The Option Investor Newsletter Wednesday 12-26-2001 Copyright 2001, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 12-26-2001 High Low Volume Advance/Decline DJIA 10088.14 + 52.80 10169.09 10034.93 801 K 2066/1074 NASDAQ 1960.70 + 16.22 1983.84 1948.77 1.11 bln 2183/1494 S&P 100 587.50 + 2.31 592.84 585.19 Totals 4249/2568 S&P 500 1149.37 + 4.72 1159.18 1144.65 RUS 2000 490.19 + 4.38 490.60 485.76 DJ TRANS 2630.22 + 24.65 2632.24 2602.44 VIX 22.93 - 0.28 24.56 22.38 VXN 49.06 - 0.38 49.61 48.79 TRIN 0.93 Put/Call 0.54 ******************************************************************* Holiday Cheers and Jeers Post-holiday emotion and a rally in retail pushed the major averages higher early Wednesday. But a late-day report of a new bin Laden video appearance quickly reversed sentiment. Stocks shot higher at the open due in part to the retail sector. UBS Warburg's weekly chain store sales index roes by 2.9 percent during the week ended December 22. The index is compiled using major discount, department, and chain stores including J.C. Penney (NYSE:JCP), Sears (NYSE:S), Target (NYSE:TGT), Kmart (NYSE:KM), Wal-Mart (NYSE:WMT), Federated (NYSE:FD), and May Department Stores (NYSE:MAY). Separately, the Redbook Retail Sales Average showed a less-then-expected decline during the first three weeks of December. The heavyweight in the group, Wal-Mart, confirmed the upside surprise in retail sales. The world's largest retailer reported that bullish business in the days before the holiday carried December sales figures to the upper-end of previous forecasts. Wal-Mart said that it expected same-store sales to reach 6 percent during the period. Other discount retailers, such as Target, reported similar bullish sales figures, which reinforced the recent trend of consumers shunning high-priced department stores for the better values offered by major discount shops. For instance, Federated, parent of Macy's and Bloomingdale's, reiterated on Monday that it expected a decline in sales during the month. The consumer's search for bargains played into the strength in the e-tailers Wednesday. Amazon (NASDAQ:AMZN) gained nearly 13 percent after an analyst said that holiday-related traffic to the company's site continued to show signs of strength. Yahoo (NASDAQ:YHOO) echoed the AMZN analyst's comments when the Web portal said that its sales volumes increased by about 86 percent over last year's figures. Shares of Yahoo finished 5 percent higher. eBay (NASDAQ:EBAY), another Internet/retail hybrid, traded well, tacking on $2.53, or about four percent. Although not components of the sector, the e-tailers added bullish sentiment to the broader group. The S&P Retail Sector Index (RLX) finished 0.86 percent higher. Wal-Mart contributed to the strength in the index with its $1.02 gain. The RLX finished off of its day high, which was traced at 932. However, Wednesday's intraday high was about five points away from the RLX's 52-week high at 937. Interestingly, the RLX has rallied up to and subsequently rolled over from the 937 area on four separate occasions this year. The RLX has come a long way from its September 21 low at 670 -- 38 percent in three months! It therefore may be due for a period of consolidation near its 52-week high. Of course, the RLX could breakout to new highs. In either case, the RLX offers important insight into the consumer, who has kept the economy afloat during the downturn. I think a breakout would be a bullish development and bode well for the health of the economy and market. I'm not necessarily suggesting that a breakout should be bought. Rather, a breakout in the RLX could be incorporated into a bullish thesis for the market and economy as a whole. And a breakout, from where I sit, would occur with an advance past 940. The averages were drifting sideways into the final hour of trading Wednesday when a new videotape of bin Laden aired on Al-Jazeera TV. Although bin Laden looked tired and weary, his mere appearance was blamed for the late-day rollover in the averages. The S&P 500 (SPX) shed about seven points in the hour following the release of the tape. Apparently there had been a bin Laden "neutralization" premium built into the tape. Or, bin Laden's appearance was simply a reason to book profits Wednesday afternoon. Whatever the reason, the price action in the final hour of trading Wednesday was seriously negative. However, volume was very light. With minimal liquidity and a lot of participants sitting the week out, it's difficult to read into the late-day sell-off too much. The SPX is still between key support and resistance levels. The average is well above the 1135 support level that Jim highlighted over the weekend, which is reinforced by the 10-dma currently at 1138. Meanwhile, the 200-dma continues to lurk above current levels. The 200-dma now sits at the 1167 level. The SPX's day high Wednesday was set at 1159. A breakout above the 200-dma could spark another round of buying and the next leg higher in the broader market, while a breakdown could portend weakness over the short-term. The catalyst to spark either move is the unknown variable. Remember that Q4 earnings season is around the corner. There's an interesting dynamic developing in the energy sector which could play into the strength and duration of the recovery in the market and economy. The cost of energy has been extremely low for the better part of this year due to the slowdown in demand obviously, but also because of the big build out in the last two years. The overcapacity in the energy space has kept the price of crude and natural gas relatively low, which has in turn kept inflation in check and put more money into the pockets of those who consume energy: businesses and consumers. But the trend of low energy prices may reverse. Crude oil rallied back above $21 a barrel Wednesday in anticipation of another 1.5 million barrel per day production cut by OPEC. The cartel is scheduled to meet Friday, when it's expected to make an official announcement. The market has all but discounted another cut, which was reflected in a rise in gasoline and natural gas prices. The cold weather hitting the Eastern United States also added to the rally in energy. While a rally in energy prices isn't the best development for the economy and consumers, it certainly helps the energy segment of the market. Specifically, the PHLX Oil Service Sector Index (OSX). It was the best performing sector Wednesday with a 3.78 percent gain. The OSX was beaten up earlier this year during the big slide in energy prices but appears to have put in a bottom in the last four months. The OSX flirted with a breakout above 90 Wednesday -- it missed a breakout by 0.15 points. The 90 level is a triple-top in the OSX and a breakout above that level could have the index set-up for an advance to its next resistance at 96 over the coming weeks. A six point move in the OSX is big and could lead to a substantial move in one of the stronger components of the sector. Similar to the RLX profile, I'm not suggesting buying a breakout in the OSX at current levels. The index seems to have already discounted the production cut by OPEC this Friday and could sell-off on the news. However, if the recent rebound in energy prices continues, there's more upside potential in the OSX. It's only a matter of finding a favorable entry point, such as a pullback in one of the strongest stocks in the group, such as BJ Services (NYSE:BJS) or Noble Drilling (NYSE:NE). Both stocks gained more than five percent Wednesday. The rise in the OSX Wednesday didn't necessarily indicate a return of inflation. The PHLX Gold and Silver Sector Index (XAU) finished lower for the day. If oil, retail, AND gold would've traded higher Wednesday, then I'd be more worried about inflation. But the lack of participation by the XAU told me that inflation will remain in check for the time being. The bullish prognosis from the retail sales reports was definitely a positive for this market and economy. It was very encouraging to hear that the consumer is alive and well. We'll find out more about the current state of the consumer in the coming days. New and existing home sales are scheduled for release Friday morning in conjunction with the Conference Board's release of its December consumer confidence index. Economists expect new home sales to have remained at a high of 880,000 annual sales during the month of November. Existing home sales are expected to slip to 5.12 million annual sales. Consumer confidence is expected to have slightly risen during December to 82.7 from November's reading of 82.2. Positive economic data could keep this week's positive trend intact and carry stocks slightly higher into the New Year. Eric Utley Option Investor ************************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 ************************************************************** ***************** STOP-LOSS UPDATES ***************** EMMS - call Adjust from $18.50 up to $20.50 ESRX - call Adjust from $44.50 up to $45 MDT - call Adjust from $48.00 up to $49.25 NVDA - call Adjust from $59.50 up to $63 SLAB - call Adjust from $31.50 up to $36 SYMC - call Adjust from $60.00 up to $61.75 VRTS - call Adjust from $41.00 up to $41.50 XMSR - call Adjust from $15.99 up to $16.70 ERTS - put Adjust from $62.52 down to $61.50 FLIR - put Adjust from $43.00 down to $42.00 QCOM - put Adjust from $54.00 down to $53.50 WEBX - put Adjust from $27.51 down to $27.25 ************* DROPPED CALLS ************* No Dropped Calls for Wednesday. ************ DROPPED PUTS ************ BBOX $54.19 +1.15 (+1.11) BBOX continued higher today, above its converged 10- and 200-dmas. The stock's pop higher was most likely due to the early strength in the broader tech sector, which may have induced some short covering above the aforementioned moving averages. Volume was extremely light during today's 2% move, which could lead to a rollover in a weak tech sector tomorrow. In light of the stop violation, we're dropping coverage this evening. ************** TRADERS CORNER ************** Emotion Trumps Logic By Mark Phillips To be a successful investor, it is necessary to have a fundamental understanding of the philosophy that drives the stock market. The mass psychology of human nature is the biggest single factor you must comprehend if you expect to trade profitably on a consistent basis. This emotional and psychological ingredient doesn't necessarily have anything to do with the state of the economy, but it does have an overwhelming affect on the movement of the market. The first unwritten rule is that rumors are the prime movers of the stock market. It's amazing how quickly speculation of upcoming events can change the character of the current trend. When investors and analysts begin to discuss bearish trends, the market generally reacts negatively because the public believes it is destined for a downturn. Similarly, we have recently seen the slightest hint of an economic uptick launch many Technology related stocks on 200-300% rallies since the September 11th attacks. Is that logic at work? I think not. Serious mention of inflation can cause investors to rush for the exits in order to dump their holdings. This type of activity will often precipitate a general market decline long before the economy actually changes into that state or condition. The market anticipates the movement of the economy and shows us in advance what we can expect with regard to corporate health, unemployment, interest rates and other financial trends. It is also said that a crash in the market is foretold by events that are mostly psychological, not economic. Sure enough, the euphoria that preceded the current bear market would have led any new investor to expect the markets to rise to the sky. Why didn't they? Because an extreme emotion cannot be sustained by either an individual or a group of individuals. Once that euphoric mood had affected all those involved, it was bound to dissipate. As it began to diminish, investors became increasingly aware of the lunacy in which they had participated, and each wave of selling generated more selling. This created waves like those that emanate out from a stone dropped in a lake, affecting all those in the water. When a major financial report is rumored as favorable, the market erupts far in advance of the actual announcement. Rumblings of interest rate reductions can have the same effect as rocket fuel - it provides a quick boost until investors come to their senses and realize the folly of their just-completed buying frenzy. Once the initial surge and consolidation has run its course though, investors will step back and evaluate the situation in a more rational manner. They are still ruled by their emotions, but at least they are not completely blinded by them. If they believe the economy is about to turn upwards, and more importantly, that other investors believe the same thing, they will trample one another in their rush to buy equities. This in turn leads to increasing equity prices, fueled by more investors coming off the sidelines, their greed overwhelming their fears, as the markets move into rally mode. Emotion taking precedence over logic. This all happens before the first signs of true economic recovery. The recovery in equity prices will begin 1-2 quarters before the signs of recovery can be seen in the economy. Investors know this, and not wanting to be left behind when the market takes off again, many will follow the emotion of greed and jump into the markets prematurely, only to be justly punished for their over-exuberance. Buying the dips on the way down has decimated many an investors account, and the psychological beating inflicted by watching the losses mount, conspires to make investors afraid to get into the market even when all the signs are positive. Emotion rules again. After having been flattened by the freight train known as a bear market, many investors will be paralyzed by fear, unable to step back onto the tracks, even though they can see that the train has passed. Afterall, the last time they stepped into the markets (following the crowd at the last market peak or trying to buy the dips on the way down), they got flattened. Just because this train has passed, doesn't mean there isn't another one speeding down the track right at that moment. Not wanting to repeat that painful experience, they stand on the sidelines, waiting for the next major pullback to give them the "thumbs up" signal to jump in with both feet. Alas, it never seems to look quite good enough to overcome their fear. With each pullback that results in markets running higher, a bit of that fear dissipates, until they finally have enough courage to overcome their fear. Sound familiar? Let's look at the typical cycle of hope to exuberance to despair, in order to learn something about how human psychology fits into the movement of the markets. After a significant market decline, all but the most adventurous investors are afraid to venture back in. They have had one position after another go bad and have begun to question their own abilities. As the bolder investors venture into the markets near the bottom, the recovery begins slowly, gradually attracting more players from the sidelines. Despair begins to give way to hope, as those that were beaten up by the market on its way down, timidly venture back into the fray. The cycle begins to feed on itself with increased buying volume attracting more buyers, which in turn creates more buying volume, driving prices higher and attracting more buyers. At the same time, broad investor sentiment moves from despair to hope to enthusiasm. This phase of the market growth cycle is entirely healthy, but the next step is dangerous. Investors see everything go up on a weekly basis, and their enthusiasm gives way to unbridled exuberance. Everyone is an equity investor now, buying stocks with abandon and without any consideration of whether the inflated prices are warranted. Voices of caution can be heard in the mainstream media, but the crowd drowns them out, as they believe new market highs will continue forever, punctuated by brief dips that offer new entry points. When investors' emotions have become uniformly bullish, and they consistently ignore signs of slowing economic growth, we know the end is near. If every investor is long the market, who is left to bid prices still higher? The first few to jump ship are ignored by the majority, who "know" that the law of gravity has been repealed, and that prices will go up indefinitely, punctuated by brief, inconsequential dips. Emotions have driven the markets too high, and the inevitable correction will have the impact of yelling fire in a crowded theatre. People can't get out fast enough, and many are trampled in the panicky process. The market decline will be met first with surprise, then disappointment, as investors see support levels give way to selling pressure in the midst of signs of slowing economic growth. That disappointment will give way to despair as investors who have held onto "invincible" stocks, watch them crumble to prices they thought would never be seen again. This despair feeds on itself and the bulk of investors become myopic, able only to see gloom and doom around every corner. When every one is lined up in the bearish camp, that is where the seeds of a market recovery are sown. Hope begins to emerge in select areas, and the cycle repeats itself. Once again, emotion trumps logic. But there is the seed of opportunity for sharp-eyed investors. If you can perform your analysis devoid of human emotion, then you know that your decisions are based on logic. Selecting stocks that should lead an economic recovery is only the first step. The next, and perhaps more important step is to identify what I call the "Pinnacle of Fear" in the market. This is the confluence of events that has driven all but the strongest hands out of equities, allowing those of us with vision to step forward and scoop up bargains at nearly every turn. It sounds so easy and is likely one of the hardest things to practice, because it means that you have to step forward and hit the "Buy" button when all those around you are screaming that the sky is falling. Separating your logical market analysis from the emotions present in the daily gyrations of the market is one of the most difficult (and important) tasks that will face an investor. It is a long process and requires much work (heck, I'm still working on it!), but the rewards far exceed the price because it allows you to know that your actions are based on the bedrock of solid knowledge, not the shifting sands of group psychology. A key to this process on a daily and weekly basis is to perform your research and analysis when the markets are closed, with the evidence upon which you will base your decision sitting before you in black and white. Whether that evidence is fundamental or technical (depending on your individual preference), if we each take responsibility for our own analysis, and do it in the absence of real-time market noise, we are far less apt to make rash decisions with our investment capital. So emotion trumps logic over the near term. But here's where the rubber meets the road. Over the long term, logic will win, meaning that the markets will rise so long as earnings are growing, and fall if earnings are falling. But if you can stand aside from the emotional masses without having your decision-making process affected by them, it will allow you to buy near the emotional troughs (extreme depression) and sell near the emotional peaks (extreme optimism), supercharging your investment results over a lifetime in the markets. And that will produce the most-desired emotion (feeling) of which I am aware -- Security. Happy Holidays! ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** NVDA - NVIDIA Corporation $67.81 +1.62 (+3.23 this week) NVIDIA Corporation designs, develops and markets 3D graphics processors, graphics processing units and related software that set the standard for performance, quality and features for every type of desktop personal computer user. Used in a wide variety of application including games, the Internet and industrial design, the company's products were the first to incorporate a 128-bit multi-texturing graphics architecture. This design approach delivers to users a highly immersive, interactive 3D experience with compelling visual quality and stunning effects at real-time frame rates. NVDA sells its products to major PC manufacturers such as Compaq, Dell, Gateway, Hewlett-Packard and IBM. Most Recent Update Another play that coerced us into temporarily repealing our stop loss rule, NVDA provided rewards for that lack of discipline on Friday. The stop violation was small, and the bullish action on Friday confirmed that the prior day's selling was overdone as NVDA rebounded sharply, advancing throughout the day and coming to rest more than 4% higher. Will the rebound continue? It's hard to say, with daily Stochastics plunging towards oversold, but based on the way price is holding up, any price dip in the next couple days could prove to be just another entry point for the rally into the end of the year. Our stop is currently sitting at $60, just below the 20-dma ($60.27), which hasn't been violated since NVDA broke above the 200-dma in early October. Jeff Bailey has talked about the power of "inside day" formations, and NVDA posted just that on Friday. So we have a couple of possible entry strategies to employ. Dip buyers can continue to target dips near $62 while those using the "inside day" technique will want to enter on a break above Friday's high of $65. Comments NVDA traded today like it wanted to trace a new 52-week high by the end of the year. The stock held onto the majority of its gains and continued to outpace the SOX.X. Look for the chip sector to trade higher again tomorrow and watch for NVDA to break above its high today at $68.94. BUY CALL JAN-65 RVU-AM OI=3421 at $6.20 SL=4.00 BUY CALL JAN-67*RVU-AC OI=1399 at $4.70 SL=3.50 BUY CALL JAN-70 RVU-AN OI=3108 at $3.50 SL=2.50 BUY CALL MAR-70 RVU-CN OI=1350 at $8.20 SL=6.75 Average Daily Volume = 9.44 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Investing 101: Back To The Basics In 2002! By Ray Cummins One of our new subscribers requested some guidelines for buying and selling stocks in the current market environment. When professional traders discuss common traits, you will often hear how important it is to understand the elements of technical analysis and basic market timing. At the same time, many of the older investors are more comfortable with fundamental analysis. That is the process where one attempts to forecast the future profits of a company by analyzing their market share, revenue, pricing structure, and other components regarding the operation of the company's business. Most of the positions that we offer are of a short-term nature and thus we favor technical analysis as the primary means for stock selection. The study of pricing trends and chart patterns has nothing at all to do with the daily operations of the company. Instead, technical analysis of price patterns is a technique used to predict the future direction and magnitude of a stock’s movement. Although each style is often viewed as less than adequate by the opposing group, there is an inherent value in both methods and either system can produce favorable results. Technical analysis is generally more suitable to markets with extreme volatility and unusual conditions, since it offers the best method for timing entries and exits. Unfortunately, new investors are so overwhelmed by the incredible number of chart patterns and indicators, they overlook the most common rule for consistent profits; buy low and sell high! Fundamental analysis provides an accurate picture of the long-range outlook, but it is miserably late in predicting the actual movement of stock prices. However, analyzing the value of a company can help to forecast potential profits (or losses) and in the end, earnings usually determine share value. Quarterly reports will also affect the short-term outlook for a stock and the most significant changes occur when a company reports earnings that are different from the analysts’ consensus estimates. As we have seen in recent weeks, even a "met expectations" earnings report will inevitably cause a company's share value to fall as soon as the information become public news. When this happens, brokerages are often first to change their opinions on the company, downgrading the issue and causing further damage to the stock price. This is one of the best occasions when fundamental analysis might be helpful in a short-term trading scenario. The dilemma facing many investors is simple; they want to own good stocks but yet they are afraid to buy amid bearish market conditions. The key to success is to become proficient with the various types of stock analysis and use the one that best suits your skill level, risk tolerance and portfolio outlook. While strategy is important, it is also imperative to approach investment activities with the right attitude and expectations. Trying to achieve too much from a portfolio can put the account in the red quickly (greed can lead to terrible decisions), and accepting returns that barely surpass current inflation rates will prevent a portfolio from growing. While most investors who make the effort to learn about the stock market are not satisfied to achieve the same return as the Dow or the S&P 500, others will actively seek mediocrity. Just look at the number of index funds that are sold to investors who then are relegated to losing what the market loses and gaining no more than what the market gains. So how do you determine a reasonable expectation? Most investors who participate in historically profitable strategies will easily average 15%-20% return on an annual basis. In the long-term, 10% a year is the typical return for broad market stocks in general. Of course, you must decide what rate of return (and corresponding risk level) is appropriate for your personal portfolio. Here are just a few of the most common guidelines that may help you avoid the pitfalls of stock ownership. While we can't take credit for these rules (many are as old as the market itself), it's important to use this knowledge to improve your success in this vicious game that is the stock market. Before opening any position: Check the overall market indicators for direction. Analyze the sector and industry in which your issue resides. Study the performance of similar groups and make sure it coincides with your outlook. Choose only those stocks with the most favorable technical formations. Once you have a candidate in mind, do your homework! Know the company and the calendar; upcoming events, earnings dates, and scheduled announcements. Before entering an order: Double-check the chart! Make sure you are absolutely ready to own the issue at the target price. Don't buy a stock that's in a downtrend (Stage IV) and never open a position right after good news, especially if the chart shows a significant advance prior to the announcement. Never buy a stock just because it appears cheap after a big sell-off. Always use simple, proven techniques and develop target prices for potential plays. Take the human factor out of trading by using LIMIT orders to open your positions. When news or events change the character of the underlying issue, make the necessary adjustments. After you have established the position: The #1 rule: Know your exit and use a mental or mechanical stop. Stay informed by monitoring all the news and announcements affecting your position. Never hold a stock in an established downtrend no matter how fundamentally sound the company appears to be. Hope is an expensive emotion! Closing the position: Determining when to exit a play is a matter of personal preference and you are the only one who can decide how you will trade. The best advice is, be consistent! If you find that you're frequently buying and selling in similar situations, something is wrong with your system. There are a number of proven techniques for managing portfolio positions, and maximizing gains while limiting losses is an important aspect of successful investing. The most difficult lesson is learning to close losing positions. It can be painful but the simple fact is: There is no reason to hang on to a losing position when there are so many other profitable positions that deserve your time and money. Accept your losses, learn from your mistakes (evaluate each one critically) and move on! Good Luck! Summary of Current Positions (as of 12/25/01): Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield VRTS JAN 40 37.42 44.63 2.58 5.7% NBIX JAN 45 43.35 53.46 1.65 3.9% ACF JAN 30 27.65 29.70 2.05 7.5% Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield NVDA JAN 50 48.95 66.19 1.05 6.2% VRTS JAN 35 43.80 44.63 1.20 9.8% EMLX JAN 27.5 26.80 39.12 0.70 6.5% IGEN JAN 25 24.50 39.28 0.50 6.1% GENZ JAN 55 53.90 59.26 1.10 5.7% NBIX JAN 40 39.45 53.46 0.55 5.1% ACF JAN 25 24.35 29.70 0.65 8.8% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield ICOS JAN 65 65.95 60.71 0.95 5.1% IMCL JAN 75 75.95 62.80 0.95 7.3% ADI JAN 55 55.55 43.10 0.55 5.8% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status ADSK 39.39 37.94 JAN30P/35P 0.50 34.50 0.50 Open KBH 40.48 39.63 JAN30P/35P 0.55 34.45 0.55 Open MCHP 40.33 37.34 JAN30P/35P 0.75 34.25 0.75 Open LXK 57.37 58.70 JAN45P/50P 0.50 49.50 0.50 Open New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Naked Puts Today's group of "naked" put candidates include some of the most popular long-term portfolio issues in the technology segment. These quality companies are leaders in their respective industry groups and based on technical and fundamental analysis, they offer above-average upside potential in the coming months. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. *************** EBAY - eBay $66.34 *** On The Move Again! *** eBay (NASDAQ:EBAY) is a United States-based dynamic pricing online trading platform. eBay developed a Web-based community in which buyers and sellers are brought together in an efficient format to buy and sell items, such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and miscellaneous items. The eBay auction-style format permits sellers to list items for sale, buyers to bid on items of interest and all eBay users to browse through listed items. eBay's service is fully automated, topically arranged and easy to use. Through its wholly owned and partially owned subsidiaries and affiliates, the company operates trading platforms in the United States, Germany, the United Kingdom, Australia, Japan, Canada, France, Austria, Italy and South Korea. eBay expects to expand its online trading to include Spain, the Netherlands, Belgium, Portugal, Sweden and Brazil. Shares of EBAY shined today in the wake of festive news that sales for the leading online retailers were turning out to be better than expected. Yahoo! (NASDAQ:YHOO) was the primary catalyst for the upside activity in the group, boasting an 86% jump in sales between 11/23 and 12/24, versus the same period in 2000. The media giant said Yahoo Shopping users spent $10 billion on products sold online, generating a wave of optimism among other Internet retailers. From a technical viewpoint, EBAY is in the process of recovering from a recent bout of profit-taking and based on today's upside movement, it may be time to consider a new bullish position in the issue. The stock is certainly an excellent candidate for any long-term portfolio and these positions offer favorable reward potential at the risk of owning this unique company at a discounted cost basis. EBAY - eBay $66.34 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT JAN 50 QXB MJ 3,516 0.5 49.50 4.8% SELL PUT JAN 55 QXB MK 5,320 0.9 54.10 7.4% *** SELL PUT JAN 60 QXB ML 6,052 1.75 58.25 10.5% *************** EMLX - Emulex $40.50 *** Data Storage - Networking Giant! *** Emulex (NASDAQ:EMLX) is a designer, developer and supplier of a broad line of storage networking host bus adapters, application specific computer chips and software products that provide the connectivity solutions for storage area networks (SANs), network attached storage and redundant array of independent disks storage. The company's products are based on internally developed ASIC, firmware and software technology, and offer support for a wide variety of SAN protocols, configurations, system interfaces and operating systems. The company's architecture offers customers a stable applications program interface that has been preserved across multiple generations of adapters, and to which original equipment manufacturers have customized software for mission critical server and storage system applications. When it comes to leading-edge technology for data storage, Emulex is widely recognized as one of the foremost companies in the industry. Their products have been selected by the world's top server and storage providers, including EMC, Fujitsu-Siemens, Dell, Compaq, Hewlett-Packard, Hitachi Data Systems, IBM, NEC, Network Appliance and Unisys. In addition, Emulex includes a number of technology industry leaders such as Brocade, INRANGE, Intel, Legato, McDATA, Microsoft, and Veritas among its current strategic partners. From our perspective, Emulex is simply an "old favorite" that has finally begun to recover from the recent market-wide slump and it is definitely an issue we would like to have in our long-term stock portfolio. These positions allow investors to establish a discounted cost basis in the issue. EMLX - Emulex $40.50 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT JAN 27.5 UMQ MY 308 0.30 27.20 4.7% SELL PUT JAN 30 UMQ MF 1,335 0.60 29.40 9.1% *** SELL PUT JAN 35 UMQ MG 1,880 1.70 33.30 18.1% *************** NVDA - Nvidia $67.81 *** Video Games Need Graphics! *** Nvidia (NASDAQ:NVDA) designs, develops and markets unique graphics processors and related software for personal computers and digital entertainment platforms. Nvidia provides a "top-to-bottom" family of performance graphics processors and graphics processing units that has set the standard for performance, quality and features for a broad range of desktop PCs, from professional workstations to low-cost PCs, and mobile PCs, to performance laptops. Nvidia is one of the top companies in the Specialty Semiconductor group and among our readers, it is also a popular portfolio issue. The fundamental outlook for the company is excellent and the chip sector will likely be a top performer in the broader market in the coming year; both factors that lead us to a bullish position in the issue. In addition, NVDA closed very near to a new all-time high today and the long-term technical trend is very favorable. The premiums in these options provide excellent reward potential at the risk of owning the issue at a favorable cost basis. NVDA - Nvidia $67.81 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT JAN 52.5 RVU MT 912 0.45 52.05 4.2% SELL PUT JAN 55 RVU MK 1,958 0.75 54.25 6.6% *** SELL PUT JAN 57.5 RVU MA 568 1.05 56.45 7.8% SELL PUT JAN 60 RVU ML 2,643 1.55 58.45 9.8% *************** VRTS - Veritas $45.56 *** "Hot" Software Sector *** Veritas Software (NASDAQ:VRTS) is a supplier of data availability software products. Its unique products are designed to enable continuous productivity for computing environments ranging from desktop computers to the large enterprise data center, including storage area networks. The company offers a wide range of data availability software products to manage the growth of available data and increasing complexity and size of networked environments that its customers face. Its products allow businesses to improve the management of their data, to protect their data and increase the availability of their data. Veritas develops products for operating systems, including versions of UNIX, Windows NT and Linux. Its software solutions are used by customers across a wide range of industries, including many global corporations and other e-commerce businesses. The company also provides a full range of services to assist its customers in planning and implementing their data availability solutions. Veritas is recognized as one of the leading independent storage software companies in the industry and a number of analysts are bullish on the issue. Analyst H. Clinton Vaughan of Salomon Smith Barney recently upped VRTS shares to a "buy" with a price target of $56, based on several factors. Vaughan reported that Veritas' pipeline is very strong and that since the attacks of 9/11, IT managers are focusing spending more on data protection, data management and data availability, areas where Veritas has strength. His expectation is that the company will easily beat his estimate for per-share earnings of $0.60 in 2002. That is certainly a bullish outlook and investors appear to agree with the assessment. These positions allow a more conservative entry point in the issue with a reasonable expectation of profit. VRTS - Veritas $45.56 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT JAN 35 VIV MG 7,745 0.55 34.45 7.5% *** SELL PUT JAN 40 VIV MH 16,766 1.35 38.65 12.7% SELL PUT JAN 45 VIV MI 2,794 3.20 41.80 20.3% *************** BULLISH PLAYS - Synthetic Positions *************** DGX - Quest Diagnostics $71.40 *** Reader's Request! *** Quest Diagnostics (NASDAQ:DGX) is a provider of testing and other related services for the healthcare industry. The company offers a broad range of clinical laboratory testing services used by physicians in the detection, diagnosis, evaluation, monitoring and treatment of diseases and other medical conditions. Quest is engaged in clinical laboratory testing and esoteric testing, including molecular diagnostics, as well as anatomic pathology services and testing for drugs of abuse. Quest has a network of principal laboratories located in approximately 30 metropolitan areas throughout the United States including several joint-venture laboratories and a number of smaller rapid-response laboratories and 1,300 patient service centers. The company also operates an esoteric testing laboratory and development facility, known as Nichols Institute, located in San Juan Capistrano, California, as well as laboratory facilities in Mexico City, Mexico and near London, England. One of our readers asked for some speculative bullish synthetic positions on large-cap issues and based on the recent performance of this stock, it easily qualifies for a bullish position. The issue has casually moved up and out of a month-long consolidation area with support at $60 (our cost basis) and current short-term indications suggest the bullish trend will continue as the stock nears a test of resistance at $75. That will be the "key moment" for DGX in the coming weeks and we will monitor the issue for any signs of a failed rally near that price. Current news and market sentiment will also have an effect on the position, so review the play thoroughly and make your own decision about its outcome. DGX - Quest Diagnostics $71.40 PLAY (conservative - bullish/synthetic position): BUY CALL FEB-85 DGX-BQ OI=376 A=$0.75 SELL PUT FEB-60 DGX-MM OI=240 B=$0.65 INITIAL NET CREDIT TARGET=$0.10-$0.20 TARGET PROFIT=$0.75-$1.25 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,795 per contract. *************** WMT - Wal-Mart $58.23 *** Bullish Outlook! *** Wal-Mart Stores (NYSE:WMT) is principally engaged in the operation of mass merchandising stores. Wal-Mart discount stores and the general merchandise area of the Supercenters are organized with 40 departments and offer a wide variety of merchandise, including apparel for women, girls, men, boys and infants. Each store also carries domestics, fabrics and notions, stationery and books, shoes, housewares, hardware, electronics, home furnishings, small appliances, automotive accessories, horticulture and accessories, sporting goods, toys, pet food and accessories, cameras and other supplies, health and beauty aids, pharmaceuticals and jewelry. In addition, the stores offer an assortment of grocery merchandise, with the grocery assortment in Supercenters being broader and including meat, produce, deli, bakery, dairy, frozen foods and dry grocery. At the beginning of 2001, Wal-Mart operated 1,736 Wal-mart discount stores, 888 Supercenters, 475 SAM'S Clubs and 19 Neighborhood Markets. Internationally, the company operates units in Argentina (11), Brazil (20), Canada (174), Germany (94), Korea (6) Mexico (499), Puerto Rico (15) and the United Kingdom (241), and under joint venture agreements, in China (11). The company operates through three segments, the Wal-Mart Stores segment, the SAM'S Club segment and the International segment. Wal-Mart shares rallied today after the world's largest retailer said December sales would be above earlier forecasts as shoppers searched for holiday bargains in the midst of a slowing economy. Consumers flocked to the popular discount chain and shunned high-line department stores and specialty outlets, despite the anticipated slowdown in retail spending for the entire sector. Analysts say this could be the worst holiday shopping period in a decade but officials at Wal-Mart are even optimistic about the post-Christmas results because the company has limited markdowns on seasonal merchandise in the wake of favorable sales reports. The current technical outlook for WMT is very favorable and our conservative synthetic position offers a way to participate in the future movement of the issue with relatively low risk. PLAY (speculative - bullish/synthetic position): BUY CALL JAN-60 WMT-AL OI=40219 A=$0.70 SELL PUT JAN-55 WMT-MK OI=17173 B=$0.60 INITIAL NET CREDIT TARGET=$0.10-$0.20 TARGET PROFIT=$0.55-$0.70 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $2,000 per contract. *************** BULLISH PLAYS - Credit Spreads These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. Current news and market sentiment will have an effect on these issues so review each position individually and make your own decision about the future outcome of the play. *************** CMA - Comerica $56.93 *** Banking Recovery! *** Comerica (NYSE:CMA) is a multistate financial services provider formed to acquire the outstanding common stock of Comerica Bank. The company owns, directly or indirectly, all the outstanding common stock of seven banking and 35 non-banking subsidiaries. Comerica has strategically aligned its operations into the three major lines of the Business Bank, the Individual Bank and the Investment Bank. The Business Bank is comprised of middle market lending, asset-based lending, large corporate banking and also international financial services. The Individual Bank includes consumer lending, consumer deposit gathering, loan origination and servicing, small business banking (sales under $5 million) and private banking. The Investment Bank is responsible for the marketing of mutual fund and annuity products, as well as life, disability and long-term care insurance products. Big banks and financial services companies have under-performed the broader market in 2001 but in recent months, the group has started to show some life. Comerica is one of the leaders in the banking industry and their solid fundamental outlook reflects that position. In early December, Saloman Smith Barney upped its rating on the bank holding firm to a "BUY," citing good prospects for the issue in the event of an economic recovery. The analyst noted that, "The stock appears to be sufficiently washed out at its current 20 percent to 25 percent price/earnings discount to the group, and we believe it offers the highest earnings and valuation leverage in an economic recovery of the mid cap banks." We simply favor the recent bullish technical indications and our conservative position offers a great way to participate in the future upside movement of the issue with relatively low risk. CMA - Comerica $56.93 PLAY (conservative - bullish/credit spread): BUY PUT JAN-50 CMA-MJ OI=1727 A=$0.20 SELL PUT JAN-55 CMA-MK OI=296 B=$0.80 INITIAL NET CREDIT TARGET=$0.65-$0.70 PROFIT(max)=15% *************** DIAN - Dianon Systems $61.51 *** New All-Time High! *** Dianon Systems (NASDAQ:DIAN) provides a full line of anatomic pathology testing services and a number of genetic and clinical chemistry testing services to patients, physicians and managed care organizations throughout the United States. The company's principal physician audience for these services includes almost 50,000 clinicians engaged in the fields of medical oncology, urology, dermatology, gynecology and gastroenterology. Dianon performs all testing at either its main facility in Stratford, Connecticut, or at its other facilities in Tampa, Florida; New City, New York; Woodbury, New York, or Englewood, Colorado. The company provides most test results to physicians within 48 hours. There's not much news on DIAN to explain today's continued rally but the technical indications suggest the issue has successfully completed a recent consolidation and is poised for future gains. Regardless of the reason for the activity, DIAN is established in a strong bullish trend and those who favor the Health Services sector can use this position to speculate conservatively on the future movement of the issue. DIAN - Dianon Systems $61.51 PLAY (conservative - bullish/credit spread): BUY PUT JAN-50 UID-MJ OI=20 A=$0.55 SELL PUT JAN-55 UID-MK OI=22 B=$1.05 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% *************** IMPH - Impath $44.00 *** A Big Day! *** Impath (NASDAQ:IMPH) focuses on the clinical application of advanced technologies in the community-based hospital environment to enable clinicians to make better treatment decisions for their cancer patients. The company expanded its focus to harness the information it was creating from performing analyses on thousands of cancer specimens annually, and to broaden the future value of applications from that biological information. The company has also completed multiple strategic acquisitions that have provided new technologies; complementary cancer information; longitudinal treatment and outcomes data; unique pharmacoeconomic analytical capabilities, and a tissue/serology archive of well-characterized, fully documented cancer specimens. Impath serves the oncology community through three operating divisions: Physician Services, IMPATH Predictive Oncology (formerly BioPharmaceutical/Genomics Services (Biopharma) and Information Services. Impath is another issue that rallied today despite any public news to explain the bullish activity. In this case, the heavy-volume buying pressure suggests that positive news or another favorable event is forthcoming and traders who favor the strong upside move can use this position to speculate conservatively on the company's future share value. Target a higher premium initially, to allow for a brief consolidation in the issue. IMPH - Impath $44.00 PLAY (moderately aggressive - bullish/credit spread): BUY PUT JAN-35 QPH-MG OI=65 A=$0.45 SELL PUT JAN-40 QPH-MH OI=18 B=$1.15 INITIAL NET CREDIT TARGET=$0.80-$0.90 PROFIT(max)=18% *************** SII - Smith International $55.12 *** Hot Sector! *** Smith International (NYSE:SII) is a global supplier of products and services to the oil and gas exploration and the production industry, the petrochemical industry and its industrial markets. The company provides a comprehensive line of technologically advanced products and engineering services, including drilling and completion fluid systems, solids-control equipment, waste management services, three-cone and diamond drill bits, fishing services, drilling tools, under-reamers, casing exit and also multilateral systems, packers and liner hangers. The company offers supply chain management solutions through an extensive branch network, providing pipe, valves, fittings, mill, safety and other maintenance products. The company's operations are organized into two business segments, Oilfield Products and Services and Distribution. Shares of Smith International continued to move higher today in conjunction with the recent recovery rally in Oil Service sector issues. The upside activity in SII shares was also bolstered by an upgrade from Deutsche Banc Alex. Brown analyst Arvind Sanger, who initiated coverage of Smith with a "BUY" investment rating and a 12-month target price of $70. The bullish trend is well established with good institutional buying support and the premiums in the spread help provide a low risk cost basis with a reasonable expectation of profit. SII - Smith International $55.12 PLAY (conservative - bullish/credit spread): BUY PUT SII-MI OI=550 A=$0.40 SELL PUT SII-MJ OI=308 B=$1.05 INITIAL NET CREDIT TARGET=$0.70-$0.75 PROFIT(max)=16% *************** SUPPLEMENTAL CREDIT-SPREAD CANDIDATES *************** BULLISH PLAYS: Stock Last Long Ask Short Bid Target Monthly Symbol Price Option Price Option Price Credit Gain CSGS 41.99 JAN-35P 0.30 JAN-40P 1.05 0.80 18% APA 53.85 JAN-45P 0.25 JAN-50P 0.80 0.60 14% IBM 122.40 JA-110P 0.65 JA-115P 1.15 0.55 12% KKD 44.47 JAN-35P 0.25 JAN-40P 0.70 0.50 11% UTX 64.55 JAN-55P 0.25 JAN-60P 0.70 0.50 11% BEARISH PLAYS: Stock Last Long Ask Short Bid Target Monthly Symbol Price Option Price Option Price Credit Gain BBY 72.87 JAN-85C 0.40 JAN-80C 0.90 0.55 12% ERTS 59.05 JAN-70C 0.35 JAN-65C 0.80 0.50 11% EASI 34.19 JAN-45C 0.20 JAN-40C 0.65 0.50 11% SYMC 65.31 JAN-80C 0.35 JAN-75C 0.80 0.50 11% *************** SEE DISCLAIMER ***************************** ************************Advertisement************************* Tired of waiting on trades to execute? 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