The Option Investor Newsletter Wednesday 11-28-2001 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/1299_1.asp Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 11-28-2001 High Low Volume Advance/Decline DJIA 9711.86 -160.74 9867.20 9706.61 1.41 bln 1069/1289 NASDAQ 1887.97 - 48.00 1941.79 1887.97 1.87 bln 2078/2365 S&P 100 578.92 - 11.91 590.83 578.69 Totals 3147/3654 S&P 500 1128.52 - 20.98 1149.50 1128.29 RUS 2000 453.70 - 7.01 460.71 453.70 DJ TRANS 2457.95 - 51.35 2508.52 2457.95 VIX 27.84 + 2.63 27.91 26.09 VXN 52.21 + 2.94 52.37 49.53 TRIN 2.57 Put/Call 0.66 ******************************************************************* Lights Out Troubled energy trader Enron (NYSE:ENE) took a turn for the worse Wednesday. Standard & Poor's lowered its credit rating on Enron earlier in the day. The downgrade gave Dynergy (NYSE:DYN), Enron's proposed merger partner, reason to step away from the deal. A Dynergy press release cited "Enron's breaches of representation, warranties, covenants, and agreements" as the reasons for pulling out of the deal. Shares of Enron lost more than 80 percent of their value on more than 340 million shares traded -- record one-day volume for a single stock. The Enron debacle has far reaching implications. The adverse impact was felt in the energy sector. Fears of exposure to Enron pressured the Natural Gas (XNG) sector. Shares of El Paso (NYSE:EPG) and Williams (NYSE:WMB) were especially hard hit. The Bank Sector (BKX) was pressured lowered, with Citigroup (NYSE:C) and J.P. Morgan Chase (NYSE:JPM) taking the brunt of the selling. The two banks reportedly backed the proposed merger with loans and equity investments. A bankruptcy filing appears imminent. Enron's bonds reflected that end Wednesday. Most of the company's debt lost around 85 percent of its value in the bond market. The fears induced a flight to quality that lent a bid to Treasuries. Although Treasuries finished well off their highs, they did finish higher as evidenced by the drop in yields across the curve. Unfortunately, Enron was a much-loved stock among institutions. According to the most recent filings, the biggest institutional holders of the stock include: Janus, Putnam, AXA Financial, Barclays Bank, Citigroup, Fidelity, State Street, Aim, Taunus, and Vanguard. The worst ramification of the Enron debacle is the impact on its employees' 401(K) accounts. I read a story in the New York Times about an Enron employee who had put his entire retirement into the stock several years back. He had worked for the company for several decades and was approaching retirement. He lost nearly all of what was left of his retirement today. Indeed, I'd guess that more than a few of our readers own directly or indirectly shares of Enron. I don't want to make an example of anyone. I sincerely sympathize with the Enron employee I read about and anybody in a similar situation. But I think there are a few lessons to be either learned or reinforced in the wake of Enron's demise: 1) The identification and management of risk is a lost art. Far too many investors don't fully understand the risk that is involved with the stock market. 2) Diversification is a step towards the management of risk. It's simple: remove the non-systematic risk through diversification. 3) Wall Street is the world's greatest salesmen. Analysts are salesmen and saleswomen. That's why they are referred to as the "sell side" of Wall Street. There are currently 15 analysts covering Enron, 6 recommend the stock a Strong Buy!?! 4) Gurus are not. In October's Money Magazine, Abbey Joseph Cohen said Enron represented a "good value" in the energy sector. The stock traded above $30 at the time. 5) Price doesn't lie. Somebody knew in late October and early November. They were selling. Technical analysis is a step towards the management of risk. I'm not a very good technician, but even I knew something bad was happening with Enron over the past two months. If there's one thing that I hope to impress upon my readers it's the necessity for risk management. It's given scant emphasis by the sales machine that is Wall Street and not nearly enough credence by the financial media. Instead of asking yourself how much money you can make from an investment, try: How much can I lose? Ask that question and you're one step closer. And remember, it can always get worse: I'm not sure how much more of an impact the Enron debacle is going to have on the broader markets. Going into Wednesday's session, the major averages remained overbought in the short-term. The Enron debacle may have been the catalyst to start the necessary consolidation process before the next leg higher. The selling was heavy and broad which helped to work off part of the overbought nature of the averages. The Dow Jones Industrial Average ($INDU) shed about 300 points from its recent peak up around 10,000 to its close around 9700. The S&P 500 (SPX) pulled back sharply and so did the Nasdaq-100 (NDX). The daily oscillators across each of the averages made some progress to the downside and although the numbers weren't available at the time of writing, I'd be willing to bet that the bullish percent figures across the major averages moved lower. Like I wrote earlier, there may be more negative consequences from the Enron disaster. Sectors that may fall under additional pressure might include Banks and Energy. But there may be a few buying opportunities in insulated sectors such as the Biotechs (BTK). The biotech group has been among the strongest since the September 21 bottom. Additional market-related weakness might pressure the BTK back down to support, where bulls might look for strong biotech stocks to bounce. The BTK has been trending higher since 09/21, using an aggressive ascending support line. It has bounced from the line several times and is again approaching the support level. The ascending line sits around 580, which may be a good spot to target the biotechs in the event of further weakness. The tech sector will remain subject to earnings news and guidance in Thursday's session. Brocade (NASDAQ:BRCD) reported numbers after the bell that edged past estimates but the company provided a less-than-bullish outlook for its next quarter. Brocade officials provided flat guidance in the quarter-over-quarter period. The downbeat guidance pressured shares lower in the after hours session. Brocade is a component of the Hardware (GHA) sector and the Nasdaq-100. In the Networking (NWX) space, ADC Telecom (NASDAQ:ADCT) reported a loss for its most recent quarter that was in-line with expectations. The company's guidance was downbeat too. ADC Telecom forecasted modest growth for next year, but nothing spectacular. The stock edged lower in the evening session. Altera (NASDAQ:ALTR), a make of programmable logic devices, reaffirmed its current quarter guidance, which calls for a decline in revenues between 5 and 10 percent from the third- to the fourth-quarter. The company was expected to reaffirm guidance, so the news may have already been discounted in the stock. Nevertheless, shares edged higher in the after hours sessions. While not much good can come for the Enron calamity, it may have served as the catalyst to remove some of the bulls from the market and work off the overbought condition of the averages. The drop from Tuesday's peak and Wednesday's subsequent decline took a lot of froth out of the bulls' charge. That's a good thing as Jim suggested Tuesday in his Market Wrap piece. If everybody's a bull, who's left to buy and carry prices higher? Stocks are again approaching support levels and may start bouncing in the next day or two. The dip-buying pattern has been prevalent since September 21. We'll find out in the next couple of days whether the pattern holds or if a protracted sell-off is in the mix. The beauty of buying stocks near support is that a tight stop can accompany those entries. And with a tight stop, risk is managed. 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 $117 up to $118.50 AFFX - call Adjust from $33 up to $34 KKD - put Adjust from $41 down to $40 LH - put Adjust from $82.50 down to $80 ************* DROPPED CALLS ************* NOK $22.10 -1.62 (-2.08) The bounce we were expecting never materialized in NOK. The stock gapped lower Wednesday morning below its 200-dma. The selling picked up through the day as NOK headed down to the $22 level. Traders who weren't stopped out Wednesday should look for any strength back up to the 200-dma at $23.20 for an exit point. ************ DROPPED PUTS ************ No Dropped Puts for Wednesday. *********** OPTIONS 101 *********** VIX Details for the Masochist By Mark Phillips Contact Support I never could have imagined the level of interest last week's VIX article generated from readers. Of course there was the long list of messages from those that expressed their gratitude for showing the characteristics of what has frequently been referred to as the "Fear Index", and those comments are always appreciated. But it was the other emails that I found most interesting. Summarizing last week's article, what I did was demonstrate how to use the VIX to read the pulse of the market, or if you'll pardon the analogy, how to tell time. I had a number of emails asking for further details of how the VIX is created, or to continue the analogy, how the clock actually works. Here are a couple of the questions that came out of the list, which I think are fairly representative of the group. "What I still don't understand is the connection between the put/call ratio and the VIX defined as the "implied volatility of the eight most heavily traded front month put and call options on the S&P 100" (from your par. 3). It is clear why p/c grows with declining markets and fear, but why does volatility (=variance) get higher with increasing p/c? What is the causal relation between the two?" And then from another reader, "I note that the VIX is calculated using the IV of the noted 8 call and put OEX options. Is the VIX calculated by averaging the IV of the 8 calls and puts? Does the put/call ratio directly affect the calculation of the VIX? For example, 1. When the market declines, put buying increases, the put/call ratio. Does this ratio directly affect the VIX? Or is it that the IV of the chosen puts goes up enough to affect the total IV of the combined 8 puts and calls? 2. In the opposite direction, when the market goes up and there is more call buying, does this not increase the IV of calls and why does that not also increase the VIX?" WOW! Great questions, guys! My initial response was "Duuuhhh, I dunno!" To be honest, I had never really given the internals of the VIX much consideration, content with the information it provided me about current market conditions. I considered the VIX to be just another key indicator to be used in my day-to-day trading. But my curious cohorts roused my normally-dormant alter ego, RocketMan. Long time readers will recall that I was a NASA engineer in a prior life, and "How does it work" musings launched me down the road to discovery once again. Care to join me and find the answers? Since the VIX is created and maintained by the ever-vigilant folks over at the CBOE, I decided that contacting them would be the logical place to start. After several dead-ends, I got John Hiatt from the Research Department on the phone and am eternally grateful for the assistance he provided. After about 5 minutes of him describing how the VIX is calculated, I realized I was never going to wrap my throbbing brain around the concept without seeing the equations in print. Mr. Hiatt was kind enough to forward me a copy of a document (Derivatives on Market Volatility: Hedging Tools Long Overdue by Robert E. Whaley) that included the formulation for the VIX. After reading the text 3 times, all I had to show for it was a pounding headache, so I'll throw in this disclaimer now -- "You are now entering the Theoretical Zone - proceed at your own risk!" Just to get everyone on the same page, I'll quote from the article: "The CBOE Market Volatility Index (VIX) is constructed from the implied volatilities of the eight near-the-money, nearby, and second nearby OEX option series. The implied volatilities are weighted in such a manner that VIX represents the implied volatility of a hypothetical thirty-calendar day (twenty-two-trading day), at-the-money OEX option." Without going into a great deal of detail (mainly because it isn't a necessary waypoint on our journey of discovery), suffice to say that a proprietary approximation method is used for calculating the implied volatilities of the OEX options. This is necessary because the OEX is an American-style cash-settled index and the Black-Scholes model is insufficient for the task. Coming back to the VIX calculation, we need a couple definitions before we proceed. As stated above, the VIX is constructed from the implied volatilities of the eight near-the-money, nearby, and second nearby OEX option series. The nearby series are defined as the front-month series, provided that there are at least 8 calendar days until expiration. Otherwise, the nearby series is defined as the next expiration month. The second nearby series uses the contract month following the nearby series. That definition alone can be confusing, so let's simplify it with an example. Since we are currently more than 8 calendar days away from December expiration, the nearby month would be defined as December and the second nearby would be defined as January. If we were in the final week of the December expiration cycle, January would be the nearby month and February would be the second nearby month. Are you with me so far? Setting the at-the-money level of the OEX options at the current cash-settled value of the OEX, we would then pick a Put and a Call just above that level and just below that level for each of the expiration months for a total of 8 options -- 2 December calls, 2 December puts, 2 December puts and 2 January puts (since there are more than 8 calendar days to expiration). That is the basis for the calculation. So taking the current value of the OEX at 578, here are the options we would use for the calculation: December - 575 Call, 575 Put, 580 Call and 580 Put January - 575 Call, 575 Put, 580 Call, and 580 Put The first step in the calculation involves averaging the implied volatilities in each of the 4 groups of options as follows: IV1 = (IV of the DEC 575 Call + IV of the DEC 575 Put)/2 IV2 = (IV of the JAN 575 Call + IV of the JAN 575 Put)/2 IV3 = (IV of the DEC 580 Call + IV of the DEC 580 Put)/2 IV4 = (IV of the JAN 580 Call + IV of the JAN 580 Put)/2 Ok, I know it's getting deep here, but bear with me. We're getting close to the end. The remainder of the calculation involves interpolation between the nearby implied volatilities (IV1 and IV3) and the second nearby implied volatilities (IV2 and IV4) to create hypothetical "at-the-money" implied volatilities for each expiration month. I won't bore you with the details of the calculation, as it would likely raise more questions than it would answer. Simply put, IV1 and IV3 through interpolation yield a value for implied volatility for December (IV-DEC). IV2 and IV4 yield a value for implied volatility for January (IV-JAN) through a similar interpolation process. The final step is to interpolate between the IV-DEC and IV-JAN implied volatilites to create a thirty calendar-day (or 22 trading day) implied volatility. Exiting the Theoretical Zone So now that I have put everyone to sleep except for those that actually raised the questions listed above, does all of this theory help to answer their questions? Well yes, at least partially. Let's take them one at a time, shall we? Q: I note that the VIX is calculated using the IV of the noted 8 call and put OEX options. Is the VIX calculated by averaging the IV of the 8 calls and puts? A: Yes, absolutely. First the implied volatilities are averaged together, and then interpolation is used to average between the front month implied volatility numbers to arrive at a theoretical at-the-money implied volatility for December. Repeat the process for January, and then use the results to interpolate one more time, arriving at a theoretical 30-day at-the-money implied volatility for the OEX, which is the VIX. Q: Does the put/call ratio directly affect the calculation of the VIX? A: Interestingly enough, the answer here is No. The ratio of puts to calls does not figure into the calculation of the VIX; only the implied volatilities of each of the individual options are pertinent to the calculation. Q: It is clear why p/c grows with declining markets and fear, but why does volatility (=variance) get higher with increasing p/c? What is the causal relation between the two? A: This question really cuts to the heart of the matter, and to be honest, I really don't know. I think it is a bit of a chicken and egg scenario -- which comes first? The change in the put/call ratio or the change in implied volatilities that are used to create the VIX? It would seem that the increase in put buying that comes with increasing fear in the markets would increase the implied volatility of the puts, while the decreased buying of calls would decrease the implied volatility of the calls, keeping the VIX relatively constant. I think the real answer is that in a falling market, traders become more uncertain and implied volatility of both calls and puts rises, which in turn causes the VIX to rise. Conversely, a rising market deflates the implied volatilities of both puts and calls, resulting in a falling VIX. It seems to me that the VIX and the put/call ratio are different indicators that do the same thing - measure fear in the markets. Each have their own rules of application and corresponding extremes, which can guide vigilant traders through a minefield of information, hopefully to the end goal of trading profits. Needless to say, I don't have all the answers, but I hope this excessively complex discussion helps to illuminate the issue for those with inquiring minds. While I did indeed learn from the process, I now need to give my brain a rest. An icepack and a cold margarita ought to do the job nicely! See you next week! ************************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 ********************* ERTS - Electronic Arts $53.61 (-0.09 this week) Electronic Arts operates in two principal business segments globally: EA Core business segment comprises the creation, marketing, and distribution of entertainment software, while the EA.com business segment if composed of the creating, marketing, and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and Website advertising. Most Recent Update ERTS hasn't done much in the last two days. We'd like to see the stock make a move in one direction or another. The tedium of a trading range is the worst pain. If ERTS rallies up to its resistance range around the $57 level, then bearish traders would be presented with a favorable risk/reward dynamic in entering put plays. In other words, a rally up to $57 would allow traders to enter puts accompanied with tight stops. Conversely, a breakdown below $51 would signal a break below ERTS' short term trend line and potentially offer momentum traders an entry into weakness. In the meantime, we're better off waiting for a move. Comments We may be early on this one. ERTS continued to trade in its range Wednesday. But with further pressure from the broader markets, it could breakdown in Thursday's session. Pay close attention to the Software Sector Index (GSO.X) and the broader Nasdaq market. Look for selling in the two markets to push ERTS below the $52 level. BUY PUT DEC-55*EZQ-XK OI= 853 at $3.80 SL=2.75 BUY PUT DEC-50 EZQ-XJ OI=2030 at $1.55 SL=1.00 Average Daily Volume = 814 K ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** An Overbought Market Suffers From Profit Taking By Mark Wnetrzak The FED's beige book survey of regional economic conditions dis- appointed investors today as the report indicated the economy remained soft in October and November. Yesterday, the Conference Board issued a disappointing report on consumer confidence. Add Nokia's (NYSE:NOK) weak forecast for sales growth in 2002 and the termination of the Dynegy (NYSE:DYN) and the Enron (NYSE:ENE) merger agreement, which reduced Enron to penny status. The major averages were ripe for a correction after testing their resistance areas for the last several days. Will it be a "normal" pullback to support offering new buying opportunities, or is the beginning of a move towards the September low? The regular editor of this section is on his annual pilgrimage to the CBOE to view the latest in electronic trading technology and the current exchange floor techniques. He will also be visiting another major financial institution in the world's money center, Zurich, Switzerland. While he is away from the market, we have asked the Covered-calls editor, Mark Wnetrzak, to provide some new candidates for this section. In addition, we have included a recent E-mail response regarding position adjustment strategies with put-credit spreads. Dear OIN, I was reading in one of your recent articles concerning the manners in which one could handle a credit spread which has crossed the sold strike. One mentioned was to short the stock to cover the sold option. Could you explain how this works; if it has to be repurchased before expiration, or is it covered somehow at expiration? How does shorting the stock affect the margin requirement in my account? Lastly, could this method be used with both stock and index credit spreads? I thank you very much for your time and assistance. Kevin Kevin, First, thanks for your interest in the Spreads/Combos section of the OIN. The narrative you referred to (regarding exit/adjustment strategies for put-credit spreads) noted that: "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 another popular technique; covering (by shorting the stock) the sold put option as the stock moves through its strike price. This is a great method for exiting the position when the underlying issue has reversed course, but you must be prepared to repurchase the stock in the event of a recovery." The first subject that must be clearly understood is short selling or "shorting" a stock. In general terms, selling short is a less common technique whereby a trader seeks to sell high and buy low; the reverse of what most investors try to do. To participate in this strategy, an investor sells borrowed stock in anticipation of a drop in price. A broker supplies the stock in a loan to your margin account. If the stock falls below the price at which it was sold, it is repurchased and eventually returned to the broker as a replacement for the stock that was originally borrowed. The profit is the difference between the sale price and the purchase price. While this technique may seem easy, short selling is one of the most misunderstood of all types of securities transactions and is often considered unscrupulous. But, when properly executed, selling short can preserve capital and be very profitable, and it also a necessary element of position management for option traders as well as an essential hedging component for market-makers and exchange-floor specialists. The most common use of the strategy with retail traders involves selling the underlying stock to hedge or cover losing positions that include short put options. The put writer is "covered" if there is a corresponding short position in the underlying stock, or its equivalent, in his account. If the sold put is exercised, and the stock is delivered, it can be further assigned to replace the previously borrowed equity. Remember, a "short sale" is the sale of a security that is not owned. The investor borrows the stock, through a broker, and then sells it in the open market. When the sold put is assigned, the investor is forced to purchase the stock, which he eventually returns to the broker, replacing the borrowed position. The problem with this technique is the potential loss can be substantial when the share value of the underlying issue rebounds above the initial short price and you do not repurchase the stock in a timely manner. If the issue remains above the strike price of the sold put, it will not be assigned and the trader will be forced to buy the stock in the open market, at the current price, to fulfill his obligation. The absolute necessity of protective trading stops is obvious in this strategy. With a "buy stop" on the stock, the chance of a potential loss in the (recovery) position is much lower if the price of the stock moves significantly higher than the strike price of the sold put. It is generally recommended that the trader place a "buy-stop" order for the (sold) stock slightly above the strike price of the short option, to protect against unexpected rallies or trend reversals. The risks of short selling are many but the most obvious problem is that when you are short, the potential loses are infinite. Short-sellers lose when the stock price rises and a stock is not limited on how high it can rise. Because short-selling involves margin (borrowed money), it's very easy for losses to get out of control and traders must maintain adequate collateral in their portfolio at all times or they will be subject to a margin call. Traders who short stocks are also subject to strict operational rules. All short sales must be made in a margin account, usually with stock borrowed from another customer of the brokerage firm, and the collateral requirements are similar to stock ownership. If the stock is in demand among short sellers, a trader may have to pay a premium for borrowing it. In addition, all dividends on the stock must be paid to the current owner and as a borrower, you are not entitled to any rights or benefits of ownership. Covering a short put with the sale of stock when the underlying issue moves through the sold options' strike is a common method for offsetting potential losses in spread positions, but it is not appropriate for everyone. However, in a bearish market, the technique offers a favorable "rescue" strategy if the issue has little chance of finishing the expiration period above the strike price of the sold put. The technique can also be used with index puts, provided you have enough capital to finance the purchase of the underlying instrument. For more information on basic option trading strategies, read Options as a Strategic Investment, by Lawrence McMillan and Option Volatility and Pricing Techniques, by Sheldon Natenburg, both available in the OIN bookstore. Good Luck! Summary of Current Positions (as of 11/27/01): 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 39.90 (0.95) 0.0% ELBO DEC 35 33.50 36.78 1.50 3.7% TMPW DEC 35 33.20 42.01 1.80 4.5% As noted in last week's BIG-CAP section, Intuit has not cooperated with our bullish outlook, moving lower since the company posted earnings that were less than outstanding. It may be some time before the stock can recover from the bearish activity so investors in the long-term position must decide if their capital would be better utilized elsewhere. Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield INTU DEC 35 34.20 39.90 0.80 5.6% ELBO DEC 30 29.50 36.78 0.50 5.0% TMPW DEC 30 29.40 42.10 0.60 6.0% EBAY DEC 50 48.85 64.77 1.15 6.8% BBY DEC 55 54.00 71.08 1.00 5.1% PCSA DEC 45 44.05 55.08 0.95 6.0% CVTX DEC 42.5 41.90 55.34 0.60 5.1% IGEN DEC 30 24.65 36.70 0.35 4.5% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield IDPH DEC 75 75.70 69.67 0.70 5.2% EASI DEC 55 55.50 41.86 0.50 4.5% Sell Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield AZN DEC 50-C 51.30 45.99 1.30 4.9% AZN DEC 45-P 43.60 45.99 1.40 5.3% ERTS DEC 60-C 60.90 54.64 0.90 5.4% ERTS DEC 50-P 48.45 54.64 1.55 7.9% 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 AGN 76.10 78.07 DEC65P/70P 0.60 69.30 0.60 Open LLY 83.33 82.23 DEC75P/80P 0.80 79.20 0.80 Open CHIR 45.59 43.68 DEC55C/50C 0.60 50.60 0.60 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 - Covered-Calls, Naked-Puts & Combinations *************** SMTC - Semtech $36.90 *** Favorable Outlook! *** Semtech (NASDAQ:SMTC) is a supplier of analog and mixed-signal semiconductors. Semtech designs, manufactures and markets a wide range of products for commercial applications, the majority of which are sold to the communications, industrial and computer markets. Semtech's semiconductors enable power management, test, protection and a wide range of other functions in products that require analog or mixed-signal processing. Semtech's customers are primarily original equipment manufacturers that produce and sell electronics. On November 19, Semtech posted third-quarter earnings that beat the consensus estimate by a penny. SMTC earned $7.7 million, or $0.10 per share, and says it expects sales to rise between 4% and 6% in the fourth quarter. That's good news for the semi- conductor sector and investors who want a low risk entry point in the issue should consider this position. Semtech has been forming a Stage I base over the last year with strong support near $30. Target a higher premium initially, to improve the monthly return. PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 30 QTU XF 1080 0.50 29.50 7.9% *** SELL PUT DEC 32.5 QTU XT 61 1.15 31.35 13.2% SELL PUT DEC 35 QTU XG 310 1.85 33.15 16.6% *************** IGEN - IGEN International $35.44 *** Legal Successes? *** 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. Separately, Roche has dismissed all claims against IGEN in a patent infringement action and is reimbursing IGEN for the legal fees that IGEN incurred in defending that suit, which total approximately $5.7 million. We simply favor the recent bullish break-out and this position offers a great way to speculate on the future movement of the issue in a conservative manner. PLAY (conservative - bullish/credit spread): BUY PUT DEC-25 GQ XE OI=375 A=$0.50 SELL PUT DEC-30 GQ XF OI=904 B=$1.25 INITIAL NET CREDIT TARGET=$0.85-0.90$ PROFIT(max)=20% *************** BEARISH PLAYS - Naked Calls & Combinations *************** CCMP - Cabot Microelectronics $68.00 *** Failed Rally *** Cabot Microelectronics (NASDAQ:CCMP) is a supplier of high performance polishing slurries used in the manufacture of the most advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization. The company supplies slurries to IC device manufacturers worldwide. Cabot Micro is developing and selling new slurries used to polish copper, a new metal used in wiring layers of IC device fabrication. Also, the company has developed and has begun sales of new CMP slurries designed for polishing several components in hard disk drives, specifically rigid disks and magnetic heads. In addition, the company has recently begun producing and selling polishing pads used in the CMP process. This play is simply based on the current price or trading range of the underlying stock and its recent technical history. Cabot Micro has been unable to break through near-term resistance at $75 and the short-term technicals suggest a move towards support at $60 is likely. With the current rally failing (forming a triple top), the share value has little chance of reaching our target position in the next three weeks. PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL DEC 70 UKR LN 1620 3.50 73.50 16.1% SELL CALL DEC 75 UKR LO 357 1.75 76.75 10.5% SELL CALL DEC 80 UKR LP 390 0.65 80.65 5.4% *** *************** CHIR - Chiron $43.36 *** 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 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. Target a higher premium initially, to improve the monthly return. PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL DEC 45 CIQ LI 594 1.65 46.65 12.6% SELL CALL DEC 47.5 CIQ LT 1698 0.90 48.40 8.4% SELL CALL DEC 50 CIQ LJ 2651 0.45 50.45 5.3% *** *************** ENZN - Enzon $57.00 *** Technical Breakdown *** Enzon (NASDAQ:ENZN) 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 and single-chain antibodies. The company applies its polyethylene glycol technology to improve the delivery, safety and efficacy of proteins and small molecules with known therapeutic efficacy. The company applies its single- chain antibody technology to discover and produce antibody-like molecules that offer many of the therapeutic benefits of monoclonal antibodies while addressing some of their limitations. Enzon recently announced the results of several clinical studies that Schering-Plough (NYSE:SGP) presented at the 52nd AASLD on the PEG-INTRON(TM) treatment of chronic hepatitis C. Enzon is entitled to royalties on worldwide sales of PEG-INTRON. Investors apparently were not pleased as the stock has sold off and has now moved below its 150-dma. The short-term technicals are bearish and the move lower on increasing volume reduces the probability of a significant upward move. PLAY (conservative - bearish/credit spread): BUY CALL DEC-70 QYZ LN OI=1159 A=$0.25 SELL CALL DEC-65 QYZ LM OI=1408 B=$0.75 INITIAL NET CREDIT TARGET=$0.55-$.65 PROFIT(max)=12% *************** 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. 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. 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