The Option Investor Newsletter Sunday 12-16-2001 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/6425_1.asp Entire newsletter best viewed in COURIER 10 font for alignment Posted online for subscribers at http://www.OptionInvestor.com The Option Investor Newsletter Sunday 12-16-2001 Copyright 2001, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 12-14 WE 12-07 WE 11-30 WE 11-23 DOW 9811.15 -238.31 10049.46 +197.90 9851.56 -108.15 + 92.72 Nasdaq 1953.17 - 68.09 2021.26 + 90.68 1930.58 + 27.39 + 4.61 S&P-100 572.38 - 19.40 591.78 + 6.98 584.80 - 8.47 + 5.20 S&P-500 1123.07 - 35.24 1158.31 + 18.96 1139.45 - 10.89 + 11.69 W5000 10443.56 -301.81 10745.37 +213.92 10531.45 - 64.95 +109.73 RUT 471.29 - 9.92 481.21 + 20.43 460.78 + 2.36 + 7.11 TRAN 2577.10 - 51.16 2628.26 +116.48 2511.78 - 23.12 + 37.53 VIX 25.97 + 1.08 24.89 - 1.25 26.14 + 1.36 - 2.39 VXN 52.79 + 2.61 50.18 + 1.73 48.45 - 2.36 - 4.23 TRIN 1.06 1.18 1.19 0.70 TICK +388 +828 +852 +976 Put/Call .72 .78 .63 .61 ****************************************************************** Tightrope Act Leaves Investors Confused! by Jim Brown The markets rallied slightly from their oversold conditions but came to a stop exactly on critical technical levels. The rally came on rumors that UBL had been captured or killed. While just a rumor the shorts did not want to hold positions over the weekend and be faced with a patriotic bounce at the open on Monday should the rumor be found true. After the close a defense dept briefing was held and the rumor proved to be untrue. Other than the rumor bounce it was a very slow day. You can tell just how slow when the three biggest news stories were on McDonalds, Home Depot and GE. Not normally news drivers they shared the spotlight as traders struggled to maintain interest a week before Christmas. McDonalds said they were on track in their recovery program but they would come in at the low end of estimates and a penny below consensus. The European business was recovering from the mad cow scare but the Japanese unit was now suffering the same fate after three cows have tested positive since September. Weak Asia/Pacific economies were also weighing on their business. Still on a slow news day McDonalds "soared" +1.16 or +4.5% on the announcement. Are you excited yet? Home Depot "rocketed" +1.81 on news that holiday shoppers were spending money on home improvement items and stores were seeing heavier traffic even though normal holiday retailers were facing slowdowns. I know this is exciting stuff but please try to control yourself while I wade through this market moving news. It appears Lowes and Home Depot actually added some merchandise that would appeal to shoppers as impulse gifts such as coffee makers, crock pots, home electronics and Christmas lights. Wow! A major marketing breakthrough! Stock what people will buy, I wonder if it will catch on in the entire retail sector? This novel approach to retailing caused HD to post the biggest gain of any Dow component. I told you this was an exciting news day! I hope your sitting down because you may need a drink after this next paragraph. At least that is what the liquor industry hopes. GE component NBC opened the spigot on allowing advertisements for hard liquor on national television. The decades old informal prohibition will come to an end with a spot for Smirnoff vodka which will air on Saturday Night Live. The advertising market has gotten so bad that it appears past taboos may become prime time gluts. Once the door is opened to liquor ads all the major brands will have to ratchet up their campaigns and throw massive amounts of money at the major networks. The change in status could provide a replacement for the tobacco ad revenue which disappeared many years ago. GE "spiked" the markets with a +.60 gain. I told you it was slow. Even the economic news was dull and uninspiring. The Industrial Production number came in at -0.3% which was much better than the -0.6% decline that was expected. Still it was the thirteenth month of decline in the last fourteen months. Capacity utilization fell to 74.7% and the lowest level since 1983. The good news was that five of the twenty industries that make up the manufacturing component showed gains and new orders are beginning to show signs of improvement. This indicates that growth over the next two months will likely remain negative but it is starting to get better. Business inventories fell -1.4% which was twice the consensus and the inventory-to-sales ratio fell to 1.39, the lowest level since June 2000. Many analysts believe the inventory correction is becoming so overdone that the rebound off the bottom will be very strong. Once inventory reaches maintenance levels orders will have to be processed to maintain those levels and not slip into shortage territory. Once this maintenance level is reached and manufacturing stabilizes then analysts will feel more comfortable about predicting future trends. The Consumer Price Index continued to gyrate and posted a flat month when analysts had expected a drop. The Fed was expecting more drops in inflation and the zero change in the rate was probably a shock. One month does not make a trend but any resiliency in the core price inflation will undermine support for further rate cuts. Of course there are not many rate cuts left in the Fed's arsenal anyway. What could happen would be a rush to take back those rate cuts if the inflation monster starts to shadow us again. The calendar for next week is very light with the only major report being the 3Q GDP on Friday. Friday is triple witching option expiration day and coupled with all the year end portfolio shuffle the volatility could be dramatic. The biggest problem we will face next week is not the economic calendar but the tax selling calendar. Most funds will want to be done before the holidays which means we could see more selling before Santa arrives. The bounce at the close on Friday was simply short covering in case the Eastern Alliance serves up a well known turban on a platter for U.S. troops. The major indexes rose up to rest exactly on support, now resistance, of 9800 (9811) 1950 (1953) and 1125 (1123). You probably recognize those numbers as my entry- exit points from the last two weeks. Could that many traders really be reading my material? Just kidding. I obviously did not pull those numbers out of my hat since they have now become something of a battle ground between the bulls/bears. Since the indexes came to a stop exactly on the edge of a breakout/breakdown we need to look a little closer at the market movers to decide what direction next week might take. To do this we can look at all the Dow stocks to see which are likely to go up or down. Dow 30 Stocks AA Alcoa $37 trending down, support $35 AXP American Express $32 trending down, support $30 T AT&T $16 trending down, support $15 BA Boeing $37 trending up, resistance $38 CAT Caterpillar $50 trending down, support $48 C Citigroup $47 trending down, support $45 DIS Disney $21 trending up, resistance $23 KO Coca Cola $46 flat - no risk DD Dupont $41.5 trending down, support $40 EK Kodak $30.5 trending down, support $29 XOM Exxon Mobil $37 trending down, support $36 GE General Electric $37.6 flat - resistance $38 GM General Motors $47.5 trending down, support $46 HD Home Depot $50 trending up but at strong resistance HON Honeywell $32 trending down, support $30+ HWP Hewlett Packard $21 trending down but at support IBM IBM $121 flat, resistance 122, support $119 INTC Intel $33 flat, resistance at $34 IP Intl Paper $39 flat, at support JPM JP Morgan $36 trending down, support $35 JNJ Johnson&Johnson $56 trending up, resistance at $57 MCD McDonalds $27 trending down, support $26 MRK Merck $58 trending down, at support MSFT Microsoft $67 trending down, support $66 MMM 3M $115 trending down, support $114 MO Phillip Morris $46 flat, resistance $46, support $45 PG ProctorGamble $80 trending up but overextended SBC SBC Comm $39 trending up, resistance $40 UTX United Tech $61 trending up, resistance $62 WMT WalMart $54 trending down, support $52 The bottom line from all the Dow analysis above is that there are 17 down trending stocks, 7 up trending and 6 flat. The difference between current prices and support on the down stocks totals slightly more than $22.50. Using an average weighting of seven to get Dow points you arrive at a downward risk of -157.50. That would put us at 9656 but it also does not take into account the up trending stocks. The stocks moving up have a total of $7 between them and resistance which equates to +49 Dow points. You cannot draw any specific point conclusions since on any given day some stocks will be up and some down. The conclusion you can draw is that the Dow is heavy. That means that it will require more effort to produce a rally than it will to cause a drop. With down trending stocks outweighing stocks moving up by better than a 2:1 margin the odds are better for another drop or at least no major gains. This analysis is only good for a couple days since the internals for each Dow stock will change daily based on hundreds of factors. The top Nasdaq stocks breakdown like this. I added the percent of the Nasdaq for each stock. DELL $28, trending down, support $26 - 2.46% CSCO $19, trending down, at support - 4.49% ORCL $14, trending down, at support - 3.08% MSFT $67, trending down, support $66 - 11.1% INTC $33, flat, resistance at $34 - 6.94% QCOM $56, trending down, support $49 - 4.56% WCOM $15, trending down, at support - 1.41% SUNW $12, trending down, at support - 1.58% PSFT $38, flat, at support - 1.48% MXIM $57, flat, at support - 2.31% AMGN $56, trending down, support $55 - 2.65% Notice anything? With 42% of the Nasdaq represented in the eleven stocks above, there are zero stocks trending up. With the exception of QCOM however there is only $6 between their current prices and support. While there are no winners there are no losers either other than possibly QCOM. This means that the Nasdaq is stronger than the Dow and could wage a tough battle here at 1950 before giving up ground. The low prices, and I am not talking about PE ratios, of the stocks on the Nasdaq compared to where they started 2001 could draw more tax sellers. HOWEVER, since the techs always lead the market out of bottoms there is likely to be a lot of buyers as well. These buyers, $4.5 trillion in cash on the sidelines, have been waiting for a sign and a failure to fall any further next week after posting huge gains since the attack could be that sign. That sign may not be seen on Monday/Tuesday. After doing the Dow/Nasdaq analysis above I went back and scanned my top 1000 stock charts. It was not a pretty picture. Many, and I repeat many, of the stocks were completely broken down. Many had fallen to support and were showing signs of failure. Chemical stocks, networking, chips, materials, banks, there were very few leaders. This appears to be a case of the soldiers getting crushed while the generals are struggling to hold the high ground. If the trend spreads next week that sign of end of year strength I spoke of above will only be wishful thinking. It is entirely possible we could see another washout drop if earnings warnings pick up speed before the holidays. In my opinion that would be the best scenario. Clear the desks, take profits, close the tax books and let the next bull market begin. Everyone knows we are in a recession. Old news! Everyone knows that a recovery will likely appear in the second half of 2002, give or take a quarter. Our task is to avoid losing money while waiting for the next move up to begin. This is really a very easy task. Instead of wondering each day if this is the day, we only need to watch the technical entry points. We do not need to worry if there will be tax selling. Or about the possibility of a Santa Claus rally or even when the January Effect really appears. We only need to worry about our planned entry point. Our job became only slightly more difficult on Friday as the markets came to rest exactly on those entry/exit points. Some of us went long when the markets rallied over the entry points on the Laden rumor and then saw those indexes fall right back to the entry point at the close. We should not agonize over this and simply keep to the plan. If we dip below those levels next week then simply go flat and wait for the numbers to be crossed again. The numbers I am referring to are Dow 9800, Nasdaq 1950 and S&P-1125. Stay flat below them and go long above them. So simple it is scary! Enter Very Passively, Exit Aggressively! Jim Brown Editor@OptionInvestor.com ************************ YEAR END RENEWAL SPECIAL ************************ I am really happy to announce this years annual renewal special. We spent considerable time and effort deciding what would be something traders could actually use instead of something to collect dust. Each of the editors was tasked to produce an investor guide covering the topics that our readers have requested most. We spent hundreds of hours compiling these five special investor guides to help our readers be better investors. Each is done with full color charts and graphs and is something you can refer back to for years to come. Winning Option Strategies - By Jim Brown Over 200 pages of strategies from simple calls and puts to spreads, straddles, naked puts, combination plays, leaps etc. Each strategy is explained in detail and then followed with real life applications of how to profit from each one. Jim teaches entry points, market cycles and general trading psychology as well as money management and money saving tips for dealing with your broker when errors occur. Swing Trading For Success - Austin Passamonte A descriptive outline providing simple guidelines that allow you to identify current market direction and profit from the high-odds price swings that occur within. The secret of swing trading is exposed: Identify underlying price direction and wait for brief market moves counter to that trend. Enter short-term trades at key points where price action is poised to snap back with the trend and enjoy a large percentage of winning trades! This guide has been written as only Austin can and is full of real tips and profitable trading knowledge. Lots of full color charts enhance the readers understanding. Point-and-Figure Charting - Jeff Bailey In this trading guide, Jeff Bailey reveals the secrets to interpreting those intriguing supply and demand charts characterized by columns of X's and O's - Point & Figure charts. If you have never used Point-&-Figure charts in your investment analysis you're missing a vital clue that institutional traders have been using for years. Jeff illustrates the basic interpretations for beginners while also discussing more advanced concepts like the bullish percent for advanced traders. Those readers who have seen the power in Jeff's point-and-figure charts can now understand and profit from this powerful charting method. Real winning tips from our point-and-figure pro. Technical Analysis Explained - Eric Utley There are myriad technical analysis tools for today's trader. Eric has sorted through the choices and found a mix that provides traders with a solid foundation for observing and operating in the market. Long-time subscribers of Option Investor have seen tools such as Fibonacci retracement brackets used by Eric Utley and Bollinger bands used by our Leaps Editor, Mark Phillips. This manual details the aforementioned indicators and others used by the Option Investor staff. Within the manual, subscribers will discover the philosophy, integration, and application of many of the most effective technical analysis tools used by the professionals. For the first time, the tools used by the Option Investor staff will be made available in a resource that will enrich and educate its readers. 2002 Mutual Fund Guide - Steve Wagner Our 2002 Mutual Fund Guide has everything you need to know about mutual funds. It covers the basics of mutual funds, such as what they are, how they work and are traded, as well as the different types and objectives of mutual funds. The guide also offers our top fund choices in eight broad investment objectives for 2002 and beyond. We provide an unbiased perspective on fund performance, risks and costs, speaking in terms you can understand and use. As of May 2001, 93 million individuals, representing 52 percent of all U.S. households, owned mutual funds. Whether you are an experienced mutual fund investor or new to mutual funds, you'll find something of value in our 2002 Mutual Fund Guide. Aggressive, conservative or income producing, there are funds for everyone. Where should your retirement savings be? Not in options we hope! 2002 Options Expiration Calendar Mousepads You will get two of these handy mousepads with the 2002 options expirations dates including a reference of month and strike price codes. These are very popular and this will be our fourth year of providing these to our readers. You get two, one for home and one for your office. This way you will never be scrambling for that date of code. This may be our best annual renewal special yet. Don't miss out on this offer. Click here for more details: https://secure.sungrp.com/02renewal.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 ************************************************************** ************* EDITORS PLAYS ************* This must be "dead cat bounce" week. The two plays I have selected to highlight this week were slaughtered by investors on news events. I view next week as risky in the market so the best way to avoid risk is to play stocks with the risk removed. AMGN - $56.03 Amgen took a fall this week after a story broke that it may be in talks to buy Immunex. Initially the analysts thought AMGN was going to pay too much for the company and would have trouble getting the deal approved by 41% owner AHP. After further review, there are a lot of positive points in this transaction. With the deal AMGN would double its rheumatoid arthritis drug franchise. IMNX has a drug called Enbrel that could easily be as big as Prilosec in sales and AMGN recently announced its own drug, Kineret for the same problem. Having two major drugs for the same illness would make marketing easier and possibly promote both drugs as a cocktail for severe cases. The deal would also give IMNX a dose of cash to bolster its efforts to develop new drugs. AHP needs the money as well and a few billion in cash and stock at a time when drug companies are getting killed in the generic market would not hurt. Both AMGN and IMNX are working on cancer and autoimmune drugs and the combined entity could accelerate its research in those areas. I like this play because the risk has been removed from AMGN. The stock has been crushed back to strong support at $55 and once the deal is made public any details could provide a boost. Also, should the deal crater then AMGN could quickly recover some of the almost -$15 it has lost on the rumors. Minimum downside and positive upside. Sounds good to me. I would use the April-$60 call YAA-DL which closed at $4.70 on Friday. ****************** PCYC $9.39 No brainer This is as close to a no brainer as you can get. Pharmacyclics reported that a phase III drug for treatment of brain cancer failed to meet its primary goals. The stock, which has only one other drug nearing completion in its pipeline, was crushed from $23 to $9. What was overlooked by the press was positive reports about the same drug being effective in lung cancer (still in tests) and a change in the way the drug was going to be administered in brain patients. It was supposed to be effective in patients who had undergone chemo and was given during and after the process. The company feels that if it is given before chemo it could be much more effective. Still, the main point here is a small cash thing. The company has $8.80 in cash for each share of stock. That means you are getting the entire company for $.59 cents. In reality the company will use some of that cash to restart trials on the drug and push the other drug to completion. More results are expected on the lung cancer tests sometime in the first quarter. Considering the cash position of the company the stock is not likely to fall below $9.00 making the short term risk here very minimal. Any favorable news about the two main drugs or any of the drugs farther back in the process will renew investor hope and increase the stock price again. I would use the June $10 call QPY-FC $2.55. ********************** Top 20 List The number of long call plays was slimmer this week as the market internals, as represented by the non-leader stocks, is becoming very weak. Please only play these calls if the market is in rally mode. CALLS ACS 98.70 Slow mover, good trend BOL 34.98 Steady trend BRKS 40.25 Rising off support CA 35.43 Buy breakout over $36 CC 24.15 On fire, new high, wait for pullback CCMP 78.63 Buy breakout over $80 CDWC 54.53 Rebounding off support after profit taking CEGE 23.13 Rebounding after pullback to support CMTN 2.25 Nice rebound, buy the stock! CPRT 35.00 Rebounding off support CPWR 13.50 Breakout EDMC 38.33 Buy breakout over $39 EMMS 19.59 Buy breakout over $20 FDC 75.16 Rebounding off support at $74 GNSS 69.80 Buy on next pullback HP 30.18 Buy over $30 IKN 11.39 Profit taking over? KBH 38.25 Near new high KKD 40.62 Cult classic MANU 17.24 New relative high MDT 48.80 Buy breakout over $49 NVDA 65.66 Breakout to new high OSIP 43.21 New life, back from the dead! SEPR 55.50 New relative high SRCL 61.64 New high XMSR 16.24 Wait until it breaks $17 then hang on PUTS CMVT 19.16 Multiple downgrades, support $15 ELNK 11.70 Bottom fell out FON 19.05 New low MIR 15.85 Energy loser 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 **************** Mixed Signals By Eric Utley On the surface, Friday was a positive day. After all, the major averages finished higher. They were fractional gains in the INDU, SPX, and NDX, but gains nonetheless. However, there was additional internal damage done last Friday. Recall that in Thursday's column I highlighted the move to Bear Confirmed in the Nasdaq-100. A few of those tech stocks that I referred in that column lost their support levels as evidenced by the further drop in the Nasdaq-100 Bullish Percent. It lost three stocks in Friday's session. To confound matters, the Nasdaq-100 COT report revealed an interesting shift this weekend. Commercial interests added a meaningful number of longs, while small traders added a huge number of shorts. That could set-up a situation in which the amateur bears are squeezed out of their positions. Also worth noting was the shift in the New High/New Low index on the NYSE. The line was been positive up until Friday's session, when the New Lows overtook the New Highs. The Nasdaq index, however, remained positive. The market's sentiment is tough to gauge with the mixed signals. Plus, the holiday and end-of-year issues are most definitely at play. And we can't forget the bin Laden factor. Something could give as early as next week. A big leg down in the tech sector is possible with the Nasdaq-100 in Bear Confirmed mode, but the COT report seems to suggest otherwise. Editor's Note: Eric Utley is on vacation next week. Russ Moore of IndexSkyBox will be filling in for Eric in the Market Sentiment. ----------------------------------------------------------------- Market Volatility VIX 25.97 VXN 52.79 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.71 592,685 423,862 Equity Only 0.66 522,572 345,728 OEX 0.64 21,219 13,682 QQQ 1.37 36,437 49,866 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 49 + 0 Bull Confirmed NASDAQ-100 65 - 3 Bear Confirmed DOW 60 - 3 Bull Confirmed S&P 500 62 - 1 Bull Confirmed S&P 100 63 - 1 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 1.22 10-Day Arms Index 1.03 21-Day Arms Index 1.10 55-Day Arms Index 1.07 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 1759 1348 NASDAQ 1833 1783 New Highs New Lows NYSE 52 56 NASDAQ 78 38 Volume (in millions) NYSE 1,302 NASDAQ 1,868 ----------------------------------------------------------------- Commitments Of Traders Report: 12/04/01 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 interests grew their net bearish position last week, although the % of OI was unchanged. Small traders added a small number of shorts and shed a few more longs. Commercials Long Short Net % Of OI 11/27/01 371,336 421,405 (50,069) (6.3%) 12/04/01 360,315 420,919 (60,604) (7.8%) 12/11/01 367,397 429,640 (62,243) (7.8%) 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 11/27/01 151,317 92,807 58,510 24.0% 12/04/01 159,336 86,534 72,802 29.6% 12/11/01 158,490 86,717 71,773 29.2% 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 traders added a significant number of longs last week, while the group's short position declined. In an interesting turn, small traders added a significant number of short positions, taking the net position to only a fractionally bullish stance. Commercials Long Short Net % of OI 11/27/01 37,259 48,315 (11,056) (12.9%) 12/04/01 42,191 51,426 ( 9,235) ( 9.9%) 12/11/01 45,468 51,392 ( 5,924) ( 6.1%) 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 11/27/01 12,540 8,359 4,181 20.0% 12/04/01 11,808 8,311 3,497 17.4% 12/11/01 12,425 11,754 671 2.7% 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 Commercial interests continued in the trend of reducing their net bullish position during the most recent reporting period. The % of OI long dropped by 6 percent. The small traders dumped a few longs and shorts for a slight decrease in their net bearish position. Commercials Long Short Net % of OI 11/27/01 24,243 11,496 12,747 35.7% 12/04/01 22,703 10,739 11,964 35.8% 12/11/01 23,135 12,576 10,559 29.6% 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 11/27/01 4,228 10,630 (6,402) (43.1%) 12/04/01 3,677 9,799 (6,122) (45.4%) 12/11/01 3,469 9,065 (5,569) (44.4%) 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 *************** Pass The Sunscreen By Eric Utley I was driven mad by the market late last week. Anybody else see the bond market? After a brief rally, Treasuries pulled back last week, which sent yields up to relative highs. That could've been a bullish development for stocks. Why then did the Nasdaq-100 Bullish Percent ($BPNDX) go Bear Confirmed last Thursday? Also, what's up, err, down with the CPI? The Labor Department reported that its consumer price index remained flat in November. Why then did Treasuries sell-off on the news? Why was the S&P Retail Sector Index (RLX) higher by 1.8 percent? Why was energy higher? What!?! What in the world was the Philly Gold and Silver Index (XAU) doing higher last Friday by 3.87 percent? Kind of smelled inflationary, didn't it? When my head spins at the rate it was last Friday, I know it's time for a reprieve. Now is that time. I'll be cruising for warmer parts over the next two weeks. Unfortunately, the ship I'm traveling on doesn't have Internet access. I know, I'm disappointed, too. It may be best to hold questions and requests until my return as I won't be replying to any e-mails over the next two weeks. Until then, I wish you and your close ones a happy and safe holiday season. 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 ---------------------------- Amgen - (NASDAQ:AMGN) Amgen has provided some good earning expectations going forward and I have been looking for a pull back to its support to enter a play. Could you do some retrenchment work on this stock. - Thanks, Rich Thank you, Rich. It's a good time to write about Amgen. Amgen, with its $60 billion market cap, is the world's largest biotech concern. The company is reportedly in merger talks with Immunex (NASDAQ:IMNX), a relatively small biotech company with a big rheumatoid arthritis drug in Enbrel. Interestingly enough, I wrote a piece detailing Amgen about a month ago in an Option Investor Intraday Update. At the time, Amgen had just received FDA approval for its rheumatoid arthritis drug, Kineret. Several reports that I read suggested that Amgen would try to combine its niche Kineret with Immunex's Enbrel in a duel treatment fashion. Little did I know that the reports I read revealed a merger in the making. The market didn't react positively to the merger talks as shares of Amgen plunged late last week. Some are concerned that Amgen's $18 billion offer for Immunex is a bit of a stretch. Amgen has about $2.5 billion in cash and a bit more in liquid assets, which it would use to pay for a portion of the acquisition. The remaining funds for the deal would come from shares of Amgen. Analysts predict that the deal would be dilutive to Amgen and some are concerned over the marketing rights for Immunex's Enbrel. That's so because American Home Products (NYSE:AHP) owns about 41 percent of Immunex. Sources close to the deal have said that American Home Products supports the merger for the most part, although AHP's sponsorship remains to be seen. Amgen is expected to formally announce the merger next week. The combination of the two would create a biotech behemoth, broad and deep in research and development and far-reaching in marketing prowess. Indeed, the cross-marketing of Amgen's and Immunex's arthritis offerings may have a long-term positive impact. But the essence of the market's negative reaction is that Amgen is willing to pay too much. (On a side note, the market has reacted rather poorly to the recent acquisitions in the biotech sector. The Millenium (NASDAQ:MLNM) and Corr Therapeutics (NASDAQ:CORR) deal was frowned upon.) The market's negative reaction helped to retrace Amgen's recent rally, which was spurred by the company's raising of fiscal '02 guidance that Rich referred to. Prior to the breakout that was induced by the positive guidance, Amgen traded in a base that had a solid bottom in place at $56. Guess where the stock stopped Friday? If you're bullish on the biotechs, the Amgen deal, or just want to try to pick a bottom in a stock, I think it can be tried here in Amgen. My speculation that AMGN will bounce from $56 was reached by using a vacuum to view the current set-up. In other words, it's independent of other variables, such as the merger falling through or the price action of the broader biotech sector. My thesis is based purely on the fact that AMGN closed near a very meaningful support level last Friday at $56. Risk is incredibly easy to manage in this case: a stop at $55. Of course a formal merger announcement could create a gap down situation, which is beyond my ability to forecast. But there could be a bounce good for three points, while risk is currently $1. ---------------------------- American International Group - (NYSE:AIG) I jumped on your AIG put bandwagon last month, feeling very impressed by all that point and figure charting, that I still don't really understand, and the 'long term' 83% chance of being correct in being bearish on AIG. How do thinks look now? Are my long term puts still in good shape? - Cheers, Damian Thanks for the question, Damian. I don't know if it was a bandwagon, but I jumped into the S&P Insurance Sector Index (IUX) play and was stopped out in early November. I'm terribly upset with that much. Are your long-term puts in good shape? I cannot comment on a specific position, but I can give you my best assessment of the IUX and AIG. The IUX, of which AIG is a component, is again under performing the S&P 500 -- the IUX is weak. The index traded back and forth during November and into early this month. I thought it was going to trace another triangle, which would have been a most interesting development. But the second triangle never came to be. The IUX's drop last Monday put it back on a sell signal. The index could not get above its 200-dma in late November and early December. The moving average finally pressured the IUX lower last Monday. What's especially upsetting to me is that the IUX failed to reach its early October highs after stopping me out in November. Most other sectors of the market traded past their early October highs during the most recent push higher. But that not the IUX. That fact alone tells me that the index is one of the weaker in the market without doing any relative strength work. So now we're back at the magical 700 level in the IUX. The index stopped at that level last Friday and traded a bit higher into the close. I think a trade below 700 could have the IUX set-up to retest its lows in early November down around 680. AIG is tracking the IUX closely. AIG does have very, very meaningful support immediately below its current level. Between $77 and $78 is serious support. If that support level is lost, then I think AIG works significantly lower. With the relative highs getting lower in AIG, the path of least resistance appears skewed to the downside. If I'm wrong, have a stop in place to protect your capital. I was wrong about the IUX triangle, but it remains to be seen if the index eventually trades down to its target. ---------------------------- 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 ************* Monday, 12/17/01 None Tuesday, 12/18/01 Housing Starts Nov Forecast: 1.53M Previous: 1.55M Housing Starts Nov Forecast: 1.47M Previous: 1.47M Wednesday, 12/19/01 Trade Balance Oct Forecast:-$27.5B Previous: -$18.7B Leading Indicators Nov Forecast: 0.2% Previous: 0.3% Thursday, 12/20/01 Initial Claims 12/15 Forecast: N/A Previous: 394K Philadelphia Fed Dec Forecast: -17.5 Previous: -20.2 Treasury Budget 12/08 Forecast:-$47.5B Previous: -$23.7B Friday, 12/21/01 Personal Spending Nov Forecast: -0.5% Previous: 2.9% Personal Income Nov Forecast: 0.0% Previous: 0.0% GDP-Final Q3 Forecast: -1.1% Previous: -1.1% Chain Deflator-Final Q3 Forecast: 2.1% Previous: 2.1% Mich Sentiment-Rev Dec Forecast: 85.7 Previous: 85.8 ************************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 12-16-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/6425_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 CNXT 15.86 0.54 -0.37 0.08 -1.53 -0.57 Dropped INTC 33.27 -0.29 0.24 0.89 -1.51 0.03 Near support XMSR 16.24 0.01 0.55 0.53 0.01 3.30 Super!!! AMR 23.12 -0.52 -0.07 0.25 -0.42 -0.22 Ready to fly? CI 89.40 -2.82 0.46 -1.03 -0.85 -4.90 Dropped FFIV 25.14 -0.30 2.30 -1.92 1.10 -0.31 Entry point IBM 121.10 -0.74 1.84 1.70 -2.95 0.70 Dropped LOW 45.89 -0.61 -0.19 0.63 -0.56 -0.42 Dropped NVDA 65.64 0.61 2.17 1.95 -1.86 5.69 Giving gifts QLGC 51.53 0.69 0.41 2.06 -3.83 -1.44 Dropped AMZN 11.00 -0.39 0.59 -0.33 -0.42 -0.74 Dropped RATL 20.86 -0.80 1.11 1.89 -0.65 0.06 Entry point! ADIC 17.05 -0.38 0.04 0.49 -0.04 0.55 New, DDX.X SEPR 55.47 1.07 0.93 0.00 0.05 3.47 New, strong OAKT 14.69 -0.03 0.51 -0.08 -0.17 1.16 New, mending MDT 48.85 -0.90 -0.26 0.27 0.39 0.85 New, breakout PUTS VZ 47.20 0.45 -0.45 -0.49 0.16 -0.66 Make or break FRE 64.05 0.75 0.20 0.50 -1.12 -0.20 Watch the bond DYN 24.94 -2.48 -1.85 -0.84 1.47 -5.34 Debt downgrade CAH 65.69 -1.37 -1.07 1.28 -1.33 -0.45 Dropped CB 67.45 -1.60 -0.09 0.13 0.12 -0.26 Dropped HGSI 33.60 -1.70 -0.35 -1.88 1.14 -2.49 Keeps falling QCOM 55.84 0.06 0.50 0.14 -2.67 -1.13 Short covering AFFX 33.65 -1.79 0.24 -1.19 0.74 -3.65 New, biowreck CERN 49.00 0.74 -1.36 -1.34 -1.40 -4.69 New, downtrend ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* MDT - Medtronic, Inc. $48.85 (+0.85 last week) See details in play list Put Play of the Day: ******************** CERN - Cerner Corporation $49.00 (-4.46 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 ^^^^^ CNXT $15.86 (-0.57) CNXT bounced from the $15.50 stop level last Friday, but failed to make much progress to the upside thereafter. The stock may come under pressure if weakness persists in the SOX next week. For that reason, we're dropping trading coverage this weekend. Traders may continue to watch for a better entry point at lower prices in this strong semi. CI $89.40 (-4.90) One of many failed breakouts in the past couple weeks, CI hasn't had a decent bullish day since closing above the 200-dma a week ago. Although our stop at the $89 level is still intact, we don't like the fact that the bulls have been unable to gain any traction over the past 5 sessions. Rather than hold our breath going into another week, we'll just kick CI off the playlist this weekend. There are plenty of other fish in the sea. IBM $121.10 (+0.70) It's time to lock in our gains and move on. IBM has been on the playlist for the past 6 weeks, providing numerous profitable trading opportunities, as the stock worked up from the $106 level as high as $123. Now that the stock has broken out to new highs, it is probably a safe bet that we'll see some sideways trade for awhile. We're more than happy to pocket our gains and move on to the next profitable play. LOW $45.89 (-0.42) Our LOW play was D.O.A. (that's Dead On Arrival). After tracing a new all-time high, the bulls seem to have gone into hibernation, as the stock has been drifting sideways for more than a week. Without any sign of life, the momentum that was driving the stock higher has clearly evaporated, and so has our interest in the play. LOW moves to the drop list this weekend. QLGC $51.53 (-1.44) After several attempts to push through the $56 resistance level, it looks like the bulls have been put out to pasture and the bears are extending their claws again. Falling below our $52 stop on Friday, QLGC has lost its bullish bias, and rather than hope for another bounce and run at resistance, we're pulling the plug this weekend. AMZN $11.00 (-0.71) After rolling over near $12.50 on Wednesday, AMZN was fighting a losing battle for the remainder of the week. The bullish wedge failed to produce an upside breakout and Friday's early weakness dragged the stock within a few pennies of our $10 stop before there was any help from the buyers. Although the stock got a decent bounce in the afternoon, the chart pattern no longer looks attractive to the long side. We'll move to the sidelines this weekend, and would recommend using any strength next week to exit the play at a more favorable level. PUTS ^^^^ CAH $65.69 (-0.45) Our CAH play has been flirting with the $63.50 level for most of the past week, and it looks like the bulls are going to win this round. With a solid bounce on Friday and daily Stochastics turning up out of oversold, it's clearly time to call an end to the play. Use any weakness next week to exit any open plays at a more favorable price. CB $67.45 (-0.26) Oops! That's not how a put play is supposed to behave. While we did manage some short-term gains in CB, the stock is back in bullish favor as buying volume has been strong. While our $69 stop is still in place, we'll take the opportunity to exit the play this weekend before the bulls gain any more traction. *********** 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 ************** OAKT - Oak Technology $14.69 (+1.16 last week) Oak Technology designs, develops and markets high-performance integrated semiconductors, software and platform solutions to original equipment manufacturers (OEMs) that serve the optical storage, I-appliance and digital imaging equipment markets. The company's products consist primarily of integrated circuits and supporting software, all designed to store and distribute digital content, enabling its OEM customers to deliver cost-effective, powerful systems to home and enterprise end users. Breakout alert! Yep, that's right. We've got another Tech stock that is rocketing higher on heavy volume. This move really got started about 2 weeks ago when OAKT cleared the $12 resistance level and we've been waiting for the breakout to fail. Well, judging by the solid upward move since then, it doesn't look like it is going to happen. Especially not with days like Friday, which say a 6.75% rally on volume more than 75% above the ADV. There's very little in the way of overhead resistance now until OAKT reaches the $18 level. It might just make sense to chase the stock higher from current levels! Either look for an intraday dip in the $13.50-14.00 area to initiate new positions or enter as the stock pushes through $15 resistance. Since this is a clear momentum play, we are initiating it with a fairly tight stop at $13. It's not a lot of wiggle room, but if OAKT can't hold above that level, it will be an early sign that the bulls are losing their resolve. BUY CALL JAN-12 KAU-AV OI=735 at $2.85 SL=1.50 BUY CALL JAN-15*KAU-AC OI= 48 at $1.30 SL=0.75 BUY CALL APR-15 KAU-DC OI=113 at $2.50 SL=1.25 BUY CALL APR-17 KAU-DW OI= 0 at $1.60 SL=0.75 Average Daily Volume = 831 K MDT - Medtronic, Inc. $48.85 (+0.85 last week) As a medical technology company that provides lifelong solutions for people with chronic disease, MDT offers therapies to restore patients to fuller, healthier lives. Reading like a medical journal, applications for the company's primary products include bradycardia pacing, tachyarrhythmia management, atrial fibrillation, heart failure, coronary and peripheral vascular disease, cardiac surgery, spinal and neurosurgery and neurodegenerative disorders. Looking for a breakout? So are MDT investors, and you can almost taste the enthusiasm by looking at the big green candle on Friday. In addition to the nearly 3% rally, volume was solid too, as the stock closed at a new post-attack high. This makes the fifth time MDT has challenged the $49 resistance level since June. Will it succeed this time? Judging by the head of steam being built up by the sharply rising daily Stochastics, it looks like the answer is "Yes". This is one of those rare occasions where it looks like buying the breakout may provide the better entry point. Wait for MDT to clear the $49.25 level, ideally on continued strong volume before taking a position. For those that can't resist trying to buy the dip, look for any intraday dip above the $46.50 level to provide attractive entry points. Set stops initially at $45.50. BUY CALL JAN-45 MDT-AI OI=8376 at $4.60 SL=2.75 BUY CALL JAN-50*MDT-AJ OI=4270 at $1.25 SL=0.50 BUY CALL FEB-50 MDT-BJ OI=5825 at $1.90 SL=1.00 BUY CALL MAY-50 MDT-EJ OI=2956 at $3.30 SL=1.75 BUY CALL MAY-55 MDT-EK OI=1432 at $1.65 SL=0.75 Average Daily Volume = 4.19 mln ADIC - Advanced Digital Information $17.05 (+0.55 last week) A leading supplier of automated tape libraries, ADIC buys tape drives from other manufacturers and outfits them with robotic arms. The arm then selects a tape from a multi-tape unit, ranging in size from desktop-size to large standalone units, and adds or accesses data. With over 55,000 libraries installed and a suite of innovative software solutions and Storage Area Networking (SAN) products, ADIC is a leader in the rapidly growing market to manage and protect computer network information. There's nothing like a pending breakout to get the bulls lining up. ADIC has been working higher in a very deliberate manner for the past 8 weeks. Rally sharply and then consolidate. Repeat. Well, the past 2 weeks, the stock has consolidated between the $16-17 price levels and is poised to break out next week. Buying volume has been rising dramatically, topping four times the ADV on Friday. You can bet there are plenty of shorts betting against the breakout, and if it does happen, we could get an additional pop when they have to cover. Of course, it could take a bit more time before the bulls are ready to push through resistance, depending on the mood in the broad markets. Consider initiating new positions on an intraday dip near $16, so long as that level holds as support. Otherwise, wait for the stock to break out over $17 and take advantage of the momentum. We are looking for a short-term move to the $18 resistance level, and then a continuation to the $20 level in fairly short order. Place stops at $15.25, just below the 200-dma and major support. BUY CALL JAN-15 QXG-AC OI=199 at $2.75 SL=1.50 BUY CALL JAN-17*QXG-AS OI=287 at $1.15 SL=0.50 BUY CALL APR-17 QXG-CS OI=359 at $2.05 SL=1.00 BUY CALL APR-20 QXG-CD OI=317 at $1.25 SL=0.50 Average Daily Volume = 568 K SEPR - Sepracor $55.47 (+3.47 last week) As a specialty pharmaceutical company, SEPR strive to develop improved versions of widely prescribed drugs. Their Improved Chemical Entities (ICE) program identifies existing, widely prescribed drugs that might be replaced by improved, single- isomer or active-metabolite forms of such drugs. The company then seeks to develop ICEs that offer one or more benefits over the parent drugs, such as reduced side effects, improved efficacy or effectiveness for new indications. SEPR has licensed or is developing ICEs to treat a broad range of indications in areas including respiratory, urology/ gastroenterology, and psychiatry/neurology. In the wake of the MRK meltdown last week, it's a bit surprising to find a bullish play coming from the Pharmaceutical sector, but here it is. SEPR shrugged off the negative news and just kept churning higher, closing just shy of the $56 level on Friday. That makes the highest close for the stock since late February. There's going to be some resistance to work through near $57, followed by the $60 level, but it is hard to argue with the bullish trend. The ascending trendline that began in late September remains unbroken and is currently resting near $52, a recent level of resistance that has been acting as support. The 10-dma (currently $52.70) has been supporting the stock on intraday dips as well. With looming resistance overhead, profit taking from the recent rise is likely just around the corner. We don't want to get caught by it. Instead, let's take advantage of it. Don't chase SEPR higher, but wait for the pullback before initiating new positions. A dip and bounce in the $52-53 area looks attractive for new entries, with stops initially placed at $51. BUY CALL JAN-55*ERQ-AK OI=1036 at $4.50 SL=2.75 BUY CALL JAN-57 ERQ-AS OI= 425 at $3.40 SL=1.75 BUY CALL JAN-60 ERQ-AL OI= 865 at $2.50 SL=1.25 BUY CALL APR-60 ERQ-DL OI= 46 at $6.70 SL=4.75 Average Daily Volume = 1.35 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 12-16-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/6425_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 ************* CERN - Cerner Corporation $49.00 (-4.46 last week) Cerner Corporation designs, develops, markets, installs, hosts and supports software information technology and content solutions for healthcare organizations and consumers. CERN's product categories include Enterprise Systems, Financial and Operational Management Systems, Decision Support Systems and Knowledge Solutions, Point of Care Clinical Systems, Systems for Clinical Centers, Personal Health Systems and Interface Technologies. Clearly the company has a product or service for literally every phase of the healthcare process. After a sharp rally from mid-September to mid-October, shares of CERN have been in a persistent downtrend, and the bears seem to be getting more tenacious by the day. The most recent rollover got started in early December, as the stock failed to move through the 20-dma (then at $55.40) and it has really been picking up speed over the past week. Not only is the price movement increasing, but so is the selling volume. Friday's selling came to a (temporary) halt near $48, giving the stock a modest rise going into the closing bell. The $48 level is the site of prior support, so the rebound could just be reflexive. We're looking to initiate new positions when the bounce runs out of steam, ideally near the $52 resistance (old support level). We could see a bit more strength before the stock rolls over again (especially on a broad market rebound), but we're not willing to let it go too far. The descending trendline is currently resting at $54, and that level should put a cap on any rallies in the near term. Higher risk players can target new positions on a pop near that level, but remember that we are placing our stop at $54 as well. BUY PUT JAN-50*CQN-MJ OI=166 at $4.30 SL=2.75 BUY PUT JAN-45 CQN-MI OI= 0 at $1.90 SL=1.00 Average Daily Volume = 821 K AFFX - Affymetrix Inc. $33.65 (-3.65 last week) AFFX has established itself as a worldwide leader in the field of DNA chip technology. The Company has developed and intends to establish its GeneChip system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The Company's GeneChip system consists of disposable DNA probe arrays containing gene sequences on a chip, certain reagents for use with probe arrays, a scanner and other instruments to process the probe arrays, and software to analyze and manage genetic information from the probe arrays. The company sells its products to Drug and Biotech companies involved in gene research. It's time to pick on the weakling. The weakling sector that is. In case you haven't noticed, the Biotech sector (BTK.X) is still leading the NASDAQ, only now it is leading it down. After breaking below the $585 level early last week, the index just continued to weaken, and it looks like AFFX is about to join the bearish party. After completing a double-top near $38, the stock has been drifting lower and is now resting just above the $33 support level. The first serious support exists near $29.50, the site of the 38% retracement of the stock's gains since the September lows. Use any failed intraday rally to gain a better entry into the stock, likely near the $35 level. Alternatively, use a breakdown below the $33 level to enter momentum-based plays. Remember to keep an eye on the BTK, as the movement in the broader sector will likely tell us the direction AFFX is headed. We are initially placing our stop at $36, just above significant intraday resistance. BUY PUT JAN-35*FIQ-MG OI=73 at $4.00 SL=2.50 BUY PUT JAN-30 FIQ-MF OI=76 at $1.65 SL=0.75 Average Daily Volume = 1.61 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 ***************** QCOM - Qualcomm $55.84 (-1.13 last week) Qualcomm is engaged in developing and delivering digital wireless communications products and services based on the company's CDMA digital technology. The company's business area include integrated CDMA chipsets and system software, technology licensing, Eudora email software, and satellite based systems. Gerard Klauer Mattison initiated coverage on QCOM last Friday morning with a lukewarm outperform rating. The brokerage firm cited QCOM's dominant market position in the wireless segment. The firm also said that QCOM had an impressive balance sheet and was in a strong financial position. The news may have been partially responsible for the slight bounce in the stock last Friday. But more than likely, QCOM bounced higher on a combination of short covering and the fractional gain in the Nasdaq. As we pointed out last Thursday, it's very important to monitor the action of the broader Nasdaq as it relates to QCOM. If the Nasdaq continues higher early next week, look for it to weaken in conjunction with a rollover in QCOM near its 200-dma at $56.86. That level is near last Thursday's intraday high. In a declining Nasdaq, watch for QCOM to breakdown below the $55 short-term support level. BUY PUT JAN-57 AAO-MY OI= 3566 at $4.90 SL=3.25 BUY PUT JAN-55*AAO-MK OI=14985 at $3.70 SL=2.25 Average Daily Volume = 16.7 mln DYN - Dynergy $24.94 (-5.34 last week) Dynergy is a provider of energy and communications solutions to customers in North America, the United Kingdom and Continental Europe. The company's expertise extends across the entire convergence value chain, from broadband, power generation and wholesale and direct commercial and industrial marketing and trading of power, natural gas, coal, emission allowances, and weather derivatives. The power plays remain a very much news driven segment of the market. The bearish news last Friday cause another shift in sentiment after last Thursday's bounce. Moody's Investor Service put Calpine under review for a possible downgrade of its credit rating. Enron released a statement concerning alleged "inaccurate news reports and statements" about the company's 401K savings plan. And Mirant tried to defend its stock against associations with Enron. The aforementioned were all lower in Friday's session, including our DYN play. While extremely difficult to gauge, the news flow from the power companies will continue to dominate near term price action in our DYN play. Traders can watch for negative news from the pertinent companies and confirm price action in the market. In DYN, look for selling below last Friday's intraday low at the $23.50 level. If negative sentiment mounts and price action confirms, DYN could migrate back down to the $20 level next week. BUY PUT JAN-30 DYN-MF OI=7747 at $6.50 SL=4.75 BUY PUT JAN-25*DYN-ME OI=9970 at $3.10 SL=2.25 Average Daily Volume = 4.88 mln FRE - Freddie Mac $64.05 (-0.20 last week) Freddie Mac is a stockholder-owned corporation that was established by Congress in 1970 to support home ownership and rental housing. Freddie Mac purchases single family and multifamily residential mortgages and mortgage related securities, which it finances primarily by issuing mortgage passthrough securities and debt instruments in the capital markets. The bond market is most relevant to this play because mortgages are closely linked to the bond market. Obviously FRE is linked to the mortgage market. The recent rise in yields across the curve has some worried that mortgage rates may rise too quickly. Indeed, rates hit a 5 month high late last week, with an advance in key mortgage rates past the 7.00% level. If rates rise too quickly, it may deter consumers from refinancing and purchasing houses. The housing market has remained incredibly strong this year because of the low rates, but that trend has the potential to reverse if rates continue higher. FRE traded lower on the notion of rising rates last week, and may continue to do in next week's trading. The key here is to monitor the bond market in the form of the 10-year Yield (TNX.X). If the TNX.X continues higher, then FRE could come under further pressure. Watch for the stock to fall back below the $64 level early next week and confirm any such decline with a breakdown below short-term support at $63. BUY PUT JAN-70 FRE-MN OI=1285 at $6.40 SL=5.00 BUY PUT JAN-65*FRE-MM OI=3502 at $2.70 SL=2.00 Average Daily Volume = 3.23 mln VZ - Verizon $47.20 (-0.66 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 Services Index (YLS.X) finished slightly lower last Friday while VZ finished down by a little more than its sector gauge. The out performance to the downside was encouraging. More importantly, perhaps, was the inside day traced by VZ last Friday. The stock traded within the previous day's high and low, which generally reveals indecision on the part of market participants. The stock could either be near the end of its recent trend or ready to break to new lows. Not by coincidence, VZ is sitting right on its relative lows at the $47 level, which has acted as support in the last two sessions. Either the stock is going to breakdown below the $47 level in the coming sessions or it's going to rebound in a big way. That said, if you have open positions in this play, consider setting a tight stop to protect against a potential pop higher. If you're searching for a new entry into this weak telecom stock, then look first for weakness in the YLS.X, and second a breakdown in VZ below the $46.90 level. BUY PUT JAN-50*VZ-MJ OI=15394 at $3.60 SL=2.75 BUY PUT JAN-45 VZ-MJ OI=15369 at $0.85 SL=0.25 Average Daily Volume = 814 K HGSI - Human Genome Sciences $33.60 (-2.49 last week) Possessing one of the largest human and microbial genetic databases, HGSI licenses its database of knowledge to pharmaceutical heavyweights like GlaxoSmithKline and Merck. Management has chosen to forgo the race to decode the entire human genome, and has instead focused on finding and patenting genes involved in developing gene-based therapeutics. Its four compounds currently in clinical trials are intended to limit the toxic effects of chemotherapy, promote the repair of damaged cells, stimulate antibody production, and spur regrowth of blood vessels. It was a painful week in the Biotech sector (BTK.X), unless you were playing the downside, that is. And HGSI kept doing what it was supposed to do; falling. After dipping near the $31 level on Thursday, some buying interest actually appeared, and we could be nearing the end of the play. While the volume was rather mild, it did occur near major support. We'll continue to target failed rallies for initiating new positions, as more weakness on the BTK could translate into HGSI challenging support near the $28 level. But with the intraday lows moving up over the past couple days, we need to be careful. Look for a rollover in the $35 area to provide fresh entry points, but keep in mind that our stop is at $35.50. If HGSI closes above that level, we'll be moving the play to the drop list in a hurry. BUY PUT JAN-35*HHA-MG OI=2885 at $4.20 SL=2.50 BUY PUT JAN-30 HHA-MF OI= 557 at $1.85 SL=1.00 Average Daily Volume = 3.26 mln ***** LEAPS ***** Patience IS Rewarded By Mark Phillips Contact Support It was a busy week here in LEAPS land, although we didn't manage to add any new Portfolio plays this week. No, most of the action was related to cleaning up some collateral damage in the Drug sector caused by the Merck (NYSE:MRK) earnings warning, and finding some new plays that should help us profit from the pending market correction. At least we'll have a correction if my expectations are met. First up is MRK, and based on the company's dismal forecast for 2002, it should come as no surprise that we booted the stock off of our Watch List. I've covered the details below, but what was really interesting was the reaction in shares of our Eli Lilly (NYSE:LLY) play. The guilt-by-association selling that took place on LLY stopped us out of that play, and while I'm thankful that our stop preserved our profits, I want back in. I like the way the stock reversed near the $78 level, and so I've recycled the stock right back onto the Watch List. See the LLY drop below for more details. Regular readers know I've been expecting this market to run out of steam for weeks now, and it looks like the emergence of weak economic reports and a rash of earnings warnings is bringing the eternal optimists back to earth. What I find interesting on the financial news (and I use the term very loosely) programs, the dominant question is whether we are going to resume the bull market. Excuse me? After the carnage we've seen in every sector of the market over the past 20 months, any rational observer would have to be asking whether we are going to resume the bear market. But I digress... Lo and behold, we're seeing many of our Watch List plays start to come back towards our Entry Targets. Granted, several of them have a lot further to go, but it looks like our expected retracement may be getting started. General Electric (NYSE:GE) got started ahead of the rest of the pack and is currently bouncing around between $36-38. While our target is for the stock to hit $36, I'm not in a hurry on this one. Ideally, I'd like to see an intraday dip below $36 and recovery above that level on strong volume (Hey, I can dream can't I?). That weekly Stochastic oscillator still has some room to fall, and the ideal entry will come with the daily emerging from oversold with the weekly bottomed in oversold as well. Another Watch List play that I found rather interesting this week was Johnson & Johnson (NYSE:JNJ). Although price was relatively flat in the $55-57 area, the daily Stochastics is recovering towards overbought rather quickly. Bullish stochastic without a bullish move in price is inherently bearish. We'll need to wait for the next cycle to oversold on the daily chart, but that could be the one that gives us our entry in the vicinity of $52. Make the play line up for you before actually taking a position, but get ready. Entry may be closer than I initially expected. The balance of our Watch List call plays are coming back to us and I think that we could see entries materializing left and right in fairly short order. Remember to wait for those entry targets to be hit, followed by a volume-backed bounce, with the appropriate alignment of the Stochastics in both daily and weekly timeframes confirming the bullish potential of the play. Take a look at the plays on the Watch List, and I think you'll see what I do. Nokia (NYSE:NOK) appears to be putting in a top near the $25-26 level and on its retracement looks entirely capable of giving us an entry near the $20-21 level. The drop in shares of Tyco International (NYSE:TYC) is pulling the weekly Stochastics into a rollover, and Broadcom (NASDAQ:BRCM) is even further along that path after topping out near $52 recently. I don't want to analyze these (or the other Watch List plays) too much this weekend. We've done plenty of that in the recent past. The point I want to make is that, as I suspected, the current bullish move is starting to run out of steam. As some of these stocks come back from their lofty heights, we should get some nice entry points. And given the strong performance these stocks have delivered over the past 3 months, I would expect them to be among the leaders in any kind of economic recovery scenario. Moving on to the broad markets, it is hard to divine any great wisdom from the churning we have seen in the past couple weeks. If you're thinking that is typical of topping action, give yourself a gold star. In fact, I'm seeing some remarkable similarities between the price action now as compared to the tail end of the rally that ran out of steam in May of this year. And why not? Both rallies were sharp and jumpy, based upon the hope that the aggressive action of the Fed would bring the economic slowdown (now a full-fledged recession) to a quick end. Well, the proof has yet to appear, and the bulls are getting nervous. The bears have yet to really crawl out of their caves yet, so there could still be some decent rallies before stocks start rolling over for real. But there is no denying that some serious technical damage was done to the case for a new bull market over the past couple weeks. Let's take a quick gander at some of the sectors that have been leading the charge since the September lows. The Biotech sector was one of the first out of the gate, rallying early and hard. But the past week was not pretty. After rolling over at $620, it has broken both support at $575 and the ascending trendline. And the rollover on the weekly Stochastics is just getting started. Long-term bullish plays here are going to be tough to game in this sector for awhile. How about Software? The GSO index ran hard until it reached the 200-dma, which is now gradually pressuring the index lower. The ascending trend here is in potential trouble too, with Friday's lows posted just above the $177 support level, also the site of the 20-dma. It hasn't broken down yet, but neither is it a paragon of strength. Then there is the Networking sector (NWX.X) which got taken to the cleaners this week due to a slew of ugly earnings warnings from the likes of Lucent (NYSE:LU), Ciena (NASDAQ:CIEN), etc. The NWX recently rolled over right at its 200-dma and has now seen a lot of technical damage, wiping out all of the gains accrued over the past month. Then we have the favorite of momentum investors, the Semiconductor sector (SOX.X). Much was made of the significance of this index closing above its 200-dma a couple weeks ago. So where is it now? Oops! Back below the 200-dma and barely hanging onto its ascending trendline by the tips of its fingers. The fat lady hasn't sung yet, but I can hear her warming up back stage. So the leading sectors are struggling to maintain altitude. Where is the strength in the market? Retailers? Nope, failed breakout in the RLX index too. Bank sector (BKX.X)? Not likely -- double top at the 200-dma and threatening to break support. How about a nice defensive sector like the Pharmaceuticals? Wait a minute...what was I thinking -- MRK put a quick end to any thoughts of strength there. I could go on, but I think you get the picture. Talk of a new bull market must be tempered by the reality that currently exists in both the economy and the stock market. And it ain't pretty, as confirmed this past week by the less-than-inspiring economic reports and rash of earnings warnings. Oh, and don't forget the continuing stream of layoff announcements. Underscoring the current indecision in the markets is the meandering behavior of the VIX. It has been wandering in the middle of its range (24-28) for a month now, and it isn't providing any clear direction at this time. It looks like it is settled back into its historical (20-30) range, and when it tests the extremes, it is highly probable that we can use it for a reliable trade filter again. But for right now, it is stuck in the middle again, just like the major market averages. The waiting is still the hardest part, but when we are seeing the markets begin to behave a little more rationally, it is a little bit easier to wait. Feel free to take advantage of any entry points that materialize in accordance with your plan. For me, I don't expect to enter any new bullish plays this year. I could be wrong (an all-too-frequent occurrence), but for now my efforts will be focused on capitalizing on any bearish opportunities provided by Mr. Market. Have a great week! Mark Phillips Contact Support LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None Puts: AIG 11/07/01 '03 $ 80 VAF-MP $ 8.40 $ 8.40 0.00% $86.50 '04 $ 80 LAJ-MP $10.60 $10.80 + 1.89% $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 JNJ 12/09/01 $54, $52.50 JAN-2003 $ 55 VJN-AK CC JAN-2003 $ 50 VYN-AJ JAN-2004 $ 55 LJN-AK CC JAN-2004 $ 50 LJN-AJ LLY 12/16/01 $78-79 JAN-2003 $ 80 VIL-AP CC JAN-2003 $ 75 VIL-AO JAN-2004 $ 80 LZE-AP CC JAN-2004 $ 80 LZE-AP WCOM 12/16/01 $14 JAN-2003 $ 15 VQM-AC CC JAN-2003 $12.5 VQM-AV JAN-2004 $ 15 LQM-AC CC JAN-2004 $ 10 LQM-AB PUTS: MO 12/09/01 $48, $50 JAN-2003 $ 50 VPM-MJ JAN-2004 $ 50 LMO-MJ GM 12/16/01 $50-51 JAN-2003 $ 50 VGN-MJ JAN-2004 $ 50 LGM-MJ New Portfolio Plays None New Watchlist Plays WCOM - WorldCom Group $14.75 ** CALL PLAY** With the market rally that we have seen since the September lows, there are few sectors of the market that have NOT been trending up, so it should come as no surprise that WCOM is trading well off its lows. The stock certainly hasn't set any speed records heading higher, but the gradual ascent has certainly been encouraging and has a much healthier look to it than many Technology stocks that have seemingly had a vertical rise. The stock has built a solid base near $14 and achieved an important milestone last week, trading above the $16 level for the first time since mid-June. What really got my attention about the move was the fact that WCOM got above its 200-dma (currently $15.50) for the first time since July of 2000. With the market weakness this past week, the stock has since fallen below that important level, and that has dragged the weekly Stochastic oscillator back into descent mode. It will likely need to see a retracement in price, and as it does, we'll look for that oscillator to put in another trough and begin to recover again. But take a look at the monthly Stochastic, and you can see that it is just starting to emerge from oversold, setting the stage for a sustained recovery. It isn't clear what is causing conditions to improve for the company, as the long-distance market is continuing the way of the dinosaur. Oh sure, the service will always be provided, but it certainly won't be the bread and butter income stream that it once was. Clearly, WCOM's futures are tied to the data market, and judging from the string of upgrades to Buy and Strong Buy over the past month, there are a lot of analysts that agree there is value in the stock. One other fundamental factor that is rather interesting is that WCOM has not been issuing the string of cap-ex spending reduction announcements common in the industry. Quest Communications (NYSE:Q) comes to mind in this department. Maybe that is what is capturing analysts' attention as well. I'm looking for some consolidation in the $14-15 level over the near term as the stock builds a higher base in order to take another shot at the 200-dma. Target new entries near the $14 level, and set initial stops at $12. I don't expect to see the stock reclaim its highs from last year anytime soon, but I think the $25 level is realistic over the next year (especially if we do see some sort of economic recovery) and given the cheap LEAPS, that could hand us some tidy profits in the process. BUY LEAP CALL JAN-2003 $15.00 VQM-AC BUY LEAP CALL JAN-2003 $12.50 VQM-AV **Covered Call** BUY LEAP CALL JAN-2004 $15.00 LQM-AC BUY LEAP CALL JAN-2004 $10.00 LQM-AB **Covered Call** GM - General Motors $47.48 ** PUT PLAY** While technical analysis comes into all of the plays here in the LEAPS column, our new play on GM is first and foremost about the fundamental picture. Unless you've been sleeping under a rock for the past 3 months, you know that the automotive sector is potentially in a world of hurt. If it wasn't, then why would they have offered the free financing that boosted sales in October to the highest levels ever. It doesn't take a rocket scientist to see that the industry effectively front-loaded sales that should have been spread throughout the next several months. That much became abundantly clear with the release of the Retail Sales report last week, which showed a sharp decline across the board, but most notably in the Auto sector. You know my thesis that the recession is far from over. Well, if I'm correct, don't you think it makes sense that auto sales are going to be weak until we actually see evidence of both an improvement in the economy and a recovery in employment? That's the basis of the play. Now on to the technicals. Since the September lows, shares of GM have been enjoying a nice rally, but it looks like that party is coming to an end. Late last week, the stock ran as high as $53.22, topping out just below the 50% retracement of the July highs to September lows, and since then has reversed sharply lower. The stock received a shock to the downside on the offering of Fiat convertible notes (convertible into GM shares), which raised the spectre of dilution for investors, sending them running for the exits. Throw in the fact that GM is idling several thousand workers next week, and I think you can see the validity of the fundamental gloom and doom scenario I described above. Additionally, I don't think it is any coincidence that the 200-dma is looming just overhead (currently $53.80) and I expect that to provide a firm ceiling for awhile due to the poor fundamental picture cited above. While the weekly Stochastic has just rolled over from overbought territory, the fact that the daily is nearly back to oversold suggests that we get another bullish bounce in price before the decline begins in earnest. Ideally, we'll fill the gap left last Tuesday, bringing the price back into the $50-51 area, and I would consider that to be an ideal entry point. Traders with less patience might want to pull the trigger near $49 (the bottom of the gap), but make sure to wait for weakness to appear on the daily chart with Stochastics once again rolling over near (or in) overbought territory. I'm expecting to see GM retrace most (if not all) of its recent gains, which will take it back into the $40-41 area. Given the limited move (from $50 down to $41) that we are targeting, I have again listed at-the-money contracts, which should give us a solid move in the option prices because of the higher delta. Once we open the position, we'll place our stop at $54, just above the recent highs and the 200-dma. BUY LEAP PUT JAN-2003 $50.00 VGN-MJ BUY LEAP PUT JAN-2004 $50.00 LGM-MJ Drops LLY $80.40 Everything was humming along nicely until MRK dropped their bombshell (see details in the MRK drop below) on the markets less than an hour after the FOMC meeting on Tuesday. While the FOMC meeting produced a big yawn, the dismal forecast from MRK was like shouting fire in a crowded theatre, sending the Pharmaceutical index plunging below support. LLY couldn't hold back the flood of sellers, and we were stopped out of the play at the closing bell. I sure am glad we raised our stop to $81 last week, as that got us out of the play on Tuesday, avoiding the plunge to just above $78 on Wednesday. But here's an interesting twist. Remember the neutral wedge that we were playing on LLY? The stock found support right at the upper boundary of that wedge and bounced on Thursday. While I'm happy to be out of the play with a profit, I still like the stock to the upside. Therefore, we are cycling it right back onto the Watch List. If you are still holding open positions, I'd recommend holding, but keep a firm stop at $78. We'll be looking to re-enter the play on another bounce in the $78-79 area, with our eyes still focused on a breakout over the $84 level. Just be aware that the weekly Stochastics is looking a bit toppy -- re-entering or holding here is higher risk than when we initiated the play back in mid-October. But I'm willing to take the chance, given the positive price action over the past couple months and the fact that the monthly Stochastics is still in a gentle recovery. MRK $60.70 Providing vivid proof that fundamentals will trump chart patterns every time, MRK went into free fall on Tuesday, less than an hour after the FOMC meeting. What inspired the drop was the company's "affirmation" of its earnings guidance for 2001. Well, that wasn't it exactly. The company followed up this good news with the prediction of "no growth" for 2002. Apparently, management just figured out that patent expiration on its two top-selling medicines (Vioxx for arthritis and Zocor for high cholesterol) is going to have a detrimental effect on earnings. Ouch! I'm sorry, but that is a major screw-up and the street definitely agreed. Less than an hour after that bombshell, the stock was trading precariously just above $60, down a whopping 9.4% from the day's opening price. And the decline continued through the end of the week with MRK settling in near $58, its lowest level since March of 2000. The negative price action destroyed the neutral wedge pattern and has us running for the exits. Fortunately we didn't get so much as a hint of an attractive entry point, so we can pull the plug on this one with the only damage being the blow to my ego due to having such a loser on the Watch 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. 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The Option Investor Newsletter Sunday 12-16-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/6425_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 ************* Portfolio Management: The High Cost Of Emotional Judgments By Mark Wnetrzak Share values are constantly changing because stocks trade in a market where humans make most of the decisions. The gyrations always include both upward and downward fluctuations in price and although the movements often appear to be random, there is a method to the madness. Underlying fundamentals such as cash flows, asset values and growth rates determine security values over the long-term but in the present, emotion drives prices and the difference between cost and fair value can occasionally become extreme. Hope and greed are the primary reasons for inflated prices and fear, a much stronger emotion, can create intense, short-lived periods of opportunity for adept traders. Buy low and sell high! That's the key to successful trading. In reality, the concept is far more difficult than it appears. Anyone who trades for an extended period will endure a number of market declines and how one reacts during those extraordinary periods will have a substantial influence on their total wealth. Although brief market corrections rarely have a lasting financial affect on long-term portfolios, a bruised ego generally prevents one from recovering quickly. Once a trader has sold in a panic, it's unlikely they will think clearly enough in the short-term to buy back in near the market bottom. The withdrawn investor will remain on the sidelines, slowly regaining the courage to participate again, while the market hastily recovers it losses. The healing process is accelerated by rising prices but in most cases, traders who sell near the bottom fail to re-enter the market until the recovery rally is almost over. New traders fail to understand why selling near the low of sharp market decline can be costly in more ways than one. First, the shares are often sold at the worst possible time, generally below the cost basis, and certainly at loss when compared with earlier prices. Unloading portfolio holdings in a panic also causes an emotional letdown, leaving most traders unable to partake in the ensuing bullish phase. This missed opportunity, every bit as important as selling for a loss, is simply a gain not realized. Of course, understanding the potential extent of a market decline can help one pre-plan a strategy for timely exits. In addition, knowing how substantial a correction is likely to be will provide a trader with a better perspective than those who can conceive of nothing but catastrophic losses and endless financial suffering. The word "crash" is often used to identify precipitous market declines caused by specific events such as bankruptcies by major financial institutions, credit defaults by foreign governments or failures of their currencies. Another practical and descriptive phrase is "market correction," and this usually describes a sharp drop that although distressing, does not carry the significance or historical implications of a widespread crash. Stock market corrections occur frequently and in some instances, they become severe enough to cause a brief panic among the general public before the upward trend resumes. Some traders favor the abstract term "retracement" when describing a short-term market pullback, because it captures the unemotional aspect of a mathematically measurable decline in prices. The severity of the movement and its duration are the most important components in any analysis of a falling market. The severity of the event can be characterized by the relative amount of damage in a specific time period. Most analysts identify a 10%-15% drop over a span of a few weeks as a "correction" whereas a decline of 20% or more in less than a few months would be considered a "crash." This type of extensive deterioration, far out of proportion to the market's underlying fundamentals, generally does not exist for long because bargain hunters eventually intervene with renewed buying pressure. During a severe decline in the market, it is important to look at each issue in your portfolio individually. When a company's share value is falling, there is not always a fundamental reason for the drop. Sometimes the stock price will simply be dragged down by traders who are selling in conjunction with a slump in the broader indices. However, there are also occasions when a problem with other companies in the sector, or in its suppliers can significantly affect the perspective for an entire industry. A recent example is Ciena (NASDAQ:CIEN), a communications giant that changed the fundamental outlook for companies that provide telecommunications equipment, specialized semiconductors, and diversified electronics. Traders must also evaluate the overall condition of the market when reviewing portfolio positions. The reasons for widespread declines in share values are generally obvious. Weak consumer demand and falling earnings are signs of an impending economic setback, and the prudent trader may decide to pair his long-term holdings until a determination can be made about the primary direction of the market. At the same time, a wise investor also develops perspective. Imagine you could look back to the current date from some point in the distant future. Would the recent downtrend be viewed as significant or would it simply be another of those periodic corrections? Is the bearish environment we are experiencing now likely to prove historically important? If not, unloading many of your long-term portfolio positions is probably unwarranted. Instead, you might consider selling some covered-calls and adding to those issues that have superior management and proven growth potential. 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 TELM 6.20 6.80 DEC 5.00 1.80 *$ 0.60 9.9% CANI 5.97 5.36 DEC 5.00 1.35 *$ 0.38 8.9% NPRO 11.32 11.70 DEC 10.00 1.85 *$ 0.53 8.1% TUNE 21.20 24.00 DEC 20.00 2.25 *$ 1.05 8.0% NTPA 5.68 6.20 DEC 5.00 1.10 *$ 0.42 8.0% MDCO 11.43 10.40 DEC 10.00 2.10 *$ 0.67 7.8% EMBT 19.16 19.95 DEC 17.50 2.25 *$ 0.59 7.6% SURE 12.20 10.55 DEC 10.00 3.10 *$ 0.90 7.2% QSFT 22.64 23.20 DEC 20.00 4.10 *$ 1.46 6.8% VTSS 11.61 12.99 DEC 10.00 2.45 *$ 0.84 6.6% SURE 12.38 10.55 DEC 10.00 2.80 *$ 0.42 6.4% PXLW 14.95 16.85 DEC 12.50 3.30 *$ 0.85 6.3% GMST 22.70 25.49 DEC 20.00 4.30 *$ 1.60 6.3% SNDK 14.19 16.93 DEC 12.50 2.20 *$ 0.51 6.2% RMBS 8.88 8.02 DEC 7.50 1.95 *$ 0.57 6.0% AMZN 8.95 11.00 DEC 7.50 1.90 *$ 0.45 5.5% MCDT 18.80 26.90 DEC 15.00 4.80 *$ 1.00 5.2% INVN 19.42 45.50 DEC 15.00 5.10 *$ 0.68 5.2% FMKT 19.75 22.05 DEC 17.50 2.85 *$ 0.60 5.1% STEL 23.54 27.00 DEC 20.00 4.20 *$ 0.66 4.9% VRTY 15.09 16.13 DEC 12.50 3.00 *$ 0.41 4.9% CRXA 14.74 15.57 DEC 12.50 2.90 *$ 0.66 4.8% ARQL 11.10 12.30 DEC 10.00 1.50 *$ 0.40 4.5% EXFO 14.18 11.41 DEC 12.50 2.55 $ -0.22 0.0% PROX 11.50 9.22 DEC 10.00 1.90 $ -0.38 0.0% JDSU 11.60 8.53 DEC 10.00 2.20 $ -0.87 0.0% PCYC 25.82 9.39 DEC 22.50 5.20 $-11.23 0.0% NPRO 11.81 11.70 JAN 10.00 2.70 *$ 0.89 7.1% FALC 8.81 9.12 JAN 7.50 1.90 *$ 0.59 6.2% OAKT 13.53 14.69 JAN 12.50 1.90 *$ 0.87 5.4% XICO 14.00 13.49 JAN 12.50 2.35 *$ 0.85 5.3% MRVL 36.96 38.30 JAN 32.50 6.60 *$ 2.14 5.1% NXTV 6.44 3.44 JAN 5.00 2.00 $ -1.00 0.0% *$ = Stock price is above the sold striking price. Comments: Is it time to digest some gains? The DOW and SP-500 look suspect in the short-term while the NASDAQ appears somewhat stronger. I vote for a lateral consolidation. Pharmacyclics (NASDAQ:PCYC) suffered a catastrophic loss on Friday after the drug developer said its lead cancer drug failed to prove effective in the treat- ment of cancer that has spread to the brain from another part of the body. As this is a short-term oriented section, we will close the position. Those investors who still believe in the company's future (there is another drug in the pipeline and Xcytrin did show that it was clinically active, especially in lung cancer patients) will begin the tedious job of selling calls and working their cost basis in the issue lower. With one week left until expiration, it is time to re-evaluate your long-term outlook on any issues you choose own. Consider the above issues: JDS Uniphase (NASDAQ:JDSU), Proxim (NASDAQ:PROX), and Electro- Optical Engineering (NASDAQ:EXFO). Do you take the small loss now or try to adjust the positions by rolling forward and or down? Not an easy decision. As for January, the horrid action this week in Next Level Communications (NASDAQ:NXTV) should have prevented any entry into the position. With the break-down below the October and November highs, we will show the position closed. Collateral damage from Lucent (NYSE:LU) and Qwest (NYSE:Q)? Positions Closed: ELON, GNTA 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 ACXM 15.63 DEC 15.00 UQA AC 1.35 69 14.28 35 4.4% CAMP 6.36 DEC 5.00 UMP AA 1.65 193 4.71 35 5.4% DTHK 11.11 DEC 10.00 DTU AB 1.80 154 9.31 35 6.4% NPRO 11.70 DEC 10.00 NYQ AB 2.60 612 9.10 35 8.6% NTAP 21.04 DEC 17.50 NUL AW 4.50 1692 16.54 35 5.0% PCLN 5.37 DEC 5.00 PUZ AA 0.95 14663 4.42 35 11.4% VSNX 16.58 DEC 12.50 MQB AV 4.80 81 11.78 35 5.3% 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 PCLN 5.37 DEC 5.00 PUZ AA 0.95 14663 4.42 35 11.4% NPRO 11.70 DEC 10.00 NYQ AB 2.60 612 9.10 35 8.6% DTHK 11.11 DEC 10.00 DTU AB 1.80 154 9.31 35 6.4% CAMP 6.36 DEC 5.00 UMP AA 1.65 193 4.71 35 5.4% VSNX 16.58 DEC 12.50 MQB AV 4.80 81 11.78 35 5.3% NTAP 21.04 DEC 17.50 NUL AW 4.50 1692 16.54 35 5.0% ACXM 15.63 DEC 15.00 UQA AC 1.35 69 14.28 35 4.4% 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). ***** ACXM - Acxiom $15.63 *** Computerized Background Checks *** Acxiom (NASDAQ:ACXM) enables businesses to develop and deepen customer relationships by creating a single, accurate view of their customers across the enterprise. Acxiom achieves this by providing customer data integration software, database management services, and premier customer data content through its AbiliTec, Solvitur and InfoBase products, while also offering a broad range of information technology outsourcing services. The company's products and services enable its clients to use information to improve their business decision-making processes and to manage existing and prospective customer relationships. Acxiom has 3 business segments: Services, Data and Software Products, and Information Technology Management. Acxiom has been selected by Intelligent Enterprise Magazine editors as one of the nation's leading "Companies to Watch" in 2002 and beyond for strong contributions to the development of intelligent enterprises. The magazine also noted that Acxiom is using its Customer Data Integration expertise to build and identify a verification system to create safer air travel by helping screen out high-risk passengers. We simply favor the break-out above Acxiom's 150-dma on heavy volume. Reasonable speculation with a cost basis near support. DEC 15.00 UQA AC LB=1.35 OI=69 CB=14.28 DE=35 TY=4.4% ***** CAMP - California Amplifier $6.36 *** On The Mend? *** California Amplifier (NASDAQ:CAMP) designs, manufactures and markets microwave equipment used in the reception of video transmitted from satellites and wireless terrestrial trans- mission sites, and two-way wireless transceivers used in the emerging fixed point wireless voice and data applications. The company also has a 50.5% controlling interest in Micro Pulse, a company that designs, manufactures, and markets antennas for various wireless applications, primarily for Global Positioning Satellite applications. CAMP suffered back in March after the company's corporate controller abruptly resigned in the face of accounting irregularities. The stock appears to have formed a strong support area around $4 and the current rally has moved the share price above the October high (forming new support near $5). Investors appear to be anticipating good news as results for the company's FY2002 3rd-quarter ended December 1, 2001, will be released after close of market on December 20. Target-shoot a lower cost basis to improve the potential yield. DEC 5.00 UMP AA LB=1.65 OI=193 CB=4.71 DE=35 TY=5.4% ***** DTHK - DigitalThink $11.11 *** On The Move! *** DigitalThink (NASDAQ:DTHK) provides e-learning solutions designed to address the strategic business objectives of its customers by helping them to improve workforce productivity, sales channel effectiveness and customer loyalty and satisfaction. DTHK's Web-based solutions deliver content on new initiatives and products or processes to large, geographically dispersed groups who can access courses from anywhere, at anytime through a Web browser. The company also offers Web-based tracking and reporting tools that its customers use to measure and evaluate participants' progress and the effectiveness of its learning programs. There's little news to explain the recent bullish activity in DigitalThink but the issue has moved above the current trading range amid continued buying pressure and heavy volume. This position offers a great way to speculate on the future movement of DigitalThink in a conservative manner. DEC 10.00 DTU AB LB=1.80 OI=154 CB=9.31 DE=35 TY=6.4% ***** NPRO - NaPro BioTherapeutics $11.70 *** Litigation Settled *** 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 recently 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 AB LB=2.60 OI=612 CB=9.10 DE=35 TY=8.6% ***** NTAP - Network Appliance $21.04 *** Data Storage Sector *** Network Appliance (NASDAQ:NTAP) is engaged in the business of network-attached data management and storage solutions. Network Appliance hardware, software, and service offerings are used to create, manage and scale seamless data fabrics, moving information to users globally. Their products consist of filer storage and caching appliances, data management and content delivery software, and support services. Network Appliance storage appliances, or filers, are systems that provide highly reliable data storage management. The company's NetCache appliances allow customers to scale network infrastructure, reduce bandwidth costs, ease network bottlenecks, and simplify data management and content delivery. The company's NetApp software offers a set of features that ensure mission-critical availability and also reduce the complexity of enterprise storage management. Network Appliance has a customer service and support organization to provide technical support, education and training. In November, Network Appliance beat Wall Street's financial targets and the company recently announced some new products and several contracts which should bode well for the future. The Data Storage sector has been improving and this position offers a conservative entry point for those wishing to add NTAP to their long-term portfolio. DEC 17.50 NUL AW LB=4.50 OI=1692 CB=16.54 DE=35 TY=5.0% ***** PCLN - Priceline.com $5.37 *** Bottom Fishing *** Priceline.com (NASDAQ:PCLN) has pioneered an e-commerce pricing system, known as a demand collection system, where consumers use the Internet to save money on a range of products and services, while enabling sellers to generate incremental revenue. Using its consumer proposition, "Name Your Own Price," Priceline.com collects consumer demand, in the form of individual customer offers, for a particular product or service at a price set by the customer. Priceline.com then either communicates that demand directly to participating sellers or accesses a pro- prietary database of inventory and elects whether or not to accept a customer's offer. Consumers agree to hold their offers open for a specified period of time and, once fulfilled, offers generally cannot be canceled. The Air Transport Assoc. reported on Friday that there is a "return to travel" as airports have become increasingly busy and airlines report improvements. That is good news for Priceline.com, which is one of the only pure-play Internet companies that generate a profit based on generally accepted accounting rules. Cheap speculation on an improving stock and industry group. DEC 5.00 PUZ AA LB=0.95 OI=14663 CB=4.42 DE=35 TY=11.4% ***** VSNX - Visionics $16.58 *** Security Sector Speculation! *** Visionics (NASDAQ:VSNX) is a worldwide producer of identification technologies and systems. Through its respective business lines, FaceIt, live scan and IBIS, the company designs and manufacturers forensic quality biometric identification systems and develops deploys facial recognition technology. The FaceIt technology enables a broad range of products and applications which include enhanced CCTV systems, identity fraud applications and authentic- ation systems for information security, access control, travel, banking and e-commerce. The TENPRINTER and FingerPrinter CMS are live scan systems used by government agencies, law enforcement, airports, banks and other commercial institutions. The IBIS is a remote identification system that combines expertise in biometric capture and connectivity, and is capable of capturing both forensic quality fingerprints and photographs for transmission to law enforcement and other legacy databases. Visionics and security related stocks have risen sharply since 9/11 and have continued to benefit from demand for new aviation security technologies under the government takeover of key airport and airline security operations. Visionics recently announced that it would expand its work force by 6% to respond to rising interest in biometric security from federal agencies. We favor a conservative entry point in the issue, closer to technical support. DEC 12.50 MQB AV LB=4.80 OI=81 CB=11.78 DE=35 TY=5.3% ***** ***************** 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 IBIS 10.84 DEC 10.00 UIB AB 1.80 444 9.04 35 9.2% SNDK 16.93 DEC 15.00 SWQ AC 3.10 1697 13.83 35 7.4% IGEN 34.25 DEC 30.00 GQ AF 6.50 986 27.75 35 7.0% XICO 13.49 DEC 12.50 UOB AV 1.90 89 11.59 35 6.8% VITR 5.75 DEC 5.00 TKU AA 1.10 168 4.65 35 6.5% OSIS 20.30 DEC 17.50 UOJ AW 4.00 13 16.30 35 6.4% CLRS 5.65 DEC 5.00 RPU AA 0.95 357 4.70 35 5.5% BPRX 17.57 DEC 15.00 BUB AC 3.40 11 14.17 35 5.1% DCLK 11.43 DEC 10.00 QWE AB 1.95 5796 9.48 35 4.8% ***************** NAKED PUT SECTION ***************** Success Basics: Finding The Right Broker By Ray Cummins One of our new readers asked for some guidelines to help in his selection of an investment broker. Finding the right brokerage firm and a personal broker that meets your financial needs is one of the key elements in becoming a successful trader. The first decision you will have to make is whether you need a full-service or a discount brokerage firm. A full-service firm usually provides execution services, recommendations, investment advice, and also research support. A discount (or online) broker normally offers only execution services; they don't provide any recommendations regarding specific stocks or trading techniques. They are designed for "do-it-yourself" traders that manage their own money without guidance from a professional financial advisor. These brokers will make trades for you at a lower price because they provide little in the way of service. The most common area of concern is inefficient order processing and the lack of timely executions. The best "buy" and "sell" signals are useless unless you are able to act on them and cheap commissions are meaningless if you can't close a trade or speak to a representative when the need arises. In most cases, discount brokers function more as order takers and for that reason, it is important you understand your trading strategies very well. Since these types of brokers cannot provide validation of a particular technique or position, they offer relatively little help to new option traders. With that idea in mind, we will focus today's discussion on the full service broker; one who can provide insight into current trends and forecasts, and help inexperienced participants learn how to be successful in the complex options market. In the past, traders used full-service brokers because they were the primary source for detailed financial data, analyst reports, real-time quotes, and the latest in sector- or company-specific news. With the recent advances in communications technology and the development of the world-wide-web, the needs of the average investor have changed significantly. No longer are we required to pay for the services of a personal broker in order to access the fundamentals of a specific company or industry; we simply get on the Internet and go to one of the popular (and free) financial sites. The benefits of this unlimited exchange of information are too numerous to list but it has also affected the brokerage industry in a profound way: it has changed the primary function of a broker from data provider to comprehensive asset-management specialist. Today's personal broker provides tax and estate advice, retirement planning and full-service banking as well as investment research and trade executions. In addition, brokers are more inclined to educate their clients about the intricate workings of the global financial system and those who specialize in a particular type of trading are happy to provide a thorough explanation of the specific strategies available for your stock or options portfolio. In the current environment, brokers are paid for experience and execution. That means they must be familiar with the options market and its characteristics and more importantly, they should trade options themselves. A broker must help you understand your investment strategies and provide detailed portfolio management guidance. In order to accomplish that task, they must be able to enter and execute any type of order efficiently and in a timely manner. The complex mechanisms of the options market requires that successful participants be equipped with all the necessary trading tools and it is important that your brokerage offer a minimum selection of services. This list should include the ability to: trade spreads and combinations, both daily and on a "good-until-cancelled" basis; place multiple orders as a single position; fill orders inside the BID/ASK spread; auto-execute "in-the-money" options at expiration; assign commissions based on segments as well as individual orders; and maintain account balances with the minimum collateral requirements. Of course, the number of brokers that have the ability and technology to offer these services (at a reasonable price) is statistically very limited, so you will need to be thorough and meticulous in your search. Fortunately, that diligence will eventually pay off because a broker with knowledge and trading experience can help you build a low risk portfolio that generates favorable, long-term profits. 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 5.77 DEC 5.00 0.30 *$ 0.30 15.7% WGRD 11.92 11.59 DEC 10.00 0.60 *$ 0.60 15.1% RSTN 18.15 17.22 DEC 15.00 0.30 *$ 0.30 14.8% INVN 25.15 45.50 DEC 17.50 0.55 *$ 0.55 14.3% IGEN 35.95 34.25 DEC 30.00 0.90 *$ 0.90 14.0% OSIS 21.90 20.30 DEC 17.50 0.30 *$ 0.30 13.9% CRXA 15.01 15.57 DEC 12.50 0.35 *$ 0.35 13.2% FNSR 12.96 10.87 DEC 10.00 0.35 *$ 0.35 12.9% ICST 21.18 20.55 DEC 17.50 0.30 *$ 0.30 12.8% RIMM 23.48 23.57 DEC 20.00 0.35 *$ 0.35 12.1% NTAP 16.51 21.04 DEC 12.50 0.65 *$ 0.65 11.9% CRXA 15.32 15.57 DEC 12.50 0.40 *$ 0.40 11.7% IMNY 7.24 8.20 DEC 5.00 0.25 *$ 0.25 10.7% RSAS 15.75 15.29 DEC 12.50 0.25 *$ 0.25 10.7% MANU 10.66 17.24 DEC 7.50 0.35 *$ 0.35 10.2% MCDT 22.75 26.90 DEC 17.50 0.45 *$ 0.45 9.8% SLAB 28.26 33.29 DEC 22.50 0.85 *$ 0.85 9.5% MCDT 25.20 26.90 DEC 20.00 0.35 *$ 0.35 9.4% MCDT 21.10 26.90 DEC 15.00 0.50 *$ 0.50 9.2% TERN 13.19 10.77 DEC 10.00 0.30 *$ 0.30 8.9% SRNA 22.90 24.25 DEC 17.50 0.50 *$ 0.50 8.6% SRNA 22.25 24.25 DEC 17.50 0.35 *$ 0.35 7.9% PMCS 23.27 22.89 DEC 15.00 0.45 *$ 0.45 7.7% CEGE 22.86 23.10 DEC 20.00 0.35 *$ 0.35 7.6% CNXT 13.37 15.86 DEC 10.00 0.30 *$ 0.30 7.3% AFFX 37.13 33.65 DEC 30.00 0.55 *$ 0.55 7.2% CREE 25.25 25.92 DEC 20.00 0.45 *$ 0.45 7.1% IMMU 23.49 20.92 DEC 20.00 0.40 *$ 0.40 6.9% MCSI 24.00 23.00 DEC 20.00 0.50 *$ 0.50 5.9% SMTC 37.55 41.05 DEC 27.50 0.35 *$ 0.35 4.8% MACR 22.08 16.02 DEC 17.50 0.45 $ -1.03 0.0% PCYC 25.49 9.39 DEC 17.50 0.65 $ -7.46 0.0% RCOM 11.14 11.10 JAN 10.00 0.45 *$ 0.45 8.6% ALOY 19.06 17.64 JAN 15.00 0.35 *$ 0.35 6.1% *$ = Stock price is above the sold striking price. Comments: Apparently, this was the week for catastrophic announcements as Pharmacyclics (NASDAQ:PCYC) and Macromedia (NASDAQ:MACR) both unleashed terrible news to the investing world. Those who performed the recommended "due diligence" on PCYC knew that everything was riding on the results from a clinical study of the cancer drug Xcytrin. Specifically, researchers were trying to determine whether trial patients live longer and achieve higher neurocognitive function after combining Xcytrin with radiation treatment. In Thursday's announcement, officials at Pharmacyclics said the pivotal phase III trial of its unique drug failed to meet the primary goals and the stock quickly lost more than half its value, plunging to a record low. Now you know why we continue to publish that infamous "WARNING" disclaimer week after week; the primary rule for selling "naked" puts is that you must want to own the underlying issue. Macromedia (NASDAQ:MACR) was also in the news after the company slashed its third-quarter revenue outlook due to "tough economic conditions" and said it does not expect to post a profit by the end of its current fiscal year. The issue dropped 30% after the announcement but our position at $17.50 was well below the initial trading range, so there was ample opportunity to exit the play for a small loss. Level 3 (NASDAQ:LVLT) is now on the watch-list and based on (bearish) technical indications, Immunomedics (NASDAQ:IMMU), Finisar (NASDAQ:FNSR) and Terayon (NASDAQ:TERN) have been closed to protect profits and limit potential losses. Positions Closed: Polymedica (NASDAQ:PLMD) 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 ASA 20.50 DEC 20.00 ASA MD 0.75 134 19.25 35 7.7% CC 24.16 DEC 20.00 CC MD 0.60 3414 19.40 35 8.5% ICST 20.55 DEC 15.00 IUY MC 0.30 37 14.70 35 5.9% IDNX 13.77 DEC 10.00 IDX MB 0.45 72 9.55 35 12.2% INRG 13.77 DEC 10.00 UME MB 0.35 70 9.65 35 9.8% OAKT 14.69 DEC 12.50 KAU MV 0.35 136 12.15 35 7.5% OSUR 12.38 DEC 10.00 QTP MB 0.45 43 9.55 35 12.9% PPD 20.77 DEC 17.50 PPD MW 0.80 278 16.70 35 11.9% 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 OSUR 12.38 DEC 10.00 QTP MB 0.45 43 9.55 35 12.9% IDNX 13.77 DEC 10.00 IDX MB 0.45 72 9.55 35 12.2% PPD 20.77 DEC 17.50 PPD MW 0.80 278 16.70 35 11.9% INRG 13.77 DEC 10.00 UME MB 0.35 70 9.65 35 9.8% CC 24.16 DEC 20.00 CC MD 0.60 3414 19.40 35 8.5% ASA 20.50 DEC 20.00 ASA MD 0.75 134 19.25 35 7.7% OAKT 14.69 DEC 12.50 KAU MV 0.35 136 12.15 35 7.5% ICST 20.55 DEC 15.00 IUY MC 0.30 37 14.70 35 5.9% 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). ***** ASA - ASA Limited $20.50 *** Gold Sector Hedge *** ASA Limited (NYSE:ASA) is incorporated in the Republic of South Africa and consequently values its investments at Johannesburg Stock Exchange share prices translated into U.S. dollars at the rand exchange rate. ASA Limited invests its assets in common shares of gold mining companies and other companies in South Africa. In addition, the weighting of Canadian Gold Mines was recently increased and a small position in Ashanti Goldfields, a Ghanaian gold mining company, was added in order to continue the company's diversification away from a heavy concentration in South African shares. ASA also has approximately one third of its total assets invested in non-gold investments such as Anglo American Platinum Corporation Limited, Impala Platinum Holdings Limited, Anglo American Corporation, and De Beers Consolidated Mines Limited/Centenary AG, since demand for platinum has been significant in world markets during the past year and the major producers have been realizing very favorable prices. Traders who are concerned about a broad-market sell-off in the coming weeks can use this gold stock to hedge their portfolio against that outcome. DEC 20.00 ASA MD LB=0.75 OI=134 CB=19.25 DE=35 TY=7.7% ***** CC - Circuit City Stores $24.16 *** A Big Day! *** Circuit City Group (NYSE:CC), a division of Circuit City Stores, is a national retailer of brand-name electronics, personal computers and entertainment software. The company sells video equipment, including televisions, digital satellite systems, video cassette recorders, camcorders, cameras and DVD players; audio equipment, including home stereo systems and compact disc players; mobile electronics, including car stereo systems and security systems; home office products, including computers, printers, peripherals, software and facsimile machines; other consumer electronic products, including cell-phones, telephones and portable audio and video products; and entertainment software and accessories. Shares of Circuit City rallied last week after an industry analyst offered a "buy" rating on the stock, citing better than anticipated November sales data and expectations of improved performance. Banc of America Securities retail analyst Shelly Hale placed a $26 price target on the retailer's stock and said she sees a 40% rise in the company's bottom line for the coming year. DEC 20.00 CC MD LB=0.60 OI=3414 CB=19.40 DE=35 TY=8.5% ***** ICST - Integrated Circuit Systems $20.55 *** Chip Sector! *** Integrated Circuit Systems (NASDAQ:ICST) is engaged in the business of designing and marketing custom application specific integrated circuits (ASICs) for various industrial customers. The company's business is divided into two categories: Core and Non-Core Segments. The Core segment supplies a broad line of timing products for use in PC motherboard and also peripheral applications. The Non-Core segment sells mixed-signal (analog and digital) integrated circuits customized to the specific requirements of a broad range of customers and applications. The semiconductor sector is expected to perform well during the coming year and this company is one of the more favorable, low-cost issues in the group. Traders can speculate on the future performance of the chip segment with this conservative position. DEC 15.00 IUY MC LB=0.30 OI=37 CB=14.70 DE=35 TY=5.9% ***** IDNX - Identix $13.77 *** Security Technology! *** Identix (NASDAQ:IDNX) provides authentication security platforms and solutions for commercial and government marketplaces. The company's products and services are classified into three groups: biometric security solutions that verify the identity of an individual through the unique physical biological characteristics of a fingerprint, including itrust, Identix's security software solution that integrates authentication, access rights and administration as a security service to safeguard information sharing and data transfer on open wired and wireless networks; biometric imaging solutions that electronically capture forensic fingerprint images that are transmitted to automated fingerprint identification systems, and information technology, engineering and consulting services, including the installation/integration of Identix products primarily to public sector agencies. Stocks in the security technology industry are "hot" and this position offers a conservative entry point in one of the more promising issues in the group. DEC 10.00 IDX MB LB=0.45 OI=72 CB=9.55 DE=35 TY=12.2% ***** INRG - Inrange Technologies $13.77 *** On The Move! *** Inrange Technologies (NASDAQ:INRG) designs, manufactures, sells and services switching and networking products for storage, data and telecommunications networks. Their products are designed to address the volume of information that is captured, processed, stored and manipulated over storage, data and telecommunications networks, and to enhance the management capabilities of these networks as they become more essential to business success. The company's key products include the IN-VSN family of directors, switches, channel extenders and optical networking products for storage networks; the Universal Touchpoint family of switches, control systems and management applications used for management of data networks, and their unique 7-View family of equipment for monitoring telecommunications networks. INRG shares rallied early in December after the company upped its fourth-quarter targets and announced a buyback of up to $20 million worth of its common stock. The CEO said their business has rebounded from the difficult third quarter and as a result, there is potential upside to the original fourth-quarter guidance and the possibility of positive earnings during the period. Investors can establish a low risk basis in the issue with this position. DEC 10.00 UME MB LB=0.35 OI=70 CB=9.65 DE=35 TY=9.8% ***** OAKT - Oak Technology $14.69 *** New 52-Week High! *** Oak Technology (NASDAQ:OAKT) designs, develops and markets high performance integrated semiconductors, software and platform solutions to OEMs worldwide that serve the optical storage and digital imaging equipment markets. The company's products consist primarily of ICs and supporting software and firmware, all designed to store and distribute digital content, thereby enabling the company's OEM customers to deliver systems to the end user for the home and enterprise. OAKT's operations are organized along its two market-focused groups: the Optical Storage Group and the Imaging Group. OAKT met expectations in October and the company said that it anticipates revenues for this quarter to increase by approximately 5 - 10%. Friday's move to a new 52-week high suggests the issue has successfully completed a recent consolidation phase and is poised for future gains. DEC 12.50 KAU MV LB=0.35 OI=136 CB=12.15 DE=35 TY=7.5% ***** OSUR - OraSure Technologies $12.38 *** What's Up? *** OraSure Technologies (NASDAQ:OSUR) develops, manufactures and markets unique oral fluid specimen collection devices using its proprietary oral fluid technologies, proprietary diagnostic products including in vitro diagnostic tests, and other medical devices. These products are sold in the U.S. and certain foreign countries to public and private-sector clients, laboratories, physician offices, and hospitals, and for workplace testing. OraSure Technologies' business focuses on the following principal platform technologies: the OraSure oral fluid collection device; the OraQuick rapid diagnostics device; and the new up-converting phosphor technology. In addition, OraSure sells certain other products, including the Histofreezer cryosurgical system, certain immunoassay tests and reagents for insurance risk assessment and forensic toxicology applications, an oral fluid Western Blot confirmatory test for HIV-1, and the Q.E.D. Saliva Alcohol Test. Shares of OraSure rallied last week on heavy volume, despite the fact there was no public news to explain the activity. Traders say the movement may be related to a recent home-office visit by analysts from JP Morgan Chase, which suggests the potential for a future upgrade or other positive news. DEC 10.00 QTP MB LB=0.45 OI=43 CB=9.55 DE=35 TY=12.9% ***** PPD - Pre-Paid Legal Services $20.77 *** Legal Eagles! *** Pre-Paid Legal Services (NYSE:PPD) was one of the first companies in the United States organized solely to design, underwrite and market legal expense plans. The company's legal expense plans (referred to as Memberships) currently provide for a variety of legal services in a manner similar to medical reimbursement plans. Plan benefits are provided through a network of independent law firms, typically one firm per state or province. Members have direct, toll-free access to their Provider law firm rather than having to call for a referral. Legal services include unlimited attorney consultation, traffic violation defense, auto-related criminal charges defense, letter writing/document preparation, will preparation and review and a general trial defense benefit. Prepaid's CEO says it all in his recent letter to shareholders: "Pre-Paid is user-friendly with an ongoing real value and our products make it significantly easier and cheaper for members to have their legal needs or problems handled. Because our service is easy to use and is valuable, we believe we are enlarging the market we serve." That's a very optimistic attitude and traders who agree with a bullish outlook for the company can establish a discounted entry point in the issue with this conservative position. DEC 17.50 PPD MW LB=0.80 OI=278 CB=16.70 DE=35 TY=11.9% ***** ***************** 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 IONA 22.00 DEC 17.50 YWQ MW 0.85 12 16.65 35 14.1% TUNE 24.00 DEC 20.00 TUF MD 0.70 333 19.30 35 9.7% CEGE 23.10 DEC 20.00 UCG MD 0.70 153 19.30 35 8.9% EMBT 19.95 DEC 15.00 MBQ MC 0.45 11 14.55 35 8.8% ADIC 17.05 DEC 15.00 QXG MC 0.50 88 14.50 35 8.2% SMTF 24.88 DEC 20.00 QAG MD 0.40 0 19.60 35 6.4% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Stocks Finish Difficult Week On A Positive Note! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, December 14 The major equity averages edged higher Friday as traders factored new data regarding business inventories and industrial production into the outlook for the U.S. economy. The Dow Jones Industrial Average closed up 44 points at 9,811 on strength in McDonald's (NYSE:MCD), Home Depot (NYSE:HD), General Electric (NYSE:GE) and Alcoa (NYSE:AA). The NASDAQ moved up 6 points to 1,953 with semiconductor companies among the strongest issues while networking shares continued to struggle. The broad market Standard & Poor's 500-stock index gained 3 points to 1,123 despite substantial losses in the biotechnology sector. Shares of gold, insurance, consumer, oil and oil service stocks managed to lift the index into positive territory at the close of trading. Volume was average with 1.29 billion shares exchanged on the NYSE and 1.92 billion shares traded on the NASDAQ. Market breadth was mixed, with advancers beating decliners 18 to 14 on the Big Board while winners roughly matched losers on the NASDAQ. Bonds ended lower with the 10-year Treasury note falling more than 1/2 point to yield 5.08%. The 30-year bond fell 1/2 point to yield 5.52%. Trim Tabs reported that equity funds had outflows of $3.7 billion this week, compared with inflows of $3.5 billion during the prior week. Last week's new plays (positions/opening prices/strategy): WellPoint (NYSE:WLP) DEC110P/D115P $0.55 credit bull-put Cooper (NYSE:CBE) DEC45C/DEC40C $0.65 credit bear-call Tellium (NSDQ:TELM) JAN7.5C/JAN10C $0.75 debit bull-call Pivotal (NSDQ:PVTL) JAN7.5C/JAN5P $0.05 debit synthetic When we offered the bullish play in Wellpoint Health Networks (with the belief that it would be a safe-haven issue) we had no idea the Health Services sector would get hammered along with with the majority of shares in the broader market. Traders who initiated the position Monday were surprised to see the issue near the sold strike at the end of the week and the only viable adjustment was a transition to the (short) JAN-$105 Put for a small credit. With near-term buying support near $110, that appears to be a reasonable alternative to closing the position prematurely for a loss. Cooper Industries traded more like we expected, offering a great entry point during Monday's brief rebound before falling to new lows later in the week. Our new positions in Tellium and Pivotal were initiated at favorable prices but unfortunately, the recent correction in technology issues has ended any upside momentum for those stocks in the short-term. Portfolio Activity: This week's broad-market correction was not unexpected, but it did surprise many of us who originally thought it would be more of a consolidation rather than a retreat. The downside activity was greater than anticipated in some of the industrial sectors and even the top NASDAQ issues were not immune to the selling pressure. While the technical retracement was beneficial for our bearish positions in Hillenbrand (NYSE:HB), Kimberly Clark (NYSE:KMB) and Unitedhealth Group (NYSE:UNH), and provided some profit-taking opportunities in time-selling plays such as Intuit (NASDAQ:INTU) and Biovail (NYSE:BVF), it did little to enhance the outlook for the majority of issues in the portfolio. In the credit-spreads group, positions in Amdocs (NYSE:DOX) and Accredo Health (NASDAQ:ACDO) were significantly affected by the bearish trends and both plays warranted early exits to protect profits and avoid losses. Among the speculative positions, Redback Networks (NASDAQ:RBAK) has fallen from grace in the wake of recent negative forecasts by Ciena (NASDAQ:CIEN) and Lucent (NYSE:LU) and although the bullish spread does not expire until April, it is unlikely to produce any profits in the near future. Despite the unfavorable activity during the past few sessions, the Spreads/Combos section has enjoyed a relatively successful month. Synthetic positions in Sun Microsystems (NASDAQ:SUNW), Leap Wireless (NASDAQ:LWIN), and Level 3 (NASDAQ:LVLT) yielded satisfactory profits and neutral-outlook (volatility) plays in Potash (NYSE:POT), Andrx (NASDAQ:ADRX), and Goldman Sachs Group (NYSE:GS) also provided excellent gains. The Covered-calls on LEAPS position in Microsoft (NASDAQ:MSFT) is performing as well as can be expected with the underlying issue hovering below the sold strike at $70, and the bullish spreads in Best Buy Stores (NYSE:BBY) and Avon Products (NYSE:AVP) are at maximum profit. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** PR - Price Communications $19.10 *** Disparity Play! *** Price Communications (NYSE:PR) is a nationwide communications company that owns and then disposes of television, newspaper, radio, cellular telephone and other communications and related properties. The company's main business strategy is to acquire communications properties at prices it considers attractive, finance such properties on terms satisfactory to it, manage such properties in accordance with its operating strategy and dispose of them if and when they determine such dispositions to be in the best interests of the company. Price is engaged, through Price Communications Wireless, in the construction, development, management and operation of cellular telephone systems in the southeastern United States. The Company markets all of its products and services under the name CellularOne. In November 2000, the company entered into a agreement whereby Verizon Wireless will acquire the primary assets of Price Communications Wireless. Implied volatility and trading volume in PR's options have been at historically high levels for the past few weeks and there is no public news to explain the increased interest. The recent bullish activity in the underlying issue has also occurred will little fanfare and now the stock is approaching a test of the 52-week high near $20. With favorable premium disparities in the front-month options, this position offers an excellent speculation play for traders who participate in time-selling strategies. PLAY (conservative - bullish/calendar spread): BUY CALL FEB-20 PR-BD OI=1290 A=$1.35 SELL CALL DEC-20 PR-LD OI=2595 B=$0.40 INITIAL NET DEBIT TARGET=$0.85-$0.90 TARGET PROFIT=25% ****************************************************************** AMGN - Amgen $56.03 *** Unwanted Merger With Immunex! *** Amgen (NASDAQ:AMGN) is a worldwide biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology. The company manufactures and markets four human therapeutic products, EPOGEN (Epoetin alfa), NEUPOGEN (Filgrastim), INFERGEN (Interferon alfacon-1) and STEMGEN (Ancestim). Amgen utilizes wholesale distributors of pharmaceutical products as the principal means of distributing the company's products to clinics, hospitals and pharmacies. Shares of Amgen fell sharply last week after rumors of a buyout offer for Immunex (NASDAQ:IMNX) became public knowledge. Amgen was reportedly offering $32 a share for Immunex and the rumors were given credence by a CNBC report that said the companies are in advanced merger talks. Investors gave a lukewarm reception to the proposed deal, one that could become the biggest-ever biotechnology merger, and analysts issued skeptical comments about AMGN's ability to complete the transaction. Some traders expressed negativity about the merger because it would dilute Amgen's earnings significantly and others suggested the deal would be vetoed by drug giant American Home Products (NYSE:AHP), which owns about 41% of Immunex. Regardless of the eventual outcome, the near-term technical indications for AMGN are very unfavorable and this position offers a way to speculate on the future (bearish) movement of the issue in a conservative manner. Target a higher premium in the spread initially, to allow for a brief recovery in the underlying issue. PLAY (conservative - bearish/credit spread): BUY CALL JAN-70 YAA-AN OI=26173 A=$0.35 SELL CALL JAN-65 YAA-AM OI=20685 B=$0.90 INITIAL NET CREDIT TARGET=$0.60-$0.75 PROFIT(max)=14% ****************************************************************** SNDK - Sandisk $16.93 *** Reader's Request! *** SanDisk Corporation (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 solutions to address the storage requirements of emerging applications in the consumer electronics as well as the industrial communications markets. The company's products are used in a number of rapidly growing consumer electronics applications; digital cameras, personal digital assistants, portable digital music players, digital video recorders and smart phones, as well as in industrial and communications applications, such as communications routers and switches and wireless communications base stations. The company's products include removable CompactFlash cards, MultiMediaCards, FlashDisk cards and Secure Digital Cards and embedded FlashDrives and Flash ChipSets with storage capacities ranging from 8 megabytes to 1.2 gigabytes One of our readers asked for some bullish collars; a strategy that provides reasonable profits in the event of a continued recovery in equity values while protecting against future corrections in the underlying issue or its industry group. A collar is a stock/option strategy in which the trader buys stock, sells an "out-of-the-money" call, and also purchases an "out-of-the-money" put. The ratio of potential profit to loss is defined by the choice of strike prices in the position and most investors establish collars in which the proceeds from the sale of the call are used to pay for the put purchase. In this case, the initial cost of the collar is the same as the initial cost for the outright purchase of stock. Of course, the strategy is viable only if you have a bullish outlook for the underlying issue and the option prices favor premium "selling" on the call side and premium "buying" on the put side. Due to the effects of put-call parity and based on the recent market conditions, finding suitable candidates for this type of position can be difficult and it is also a very subjective activity. However, I was able to enlist the superb services of the Covered-call editor and together we produced some issues that have potential in the current environment. Since the Data Storage sector has been improving technically, even with the recent downturn, this issue offers better than average upside potential with relatively low downside risk. PLAY (very conservative - bullish/collar): BUY STOCK - SNDK LAST=$16.93 SELL CALL APR-20.00 SWQ-DD OI=884 A=$2.60 BUY PUT APR-15.00 SWQ-PC OI=310 A=$2.70 INITIAL NET DEBIT TARGET=$16.75-$16.90 PROFIT(max)=18% - or - PLAY (conservative - bullish/collar): BUY STOCK - SNDK LAST=$16.93 SELL CALL APR-22.50 SWQ-DX OI=663 A=$1.90 BUY PUT APR-12.50 SWQ-PV OI=65 A=$1.60 INITIAL NET DEBIT TARGET=$16.40-$16.50 PROFIT(max)=36% ****************************************************************** GT - Goodyear Tire & Rubber $24.04 *** Reader's Request! *** Goodyear Tire & Rubber Company's (NYSE:GT) principal business is the development, manufacture, distribution and sale of tires for most applications. Goodyear also manufactures and sells several different lines of rubber and other related products for the transportation industry and various other industrial and consumer markets and rubber-related chemicals for related applications; provides automotive repair and other services at retail and commercial outlets; and sells various other products. One of our new readers submitted this issue for a bullish play and asked if we would make a suggestion as to how to speculate conservatively on future upside movement in the stock. Since Goodyear is a stable company (almost a blue-chip) and one that we wouldn't mind owning, the easiest way to profit from bullish activity without owning shares is to use a synthetic position. PLAY (speculative - bullish/synthetic position): BUY CALL APR-30 GT-DF OI=137 A=$0.70 SELL PUT APR-20 GT-PD OI=2080 B=$0.95 INITIAL NET CREDIT TARGET=$0.30-$0.40 TARGET PROFIT=$0.75-$1.00 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $575 per contract. ****************************************************************** - STRADDLES & STRANGLES - ****************************************************************** YHOO - Yahoo! $17.21 *** Cheap Speculation! *** Yahoo! Inc. (NASDAQ:YHOO) is a global Internet communications, commerce and media company that offers a comprehensive branded network of services. The company's principal site, yahoo.com, is an online navigational guide to the Web. The company also provides online business and enterprise services designed to enhance the productivity and Web presence of Yahoo's clients. These services include Corporate Yahoo, a customized enterprise portal solution; audio and video streaming; store hosting and management; and Website tools and services. Yahoo has offices in Europe, Asia Pacific, Latin America, Canada and the United States. Under the Yahoo brand, the company provides broadcast media, communications, business, enterprise and other commerce services. Readers are always asking for more debit straddles and this play topped our list of candidates in the low-cost "expiration-week" category. Based on the recent share price activity, the issue meets our criteria for adequate movement and with the current speculation on the buyout of HotJobs.com (NASDAQ:HOTJ), there is excellent potential for future events or activities that can create volatility in the stock. In addition, the probability of profit in this position is higher than other plays in the same strategy due to disparities in theoretical option pricing. PLAY (speculative - neutral/debit straddle): BUY CALL DEC-17.50 YHZ-LW OI=6073 A=$0.65 BUY PUT DEC-17.50 YHZ-XW OI=2720 A=$0.90 INITIAL NET DEBIT TARGET=$1.45-$1.50 TARGET PROFIT=15% ****************************************************************** BGEN - Biogen $56.46 *** Premium Selling! *** Biogen (NASDAQ:BGEN) is a biopharmaceutical company principally engaged in the business of developing, manufacturing and selling drugs for human healthcare. Biogen currently derives revenues from sales of its Avonex (Interferon beta-1a) product for the treatment of relapsing forms of multiple sclerosis, and from royalties on worldwide sales by the company's licensees of a number of products covered under patents controlled by Biogen. Such products include forms of alpha interferon, hepatitis B vaccines and hepatitis B diagnostic test kits, among others. Biogen continues to have an active development program related to Avonex, and is conducting several important clinical trials of the product. Biogen also continues to devote significant resources to its other ongoing development efforts. Biogen surfaced this week in a scan for issues with relatively stable trading patterns and inflated option premiums. Based on analysis of historical option pricing and the issue's technical background, this position meets the fundamental criteria for a favorable credit-strangle. The profit envelope is well within the recent price range of the stock and there are no (expected) events or activities that will change the fundamental outlook for the company prior to the January options' expiration. In addition, the well-defined trading pattern should help in any future adjustments that become necessary due to an unexpected change of (technical) character. As with any recommendation, the position should be evaluate for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (aggressive - neutral/credit strangle): SELL CALL JAN-60 BGQ-AL OI=10258 B=$1.90 SELL PUT JAN-50 BGQ-MJ OI=1965 B=$1.10 INITIAL NET CREDIT TARGET=$3.00-$3.20 PROFIT(max)=20% UPSIDE B/E=$63.00 DOWNSIDE B/E=$47.00 ****************************************************************** ************************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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