excessive unsustainable rebound. He will be cussed by the markets if he only cuts 25 points. After eight cuts however another 50 point drop could also be seen as Fed fear over something the analysts have not yet factored into the picture. Either way the Fed will be the highlight of the news on Mon/Tue. After that the corporate earnings warnings will be flying fast. As of Friday we had only seen 577 Q3 warnings compared to 622 for the last quarter. First Call went on record saying they expected Q3 to still set a warnings record. That means we could see over 100 warnings in the next two weeks. Many analysts feel that the WTC disaster is a "get out of jail free" card for the corporate world. Those who have not warned can throw every junk item on their balance sheet into this warning and blame it on the terrorists. Since many companies do not report monthly numbers it would be impossible to determine what their business looked like in the two months prior to the attack. The performance for the "quarter" would be all that is reported. Smoke and mirrors to deflect negative investor sentiment. Many may actually be waiting for the Fed announcement hoping to slide in unnoticed in the press. Another problem we will see is the lack of guidance. While it was getting harder to get guidance from tech companies before the disaster it will be next to impossible to get it now. Everyone will take advantage of the confusion on the economic front to avoid being held accountable to a guesstimate for 4Q. Sony (SNE) was one of the biggest companies to use the terrorist excuse last week. On Friday they said profits would fall nearly -90% from the July estimate of $755 million to $84 million partly as a result of the attack. This was down from the April estimate of $1.3 billion. Now that is a serious shortfall and while a week of missing sales would hurt I can't see the connection to that large of a drop. If anything consumers staying home could equate to more TV and game sales eventually. My point is simply this. The global economy was already in the tank and betting on us. The quarter is over and it is time to confess and it will not be pretty. A leading indicator for the quarterly results was the warning by UPS on Friday that shipments had declined by more than 10% since the attack. Yellow Freight also warned that profits would be cut in half by falling shipments. Equipment rental companies, temporary staffing agencies and chemical companies were all warning that business had dropped significantly since the attack. Parts manufacturers were seeing cancellations in orders for components in almost every sector. Many economists and major companies had previously gone on record saying that the economic slowdown was the sharpest anyone had ever seen. Unfortunately this was last quarter and well before the September event. Those benchmarks for "worst ever" will obviously need to be revised. The coming week in the markets is likely to be very tough. The month of October is typically known for the biggest drops. This is because summer is a slow time for business and the October earnings report this. The last quarter was the worst quarter ever for the Dow and the second worst for the Nasdaq. This could temper any further losses to some extent but the odds of another negative market event are very high. The +611 point gain for the Dow last week relieved much of the grossly oversold conditions. The index is ripe for profit taking with some companies showing significant gains since black Monday two weeks ago. The VIX has come back down to almost exactly where it was the Monday before the attack and the put/call ratio is neutral. The retail investor has drifted back into complacency. The window dressing/rebalancing week is over and everyone is holding their breath. Five of the last seven days the Nasdaq has bounced off resistance at 1500. There is no overwhelming desire to be in the markets until after the October earnings are known. With all the pessimism about the future economic outlook any good news may look like a life boat on the Titanic. Investors could seize on that hope. Still, the odds for bad news greatly outweigh chances for good news over the next two weeks. Once the first two weeks of earnings are over I would suspect we will know what the bottom was for October. Until then I could easily see the 8000 level on the Dow tested again as well as something below 1400 on the Nasdaq. Friday the 21st was a buying opportunity for long term stock investors and leap buyers. Last week was a great trading rally. If you missed both you should be getting ready for another buying opportunity. The rebound off any serious October dip could easily set new records but a word to the wise. Don't buy the first dip. We want to look for the next washout, not the next dip. I doubt it will come this week and as a betting man I would look for it between the 10th and 19th. This week will best be traded on the sidelines and on paper. Patience is a profitable virtue! Profit from it! Definitely, enter passively, exit aggressively! Jim Brown Editor ************************Advertisement************************* ENTER THE DRAGON™ With an optionsXpress account, you have access to our easy-to-use, online analysis tools, like our new Option Dragon™! The Dragon can scan the market in real time for a top 50 ranking of matching stocks and their options based upon various criteria, like stock or option volume, P/E, volatility, open interest, etc. Find out more at http://www.optionsxpress.com/marketing.asp?source=optinv2 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************** Editor's Plays ************** Time Running Out For Microsoft The judge in the Microsoft antitrust case ordered the company and the government into "round the clock" settlement talks through November 2nd. She said "I expect you to meet seven days a week around the clock". She said that in light of the significant impact to the economy from the terrorist attack it was in the best interest of the country to settle the case quickly. She also ordered mandatory mediation if it is not settled by Oct-12th. She scheduled a hearing for Nov-5th to hear their resolution and threatened to act swiftly and decisively to determine a remedy if they had not settled by then. The get tough approach and the threat of "serious remedies" is likely to make Microsoft much more agreeable in the settlement process. They won a battle when the case was kicked back to the lower court and to give up those gains by being stubborn in the settlement period would be stupid. The point to all this is simple. There is a very good possibility that the case will be settled by Nov-5th. If it goes past the 5th it will not likely be in Microsoft's favor. MSFT gained +1.21 on the news and is now just slightly over strong support at $50. The way I would play this is a strangle. Since we know the time frame it is easy to choose an option that will fit the case. I would buy the Jan-$55 call MSQ-AK @ $4.10. This allows for time premium after the November 5th deadline. Buying a Nov call would not allow for any slippage in the court dates and have little time premium left by the announcement. I would also buy the Jan-$50 put MSQ-MJ - BUT NOT NOW! The stock may gain over the next two weeks with any kind of positive comments coming out of the talks. The Jan-$50 put is currently trading at $5.40. I would put in a limit order for $4 and hope to get filled on any bounce. For those who want to be a little more aggressive I would put in a $5 limit order for the Jan-$55 put (currently $8.00) and hope to get filled on a bounce. The stock could easily move $20 points in either direction upon a settlement of the case. The trouble is we just do not know which direction. The tough talk from the judge could embrazen the justice dept to be tough in the negoiations knowing that the judge was on their side. Also they could be getting heat to settle the case from the Bush administration and we are not privy to that. Either way the case could be coming to a close and Microsoft or a bunch of baby Microsofts wil be free to trade when it is over. Microsoft generates huge amounts of free cash and will survive in whatever form the courst dictate. That could easily mean that a call only play would work just as well. Assuming that even the worst outcome is still a conclusion the Jan call could be a good bet. ************ 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 **************** Quite a Quarter By Jeffrey Canavan As the third quarter comes to a close, the numbers aren't very encouraging for bulls. The Dow and S&P 500 lost over 15%, and the Nasdaq Composite lost 30.6%. Ouch! It doesn't get any better for tech bulls in October. Traditionally October is the worst month for the Nasdaq, Losing a total of 10.5% for the month between years 1971 and 2000. October is the only month with a cumulative net loss. The good news is that the end of October marks the end of worst six-month period for the Nasdaq (May to October). Could this October be different? Certainly, we are in uncharted waters. Dow Jones Industrial and Nasdaq Composite Daily Charts While the waters may be uncharted, we do have charts. A chart of the Dow is telling us that we are starting to get a little overbought. There might be a little more room for the Dow to rise to 9,000, but the stochastic is saying that a reversal looks imminent. The Nasdaq continues to struggle compared to the Dow. The tech index has yet to climb above its 10-day moving average, or take out Tuesday's high of 1528. It's not quite as overbought as the Dow, but the stochastic could quickly roll over. ----------------------------------------------------------------- Market Volatility VIX 35.19 VXN 65.44 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.61 745,773 456,710 Equity Only 0.49 657,681 320,749 OEX 1.55 14,674 22,738 QQQ 0.45 59,287 26,829 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 18 - Bear Confirmed NASDAQ-100 12 +12 Bear Confirmed DOW 18 - Bear Confirmed S&P 500 16 - Bear Confirmed S&P 100 16 - Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 0.91 10-Day Arms Index 0.95 21-Day Arms Index 1.18 55-Day Arms Index 1.23 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Advancers Decliners NYSE 2501 691 NASDAQ 2539 1177 New Highs New Lows NYSE 58 102 NASDAQ 46 162 Volume (in millions) NYSE 1,646 NASDAQ 2,086 ----------------------------------------------------------------- Advisory Sentiment Bullish Bearish Correction Net Bullish Change 35.7% 37.6% 26.7% -1.9% -15.3% A bearish reading of 25% to 30%, combined with a bullish reading greater than 55% is typically considered bearish by contrairians. A net percentage greater than 30% is also viewed as bearish. ----------------------------------------------------------------- Commitments Of Traders Report: 09/25/01 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Bears have gotten 40% less bearish over the past two weeks, but the numbers are a bit deceiving. Rather than institutions adding new long positions, there was a mass exodus out of S&P 500 futures. For the period ending 9/25, open interest, the number of contracts outstanding, fell 103,420, or 17%. The 64,787 drop in institutional short positions suggests short covering, and the lack of new positions, long or short, being added echoes the wait and see approach. Commercials Long Short Net % Of OI 9/10/01 359,360 442,070 (82,710) (10.32%) 9/18/01 406,387 471,823 (65,436) ( 7.45%) 9/25/01 357,873 407,036 (49,163) ( 6.43%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 41,144) - 5/1/01 Small Traders Long Short Net % of OI 9/10/01 156,500 69,090 87,410 38.75% 9/18/01 172,988 100,531 72,457 26.49% 9/25/01 122,613 71,721 50,892 26.19% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 Nasdaq futures - big drop in open interest, but little change in commercial net positions. Commercials Long Short Net % of OI 9/10/01 26,784 37,912 (11,128) (17.20%) 9/18/01 35,497 45,731 (10,234) (12.60%) 9/25/01 26,761 36,812 (10,051) (15.81%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: (1,825) - 1/02/01 Small Traders Long Short Net % of OI 9/10/01 15,263 12,555 2,708 9.73% 9/18/01 22,876 21,702 1,174 2.63% 9/25/01 10,699 6,580 4,119 23.84% Most bearish reading of the year: (1,028) - 1/02/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Slight drop in institutions net bullish stance, but the % of open interest jumped due to the drop in open interest. Commercials Long Short Net % of OI 9/10/01 25,445 13,033 12,412 32.3% 9/18/01 28,425 15,077 13,348 30.7% 9/25/01 20,013 7,806 12,207 43.9% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 13,348 - 9/18/01 Small Traders Long Short Net % of OI 9/10/01 7,460 12,735 (5,275) (26.12%) 9/18/01 7,335 15,044 (7,709) (34.45%) 9/25/01 4,530 12,621 (8,091) (47.18%) Most bearish reading of the year: (8,091) - 9/25/01* Most bullish reading of the year: 1,909 - 1/16/01 COT Commercial Net Position Charts ----------------------------------------------------------------- *************** ASK THE ANALYST *************** $5 Shake By Eric Utley They told me in Econ 101 that a recession is defined by two consecutive quarters of contraction in gross domestic product (GDP). They also told me that six consecutive quarters of contraction is also known as a depression. They sure do say a lot. I wonder if the economy does slip into a recession whether or not I'll be able to order another $5 shake. I know, a $5 shake is most certainly excessive. It's irrational, inefficient, and some might argue that it goes against the tenants of capitalism, but some don't have the luxury of retrospect. After all, it's just milk and ice cream. Heck, just last week, two proprietors of $5 shakes turned the page to the ever-dreaded chapter 11 in the book of business. Actually, now that I think back, the last time I downed a $5 shake it really wasn't that good. In fact, I thought it was a waste of space on the menu. For $5, I'll opt for the crème brule, thank you very much. With the $5 shake going by the wayside, I wonder what impact that will have on the menu going forward. My guess is that it's going to be a very positive thing. Less competition and less supply could lead to a much quicker recovery for the crème brules of the menu. At any rate, I've got a date with Mia Wallace this weekend. Wish me luck! Please send your questions and suggestions to: Contact Support ---------------------------- Sun Micro - SUNW Following [last] Sunday's bit on bearish price objectives, I took a shot at figuring one for SUNW. I came up with $2.5 as an objective. Please tell me I've made a mistake. Also, in general, what is your opinion of SUNW here at $8.00. It seems pretty cheap, but it also seemed that way at $40, then $20, the $10... - Thanks a lot, Michael Thank you for the excellent questions, Michael. The bearish price objective I came up with for Sun Micro (NASDAQ:SUNW) is a bit higher than $2.50. Let's review the process of determining a bearish price objective. First, we determine where the latest buy signal was generated on the Point & Figure chart. Sun's last buy signal was given in late July when the stock exceeded a previous column of X's at the $16.50 mark (Exhibit A). On that buy signal, Sun traded as high as $18 (Exhibit B). Second, we want to determine the sell signal generated immediately after the most recent buy signal. The sell signal we want to concentrate on was given in August when Sun took out its previous column of O's with a print at $13.50 (Exhibit C). Once we have identified the appropriate sell signal, we then attain a vertical count by counting the number of O's in the column of the sell signal we are interested in. In this case, Sun generated a total of 9 O's during its sell signal (Exhibit D). Once we have the vertical count, which, in this case, is 9, we then multiply that number by the scale of the chart. If the stock is trading between $20 and $100, the scale will ALWAYS be $1. But, when the stock is trading between $5 and $19.50, the scale will ALWAYS be $0.50. Therefore, in this case, the scale we'll be working with is $0.50. We multiply that scale by our vertical count of $9 to arrive at $4.50. After that calculation, we then throw in our multiplier of $2 since this is a bearish price objective calculation. Multiplying our post-scale number of $4.50 by $2, we arrive at our subtractor of $9. (Conversely, if we were performing a bullish price objective calculation, we'd use the same process, expect our multiplier would be $3 instead of $2. We use $3 in the case of bullish price objectives because: 1) Stocks can only go to zero; 2) Stocks could potentially go to infinity; in other words, there's no limit to the upside in a stock.) Once we have our subtractor, which, in this case, is $9, we take that number away from the first O in the sell signal column we're concerned with (Exhibit E). In Sun's case, the O from which we subtract $9 is at $17.50. Take $9 from $17.50 and we arrive at $8.50. Analysis: As you can see on the chart, Sun traded below its bearish price objective last week by $0.50 (Exhibit F). Its print at the $8.00 box violated its price objective of $8.50. Because the stock violated its price objective, I would guess that Sun has further downside from current levels over the intermediate-term. However, remember that the bearish price objective is NOT an exact science. Because Sun is trading "around" its bearish price objective, bullish traders could consider "nibbling" FOR A TRADE down around current levels. But, only with a very tight stop and defined upside of about $1 or $1.25. But, to reiterate, the violation of its bearish price objective suggests further downside. LOW PRICE DOES NOT EQUATE TO CHEAPNESS! Sure, Sun is selling for $8, but does that make it cheap? The company is expected to earn 12 cents per share this year. Taking Friday's closing price of $8.27, 12 cents per share in earnings gives the stock a multiple of around 69. Is a PE of 69 cheap? Not by any stretch of the imagination is that cheap! To be fair, Sun is expected to earn 39 cents per share next year, which, if met, would give the stock a forward-looking multiple of around 21. That's much more reasonable, but still relatively expensive in terms of historical means. And, what if Sun doesn't make its numbers next year? The range in estimates for Sun next year is extremely wide. On the optimistic end, one analyst expects Sun to earn 70 cents next year, while the most pessimistic analyst is predicting 12 cents on the low-end. In other words, Wall Street is quite uncertain what Sun will earn next year. One problem with these big cap techs is that they split their stock so many times during the great bull market, in addition to issuing a ton of new stock to pay for all of their acquisitions in many cases. As a result, there's so much damn stock outstanding that a low share price, i.e. $8.27, doesn't make 'em "cheap." Consider the fact that Sun has about 3.25 BILLION shares outstanding. ---------------------------- Potpourri Enjoy your column very much and have learned much about Point & Figure charting. Three questions for you: 1) What's your favorite book and author for a comprehensive discussion of point & figure charting? 2) What's your outlook for BEAS? 3) What's your outlook for CIEN? These stocks are very interesting inasmuch both companies appear to be well positioned in their respective markets, have decent fundamental prospects going forward, and both are trading at or near 52-week lows. Will these stocks lay on the bottom (the current $10 levels, or possibly lower still at $5-$6) or are they positioned to rebound if we see an economic recovery sometime in the future? - Anonymous Very good questions! And, thanks for the compliment! Bookstore First, the ONLY book one ever needs to read concerning Point & Figure charting was written by Thomas Dorsey. The title of the book is Point and Figure Charting: The Essential Application for Forecasting and Tracking Market Prices, 2nd Edition. It's expensive, but well worth the $60. You can order the book from most online bookstores, and most chain stores carry the book. The Call Before I touch upon the specifics of BEA Systems (NASDAQ:BEAS) and CIENA (NASDAQ:CIEN), let me throw an idea on the table. Consider the following discussion between a money manager and one of his clients. After receiving and thoroughly reading his end-of-year investment report, the client discovers a peculiar position in the fund and phones the money manager... "Hey, Martyr the Money Manger, I know you believe strongly in tech, but that doesn't mean I have to suffer because of your beliefs." With bewilderment, the money manager replies, "Why, Carl the Client, whatever do you mean?" Carl the Client retorts, "You know damn well what I'm talking about...What the hell is BEAS doing in the fund? Are you aware that the stock is down 86 percent year-to-date?" The money manager cowers, but tries to appease his client, "Don't you worry, Carl, BEAS is coming back in 2002! Have you seen the company's balance sheet? Squeaky clean. I know for a fact that BEAS will hit its numbers next year. We're talking about a triple, maybe even more. That's why I've been buying it all the way down." Carl, now bewildered, enters a state of calmness, and requests, "Send me my money, you're fired." Moral If I'm managing a mutual fund, hedge fund, or pension fund, I don't ever want to have the above conversation with my clients. And that goes for most money managers who want to keep their jobs. As a result, stocks that have been literally taken apart through the course of the year are often dumped at the end of the year so that money managers don't have to explain their mistakes to clients. In other words, the months of October, November, and most of December are not months in which to be a hero and try to pick a bottom in beaten up stocks. Stocks that are down 60, 70, and 80 percent near the end of the year tend to go lower. If you're considering bottom fishing for beaten up tech stocks, think about waiting until the last two weeks of December, preferably the last week. This applies to CIENA and BEA Systems and, for that matter, most of the Nasdaq-100. (In fact, there exists a trade at the end of the year of buying the most beaten up stocks in the last week of December, then flipping those stocks in January. We put on this trade last year with several stocks. One of them was Worldcom (NASDAQ:WCOM), which netted us a 50 percent return in the underlying in the space of about two weeks! And don't you worry, I'll be ahead of that trade again this year and will dedicate a column to that event.) Specifics BEA's chart looks terrible. There's one dominant theme on the chart and that is supply, supply, and more supply. The stock hasn't even tried to trace a bottom, and I wouldn't consider stepping in at current levels. Sure, the company is pretty clean financially, but what software company isn't? The dominant them is that its earnings expectations have been in free fall for the last six months. Those estimates need to come down further, which should continue pressuring the stock on top of the end-of-year selling. CIENA is also a financially "clean" company, which is a little more rare in the networking space. It's going to make it and could do well once spending rebounds. But, like BEA, CIENA's numbers continue coming down. Until that trend reverses, the stock should remain under pressure. However, I will say three positive things concerning CIENA. First, the nature of its products makes them in high demand by the carriers. CIENA's stuff saves the carriers money. Second, CIENA was one of the last networkers to stumble, which is a testament to the demand of its products. The company should be one of the first to benefit from an up-tick in demand. Finally, the price action in the big carriers recently, such as SBC, BellSouth, Ma Bell, and Verizon, has been quite positive. Sure, it's been associated with wireless, but bigger profits for those carriers could translate into an increase in capital expenditures. ---------------------------- Another Tech Take Can you give me your take on DIGL and AMD? I asked this question two weeks ago and no one has replied. - Thank YOU!, Anonymous Sorry for the delay. Let's get to it! Digging Into Digital Digital Lightwave (NASDAQ:DIGL) is a networking company, so naturally I'm going to want to know how the Networking Sector (NWX.X) is trading. Although Digital isn't a component of the index, it's paramount to get a sector view in any market operation. The sector has been trading "like a dog with fleas" relative to the broader market (S&P 500) and the Nasdaq-100. I don't like being bullish on sectors that are demonstrating poor relative strength. Instead, I like to buy stocks in sectors that are trading better than the overall market. Because the NWX is trading so poorly, I'd tend to avoid bullish bets in the group. At the same time, however, stocks like Digital, and CIENA for that matter, are trading at such low prices that shorting them doesn't make a whole lot of sense. Personally, I tend to avoid shorting stocks below $15. But, to be objective, the NWX has put in some preliminary basing work, for the short-term anyway. The index did trace a 3-box reversal last week and is currently about 17 points away from a buy signal. If one were leaning bullish on networking shares FOR A TRADE, they should be watching for the NWX to print 232 next week. A trade at 232 would put the NWX on a buy signal based on its current point & figure setup. On the other hand, if the NWX takes out its relative lows down around 204, all bullish bets are off. Digital's rate of decline versus the NWX is slowing, which may be the preliminary signs of a bottom. But, picking bottoms is a risky business. So, in order to take a stab at quantifying risk, I've fitted a retracement bracket on Digital's decline. I've simply fitted the retracement levels of the bracket with meaningful resistance levels in Digital. It's an art, I know, but I'd be willing to bet that a few market makers in Digital are using the same technique. I wouldn't be surprised to discover that those market makers are clearing inventory to get ready for another leg lower in Digital. Although the stock has recently paused around the $10 level, I wouldn't be jumping in at current levels. It makes more sense, judging by the bracket, to start to look for a bottom around the $6.75 to $7.00 area. That's where the lower-end of the bracket lies and I'd be willing to bet that that's the level where market makers will begin building inventory (Read: Bid). Microprocessor Malaise Intel (NASDAQ:INTC) and Advanced Micro (NYSE:AMD) are duking it out. You don't want to buy the stock of a company that is engaged in a price war. Lower margins mean lower profits mean lower stock prices! In the case of AMD, it's a triple-whammy losing proposition. The company's profits are falling because of the price war with Intel. The company is losing market share to Intel in a big way; several of the large box makers have recently announced that they'd quit using AMD's chips. Finally, the market for AMD's chips is in terrible shape. Gateway (NYSE:GTW) at $5, enough said. The stock's too low to short and AMD's business is too ugly to buy. In a word: AVOID! ---------------------------- Natty Gas Your column is always insightful, really appreciate how you look at the requests different analysis, whichever you think is most appropriate I suppose...Two requests...If limited to one, please do...TRP. - Thanks, James You're far too kind, James. Thank you. I thought it would be interesting to take a look at TransCanada Pipelines (NYSE:TRP) for two reasons. First, it's a nice change of pace from tech, which seems to be a predominant theme in the requests I receive. And second, the stock is trading like a champ! James was kind enough to offer the following: With regards to TRP, it's a Canadian company dual listed on the TSE and on NYSE. Trading volume is higher on the TSE. Options are available through the MSE on the Canadian. Just realized there's no options on TRP in the US. Unfortunately, my faithful and incredibly accurate energy contact was unavailable for comment this weekend. I think he's somewhere in the Rocky Mountains, but I was unable to confirm that much. It's been about a week since I've received his insight into the energy market, so I don't dare take a guess on the supply/demand situation of the natural gas market, which most certainly concerns TransCanada as does the power market. My contact has been so accurate in calling the prices of energy recently that I'd rather wait for his insights instead of passing along inaccurate or dated information. I'll be sure to get his thoughts next week and pass along my findings as they relate to TransCanada. In the meantime, I'll give my readers the technical and company-specific fundamental takes. So a 4 percent earnings growth rate isn't all that sexy. But, earnings growth, in itself, is becoming a rare commodity in certain sectors of the market. Maybe 4 percent EPS growth isn't that bad? In all seriousness, there are a couple of things to like about TRP. Lower interest rates should be of benefit because of the company's debt-financed operations, which is the case for most utilities. In addition, the company's chunky dividend yield is something to consider. At current levels, TRP yields about 4.5 percent - - that's before any potential capital appreciation. How much is your savings account yielding? On the technical front, TRP's chart is a thing of beauty. The stock's up about 20 percent year-to-date. But, lookout for that 200-weekly moving average. Could be a site of consolidation for a few weeks. If my energy contact has good things to say about the natural gas and power markets, then I think TRP is worth a closer look for an intermediate- to long-term position. If the stock continues along its trend, I'd give it a one-year price target between $15.60 and $16. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COMING EVENTS ************* For the week of October 1, 2001 Amongst a barrage of economic releases, the Federal Open Market Committee meets on October 2. Analysts are expecting a 25 basis point rate cut, the second cut in a period of just three weeks. Monday ====== Auto Sales Sep Forecast: 5.5M Previous: 5.8M Truck Sales Sep Forecast: 6.7M Previous: 7.4M Personal Income Aug Forecast: 0.3% Previous: 0.5% PCE Aug Forecast: 0.3% Previous: 0.1% Construction Spending Aug Forecast: -0.4% Previous: -0.1% NAPM Index Sep Forecast: 45.0% Previous: 47.9% Tuesday ======= FOMC Meeting Wednesday ========= NAPM Services Sep Forecast: 43.8% Previous: 45.5% Thursday ======== Initial Claims 9/29 Forecast: N/A Previous: 450K Factory Orders Aug Forecast: -0.5% Previous: 0.1% FOMC Minutes 8/21 Friday ====== Nonfarm Payrolls Sep Forecast: -100K Previous: -113K Unemployment Rate Sep Forecast: 5.0% Previous: 4.9% Hourly Earnings Sep Forecast: 0.3% Previous: 0.3% Average Workweek Sep Forecast: 34.0 Previous: 34.1 Consumer Credit Aug Forecast: N/A Previous: 0.0B ************************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 09-30-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3593_2.asp ************************Advertisement************************* ENTER THE DRAGON™ With an optionsXpress account, you have access to our easy-to-use, online analysis tools, like our new Option Dragon™! The Dragon can scan the market in real time for a top 50 ranking of matching stocks and their options based upon various criteria, like stock or option volume, P/E, volatility, open interest, etc. Find out more at http://www.optionsxpress.com/marketing.asp?source=optinv2 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* GE - General Electric $37.20 (+5.90 last week) See details in sector list Put Play of the Day: ******************** PGR - Progressive Corp. $133.90 (+17.92 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 ^^^^ No Dropped Puts for the weekend. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************* NEW CALL PLAY ************* PPG - PPG Industries $45.75 (+5.04 last week) PPG manufactures a variety of products for the manufacturing, construction, automotive and chemical processing industries. The company also helps do-it-yourself homeowners brighten up their house with its Lucite brand of house paints. Paints, stains, and other coatings account from almost half of the company's sales, with the balance coming from the glass products and chemicals divisions. PPG has over 75 manufacturing facilities in 16 countries, but North America accounts for 70% of company sales. Despite a sharp intraday dip on September 21st, PPG managed to hold above the critical $40 support level on a closing basis and then spent most of last week consolidating between $42-43. Then on Friday, a surge of buying volume (30% above the ADV) launched the stock through near term resistance and brought it within striking distance of the $46 resistance level, also the bottom of the gap created when trading resumed on September 17th. Daily Stochastics are still on the rise, and that may be enough to lift PPG to the 20-dma ($48.54) before profit taking emerges. While we could see a bit of weakness next week, we're looking for the $43 support level to provide solid support on any dip. A solid bounce near that level would provide attractive entry points, as would a volume-backed rally through the $46 level. We are initiating the play with a $42.50 stop. BUY CALL OCT-45*PPG-JI OI= 29 at $1.95 SL=1.00 BUY CALL NOV-45 PPG-KI OI= 22 at $2.85 SL=1.50 BUY CALL NOV-50 PPG-KJ OI= 24 at $0.80 SL=0.00 BUY CALL JAN-50 PPG-AJ OI=170 at $1.75 SL=1.00 Average Daily Volume = 548 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 09-30-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3593_3.asp ************************Advertisement************************* ENTER THE DRAGON™ With an optionsXpress account, you have access to our easy-to-use, online analysis tools, like our new Option Dragon™! The Dragon can scan the market in real time for a top 50 ranking of matching stocks and their options based upon various criteria, like stock or option volume, P/E, volatility, open interest, etc. Find out more at http://www.optionsxpress.com/marketing.asp?source=optinv2 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ****************** CURRENT CALL PLAYS ****************** ATK - Alliant Techsystems $85.60 (+4.99 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. ATK pulled back Friday despite the strength across the broad markets. In fact, the majority of defense-related issues were weak last Friday, including NOC and GD. There are two explanations for the weakness. First, ATK could've been taken lower on profit taking after its solid showing through Thursday. The profit taking scenario is the most favorable in our opinion, because a pullback at this point is natural and routine. The second, and less favorable scenario, is that the defense-related issues have lost their appeal. For whatever reason, it seems a little fishy that ATK didn't trade higher last Friday on a day when the Dow gained 1.9 percent and the S&P gained over 2 percent. It could've been just normal profit taking, but we want readers to be on alert of the divergence in price last Friday. Of course last Friday's pullback may have traders on alert for an entry point near support. For those looking for entries near support, watch for a bounce near the stock's ascending support line currently sitting at $84.50. Below, the $82.25 to $83 area may attract dip buyers. But, if you're going to enter on a dip, which is the preferred entry strategy at this point, make sure to confirm strength in other defense-related issues such as NOC, GD, and LLL. BUY CALL OCT-80 ATK-JP OI= 46 at $8.80 SL=6.75 BUY CALL OCT-85*ATK-JQ OI= 132 at $5.70 SL=4.00 BUY CALL OCT-90 ATK-JQ OI= 65 at $3.30 SL=2.00 BUY CALL NOV-85 ATK-KQ OI=1042 at $7.70 SL=6.00 BUY CALL NOV-90 ATK-KR OI= 20 at $5.60 SL=4.00 Average Daily Volume = 152 K MO - Phillip Morris $48.29 (+.61 last week) Phillip Morris is a holding company whose principal wholly owned subsidiaries, Phillip Morris Inc., Phillip Morris International, Kraft Foods, and Miller Brewing Company, are engaged in the manufacture and sale of various consumer products. The good news last Friday was that MO put in some consolidation work around the $49 level, which is what we were looking for in our update last Thursday. The bad news was that the Dow finished solidly higher. MO, of course, is a component of the Dow and its relative weakness is something to consider going forward. We can't have it both ways, but we want traders to be very cognizant of MO's under performance last Friday. In fact, other tobacco-related issues such as RJR and UST under performed the broader market averages. The sector's and, indeed, MO's under performance may have been a byproduct of end-of-quarter shenanigans, but that remains to be seen. Turning back to our consolidation thesis, as long as MO can hold above the roughly $47.50 level, we feel that the stock could be setting up for a breakout above near-term resistance at $49.50. If the stock begins to stumble below that level, it may be an indication that its relative weakness last Friday is something more than a one-day event. Nevertheless, future pullbacks down to the $47.50 level may offer favorable entry points in terms of risk versus reward. In other words, an entry at $47.50 can be accompanied with a conservative stop. On the flip side, momentum fans can consider using an advance above the $49 level as an entry point, with the understanding that the $49.50 resistance level sits just above that entry point. BUY CALL OCT-45*MO-JI OI=39397 at $3.70 SL=2.50 BUY CALL OCT-50 MO-JJ OI=21540 at $0.50 SL=0.25 BUY CALL DEC-45 MO-LI OI= 2684 at $5.00 SL=3.75 BUY CALL DEC-50 MO-LJ OI=18760 at $1.95 SL=1.00 Average Daily Volume = 5.89 mln RTN - Raytheon $34.75 (+0.71 last week) Raytheon Company is in the business of defense electronics, including missiles; radar; sensors and electro-optics; intelligence, surveillance and reconnaissance; command, control, communication and information systems; naval systems; air traffic control systems; aircraft integration systems; and technical services. Raytheon's commercial electronics businesses leverage defense technologies in commercial market. RTN held up pretty well last Friday considering its performance the day before. The fact that the stock only gave back $0.05 of its gains from Thursday was encouraging, especially after considering the weakness in other defense-related issues. However, it was discouraging that RTN didn't participate in last Friday's rally. It's therefore becoming evident that the $35 area is going to serve as formidable resistance going forward. The stock attempted to move above that level again Friday morning, only to be "leaned" on the rest of the day. Granted, the longer that RTN bumps against the $35 level, the sooner that the seller at that level loses his/her supply. Once out of the way, RTN should trade up to the $36 level. In summary, if the stock bases right below the $35 early next week, bullish traders might look for a rally attempt above that level, but only after confirming direction in the broader market as well as sector cohorts such as NOC, GD, ATK, and LLL. Additionally, one variable in this play is how the market is going to react once military action is taken. Of course we don't know when that's going to happen, but traders should consider their risk tolerance ahead of forthcoming military action. One on side, the defense stocks may pop higher on the news. Then again, they could sell-off in typical "buy the rumor, sell the news" fashion. Just something to consider. BUY CALL OCT-30 RTN-JF OI= 521 at $5.10 SL=3.75 BUY CALL OCT-35*RTN-JG OI= 136 at $1.60 SL=0.75 BUY CALL NOV-30 RTN-KF OI=2291 at $5.70 SL=3.50 BUY CALL NOV-35 RTN-KG OI=1541 at $2.60 SL=1.75 Average Daily Volume = 1.68 mln ENZN - Enzon $51.00 (+6.02 last week) Enzon is a biopharmaceutical company that develops and commercializes enhanced therapeutics for life-threatening diseases through the application of its two proprietary platform technologies: polyethylene glycol (PEG) and single-chain antibody (SCA). The company applies its PEG technology to improve the delivery, safety and efficacy of proteins and small molecules with known therapeutic efficacy. We're on alert for further weakness in the biotech sector. The AMEX Biotechnology Index (BTK.X) traced an ominous reversal last Friday, which was evident in the price action in ENZN. Volume was a little less active in ENZN Friday, which may suggest that its late-day pullback was profit taking-related. But other biotech issues, such as AMGN and BGEN, saw a slight up-tick in volume in conjunction with their respective weakness. That slight day-over-day increase in volume may have been attributable to end-of-quarter adjustments, but we'll want to be on the alert next week nonetheless. ENZN did stage a nice recovery last week, so a little pullback is not out of the ordinary. Plus, we initiated coverage Thursday with the understanding that ENZN was, at the time, a momentum play. Still, those traders who took positions last Friday should be thinking about ways of managing risk going into next week's trading. The $50 level is both technically and psychologically significant insofar as support is concerned, so bullish traders could turn to that level when managing risk. On the other hand, those waiting for an entry point could take a bounce from the $50 level if the BTK rebounds. If ENZN loses the $50 level, the next logical level to turn towards for support is the 10-dma currently at $48. As such, traders with open positions should take that into account and manage risk accordingly. BUY CALL OCT-50*QYZ-JJ OI=2284 at $4.70 SL=3.00 BUY CALL OCT-55 QYZ-JK OI=1342 at $2.25 SL=1.00 BUY CALL NOV-50 QYZ-KJ OI= 68 at $6.20 SL=4.25 BUY CALL NOV-55 QYZ-KK OI= 763 at $4.00 SL=3.00 BUY CALL NOV-60 QYZ-KL OI= 445 at $2.40 SL=1.75 Average Daily Volume = 1.37 mln MTG - MGIC Invest $62.89 +2.58 (+6.70 this week) MGIC Investment is a holding company that, through its wholly owned subsidiary, Mortgage Guaranty Insurance Corp., is a provider of private mortgage insurance coverage in the United States to the home mortgage lending industry. MTG staged another stellar day last Friday, but obviously its gap higher didn't warrant the best entry point. It's probably unlikely that readers were able to get a favorable entry point into the play unless the opening low around the $64 level was used to gain entry. Going forward, if the IUX.X continues its journey higher, bullish traders can watch for MTG to breakout above its 200-dma currently at $65.84. Perhaps an advance above the $66 level would confirm any breakout attempt above the 200-dma. For those traders looking for new entries, however, make sure to consider that this play is currently momentum-based in nature. A pullback may be in the offing, so traders should take that into account before entering new plays. That's not to say that the stock won't work higher, it's just that managing risk in a momentum play is harder. For those who did enter plays last Friday, perhaps a stop just below entry points would make sense. But, that's only a suggestion, in the end it's up to the individual to make the best decision. If MTG does continue working higher next week and passes the $66 level early on, look for resistance around $67 as a possible exit point, or higher around $68. BUY CALL OCT-60*MTG-JL OI= 5 at $7.50 SL=5.00 BUY CALL OCT-65 MTG-JM OI=315 at $3.30 SL=2.25 BUY CALL DEC-60 MTG-LL OI=120 at $8.70 SL=6.50 BUY CALL DEC-65 MTG-LM OI= 12 at $4.40 SL=3.50 Average Daily Volume = 634 K QCOM - Qualcomm $47.54 (+2.65 last week) Qualcomm is engaged in developing and delivering digital wireless communications products and services based on the company's CDMA digital technology. The company's business area include integrated CDMA chipsets and system software; technology licensing; Eudora email software for Windows and Macintosh computing platforms; satellite-based systems including portions of the Globalstar system and wireless fleet management systems, OmniTRACS and OmniExpress. QCOM just could not get above the $49.30 level last Friday, which was its day high last Wednesday. It was a little disappointing to see the Nasdaq end solidly higher, while QCOM couldn't muster a close in positive territory. Being one of the larger components of the Nasdaq, we expected a little bit more from QCOM. It remains to be seen whether or not the stock's under performance last Friday had anything to do with the end of the quarter rebalancing. We'll most likely find out early next week if QCOM rebounds. But because QCOM is in between is resistance and support levels currently, bullish traders who are looking for new entry points into the play may want to wait for one of two things to occur. The first would be a strong advance above the $49.30 level in conjunction with an advancing Nasdaq. That scenario could allow momentum traders to gain new entries. The second scenario to consider using for an entry point is a pullback down to support at the $45 level. Some might use a bounce around the $47 level, but $45 may provide a better risk/reward setup. BUY CALL OCT-45*AAO-JI OI=10120 at $4.90 SL=2.75 BUY CALL OCT-50 AAO-JJ OI=10055 at $2.20 SL=1.00 BUY CALL NOV-45 AAO-KI OI= 2334 at $6.70 SL=5.00 BUY CALL NOV-50 AAO-KJ OI= 1522 at $4.10 SL=3.00 Average Daily Volume = 11.8 mln BAC - Bank of America Corp. $58.40 (+7.40 last week) Providing a diversified range of banking and certain non-banking financial products and services, BAC's operations consist of Consumer Banking, Commercial Banking, Global Corporate and Investment Banking, and Principal Investing and Asset Management. Consumer Banking targets individuals and small businesses, while Commercial Banking targets businesses with annual revenues up to $500 million. Global Corporate and Investment Banking provides investment banking, trade finance, treasury management, leasing and financial advisory services. Principal Investing includes direct equity investments in businesses and general partnership funds, while the Asset Management businesses are split into three branches; Private Bank, Banc of America Capital Management and Banc of America Investment Services. The banking sector (BKX.X) has staged an impressive rebound since September 21st, regaining nearly 15% from its lows. While the economy is clearly worse than before the attack, investors are apparently gaining confidence that we are not falling into an abyss. Our BAC play is doing even better than the broad sector, vaulting nearly 17% higher on the week and clearing the 20-dma ($57.67) on Friday. A good measure of this outperformance is the fact the BKX is still below its own 20-dma, which sits at $801.78. While the daily Stochastics for both the BKX and BAC have now entered overbought territory, BAC also showed its strength by attracting buying volume nearly 50% above the ADV as funds redressed their portfolios. So, what can we expect from next week? Uncertainty ahead of the Fed meeting could give us another entry point, possibly near $57 (old resistance becomes support) or even at the 200-dma ($55.08). We've moved our stop up to $55 as a drop below the 200-dma would indicate the bulls are in trouble. Buying further strength above Friday's closing price may be a little to risky at this juncture, as we have solid resistance looming at the $60 level. That would be a good place to consider taking some profits in anticipation of another dip and entry opportunity. BUY CALL OCT-55*BAC-JK OI= 3640 at $4.50 SL=2.75 BUY CALL OCT-60 BAC-JL OI= 6553 at $1.25 SL=0.50 BUY CALL NOV-60 BAC-KL OI= 9907 at $2.50 SL=1.25 BUY CALL NOV-65 BAC-KM OI=13698 at $0.90 SL=0.00 BUY CALL JAN-60 BAC-AL OI=25174 at $3.60 SL=1.75 Average Daily Volume = 5.51 mln CMCSK - Comcast Corp. $35.87 (+3.36 last week) Comcast and its subsidiaries are involved in three principal lines of business: cable, commerce and content. The cable communications side of the business in involved in the development, management and operation of broadband cable networks in the United States. Electronic retailer QVC constitutes the company's commerce arm, through which a wide variety of products are marketed directly to consumers on merchandise-focused television programs. Content is provided through CMCSK's subsidiaries Comcast-Spectator, Comcast SportsNet and E! Entertainment Television Inc., and through other programming investments including The Golf Channel, Speedvision and Outdoor Life. Early trading in shares of CMCSK was favoring the bears on Friday as the stock seemed unable to hold above the 20-dma (currently $35.35). But as the day drew to a close and the broad markets moved to close near their highs, the bulls gained the upper hand, ending the day just below the $36.25 resistance level. Perhaps adding fuel to the bullish case was the bankruptcy announcement from ExciteAtHome, and their agreement to sell their Internet access business to AT&T for $307 million in cash. This announcement hit the newswires after CMCSK confirmed it was in exclusive talks on its $40 billion bid to buy AT&T's broadband division, a unit that would presumably include the ExciteAtHome's assets if that deal is completed. Buying volume remained above the ADV as CMCSK inched closer to a serious challenge of resistance, but with daily Stochastics now in overbought, the bulls may be running out of momentum. The best risk/reward approach for new positions is now to buy the dips, targeting a bounce in the $34.50-35 area, accompanied by continued strong volume. Our stop has now moved up to the $34.50 level, as a drop below that would signal a possible retest of the September 21 lows. BUY CALL OCT-35*CQK-JG OI=1928 at $2.00 SL=1.00 BUY CALL OCT-37 CQK-JU OI=2551 at $0.80 SL=0.00 BUY CALL NOV-35 CQK-KG OI=4814 at $2.75 SL=1.25 BUY CALL NOV-37 CQK-KU OI= 575 at $1.55 SL=0.75 BUY CALL JAN-37 CQK-AU OI=3409 at $2.65 SL=1.25 Average Daily Volume = 7.44 mln GE - General Electric $37.20 (+5.90 last week) As one of the largest and most diversified industrial companies in the world, GE's products include major appliances, lighting products, industrial automation equipment, medical diagnostic equipment, electrical distribution and control equipment and power generation and delivery products. Additionally, GE provides commercial and military aircraft jet engines, locomotives and nuclear power support services. Through the National Broadcasting Company (NBC), GE delivers network television services, operates television stations and provides cable, Internet and multimedia programming and distribution services. After gapping sharply higher on Monday, shares of GE remained locked in a narrow trading range for much of the week before finally breaking above the $36 level on Friday. Closing above $37 for the first time since trading resumed on September 17th, the stock saw strong volume of more than 32 million shares. That's the good news. Now the bulls are really going to have a fight on their hands, as the share price has risen to the descending 20-dma ($37.46), and will also need to fight with resistance created near $38 with the March lows. With daily Stochastics now in overbought territory, and GE more than 30% above its recent lows, it would seem logical that we'll have some profit-taking next week. A dip and bounce in the $35-36 area would be the most likely entry setup, as we are expecting our $33.50 stop to provide solid support on any weakness. Above the $37 level, GE will start to encounter formidable resistance in the $39-40 area, and we would look to take profits near that level. BUY CALL OCT-35 GE-JG OI=16862 at $3.10 SL=1.50 BUY CALL OCT-37*GE-JS OI=19013 at $1.60 SL=0.75 BUY CALL NOV-35 GE-KG OI= 6773 at $3.80 SL=2.25 BUY CALL NOV-37 GE-KS OI= 1845 at $2.30 SL=1.25 BUY CALL NOV-40 GE-KH OI= 8765 at $1.25 SL=0.50 Average Daily Volume = 22.0 mln ORCL - Oracle Corporation $12.58 (+1.82 last week) According to the company's ads, "Software powers the Internet". ORCL is a supplier of software for information management, servicing two broad product categories - systems software and business applications software. Systems software is a complete Internet platform to develop and deploy applications for computing on the Internet and corporate Intranets. Business applications software automates the performance of specific business data processing functions for customer relationship management (CRM), supply chain management, financial management, procurement, project management, and human resources management. After rocketing higher on Monday, ORCL spent much of the week being pushed lower by its declining 20-dma. Friday's buying surge provided the necessary boost to get the stock heading north again and it cleared the 20-dma (currently $12.07) to close just below the $13 resistance level on average volume. With a 17% weekly gain, ORCL was the best performer of the NASDAQ large-cap stocks, and this relative strength could bode well for the week ahead. Of course we need to pay attention to the daily Stochastics, which appear to be losing strength, and this is somewhat disconcerting, as they have yet to enter overbought territory. Our stop is still in place at $11.50, which leaves us with a possible dip and bounce above this level as one possible entry point. The other strategy will be to watch for a strong-volume rally through the $13 level, ideally with the NASDAQ remaining in a positive (if weak) trend. BUY CALL OCT-10*ORQ-JB OI= 5736 at $2.85 SL=0.75 BUY CALL OCT-12 ORQ-JV OI=40369 at $0.95 SL=0.50 BUY CALL NOV-12 ORQ-KV OI= 1751 at $1.40 SL=0.75 BUY CALL DEC-12 ORQ-LV OI= 9130 at $1.85 SL=1.00 BUY CALL DEC-15 ORQ-LC OI=15826 at $0.85 SL=0.00 Average Daily Volume = 38.7 mln PPDI - Pharmaceutical Product Dev. $29.29 (+3.67 last week) PPDI and its subsidiaries provide a broad range of research, development and consulting services in two segments, development and discovery sciences. In the development segment, the company provides worldwide clinical research and development of pharmaceutical products, medical devices and analytical laboratory services. The discovery sciences division pursues target identification and validation, compound creation, screening and compound selection. PPDI provides services under contract to clients in the pharmaceutical, general chemical, agrochemical, biotechnology and other industries. While a rising tide certainly lifts all boats, there is no question that PPDI has been leading the fleet. The stock found bottom a couple days before the rest of the market (September 19th) and since then has rallied more than 50%. It looked like the ride might be ending in the middle of last week, but then PPDI found support first at the 20-dma (then at $27.60) and then the 200-dma ($28) on Friday. This brings the bulls that much closer to a serious challenge of the $30 resistance level, but we'll need to approach new entries with caution from here on. Daily Stochastics are starting to weaken in overbought territory, and volume has dropped back to the ADV over the past 2 days, indicating that the oversold extreme has definitely been relieved. Now PPDI will have to trade on the underlying health of its business, making further upward moves more challenging. The best approach for new positions will be to target intraday dips, either to the 200-dma, or even to the $26 level, but only if the rebound comes on solid volume. This weekend, we're moving our stop up to $26, as a drop below that level would point to significant weakness ahead. BUY CALL OCT-27 PJQ-JY OI=309 at $3.40 SL=1.75 BUY CALL OCT-30*PJQ-JF OI=874 at $1.90 SL=1.00 BUY CALL OCT-32 PJQ-JZ OI=634 at $1.00 SL=0.50 BUY CALL NOV-30 PJQ-KF OI= 29 at $3.20 SL=1.50 BUY CALL JAN-30 PJQ-AF OI=475 at $4.60 SL=2.75 BUY CALL JAN-35 PJQ-AG OI=103 at $2.80 SL=1.50 SELL PUT OCT-27 PJQ-VY OI=511 at $1.25 SL=2.50 (See risks of selling puts in play legend) Average Daily Volume = 785 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. 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The Option Investor Newsletter Sunday 09-30-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3593_4.asp ************************Advertisement************************* ENTER THE DRAGON™ With an optionsXpress account, you have access to our easy-to-use, online analysis tools, like our new Option Dragon™! The Dragon can scan the market in real time for a top 50 ranking of matching stocks and their options based upon various criteria, like stock or option volume, P/E, volatility, open interest, etc. Find out more at http://www.optionsxpress.com/marketing.asp?source=optinv2 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************* NEW PUT PLAYS ************* AHP - American Home Products $58.25 (+4.27 last week) American Home Products is engaged in the discovery, development, manufacture, distribution and sale of a diversified line of products in two primary businesses, Pharmaceuticals and Consumer Health Care. Pharmaceuticals products include branded and generic human ethical pharmaceuticals, biologicals, nutritionals and animal biologicals and pharmaceuticals. Drug shares saw a massive allocation of capital last week. Part of that buying may have stemmed from bottom fishers looking for bargains following the big dip in the Dow. Another reason for the buying could've been portfolio managers allocating capital to stocks and away from bonds. Those who were deploying capital into stocks could've used the drug sector as a means to gain exposure to equities because of the business's relatively defensive and stable nature. The parabolic moves in some of the drug stocks including AHP were large and unsustainable last week. As such, a retracement in the group should come as no surprise. In fact, the retracement of the group may already be under way. The Drug Sector Index (DRG.X) under performed the broader market last Friday, and many components in the group turned negative, including AHP, hence our bearish focus. What's appealing about the potential for a pullback in the DRG is that risk can be easily managed in a play on the speculation through AHP. For its part, AHP ran right up to its long standing descending trend line, which has been in place since June. As such, we're setting our stop at the $60 level, and looking for downside around the $56 level, which is the 50% retracement of AHP's recent advance. That set up gives us a pretty good risk/reward scenario. An entry closer to AHP's relative high around $59.50 would improve the risk/reward ratio in this play. But, if the stock doesn't get that high, look for a rollover around $58.50 or a breakdown below $57.25. BUY PUT OCT-60*AHP-VL OI=1633 at $2.75 SL=1.50 BUY PUT OCT-55 AHP-VK OI=9413 at $0.75 SL=0.25 Average Daily Volume = 3.02 mln PGR - Progressive Corp. $133.90 (+17.92 last week) Traditionally a leader in non-standard, high-risk personal auto insurance, PGR has moved into standard-risk and preferred auto insurance, as well as other personal use vehicle coverage, such as motorcycles and recreational vehicles. The company's property-casualty insurance products protect its customers against collision and physical damage to their vehicles and liability to others for personal injury or property damage. Insurance stocks were one of the hardest hit sectors after trading resumed following the September 11th terrorist attack, and the depth of the decline can be seen in the Insurance index (IUX.X). After falling as low as $600, the IUX has now recovered all of its losses and then some, and is approaching the $710 resistance level. PGR has followed the broader sector quite well over the past 2 weeks and has had a near vertical rise, which has brought the stock back up near its $135 resistance level. With the daily Stochastics now buried in overbought, the upper Bollinger band looming just above $135, and significant overhead resistance, it looks like a lead-pipe lock for a bearish trade. After the opening gains, PGR traded flat throughout the day on Friday, and it looks like the bulls have run out of momentum, giving us a high odds entry. Target any rollover between current levels and the $135 level for a return to lower price levels. We're placing a tight stop on the play at $136.50, as a rally through resistance would indicate more upside ahead. While a return to the recent lows seems unlikely, it wouldn't be unreasonable to look for PGR to drop back to the $125 support level, also the site of the 20-dma. BUY PUT OCT-135*PGR-VG OI= 1 at $4.60 SL=2.75 BUY PUT OCT-130 PGR-VF OI= 66 at $2.55 SL=1.25 BUY PUT OCT-125 PGR-VE OI=287 at $1.40 SL=0.75 Average Daily Volume = 344 K ***************** CURRENT PUT PLAYS ***************** BBY - Best Buy $45.45 (+2.05 last week) Best Buy Company, Inc. is a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. The Company operates retail stores and commercial Websites under the brand names Best Buy (BestBuy.com), Media Play (MediaPlay.com), On Cue (OnCue.com), Sam Goody (SamGoody.com), Suncoast (Suncoast.com) and Magnolia Hi-Fi (MagnoliaHiFi.com). Best Buy stores account for 68% of the Company's total retail square footage. BBY rebounded in a big way last Friday on the heels of favorable economic news. But, was last Friday's nearly 7 percent gain a solid entry point into new put plays? Only time will tell. Despite last Friday's advance, BBY is still under performing the broader Retail Sector Index (RLX.X). We maintain that the stock should out perform to the downside if the S&P and RLX weaken early next week. If bearish traders observe weakness in the RLX and S&P early next week, then new put positions in BBY at its current levels may be a favorable proposition, especially because risk can be fairly easily measured and managed at current levels. The stock stalled right at its 10-dma last Friday, which, at the time, sat at $45.75. Therefore, if the S&P and RLX pullback early next week, new entries at current levels in BBY can be managed with an ultra tight stop just above the 10-dma. Picking tops is a lucrative game, but should only be attempted with the proper risk management procedures in place! BUY PUT OCT-45*BBY-VI OI=2769 at $3.00 SL=2.00 BUY PUT OCT-42 BBY-VV OI=2417 at $2.00 SL=1.25 Average Daily Volume = 2.62 mln SV - Stillwell Financial $19.50 (+0.52 last week) Stilwell Financial Inc. is a diversified, global financial services company with operations through its subsidiaries and affiliates in North America, Europe and Asia. Stilwell's subsidiaries and affiliates are engaged in a variety of asset management and related financial services to registered investment companies, retail investors, institutions and individuals. The primary entities comprising Stilwell, as of December 31, 2000, were Janus Capital Corporation, an approximate 82.5%-owned subsidiary; Stilwell Management, Inc. Sure, SV rebounded with the broader market last Friday. But, we'd like to point out two things. First, the relative lows in the stock continue getting lower. Second, the relative highs in the stock continue getting lower. If this pattern continues, which we believe it will, something should be painfully obvious concerning entry and exit points: Enter new put positions on strength and exit on weakness. Furthermore, it's becoming evident that this stock is a slow mover, at least that was the case late last week. Now, a slow moving stock isn't necessarily a bad thing. It just requires patience and careful execution. Moving forward, rollovers near the $20 level accompanied with a tight stop may prove to be favorable entry points. For entries taken at that level, exits may be pin pointed down around the $18 level. Now, that's only $2 in the underlying, but consider the fact that the cost to carry SV's options is pretty darn low, and its implied volatility is creeping lower, too. Therefore, a $2 move is quite large and could be very profitable if captured! For insights into SV's price action, bearish traders can use the Securities Broker/Dealer Index (XBD.X) for one reference. But, a better reference is probably others in the asset management business such as TROW, FII, WDR, and NEU. BUY PUT OCT-22 SV-VX OI=474 at $3.50 SL=2.25 BUY PUT OCT-20*SV-VD OI= 86 at $1.65 SL=1.00 Average Daily Volume = 948 K EBAY - eBay, Inc. $45.75 (+1.96 last week) After developing a Web-based community in which buyers and sellers are brought together in an efficient format, EBAY has emerged as the dominant online auction site. The eBay dynamic pricing format permits sellers to list items for sale, buyers to bid on items of interest and all eBay users to browse through listed items. Items listed on eBay include collectibles, automobiles, art objects, jewelry, consumer electronics and a host of practical and miscellaneous items. Although based in the United States, through its subsidiaries, EBAY also operates trading platforms in Germany, the United Kingdom, Australia, Japan, Canada, France, Austria, Italy and South Korea. Shares of online auction site, EBAY have tried valiantly to put in a bottom, but the recovery is looking tenuous at best. While volume is running well above the ADV and daily Stochastics are on the rise, the share price has really gone nowhere over the past 6 sessions. Support is resting near $44 and then between $41.50-42.00, while resistance looms just overhead at $48. An additional bearish indication is that the stock has been unable to clear the 10-dma (currently $46.51), and it is worth noting that this moving average has been providing formidable resistance since early August. The stock's valuation is still lofty with a PE of 151, and we're looking for the stock to continue its downward trend, with occasional tests of the 10-dma. Target failed intraday rallies below $48 for fresh entry points, and look to ride EBAY down to its next support level near $35. A volume-backed move below $40 could provide attractive entries as well, but keep your stops in place. For now, our stop is resting at the $48 level. BUY PUT OCT-50 QXB-VH OI=5523 at $6.10 SL=4.00 BUY PUT OCT-45*QXB-VI OI=7068 at $3.30 SL=1.75 BUY PUT OCT-40 QXB-VH OI=4702 at $1.75 SL=0.75 Average Daily Volume = 6.44 mln ENE - Enron $27.23 (-1.07 last week) Originally only an energy company, in recent years ENE has moved into the communications market as well. Through its subsidiaries, the company is primarily engaged in the transportation of natural gas through pipelines throughout the United States, and the generation, transmission and distribution of electricity to markets I the northwestern United States. ENE also markets natural gas, electricity and other commodities and finance services worldwide. Most recently, the company has moved into the Communication business, developing an intelligent network platform to provide bandwidth management services and deliver high bandwidth applications. Holding true to form, ENE traced another yearly low last week, before giving us another positive day to break up the monotony. Energy stocks, regardless of their specific sub-sector (Oil, Natural Gas, or Electricity) continue to be under pressure due to concerns about reduced energy demands in a recessionary economy. With the 10-dma (currently $27.35) continuing to cap any bullish move, the fact that ENE closed just below that level on Friday makes it look like another attractive entry point. Volume remains heavy, demonstrating the current uncertainty in the stock, as prices see-saw their way lower. Our outlook for ENE is that it will eventually drop to the $20-21 level before finding any sustained buying support, and that will be a good place to consider taking some profits off the table. In the meantime, target rollovers near the 10-dma for initiating new positions, and follow the stock down with a trailing stop loss. For now, we have our stop set at $28.50. BUY PUT OCT-30 ENE-VF OI=15559 at $3.90 SL=2.50 BUY PUT OCT-27*ENE-VY OI= 4504 at $2.30 SL=1.25 BUY PUT OCT-25 ENE-VE OI= 6794 at $1.25 SL=0.50 Average Daily Volume = 4.86 mln MVSN - Macrovision Corp. $28.41 (-3.24 last week) Helping to keep intellectual property rights intact, MVSN designs, develops and licenses copy protection and rights management technologies. Integral to the entertainment industry, the company provides copy protection for major Hollywood studios, independent video producers, PC games, digital set-top box manufacturers and digital pay-per-view (PPV) network operators. In addition to helping content owners protect content such as videocassette, DVD and PPV movies, and PC games, MVSN also provides the ability to electronically market that content in a secure manner. When we added MVSN to the put list on Thursday, it was with the premise that the stock was weak and likely to Underperform the broad market. How true that was on Friday. While the stock only suffered a minor loss, it looked particularly weak when compared to the broad market, which had virtually all sectors in rally mode. Any further market weakness next week should have MVSN setting new yearly lows, and we're planning to be along for the ride. Stochastics paint a weak picture, after rolling over in the middle of last week, and it looks like they are headed back for oversold territory. Additionally, MVSN is trading at new yearly lows, well below the lows of March/April. And don't forget the volume which has been running close to double the ADV over the past 2 days. Solid resistance now rests near $32, also the site of the 10-dma, and a failed rally there would make for an attractive entry into the play. Momentum players can consider new positions on a drop under $28, as we are looking for a decline to solid support near $22-23 before the buyers start to participate in earnest. That will likely be a good time to harvest some profits. For now, our stop is resting at $34, as a rally through that level would be a strong indication that we're on the wrong side of the trade. BUY PUT OCT-30*MVU-VF OI=2177 at $3.80 SL=2.25 BUY PUT OCT-25 MVU-VE OI= 24 at $1.80 SL=1.00 Average Daily Volume = 1.07 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 ***** Holding Action, But No Bullish Victory Yet By Mark Phillips Contact Support To those who were tiring of triple-digit days in the red, the trading action over the past week has been a great relief. The path has definitely not been smooth, but it is good to see all the major indices trading off their lows of one short week ago. The debate rages on about whether there is any real buying taking place, or if it is just nervous short covering their massive profits. With significant chunks of cash flowing out of equity funds ($20 billion since the attack according to TrimTabs.com), it is hard to make a case that there is any significant cash finding its way from the sidelines and into stocks. With the constant barrage of negative news, it is no wonder investors are biding their time. The economy continues to worsen, with the spectre of recession now acknowledged to be a near certainty by many of those that denied its existence in the not-so-distant past. The economy will eventually find a firm bottom, and as has been the pattern as long as there have been equity markets, the market will lead that charge. If we are only going to trade the long side of the market, it is our job to preserve capital long enough that we can participate in the next bull market. When will it arrive? Having heard optimists proclaim its arrival in early 2002 and the perma-bears' dire prediction of a decade-long basing process, I find myself without an opinion. As I've mentioned before, this is the first real bear market that I have personally traded through, and I am applying all I have learned to profit from the experience just like the rest of you. The most valuable lesson I have learned over the past 18 months has been that profits come from listening to what the markets are saying, not by telling them what to do. They don't give one whit what I think and laugh when I place my hard-earned capital contrary to their chosen direction. Another important lesson is that no matter how cheap a stock is, it can ALWAYS go lower! Nowhere is this lesson more evident than by taking a quick glance at the Watch List. When we initiated coverage of Calpine (NYSE:CPN), I never would have believed we'd be so lucky as to get an entry point near $20, but here we are. In fact, CPN hit an intraday low of $18.90 on Thursday and amazingly it still isn't a buy. Even with a PE ratio of 13, concerns about declining energy demand from a slowing economy are keeping all the utilities under pressure. But I still expect the stock to be a solid play when it finally finds support and firms. That process may have gotten started Friday, as the company re-affirmed its guidance for the fourth quarter, as well as for the full-year for 2001 and 2002. To that end, we continue to hold our current entry target, and we'll take an entry when we see the stock move steadily higher from our entry target without this gapping action that is typical of a volatile and weak market. The story is much the same for our Enron (NYSE:ENE) play -- no entry yet, but the one thing we do know is that the cheaper the stock gets, the closer we get to actually being ushered into the play. Our Industrial plays similarly kept us on the sidelines this week. Both General Electric (NYSE:GE) and Tyco International (NYSE:TYC) gapped above our entry targets and crept higher throughout the week, keeping us on the sidelines. Remember that we don't want to chase our long-term entries higher, especially on those gap moves. We'll sit patiently and wait for the next dip, which will hopefully take place in a more orderly manner. Remember my hypothesis of what the market-bottoming picture is likely to look like? If the lows of a week ago are really a part of a significant low (although not necessarily THE BOTTOM), I'm looking for a W-bottom formation where we bounce off the lows (similar to March/April of this year), retrace most of that bounce and then retest the lows. That scenario is off to a good start, with the broad market struggling higher over the past week and pushing the daily Stochastics into overbought for both the DJIA and the S&P500 (SPX.X). I'm looking for significant resistance to be encountered at the 20-dma on these indices, which corresponds to 1070 for the SPX and 9300 on the DJIA. That is if we get that high. Optimism ahead of next Tuesday's Fed meeting is the best near-term catalyst I can come up with and then we'll be plunging headlong into what promises to be a dismal earnings cycle. I'm expecting that earnings weakness to propel the markets back down for a retest of their recent lows and will look for a successful retest to usher in the next significant bullish move. The rebound off those lows for the broad market should create similar patterns in charts of several of our Watch List plays like GE and TYC, as well as Eli Lilly (NYSE:LLY) without the untradable gaps that we saw earlier this week. Despite the way that General Dynamics (NYSE:GD) has run away from us since we added it to the Watch List, I'm not willing to raise our entry target just yet. Trading has been rather erratic and I still expect that gap down to the $76 level to be filled. That will be the high-odds entry that we want to see, and I am willing to wait for it. Friday's positive action was likely due to portfolio rebalancing of the funds, so I'm having a hard time getting excited about the strong moves. Our 2 existing Portfolio plays are actually treating us fairly well, with Philip Morris (NYSE:MO) regaining the $48 level and Sprint PCS (NYSE:PCS) advancing sharply. In fact, PCS is currently challenging the $27 resistance level, which has kept a lid on rally attempts for the past 7 months. A push through that level will definitely be a good sign for our play! Notice that we've ratcheted our stop up to the new location of the ascending trendline. We're looking to ride this one higher for the long term, but with the solid gains over the past 2 weeks, more reactive traders may want to tighten their stops further to ensure that at worst, they will get out with a break-even trade. My near-term focus is still being influenced by the action of the VIX which spent the entire week in the red, falling all the way to 35.19 at the close on Friday -- 38% off its high six days ago, and right on the 20-dma. Recall that the 20-dma frequently acts as support and if it does so in this case, it will likely launch the VIX higher again. This would be a precursor to forming the double-top in the VIX and double-bottom on the SPX that would indicate a more reasonable entry point for new long-term positions. While a VIX at 35 still indicates a fair amount of fear in the market, the chart above has me thinking it is time for another spike in our fear index. Whether that comes from economic news, earnings disappointments or military action around the world, I don't know. But I be keeping a low risk profile with any bullish trades right now. While I'm as anxious as the rest of you to see our precious markets find that elusive bottom, if it happens in the next 3 weeks, it will do so without me. The terror of September 11th reminded me how insignificant the actions of the equity markets are in the grand scheme of life. Doing my part to help keep our economy churning along, I'm headed to the island of Maui to marry my best friend and spend a couple weeks in the sun, away from the harried pace of everyday life. Needless to say, the laptop is not traveling with me on this trip, so the LEAPS column will be idle for the next 2 weeks. My trusted colleague, Eric Utley has promised to provide any updates that are necessary to the Portfolio, but due to his numerous other responsibilities, will only do so if warranted by market conditions. I'll be back in the saddle on October 21st, refreshed and ready to do battle with these turbulent markets. While I never could have known when I planned this hiatus back in February that it would occur with the markets beaten down as far as they currently are, I have no doubt that I will return in plenty of time to witness the beginning of the next solid bullish move in the broad markets. Remember, if the markets refuse to deliver favorable trading conditions, it may just be a subtle reminder to step back for a bit and spend time with the ones you love. Amazingly, when you return to the Great Game, you'll likely find a renewed vigor for the work required, and maybe even a fresh perspective. See you soon! Mark Phillips Contact Support LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP MO 07/30/01 '03 $ 45 VPM-AI $ 6.10 $ 7.90 29.51% $ 46 PCS 09/17/01 '03 $ 25 VVH-AE $ 5.00 $ 7.00 40.00% $ 23 '04 $ 25 LVH-AE $ 7.10 $ 9.60 35.21% $ 23 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CPN 07/08/01 $22-23 JAN-2003 $ 25 OLB-AE CC JAN-2003 $ 25 OLB-AE JAN-2004 $ 30 LZC-AF CC JAN-2004 $ 30 LZC-AF ENE 07/29/01 $24 JAN-2003 $ 25 VEN-AE CC JAN-2003 $ 20 OFE-AD JAN-2004 $ 25 LYN-AE CC JAN-2004 $ 20 LYN-AD 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 $32-33 JAN-2003 $ 40 VGE-AH CC JAN-2003 $ 30 VGE-AF JAN-2004 $ 40 LGR-AH CC JAN-2004 $ 30 LGR-AF GD 09/16/01 $75-76 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 $40-42 JAN-2003 $ 45 VYL-AI CC JAN-2003 $ 40 VYL-AH JAN-2004 $ 50 LPA-AJ CC JAN-2004 $ 40 LPA-AH NOK 09/23/01 $13-14 JAN-2003 $ 15 VOK-AC CC JAN-2003 $12.5 VOK-AV JAN-2004 $ 15 LOK-AC CC JAN-2004 $ 10 LOK-AB New Portfolio Plays None New Watchlist Plays None 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 09-30-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3593_5.asp ************************Advertisement************************* ENTER THE DRAGON™ With an optionsXpress account, you have access to our easy-to-use, online analysis tools, like our new Option Dragon™! The Dragon can scan the market in real time for a top 50 ranking of matching stocks and their options based upon various criteria, like stock or option volume, P/E, volatility, open interest, etc. Find out more at http://www.optionsxpress.com/marketing.asp?source=optinv2 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************* COVERED CALLS ************* Charting Basics: Looking For The Bottom By Mark Wnetrzak In response to a reader's request for additional discussions about technical analysis, today we will review some popular candlestick reversal patterns. One of the most commonly used indicators in candlestick chart analysis is the "Star." The Star is a signal that a trend may be coming to an end. The pattern occurs when the current day's candlestick has a small body that gaps away from a large body in the prior session. Stars can occur near resistance or support and the color of the Star is generally not significant. If the Star has no body, it is called a "Doji" Star. The significance of this pattern is a change in the market environment. The appearance of a Star during a substantial rally indicates that buying strength is dwindling and the stock is susceptible to a correction. In contrast, a Star that occurs in the middle of a major downtrend suggests that buyers may be gaining control of the issue. Overall, the emergence of a Star indicates that the previous bias in the market (buying or selling) is beginning to equalize and thus a change in character may soon occur. The Star is the primary indication in a number of basic reversal patterns; Shooting Star, Doji Star and the Morning/Evening Star. The Morning Star pattern occurs at the end of a downtrend. It consists of a lengthy black body followed by a small body which begins below the previous day's (closing) low. The final line is a white body that is enveloped by the black body of the first session. The appearance of the small body (the Star) after a major downtrend suggests that selling is at an end and when the following session produces an opening gap with a white body, the bullish pattern is confirmed. While the gap-up is not necessary to define the pattern, it does produce much better results. Of course there are many variations of the Morning Star, the most common of which includes more than one Star in the reversal pattern. In bullish markets, the Evening Star is often the kiss of death. It is also an important "exhaustion" signal when observed in an area of congestion and confirmed by other negative signals. The pattern is similar to an "Island Top" reversal used by bar chart technicians but the candlestick version reflects the potential reversal in a much better fashion. When the Evening Star occurs during a major up-trend, there is cause for concern. The first line is the last bullish indication; a long, white body. The next candlestick is the Star, the first signs of a top formation. The final candlestick is a black body that intrudes well into the body of the initial (white) candlestick. As with the previous reversal pattern (Morning Star), it is best when there is a gap between the body of the middle candlestick (Star) and the opening (or closing) prices of the surrounding sessions. In any case, the low point of the Star's body should be well above the closing high of the first candlestick. Volume is an important component of technical reversal patterns. When trading volume is light during the final phase of a trend (the first candlestick) and increases during the beginning stages of a reversal (the candlestick following the last Star), there is a higher probability of follow-through in the new character. The enthusiasm with which investors accept the new direction can be defined by the presence (or lack) of trading activity. In fact, when the overall trend is less defined, the change in volume can be almost as significant as the actual candlestick formation. Next week, we'll look at another group of reversal patterns; the Dark Cloud Cover and its counterpart, the Piercing Pattern. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield GNSS 28.34 28.14 OCT 22.50 7.30 *$ 1.46 7.5% TQNT 18.08 15.99 OCT 15.00 3.90 *$ 0.82 6.3% BLDP 18.55 19.56 OCT 15.00 4.30 *$ 0.75 5.7% BSX 18.50 20.50 OCT 17.50 1.75 *$ 0.75 4.9% PDG 13.32 12.79 OCT 12.50 1.35 *$ 0.53 4.8% IMNX 17.59 18.68 OCT 15.00 3.20 *$ 0.61 4.6% WEBX 21.60 21.24 OCT 17.50 4.80 *$ 0.70 4.5% *$ = Stock price is above the sold striking price. Comments: The major averages began to show strength this week though investors struggled to decipher the economic impact of 9-11. Next week begins the dreaded month of October and the start of earnings season, not to mention Tuesday's FED meeting. Extreme caution still reigns as the modus operandi. Of the positions in the summary above, Triquint Semi (NASDAQ:TQNT) warrants close monitoring as the stock tests the June low after failing to move above its 30 dma. If the markets do in fact firm up, Placer Dome (NYSE:PDG) may experience some selling pressure as investors reduce their hedge positions. Monitor a violation of the 30 dma on a closing basis as a short-term exit signal. Long-term investors could use the 150 dma as an exit signal. Genesis Microchip (NASDAQ:GNSS) rebounded off its 150 dma after announcing the acquisition of Sage (NASDAQ:SAGI) on Friday. A move back above its 30 dma would improve the short-term outlook. NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield EPIQ 25.50 OCT 22.50 FQU JX 3.70 42 21.80 21 4.7% IMMU 11.97 OCT 10.00 QUI JB 2.30 55 9.67 21 4.9% IMNX 18.68 OCT 17.50 IUU JW 1.85 5696 16.83 21 5.8% MOGN 13.37 OCT 12.50 QOG JV 1.45 247 11.92 21 7.0% PDX 40.79 OCT 40.00 PDX JH 2.50 45 38.29 21 6.5% PXLW 12.60 OCT 10.00 PUO JB 3.10 298 9.50 21 7.6% SANG 18.43 OCT 17.50 QDY JW 1.50 160 16.93 21 4.9% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield PXLW 12.60 OCT 10.00 PUO JB 3.10 298 9.50 21 7.6% MOGN 13.37 OCT 12.50 QOG JV 1.45 247 11.92 21 7.0% PDX 40.79 OCT 40.00 PDX JH 2.50 45 38.29 21 6.5% IMNX 18.68 OCT 17.50 IUU JW 1.85 5696 16.83 21 5.8% IMMU 11.97 OCT 10.00 QUI JB 2.30 55 9.67 21 4.9% SANG 18.43 OCT 17.50 QDY JW 1.50 160 16.93 21 4.9% EPIQ 25.50 OCT 22.50 FQU JX 3.70 42 21.80 21 4.7% 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). ***** EPIQ - EPIQ Systems $25.50 *** When "Bad" Means Good! *** EPIQ Sys. (NASDAQ:EPIQ) develops, markets and licenses proprietary software solutions for workflow management, electronic banking and communications infrastructure that serve the bankruptcy management and financial services markets. In the bankruptcy management market, the company develops, markets, licenses and supports internally developed proprietary software products primarily to trustees under Chapter 7 and Chapter 13 of the federal bankruptcy system, as well as to other users of the federal bankruptcy system, including trustees in Chapter 11 and Chapter 12. For the financial services market, the company's DataXpress product line provides a cross-platform, software-based communications infrastructure that enables corporate customers to route, format and secure business critical data over the Internet and private networks. In July, EPIQ announced record results for the second quarter ended June 30, 2001, with bankruptcy services revenue growth of 31% and overall revenue growth of 23%. It appears when business is bad, business is good for EPIQ. EPIQ Systems could be resuming its up-trend as investors anticipate this quarter's earnings report. We favor the technical support near $22. OCT 22.50 FQU JX LB=3.70 OI=42 CB=21.80 DE=21 TY=4.7% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=EPIQ ***** IMMU - Immunomedics $11.97 *** New Trading Range! *** Immunomedics (NASDAQ:IMMU) is a biopharmaceutical company applying innovative proprietary technology in antibody selection, modification and chemistry to the development of products for the detection and treatment of cancers and other diseases. Integral to these products are highly specific monoclonal antibodies designed to deliver radioisotopes, chemotherapeutic agents, toxins, dyes or other substances to a specific disease site or organ system. The company currently markets and sells CEA-Scan in the U.S., and CEA-Scan and LeukoScan throughout Europe and in certain other markets outside the United States. Immunomedics appears to be forming a new trading range with support near $10. Reasonable speculation for those investors who have researched this company and desire a low-risk entry point. OCT 10.00 QUI JB LB=2.30 OI=55 CB=9.67 DE=21 TY=4.9% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=IMMU ***** IMNX - Immunex $18.68 *** Stage I 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. Recently, Immunex stated it would receive a speedy review of the firm's request to widen the approved use of its Enbrel arthritis drug to include patients with psoriatic arthritis. IMNX continues to forge a Stage I base and this position offers a low-risk entry point from which to speculate on the company's future. OCT 17.50 IUU JW LB=1.85 OI=5696 CB=16.83 DE=21 TY=5.8% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=IMNX ***** MOGN - MGI Pharma $13.37 *** Bracing For A Rally? *** MGI Pharma (NASDAQ:MOGN) is an oncology-focused pharmaceutical company that acquires, develops and commercializes proprietary pharmaceutical products that meet patient needs. The company markets four cancer-related products in the US: Salagen Tablets which treats symptoms known as chronic dry mouth; Didronel I.V. Infusion, which is approved for the treatment of elevated blood calcium in late-stage cancer patients; Hexalen Capsules, a second-line chemotherapy for ovarian cancer patients; and Mylocel Tablets, a treatment for certain malignancies. This week, MGI announced that it has initiated a Phase 1 clinical trial of irofulven, its novel anti-cancer compound, in combination with the anti-cancer drug Taxotere® (docetaxel), in patients with advanced cancers. We simply favor the bullish move above the 150-dma on increasing volume with technical support at $12. OCT 12.50 QOG JV LB=1.45 OI=247 CB=11.92 DE=21 TY=7.0% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=MOGN ***** PDX - Pediatrix Medical $40.79 **** The Trend Is Your Friend *** Pediatrix Medical (NYSE:PDX) is a provider of physician services at hospital-based neonatal intensive care units (NICUs). NICUs are staffed by neonatologists, who are pediatricians with additional training to care for newborn infants with low birth weight and other medical complications. In addition, the company is a provider of perinatal physician services. Perinatologists are obstetricians with additional training to care for women with high risk and/or complicated pregnancies and their fetuses. PDX also provides physician services at hospital-based pediatric ICUs and pediatrics departments in hospitals. Pediatrix recently expanded into Atlanta and Dallas and closed on a new $100 million, three-year senior revolving credit facility. One of the few stocks showing sustained strength during the broader market deterioration and which has sufficient financial resources to continue to execute its growth strategy into to future. OCT 40.00 PDX JH LB=2.50 OI=45 CB=38.29 DE=21 TY=6.5% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=PDX ***** PXLW - Pixelworks $12.60 *** A Little Bottom-Fishing *** Pixelworks (NASDAQ:PXLW) is a designer, developer and marketer of semiconductors and software for the advanced display industry. The company develops products that integrate a microprocessor, memory and image processing circuits that function as a computer on a single chip, or system-on-a-chip. PXLW began developing its products for the most technically demanding advanced display devices; multimedia projectors, multimedia flat panel monitors, and high-definition televisions. During 2000, the company expanded into lower cost flat panel monitors designed for the 15-inch XGA monitor market segment. To further its efforts in this area, in January 2001, Pixelworks completed the acquisition of Panstera, which is developing a broad line of mixed signal ICs that provide a family of products for mass-market, XGA- resolution LCD monitors. Low-risk speculation on a stock that appears to have made a successful test of the April low. OCT 10.00 PUO JB LB=3.10 OI=298 CB=9.50 DE=21 TY=7.6% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=PXLW ***** SANG - SangStat Medical $18.43 *** Rally Mode! *** SangStat Medical (NASDAQ:SANG) is a global biotechnology company building on its foundation in transplantation to discover, develop and market therapeutic products in the transplantation, immunology and hematology/oncology areas. The company sells Thymoglobulin (sold under the name Thymoglobuline outside the United States); Gengraf cyclosporine capsule (co-promoted with Abbott Laboratories in the United States); SangCya Oral Solution - cyclosporine (outside the United States); Lymphoglobuline (outside the United States), and Celsior. Its principal products under development include a generic cyclosporine capsule, ABX-CBL (anti-CD147 antibody in co- development with Abgenix, Inc.) and RDP58. The Biotech Sector has been one of the few sectors to draw investor interest. The bullish move to a new 52-week high on heavy volume suggest higher prices in the future. OCT 17.50 QDY JW LB=1.50 OI=160 CB=16.93 DE=21 TY=4.9% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=SANG ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ROXI 15.20 OCT 15.00 RXU JC 1.40 11 13.80 21 12.6% PFCB 35.92 OCT 35.00 HUO JG 3.70 89 32.22 21 12.5% IDX 8.14 OCT 7.50 IDX JU 1.10 230 7.04 21 9.5% CCUR 9.08 OCT 7.50 URC JU 1.95 50 7.13 21 7.5% WEBX 21.24 OCT 17.50 UWB JW 4.30 23 16.94 21 4.8% TDY 15.95 OCT 15.00 TDY JC 1.40 270 14.55 21 4.5% GLC 20.76 OCT 17.50 GLC JW 3.70 172 17.06 21 3.7% ***************** NAKED PUT SECTION ***************** Trading Basics: A System For Success By Ray Cummins Using a trading system is the easiest way to a be successful in the stock market. A concise plan of attack helps new traders learn proper money management and the correct use of technical analysis in identifying precise entry and exit points. Trading in a systematic manner is also more likely to produce consistent profits than a scheme based on intuition, emotion, or the trend of the day. The benefits to this approach are many but most importantly, you can eliminate the guesswork that comes from trying to manage an active position without realistic goals or loss limits. The targets and exit strategies are predefined, leaving no doubt as to when and how to get out of a position if the market moves against you. Potential risk is identified prior to beginning the trade, with a fixed limit on maximum losses and a formula for taking profits. There are no positions initiated without a complete assessment of the capitalization necessary to carry out the entire strategy, even in the worst case scenario. A careful study of the underlying issue's historical data is used to provide objective goals for future movement, based on expected volatility and technical indications. With all of these elements properly evaluated and arranged, you can develop an effective plan that contains a suitable risk-reward outlook based on appropriate strategies that are compatible with your personal trading style. The first step in developing a practical method for participating in the market is to determine your comfort threshold and stress level. Think about the unique emotional effects of your trading activities and managing an investment portfolio. Are you usually a cautious person or do you feel comfortable traveling at "warp" speed? How will a specific type of trading affect you mentally? Can you handle the volatility of day-trading options or are you happier with conservative, longer-term plays. After you identify the appropriate trading attitude, it is important to decide what type of market activity is most favorable to your personal style. Some traders prefer strategies that profit from trending markets such as those characterized by a sustained advance or decline. Techniques that benefit from this type of movement include Put or Call buying and high potential spreads or combinations. Another tactic might be to focus on changes in volatility. Traders using this approach buy or sell premium in an attempt to profit from transitions in market character. Some utilize neutral positions such as calendar or ratio spreads when the technical outlook for the underlying issue is range-bound or static. Regardless of the method you prefer, each category of price action demands a unique type of trading system. The key to success is to specialize in a specific kind of market activity and utilize trading strategies that perform well in that particular environment. One of the most important steps in developing a profitable system is identifying the appropriate level of complexity when selecting trading techniques. The simplest approach is most often the best but every strategy has risk and it is impossible to classify any particular technique as the absolute perfect method. In most cases, there is more than one favorable technique and even though each strategy has different attributes, they can all be useful in a trader's arsenal at the proper time. The easiest way to become successful is to completely understand the mechanics of any technique that you are using and try to construct a group of diverse positions based on the correct market outlook. Of course you must remember that the individual investment objectives are far more important than the merits of the technique itself. If a specific strategy is not suitable for you or your trading style then it should not be used, no matter how attractive it appears. In addition to selecting the proper trading techniques, you must also identify the appropriate time frame in which to participate in the market. Most investors are suited to longer-term plays as they require less attention and are easy to manage for those who have full-time commitments to work or family. Traders who have the temperament and resources to follow the markets at all hours should consider short term techniques based on intraday data and momentum-based trends. Using the appropriate strategy when the markets dictates action is the fundamental step in developing the ability to trade in a disciplined manner. After you have identified the characteristics of the market and selected the correct technique to profit from future trends, the next task is to determine specific entry and exit points for the underlying instrument. In most cases, technical analysis should be used to ascertain the correct parameters for risk and reward. With this approach, a simple mechanism for money management is built into the initial position. Entry timing can be based on a number of different indicators and the criteria used to identify a trading opportunity is a personal choice. The great thing is, you don't have to open any position until you are satisfied with the probability of a profitable outcome. You can search through charts for the perfect pattern, perform extensive due-diligence, and wait for the best combination of technical indicators and favorable market conditions. In short, you can forego any trade until the number of reasons to participate becomes overwhelming. Remember, the market does not care whether you play along or sit on the sidelines. In addition, when you trade without a system, it's amazing how confusing the situation can become. Once you are committed, you are playing by the market's rules, not your own. 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 TERN 7.01 7.19 OCT 5.00 0.30 *$ 0.30 12.8% AEM 11.18 10.36 OCT 10.00 0.35 *$ 0.35 10.4% FTO 15.32 17.15 OCT 12.50 0.35 *$ 0.35 10.4% PLCM 27.37 24.37 OCT 20.00 0.40 *$ 0.40 7.4% KNDL 19.65 19.74 OCT 17.50 0.40 *$ 0.40 7.1% RTN 34.04 34.75 OCT 30.00 0.65 *$ 0.65 6.9% IMCL 53.30 56.55 OCT 40.00 0.60 *$ 0.60 5.8% AH 20.00 19.80 OCT 17.50 0.30 *$ 0.30 5.6% *$ = Stock price is above the sold striking price. Comments: There was little significant activity in the portfolio this week and only two issues rate a comment. Three-Five Systems (NYSE:TFS) is continuing to establish a base near $15 and as long as that support area remains intact, our position will be successful. However, a move below $14 in the coming week would likely be an early-exit signal. The gold sector hedge in Agnico-Eagle Mines (NYSE:AEM) was available at a higher premium than initially quoted when the issue slumped below $11 on Monday and the stock continued to decline in Tuesday's session. The issue has yet to show signs of firming near the support area at $10 but there is consolation in the fact that December gold futures closed $0.80 higher Friday at $294 per ounce. Gold prices have been trading sideways to higher and consolidating at higher levels, thus indicating a potentially bullish trend in the commodity. Lets hope that translates to higher share values for AEM in the coming month. NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ARXX 11.00 OCT 10.00 ARX VB 0.40 101 9.60 21 15.2% DRXR 15.50 OCT 12.50 RXQ VV 0.30 32 12.20 21 12.4% ILXO 26.26 OCT 22.50 IUE VX 0.45 0 22.05 21 9.1% PLCM 24.37 OCT 15.00 QHD VC 0.50 460 14.50 21 13.5% PRX 35.75 OCT 30.00 PRX VF 0.70 82 29.30 21 11.0% SAGI 15.25 OCT 12.50 UEJ VV 0.45 50 12.05 21 17.2% TTN 19.60 OCT 17.50 TTN VW 0.30 105 17.20 21 7.2% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield SAGI 15.25 OCT 12.50 UEJ VV 0.45 50 12.05 21 17.2% ARXX 11.00 OCT 10.00 ARX VB 0.40 101 9.60 21 15.2% PLCM 24.37 OCT 15.00 QHD VC 0.50 460 14.50 21 13.5% DRXR 15.50 OCT 12.50 RXQ VV 0.30 32 12.20 21 12.4% PRX 35.75 OCT 30.00 PRX VF 0.70 82 29.30 21 11.0% ILXO 26.26 OCT 22.50 IUE VX 0.45 0 22.05 21 9.1% TTN 19.60 OCT 17.50 TTN VW 0.30 105 17.20 21 7.2% 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). ***** ARXX - Aeroflex $11.00 *** Defense Industry Rally! *** Aeroflex (NASDAQ:ARXX) uses its advanced design, engineering and manufacturing abilities to produce microelectronic, integrated circuit, interconnect and testing solutions. The company's many products are used in the fiber-optic, broadband cable, wireless and satellite communications markets. The company also designs and manufactures motion-control systems and shock and vibration isolation systems, which are used for commercial, industrial and defense applications. The company's operations are grouped into three segments: Microelectronics, Test, Measurement and Other Electronics, and Isolator Products. Shares of defense issues rallied last week in the wake of terrorist attacks on New York and the Pentagon. In addition, the recently renamed "Operation Enduring Freedom" may be the catalyst the defense industry needs to reestablish a bullish outlook and this position offers a way to speculate on a future bullish movement in the issue with low risk. OCT 10.00 ARX VB LB=0.40 OI=101 CB=9.60 DE=21 TY=15.2% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=ARXX ***** DRXR - Drexler Technology $15.50 *** Border Patrol! *** Drexler Technology Corporation (NASDAQ:DRXR) develops, produces and markets optical data storage products and systems featuring LaserCard optical memory cards and chip-ready Smart/Optical cards. Drexler-made LaserCard optical memory cards are used for "digital governance" applications such as immigration services, visas, cargo manifests, motor vehicles, import-duty collection, standard pay-per-use systems, and ID/access; and for healthcare and other digital read/write wallet-card applications. The recent attacks have put the U.S. on alert at its many borders and DRXR's unique product line stands to benefit from the new demand for personal identification services. Drexler's highly secure optical memory cards are slated for use by the U.S. Department of State as part of an $81 million procurement program for the Immigration and Naturalization Service. Traders who believe the upward momentum will continue can profit from that activity with this position. OCT 12.50 RXQ VV LB=0.30 OI=32 CB=12.20 DE=21 TY=12.4% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=DRXR ***** ILXO - ILEX Oncology $26.26 *** On The Move! *** ILEX Oncology (NASDAQ:ILXO) is building an oncology-focused pharmaceutical company by assembling and developing a portfolio of novel treatments both for advanced-stage cancers and for early stage cancers and pre-malignant conditions. The company has a portfolio of eight anticancer product candidates in clinical development and several preclinical stage product candidates. In addition to its clinical development programs, ILEX is also conducting drug discovery research, translational research and pre-clinical studies in the fields of angiogenesis inhibition and targeted medicinal phosphonate chemistry, laying the initial groundwork for bringing other new proprietary product candidates into its pipeline. The company's leading product is Campath, which the U.S. FDA has cleared for marketing as a treatment for specific patients with B-cell chronic lymphocytic leukemia and Schering AG announced last week that Campath was successfully tested in a clinical trial for the treatment of T-PLL (T-cell prolymphocytic leukemia). The issue is in "rally mode" after a recent consolidation and traders who want to speculate on a unique biotechnology company should consider this position. OCT 22.50 IUE VX LB=0.45 OI=0 CB=22.05 DE=21 TY=9.1% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=ILXO ***** PLCM - Polycom $24.37 *** PictureTel Merger Approved! *** Polycom (NASDAQ:PLCM) develops, builds and sells communications equipment that enables enterprise users to access broadband network services and leverage increased bandwidth to conveniently conduct voice, video and data communications. Their NetEngine family of network access products enables enterprises to more easily and cost-effectively utilize broadband communications services. In addition, its enterprise communications products enable businesses and other organizations to utilize bandwidth intensive voice and video applications to effectively communicate with employees, customers and partners. Shares of PictureTel (NASDAQ:PCTL) and Polycom rallied earlier this month after the companies said they had received an antitrust clearance from U.S. authorities, giving them a green light to merge. Analysts see the union as beneficial to both companies and they also believe that videoconferencing in its various forms is likely to achieve increased popularity in the coming months. Investors who want to own the new combined entity can use this play to establish a very conservative cost basis in the issue. OCT 15.00 QHD VC LB=0.50 OI=460 CB=14.50 DE=21 TY=13.5% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=PLCM ***** PRX - Pharmaceutical Res. $35.75 *** Consolidation Complete? *** Pharmaceutical Resources (NYSE:PRX) is a holding company that, through its subsidiaries, develops, manufactures and distributes a line of generic drugs in the United States. PRX operates mainly through its wholly owned subsidiary, Par Pharmaceutical, a maker and distributor of generic drugs. The company's products consist of prescription and over-the-counter generic drugs and Par markets approximately 58 products, representing various dosage strengths for 22 drugs that are manufactured by PRI, and approximately 45 additional products, representing various dosage strengths for 23 drugs that are manufactured for it by other companies. Products are marketed principally in solid oral dosage form, consisting of tablets, caplets and two-piece hard-shell capsules. The company also distributes one product in the semi-solid form of a cream. Traders who want a favorable cost basis in a solid pharmaceutical services company should consider this position. OCT 30.00 PRX VF LB=0.70 OI=82 CB=29.30 DE=21 TY=11.0% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=PRX ***** SAGI - Sage $15.25 *** GNSS Buyout! *** Sage (NASDAQ:SAGI) is a leading provider of digital display processors, enabling superior picture quality for a variety of consumer technology and PC-display products ranging from web appliances to TVs and flat panel monitors. Sage is developing products that bring the home theater experience to the mass consumer and PC-display market through digitally enhanced TV, projection displays, DVD players and internet appliances. NEC Corporation has recently selected Sage's Jaguar processor for their new Valuestar monitors. SAGI shares rallied last week after Genesis Microchip (NASDAQ:GNSS), a maker of semiconductors used in graphics and video applications, said it would buy Sage for $241 million in stock to expand in the market for chips used in flat-panel displays. Genesis will issue 0.571 share of GNSS for each outstanding share of SAGI and the deal currently values Sage's stock at over $15 a share. For traders who wouldn't mind owning a stake in the combined company, this position offers a very favorable risk-reward outlook. OCT 12.50 UEJ VV LB=0.45 OI=50 CB=12.05 DE=21 TY=17.2% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=SAGI ***** TTN - Titan $19.60 *** Bracing For A Rally! *** The Titan Corporation (NYSE:TTN) is a diversified technology company whose business is to create and launch technology-based businesses. The company has organized its business into four core segments and its Emerging Technologies and Businesses segment: Titan Systems offers unique information technology and communications solutions, services and products for defense, intelligence, and other U.S. and allied government agencies; SureBeam offers electronic food irradiation systems and services; Titan Wireless offers satellite/wireless-based communication services and systems that provide cost-effective voice, facsimile, data, Internet and network communications services in developing countries; Cayenta is a total service provider of information technology services and software applications for its customers' business and governmental functions; and Emerging Technologies and Businesses pursues commercial applications for technologies originally developed by Titan. Titan is benefiting from the rally in defense and security-based issues and this position offers a conservative method to speculate on its future share OCT 17.50 TTN VW LB=0.30 OI=105 CB=17.20 DE=21 TY=7.2% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=TTN ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield GOTO 12.55 OCT 10.00 GUO VZ 0.40 275 9.60 21 19.9% GNSS 28.14 OCT 22.50 QFE VX 0.70 64 21.80 21 16.0% VAST 11.20 OCT 10.00 AQY VB 0.30 0 9.70 21 12.1% TECD 37.90 OCT 35.00 TDQ VG 1.10 441 33.90 21 11.9% MCHP 26.80 OCT 22.50 QMT VX 0.55 85 21.95 21 11.4% ATVI 27.22 OCT 22.50 AQV VX 0.50 11 22.00 21 10.9% TRDO 25.66 OCT 22.50 UNC VX 0.55 57 21.95 21 10.4% ************************ SPREADS/STRADDLES/COMBOS ************************ Have We Finally Seen The Bottom? By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, September 28 The major equity averages moved higher again today as investors reacted positively to data showing an encouraging outlook for the U.S. economy. New reports from the Commerce Department and the National Association of Purchasing Management's (NAPM) Chicago unit suggested that prior to the attacks, the economy may have been starting to recover. The Dow Jones Industrial Average ended up 166 points at 8,847 and the NASDAQ Composite index finished 38 points higher at 1,498. The S&P 500 stock index gained 22 points to close at 1,040. On the Big Board, 1.56 billion shares traded with 2,477 stocks advancing while 704 issues declined. More than 1.95 billion shares traded on the NASDAQ with advancers outpacing decliners more than 2 to 1. Despite the brief rally, the S&P 500 stock index has dropped 21% during the current year and the Dow marked its worst quarterly performance since 1987. Those numbers pale in comparison to the NASDAQ which is off 39% since January, making the past three quarters the worst sustained decline in the history of the technology-heavy market measure. Last week's new plays (positions/opening prices/strategy): Drexler (NASDAQ:DRXR) JAN15C/OCT15C $1.05 debit calendar Astoria (NASDAQ:ASFC) JAN50P/OCT50P $1.35 debit calendar Alltel (NYSE:AT) OCT65C/OCT60C $0.75 credit bear-call Boeing (NYSE:BA) JAN30C/JAN30P $7.75 debit straddle Our new selection of combination positions offered mixed results this week with the lone bullish play benefiting from a rally in security-technology issues while the bearish candidates suffered from a broad-based recovery in the equity markets. DRXR opened higher on Monday and continued to rise every session until Friday, finishing just above the sold strike at $15. The issue is now at a key resistance level and a heavy-volume rally through the $16 range will be the signal to make a (bullish) adjustment in the spread. ASFC also opened higher on Monday and the issue closed the week with five straight days of gains on optimism from two brokerage upgrades and rumors of a buyout offer from Washington Mutual (NYSE:WM). The abrupt change in character was completely unexpected and in most cases would have produced a substantial loss in any bearish trade however, the large disparity in option premiums provided an excellent cost basis in the spread and even with Friday's rally to $59.26, the value of the long (Put) option is slightly higher than our overall debit in the position. The current option premium will erode quickly if the stock continues to climb above resistance (near $60) in the coming sessions, so monitor the play closely and consider an early (break-even) exit if the bullish trend persists. Alltel was another bearish issue at the end of last week but the selling came to a temporary end with the renewed optimism for stocks. Our position is intact as long as the issue remains in the current range but a close above $59 would signal a potential change in character. Boeing was a big mover on Monday, preventing any entry near the target price and the issue continued to trade in a volatile manner during the early part of the week. The position was not as favorable at the higher debit but it has already achieved profitability for traders who entered the play, based on an opening (overall) cost below $8. Market Activity Stocks rose again Friday with the broader market ending higher for the fourth session in five days as investors speculated on downtrodden issues in the wake of the "post-attack" sell-off. The recent recovery rally has been a welcome event for nearly everyone involved in the equity markets and now the question is how long can the upward trend can be sustained in anticipation of an economic rebound before sellers regain the upper hand. Most analysts agree that the outlook is cautiously optimistic in the near-term and many fund managers have been raising cash in anticipation of market rebound fueled by interest-rate cuts. The Federal Reserve recently reduced its benchmark overnight lending rate for the eighth time this year and analysts expect another cut, perhaps as much as a half percentage point, when the central bank's policymaking Federal Open Market Committee meets next Tuesday. Lowering the cost of borrowed capital is one of the primary steps to rejuvenating corporate profits and the prospect of improving earnings has apparently led investors to renew their search for undervalued stocks, even as group of blue-chip companies issued warnings on how much the attacks on the World Trade Center and Pentagon would hurt future revenues. Traders were also comforted by the announcement that the Gross Domestic Product or GDP, the total value of goods and services produced within the economy, grew 0.3% in the second quarter. The growth rate was unexpectedly higher than the 0.1% forecast by Thomson Global Markets and that gave analysts additional confidence on the outlook for U.S. companies. Another bright spot for investors was the data from the National Association of Purchasing Management's Chicago unit, which reported that its index of business activity was 46.6 in September, compared with the 43.5 reported in August. A number below 50 indicates shrinking economic activity, but the activity index was higher than expected and that gave investors some confidence that the Fed's aggressive rate-management policy will eventually bolster the U.S. economy. Next week, Wall Street will focus on additional economic data such as the National Purchasing Managers' Index and the Labor Department's unemployment report for September. In addition, Federal Reserve policy-makers will meet Tuesday to determine their outlook for the economy and if they choose to reduce the federal funds rate, the cost of borrowing money would fall to the lowest level in more than 40 years. Although most experts agree that a recession is inevitable, many have recently become optimistic that when a recovery finally occurs, it will be much stronger due to the amount of liquidity that has been infused into the economy by the Federal Reserve. Analysts see mid-2002 as the likely period when the world's most productive nation could return to prosperity and that's an event we can all look forward to with impatience and enthusiasm. Questions & comments on spreads/combos to Contact Support ****************************************************************** - Speculation Plays - One of our readers asked for some low cost speculation positions. All of these plays offer favorable risk-reward potential however they should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** ELNK - Earthlink $15.23 *** Rally Underway? *** EarthLink (NASDAQ:ELNK) is a major Internet service provider, providing nationwide Internet access and related value-added services to individual and business customers. The company's primary service offerings include Dial-up Internet access; high speed access via DSL, cable modem, fixed wireless or dedicated circuits; Web hosting; and content, commerce and advertising. Their business services consist of Web hosting, the business of maintaining a customer's Internet Website, Web page design, domain name registration and e-commerce solutions. ELNK shares rallied Friday after an analyst commented that the company was an attractive takeover candidate and would achieve profitability due to price increases and cost cutting measures. We will use any near-term pullback from Friday's rally to open this play at a small credit and if the issue continues to rally, we will likely leave the sold Put open (in anticipation of its eventual expiration) when we sell the Call for a profit. PLAY (very speculative - bullish/synthetic position): BUY CALL OCT-17.50 MQD-JW OI=2476 A=$0.35 SELL PUT OCT-12.50 MQD-VV OI=692 B=$0.20 INITIAL NET CREDIT TARGET=$0.05-$0.10 TARGET PROFIT=$0.35-$0.50 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $360 per contract. http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=ELNK ****************************************************************** IDCO - Interactive Data $13.10 *** Cheap Speculation! *** Interactive Data (NASDAQ:IDCO) is a leading global provider of securities pricing, financial information, and analytic tools to institutional and individual investors. The company supplies time-sensitive pricing, dividend, corporate action, and unique descriptive information for the more than 3 million securities traded around the world, including hard-to-value, unlisted fixed income instruments. The company also has links to most of the world's best-known financial service and software companies for trading, analysis, portfolio management and share valuation. Shares of IDCO closed at an 18-month high Friday despite the fact that some of its collection and distribution facilities were subject to the effects of the recent terrorist attacks on the World Trade Center in New York City. In the aftermath of the attack, traders were fearful that the stock markets might not be able to function effectively but companies like IDCO continued to provide pricing and related data for equities with little difficulty. The company has a diverse system of information resources and the CEO says their institutional business has been particularly strong in recent months. That factor, combined with the long-term trends of growth in funds under management and securitization of assets helps underpin the company's future in the finance industry. With excellent disparities in the front-month premiums, this position offers a favorable speculation play for those who are bullish on the issue. PLAY (speculative - bullish/calendar spread): BUY CALL DEC-15 BQD-LC OI=129 A=$0.95 SELL CALL OCT-15 BQD-JC OI=50 B=$0.20 INITIAL NET DEBIT TARGET=$0.65-$0.70 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=IDCO ****************************************************************** JDSU - JDS Uniphase $6.32 *** Pure Bottom-Fishing! *** JDS Uniphase (NASDAQ:JDSU) is a provider of advanced fiber optic components and modules. These products are sold to telecom and cable television system and subsystem providers (OEMs) including established system providers as well as emerging system providers. The telecommunication system and subsystem providers use these components and modules as the building blocks for the systems that they ultimately supply to telecommunications carriers. In February 2001, the company completed its merger with SDL, Inc. As a result of the merger, SDL became a wholly-owned subsidiary of JDS Uniphase. SDL's products power the transmission of data, voice and Internet information over fiber optic networks to meet the needs of telecommunications, data transmission, wavelength division multiplexing and cable television applications. JDS Uniphase is certainly one of the most volatile stocks in the history of the NASDAQ, having traded in the "triple-digits" just one year ago before a massive sell-off erased the inflated market capitalization of almost every technology issue. Now the stock languishes in the $5 range but analysts say the slump in sales of the company's products is stabilizing and they expect JDSU's share value to begin a long-term recovery in the coming months. This position utilizes Jim Brown's popular technique of writing "deep-in-the-money" Puts to take advantage of upward movement in the underlying issue. A near-term Put is also purchased to limit downside risk in the play if the recovery does not begin as soon as expected. More information on this unique strategy can be found at: http://members.OptionInvestor.com/editorplays/042201_1.asp PLAY (speculative - bullish/short-put combination): SELL PUT JAN03-15.00 OVU-MC OI=6342 B=$9.10 BUY PUT DEC01-5.00 UQD-VA OI=1755 A=$0.55 INITIAL NET CREDIT TARGET=$8.50 TARGET PROFIT=?!? Note: There is a collateral requirement for the sold (short) Put, whether it is partially covered in the initial spread or exists "naked" when the long option expires. Please review the terms of the collateral requirements with your broker. http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=JDSU ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. Current news and market sentiment will have an effect on these issues so review each position individually and make your own decision about its future outcome. ****************************************************************** GD - General Dynamics $88.32 *** Defense Sector Rally! *** General Dynamics (NYSE:GD) is engaged primarily in the businesses of shipbuilding, marine systems, business aviation, information systems, and land and amphibious combat systems. Each of these businesses involves design, manufacturing and program management expertise, advanced technology and integration of complex systems. The primary customers for the company's businesses are the United States military, the armed forces of allied nations, and other government organizations as well as a diverse base of corporate and industrial buyers. Few stocks survived the "post-attack" selling binge but with the nation possibly gearing up for a long-term battle with terrorism, defensive companies are seen as a solid bet to attract investors in the coming months. Indeed, shares of defense contractors have been "on the move" in recent sessions and the primary players in the group, Northrop Grumman (NYSE:NOC), Lockheed Martin (NYSE:LMT) and General Dynamics (NYSE:GD) have posted substantial gains since the day terrorists struck fear into the heart of Americans with their bold strikes on the World Trade Center and the Pentagon. The upcoming earnings report from GD may also contribute to the bullish trend in the coming weeks and we are going to use this limited-risk spread, with a cost basis well below the current price of the stock, to profit from any future upside activity. PLAY (conservative - bullish/credit spread): BUY PUT OCT-75 GD-VO OI=121 A=$0.50 SELL PUT OCT-80 GD-VP OI=133 B=$0.90 INITIAL NET CREDIT TARGET=$0.50-$0.60 PROFIT(max)=11% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=GD ****************************************************************** VOD - Vodaphone $21.96 *** On The Rebound! *** Vodafone Group Plc (NYSE:VOD) is a wireless telecommunications company with worldwide operations through its subsidiary, joint venture and associated undertakings. Vodafone has interests in wireless telecommunications businesses in the Middle East and Africa and 25 countries across five continents. The company provides a full range of wireless telecom services, including cellular, personal communications services, paging and data communications. Vodafone currently has more than 40 million customers and serves markets covering a total population of 400 million people worldwide. Vodafone's operations are currently divided into the geographic areas of Europe, Middle East and Africa; the United Kingdom, and the United States and Asia. Vodafone also owns 45% of Verizon Wireless, a wireless operator formed by the combination of the U.S. cellular operations of Vodafone, Bell Atlantic and GTE. This position emerged in a search for bullish candidates with favorable premiums for speculative option-buying strategies and the recent technical indications suggest the issue has excellent potential for upside activity in the coming months. PLAY (conservative - bullish/synthetic position): BUY CALL NOV-25 VOD-KE OI=263 A=$0.85 SELL PUT NOV-20 VOD-WD OI=55 B=$0.85 INITIAL NET CREDIT TARGET=$0.10-$0.25 TARGET PROFIT=$0.75-$1.25 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $775 per contract. http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=VOD ****************************************************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. 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