The Option Investor Newsletter Sunday 12-02-2001 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/8321_1.asp Entire newsletter best viewed in COURIER 10 font for alignment Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 11-30 WE 11-23 WE 11-16 WE 11-11 DOW 9851.56 -108.15 9959.71 + 92.72 9866.99 +258.99 +284.46 Nasdaq 1930.58 + 27.39 1903.19 + 4.61 1898.58 + 70.10 + 82.75 S&P-100 584.80 - 8.47 593.27 + 5.20 588.07 + 10.08 + 18.00 S&P-500 1139.45 - 10.89 1150.34 + 11.69 1138.65 + 18.34 + 33.11 W5000 10531.45 - 64.95 10596.40 +109.73 10486.67 +189.46 +280.40 RUT 460.78 + 2.36 458.42 + 7.11 451.31 + 13.21 + 5.03 TRAN 2511.78 - 23.12 2534.90 + 37.53 2497.37 +176.68 + 74.03 VIX 26.14 + 1.36 24.78 - 2.39 27.17 - 1.59 - 3.64 VXN 48.45 - 2.36 50.81 - 4.23 55.04 - 3.55 - 2.60 TRIN 1.19 0.70 0.99 0.90 TICK +852 +976 +750 +784 Put/Call .63 .61 .50 .74 ****************************************************************** Close But No Cigar! by Jim Brown I think I can, I think I can, well maybe not. The Dow struggled back from another visit to 9800 at the open and tried valiantly to reach the high ground again but was unsuccessful. The Nasdaq traded on both sides of negative as well but even positive comments from Greenspan could not keep it in the green. For the week the Dow lost -108 points and the Nasdaq gained +27 but the Friday numbers showed just how troubled the markets are becoming. The Dow posted the best November since 1962 with a +8%, +775 point gain. The Nasdaq posted the best November ever and the sixth best month overall with a +14%, +240 point gain. While this may be a good running start into historically the best month of the year, the battle still lies ahead. In order to close the year where we started 2001 the Dow will have to gain +900 points and the Nasdaq +540 points in December. Now that would be a record December that we could all celebrate! Any bettors out there that feel this will happen? The CSFB tech conference last week gave us plenty of positive news and the Nasdaq ended the week flat. Dell, Cisco, Intel, Palm, Brocade, Siebel, Xilinx and several others affirmed earnings guidance and stocks still had trouble moving ahead. Next week we get more in-depth guidance from tech big caps INTC, SUNW, CSCO and ORCL but a warning from Novellus on Thursday may have poisoned the air. Granted the majority of the weakness we saw last week was due to the Enron destruction but any confirmation of a longer recovery period than previously expected could be equally disastrous. On Friday the 3Q GDP was restated at -1.1% from a previously estimated -0.4% and investors were not happy. Everyone expected the number to be revised downward but consumer consumption was cut by more than half to only a +1.1% rate. The only positive aspect was a big decrease in business inventories by -$60 billion which would give hope to a bottom soon. When the recovery begins the steeper the prior inventory drop the steeper the rebound according to economists. If anything this report again cements another Fed rate cut on Dec. 11th and possibly again in January. The GDP number was the worst in a decade. Adding to the gloom was the Chicago PMI which fell in Nov to 41.1 from 46.2 in October. Any number under 50 represents a contraction in manufacturing. After two months of rebound to the 46 level the drop back to the lowest level since July's 38 brought doubts about the bottom being behind us. The employment index lost five points to 37.2% in November indicating that jobs are continuing to be lost. This is the 15th consecutive month of declines in the PMI and the drop after two months at higher levels did not help stock prices. There were 1,816 mass layoffs (more than 50 employees) in October with more than 200,000 workers fired. Prior to the Intel conference next week Dan Niles raised earnings estimates and many analysts speculated aloud that they expected Intel to do the same. That would be a real shock. Intel is one of the companies that manages earnings about as well as IBM. If they did have a windfall profit they would shift some of that profit into the next quarter or book a write down somewhere else to avoid a premature bullish announcement. With all this said you could also believe that if Intel did raise guidance then things are going very well and they could not hide it all. We need to hope that they raise guidance or at least perform better than analysts expect in order for the tech rally to continue. After the Fall bounce the tech big caps are trading at very high PE multiples compared with 2001 earnings. For instance, Intel's PE is 61, Cisco 146 and SunMicro 476. Sound like Internet stocks again? The reason for the high PE is not a huge rebound in stock prices but a crushing drop in earnings over the last year. The recent thought process was a recovery from a September bottom into 2Q of 2002. That recovery would spike earnings back up into more recent 2000 levels and drive the PE ratios back down. If those earnings do not return soon then PE compression and a drop in stock prices is inevitable. The 4Q earnings warnings period begins in earnest next week but there is some good news in that event. The ratio of negative to positive warnings so far in the fourth quarter has been better than anytime earlier this year. There has been a flurry of affirmed estimates and even some raised guidance. Actual warnings have been fewer but then next week will tell the tale. AVCI beat the rush after the close on Friday saying they would cut another -12% of their workforce and cut costs further in light of current conditions. They said they expected the Internet router market to remain flat through the first HALF of 2002. When companies have been warning this is the predominant excuse, "No recovery THROUGH the second half of 2002." Hopefully the analyst conferences for the big four (ORCL, INTC, CSCO, SUNW) will overshadow any negative news we receive from earnings. Of course, negative news at any of those meetings could be very bad for the market. From a technical standpoint it would appear we are in trouble. Historically December is normally the best month of the year for the markets followed by January as second best. However we are not normally coming out of a +25% Dow gain off the September lows or a +39% gain for the Nasdaq. Those gains will be tempered by tax selling as the residue of the great Tech Wreck is flushed by disappointed investors. The bottom line, December should be very interesting. Dow 10,000 may happen but 10,200, 10,300, 10,500 may be very tough to hit. The same with the Nasdaq. We have stalled at resistance just below the 200DMA at 1954. Should we break through this level the next 300 points will be very hard to conquer. There is very strong resistance from 2000 to 2300. There may not be any sustained drive but a daily battle for each point. The Fed is not going to be a factor even if they cut rates again in January. Greenspan said on Friday that productivity should rise unscathed in the fourth quarter. That provided a small bounce but it evaporated at the close. There was some strong market on close orders across multiple sectors but it was attributed to a rebalancing of the Morgan Stanley Indexes. That rebalancing does not explain a three day drop in GE which closed at the low of the day on Friday. Banks, a critical component to any sustained rally, are flat to down. The big banks are under pressure due to concerns about Enron loans or loans to others who may suffer from an Enron bankruptcy. Were it not for Home Depot posting a +2.63 gain the Dow could have closed in negative territory. While it sounds like I am painting a very negative picture there are some bright spots. Intel is $.34 away from breaking a nine month high and is looking very strong. All that could of course change with their analyst meeting next week. Dell is just a few cents away from hitting highs not seen since July and April. Cisco is right at its high from the summer. Again, conference this week. SUNW is at a three month high. Conference this week! The other big caps MSFT, WCOM, QCOM and ORCL are not look healthy. The leaders can extend their lead with positive comments or shoot themselves and the market in the foot with cautionary statements. I would be very cautious about opening any new long call positions this week. We need to remain objective and unbiased, (despite what I said above), and only trade when it is profitable to trade. I would use 9800/1900/1125 as my triggers to go flat. (Note that I have modified those slightly from Thursday's 9800/1925/1150.) Should any of these indexes fall below those levels I would move to the sidelines until they trade above them again. This makes the "should I" or "shouldn't I" trade decision painless. Open new positions on any rebound from BELOW those numbers. If you are currently flat and the market moves up from here I would not open new positions until we pass 10000/1955/1165. Why open positions below those numbers if each has produced a solid top over the last several weeks? If the market is going to rally there will be plenty of time for profits. If it is going to fail again then you don't want to be long. Right? Trade what the market gives you or don't trade at all! Enter very passively, Exit aggressively! Jim Brown Editor@OptionInvestor.com ************************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 ************************************************************** ************** Editor's Plays ************** Plays From the Darkside Not every option play is a call. That could come as a shock to many traders but and based on the email I receive I know it to be true. Because of the weak market from last week I decided to highlight several put plays for this edition. Each has a story so we are not just betting on the chart. Capital One - $50.00 Capital One is a large sub prime credit card lender. They rallied out of the September drop but they were already under pressure from the weak economy and rising unemployment. Twice in the last two weeks the stock has bounced off $50 as support. Friday it came to rest exactly on that threshold. If the Jobs Report next Friday is highly negative then investors will likely dump more shares of COF. This is a speculative play and should only be entered if COF trades under $50. The Dec-$50 put, COF-XJ is $2.80 and the Jan-$50 put, COF-MT is $2.90. NSI $15.92 National Service Industries is spun off AYI, a lighting services arm, on Friday. AYI will start trading on the NYSE on Monday. Normally when a company spins off a portion of its assets the parent company loses value. NSI has already dropped from $24 to $16 in the last three months but other factors could continue to pressure the stock. S&P dropped it from the index on Friday as "no longer representative" and that news knocked off another dollar earlier in the week. This is a speculative play and should only be entered if further weakness is seen in NSI. The January-$15 put, NSI-MC is only $.65 cents. RiteAid (RAD) $4.69 Would somebody just shoot this stock, please ! RiteAid has been the poster child for mismanagement for some time. Recently management appeared to get control and the stock rallied from a low of $1.50 in Oct-2000 to $10.00 in June of this year. Since June it has been all down hill and accelerating. Two weeks ago they announced an offer of $125 million of immediately convertible notes. At a $4 share price that is like selling 32 million new shares and it appears that there are no takers. One analyst said $1.50 looks like a magnet again. This is a speculative play and should only be entered if RAD trades below $4.50. The Dec-$5.00 put, RAD-XA is $.55 cents. The Jan-$5.00 put, RAD-MA is $.80 cents and has over 34,000 open interest. Top 20 List This was really hard. There were a large number of plays that looked good but each requires a positive market to continue. Please only play these calls if the market is in rally mode. CALLS ABT 55.00 breakout (BO) over $55 AET 31.17 recovering from attack worries BVF 54.78 new relative high CD 17.00 new relative high CHTR 15.38 new relative high EBAY 68.07 my fingers rebel when typing this symbol EMLX 32.60 new relative high GNSS 56.84 entry point? HLIT 12.17 BO over $12.50 HSIC 40.11 BO over $40 INTC 32.66 BO over $33 MCDT 25.20 strongest stock in list MLNM 34.09 BO over $35 SURE 12.64 good trend TSN 12.01 new relative high UTX 60.27 recovering from terrorists PUTS NEWP 17.77 support $15 PRSE 19.45 below $20 support SLM 85.07 free fall under $85 ATK 78.80 defense boom is over? AWE 13.97 making a bid for @Home ? BAC 61.46 Enron exposure? CPN 21.55 Enron exposure? CSGS 30.92 look out below. DUK 36.16 Enron exposure JCP 25.36 No holiday rush? JWN 18.95 Consumer boycott? All of the above plays involve risk. You need to do your own research before initiating any of these plays. Good Luck Jim **************** MARKET SENTIMENT **************** Weekend Roundup By Eric Utley I was wrong about one thing last week. Friday afternoon didn't offer much in the way of insight into future short-term direction. The major averages ended mixed. The Dow pulled back later in the day, but ended slightly higher. The S&P followed the Dow, but finished slightly lower. While the Nasdaq-100 traded back and forth. The lack of follow-through from Thursday's late-day rally into Friday's session makes me believe all the more that Thursday's rally was a product of end-of-the month shufflings. The sentiment data isn't offering much help. The fear gauges of the market, the CBOE Market Volatility Index (VIX) and Nasdaq-100 Volatility Index (VXN), are back to what I would consider historical norms. However, a few traders I speak with frequently consider the fear gauges more complacent than I do. The put/call ratios are bouncing around from one day to the next. The one reading that stuck out again last Friday was the QQQs put/call ratio. It spiked higher last Thursday and went even higher in Friday's session. Again, I think the trader types of the market shorted into the rally Thursday and again Friday. The QQQ put/call ratio is more volatile than the others and is normally below 1.00. I find it very interesting that the ratio spiked to 3.00. It's a powder keg if the right catalyst arrives that sends the shorts scrambling to cover. The bullish percent data of the major averages was relatively flat last week. The sell-off Wednesday wasn't nearly deep enough to put a lot of stocks on sell signals after their recent big runs. It's going to take a bigger sell-off to get the bullish percent data lower, but sound of the groundwork for sell signals was laid last Wednesday. Four out of the five averages remain in bull confirmed, which is the strongest of bull markets according to bullish percent data. The ARMS Index (INDEX:TRIN) is creeping higher, but still well off of extreme levels. It's revealing that the short-term selling has picked up through the spike in the 5-dma. But I don't like to read into this indicator too much until it's at an extreme level. The advance/decline line reflected price action in the averages Friday. The line was negative, but not by a large amount. However, the new high/new low line remained decidedly bullish, which was a positive. The most recent COT report revealed more of a bearish tone. Maybe not exactly bearish, but less bullish. Shorts were added and longs were liquidated. That's to be expected after a big run in the averages. And also reflects cautiousness ahead of December warnings season. ----------------------------------------------------------------- Market Volatility VIX 25.87 VXN 48.45 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.63 448,568 281,771 Equity Only 0.56 404,684 227,385 OEX 1.94 3,987 7,746 QQQ 3.00 7,947 23,891 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 46 + 0 Bull Confirmed NASDAQ-100 74 + 1 Bull Correction DOW 60 + 0 Bull Confirmed S&P 500 61 + 1 Bull Confirmed S&P 100 61 + 0 Bull 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 1.37 10-Day Arms Index 1.19 21-Day Arms Index 1.14 55-Day Arms Index 1.10 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 1549 1580 NASDAQ 1772 1887 New Highs New Lows NYSE 82 33 NASDAQ 84 44 Volume (in millions) NYSE 1,343 NASDAQ 1,796 ----------------------------------------------------------------- Commitments Of Traders Report: 11/27/01 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 Commercial traders backed off their most bullish reading of the year over the past two weeks. While the number of short contracts remained relative flat, about 10,000 longs were closed. Meanwhile, small traders added a significant number of new long positions for a net bullish increase of 10,000 contracts. Commercials Long Short Net % Of OI 11/06/01 376,807 416,063 (39,256) (5.0%) 11/13/01 381,539 421,284 (39,745) (5.7%) 11/27/01 371,336 421,405 (50,069) (6.3%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 11/06/01 132,106 81,208 50,898 23.9% 11/13/01 136,047 87,645 48,402 22.0% 11/27/01 151,317 92,807 58,510 24.0% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 Commercial and small traders shifted in the same direction recently. Commercial traders added to their net bearish position while small traders reduced their net bullish position. Commercials Long Short Net % of OI 11/06/01 39,410 47,890 ( 8,480) ( 9.7%) 11/13/01 38,751 49,257 (10,506) (12.0%) 11/27/01 37,259 48,315 (11,056) (12.9%) 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 11/06/01 11,406 8,143 3,263 16.7% 11/13/01 11,568 6,505 5,063 28.0% 11/27/01 12,540 8,359 4,181 20.0% 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 Neither commercial nor small traders shifted positions on a large scale since the last reporting period. Commercials remained decidedly bullish while the small traders continued to lean bearish on the Dow. Commercials Long Short Net % of OI 11/06/01 25,977 11,951 14,026 37.0% 11/13/01 24,145 10,204 13,941 40.6% 11/27/01 24,243 11,496 12,747 35.7% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 11/06/01 3,569 12,281 (8,712) (55.0%) 11/13/01 4,094 12,121 (8,027) (50.0%) 11/27/01 4,228 10,630 (6,402) (43.1%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************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 ************************************************************** *************** ASK THE ANALYST *************** And The Winner Is... By Eric Utley I received a lot of responses to my contest last week. So I had that going for me, which was nice. The first correct response I received was from Rick, whose e-mail succinctly read: 44 That was the price objective for the Gold and Silver Index (XAU) based upon the chart in last week's column and still is the price objective for that matter. I noticed a lot of common mistakes made in the number of incorrect responses I received. I'll go over the calculation to clear up any questions this weekend. Lucky for me, Rick is a fan of sushi. I'm grateful for the effort and time taken to participate in my little contest. I'll have to think of another. I tried to reply to everyone who sent in a response; I really enjoy establishing a dialouge with readers. Although it's electronic, I really think communication adds to this column. I'm always open to questions. The point and figure charts that appear in this column were created using www.Stockcharts.com. Please send your questions and suggestions to: Contact Support ---------------------------- Price Objectives Continued A prize fighter in the corner is told Hit where it hurts, silver and gold Last weekend, I explained how to calculate price objectives. I was once told that penning instructions is the most difficult form of writing. I hope mine were clear, concise, and easy to follow. Here are the instructions for calculating both bullish and bearish price objectives, reprinted with my permission: Bullish Price Objective - 1) Find the first buy signal following the most recent sell signal. 2) Count the number of 'Xs' in the column in which the buy signal was generated. 3) Multiply the number of 'Xs' in the column by 3. 4) Multiply the number from Step 3 by the size of the box on the point & figure chart. 5) Add the number from Step 4 to the first 'X' in the column that generated the buy signal. Bearish Price Objective - 1) Find the first sell signal following the most recent buy signal. 2) Count the number of 'Os' in the column in which the sell signal was generated. 3) Multiply the number of 'Os' in the column by 2. 4) Multiply the number from Step 3 by the size of the box on the point & figure chart. 5) Subtract the number from Step 4 from the first 'O' in the column that generated the sell signal. Gold and Silver Index (XAU) When you first pull up a point and figure chart, you need to determine whether or not the stock/index/market is on a buy or sell signal. Once you determine whether the security is on a buy signal or sell signal you can then start with the calculation of the price objective. The XAU is currently on a sell signal. If the index is on a sell signal, then it's bearish. If the index is bearish, then we're looking to calculate its bearish price objective. Let's walk through the five steps: 1) The first sell signal following the most recent buy signal was generated when the XAU declined below the 55 box. Its most recent buy signal was generated with the advance past the double-top at 58 (1). Therefore, the first sell signal generated after the most recent buy signal was the decline below 55 (2). 2) Next, simply count the number of 'Os' in the column in which the sell signal was generated. There are a total of 7 'Os' in the column that generated the sell signal (3). 3) Once the 'Os' have been counted, multiply that number by 2. Here's where a lot of mistakes were made. Note that 3 is the multiplier used when calculating BULLISH price objectives and 2 is used when calculating BEARISH price objectives. Why? Stocks can only go to zero, where the downside is limited. To the upside, stocks can go to infinity, where the upside is unlimited. The different multipliers reflect that logic. With 7 'Os' totaled, we multiply by 2: 7 X 2 = 14. 4) Multiply the number calculated in step 3 by the size of the box. This step is used for relevancy. When calculating the price objective for a stock below $5, you'll use a smaller box size to reduce the number reached in step 3. While a stock priced above $100, for example, will have a higher box size and require an increase in the number reached in step 3. Stocks, or in this case an index, priced between $21 and $99 will always have a $1 box, so this step can be skipped in a lot of cases because: 14 X 1 = 14. 5) Because we're calculating a bearish price objective, we subtract the number reached in step 4 from the FIRST 'O' in the column that generated the sell signal. Here's another step in which some readers were wrong. Don't subtract from where the sell signal was generated. Subtract from the first 'O' in the column (4), which in the case of the XAU was at the 58 box. The final calculation: 58 - 14 = 44. That's the bearish price objective for the XAU. Questions & Answers I received a lot of good questions in conjunction with the replies last weekend. For instance, several readers asked about the accuracy of the price objectives. From what I've observed, the more liquid, efficient stocks and markets tend to follow their price objectives more closely. Stocks such as General Electric (NYSE:GE), AOL-Time Warner (NYSE:AOL), and AT&T (NYSE:T) like to follow their price objectives. That's because the stocks are extremely efficient and widely held. They're traded by a lot of people and monitored by even more. I would dare say that the price objectives become a self-fulfilling prophecy in some of these stocks. The more volatile, less liquid stocks such as those found on the Nasdaq market don't follow their price objectives as closely. There's more emotion in the Nasdaq market which is why I think the price objectives of four-letter stocks aren't reached as often as those listed on the NYSE. Indexes are more efficient than stocks, and tend to track their price objectives. Several readers asked how to use price objectives and what to infer from them. I think the price objectives are more relevant over a longer time period, anywhere from three to six months. I don't think they're a crucial tool for the short-term trader. However, I think it's important to at least know where the current price objectives rest of the stocks you're trading. Many times I've seen a stock hit its bearish or bullish price objective on the nose then reverse. In that case, you wouldn't want to short a stock right at its bearish price objective only to watch it reverse on you. ---------------------------- 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. ************* COMING EVENTS ************* =============================================================== Economic Reports There may be a number of economic reports out this week but Wall Street will probably spend much of its time betting, talking, and arguing over the Fed's decision at the FOMC meeting on Dec. 11th. Earnings have dwindled to a handful of companies but we approach that wonderful time of year called "warnings season" which always precedes earnings season. There may be a few corporations that surprise investors early in December. =============================================================== Monday, 12/03/01 Auto Sales Nov Forecast: 6.8M Previous: 7.8M Truck Sales Nov Forecast: 7.9M Previous: 9.8M Personal Income Oct Forecast: 0.1% Previous: 0.1% Personal Spending Oct Forecast: 1.9% Previous: -1.8% NAPM Index Nov Forecast: 41.9 Previous: 39.8 Construction Spending Oct Forecast: -0.5% Previous: -0.4% Tuesday, 12/04/01 None Wednesday, 12/05/01 NAPM Services Nov Forecast: 42.5 Previous: 40.6 Thursday, 12/06/01 Initial Claims 12/01 Forecast: N/A Previous: 488K Productivity-Rev. Q3 Forecast: 2.6% Previous: 2.7% Factory Orders Oct Forecast: 1.0% Previous: -6.2% Friday, 12/07/01 Nonfarm Payrolls Nov Forecast: -210K Previous: -415K Unemployment Rate Nov Forecast: 5.6% Previous: 5.4% Hourly Earnings Nov Forecast: 0.2% Previous: 0.1% Average Workweek Nov Forecast: 34.0 Previous: 34.0 Consumer Credit Oct Forecast: $1.5B Previous: $3.2B ************************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 12-02-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/8321_2.asp ************************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 ************************************************************** *********************************************************** DAILY RESULTS *********************************************************** CALLS Mon Tue Wed Thr Week SPW 121.50 4.85 -0.90 1.48 -2.29 2.93 Pulling back PMCS 22.79 1.76 0.07 -1.49 1.20 -1.31 Popped higher PDLI 37.69 2.59 -0.73 -1.94 1.40 1.50 Bounding bio AFFX 36.22 0.74 -0.74 -0.77 0.65 -0.91 Dropped BRCM 43.99 3.45 -0.07 -2.97 -0.92 -2.46 Dropped IBM 115.59 0.98 -2.13 -2.05 2.28 0.24 Consistent JNPR 24.58 0.54 -0.09 -2.13 0.57 -1.27 Entry point QCOM 58.72 0.91 -1.29 -2.73 1.13 -2.59 Dropped CNXT 14.89 0.79 0.77 -0.43 0.41 0.95 Profit taking FFIV 22.33 0.84 0.05 -1.69 1.26 -0.39 Dropped MLNM 34.09 2.29 0.02 -2.09 1.67 2.87 Reliable trend INTC 32.66 0.80 0.44 -0.55 0.56 1.59 New, $33 MCDT 25.20 0.55 0.31 -0.46 1.91 2.45 New, storage IMCL 72.00 3.14 -0.15 0.15 2.16 4.34 New, biotech PUTS NOC 93.88 -2.25 0.49 1.18 -0.13 -0.17 Diverging KKD 37.25 -0.80 -0.81 -1.64 -0.50 -2.70 Up on relief WWCA 24.57 -0.64 -0.26 0.57 -0.51 -1.28 New low LH 76.90 -0.90 -3.50 -1.40 1.25 -4.90 200-dma VRSN 37.73 0.01 0.01 -0.73 -1.57 -2.66 Violation YUM 47.45 0.34 -0.47 -0.41 -0.15 -1.26 New, yummy VZ 47.00 -0.15 -0.85 -0.15 -0.39 -2.00 New, hang-up SEBL 22.35 0.24 -0.49 -1.83 1.48 -2.19 New, extended ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* INTC - Intel $32.66 (+1.59 last week) See details in play list Put Play of the Day: ******************** SEBL - Siebel Systems $22.35 (-2.19 last week) See details in play 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 ^^^^^ AFFX $36.22 (-0.91) Have you noticed that a lot of our call plays are just plain running out of steam? That's the case with AFFX, which has barely moved in the past week after running into firm resistance at $38. While still holding above our $34 stop, it doesn't look like the bulls are interested in driving this stock significantly higher. We'll drop the play this weekend and focus on healthier plays for the week ahead. BRCM $43.99 (-2.46) The comments from NVLS Thursday night sent the chip sector reeling, and coupled with BRCM's own lukewarm comments at the CSFB Tech Conference this week, sent shares of BRCM sharply lower. After just managing to claw its way above our $46 stop at the close on Thursday, the damage done on Friday finishes the job of kicking the play off the call list this weekend. Despite several valiant attempts, the bulls just couldn't get the stock back into positive territory on Friday and it looks like the rollover has begun in earnest. Use a bounce from the $44 level next week to exit any remaining open positions. FFIV $22.33 (-0.39) Every healthy rally needs to pause for consolidation from time to time, but the consolidation in shares of FFIV is just taking too long. After breaking out on the heels of the strong rally in the Networking sector (NWX.X), the stock has been stuck below $24 for the past 2 weeks and has lost its upward momentum. Our stop is still intact just above $20, but we'll take this opportunity to exit the play before the bears really get serious. Use any bounce from the ascending trendline to achieve a more favorable exit. QCOM $58.72 (-2.59) So much for last week's breakout. QCOM spent this week drifting lower and came dangerously close to making the drop list on Wednesday, dipping to just above our $57 stop. But the bulls came to its defense just in time, and began buying right at the 20-dma (then at $57). The past couple days have seen a mild recovery in price, but the bulls ran out of steam right at the $60 level, which is obviously still a level of resistance. With the lack of follow through above $60, we're dropping QCOM this weekend in favor of stronger plays even though the $57 stop is still intact. Right now the risk of breakdown outweighs the potential reward, so use any strength next week to gain a better exit point. 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 PLAYS ************** INTC - Intel $32.66 (+1.59 last week) Intel is a semiconductor chip maker, supplying the computing and communications industries with chips, boards and system building blocks that are integral to computers, servers and networking and communications products. Its products are offered at various levels of integration, and are used by industry members to create advanced computing and communications systems. Will the biggest of tech breakouts materialize next week? We'll probably find out. Intel hasn't traded above the $33 level since March 8th. The stock came within a penny of that level last week. While INTC has had a big run and it could be argued that the stock is overbought, a breakout above the $33 level next week would most likely cause a short covering and momentum-based rally that could be good for a few points. After the $33 level, INTC doesn't have meaningful resistance until $36. While there's no sure thing in the market, we like the prospects of a good move on a breakout above $33 as institutions are likely to jump all over the breakout. The potential catalyst behind a breakout is Intel's mid-quarter update after the bell next Thursday. The conference call is highly anticipated and could serve as the launching pad for the stock if positive. Of course a negative call would temper the prospects for a breakout. There's risk with holding positions over the conference call. Hopefully the stock will breakout ahead of the call. The play is straightforward, but readers might want to keep an eye on the SOX when gaming an Intel breakout above $33. Just look for the SOX to trade higher in conjunction with an advance past $33. Our stop is at $30. BUY CALL DEC-30 INQ-LF OI= 53833 at $3.30 SL=2.25 BUY CALL DEC-32*INQ-LZ OI= 74620 at $1.55 SL=0.75 BUY CALL JAN-30 INQ-AF OI= 88964 at $4.00 SL=3.00 BUY CALL JAN-32 INQ-AZ OI= 73673 at $2.45 SL=1.75 BUY CALL JAN-35 INQ-AG OI=185890 at $1.30 SL=0.75 Average Daily Volume = 4.71 mln MCDT - McDATA $25.20 (+2.45 last week) McDATA is a provider of high availability storage area network director switching devices that enable enterprises to connect and centrally manage large numbers of storage and networking devices. McDATA designs, develops, manufactures and sells switching devices that enable enterprise-wide high performance storage area networks (SANs). The storage and server stocks traded well late last week. IBM bounced from its support level, SUNW broke above its resistance, and EMC edged higher. The suppliers to the aforementioned manufactures traded strongly too. Stocks such as QLGC, EMLX, and MCDT powered higher. MCDT is our focus for this new bullish play, which is more of a play on the entire storage group. MCDT was one of the stronger late last week as it traced a new relative high Friday and closed in the green for the day. The stock broke above its 200-dma about two weeks ago and followed through last week. Amazingly, the stock doesn't have meaningful resistance until the $38 level. That doesn't mean MCDT will trade straight up to that level, but it's worth noting in this play and reveals that the stock could have substantial upside from current levels. Bullish traders can look for new entries on an advance from current levels early next week. Confirm strength in the others mentioned above. Those who'd prefer entering call plays on a pullback might wait for weakness down around $23. Our stop is initially in place at $22. BUY CALL DEC-22 DXZ-LX OI=1267 at $3.80 SL=2.75 BUY CALL DEC-25*DMU-LW OI= 113 at $2.20 SL=0.75 BUY CALL JAN-25 DMU-AW OI= 456 at $3.60 SL=2.50 BUY CALL JAN-30 DMU-AX OI= 645 at $1.65 SL=0.75 Average Daily Volume = 4.71 mln IMCL - Imclone Systems $72.00 (+4.34 last week) Engaged in the research and development of novel cancer treatments, IMCL focuses on growth factor inhibitors, therapeutic cancer vaccines and angiogenesis inhibitors. The company's lead product candidate, IMC-C225, is a therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain tumors depend. Phase I/II clinical trials have been promising. The lead candidate for angiogenesis inhibition, IMC-1C11 is an antibody that binds selectively and with high affinity to KDR, a principal Vascular Endothelial Growth Factor (VEGF) receptor, thus inhibiting angiogenesis. While the Biotechnology sector (BTK.X) has been one of the leaders of the NASDAQ rally off the September lows, the sector's nearly 50% rise over the past 2 months is not nearly as impressive as the rally in shares of IMCL. While the stock is 'only' up 44% from late September, IMCL didn't so much as flinch while the rest of the market tanked after the September attacks. Take a look at the charts of IMCL vs. the BTK and you can see the relative strength. So we've got a strong sector that looks like it wants to continue northward, and a stock within the sector that is outperforming. Sounds like the perfect recipe for a call play, don't you think? IMCL blasted through the $63 resistance level 2 weeks ago and then vaulted through the $67 resistance this week. Now clearly in breakout territory, IMCL is trading at levels not seen since March of 2000. Have you seen any other stocks trading that strongly lately? Clearly, this is a momentum run that we're looking to take advantage of, and as such, pullbacks to support are likely to be fleeting. Support and resistance can currently be defined by the ascending channel the stock has been trading in for the past 2 weeks, with support currently at $71.50. Target either intraday bounces from the supportive trendline or a breakout to new yearly highs above $73.50. Of course, IMCL might not remain in this aggressive channel for long, and we'd consider it a gift to get a pullback near intraday support at $70 or even $68. Place stops initially at $67. BUY CALL DEC-70*QCI-LN OI=1520 at $4.10 SL=2.50 BUY CALL DEC-75 QCI-LO OI=3537 at $1.65 SL=0.75 BUY CALL JAN-70 QCI-AN OI=1196 at $6.40 SL=4.25 BUY CALL JAN-75 QCI-AO OI=1308 at $3.70 SL=2.25 BUY CALL JAN-80 QCI-AP OI= 880 at $1.90 SL=1.00 Average Daily Volume = 2.14 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 12-02-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/8321_3.asp ************************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 ************************************************************** ****************** CURRENT CALL PLAYS ****************** PMCS - PMC-Sierra $22.79 (-1.31 last week) PMC-Sierra designs, develops, markets and supports high performance semiconductor networking solutions. The company's products are used in high speed transmission and networking systems, where are being used to restructure the global telecommunications and data communications infrastructure. PMCS popped above its very short-term resistance last Friday but couldn't follow-through on its rally attempt. The stock was most likely held back by selling pressure in the Semi (SOX) sector although the Networkers (NWX) finished fractionally higher. The stock is still in a trading range and should break out next week. It's unclear which way the stock is going to break. It could be up or down, depending on how the Nasdaq and the SOX and NWX next week. PMCS is still one of the stronger in its group. It could get a lift from the Cisco analyst meeting next week as PMCS is one of Cisco's big suppliers. The stock is sitting near its ascending trend line that has been in place since early October. Entries near the trend line, based upon the prospects of a bounce, could be controlled with a relatively tight stop. Look for weakness near $22 for a possible entry. New entries can be targeted around current levels next week if the Nasdaq and SOX and NWX are advancing. Otherwise, wait for a breakout above $24.50. BUY CALL DEC-20 SQL-LD OI=3108 at $3.90 SL=2.75 BUY CALL DEC-22*SQL-LX OI=2976 at $2.40 SL=1.25 BUY CALL DEC-25 SQL-LE OI=3303 at $1.20 SL=0.50 BUY CALL JAN-22 SQL-AX OI= 746 at $3.50 SL=2.25 BUY CALL JAN-25 SQL-AE OI=5975 at $2.60 SL=1.25 Average Daily Volume = 10.1 mln SPW - SPX Corp. $121.50 (+2.93 last week) SPX Corp is a global provider of technical products and systems, industrial products and services, service solutions and vehicle components Its products include storage area network, fire detection and building life-safety products, television and radio broadcast antennas and towers, transformers, substations and industrial mixers and valves. SPW continued to weaken last Friday. But its day loss was only fractional and most likely market-related as the S&P 500 (SPX) finished fractionally lower. SPW ever-so-slightly bounced from the $121 area, which was the same level that the stock bounced from in Thursday's session. Short-term traders, such as day traders, might consider looking for another bounce from that level early next week and playing an upside move of maybe $2 or $3. Those who hold positions for more than one or two days might consider waiting for the stock to pullback lower somewhere down around the $120 level. That's the current site of the stock's 10-dma and may offer a slightly better risk versus reward set-up, allowing for a tight stop. The stock's historical congestion lies between the $120 and $130 levels as we've highlighted in past updates. The recent weakness makes sense after the stock's big run and is by no means out of the ordinary. However, traders with open positions that were entered at much lower prices shouldn't get careless by letting gains slip away. Use a tight trailing stop to protect profits. BUY CALL DEC-110 SPW-LB OI= 872 at $13.80 SL=10.50 BUY CALL DEC-115 SPW-LC OI= 579 at $ 9.50 SL= 7.25 BUY CALL DEC-120*SPW-LD OI=1108 at $ 6.50 SL= 4.75 BUY CALL MAR-115 SPW-CC OI= 210 at $16.10 SL=13.75 BUY CALL MAR-120 SPW-CD OI= 605 at $13.10 SL=11.00 Average Daily Volume = 410 K CNXT - Conexant Systems $14.89 (+0.95 last week) Conexant provides semiconductor products and system solutions for a wide variety of communications electronics. Conexant delivers semiconductor integrated circuit products and system level solutions for a broad range of communications applications. The weakness we wrote about a few updates ago developed late last week in shares of Conexant. The company's raised guidance Thursday may have been the catalyst, in a backwards way, to start the profit taking pullback we witnessed into Friday's session. Of course the weakness in the SOX pressured CNXT, but it was due for a pullback after the breakout to new relative highs. We're actually happy with last week's weakness as it should allow longer term traders to start looking for favorable entry points into this strong chip stock. CNXT's 10-dma currently sits at $14.21 which may be one possible such entry point. The $14 level may serve the same purpose of gaining a favorable entry. A protracted pullback in the SOX could pressure CNXT below the $14 area, however, in which case a lower entry point should be considered. If the stock's pattern of higher relative lows continues, CNXT has room to trade down to the $13 level and keep the pattern intact. Yes that is a long way down from current levels, but the wait may be worth it because the risk in entering a bullish play down around $13 is easy to manage with a stop at $12.50. Whatever level you consider targeting a bullish entry in CNXT make sure you monitor the SOX before doing so. BUY CALL DEC-12 QXN-LV OI=5974 at $2.90 SL=1.75 BUY CALL DEC-15*QXN-LY OI=3827 at $1.15 SL=0.75 BUY CALL JAN-15 QXN-AY OI=3183 at $1.95 SL=1.25 BUY CALL JAN-17 QXN-AW OI= 982 at $1.05 SL=0.50 Average Daily Volume = 4.71 mln PDLI - Protein Design Labs $37.69 (+1.50 last week) Protein Design Labs is engaged in the development of humanized monoclonal antibodies for the prevention and treatment of disease. The company has licensed certain rights to its first humanized antibody product, Zenapaz, to Hoffman-La Rouche and its affiliates Roche, which markets Zenapaz for the prevention of kidney transplant rejection. PDLI's pattern of relatively higher lows continued last week with the stock's bounce and subsequent advance from the $36 area. We're hoping that the pattern will lead to a new high in PDLI next week, possibly above the $40 level. The Biotech (BTK) group traded well last Friday, which obviously bodes well for PDLI going into next week's trading. With its slight advance last Friday, PDLI moved into the middle of its very short-term trading range. The "better" entries in this stock have come on weakness. The failed rally two weeks ago on the advance past $38 helped to reinforce the notion of entering on weakness. The problem with the stock trading in the middle of its recent range is that it might not pullback to support for another week depending on how the BTK trades. Given its current position, traders might consider entering on an advance past $38 with the understanding that there's more risk involved at current levels as opposed to slightly lower prices. Then again, the potential upside from current levels may justify the added risk if PDLI goes onto to trace a new relative high. Let your risk tolerance be the guide. And watch for the BTK for confirmation. In other words, if the BTK is powering higher then it may be prudent to enter new call plays on strength. BUY CALL DEC-30 PQI-LF OI= 193 at $8.00 SL=6.75 BUY CALL DEC-35*PQI-LG OI=5344 at $4.10 SL=3.25 BUY CALL DEC-40 RPV-LH OI=1507 at $1.55 SL=0.75 BUY CALL FEB-35 PQI-BG OI=1544 at $6.60 SL=5.25 BUY CALL FEB-40 RPV-BH OI= 853 at $4.30 SL=3.00 Average Daily Volume = 2.17 mln JNPR - Juniper Networks $24.58 (-1.27 last week) As a provider of Internet infrastructure solutions, JNPR serves Internet service providers and other telecommunications service providers, helping them to meet the demands resulting from the rapid growth of the Internet. The company delivers next generation Internet backbone routers that are specifically designed for service provider networks. JNPR's flagship product is the M40 Internet backbone router, which complements the recently-introduced M20, which is a router built specifically for emerging service providers. The routers provided by the company combine the features of the JUNOS Internet Software, high performance ASIC-based packet forwarding technology and Internet-optimized architecture into a purpose-built solution for service providers. After running up to the $27.50 level early in the week, JNPR was unable to get out of the way of the bears, falling to just above $23 before buyers appeared to stop the stock's slide. The past two days have seen a pitched battle between the bulls and bears, as the stock has been stuck between $24-25. This range will break, and likely sooner than later. We'll use the direction of that break to determine the health of our play, but for now it remains active. A renewed bounce from the $24 level is likely to be our best entry, but those looking for some sort of confirmation of bullish intent can wait for a rally through $25 before taking a position. Keep in mind that our stop is still resting at $24, and a close below that level will bring the play to an inauspicious conclusion. A large part of the weakness last week was due to the pullback in the Networking sector (NWX.X), which is currently consolidating between $320-330, holding just above the 2-month ascending trendline (now at $325). If the NWX can move up from this trendline next week, the buoyant effect should lift JNPR back towards its recent highs and possibly the $29-30 resistance level. BUY CALL DEC-22 JUX-LX OI= 2141 at $3.50 SL=1.75 BUY CALL DEC-25*JUX-LE OI=17795 at $1.85 SL=1.00 BUY CALL JAN-25 JUX-AE OI= 5655 at $3.10 SL=1.50 BUY CALL JAN-30 JUX-AF OI= 8447 at $1.35 SL=0.75 Average Daily Volume = 22.2 mln MLNM - Millennium Pharmaceuticals $34.09 (+2.87 this week) Through an integrated approach called "gene to patient", MLNM is engaged in the development of breakthrough drugs and predictive medicine products for the treatment of major human illnesses. By discovering disease-related genes, the company seeks to produce validated drug targets and develop new, proprietary drugs to treat cancer, metabolic disease (including obesity) and inflammation. MLNM's LeukoSite subsidiary has developed Campath, a potential leukemia treatment that has received FDA fast-track status. The company also has significant programs in infectious diseases, cardiovascular diseases and diseases of the central nervous system. MLNM derives its revenue from research and development alliances with such companies as Bayer AG, Pharmacia and American Home Products. You've just got to love that reliable ascending channel in shares of MLNM. As the Biotech index (BTK.X) has continued working higher over the past two months, MLNM has been riding a nice tight bullish channel, providing numerous entry and profit-taking opportunities for bullish traders. This sort of pattern will eventually break down, but while it remains intact, can be a powerful trading tool. The upper trendline is currently $35, and the bulls actually made a run towards it the past two days, running the price to the $34.50 level before giving up a bit of ground heading into the closing bell. We don't want to chase MLNM higher here, but instead want to wait for it to come back near the lower trendline (currently $31.50) and just below the supportive 10-dma ($31.86). A bounce near that level should make for an attractive entry into the play, and we can protect ourselves with a tight stop at $29.75. That is just above the 200-dma ($29.84), which the 20-dma is in the process of climbing through right now. BUY CALL DEC-30 QMN-LF OI=5392 at $5.00 SL=3.00 BUY CALL DEC-35*QMR-LG OI=2312 at $1.80 SL=1.00 BUY CALL JAN-30 QMN-AF OI= 158 at $6.10 SL=4.00 BUY CALL JAN-35 QMR-AG OI= 511 at $3.20 SL=1.50 BUY CALL JAN-40 QMR-AH OI= 252 at $1.60 SL=0.75 Average Daily Volume = 3.23 mln IBM - Int'l Business Machines $115.59 (+0.24 last week) International Business Machines uses advanced information technology to provide customer solutions. The company provides value to its customers through a variety of solutions including technologies, systems, products, services, software and financing. IBM's three hardware product segments are comprised of Technology, Personal Systems and Enterprise Systems. Other major operations consist of a Global Services segment, a Software segment, a Global Financing segment and an Enterprise Investments segment. IBM has been nothing if not consistent, as it continues to bounce between the $112 support level and recent resistance near $117. This range continues to provide profits for traders that can buy at support and sell at resistance, while the buy-and-hold approach can be frustrating. The past 2 days trading is a perfect example of this action, as IBM dipped to just below $112 and then bounced sharply Thursday afternoon, before continuing upward on Friday. Ending just below $116, IBM provided a nearly $4 range for those with the nerve to play it. We'll continue to play the range, as IBM should be one of the big beneficiaries if the DOW can clear the 10,000 level. That sort of broad market move would likely vault IBM through the $117 level and give the bulls an honest shot at $120, resistance from earlier this year. Continue to target new entries near the $112 level and consider harvesting profits as IBM nears the $117-118 level, especially if the DOW starts showing signs of weakness. Keep stops in place at $112. BUY CALL DEC-115*IBM-LC OI=12832 at $3.70 SL=2.25 BUY CALL DEC-120 IBM-LD OI=77060 at $1.30 SL=0.75 BUY CALL JAN-115 IBM-AC OI=25929 at $6.00 SL=4.00 BUY CALL JAN-120 IBM-AD OI=38999 at $3.60 SL=1.75 BUY CALL JAN-125 IBM-AE OI=27078 at $1.90 SL=1.00 Average Daily Volume = 8.65 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 12-02-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/8321_4.asp ************************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 ************************************************************** ************* NEW PUT PLAYS ************* YUM - Tricon Global Restaurants $47.45 (-1.26 last week) Tricon Global Restaurants is a quick service restaurant company with more than 30,400 units in over 100 countries and territories. The Tricon organization is currently ade up of four operating companies organized around its three core concepts, KFC, Pizza Hut and Taco Bell. The bears are licking their paws over this restaurant stock. Recent price action seems to confirm the bearish bias. YUM has been on the slide since early November. The stock has followed a path of lower relative lows over the last four sessions and is poised to trade lower into next week. Rotation out of the defensive issues, such as restaurant stocks, could be at play in YUM. In addition, the company reported lackluster same store sales figures of 1 percent growth earlier in the month. Bearish traders can look for further weakness below current levels early next week. Those who'd rather wait for more downside confirmation can look for a breakdown below the $46 level on increasing volume. A bounce and subsequent rollover from the 10-dma at $48.78 would offer another entry opportunity. Our stop is in place at $49. BUY PUT DEC-50*YUM-XJ OI=107 at $3.20 SL=1.75 BUY PUT DEC-35 YUM-XI OI=394 at $0.75 SL=0.50 Average Daily Volume = 814 K VZ - Verizon $47.00 (-2.00 last week) Verizon provides communications services. The company has four reportable segments, which it operates and manages as strategic business units and organize by products and services. The Wireless (YLS) sector has produced some winners recently. But the majority of the strength in the sector has come from the equipment makers such as Qualcomm. The service providers haven't fared as well especially Verizon. The stock broke down to levels last week not seen since the spring. Its weakness has been in stark contrast to the strength in the YLS. As such, further weakness in the YLS should lead to a further decline in VZ. The stock has moderate historical support at the $46 level and again at $44. But immediately below current levels exists no support. Bearish traders can watch for the stair-step pattern of lower lows to continue by monitoring the aforementioned support levels and their hopefully forthcoming failure. Watch the YLS for weakness. If the YLS continues lower early next week, bearish traders might consider entering new put plays at current levels. A relief rally could take VZ back up to the $48.50 area where traders can look for a rollover. Our stop is initially in place at $49. BUY PUT DEC-50*VZ-XJ OI= 2872 at $3.20 SL=1.75 BUY PUT JAN-50 VZ-MJ OI=15359 at $4.00 SL=2.50 Average Daily Volume = 814 K SEBL - Siebel Systems $22.35 (-2.19 last week) Siebel Systems is a provider of eBusiness applications. The company's products enable organizations to sell to, market to, and service their customers across multiple channels, including the Web, call centers, resellers, retail, and dealer networks. SEBL's eBusiness applications are available in industry-specific versions designed for the pharmaceutical, healthcare, telecommunications, insurance, energy, apparel, automotive, and finance markets. Through SEBL's applications, companies can create a single source of customer information that sales, service, and marketing professionals can use to tailor product and service offerings to meet each of their customer's unique needs. After a 50% rally from the September lows, the Software sector (GSO.X) has run into a brick wall of resistance near $177. After banging its head into this resistance level for the past 2 weeks, it looks like the index is about to fall below the 2-month ascending trendline, so let's pick on one of the weaker stocks in the sector. SEBL ran out of steam over 2 weeks ago, near the $26 level and has been drifting lower ever since. Bullish traders tried to prop the stock up at the 20-dma (currently $23.43) on Thursday, but that level turned into resistance on Friday as selling volume surged more than 60% above the ADV. Stochastics are still pointing south and nearing oversold, it looks like a foregone conclusion that SEBL will retest the $20 level before finding any serious buying support. And it wouldn't be out of the question to see the stock decline to the $17-18 level before the bears are done playing. Target failed rallies in the $24-25 area for initiating new positions and set stops at $25.50. Alternative entries can be considered on a breakdown below $22. BUY PUT DEC-25 SGQ-XE OI=3021 at $3.50 SL=1.75 BUY PUT DEC-22*SGQ-XX OI=2648 at $1.95 SL=1.00 Average Daily Volume = 16.2 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 ************************************************************** ***************** CURRENT PUT PLAYS ***************** WWCA - Western Wireless $24.57 (-1.28 last week) Western Wireless provides wireless communications services in the United States, principally through the ownership and operation of cellular systems. The cellular operations are primarily in rural areas. WWCA broke down last Friday, setting a new low at the $24 mark. The Wireless (YLS) sector moved lower too. Continued weakness in the broad market, specifically the Nasdaq, should continue pressuring WWCA lower. In addition, bearish traders should look for continued weakness in the YLS. Momentum traders can look for a breakdown below the $24 level early next week for a potential entry point with the understanding that WWCA is still relatively oversold. A few more days of sideways trading would help to work off the oversold condition and may be more conducive to entering momentum-based breakdowns. The stock's rally up to its 10-dma last Wednesday offered a favorable entry point into strength. A bounce in the market could carry WWCA higher and offer another rollover entry opportunity near resistance at $25.50. BUY PUT DEC-30 WRQ-XF OI= 80 at $5.80 SL=4.25 BUY PUT DEC-25*WRQ-XE OI=118 at $1.55 SL=0.75 Average Daily Volume = 822 K NOC - Northrup Gruman $93.88 (-0.17 last 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. NOC edged higher last Friday, but so did the Defense (DFI) sector. For its part, the DFI tacked on 0.91 percent in Friday's session, which wasn't a big move. Interestingly, NOC continued to diverged from its sector. The stock only tacked on 0.57 percent. The fact that NOC didn't advance as much as its sector on a percentage basis was again encouraging to observe, but it didn't hide the fact that the stock finished higher Friday. If the DFI continues working higher then NOC will probably be dragged along for the advance. Keep that risk in mind if you have open put positions on NOC. The stock is again approaching overhead resistance and could rollover anywhere between current levels and $95. Weakness in the DFI should spur a rollover in NOC. BUY PUT DEC-95*NOC-XS OI=1017 at $3.40 SL=2.50 BUY PUT DEC-90 NOC-XR OI=1674 at $1.35 SL=0.75 Average Daily Volume = 1.19 mln KKD - Krispy Kreme $37.25 (-2.70 last week) Kripy Kreme is a branded specialty retailer of premium quality doughnuts. Krispy Kreme is a vertically integrated company structured to support and profit from the high volume production and sale of high quality doughnut products. The oversold nature of KKD led to its relief rally last Friday. Hopefully traders with open positions were able to book gains before the majority of the stock's advance. The rally wasn't entirely unexpected. KKD had closed lower in several consecutive sessions going into Friday's trading and a little pop higher is part of the process. In fact, higher prices would provide a better entry into new put plays. KKD advanced past the $37 level, which we thought might provide resistance, which it did not during Friday's session. Bearish traders might watch for selling to increase near the $38 level, but up around the $39 level might provide a more solid entry point into new put plays. The $39 area is the current site of KKD's 10-dma. BUY PUT DEC-40*KKD-XH OI=1511 at $3.90 SL=2.75 BUY PUT DEC-35 KKD-XG OI=2989 at $1.10 SL=0.50 Average Daily Volume = 814 K LH - Laboratory Corp. of America $76.90 (-4.90 last week) Laboratory Corporation of America Holdings (LabCorp) is the #2 clinical laboratory service in the world, behind Quest Diagnostics. LH performs 2000 types of tests for more than 100,000 clients, including health care providers, pharmaceutical firms, physicians, government agencies and employers. With 25 major laboratories and some 1200 service sites nationwide, the company emphasizes specialty and niche testing such as allergy tests, HIV tests, blood analyses, and substance abuse screenings. Falling sharply from the 20-dma last week, shares of LH provided a quick in and out profit this week as the stock fell as low as $73 on Wednesday. That was enough to prompt buyers to nibble at the stock and since then, shares of LH have recovered back near $77, right where they were when we initiated coverage on Tuesday. So the big question is whether the bulls or the bears are going to win this tug of war. Given the bearish trend over the past month, we'd have to say the bears have the upper hand, even though daily Stochastics are starting to emerge from oversold territory. Resistance looks firm near $79, and a failed rally near that level would make for a good entry into the play, as it looks like support at the 200-dma ($75.85) is weakening. The descending trendline is currently resting just below $80, giving us the ability to manage our risk with a tight stop at $80. Look for a breakdown under the 200-dma to trigger another test of the long-term ascending trendline, currently at $72. Should buyers support the stock near that level, it will make for a good opportunity to lock in profits and wait for the next entry point. BUY PUT DEC-80 LH-XP OI= 542 at $5.40 SL=3.25 BUY PUT DEC-75*LH-XO OI= 271 at $2.85 SL=1.50 Average Daily Volume = 762 K VRSN - VeriSign, Inc. $37.36 (-2.66 last week) VeriSign is the leading provider of Internet trust services and digital certificate solutions needed by Web sites, enterprises and individuals in order to conduct secure electronic commerce and communications over IP networks. VRSN has used its secure online infrastructure to issue over 100,000 of its Website digital certificates and over 3.5 million of its digital certificates for individuals. The company also offers the VeriSign Onsite service, which allows an organization to leverage the company's trusted service infrastructure to develop and deploy customized digital certificate services for use by an organization's employees, customers and business partners. To date, over 300 enterprises have subscribed to the OnSite service and VRSN has strategic relationships with industry leaders including Cisco, Microsoft ,RSA, Security Dynamics, and VISA. Shares of VRSN have been underperforming relative to the NASDAQ for the past couple weeks, and unless the bulls can push the tech index higher, the stock looks like it is going to take out support just above $36 in the near future. The stock has been laboring under a descending trendline since hitting $68 in May. That trendline turned back the bulls near $47 a couple weeks ago, and the bears are salivating at the prospects of pushing the stock under the $36 level. In fact they managed an intraday violation on Friday, letting the bulls know their intent. Volume has been well above the ADV over the past 2 days, and should pick up again when support is breached. The best entries will continue to come on the failed intraday rallies, with resistance likely to turn back the buyers at $38, followed by $39 and then $40. We currently have our stop set at $41, as any rally through that level would indicate we're on the wrong side of the trade. Firmer support exists in the $32 area and we would consider taking profits near that level in anticipation of another oversold bounce. Note that the options volume in the December strikes has been extraordinarily heavy over the past few days (both puts and calls), indicating market participants are expecting a big move one way or the other in the near future. BUY PUT DEC-40*QVR-XH OI= 3946 at $4.70 SL=2.75 BUY PUT DEC-35 QVR-XG OI=11090 at $2.10 SL=1.00 Average Daily Volume = 11.8 mln ***** LEAPS ***** The Waiting Is The Hardest Part By Mark Phillips Contact Support The past month has been excruciatingly tedious for those (like me) that "know" the markets have run too far, too fast. We want to jump into some of these stocks that have shown such great strength in the past 2 months, but we're afraid to jump in without a decent pullback for fear of buying near the high and then having to take a loss when the market proves that we were indeed the "greater fool". So the Tom Petty lyrics above are an apt description of what prudent long-term traders are experiencing right now. Either you plunged in near the September lows and have held on through some wild volatility or you (like me) have waited in vain for that rational pullback to support before exposing your capital to long-term risk. I've been looking in vain for a chart that doesn't look overbought for the past month, but the only ones that pop up are those that you wouldn't want to own anyways. Distressed companies in distressed industries are about the only stocks that don't look overextended. Enron certainly comes to mind, but the airline stocks are another group that certainly isn't overextended...or is it? It is hard to gauge what would be a fair value for a company that is operating under the unfavorable conditions that currently exist in the airline industry, and don't even get me started on the mountain of debt this group carries, and the recent pattern of worsening losses sure doesn't make me want to play the long side there. Speaking of Enron, did you notice the flurry of downgrades that flew the past 2 weeks as it became clear that the company was on the endangered species list? Thursday RBC Capital Markets downgraded the stock from Buy to Market Underperform, which came on the heels of UBS Warburg's reduction from Strong Buy to Hold. How about good old Goldman Sachs? Downgrade from Recommended List to Market Perform on November 21st, the same day that CIBC World Markets dropped their rating from Buy to Hold. Long-time readers know I like to pick on Goldman, mainly because I like pointing out any silly thing that Abbey Cohen has to say. Well, I'll leave her along tonight, and I won't even single out her firm. What I want to point out is that in the past 2 weeks there have not been any new SELL ratings! CIBC and UBS think a Hold is the appropriate rating?? And Goldman actually thinks that the stock will perform on par with the broader market? Who are they kidding? I mean, come on. Even I could see the handwriting on the wall, removing the stock from our Watch List at the end of October when the stock fell below the $20 level? Am I really that much smarter than all these so-called professionals? I really doubt it, but I do think I've got a much better grasp on the concept of ethics. It is my job to give you the best advice I can and tell you what I honestly think. That's the analyst's job too, but I think that function is routinely subordinated to the firms' other interests -- namely keeping those investment banking dollars rolling in, even if it means fleecing our retail clients. I'll tell you a firm that I like. Prudential Securities. They issued a SELL rating on ENE on October 24th, the same day I would have if it weren't for our once-per-week publishing schedule. Why was Prudential so prompt with sounding the alarm for their clients? Could it be that it is due to the fact the firm has very little investment banking business? I'll let you be the judge. JP Morgan still has a LT Buy rating, Merrill Lynch is Neutral (well that's a big help!) and Banc of America Securities downgraded to Market Perform on October 25th and hasn't made a peep since then. What's the point of my rant-of-the-week? Simply that we need to be responsible for all of our investment decisions. Education is paramount, because once we learn how to evaluate the health of a company and the attractiveness of its stock, we don't need to listen to anyone else's advice. We can then successfully plot our own financial course, where the seas are calmer, and we know all the hidden agendas of our trusted financial professionals (or at least we should). Which brings me full circle back to our discussion of the fact that there are no new plays. Despite all the talk of the "new bull market", you can't fool me. This "bull" is running out of steam and I can see it in virtually every chart that comes across my trading screen. Oh sure, the markets might stumble their way a little bit higher, but this is not the time to join the party. All the major (and most of the minor) indices are getting very close to major resistance, and hope for an improving economy or another 50-basis point rate cut are not going to be enough to clear those levels. It's time to let some air out of this bubble before it bursts again, and I will gladly wait for more rational thinking to prevail before venturing into new long-term bullish plays. But what about LEAP Puts, you ask? Well, let's just say that the jury is still out on the advisability of LEAP Puts at this time. I thought I had a lead-pipe lock with our EBAY play, and judging by the Drop writeup you'll find down below, you can see how wrong I was. Our other LEAP Put could be in trouble too, as AIG is definitely seeing some support from the company's share-buyback plan and is also being helped by the broad Insurance index (IUX.X), which is threatening to break out over the $740 level. We've still got our stop in place, and I'm watching for confirmation of either being right or wrong, because I've got my eye on some other stocks that I think MIGHT make good long-term Put plays. Two of the front-runners right now are Home Depot (NYSE:HD) and Intel (NASDAQ:INTC), both of which look ready for a fall. Both stocks are still on bullish trends, but both of them look wholly unsustainable, in my book. I just might have to take advantage of one of them in the weeks ahead. Send me an email if you'd like to see a breakdown of my thinking and I'll dissect one or both of the stocks in my Wednesday column this week. One positive development this week was the fact that Merck (NYSE:MRK) finally poked its nose above the upper bound of its confining wedge on Friday. That was enough for me to remove the play from probation and it is back on the Watch List this weekend with an entry target at $64, right at the lower edge of the wedge. The Calpine (NYSE:CPN) play is just barely hanging in there, as it is feeling the pain of guilt-by-association to the ENE debacle. We've got our stop sitting at $21, and it will either hold or we'll get taken out. Only time will tell. Hang in there, baby! One thing to take note of is the fact that some of our Watch List plays are starting to come back to us, most notably of which is General Electric (NYSE:GE). It plunged back under the $40 level last week and judging from the position of the daily Stochastics, we could get a decent entry near our $36 target. Let's just hope the weekly Stochastics doesn't roll over, as that would change the equation entirely. Even Broadcom (NASDAQ:BRCM) is having a hard time maintaining altitude and it looks like I may have been right to avoid chasing it higher. The only remaining question is whether I've been too stingy on the listed entry point. I know it sounds like a broken record, but only time will tell. The VIX is hovering near 26-27, which says to me that it isn't a screaming market-top signal, as there is still enough fear in the markets to give the bulls a sufficient wall of worry to climb. I would expect them to keep clawing their way higher until each of the major indices creep up to their 200-dmas and/or 62% retracements that we listed 2 weeks ago. By that time, I'll be looking for the VIX to have slipped down towards the 22-23 area and that will be a much better time to consider fresh bearish positions. Of course, I could be entirely wrong and we might start selling off on Monday morning, bringing those entry points to us sooner than we might have hoped. Hey, I can dream, can't I? Either way, we must trade what the market gives us, not what we believe. And for right now, I believe I'll wait for a better opportunity. The waiting really is the hardest part... Mark Phillips Contact Support LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: LLY 10/17/01 '03 $ 75 VIL-AO $10.80 $14.80 37.04% $ 79.50 '04 $ 80 LZE-AP $12.20 $16.60 36.07% $ 79.50 CPN 10/25/01 '03 $ 25 OLB-AE $ 6.00 $ 4.70 -21.67% $ 21 '04 $ 30 LZC-AF $ 6.50 $ 5.30 -18.46% $ 21 Puts: AIG 11/07/01 '03 $ 80 VAF-MP $ 8.40 $ 8.20 - 2.38% $86.50 '04 $ 80 LAJ-MP $10.60 $10.60 0.00% $86.50 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: GE 08/12/01 $36 JAN-2003 $ 40 VGE-AH CC JAN-2003 $ 30 VGE-AF JAN-2004 $ 40 LGR-AH CC JAN-2004 $ 30 LGR-AF TYC 09/16/01 $50 JAN-2003 $ 55 VYL-AK CC JAN-2003 $ 50 VYL-AJ JAN-2004 $ 60 LPA-AL CC JAN-2004 $ 50 LPA-AJ NOK 09/23/01 $20-21 JAN-2003 $ 25 VOK-AE CC JAN-2003 $ 20 VOK-AD JAN-2004 $ 25 LOK-AE CC JAN-2004 $ 20 LOK-AD BRCM 10/28/01 $31-32 JAN-2003 $ 35 OGJ-AG CC JAN-2003 $ 30 OGJ-AF JAN-2004 $ 35 LGJ-AG CC JAN-2004 $ 30 LGJ-AF EMC 11/04/01 $12-13 JAN-2003 $12.5 VUE-AV CC JAN-2003 $ 10 VUE-AB JAN-2004 $12.5 LUE-AV CC JAN-2004 $ 10 LUE-AB MRK 11/11/01 $64 JAN-2003 $ 65 VMK-AM CC JAN-2003 $ 60 VMK-AL JAN-2004 $ 70 LMK-AN CC JAN-2004 $ 60 LMK-AL PUTS: None New Portfolio Plays None New Watchlist Plays None Drops EBAY $65.16 Have you ever had one of those plays that just makes you mad? Well, our EBAY play made me mad! I did all the research, had the technical picture nailed down and had what I thought was a great entry. Ok, I was a bit early according to the daily chart, but other than that, had all the ducks lined up. So what happened? Game warden showed up and fined me for hunting ducks out of season! But seriously, that isn't far from the truth. By all rights the stock SHOULD be going down (at least in my opinion), but the market obviously disagrees with me. What nerve! But that's what stop losses are for. After you've done all your homework and intelligently laid out your plan for the trade, you put that stop in place in case you are dead wrong. In the case of EBAY, I was wrong, as demonstrated by this week's strong bullish move that shattered our $64 stop right out of the gate Monday morning. That completed the breakout over the descending trendline and set a new post-attack high. Puts are not the instrument to apply under those conditions (they are out of season) and that leaves us with no choice but to take the loss (accept the fine) and move on. Maybe I was really wrong about EBAY and maybe I was just early. Only time will tell. And believe me, I'll be watching. ************************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 12-02-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/8321_5.asp ************************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 ************************************************************** ************* COVERED CALLS ************* Option Pricing Theory: Premium and Volatility By Mark Wnetrzak Each week we receive a number of emails concerning the basics of pricing theory and how we determine which options are favorable. Most new traders that enter the derivatives market are quickly overwhelmed by the incredible number of choices to be made when selecting an issue for a specific strategy. Even when you limit the candidates to short-term positions (90-days or less), there are still a large assortment of contracts from which to choose. The choices are so numerous that many beginning traders give up long before they learn how to select the correct position (with the highest probability of profit) for the underlying instrument. The successful option trader must be able to identify potentially profitable strategies given the current market conditions. Before he can accurately assess a position's value, a trader must fully understand the components of theoretical option pricing. Two of the most common statistical measurements; Implied and historical volatility, can help a trader determine if an option is cheap or expensive. The volatility component of option valuation is a measure of the range the underlying security is expected to change over a given period of time. The measurement of volatility is the standard deviation of the daily price changes in the security. In simpler terms, the more volatile the stock, the greater the price of the option. Historical volatility estimates volatility based on past prices. Because it can be so erratic from one day to the next, moving averages are generally used in pricing models to determine the fair value of an option. Once again, the larger the statistical volatility, the more an option is worth. Implied volatility starts with the current option price and works backward to calculate the theoretical value of volatility that is equal to the market price minus intrinsic value. It is a computed value that has more to do with the option price rather than the underlying asset. The simple definition: Implied volatility is the volatility value that makes an option's fair value equal to its actual market price. Most traders refer to implied volatility as "premium" even though the word premium refers to the option price relative to the price of the underlying security. What the trader is really referring to is the implied volatility. The moral of the story: when the implied volatility is low, options are effectively under-priced. When the implied volatility is high, options are effectively overpriced. In our next discussion on pricing theory, we will discuss how to select the correct time frame and option strike when assessing covered-call candidates. Trade Wisely! 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 PCYC 25.82 25.52 DEC 22.50 5.20 *$ 1.88 9.9% TELM 6.20 6.97 DEC 5.00 1.80 *$ 0.60 9.9% CANI 5.97 6.65 DEC 5.00 1.35 *$ 0.38 8.9% NTPA 5.68 5.45 DEC 5.00 1.10 *$ 0.42 8.0% MDCO 11.43 10.88 DEC 10.00 2.10 *$ 0.67 7.8% SURE 12.20 12.38 DEC 10.00 3.10 *$ 0.90 7.2% QSFT 22.64 24.31 DEC 20.00 4.10 *$ 1.46 6.8% VTSS 11.61 12.19 DEC 10.00 2.45 *$ 0.84 6.6% EXFO 14.18 12.60 DEC 12.50 2.55 *$ 0.87 6.5% PXLW 14.95 17.05 DEC 12.50 3.30 *$ 0.85 6.3% GMST 22.70 27.73 DEC 20.00 4.30 *$ 1.60 6.3% RMBS 8.88 8.55 DEC 7.50 1.95 *$ 0.57 6.0% GNTA 16.75 16.01 DEC 15.00 2.85 *$ 1.10 5.7% AMZN 8.95 11.32 DEC 7.50 1.90 *$ 0.45 5.5% JDSU 11.60 10.08 DEC 10.00 2.20 *$ 0.60 5.5% MCDT 18.80 25.20 DEC 15.00 4.80 *$ 1.00 5.2% INVN 19.42 25.15 DEC 15.00 5.10 *$ 0.68 5.2% CRXA 14.74 15.01 DEC 12.50 2.90 *$ 0.66 4.8% ARQL 11.10 12.83 DEC 10.00 1.50 *$ 0.40 4.5% PROX 11.50 11.00 DEC 10.00 1.90 *$ 0.40 4.5% ELON 17.30 14.20 DEC 15.00 3.00 $ -0.10 0.0% *$ = Stock price is above the sold striking price. Comments: Have we finally entered into a consolidation phase for the major averages? Will the Bulls be able to push stocks higher or will profit-taking become in vogue? Next week should offer some clues. InVision Technologies (NASDAQ:INVN) continues to scream higher and may be causing some call "selling" regret. Such is the life of a time merchant. A few issues in the covered call portfolio are acting a bit worrisome. Echelon (NASDAQ:ELON) is an early exit candidate as the company received a "sell" recommendation from Prudential and the share price has dropped to support near $14. We will show the position closed in the name of capital preservation. Other issues on the watch list are Rambus (NASDAQ: RMBS) and JDS Uniphase (NASDAQ:JDSU), as both have moved lower and are testing support. 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 FMKT 19.75 DEC 17.50 FAQ LW 2.85 809 16.90 21 5.1% NPRO 11.32 DEC 10.00 NYQ LB 1.85 428 9.47 21 8.1% SNDK 14.19 DEC 12.50 SWQ LV 2.20 1082 11.99 21 6.2% STEL 23.54 DEC 20.00 URU LD 4.20 26 19.34 21 4.9% SURE 12.38 DEC 10.00 UGN LB 2.80 922 9.58 21 6.4% TUNE 21.20 DEC 20.00 TUF LD 2.25 130 18.95 21 8.0% VRTY 15.09 DEC 12.50 YQV LV 3.00 970 12.09 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 NPRO 11.32 DEC 10.00 NYQ LB 1.85 428 9.47 21 8.1% TUNE 21.20 DEC 20.00 TUF LD 2.25 130 18.95 21 8.0% SURE 12.38 DEC 10.00 UGN LB 2.80 922 9.58 21 6.4% SNDK 14.19 DEC 12.50 SWQ LV 2.20 1082 11.99 21 6.2% FMKT 19.75 DEC 17.50 FAQ LW 2.85 809 16.90 21 5.1% STEL 23.54 DEC 20.00 URU LD 4.20 26 19.34 21 4.9% VRTY 15.09 DEC 12.50 YQV LV 3.00 970 12.09 21 4.9% 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). ***** FMKT - FreeMarkets $19.75 *** Breaking Out *** FreeMarkets (NASDAQ:FMKT) creates business-to-business online markets and provides electronic commerce technology and services for the procurement of industrial parts, raw materials, commodities and services. FreeMarkets has created over 9,200 online markets and has enabled its customers to source products from more than 165 supply verticals. In addition to its FullSource offering, which provides customers with the full range of FreeMarkets' technology, services and information, the company offers its DirectSource and QuickSource hosted services, which enable customers to run their own online markets. FreeMarkets also operates the FreeMarkets Asset Exchange for buyers and sellers of surplus assets and inventory. On Wednesday, FreeMarkets raised its revenue and profit outlook for the 4th-quarter after several large customers renewed long-term contracts. The company said it expects operational profits of 5 to 9 cents a share compared to Wall Street estimates of 1 cent to 2 cents a share. We simply favor the strong rally supported by heavy volume which suggest further upside potential. DEC 17.50 FAQ LW LB=2.85 OI=809 CB=16.90 DE=21 TY=5.1% ***** NPRO - NaPro BioTherapeutics $11.32 *** Good News *** NaPro BioTherapeutics (NASDAQ:NPRO) is a biopharmaceutical company focused on the development, production and licensing of complex natural-product pharmaceuticals. NaPro is also engaged in the development and licensing of novel genetic technologies for applications in human therapeutics and diagnostics. NaPro has partnerships with Abbott Labs, F.H. Faulding & Co., Tzamal Pharma and JCR Pharmaceuticals Co. NaPro's lead product is the cancer drug paclitaxel. NaPro believes its resources, technology and international partner- ships position it for significant participation in the growing worldwide paclitaxel market. NaPro's stock surged this week after it announced an agreement with Bristol-Myers Squibb (NYSE:BMY), to market a paclitaxel injection, pursuant to an ANDA approval (expected later this month). This agreement also settles the paclitaxel-related litigation currently pending between the two companies. A conservative entry point from which to speculate on the company's future. DEC 10.00 NYQ LB LB=1.85 OI=428 CB=9.47 DE=21 TY=8.1% ***** SNDK - SanDisk $14.19 *** Bottom Fishing *** SanDisk (NASDAQ:SNDK) designs, manufactures, and markets flash memory storage products that are used in a wide variety of electronic systems. The company has designed its flash memory storage solutions to address the storage requirements of emerging applications in the consumer electronics and industrial/communi- cations markets. SNDK's products include removable CompactFlash cards, MultiMediaCards, FlashDisk cards and Secure Digital Cards and embedded FlashDrives and Flash ChipSets. Toshiba Corporation and SanDisk have recently jointly introduced the world's first commercial one gigabit NAND flash memory chip, a new generation of flash memory that effectively doubles the amount of storage in flash memory cards. The stock has been forging a Stage I base for the last couple months after the 'September' drop, and is forming a support area around $12. This position offers a reasonable entry point from which to speculate on a storage sector rebound. DEC 12.50 SWQ LV LB=2.20 OI=1082 CB=11.99 DE=21 TY=6.2% ***** STEL - Stellent $23.54 *** Bracing For A Rally *** Stellent (NASDAQ:STEL), formerly known as IntraNet Solutions, is a leading provider of business content management solutions, providing browser-based Web and wireless access to content-centric business Websites and content-supported e-business applications. The company's software products provide for business and Web content from a wide variety of enterprise sources, including desktop applications, business applications, and templates, to be automatically converted to output formats. Stellent has more than 1,500 customers, including Merrill Lynch, Agilent Technologies, Target Corp., Cox Communications, Yahoo!, Hewlett-Packard and Ericsson Telecom AB. Stellent was upgraded to a 'strong buy' after reporting earnings in October, showing 2nd-quarter revenues up 48% compared to the prior year. Several new products and alliances, including Microsoft elevating the company to the Gold level of its Windows Embedded Partner Program (WEP), should bode well for the future of Stellent. The stock continues to remain above its 50-dma and a move above its 150-dma should improve the long-term outlook. We simply favor the support area around $20. DEC 20.00 URU LD LB=4.20 OI=26 CB=19.34 DE=21 TY=4.9% ***** SURE - - SureBeam $12.38 *** Titan Contract Supplier *** SureBeam (NASDAQ:SURE) is a provider of electronic irradiation systems and services for the food industry. Their electronic food irradiation process significantly improves food safety, prolongs shelf life and provides disinfestation, without compromising food taste, texture or nutritional value. The company offers services for the electronic irradiation of food through in-line turnkey systems and centrally located service centers allowing growers, packers and processors to choose the most convenient and effective way to utilize its SureBeam system for electronically irradiating their products. Titan Corporation (NYSE:TTN) received a contract from the U.S.P.S. to irradiate the mail and they said they will subcontract the order for the systems, which use electron beam and X-ray technology to destroy harmful bacteria, to its majority owned subsidiary SureBeam. The Defense Department recently added to the normal military food procurement authorization lists ground beef and poultry products that will be processed using electron beam food safety technology. Attractive speculation on a company that can "cure" the current fears of unsafe mail and food products. DEC 10.00 UGN LB LB=2.80 OI=922 CB=9.58 DE=21 TY=6.4% ***** TUNE - Microtune $21.20 *** On The Move *** Microtune (NASDAQ:TUNE) is a radio frequency silicon and systems company, providing radio frequency tuners, upstream amplifiers and transceivers to the broadband communications markets. Using proprietary technologies and design methodologies, the company has designed and developed radio frequency integrated circuits and radio frequency systems (modules) for a variety of broadband communications access and other consumer electronic devices, including cable modems, multimedia personal computers with broad- band reception capabilities (PC/TVs), set-top boxes, digital televisions, and other consumer electronic devices. Microtune and STMicroelectronics (NYSE:STM) recently announced plans to jointly develop a cable set-top box reference designs that feature their complementary digital and radio frequency silicon technologies. STM's strong market position, coupled with Tune's industry-leading IC technologies and systems expertise, should position the company to aggressively meet the requirements of their customers with premier, cost-efficient solutions. The move above the October high (which is now support) on heavy volume suggests a successful test of the June-July resistance area. Reasonable speculation on a bullish stock. DEC 20.00 TUF LD LB=2.25 OI=130 CB=18.95 DE=21 TY=8.0% ***** VRTY - Verity $15.09 *** More Bottom Fishing *** Verity (NASDAQ:VRTY) is engaged in powering business portals. These include corporate portals used for sharing information within an enterprise, e-commerce portals for online selling, and market exchange portals for Business-to-Business activities. Business portals provide personalized information to employees, partners, customers and suppliers. The company's product suite enables organizations to turn corporate intranets and extranets into a powerful knowledge base, making business information accessible and reusable across the enterprise. Verity recently announced that Roche Diagnostics has licensed Verity's advanced portal infrastructure software for the Roche Diagnostics' global intranet. We simply favor the bullish move off the September low that has moved the share price above several layers of support: the 30-dma ($13.50), the 50-dma ($13), and the October high ($12). Verity appears on the mend and this position offers a discounted cost basis in the issue. DEC 12.50 YQV LV LB=3.00 OI=970 CB=12.09 DE=21 TY=4.9% ***** ***************** 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 RSAS 15.75 DEC 15.00 QSD LC 1.75 1510 14.00 21 10.3% LVLT 5.58 DEC 5.00 HGY LA 0.90 9335 4.68 21 9.9% ARQL 12.83 DEC 12.50 ARQ LV 1.05 241 11.78 21 8.9% CCRD 17.99 DEC 17.50 UCD LW 1.50 73 16.49 21 8.9% QVDX 10.34 DEC 10.00 XUC LB 0.85 63 9.49 21 7.8% IVX 20.60 DEC 20.00 IVX LD 1.55 2731 19.05 21 7.2% INVN 25.15 DEC 20.00 FQQ LD 6.00 3333 19.15 21 6.4% EMLX 32.61 DEC 27.50 UMQ LY 6.10 57 26.51 21 5.4% UTSI 23.94 DEC 22.50 UON LX 2.25 426 21.69 21 5.4% MCDT 25.20 DEC 22.50 DXZ LX 3.50 1267 21.70 21 5.3% ***************** NAKED PUT SECTION ***************** Investing Basics: An Explanation Of Structured Products By Ray Cummins Most people believe that investing in the stock market is one of the best ways to increase personal wealth over the long run. Unfortunately, the potential downside risk of owning stock keeps many people from investing in this manner, even where long-term growth, such as planning for retirement is the objective. While there are few investments that offer the potential for favorable returns without the possibility of loss, a number of new products such as "protected growth" trusts have been developed to attract risk averse customers. These financial instruments allow you to profit from the growth of the stock market while insuring that your principal investment is preserved in the event of a severe, prolonged downtrend in the economy. There are three main categories of these guaranteed investments: Index Annuities offered by major insurance companies; Index CDs offered by institutions (such as Banker's Trust); and Protected Growth trusts offered by the larger brokerages. Merrill Lynch is a pioneer in this category and they offer a number of unique products that combine participation in the appreciation potential of stocks and other opportunities, with protection of principal. Protected Growth assets are financial instruments with features of both stocks and bonds. The benefits of these complex issues also include diversification, reduced minimum investment and liquidity. The most common products provide for a market-based return linked to a range of potential growth opportunities such as major indexes, individual stocks or other popular financial indicators. In most cases, the issues are tied to index funds that are (initially) offered at $10 a share and usually mature in seven years or less. If you retain the issue to maturity, you profit from the growth of the index. In the event of substantial price declines, these instruments guarantee repayment of their principal amount at maturity. The purpose of Protected Growth investing is simple, to allow the pursuit of growth with less risk. The low initial cost of these assets provide investors an affordable means of participating in the long-term performance of a number of financial instruments and industry groups. The diversification possibilities available through these investments is often greater, and at a lower price than that which could be achieved by purchasing individual issues. The majority of these instruments are listed on the major stock exchanges. This feature allows you to trade the assets publicly, as well as monitor their progress through daily price quotations on the Internet or in the financial pages of major newspapers. There are many advantages to investing with structured products such as Protected Growth trusts, but they are complicated assets requiring careful examination and specific strategies to maximize potential profits. One of the most critical factors associated with many of the newer instruments is the "annual adjustment factor." Typically, a structured product allows an investor to capture the percent increase of an index over the offering price, any time up to the maturity date of the issue. If there is no increase, the principal investment is returned. However, in the case of recent products, an annual adjustment factor is used to reduce the index value before the final cash settlement amount is determined. The adjustment factor will vary but even when the amount is only 2% or 3%, the reduction in overall return can be substantial. When aversion to risk stands in the way of achieving long-term personal goals, alternate solutions must be explored to remedy the situation. If your financial outlook dictates the need for capital growth, but you are concerned about the volatility or potential downside associated with stocks, you might consider including structured products as part of your portfolio. This type of investing allows you to participate in numerous growth opportunities that may otherwise be too extreme for your risk tolerance. Regardless of your personal financial outlook, a sound investing strategy includes diversification and low-risk capital appreciation, and these relatively unknown issues can be an excellent and profitable way to achieve that objective. 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 LVLT 6.82 5.58 DEC 5.00 0.30 *$ 0.30 15.7% WGRD 11.92 11.11 DEC 10.00 0.60 *$ 0.60 15.1% FNSR 12.96 10.82 DEC 10.00 0.35 *$ 0.35 12.9% NTAP 16.51 15.43 DEC 12.50 0.65 *$ 0.65 11.9% CRXA 15.32 15.01 DEC 12.50 0.40 *$ 0.40 11.7% IMNY 7.24 8.10 DEC 5.00 0.25 *$ 0.25 10.7% MANU 10.66 11.80 DEC 7.50 0.35 *$ 0.35 10.2% MCDT 22.75 25.20 DEC 17.50 0.45 *$ 0.45 9.8% SLAB 28.26 25.76 DEC 22.50 0.85 *$ 0.85 9.5% MCDT 21.10 25.20 DEC 15.00 0.50 *$ 0.50 9.2% TERN 13.19 12.06 DEC 10.00 0.30 *$ 0.30 8.9% SRNA 22.90 23.46 DEC 17.50 0.50 *$ 0.50 8.6% SRNA 22.25 23.46 DEC 17.50 0.35 *$ 0.35 7.9% PMCS 23.27 22.79 DEC 15.00 0.45 *$ 0.45 7.7% CNXT 13.37 14.89 DEC 10.00 0.30 *$ 0.30 7.3% AFFX 37.13 36.22 DEC 30.00 0.55 *$ 0.55 7.2% CREE 25.25 24.86 DEC 20.00 0.45 *$ 0.45 7.1% IMMU 23.49 23.80 DEC 20.00 0.40 *$ 0.40 6.9% MACR 22.08 22.20 DEC 17.50 0.45 *$ 0.45 6.7% MCSI 24.00 20.75 DEC 20.00 0.50 *$ 0.50 5.9% SMTC 37.55 38.52 DEC 27.50 0.35 *$ 0.35 4.8% *$ = Stock price is above the sold striking price. Comments: Mcsi Inc. (NASDAQ:MCSI), Level 3 Communications (NASDAQ:LVLT), Finisar (NASDAQ:FNSR), and Silicon Laboratories (NASDAQ:SLAB) are all candidates for early exit or adjustment. Traders must evaluate each individual play, based on the current technical outlook for the underlying issue and make a decision about the future outcome of the position. 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 CEGE 22.86 DEC 20.00 UCG XD 0.35 167 19.65 21 7.6% CRXA 15.01 DEC 12.50 CVQ XV 0.35 66 12.15 21 13.2% IGEN 35.95 DEC 30.00 GQ XF 0.90 974 29.10 21 14.0% INVN 25.15 DEC 17.50 FQQ XW 0.55 1139 16.95 21 14.3% MCDT 25.20 DEC 20.00 DXZ XD 0.35 155 19.65 21 9.4% PLMD 23.00 DEC 20.00 PM XD 0.65 482 19.35 21 13.7% RSAS 15.75 DEC 12.50 QSD XV 0.25 472 12.25 21 10.7% 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 INVN 25.15 DEC 17.50 FQQ XW 0.55 1139 16.95 21 14.3% IGEN 35.95 DEC 30.00 GQ XF 0.90 974 29.10 21 14.0% PLMD 23.00 DEC 20.00 PM XD 0.65 482 19.35 21 13.7% CRXA 15.01 DEC 12.50 CVQ XV 0.35 66 12.15 21 13.2% RSAS 15.75 DEC 12.50 QSD XV 0.25 472 12.25 21 10.7% MCDT 25.20 DEC 20.00 DXZ XD 0.35 155 19.65 21 9.4% CEGE 22.86 DEC 20.00 UCG XD 0.35 167 19.65 21 7.6% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** CEGE - Cell Genesys $22.86 *** Big News! *** Cell Genesys (NASDAQ:CEGE), a gene therapy company, is focused on the development and commercialization of cancer vaccines and gene therapies to treat major, life-threatening diseases. The company is conducting multicenter clinical trials for its GVAX cancer vaccines in prostate and lung cancer, pancreatic cancer and myeloma, and expects to initiate additional vaccine trials in many of these cancers, as well as leukemia, during the next year. In addition, Cell Genesys has a number of opportunities at the preclinical stage, including in vivo gene therapies for cancer, hemophilia and cardiovascular disease. Shares of CEGE rallied recently after the company announced it is initiating a multicenter Phase II clinical trial of GVAX cancer vaccine for acute myelogenous leukemia (AML), the most common form of adult leukemia. The trial is strongly supported by preclinical data demonstrating that GVAX cancer vaccine in combination with bone marrow transplantation helped prevent relapse of leukemia and increased the overall survival rate. Investors appear to be impressed by the outlook for this unique drug and traders can speculate on the future movement of the company’s share value with this position. DEC 20.00 UCG XD LB=0.35 OI=167 CB=19.65 DE=21 TY=7.6% ***** CRXA - Corixa $15.01 *** Own This One! *** Corixa (NASDAQ:CRXA) is a developer of immunotherapies with a commitment to treating and preventing autoimmune diseases, cancer and infectious diseases by understanding and directing the immune system. The company has a broad range of technology platforms, which enable both integrated vaccine product design and the use of its separate proprietary technologies (antigens, monoclonal antibodies, adjuvants, antigen delivery technology and tumor activated peptide, or TAP, pro-drug technology) on a stand-alone, POWERED BY CORIXA basis. Corixa is awaiting word from the FDA regarding its application for Bexxar, an experi- mental lymphoma drug, but has not been scheduled for the FDA's December agenda. They are also working on a new technology involving radio-isotopes and last week, CRXA was added to the NASDAQ Biotechnology Index. With the current bullish outlook, this position offers great speculation on a unique small-cap issue for investors who like the biotechnology group. DEC 12.50 CVQ XV LB=0.35 OI=66 CB=12.15 DE=21 TY=13.2% ***** IGEN - Igen Intl. $35.95 *** Favorable Settlement? *** IGEN International (NASDAQ:IGEN) develops and markets products that incorporate the company's proprietary ORIGEN technology, which permits detection and measurement of biological substances. ORIGEN is incorporated into instrument systems and consumable reagents. The company 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. IGEN International is currently in litigation with Hoffmann-La Roche and the recent favorable outcome of a trial in the U.S. District Court in Delaware has boosted the outlook for the issue. Traders can speculate on the future outcome of the lawsuit with this conservative position. DEC 30.00 GQ XF LB=0.90 OI=974 CB=29.10 DE=21 TY=14.0% ***** INVN - InVision Technologies $25.15 *** Big FAA Order! *** InVision Technologies (NASDAQ:INVN) markets advanced detection and inspection products by adapting various medical and laboratory technologies for government and commercial uses, such as security, defense and process control. InVision is the worldwide leader in explosive detection technology and has produced the first automated explosive detection systems to be certified by the FAA as meeting its stringent requirements. Shares of InVision rallied this week after the firm won a contract to provide the U.S. Federal Aviation Administration with imaging systems to detect concealed weapons. The FAA bought from InVision's Quantum Magnetics subsidiary several i-Portal 100 imaging detection systems that will be installed at undisclosed locations in the United States. This issue is heavily shorted and that could increase the buying pressure in the current rally. This conservative play offers a favorable way to speculate on the company's future share value. DEC 17.50 FQQ XW LB=0.55 OI=1139 CB=16.95 DE=21 TY=14.3% ***** MCDT - McDATA $25.20 *** The Rally Continues! *** McDATA (NASDAQ:MCDT) is the worldwide leader in open storage networking solutions and provides highly available, scalable and centrally managed storage area networks (SANs) that address enterprise-wide storage problems. McDATA's core-to-edge enter- prise SAN solutions improve the reliability and availability of data to simplify SAN management and reduce the total cost of ownership. McDATA distributes its products through its OEMs, network of resellers and Elite Solution Partners. Earlier this month, Deutsche Banc Alex. Brown launched coverage of the Storage Networking sector, which includes McDATA, saying that the right companies will have a competitive advantage and command "premium" returns in the future. Robertson Stephens backed that bullish opinion when analyst Dane Lewis initiated coverage on company with comments that MCDT is "positioned for growth driven by the expanding fire channel storage switching market." This week, JP Morgan issued a long-term BUY rating on the issue, based on growing demand for its storage products. The technical trend is bullish and this position offers a low risk basis in the issue. DEC 20.00 DXZ XD LB=0.35 OI=155 CB=19.65 DE=21 TY=9.4% ***** PLMD - PolyMedica $23.00 *** Entry Point *** PolyMedica (NASDAQ:PLMD) is a provider of direct-to-consumer specialty medical products and services, conducting business in the Chronic Care, Professional Products and Healthcare markets. The company sells diabetes supplies and related products through its Chronic Care segment. The company also provides direct-to-consumer prescription respiratory supplies and services to Medicare-eligible seniors suffering from chronic obstructive pulmonary disease and sells, manufactures and distributes a wide range of prescription urological and suppository products through its Professional Products group. The company's AZO products for urinary health are distributed primarily to food and drug retailers and mass merchandisers nationwide through its Consumer Healthcare segment. PLMD is on the mend and this position offers a discounted cost basis in the issue. DEC 20.00 PM XD LB=0.65 OI=482 CB=19.35 DE=21 TY=13.7% ***** RSAS - RSA Security $15.75 *** On The Move! *** RSA Security (NASDAQ:RSAS) is a provider of electronic security solutions. The company has two business segments: e-Security Solutions and RSA Capital. The operations of the e-Security Solutions segment consist of the sale of software licenses, hardware, maintenance and professional services through two product groups: Enterprise solutions and Developer solutions. Enterprise solutions include sales of RSA SecurID authenticators, RSA ACE/ Server software, RSA Keon software, and maintenance and professional services and Developer solutions include sales of RSA BSAFE cryptographic software and protocol products, RSA Keon components, and maintenance and professional services. The RSA Capital segment includes the activities relating to the company's existing and future investments in e-businesses and technology companies. RSAS is on the move and with the heavy-volume rally Friday, the issue appears poised for future upside movement. DEC 12.50 QSD XV LB=0.25 OI=472 CB=12.25 DE=21 TY=10.7% ***** ***************** 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 XMSR 11.59 DEC 10.00 QSY XB 0.45 440 9.55 21 18.6% RSTN 15.68 DEC 12.50 RQJ XV 0.30 756 12.20 21 12.6% SRNA 23.46 DEC 20.00 NHU XD 0.55 104 19.45 21 12.3% CAL 22.98 DEC 20.00 CAL XD 0.55 622 19.45 21 11.8% PMCS 22.79 DEC 17.50 SQL XW 0.35 1652 17.15 21 10.3% OVER 25.55 DEC 20.00 GUO XD 0.35 136 19.65 21 9.3% PZZA 25.82 DEC 25.00 ZZQ XE 0.50 54 24.50 21 7.2% DFXI 27.97 DEC 22.50 DQF XX 0.25 584 22.25 21 6.1% SMTC 38.52 DEC 30.00 QTU XF 0.30 1090 29.70 21 5.4% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Option Trading Fundamentals: Strategy Selection Is Important! By Ray Cummins The key to success in options trading is to utilize strategies that provide reasonable profit potential while maintaining a minimum amount of risk. The Spreads/Combos editor is in Europe so there will be no new candidates this week. However, with the recent volatility and indecision in the market, we have a great opportunity to review the fundamentals of option trading and strategy selection. Success Requires A Methodical Approach There are many types of investors and no single strategy can work for all of them. By definition, trading is a risky venture but you know there are people who profit regularly in this business. What do these successful traders have in common? As a group, they all conform to the same fundamental plan. They develop sound and sensible methods for participating in the market, using strategies that work best for each particular situation. They also acquire the proper tools for accurate analysis of their candidates and potential plays, and they construct positions with regard to the appropriate risk-reward attitude of their financial situation. Basic Strategies: There are a number of ways to be successful in the options market. The primary uses of options are speculating and portfolio hedging. Both of these practices involve the management of risk, with each strategy approaching the potential for loss in a different manner. Fund managers and institutional traders reduce risk by offsetting a portion of their holdings with option positions. Many of them purchase Puts to insure their equity portfolios while others use option writing strategies, selling both Puts and Calls to improve returns from their long-term investments. Speculative strategies include buying and selling options and in most cases, traders use these techniques to generate additional leverage in directional positions. Ownership of an option can produce large profits when the underlying instrument moves as expected and on those occasions when the forecast is incorrect, the loss is limited to the initial cost of the position. Another popular approach, spread (or combination) trading, seeks to produce option positions with less risk than the speculative strategies. The majority of spread techniques involve buying and selling simultaneous but opposing positions in different option series. Common spread strategies include calendar Spreads, price (or vertical) spreads, and various combinations of the two. The calendar spread (also known as a horizontal spread) involves the purchase of an option with one expiration date and the sale of another option at the same price but a different expiration date. The philosophy for using calendar spreads is that time will erode the value of the short-term option at a faster rate than it will the long-term option, providing a profit if the underlying issue remains in a relatively small (target) range. Traders who attempt to forecast the future direction of specific issues generally use price spreads. These positions consist of a long (bought) option and a short (sold) option, where both options are of the same type (calls or puts) and expire at the same time. Vertical spreads are commonly used by traders who want to use options to take advantage of a directional market move. The benefit of this technique is that it is aptly suited to situations where the underlying issue's trend is relatively well established and option pricing concerns are of secondary importance. One of the most commonly utilized neutral-outlook strategies is the debit (or long) straddle. The debit straddle involves the simultaneous purchase of both call and put options and the position benefits from a large movement in the underlying issue. Based on the size and timeliness of the move, the technique can generate large profits. In most spread and combination strategies, the returns are far smaller than those generated by speculative positions in exchange for reduced risk. Advantages & Pitfalls There are two primary benefits of derivatives. They can be used to generate large (relative) profits on correctly forecast market activity and alter the risk profile of a portfolio. A trader who purchases calls can profit from an increase in the price of the underlying asset and the maximum loss from buying the option is limited to its initial cost. The potential gains in this type of position are restricted only by the future price change in the underlying issue. Since the asset's price is the most important factor affecting an option's value, the success of directional strategies is primarily based on an accurate assessment of future market movement. Technical and fundamental analyses are typical procedures used to identify potential direction and magnitude of movement in the underlying issue. Once a group of candidates has been identified, time frame and leverage become primary factors in selecting a specific position. Obviously, the major drawback for options is they are a wasting asset; the extrinsic value of the option falls as the expiration date approaches. Timing is a critical concern with derivatives because the initial premium for time value can be larger than any profit resulting from favorable movements in the underlying instrument. In addition, the future potential (Implied Volatility) of an option can be difficult to assess and that particular concept can be overwhelming for novice market players. The most common result is that an investor will correctly forecast the movement of the underlying instrument but, having paid an excessive premium for the option, will eventually experience a loss in the position. Leverage is also an important component of option-trading strategy as it allows an investor to achieve large profits with a relatively small cash investment. The most prevalent failure among new traders is the inability to assess the suitability of a specific position in terms of its risk and profitability characteristics, and the basic lack of theoretical option-pricing knowledge. In addition, many novice option traders base their selection of plays on the potential for return rather than the appropriate position or strategy for each combination of market direction and volatility. Retail option buyers are a great example. They consistently purchase options that are "out-of-the-money" with only a short period remaining before they expire. They usually avoid theoretical option-pricing models due to their confidence concerning the future movement of the underlying issue and their distorted assumptions about profit potential. In fact, many investors partake in the options market without paying any attention to Fair Value and Implied Volatility. As a result, they purchase overpriced options and fail to profit even when they are correct about the character of the underlying issue. Limiting Risk With Combination Positions Options possess characteristics that differ from other financial instruments. These unique attributes provide option traders with advantages unavailable to the majority of market participants. Although the initial learning curve can be difficult to overcome, the evidence concerning spread trading suggests that a structured plan with strategies for limiting losses and maximizing gains can produce favorable portfolio growth in the long-term. The majority of experienced traders utilize spreads to reduce the cost and the risk of option ownership. They construct combination plays with partially offsetting option positions to reduce the potential for capital loss. Spreads can also be designed to generate return diagrams of almost any character. For the investor who is not familiar with spread and combination strategies, this type of approach also offers a great opportunity to learn the basics of derivatives trading in a low risk environment. The fundamental concepts are relatively easy to understand and once established, most positions can usually be managed with little difficulty. The occasional adjustments also provide the necessary background for more advanced techniques. Those who enjoy aggressive, directional trading can construct combination positions to fit their style as well. Although the potential for upside profit is reduced, the limited downside exposure provides a favorable risk/reward ratio for the majority of investors. The options market offers a number of tools and techniques that can help the astute trader construct a powerful portfolio; one which possesses a high degree of safety with consistent returns. Through the use of combinations, the trader has a vehicle to pursue a wide variety of strategies. The complete option player can profit with both bullish and bearish plays, in situations that dictate either aggressive or conservative positions. With an understanding of the risk/reward relationships between long and short options at different prices in varying time periods, he can benefit from the most advanced techniques available in the derivatives market. Based on the E-mail I receive, spread and combination trading is a very popular approach among our readers and one we will continue to explore in future editions. Good Luck! ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. 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