The Option Investor Newsletter Wednesday 12-12-2001 Copyright 2001, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/5125_1.asp Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 12-12-2001 High Low Volume Advance/Decline DJIA 9894.81 + 6.44 9919.72 9806.10 1.42 bln 1520/1625 NASDAQ 2011.38 + 9.45 2022.76 1975.65 1.86 bln 1855/1744 S&P 100 580.37 + 1.05 582.56 574.33 Totals 3375/3369 S&P 500 1137.07 + 0.31 1141.58 1126.01 RUS 2000 475.31 + 0.54 476.32 470.99 DJ TRANS 2580.28 - 6.31 2591.70 2561.87 VIX 25.45 - 0.24 27.38 25.14 VXN 48.09 - 2.64 51.36 48.09 TRIN 1.07 Put/Call 0.64 ******************************************************************* SPX At Support, Time To Buy Or Sell? The S&P 500, referred to by the trader types as the SPX, rebounded from a key support level Wednesday. The index represents the 500 largest publicly traded stocks on the U.S. exchanges. In other words, it's a good representation of the broader market. Let's take a closer look at the SPX. Levels: Where's my risk? The SPX's rebound from 1126 Wednesday was meaningful for that level has served as support on seven separate occasions in the last four weeks. Not exactly 1126, but in that general area. Let's call it 1127.50, plus or minus 2.50. You get the point. The seven observations: 11/16 at 1129, 11/21 at 1129, 11/28 at 1128, 11/29 at 1125, 12/03 at 1125, 12/04 at 1128, and Wednesday at 1126. What's so special about the level? Maybe a simple retracement bracket can lend a hand. Using the SPX's high in late-May around 1315 as my top anchor point, I've anchored the bottom of the retracement bracket at the SPX's September 21 low around 944. It looks like this: Before elaborating on the 1127.50 area, let me give this bracket credence. Through the month of October, the SPX gyrated around the 38.2 percent retracement level around the 1085 area. It spent the month consolidating around 1085. At that point, the SPX had retraced 38.2 percent of its decline from late-May until September 21. The SPX then went on to break out of its range in early November, advanced past the 1127.50 area, and reached as high as 1173 on December 5. Does anybody else find it curious that the 1173 level is also the site of the SPX's 61.8 percent retracement level? Coincidence? I think it not. This bracket works. Here we are back at the 1127.50 area -- the 50 percent retracement level of the bracket. As I previously pointed out, the 1127.50 level has provided support seven times during the most recent consolidation. Will the SPX rebound again and retest relative highs around 1173? If you're betting that way, at least you can measure and manage your risk relatively easy with the retracement bracket. It works like this: You've identified support in the SPX at 1127.50, you've observed that the level has provided support on six occasions in the past. You buy your favorite STRONG stock on a bet that the SPX will again rebound from 1127.50 and trade higher over the short-term. If you're wrong, and the SPX cracks at 1127.50, then you can stop out of your bet quickly and minimize losses. Since the SPX has traded plus or minus 2.50 points around 1127.50, you would need to set a lower mental stop in order to weed out the whipsaws. Currently, I'd consider a decline below 1120 a break of the 1127.50 support area. If you're right in buying at the 1127.50 level and the SPX trades higher in the short-term, you can use the retracement bracket to define your exit point. The obvious level to turn to is the 68.2 percent retracement level at 1173. But, what if the SPX breaks down? A breakdown below 1127.50, again confirmed with a decline below 1120, could have the SPX trading lower over the short-term. Risk is more difficult to measure and manage when trading breakdowns (or breakouts for that matter). The reason is because the majority can see and will be in on the move. Where there's more participants there's more emotion, not to mention the fact that there isn't a meaningful resistance level immediately above the 1127.50 area to be used for a mental stop. In these type of cases, it's best to use a dollar amount- or percentage-based stop on bearish bets. While the retracement bracket isn't a lot of help in measuring and managing risk in bearish bets, it clearly defines a downside target at 1085. Remember the 38.2 percent retracement level that the SPX gyrated around in October? That's your downside target on shorts/puts entered on a break below 1127.50. What's In It? The SPX is divided into ten industry groups: Energy, Materials, Industrials, Consumer Discretionary (Retail), Consumer Staples, Health Care, Financials, Information Technology, Telecom Services, and Utilities. Information Technology currently accounts for 18.83 percent, Financial accounts for 17.79 percent, and Health Care accounts for 14.36 percent of the SPX. The three are the biggest by far. If the SPX is going to trade higher after its bounce from 1127.50 Wednesday, it will need participation from at least two of its big three industry groups. Technology: Technology was the only group that participated in Wednesday's rebound. Within technology, Hardware, Software, Box Makers, Internets, Semiconductors, and Disk Drives were higher. Only Networkers finished lower within the group. For the technology group, readers can use the Philadelphia Semiconductor Index (SOX). Curiously, the SOX rebounded from a key support level Wednesday in similar fashion to SPX. The SOX rebounded from 560, which is now a double-bottom in the index. The SOX, however, has traced a pattern of sequentially lower highs since peaking on December 5 -- the same day the SPX hit its relative high. The SOX has fallen into a very short-term descending trend, which remained intact even after Wednesday's rebound. (Some technicians might refer to the SOX's recent price pattern as a flag or pennant.) If the pattern of lower highs persists, the SOX may breakdown below its double-bottom at 560. Such a breakdown would be signaled with a decline below the 555 level. Any breakdown of the sort would add conviction to betting on a breakdown in the SPX below its support level. After the bell, Applied Materials (NASDAQ:AMAT) reported that it was eliminating 1,700 jobs. The company is the world's biggest maker of semiconductor equipment and is one definitely worth monitoring as it relates to the SOX. Shares of AMAT shed about 40 cents in the after hours session on the news of the job cuts. Financial: Within the financial industry group, only the insurers traded higher during Wednesday's rebound. Banks and brokers finished fractionally lower. The bank sector is perhaps one of the better gauges of the health of the economy and can be tracked through the KBW Bank Sector Index (BKX). The BKX ran higher about two weeks ago, but has since slid lower. There are several issues at play in the sector that may be pressuring the BKX. Fears continue to linger over Argentina and the country's troubled financial situation. And the Enron fiasco isn't helping. Citigroup (NYSE:C) and J.P. Morgan Chase (NYSE:JPM) -- the two biggest components of the BKX -- have a significant amount of exposure to Enron. But a panel of Enron's creditors, including Citi and Morgan, convened Wednesday to sort out the company's debts. If all goes well, Citi and Morgan will get back part or all of the $1.5 billion the two banks recently injected into the troubled energy trader. Such a development could ease fears and lend strength to the BKX, thus propping up the SPX. Away from the micro concerns, the macro environment is shaping up well for the bank sector. The yield curve is incredibly steep, which allows the banks to borrow at the short-end and lend at the long-end, thus capturing the spread and printing money in the process. The steep yield curve, which reflects a rebound in the economy, is a huge element of bullishness for the banks. Indeed, the trough of a business cycle is the right time for money-center banks such as Citigroup. The prospects of a recovering economy next year could translate into an elimination of bad debts and a boost to the balance sheets of many banks. But the aforementioned fears are holding back the BKX in the short-term. The index has been struggling to advance past its 200-dma since peaking in late November at the 865 level. The BKX again rolled over at its 200-dma following the Fed's decision to lower rates Tuesday. An advance in the BKX could portend a run on relative highs and a subsequent breakout. Of course a breakout in the banks would boost the SPX. In the meantime, I think the banks make sense on weakness; or, a good sector to consider buying on weakness. Healthcare: Healthcare, for all of its defensive attributes, has been one of the more volatile sectors of the SPX recently. I define the broader healthcare industry through the AMEX Pharmaceutical Index (DRG), the AMEX Biotechnology Index (BTK), and the S&P Healthcare Index (HCX). The HCX is the best representation of the broader sector. It includes medical device makers such as Guidant (NYSE:GDT) and HMOs such as Humana (NYSE:HUM). If you had to monitor only one index in the healthcare sector, it should be the HCX for its breadth; it includes pharmas and biotechs. The three (DRG, BTK, and HCX) all finished lower Wednesday. The biggest drag on the DRG was shares of Merck (NYSE:MRK). The stock continued lower in Wednesday's session a day after the company warned on '02 financial performance. A slew of downgrades and earnings estimate reductions pressured MRK and others in the DRG Wednesday. Bristol-Meyers (NYSE:BMY) and Schering-Plough (NYSE:SGP) were knocked down patent expiration fears. The BTK has had its share of weakness recently. The group went from one of the strongest in the market to a relatively weak sector recently. There's been several reasons why. First, a disappointment from Protein Design Labs (NASDAQ:PDLI) -- a component of the BTK -- sent the stock sliding lower. The company reported disappointing results for two of its developmental drugs. Second, several mergers have been frowned upon by the street, most notably the Millennium (NASDAQ:MLNM) and Corr Therapeutics (NASDAQ:CORR) marriage. The acquirer, Millennium, has seen its stock drop by more than 30 percent since announcing its merger plans, including another five percent drop Wednesday. HOWEVER, like the SOX, the BTK is near a very meaningful support level. Using its relative low in late-September as the bottom and its recent high up around 625 as the top, I've laid a retracement bracket over the BTK's recent rally. The 38.2 percent retracement level sits at 540 -- a super serious support level. I think the stronger biotechs can be played on a bet that the BTK bounces from 540. If it doesn't, a tight mental stop can be placed at 530. For if 530 is broken, the BTK is likely to head much lower over the short-term and in doing so, pressure the SPX. But it's a relatively low risk (assuming you manage risk with the 530 level), potentially high rewarding situation. Which are the stronger biotechs? Millennium is not. Neither is Protein Design Labs. Of the components of the BTK, Immunex (NASDAQ:IMNX) and IDEC Pharmaceuticals (NASDAQ:IDPH) are among the stronger. While not a component of the BTK, Myriad Genetics (NASDAQ:MYGN) is another that trades well. Into The Unknown The future is unknown. As traders, we operate in an environment of uncertainty, of risk. It's only after that risk is identified and managed should a trade be entered. Not all risks are foreseen. Not all risks can be managed. But the risks that are easily observed and managed should be observed and managed. If you take the step of identifying the easy risks, then you're better than 90 percent of the players in this game. The risk in being bearish on this market is that the banks could blow-up to the upside. After all, they are primed for such a move at this point in the business cycle. The risk is being bullish on tech stocks is that the SOX could breakdown below its double-bottom, sparking a sell-off across the broader tech space. Will either of the aforementioned events occur? I don't know, but you're better-informed by knowing where the risks are. In the process of finding the risks, you begin to identify opportunities and piece together the puzzle that is the market. Why was the SPX higher Wednesday? That's an easy one: techs were higher. Will the SPX continue higher Thursday? You can find the answer through the process of risk management. Eric Utley Option Investor ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ***************** STOP-LOSS UPDATES ***************** CNXT - call Adjust from $15 up to $15.50 XMSR - call Adjust from $11 up to $12.50 NVDA - call Adjust from $58 up to $59 QLGC - call Adjust from $51 up to $52 CAH - put Adjust from $67.75 down to $66.75 HGSI - put Adjust from $39 down to $35.50 DYN - put Adjust from $29.50 down to $28.50 ************* DROPPED CALLS ************* No Dropped Calls for Wednesday. ************ DROPPED PUTS ************ No Dropped Puts for Wednesday. ***** LEAPS ***** No More Procrastinating - It's Time To Talk About Intel By Mark Phillips Contact Support IMPORTANT NOTICE: Before we get started tonight, a quick note for all of you that have emailed me with questions. I always respond to emails, sometimes directly, and sometimes simply with a followup article that addresses the questions you have raised. If you've sent a question, but haven't received a response, make sure that I haven't answered it in a subsequent article. Then confirm that you have a valid return email address. This is very important, as it is the only way that I can respond to you. There are few things more frustrating than composing a reply to an interesting question, and having the mail administrator kick the message back to me as undeliverable. I bring this up because it is occurring with greater frequency. And Jan in Montreal. You're the next contestant on the "Email Address Isn't Right". Just remember to get those return addresses set correctly and I'll do my best to provide useful answers. Thanks! -MP And now, on with the show! I've made no secret of the fact that I think the current rally in the markets is an exercise in sheer lunacy. With Uncle Alan reinflating the bubble that he took great pains to pop in 2000, investors are throwing money at their favorite momentum stocks in the hopes that it is 1999 all over again. Nothing would make me happier than to report that it is true, but I'm not Santa Claus. Since the market lows (and fear highs) in late September, investors have been responding positively to aggressive stimulative action from the Federal Reserve (interest rate cuts) and promises of generous assistance (economic stimulus package) from the Federal Government. That combined with hints from leading companies (technology and otherwise) that they are seeing conditions improving, has many investors going to bed with visions of sugarplums dancing in their heads. This optimism seems to founded on the expectation that we are going to not only have a recovery in the first half of 2002, but that it is going to be a barn-burner. While most analysts are calling for a more muted recovery, price action, particularly in the Technology sector is pointing towards a stellar and dramatic recovery in earnings over the next 6 months. Either that, or we are heading for what my good friend Buzz Lynn has termed "MOPO" (Mother Of all Put Opportunities). And it could very well be the latter. By most fundamental measures, many stocks are more ridiculously overvalued than they were in early 2000, and few stocks were immune from that deflationary effect. In terms of percentage movement, few areas of the market have moved further to the upside than Semiconductors (SOX.X), and it is all coming on anticipation of better profits ahead. That is the definition of faith - the substance of things hoped for, the evidence of things not seen. While faith can be a good thing, I wouldn't consider it to be a rational near-term investing methodology. But the charts are hard to argue with, and from the weekly chart of the SOX below, you can see the index has been a favorite of the bulls for the past 3 months, rising through numerous resistance levels that should have provided more resistance than they did. I must admit that I was impressed with the SOX's ability to clear the $550 level, but it looks to me as though the index is getting a bit top heavy. Stochastics are getting kind of flat in overbought territory, and we have significant resistance near $600, both historical and descending trendline. While a rollover near $600 may make for a good entry, don't rule out the power of a crowd of irrational bulls. Overbought can become more so, and I could see the SOIX running as high as $675 before the bulls exhaust themselves. And judging by some of those recent weekly candles, you can see that a move of 75-100 points would not be out of the question in a short one-week span of time. Simply put, the bull is still running, but the bears are closing in. Which brings me to the heart of our conversation. Intel (NASDAQ:INTC) has been running with the SOX, and marginally positive comments from the company last week was the necessary catalyst to push the stock through the $32 level, which had been holding back the bulls Note that the chart above ended in late November, as that was the last snapshot available before the stock moved through the $32 resistance level. Despite my fundamental bearish leaning on the stock, there was nothing on the chart to tell me to start warming up that order for long-term puts...at least not yet. Speaking of the fundamental picture, here's what is getting my attention on INTC. The company still makes (and will continue so for the foreseeable future) most of their revenue from sales of its Pentium line of microprocessors. And the primary use for those processors is new computers. Aside from industry leader Dell Computer (NASDAQ:DELL), I haven't heard anything bullish from the PC industry lately. Oh there is lots of speculation that people and companies and individuals WILL BE buying more PCs in the near future. But that hope is not borne out yet by increasing retail sales. Either sales must pick up soon, or Q1 2002 could be ugly. Here's where the potential ugliness comes from. In their mid-quarter update, INTC was seeing orders start to pick up for their P4 chips. So that means someone is buying the chips to put into new PCS, right? Well, what happens if those new PCs don't leap off the shelves into the arms of eager holiday buyers? That's right! The following quarter (Q1, which is historically weak for PC sales) would see the next wave of demand-weakness hit the chip giant right in the bottom line. And I think the long-term charts could be giving us a hint of that eventual outcome, as I sit here tapping these keys. Now that chart almost looks tempting doesn't it? With the beginning of a rollover in the weekly Stochastics, eager players might be thinking about Put LEAPS near current levels. But not me. What gives me pause is the picture on the monthly chart. When we switch to the monthly time frame, we can see that INTC has handily cleared the $32 level, but may be facing an uphill battle near the $36 level. But with the Stochastics pointing skywards, I wouldn't be surprised to see the stock testing major resistance in the $39-40 area before real weakness arrives. Putting It All Together: I could be accused of just trying to find a convenient chart pattern in order to rail against INTC for whatever deep-seated reasons I might have. But that isn't the case. At least not this time. What I see is a sector that has run too far, too fast, and on dubious grounds. Essentially the SOX is up based on expectations of an economic rebound in the first half of next year. While we may be seeing conditions stabilize and improve modestly, the recent action in certain sectors of the market (particularly Semiconductors) is forecasting a return to the rapid growth seen in the late 1990's. In my (never-to-be-humble) opinion, that is a fantasy. Even with all the monetary stimulus currently being thrown at the economy, that is likely to just diminish the severity of the downturn, not power us out of it. So if you accept my theory that the SOX is getting ahead of yourself, why not get ready to profit from one of the sub-sectors most likely to feel the pinch when the recovery fails to materialize. Namely PC sales. INTC is a great company and will be an industry leader for the foreseeable future. But the business environment is not conducive to a sustained upward move from current levels. In fact, the convergence of the $675 level on the SOX, with the $39 level in shares of INTC could line up nicely with the monthly Stochastics starting to weaken (led lower by the weekly) in perhaps February or March. I know it's a little ways off, but many good trades consist of forecasting the set up and then waiting for everything to come into alignment. I think INTC is going to be a good example of that and you can bet I'll be watching carefully. I may end up with egg on my face, but one way or the other I think we'll all learn something from the process. Keep an eye on this column and the LEAPS column over the next couple months. Who knows, INTC could make it onto our LEAP Puts play list. Until then remember, that chance favors the prepared mind. I'm in the process of preparing MY mind to profit from MOPO when it arrives. I'm not saying that the scenario I've painted above has to come to pass, but if you're currently long on INTC, don't you think it would make sense to pay attention to the behavior of the SOX and INTC over the next few months, paying particular attention to the points I've laid out and what comes to pass with respect to the demand side of the equation. Better safe than sorry! Have a great week! ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** IBM - Int'l Business Machines $123.20 +1.70 (+2.80 this 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. Most Recent Update After last week's stellar breakout through the $120 level, shares of IBM were due for some consolidation. That's just what we got, as Big Blue dipped back near the $119 level before resuming rally mode on Tuesday. Buying volume surged again, as the stock rebounded to post another yearly closing high of $121.50. Traders that bought the most recent dip are waiting with bated breath to see if IBM can blow through the $123 level and start the next ascent towards the $127.50 level, last visited in September 2000. Continue to target new entries on dips near $119-120. A breakout over $123 is buyable, but be quick to harvest profits with the looming $127.50 resistance level. Due to the strong performance over the past week, we are raising our stop to $117. Comments IBM displayed its awesome strength again Wednesday with another new yearly high. The stock closed at its day high. Look for follow-through early tomorrow morning and consider targeting new entries at current levels if the market is advancing. Those readers who bought the dip down to $120 recently might use any further strength early tomorrow to book quick gains on partial positions. ***December contracts expire in less than two weeks*** BUY CALL DEC-120*IBM-LD OI=37762 at $4.10 SL=3.25 BUY CALL DEC-125 IBM-LE OI=17261 at $1.25 SL=0.75 BUY CALL JAN-120 IBM-AD OI=39233 at $6.70 SL=5.25 BUY CALL JAN-125 IBM-AE OI=29388 at $3.80 SL=2.50 BUY CALL JAN-130 IBM-AF OI=23032 at $1.90 SL=1.00 Average Daily Volume = 8.56 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Stocks Finish On A Positive Note Despite Profit Warnings By Ray Cummins The blue-chip average moved higher today, just one session after interest rates were lowered for the 11th time this year, even as earnings warnings from Dow bellwethers American Express (NYSE:AXP) and Merck (NYSE:MRK) weighed heavily on investors. The Dow Industrials fell in early trading after financial services giant American Express told analysts it would cut its workforce by an additional 5,500 jobs and warned that earnings-per-share in the fourth quarter would fall short of consensus expectations. The company said business volumes in financial markets, travel, corporate spending and the general economy were impacted by the effects of the 9/11 terrorist attacks. Not to be outdone, drug kingpin Merck said it expected zero earnings growth in 2002 due to stiff competition from generic products. The company's share value tumbled in the wake of the unexpected news and downgrades from CS First Boston and ABN Amro quickly followed. Among the day's lesser performers were Alcoa (NYSE:AA), DuPont (NYSE:DD), J.P. Morgan (NYSE:JPM), Honeywell (NYSE:HON), and McDonald's (NYSE:MCD). The lone bright spot was Procter & Gamble (NYSE:PG), which jumped 5% after the company said it expects to beat Wall Street's profit expectations in its second quarter due to strong sales growth in baby, beauty and health products. Analysts at Lehman Brothers and Morgan Stanley upped their EPS views on the consumer products conglomerate to reflect a better-than-expected mix of products and pricing. The technology index followed the blue-chips lower for most of the day with losses in networking and chip companies. Stocks in both groups fared poorly despite numerous upgrades from popular analysts, including a bullish report on the semiconductor equipment segment from Prudential Securities. InVision Technologies (NASDAQ:INVN) was among the most attractive NASDAQ issues, up over 10% after the company said it had received an order from the Federal Aviation Administration for multiple explosive detection systems valued at $16.3 million. Chartered Semiconductor (NASDAQ:CHRT) was also a popular issue, with the stock gaining 8% after the chip company announced it is maintaining its fourth-quarter financial targets. Companies in the software segment were bolstered by the bullish activity in Veritas Software (NASDAQ:VRTS), which was upgraded to a "buy" at Salomon Smith Barney. The firm said it believes the company is set for a solid 2002, based on their strong pipeline of products for data protection, data management and data availability. In the broader market, selling in natural gas, utility, oil service, drug, biotechnology and chemical shares led the major averages lower in early trading while airlines, gold and insurance stocks boosted the late-session recovery. Summary of Current Positions (as of 12/11/01): Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield INTU DEC 45 40.85 43.56 2.88 4.8% TMPW DEC 35 33.20 45.18 1.80 4.5% ELBO DEC 35 33.50 42.10 1.50 3.7% Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield SMTC DEC 30 29.50 42.47 0.50 7.9% EBAY DEC 50 48.85 70.10 1.15 6.8% PCSA DEC 45 44.05 53.59 0.95 6.0% TMPW DEC 30 29.40 45.18 0.60 6.0% INTU DEC 35 34.20 43.56 0.80 5.6% CVTX DEC 42.5 41.90 54.53 0.60 5.1% BBY DEC 55 54.00 69.20 1.00 5.1% ELBO DEC 30 29.50 42.10 0.50 5.0% IGEN DEC 30 24.65 33.92 0.35 4.5% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield CCMP DEC 80 80.65 78.55 0.65 5.4% CHIR DEC 50 50.45 43.37 0.45 5.3% IDPH DEC 75 75.70 67.75 0.70 5.2% EASI DEC 55 55.50 37.90 0.50 4.5% Sell Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield AZN DEC 50-C 51.30 44.28 1.30 4.9% AZN DEC 45-P 43.60 44.28 0.68 2.6% ERTS DEC 50-P 48.45 63.18 1.55 7.9% Closed: Electronic Arts (NASDAQ:ERTS) DEC-$60 call. Credit Spreads: Stock Pick Last Position Credit C/B G/L Status PCAR 62.59 64.05 DEC50P/55P 0.70 54.30 0.70 Open AHP 58.75 58.75 DEC65C/60C 0.65 60.65 0.65 Open CSC 45.09 49.16 DEC35P/40P 0.60 39.40 0.60 Open PEP 50.28 46.60 DEC45P/47P 0.35 47.15 (0.55) Closed NKE 51.56 55.00 DEC45P/47P 0.40 47.10 0.40 Open AGN 76.10 75.78 DEC65P/70P 0.60 69.30 0.60 Open LLY 83.33 80.40 DEC75P/80P 0.80 79.20 0.80 Closed CHIR 45.59 43.37 DEC55C/50C 0.60 50.60 0.60 Open IGEN 35.44 33.92 DEC25P/30P 0.85 29.15 0.85 Open ENZN 57.00 553.50 DEC70C/65C 0.60 65.60 0.60 Open With the move away from safety and cyclical stocks, the Food and Beverage group has become less attractive and Pepsi (NYSE:PEP) has been fading since the middle of last week when the issue fell below near-term support at $48. Fortunately, the recent technical indications provided a great "early-exit" signal, allowing traders to close the position near break-even or for a very small loss. Eli Lilly (NYSE:LLY) closed below near-term support at $81 Tuesday and a move below the sold strike at $80 (the top of a previous trading range) would be an absolute confirmation of a new bearish trend. New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** ADSK - Autodesk $39.39 *** Low Risk - Low Reward! *** Autodesk (NASDAQ:ADKS) is a software design and digital content company for the architectural design and land development, manufacturing, utilities, telecommunications and media and entertainment industries. The company provides design software, Internet portal services, wireless development platforms and point-of-location applications that empower more than four million customers in over 150 countries. The company's software products are sold worldwide, both directly to customers and through a network of resellers and distributors. The company is organized in two reportable segments: the Design Solutions Segment and the Discreet Segment. New traders are always asking for low risk positions that will allow them to participate in combination strategies with a high probability of success. Based on the recent bullish technical indications and the solid buying support near our cost basis, this play meets the basic criteria for a low risk - low reward position. Target a higher premium in the spread initially to increase the overall profit potential of the play. ADSK - Autodesk $39.39 PLAY (very conservative - bullish/credit spread): BUY PUT JAN-30 ADQ-MF OI=81 A=$0.25 SELL PUT JAN-35 ADQ-MG OI=142 B=$0.65 INITIAL NET CREDIT TARGET=$0.50-$0.60 PROFIT(max)=11% *************** EMLX - Emulex $40.70 *** An Old Favorite! *** Emulex (NASDAQ:EMLX) is a designer, developer and supplier of a broad line of storage networking host bus adapters, application specific computer chips and software products that provide the connectivity solutions for storage area networks (SANs), network attached storage and redundant array of independent disks storage. The company's products are based on internally developed ASIC, firmware and software technology, and offer support for a wide variety of SAN protocols, configurations, system interfaces and operating systems. The company's architecture offers customers a stable applications program interface that has been preserved across multiple generations of adapters, and to which original equipment manufacturers have customized software for mission critical server and storage system applications. When it comes to leading-edge technology for data storage, Emulex is widely recognized as one of the foremost companies in the industry. Their products have been selected by the world's top server and storage providers, including EMC, Fujitsu-Siemens, Dell, Compaq, Hewlett-Packard, Hitachi Data Systems, IBM, NEC, Network Appliance and Unisys. In addition, Emulex includes a number of technology industry leaders such as Brocade, INRANGE, Intel, Legato, McDATA, Microsoft, and Veritas among its current strategic partners. From our perspective, Emulex is simply an "old favorite" that has finally begun to recover from the recent market-wide slump and it is definitely an issue we would like to have in our long-term stock portfolio. These positions allow investors to establish a discounted cost basis in the issue. EMLX - Emulex $40.70 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT JAN 27.5 UMQ MY 87 0.70 26.80 6.5% *** SELL PUT JAN 30 UMQ MF 794 1.10 28.90 9.8% SELL PUT JAN 35 UMQ MG 607 2.25 32.75 14.4% *************** KBH - KB Home $37.82 *** Hot Sector! *** KB Home (NYSE:KBH) is a homebuilder with domestic operating divisions in California, Arizona, Nevada, New Mexico, Colorado and Texas. Kaufman & Broad S.A., the company's majority-owned subsidiary, is a homebuilder in France. In fiscal 2000, the company delivered homes to 22,847 families in the United States and France. It also operates a full-service mortgage company, Kaufman and Broad Mortgage company, for the convenience of its buyers. The company builds homes that cater primarily to first time and first move-up homebuyers, generally in medium-sized developments close to major metropolitan areas. Stocks in the residential construction group rallied today after luxury homebuilder Toll Brothers (NYSE:TOL) reported robust fourth-quarter earnings and said the high-end home market has recovered faster than expected after the post-9/11 slowdown. The company, whose single-family homes sell for an average price of about $500,000, said earnings jumped 17% in the quarter as lower interest rates made mortgages more affordable and fueled home buying. Homebuilders have weathered the recession as low mortgage rates have bolstered demand and the housing outlook improved again on Tuesday after the Federal Reserve cut the cost of borrowing to the lowest level in 40 years. Analysts say the next few months should be bullish for homebuilders and traders can speculate on that outcome with this conservative position. KBH - KB Home $37.82 PLAY (conservative - bullish/credit spread): BUY PUT JAN-30 KBH-MF OI=456 A=$0.35 SELL PUT JAN-35 KBH-MG OI=75 B=$0.85 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=13% *************** MCHP - Microchip Technology $40.33 *** Chip Sector! *** Microchip Technology (NASDAQ:MCHP) develops and manufactures specialized semiconductor products used by its customers for a wide variety of embedded control applications. The company's product portfolio comprises field-programmable RISC-based microcontrollers that serve eight- and 16-bit embedded control applications and a broad spectrum of high-performance linear and mixed-signal, power management as well as thermal management devices. The company also offers complementary microperipheral products, including interface devices, serial EEPROMS and its patented KEELOQ security devices. The company markets its many products to the automotive, communications, computing, consumer and industrial control markets. Microchip Technology was in the news today as company officials announced in a quarterly business update that, based on October and November data, MCHP is tracking towards its earlier guidance of revenue and earnings for the quarter. After reviewing current operating data, Microchip reaffirmed its guidance on earnings per share at the upper end of the range, near $0.17 per share. In addition, the company's cash balance at the end of the year is expected to be approximately $240 million, an increase of $70 million from the end of the September quarter. The surplus is a result of continuing strong cash flow from operations and low capital spending, two conditions that are expected to boost the company's EPS in the coming months. Analysts were bullish on the report and traders can profit from future upside activity in the issue with this conservative combination position. MCHP - Microchip Technology $40.33 PLAY (conservative - bullish/credit spread): BUY PUT JAN-30 QMT-MF OI=1632 A=$0.40 SELL PUT JAN-35 QMT-MG OI=2204 B=$1.05 INITIAL NET CREDIT TARGET=$0.75-$0.80 PROFIT(max)=17% *************** NVDA - Nvidia $64.67 *** Reader's Request! *** Nvidia (NASDAQ:NVDA) designs, develops and markets unique graphics processors and related software for personal computers and digital entertainment platforms. Nvidia provides a "top-to-bottom" family of performance graphics processors and graphics processing units that has set the standard for performance, quality and features for a broad range of desktop PCs, from professional workstations to low-cost PCs, and mobile PCs, to performance laptops. Nvidia is one of the top companies in the Specialty Semiconductor group and among our readers, it is also a popular portfolio issue. The fundamental outlook for the company is excellent and the chip sector is expected to outperform the broader market in the coming months; both factors that lead us to a bullish position in the issue. In addition, NVDA closed at a new all-time high today and the long-term technical trend is very favorable. The premiums in these options provide excellent reward potential at the risk of owning the issue at a favorable cost basis. NVDA - Nvidia $64.67 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 57.5 RVU XA 1,969 0.40 57.10 7.1% *** SELL PUT DEC 60 RVU XL 1,878 0.85 59.15 13.0% SELL PUT JAN 50 RVU MJ 6,417 1.05 48.95 6.2% *** SELL PUT JAN 52.5 RVU MT 784 1.30 51.20 7.1% SELL PUT JAN 55 RVU MK 1,367 1.80 53.20 8.2% *************** VRTS - Veritas $44.42 *** Hot Stock! *** Veritas Software (NASDAQ:VRTS) is a supplier of data availability software products. Its unique products are designed to enable continuous productivity for computing environments ranging from desktop computers to the large enterprise data center, including storage area networks. The company offers a wide range of data availability software products to manage the growth of available data and increasing complexity and size of networked environments that its customers face. Its products allow businesses to improve the management of their data, to protect their data and increase the availability of their data. Veritas develops products for operating systems, including versions of UNIX, Windows NT and Linux. Its software solutions are used by customers across a wide range of industries, including many global corporations and other e-commerce businesses. The company also provides a full range of services to assist its customers in planning and implementing their data availability solutions. Shares of Veritas led the software group higher today after the company announced a deal with the consulting arm of computer hardware giant International Business Machines (NYSE:IBM). The report said IBM's consulting arm will resell Veritas' storage management software products as part of its data infrastructure services and Salomon Smith Barney quickly upgraded VRTS on the news. The brokerage upped VRTS shares to a "buy" with a price target of $56, based on several factors. Analyst H. Clinton Vaughan said he believes that Veritas' pipeline is strong; that since the attacks of 9/11, IT managers are focusing spending on data protection, data management and data availability -- the areas where Veritas has strength; and his expectation that the company will beat his estimate for per-share earnings of $0.60 in 2002. That is certainly a bullish outlook and investors appear to agree with the assessment. These positions allow a more conservative entry point in the issue with a reasonable expectation of profit. VRTS - Veritas $44.42 PLAY (buy stock and sell covered call; or sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL JAN 40 VIV AH 15,346 7.00 37.42 5.7% *** -or- SELL PUT DEC 40 VIV XH 9,477 0.60 39.40 14.5% *** SELL PUT JAN 30 VIV MF 31,097 0.50 29.50 4.4% SELL PUT JAN 35 VIV MG 5,213 1.20 33.80 9.8% *** SELL PUT JAN 40 VIV MH 14,105 2.50 37.50 13.0% *************** BEARISH PLAYS - Naked Calls & Combinations *************** ICOS - Icos Corporation $56.70 *** Technicals Only! *** ICOS (NASDAQ:ICOS) is a product-driven company with expertise in both protein-based and small molecule therapeutics. The company combines its capabilities in molecular, cellular and structural biology, high-throughput drug screening, medicinal chemistry and genomics to develop products with commercial potential. Icos is evaluating Cialis, a small molecule compound that inhibits the phosphodiesterase type five enzyme for the treatment of male erectile dysfunction and female sexual dysfunction. The company is also evaluating Pafase, a recombinant human serum protein, for the treatment of sepsis and diseases characterized by increased activity of platelet-activating factor. Icos is one of our regular issues on the "premium selling" list and after observing the recent technical indications, we have decided to add it to our small selection of bearish candidates. Based on analysis of option pricing and the underlying stock's technical background, this issue meets our fundamental criteria for a favorable "naked" call position. The issue has robust option premiums, a well-defined trading range and a relatively high probability of remaining below the target strike price. As with any recommendation, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. ICOS - Icos Corporation $56.70 PLAY (conservative - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL JAN 65 IIQ AM 7,894 0.95 65.95 5.1% *** SELL CALL JAN 60 IIQ AL 1,828 2.20 62.20 8.4% *************** BMY - Bristol-Myers Squibb $50.45 *** Nationwide Lawsuit! *** Bristol-Myers Squibb (NYSE:BMY) is a producer and distributor of medicines. The company's products include PRAVACHOL, GLUCOPHAGE, TAXOL, PLAVIX, BUSPAR, PARAPLATIN, ZERIT, MONOPRIL, CEFZIL, VIDEX, AVAPRO, SERZONE, CAPOTEN/CAPOZIDE, EXCEDRIN, infant formulas, ostomy products, and wound care products. Last year, the company announced the divestiture of its Clairol and Zimmer businesses. The company separated the Zimmer business in a tax-free spin-off to shareholders in August, 2001 and in November 2001, the company sold Clairol to Procter & Gamble. Bristol Meyers Squibb recently acquired DuPont Pharmaceuticals Company, a subsidiary of DuPont. DuPonts' key products include SUSTIVA, a non-nucleoside reverse transcriptase inhibitor; COUMADIN, an oral blood anticoagulant; and CARDIOLITE, a cardiovascular radiopharmaceutical that is the gold standard. Bristol-Myers Squibb was a big mover today, down almost 10% after the company received news of a legal broadside in which attorney generals from 29 U.S. states filed lawsuits against the drug giant. The complaints allege that BMY illegally kept generic versions of its BuSpar anxiety medication off the market, cheating consumers out of millions of dollars. The complaint also alleged that the world's #5 drug-maker knowingly made false statements to the U.S. Food and Drug Administration and that's not something you want to do when you have other developmental drug applications pending. One analyst said, "The company has tried to bring every bit of legal leverage they could find to protect their patents and there has been a question if this aggressive approach was going to backfire." The answer appears rather obvious at this point and traders can speculate on the near-term movement of the issue, in a conservative manner, with this combination position. BMY - Bristol-Myers Squibb $50.45 PLAY (speculative - bearish/credit spread): BUY CALL DEC-60 BMH-LL OI=3880 A=$0.20 SELL CALL DEC-55 BMH-LK OI=1736 B=$0.50 INITIAL NET CREDIT TARGET=$0.35-$0.40 MONTHLY PROFIT(max)=22% *************** SEE DISCLAIMER ***************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. 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