The Option Investor Newsletter Wednesday 11-21-2001 Copyright 2001, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/492_1.asp Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 11-21-2001 High Low Volume Advance/Decline DJIA 9834.68 - 66.70 9894.19 9796.41 1.02 bln 1260/1813 NASDAQ 1875.05 - 5.46 1884.49 1853.67 1.54 bln 1717/1772 S&P 100 586.36 - 3.67 590.03 581.93 Totals 2977/3585 S&P 500 1137.03 - 5.63 1142.66 1129.78 RUS 2000 452.31 - 1.59 453.90 449.95 DJ TRANS 2485.60 - 3.80 2491.34 2468.90 VIX 25.32 - 0.81 26.75 24.77 VXN 52.68 + 1.27 54.33 52.51 TRIN 1.38 Put/Call 0.60 ******************************************************************* Indigestion Stocks finished with a negative bias Wednesday. Volume was light ahead of the holiday. Bonds were whacked. The Labor Department reported Wednesday morning that unemployment claims dropped for the fourth consecutive week. It's worth noting that the recent four-week stretch of declining unemployment claims is the longest since early 1999. Jobless claims totaled 427,000 during the most recent reporting period, which was about 15,000 lower than expected. Continuous claims, however, remained historically high at around 3.75 million. The recent retreat in unemployment claims has some economists suggesting that the worst has passed in the job market. Meanwhile, the University of Michigan reported that its consumer sentiment index rose to a higher-than-expected reading of 83.9 in November. The index hit 82.7 in October. The two positive economic reports sent prices of treasuries spiraling lower. Bond market participants exited the government's debt, betting that the Fed would bring an end to its benign monetary policy in the wake of the positive economic reports. The sell-off in bonds further pointed to a recovery in the U.S. economy next year. The benchmark 10-year Note (TNX.X) traded above 50.00 (5.00%) at one point Wednesday. The print above 50.00 was the TNX.X's first since mid-August. The growing consensus is that the U.S. economy will recover next year, but not at the 5 percent annual rate of growth investors grew to enjoy in the late 90s. The economic indicators are revealing that while the economy is still weak, it's on the mend and any recession should be shallow and short. The recent rally in stocks from the September 21 lows discounted part of the forthcoming economic recovery. On the surface, the sell-off in stocks following the positive economic reports Wednesday morning didn't make sense. After all, good economic news is good for stocks. Right? The markets are forward-looking and as such had already discounted this morning's positive reports. If the forecasts are accurate, the U.S. economy isn't going to grow at an exceptional rate next year. Many investors may still be in the frame of mind that equates economic growth with 100 percent annual returns in stocks. That's just not the case. The period between 1995 and early 2000 was "of biblical proportions," in the words of Jeff Bailey. The economy grew at an exceptional rate as a result of a confluence of several events and catalysts. This week's weakness in stocks may be a product of investors coming to the realization that while the economy is going to grow next year, it may not be the type of growth that supports doubles, triples, or 10-baggers in a lot of stocks. Earlier in the week, several chip analysts shed cautious comments on the group, suggesting that "sentiment had gotten ahead of fundamentals." Wednesday morning, Salomon Smith Barney software analyst, Richard Gardner, cut his rating on shares of Microsoft (NASDAQ:MSFT). Gardner reduced his rating to a Neutral from Outperform, citing current valuation relative to sales and earnings. The market responded to Gardner's cautious outlook as MSFT slid more than 2 percent. The pullback across sectors levered to the economy Wednesday, such as Retailers (RLX.X), Banks (BKX.X), Chemicals (CEX.X), and Telecom (XTC.X), left those sectors relatively independent of the business cycle to the bulls. The broader healthcare sector traded well. The HealthCare Sector (HCX.X) was carried higher by makers of defibrillators Wednesday. Shares of Guidant (NYSE:GDT), Medtronic (NYSE:MDT), and St. Jude (NYSE:STJ) boosted the HCX.X to a 1.25 percent gain. Guidant received favorable news that suggested its implantable defibrillator could benefit a larger number of heart patients than previously thought. The good news for Guidant spread to its aforementioned competitors. Amgen (NASDAQ:AMGN) boosted the Biotech Sector (BTK.X) after its bullish prognosis Tuesday night during its analyst meeting. The company raised guidance for fiscal 2002 thanks in part to sales of its anemia drug. The company had been expected to grow earnings by about 19 percent next year, but raised expectations to the "low 20s." Shares of Amgen finished 7 percent higher and pushed the BTK.X into positive territory. Completing the healthcare trifecta, Eli Lilly (NYSE:LLY) received regulatory approval for its sepsis drug late Wednesday. Interestingly and separately, Chiron's (NASDAQ:CHIR) sepsis drug had been rejected earlier in the day. Lilly's drug, Xigris, was approved based upon the results of its Phase III clinical trial, which revealed that the risk of death from sepsis had been reduced by 20 percent. Shares of Lilly finished more than $2 higher. Point & Figure aficionados might find it worth while to take a closer look at Lilly. The stock recently completed a bullish triangle. Lilly's positive development pushed the Drug Sector (DRG.X) through the 400 level Wednesday. The DRG.X has had a nice run over the past four sessions and could have more upside in the short-term. It has some congestion between current levels and 404. The rally in healthcare may have been the cure for the bulls' indigestion caused by the stocks levered to the economy. There may be a theme developing in healthcare that is worth monitoring in this trader's opinion. Don't confuse that with bearish sentiment on the broader market, that's the farthest from the truth. I believe that we're in a new bull market. I believe that the bottom is in place. But, each bull market is different. When most investors think about a bull market, visions of the late 90s come to mind. This bull market could be different. Maybe it'll be shorter. Of course that's only speculation, but it's a distinct possibility. In the meantime, as Jim has been suggesting, buying the dips has been working. In the short-term, the major averages could be headed slightly lower. According to daily oscillators, the NDX is closer to oversold than overbought. But the INDU and SPX are still relatively overbought. The bond market, however, is a variable that I don't yet fully understand. The massive amount of money coming out of bonds has to go somewhere. Will it move into corporate and high yield bonds? Is the money coming from bonds being to used to pay for recent stock purchases? Or, is the money coming from bonds earmarked for stocks over the short-term? I don't have the answer yet, but hope to find it soon. Independent of the bond market, stocks appear due for more backing and filling. Most importantly, have a safe and peaceful Thanksgiving. Eric Utley Option Investor ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ***************** STOP-LOSS UPDATES ***************** SPW - call Adjust from $112 up to $113 KKD - put Adjust from $42.25 down to $42 ************* DROPPED CALLS ************* MSFT $64.03 -1.37 (-1.72) MSFT was downgraded this morning by Salomon Smith Barney. The stock was pressured lower by the weakness in the broader tech sector as well as the downgrade. MSFT closed below our stop at $64.50. We're dropping the play in light of its stop violation and would look to exit positions on a bounce Friday. ************ DROPPED PUTS ************ No Dropped Puts for Wednesday. *********** OPTIONS 101 *********** Measuring the Mood of the Markets By Mark Phillips Contact Support One of the most important facts to understand about market action is that it is driven by investor psychology. In fact, it has been said that the stock market is a barometer for fear or complacency about the economy, where measurements are taken in terms of dollars gained and lost. Knowing that investor psychology is a dominant factor in the financial markets is a necessary, but not a sufficient condition for successful investing. The other tool that traders need is a method for measuring the emotions of other investors as a group. Fortunately, the Chicago Board of Options Exchange (CBOE) has provided us just such a tool in the form of the Volatility Index, or VIX. The VIX is a sentiment indicator that is calculated using the implied volatility of the eight most heavily traded front month put and call options on the S&P 100 index (OEX). Recall that the VIX typically moves in a contrary manner to stock prices. As prices rise, the VIX falls, and vice versa. While most of us know that the VIX has a 'normal' range in which it trades, giving buy signals above 30 and sell signals near 20, that knowledge doesn't really address the underlying importance of the indicator. When the market is falling, traders buy more puts than calls either to protect open long positions, or as speculation that the market will continue to fall. As the market declines further, increasing levels of put buying drives the VIX towards the high end of its range by increasing the ratio of puts to calls, confirming the increased fear in the market. Conversely, when the market is rising, investor enthusiasm drives them to speculate with calls, decreasing the put/call ratio. The cycle feeds on itself, driving the VIX towards the lower end of its range. Since we talk about the action of the VIX so frequently, especially in the LEAPS column, I thought it would make sense to look at the action of this indicator in detail. Analyzing historical behavior in the market helps us to both profit from patterns that tend to repeat, as well as avoid repeating mistakes we may have made in the past. We have all seen long periods of time where the VIX can hover near one of the extremes of its range for weeks and months at a time without a corresponding move back in the other direction. Then all of the sudden, it (and the market) reverse directions and give us a very tradable rally (or decline). Then during extreme movements in the markets, the VIX may stay outside the normal 20-30 range for weeks or even months at a time. What this demonstrates is that peaks and troughs in volatility are not discrete events, but should instead be viewed as a process. I went back to a couple of historical peaks in volatility that I think demonstrate this process; first in late 1998 and then the first half of 2001. Note the similar behavior demonstrated as the VIX pushed through the upper end of its normal range near 30. Starting with the 1998 case, we can see that the VIX began probing above the 30 level in early August, but fear didn't really take hold until nearly a month later when the VIX finally broke decisively above 30. After that point, it took 6 full weeks for the 'fear index' to reach its peak near 60 on October 8th. With that kind of blowoff, the markets reached an unsustainable level of fear driven both by the 'Asian flu' currency crisis and the collapse of the Long Term Capital Management (LTCM) hedge fund. Not only was October 8th the peak for the VIX, but it also represented the low for the broad market as measured by the S&P 500 (SPX.X) or the S&P 100 (OEX.X). As investors determined that neither of the macro-economic events listed above would cause a national economic disaster, they started behaving in a more bullish manner, buying stocks (and calls) and this led the VIX back down to the 30 level by the end of the month. Once the VIX moved back into the 20-30 range in late October, the broad market had gotten a nice start on the next leg of its great bull run that lasted into the following summer. The picture for the VIX was very similar earlier this year, although the cause was very different. As the economy continued to weaken, investor fear started increasing throughout the month of February and the VIX shot began pushing above the upper end of its typical range. The real breakout didn't take place until mid-March, and that set the stage for more than 6 weeks of exceedingly volatile trade in the markets, culminating with the completion of a double-top in early April. Once again, the final VIX peak near 40 on April 3rd coincided with a near-term market bottom, from which the bulls were able to stage a solid 7-week rally. We can't use the VIX alone to make our trading decisions, but it can certainly provide a powerful confirmation of the extremes in the market. So let's take a look at more recent action and see what the VIX is telling us. After the inflection point seen in late August, the market was already in decline before the September 11th terrorist attack, and that event was simply the catalyst to hasten the spike in fear measured by the VIX running as high as 58 in late September. The sharp decline in the VIX that followed over the next few weeks came at the same time that the SPX rallied well off its lows. Then most of the month of October, showed a coiling action, with the SPX refusing to sell off under support, while the VIX failed to break resistance in the high 30's. Simply put, the bears were unable to stampede the bulls into another selling panic, and that situation naturally resolved itself with the market rallying through resistance and the VIX falling back into its historical range. Over the past few days, we've seen some profit taking in the broad market, but important support levels are holding, indicating there is certainly not a rush for the exits -- all we have here is some healthy profit taking ahead of the holiday weekend. This is confirmed by the declining fear in the markets, as the VIX continues to work towards the lower end of its traditional range, even on negative market days. Barring another terrorist attack, or equally fear-inducing event, it appears that the VIX will continue falling towards the 20-22 area before we see a meaningful reversal in sentiment. The really important point here is that the extremes in the VIX consistently telegraph high-odds buying opportunities. We have to endure some volatile market action in the weeks that follow the extreme, but history demonstrates that these times can provide outsized returns for those with above-average intestinal fortitude. There are other sentiment indicators such as the Put-Call ratio and the TRIN, and each has their own advantages and disadvantages. No single technical indicator can tell you everything you need to know to trade a given financial instrument, but if you trade the SPX or OEX (or any of their major components), then using the VIX along should allow you to act rationally when the crowd is paralyzed by fear. ************************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 ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* NOC - Northrup Gruman $94.30 -2.45 (+2.80 this week) Northrop Gruman is a global aerospace and defense company. The company provides technologically advanced products, services and solutions in defense and commercial electronics, systems integration, information technology and non-nuclear shipbuilding and systems. Most Recent Update The Defense (DFI.X) sector worked off its oversold condition in the last three session. NOC did the same. Its daily oscillators, which were buried in oversold territory just last week, have measurably moved out of oversold territory. In addition, the stock rolled over near recent historical congestion between $97 and $98. We would've liked to have seen the stock pause and rollover at a slightly lower level, but Tuesday's action was encouraging nonetheless. The DFI.X finished fractionally higher, which put NOC fractional gain into perspective. If the sector and stock are going to rollover, the weakness should begin to emerge in tomorrow's session. Traders who took entries on the intraday rollover today should have a tight stop set to manage risk. Those looking to enter new positions should watch for weakness in the DFI.X and consider entries at current levels. Those looking for more confirmation to the downside might wait for the DFI.X to weaken and look for NOC to decline below the $95 to $95.50 range. Comments The rollover in the DFI.X came on schedule Wednesday. NOC followed its sector lower. Look for follow-through to the downside in Friday's session, confirming weakness in the sector. Consider entries at current levels on confirmation. BUY PUT DEC-95*NOC-XS OI= 739 at $3.90 SL=2.50 BUY PUT DEC-90 NOC-XR OI=1342 at $1.90 SL=1.25 Average Daily Volume = 1.19 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Time For A Holiday! By Ray Cummins The major equity averages finished "in the red" today amid light volume ahead of the Thanksgiving Holiday. Investors continued to be optimistic however, as favorable employment data and news of improving consumer confidence helped the Market rebound from session lows. Readers have asked for more information on exit and adjustment strategies when trading spreads and since today's publishing deadline limits the time available for new candidates, this is an excellent opportunity to reprint a portion of one of my recent E-mail replies regarding this subject. Credit Spreads: A credit spread is a combination strategy that allows traders to have time decay work in their favor while maintaining a manageable level of risk. To initiate a credit spread, a trader writes a put (call) option and buys a put (call) option that expire at the same time but have different strike prices. The short option is closer to the price of the underlying issue than the long option, thus it has a higher premium. Traders receive a credit in their account, hence the name "credit spread." The objective is for both options to expire worthless so the trader can retain all of the credit in their account. Normally, a credit spread trader uses front-month options, as the time decay evaporates most rapidly in the final few weeks before expiration. The rapid time erosion benefits a credit spread trader, assuming there are no changes in the other variables that might affect the position; the underlying security's price, volatility, dividends, or interest rates. With credit spreads, a trader has many different alternatives when the underlying issue moves beyond the sold (short) strike price in the position. In most instances, the appropriate action should be taken prior to that event, when the stock experiences a technical change in character such as breaking-out of a recent trading range or closing above/below a moving average. The methods for taking profits and preventing losses (as well as making adjustments or rolling to new positions) fit into one of two basic categories: a prearranged target profit or loss limit; or a technical exit based on the chart indications of the issue. The first technique; using a mechanical or mental closing STOP to exit a play, or initiate a roll-out, is simple as long as you adhere to the limits that were initially established for the position. The alternative method; a technicals-based exit, is more difficult. However, there are many different indicators available to establish an acceptable exit point; moving averages, trend-lines, previous highs/lows, etc. and with this type of loss-limiting system, you exit the play after a violation of a pre-determined level. The most difficult decision that traders face is when to exit or adjust a position. Of course, the action taken should be based on the existing market, sector and industry conditions as well as the current outlook for the underlying issue and the ratio of potential gain to additional risk. One outstanding principle that investors fail to adhere to is the need to outline a basic exit strategy, before initiating any position, to eliminate emotional decisions. This plan must be simple enough to implement while monitoring a portfolio of plays in a volatile market. In addition, these exit (and adjustment) rules should apply across a range of situations and be designed to compensate for a trader's personal weaknesses and inadequacies. To be effective in the long term, they must be formulated to help maintain discipline on a general basis and at the same time, offer a timely memory aid for difficult situations. Utilizing this type of system addresses a number of problems, but the most significant obstacle it eliminates is the need for any "judgment under fire." In short, a sound exit strategy will help you avoid exposing your portfolio to excessive outflows and that's important because the science of successful trading is far less dependent on making profits, but rather on avoiding undue losses. Specific Exit/Adjustment Strategies: Credit spreads are a very popular strategy among option traders and there are ways to limit potential losses or even capitalize on a reversal (or transition) to a new trend. With bullish credit spreads, there are three common methods to exit or cover a losing position and the alternatives range from "legging-out" or rolling into a long-term spread to "shorting" the underlying issue. First, you can simply close the position at a debit and register the loss. There is also another popular technique; covering (by shorting the stock) the sold option as the stock moves through the short strike. This is a great method for exiting the position when the issue has reversed course but you must be prepared to repurchase the stock in the event of a recovery. Another option is to "roll-out" of the spread for profit (or at least a break-even exit). To roll-out of a credit spread, place an order to close the short option anytime the stocks trades (and preferably closes) below technical support or a well-established trend line or moving average on heavy volume. There are certainly more precise signals that can be used but this simple technique is based on the probability that (once a reversal has occurred) the stock should continue to move in that direction. After the short option is repurchased, wait for the new trend to lose momentum and sell the long position to close the entire play. It is a very difficult technique to perform when emotion enters the formula but it works well once you become experienced at it, and learn to work with the technical indications rather than your impulses. The key to success is using the method at known support levels or after obvious reversal signals, otherwise you are simply speculating about the stock's next move. The great thing about spreads; once you understand them, you can turn many losing plays into winning ones with the effective use of STOPS and by rolling out-of/in-to new positions when the stock moves against you. When you do lose, at least you have reduced your losses by leveraging against another position. In all cases where an attempt to recover a losing position is made, you must be prepared for further draw-downs and have thorough knowledge of the strategy. As with any technique, it must also be evaluated for portfolio suitability and reviewed with regard to your personal approach and trading style. Good Luck! Ray P.S. I can't tell you when to trade, that simply wouldn't be appropriate. However, I do try to provide comments concerning the technical condition of issues in the current portfolio and suggestions as to potential exit/adjustment opportunities. Keep in mind the Option Investor Newsletter is really just a selection of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the issues meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, portfolio outlook, and risk-reward tolerance. In addition, we suggest you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. Summary of Current Positions (as of 11/20/01): Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield INTU DEC 45 40.85 39.79 (1.06) 0.0% ELBO DEC 35 33.50 35.89 1.50 3.7% TMPW DEC 35 33.20 39.70 1.80 4.5% As noted in Sunday's Spreads/Combos section, Intuit did not cooperate with our bullish outlook as the company posted earnings last week that were less than outstanding. The issue was promptly sold-off, down to a level not seen since October and it may be some time before the stock can recover from the bearish activity. Investors in the long-term position must decide if their capital would be better utilized elsewhere. Electronics Boutique was also a victim of earnings-related selling pressure. The stock slipped through a near-term support area at $36 ahead of its quarterly announcement and the rise in trading volume supported a bearish change of character. A decision to exit the play, in the interest of capital preservation, would have been a viable alternative but after the bell Tuesday, the company posted quarterly profits that were double those during the same period last year and said it now expects same-store sales to increase over 30% in the current quarter. It remains to be seen how investors will respond to the news and we can only hope this was simply some profit-taking after the recent upside activity. A close below $35 will be the first indication of a failed rally. Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield INTU DEC 35 34.20 39.79 0.80 5.6% ELBO DEC 30 29.50 35.89 0.50 5.0% TMPW DEC 30 29.40 39.70 0.60 6.0% EBAY DEC 50 48.85 59.11 1.15 6.8% BBY DEC 55 54.00 66.26 1.00 5.1% PCSA DEC 45 44.05 55.65 0.95 6.0% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield IDPH DEC 75 75.70 67.60 0.70 5.2% EASI DEC 55 55.50 40.92 0.50 4.5% Idec Pharmaceuticals (NASDAQ:IDPH) was previously in the credit-strangle section but when the issue moved through the break-even point in the bearish portion of our neutral position, we decided to remain in the play for a credit with a transition to a DEC-$75 call. Sell Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield AZN DEC 50-C 51.30 45.40 1.30 4.9% AZN DEC 45-P 43.60 45.40 1.40 5.3% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status PCAR 62.59 62.90 DEC50P/55P 0.70 54.30 0.70 Open AHP 56.47 57.09 DEC65C/60C 0.65 54.35 0.65 Open CSC 45.09 46.11 DEC35P/50P 0.60 39.40 0.60 Open PEP 50.28 49.68 DEC45P/47P 0.35 47.15 0.35 Open NKE 51.56 53.64 DEC45P/47P 0.40 47.10 0.40 Open New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Conservative Covered-Calls & Naked-Puts *************** CVTX - CV Therapeutics $54.53 *** Angina Treatment! *** CV Therapeutics (NASDAQ:CVTX) is a biopharmaceutical company that is engaged in the discovery and development of new small-molecule drugs to treat cardiovascular disease. The company is conducting clinical trials for three of its drug candidates. Ranolazine, the first in a new class of compounds known as partial fatty acid oxidation (pFOX) inhibitors, is in Phase III clinical trials for the potential treatment of chronic angina. Another drug, CVT-510, an A1 adenosine receptor agonist, is in Phase II clinical trials for the potential treatment of atrial arrhythmias. CVT-3146, an A2A adenosine receptor agonist, is in Phase I clinical trials for the potential use as an adjunctive pharmacologic agent in cardiac perfusion imaging studies. Trading has been very active in CVTX shares during the past few weeks and the reason for the new interest in the issue is the recent positive announcement about the company's experimental treatment for the heart condition angina. CVTX said the drug, called Ranolazine, achieved its main goals in patient testing; a significant increase in the length of time patients were able to exercise. CV Therapeutics, which presented the data at a recent meeting of the American Heart Association, said it plans to apply for government approval to market the drug in 2002. Today, Morgan Stanley started coverage of CV Therapeutics with a "strong buy" rating and a price target of $71, based on the the upside potential for the experimental heart drug. Traders who agree with a positive outlook for the company can establish a discounted cost basis in the issue with these positions. CVTX - CV Therapeutics $54.53 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 42.5 UXC XV 63 0.60 41.90 5.1% *** SELL PUT DEC 45 UXC XI 192 1.00 44.00 7.4% SELL PUT DEC 47.5 UXC XW 7 1.45 46.05 8.8% *************** IGEN - IGEN International $36.59 *** Legal Success? *** IGEN International (NASDAQ:IGEN) develops and markets products that incorporate the company's proprietary ORIGEN technology, which permits the detection and measurement of unique biological substances. ORIGEN is incorporated into instrument systems and related consumable reagents. IGEN also offers assay development and other services used to perform analytical testing. Products based on the company's ORIGEN technology currently address the following markets: Life Science; Clinical Testing-In Vitro; and Industrial Testing. Shares of IGEN have rallied in recent sessions amid speculation the company will soon win a lucrative settlement in its ongoing legal fight with German medical company Roche Diagnostics. In a lawsuit filed in 1997, IGEN charged that Roche, a subsidiary of Swiss health-care giant F. Hoffman-La Roche, breached an earlier contract in which Roche licensed IGEN's biological-detection technology, called Origen, for use in clinical testing products. Among other claims, IGEN accuses Roche of violating the contract by underreporting royalties and selling Origen-based systems in markets not covered by the contract. Earlier this year, a U.S. judge granted a summary judgment in IGEN's favor on three of 14 claims and analysts believe the courtroom activity is favoring a positive settlement of the 11 claims currently being decided at the trial. The jury's verdict is expected before Christmas and some experts say the final settlement could exceed $1 billion. The robust option premiums will allow traders to speculate, in a conservative manner, on the future movement of the company's share value. IGEN - IGEN International $36.59 PLAY (buy stock and sell covered call; or sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL DEC 30 GQ LF 3,105 7.60 28.99 3.4% *** SELL CALL DEC 35 GQ LG 5,244 4.40 32.19 8.6% SELL PUT DEC 25 GQ XE 355 0.35 24.65 4.5% SELL PUT DEC 30 GQ XF 841 1.10 28.90 11.8% *** SELL PUT DEC 35 GQ XG 88 2.70 32.30 16.8% *************** BULLISH PLAYS - Conservative Credit-Spreads *************** AGN - Allergan $76.10 *** Reader's Request! *** Allergan (NYSE:AGN) is a provider of eye care and other specialty pharmaceutical products throughout the world with products in the eye care, ophthalmic surgical device, over-the-counter contact lens care, movement disorder and dermatological markets. Their worldwide consolidated revenues are principally generated by prescription and non-prescription pharmaceutical products in the areas of ophthalmology and skin care, neurotoxins, intraocular lenses and other ophthalmic surgical products and contact lens care products. One of our readers submitted this issue for a bullish position, based on the company's favorable earnings outlook and the recent positive news about its new glaucoma medication. In October, Allergan posted a 22% rise in third-quarter earnings, fueled by the company's eye-care pharmaceutical sales. The CEO said that numerous worldwide product approvals throughout the course of 2001 are beginning to lift sales growth and the company now expects an average profit margin for the year of about 75%, or 2.5 points higher than full-year 2000 results. On Monday, the company announced that a European committee had recommended its glaucoma medication Lumigan be approved by the EUC and the full EU sanction should occur within about three months. The company said the drug has already been approved by the FDA and sales for Lumigan this year have already exceeded $20 million. Analysts at Thomas Weisel recently started coverage on the stock with a favorable rating and based on the bullish technical indications, this position offers reasonable reward potential with relatively low risk. AGN - Allergan $76.10 PLAY (conservative - bullish/credit spread): BUY PUT DEC-65 AGN-XM OI=55 A=$0.40 SELL PUT DEC-70 AGN-XN OI=260 B=$1.00 INITIAL NET CREDIT TARGET=$0.65-$0.75 PROFIT(max)=15% *************** LLY - Eli Lilly $83.33 *** FDA Approval For Xigris! *** Eli Lilly and Company (NYSE:LLY) discovers, develops, makes and sells its products in one significant business segment, called Pharmaceutical Products. The company also manufactures and sells animal health products, and manufactures and distributes other products through owned or leased facilities in the United States, Puerto Rico and 30 other countries. The company's products are sold in approximately 160 countries. Lilly directs its research efforts primarily toward the search for products to diagnose, prevent and treat human diseases. Lilly also conducts research to find products to treat diseases in animals, and to increase the efficiency of animal food production. Shares of the drug giant soared today after the FDA approved the company's sepsis drug Xigris, calling it a significant advance against an often deadly syndrome that has eluded treatment. Sepsis occurs when the body's immune system overreacts to an infection, causing blood clots that can lead to organ failure and death. Xigris is a potential blockbuster for Lilly because it is one of a handful of medicines the company is counting on to fill the revenue gap caused by dramatically slowing sales of its antidepressant Prozac. Lilly said it plans to start selling the drug in the United States "within days" and the company has also applied for regulatory approval of Xigris in Canada, the EU and Australia. Analysts say this development is very positive for the company and investors have flocked to the issue since the announcement. We simply favor the bullish character change and our conservative position offers a way to participate in the future movement of the issue with relatively low risk. LLY - Eli Lilly $83.33 PLAY (moderately aggressive - bullish/credit spread): BUY PUT DEC-75 LLY-XO OI=6078 A=$0.25 SELL PUT DEC-80 LLY-XP OI=4828 B=$0.95 INITIAL NET CREDIT TARGET=$0.75-$0.85 PROFIT(max)=17% *************** Neutral Plays - Straddles & Strangles *************** ERTS - Electronic Arts $54.00 *** Premium Selling! *** Electronic Arts (NASDAQ:ERTS) operates in two principal business segments globally: EA Core, the primary business, comprises the creation, marketing and distribution of entertainment software, while the EA.com business segment is composed of the creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and Website advertising. Readers have been asking for more "premium selling" plays and based on the underlying issue's technical background and option premiums, ERTS is a favorable candidate for this strategy. The stock has established a relatively stable trading pattern near its current price and our profit envelope is comfortably beyond the range of its movement for the past month. In addition, the company is a leader in its industry and a cost basis near $47 would be an acceptable entry point in the stock for long-term investors. News and market sentiment will have an effect on the position, so review the play thoroughly and make your own decision about its outcome. ERTS - Electronic Arts $54.00 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 50 EZQ XJ 1,981 1.55 48.45 7.9% SELL CALL DEC 60 EZQ LL 3,793 0.90 60.90 5.4% CREDIT TARGET=$2.50-$2.60 UPSIDE B/E=$62.50 DOWNSIDE B/E=$47.50 *************** BEARISH PLAYS - Naked Calls & Combinations *************** CHIR - Chiron $45.59 *** Lilly's Success = Chiron's Demise! *** Chiron (NASDAQ:CHIR) is a biotechnology company that applies leading scientific approaches to discover and develop innovative healthcare products to prevent and treat cancer and infection. The company brings products to the worldwide healthcare market through collaborations with major healthcare companies and also through three growing businesses: biopharmaceuticals, vaccines, and blood testing. Chiron has recently acquired PathoGenesis, a biotechnology company developing drugs to treat infectious diseases, particularly serious lung infections, where there is significant need for improved therapy. In addition, Chiron has also established an alliance with Novartis AG, a life sciences company headquartered in Basel, Switzerland. Investors unloaded shares of Chiron today after the company said its drug designed to treat the blood infection syndrome sepsis proved ineffective in a clinical trial. The experimental drug, Tifacogin, had been expected to compete with Xigris, a sepsis treatment from Eli Lilly that received approval from the FDA. Analysts noted that Tifacogin, co-developed with Pharmacia, had been Chiron's best bet to produce a "blockbuster" and they were banking on the drug to propel it into the top tier of bio-tech companies. The company said it would make a decision about the future development of the drug after it fully analyzes data from the clinical trial but Ken Nover, an analyst at A.G. Edwards & Sons, said "It would appear Chiron's drug is dead." That's not good news for the company in the near-term and traders who think it is unlikely the issue will recover from the sell-off over the next few weeks can speculate on that outcome with this position. CHIR - Chiron $45.59 PLAY (conservative - bearish/credit spread): BUY CALL DEC-55 CIQ-LK OI=16775 A=$0.30 SELL CALL DEC-50 CIQ-LJ OI=2342 B=$0.85 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% *************** SEE DISCLAIMER ***************************** ************************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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