The Option Investor Newsletter Wednesday 01-09-2002 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 01-09-2002 High Low Volume Advance/Decline DJIA 10094.09 - 56.46 10270.88 10069.45 1.45 bln 1527/1599 NASDAQ 2044.89 - 10.85 2098.88 2034.09 2.28 bln 1693/1946 S&P 100 589.62 - 2.88 600.02 587.80 Totals 3220/3545 S&P 500 1155.14 - 5.57 1174.26 1151.89 RUS 2000 494.74 - 3.16 503.08 494.74 DJ TRANS 2775.15 - 48.19 2826.65 2769.27 VIX 23.29 + 0.79 23.68 22.03 VXN 48.28 + 0.87 48.71 45.98 TRIN 1.31 Put/Call 0.55 ******************************************************************* A Beautiful Day? Austin Passamonte "It's a beautiful day in the neighborhood, a beautiful day for trading" crooned Mr. Rodgers if he played the S&Ps lower this afternoon. What looked to be a non-trading session early on finished the final two hours with handsome potential gains ripe for the picking, but just beyond outstretched grasp for many. More on that later. First let's deal with what lies ahead. Purportedly bullish fundamental news propelled markets higher on a gap-up open and rapid ascent to recent index highs ensued from there. But price action soon stalled right where resistance has held on several tests before. Various companies said this & that construed as reasons to buy the open or cover shorts for traders who hang on market news. I never get too caught up in those details myself. That stuff was once very important back in the go- go days of 1999 and early 2000 but as witnessed today, news-driven stocks are often best played on a fade than along with opening momentum. Different Fed heads strolled up to podiums last night and today after the close, jawboning how recent bad economic indicators are now improved towards benign. Can we therefore kiss any further rate cuts goodbye? Is that their way of telegraphing what comes next in the easing cycle? Companies are pre-warning less and pre-announcing more, with some insiders believing they sandbagged last time for upside surprises this time around. Such are the usual dynamics of broad market fundamental news found across all the public wire services. In the end, all that stuff is factored into price charts as people with more knowledge and money than us act upon their advantage and cause chart signal movement readily apparent from there. I personally cannot trade market news: I can only trade the market's REACTION to that news. It was said that today's late-session drop came from global event rumors, dried up volume, etc. I want to know why indexes stalled right at clear points of resistance first thing this morning and failed right from there? If buying volume dried up and there was a lack of selling, why didn't price action trade flat instead of plunging? It appears to me that massive resistance lies near those key measures tested today and yet another firm rejection tells us some we really need to know. So let's peruse some charts together and see what they have to offer. Our only rule is to enter each picture as a blank canvas and see what vision appears before us without favor or bias. Fair enough? Here we go: (Daily Chart: SPX) We begin with professional money's index. Commercial traders rule the S&P, retail traders focus on NASDAQ Comp. Still trading within a channel and struggling mightily to hold above its 200-DMA and recent highs. Nothing doing. Right now we have price action drifting in space with firm support down near the lower channel line (red) and 50-DMA (green) before looking lower towards Fib retracement levels from September lows to recent highs. Stochastic values are in full-bear mode as well. (Daily Chart: NDX) NDX is very similar to the SPX except it holds above 200-DMA. Note how three points of support now converge: 50 and 200-DMA together with that lower channel line. If it cannot hold the fort right there, look for another –100 to –200 points shed in short order. Stochastic values are also beginning to tip over from overbought extreme in bearish fashion as well. (Daily Chart: Dow) And the Dow trades right between SPX and NDX with price action sitting squarely on its 200-DMA. Other than that, mirror image of the first two. Currently sitting on support, a break lower from here sees strong arms at 50-DMA near 9,843 and then subsequent retracement levels below. (60/30-Min Chart: OEX) For traders with a short-term outlook, I would not be waiting for sustained strength early tomorrow. Using the OEX as a general (and very good) proxy for all major indexes, we see price action in the hourly chart (left) just below 50% retrace of last week's range. It appears looking to drop a few points lower. Intraday stochastic values in full-bear mode would suggest continuation lower for the start of Thursday. (60/30 Min Charts: QQQ) Likewise the QQQs for traders who favor this symbol. Hourly chart price action (left) seems to be tracing a bearish expanding wedge pattern. It is bearish because higher-high and lower-low instability expends market energy rather than store it. Therefore, how can it break above resistance while weakening in the process? Support should be found in the same area we've watched as resistance since last week: its 40.50 price level. Conclusion Much as we hate to admit it, market action is still going nowhere for the ninth straight week and counting. Traders who think such sideways action is just working off a rapid ascent and overbought extreme in healthy basing mode may indeed be right, but watch out for that low VIX falling to 20 or below. It's in a relatively neutral zone right now and must remain above 21 level to give bulls comfort that this sideways market will break and trend higher above recent marks. Those who know me well realize I'm as unbiased for market direction as they come. Up or down 1,000 Dow points from here make zero difference to me. I don't care because I cannot afford to care: biased traders are doomed to face market direction they cannot handle and it parts them from precious capital far quicker than was doled out in the favored times. That being said, I simply cannot see the indexes breaking out in a big way either direction right now. A strong case with numerous valid points can be made for Dow 12,000 or 8,000 next. I believe the markets will break one way or the other soon, but no clear signs exist for that tonight. Let those ascending channels shown above fail to hold price action within and I'll change my outlook in a hurry! For now I'm prepared for more sideways, choppy action ahead. If forced to pick a direction at gunpoint it'd still be lower due to overbought oscillators, price action failing to break resistance and a low VIX. But that's not enough to convince me a slide is about to begin from here. These are indeed very tough markets to trade. By popular email request we'll quickly review what is possible to accomplish, although I'm the first to say that short-term trading in V-turn markets like this is anything but easy at all: (OI Market Monitor: 12:59pm) Near 12:59pm EST today we noted that intraday charts were making the first coiled consolidations as price action peaked earlier and moved sideways from there. I remarked that major index intraday charts were looking overbought and bull-flag patterns forming, so watch for a break either way. With bearish stochastic values forming, a downside failure of these patterns coupled with falling oscillators would be a tradable event. Tradable for whom? Risk- averse, daring day traders only! This was a high-odds downside play and limited upside play suited only for those who know how to manage risk in the first place. (30 Min Charts: SPX) The left chart has price action backed up to just before 2:00pm levels. Note the highs and lows traced within that pattern for three hours straight (six candles = three hours) hinting of a market pause before continuing the move higher. Traders who only rely on patterns without using a measure of price strength (oscillators) only saw half the story. Stochastic values were bearish all the way, tipping downside odds more in our favor with each passing tick. The MM posting almost an hour before this market failure noted to watch for a break up or down. Where? We didn't know then... the pattern was still in its formation. But extending trendlines above 30-min highs and lows gave us measures or resistance and support to gauge, noted in green and red. A break either way was tradable in short-term mode with a high bias to the downside via chart signals turned bearish. Sure enough, support near 1169 broke and traders had ample time to get short this whipsaw market move. Easy? Heck no... who ever said that! But possible for those who've honed their skills by watching & learning within educational services such as this. Reward For Tedious Study Pass the short-term trading test and potential gains exist for those who dare within two market-hour's duration: SPX Jan 1175 put (SPT-MO) Entry near 15.50 Current sale 24.00 Gain on contract cost: +54.8% SPX Jan 1150 Put (SPT-MJ) Entry near 7.00 Current sale 11.80 Gain on contract cost: +68.6% S&P e-mini short at 1169 cash index: lowest level 1152 or 17 index points captured @+$50 per index point, which is +$850 per short futures contract. Margin to hold: $3,000 per contract. Gain on contract cost: +28.3% Folks, this is tough sledding but possible to accomplish. The little book I wrote for annual subscription renewals explains the basics here and how-to articles archived and to follow will continue to help nudge the learning curve along. No need to rush it: the indexes will be trading long after we retire, so let's begin when we're ready and retire rich instead! Summation Those who know me best also realize I'd prefer to enter plays each Monday and ignore them until Thursday afternoon. Then close out for massive profit and take a three-day weekend before repeating the process. Does that sound good to you? Sounds great to me but the markets just don't care. They refuse to oblige for what I want, instead delivering exactly what they dictate instead. I can either try to mold my methods with their demand, stand out of the way or get plowed under in the process. For me it's a constant struggle to accomplish the first two while avoiding the third. How about you? These are challenging markets that force me to give it my all and sometimes that falls short of good enough. It won't always be this way, of that I can assure you. Better times are ahead and easier days lie in our path down the road. But for now we must willingly accept the markets that are given us because nothing changes that fact. My advice is to trade careful, trade a bit smaller than usual (if at all), don't marry a position and for gosh sakes do not fall in love with either direction. That is a sure way to break your heart before long! Best Trading Wishes, austinp@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************************* 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 ************************************************************** *********** OPTIONS 101 *********** More on the Selection Between LEAPS vs. Stock By Mark Phillips Last week we started discussing the decision process necessary to intelligently select between LEAPS and the underlying stock. Recall that the primary incentive for choosing LEAPS over shares is the ability to garner a greater reward through leverage, while exposing our account to less risk by implementing the trade with less money on the line. We went through a fairly detailed example using current prices on International Business Machines (NYSE:IBM) and came to the conclusion that there wasn't a clear advantage (at least on a potential reward basis) for selecting LEAPS over the shares. But the advantage clearly resided with buying the underlying stock in the event that IBM behaves contrary to our expectations, staying flat over the next 12 months or even declining. If IBM were to cease trading a year from now at the $125 level, the stock position would be unchanged, while the LEAPS position would have suffered a 33% loss. And if the stock actually declines in value, the performance of the stock position will continue to shine with respect to the LEAPS position. With IBM trading only $10 lower at $115, the stock position would have suffered a $1000 loss ($10 x 100 shares). By contrast, our 2004 $120 (LIB-AD) would likely have declined to near $14 (based on the current value of the 2003 $130 LEAP). That represents a loss of 46% from our initial investment of $25.90. This little hypothetical example should once again underscore the importance of both timing and direction when contemplating any options purchase, even those with an expiration cycle that is measured in years. Options give us great leverage, but that leverage can work against us when the stock in question fails to live up to our expectations. Unless the option is deep in the money, it is a wasting asset, losing value each and every day as time marches on. So with that as our background, let's look at a couple more examples to hopefully make the decision process more clear. My first example will be one that clearly favors a purchase of the stock. Let's say you're bullish on the Optical Equipment stocks (I know it's a long shot, but work with me on this one), and you like the base that has been building in shares of JDS Uniphase (NASDAQ:JDSU) over the past 6 months. You want to initiate a long-term position at current levels in anticipation of a recovery in the economy later in 2002. So with JDSU currently trading at $9.58 per share, buying 100 shares would cost $479 using a 2-1 margin account. Given the currently depressed condition of the industry, let's make our assessment based on a fairly tame 50% move, with JDSU working its way up to the $15 level over the next 12 months. That would give us a gain of $5.42 ($542) on our stock purchase, or a 113% gain. Even subtracting out the 7% margin interest expense of $33.53, our gain on the JDSU stock purchase would come in at 106%. That's not bad, but we need to keep in mind that in the worst case (JDSU going to zero), we would be liable for the entire value of the original position, $958. That is our maximum risk, but we can control that effectively with judicious use of a stop loss order. So what would we be likely to expect from the same stock movement if we chose to invest in LEAPS instead? Let's use the $10 2004 LEAP (KAJ-AB) for our discussion here. It is currently trading for $4.40, which makes our initial risk in the trade $440. Looking forward to JDSU trading at $15 in 12 months, we can get a good estimate of the value of our position by looking at the current value of the 2003 $5 LEAP (OVU-AA), which is currently trading at $5.50. Do you notice what I do? That's only an appreciation of $110 on our original investment or a gain of 25%! This is a perfect example of the impact of time decay. Most of the increase in value to our LEAP that came from the stock moving higher was negated by the loss of time value over the intervening 12 months. Even the initial cost basis only presents a slight advantage over buying the underlying stock. No matter how you slice, it if you want to play the severely depressed Optical Networking stocks, the best bang for the buck is likely to come from buying the stock outright and holding on for the long-haul. So how about an example that clearly favors LEAP buyers over stock investors? Well, you know sometimes things don't work out the way you planned! I went through this pricing exercise on several dozen stocks today, and could not find a single example where the reward from a reasonable price move in the stock yielded a substantially better return on the LEAP than buying the underlying shares on margin. While that's frustrating, it does provide a couple of important lessons. The first is the issue of time decay. While buying a LEAP gives you the luxury of time to be right, we don't want to take too much time in the trade. Holding a LEAP for a year exposes us to too much time decay to make it an advantageous strategy over buying the stock. Buzz Lynn made the comment at the end of his Wrap on Monday, "Trade them, don't keep them" and that certainly applies here. The big return advantage in LEAPS comes from a solid move in the stock over a relatively short period of time (in the area of 3-6 months). In that period of time, time decay doesn't take nearly as large a bite out of our option premium. The other important point to keep in mind is that our downside risk is substantially less when buying LEAPS due to the lower initial cost. And we don't want to overlook the inherent risk associated with buying stock on margin. When a margined position goes against us, it can do so with a vengeance, as so many investors learned over the past 2 years. Having an option expire worthless is an unpleasant experience as well, but at least we know precisely our maximum risk when we enter the trade. And for investors that are not comfortable with the risk inherent to investing on margin, using LEAPS is a great way to control risk while at the same time taking advantage of the concept of leverage. When compared against buying the stock outright, LEAPS will almost always (except in cases of extreme volatility) outperform by a wide margin. Remember that there are a whole bunch of factors such as current and future volatility, strike selection, and actual price movement (along with the time period the price movement takes) that can affect these hypothetical calculations. While my examples didn't come together the way I had hoped, it is my hope that you have a better understanding of the advantages and disadvantages of choosing LEAPS over buying the underlying stock. Have a great week! Mark ************** TRADERS CORNER ************** Fundamentals Guy Takes a Field Trip Buzz Lynn email@example.com For what it's worth, let me offer up an axiom of business management. In addition to time spent working IN our business (trading in this case), ultimately profitability is directly related to working ON the business. That is to say that setting goals, working out better procedures, getting educated to how others do their jobs, and adapting information from different business models provides the foundation, framework, and knowledge background that guides our profit-seeking endeavors. I have a friend in the building maintenance business (9-digits of annual billings) that told me many bull sessions ago that his business could now run itself on cruise control and that he would now take more time off. He suggested that his loyal lieutenants could run the day to day operations of the business, which would then leave my friend more time for other matters of interest to him. I disagreed with him then and explained that he was the guiding force, character, brains, and reputation of the company. No way would his business survive in the long run without his skills and acumen when strategic decisions needed to be planned and implemented. It would only be a matter of time before the business landscape/economic environment changed and would ultimately require him to answer the hard questions, something like, "Well Sir, many of our customers' facilities are closing. What do we do now?" In fact, that turned out to be the case. It wasn't just a matter of how many nights per week the trash was emptied and floors mopped, but rather how to stay successful delivering a product that exceeded their customers' expectation at a very fair price in a difficult economic environment. That is where working ON the business comes into play and is the reason I actually played hooky from the markets today - to get educated from those far smarter than I in hopes that I might gauge current business conditions and be able share my observations with you this evening. We still aim to bring you the best information from the brightest people out there, including ourselves (we hope). So what was my field trip where I got to listen to smart people provide observations for me to share? I attended the "Directions 2002" business conference sponsored by the Reno-Sparks (Nevada) Chamber of Commerce and EDAWN (Economic Development Authority of Western Nevada. While speakers were top caliber on the subject of economic development, the keynote speaker was Steve Forbes, namesake of Forbes Magazine and former Presidential candidate, and a guy whose opinion I immensely respect after having read his stuff for 20 years. He's extremely well read, and like me, a radical for capitalism. I went in hopes of hearing it from the horse's mouth that "this is the bottom". Alas, he offered no opinion on future economic direction. But what he did convey was equally interesting and helps explain our current economic condition. He opined that there were actually four factors that contributed to the worldwide slowdown. It wasn't just a matter of a tech wreck, as many pundits would have us believe. The first item he cites are mistakes made by Alan Greenspan and the Federal Reserve Board - a bunch of central bankers who Forbes contends are a generally mentally unhappy bunch who want us to be miserable too. He asserts that they are miserable because they (central bankers in general) believe in the Phillips Curve (no relation to our own Rocketman and LEAPS editor, Mark Phillips), an economic theory that says prosperity causes inflation. He also asserts that notion as garbage, as do I. One need only look at the 1980's and 1990's as proof that inflation is not a problem in a growing economy. In 1999, the Fed began raising rates because of inflation fears - we were too prosperous! Imagine your doctor trying to make you sick out of fear that good health is not healthy - silly! The Fed in fact may have made us TOO sick and tried to un-do its damage by dropping rates 475 points total over 10 separate occasions in 2001. For those interested, Forbes contends the patient is not better and to expect another rate cut this month, small as it may be. Greenspan's greatest fear of cutting rates to the bone early and often to re-stimulate growth is that he believes to do so would ignite inflation. The upshot is to deliberately and slowly ease while business meanwhile chokes to death. How can that be with all that cash on the sidelines? Like any situation where scarcity is perceived, people stock up as the investing public has done with cash. Forbes equates that buying all the water you can in anticipation of a water shortage. When Greenspan shows up at our houses, all he sees is how liquid we are! That's scary for a misguided Phillips curve guy. Second, 70% of the dollars produced here actually find their way overseas since many countries tie their currency to the value of the dollar and actually use the dollar for trade. No surprise then that the Fed's actions affect the conditions of dollar-backed foreign countries - long tentacles, that dollar. Third, Forbes cites the nutty tax structure in this country. Forbes calls taxes a "price and a burden" or a "cost" of success, not just a revenue source for the government. The heavier burden or cost means less good stuff demanded and produced. Lighten the burden and the demand and production of good stuff goes up. He points out that about every 20 years, we get a tax break - Kennedy, Reagan, now Bush. But he equates the Bush tax as a light tea passed off by an obstinate Senate as high-test bourbon. The solution of course is a cut in capital gains and the death tax in addition to simplification of the tax code (aka flat tax). Of course, you'd expect him to say this, as he flat said too that he would run again for President in the 2004 election. One thing about Forbes - he's consistent and sticks to his message. Even if you think he's just on the campaign trail, it's worth noting that Russia went to a 13% flat tax and thus doubled its intake to the treasury. Another little simplification metaphor that he used was to note the Bible has 783,000 words and houses much wisdom, (please, no hate mail - we're not arguing interpretation here) while the U.S. tax code contains 8,000,000 words and nobody really knows how to interpret that. Let's see an archeologist translate thing when digs it up 8,000 years from now! The point is that simplification could be extremely beneficial here too, but a lot of accountants and tax planners would be unemployed; so don't look for that to happen soon. One business opinion that did offer was that the airwaves, aka spectrum will be practically free much like ocean water that makes a cruise possible and air that makes international flight possible. The notion that somehow we should pay for the water we cruise on and the air we fly through is silly. So too with the spectrum with communicate through. It is infinite and ubiquitous. My take: Look for FCC chief, Michael Powell (yes, Colin's son) to break open the dam and send wireless communications through the roof. I don't know who will be the winner, but abundance will insure many of them. Finally, Forbes notes that the world economy is bad shape because sound economic principles are ignored by the likes of the IMF. For those who don't know about the IMF, its m.o. is to have countries raise taxes and devalue their currency in order to get the bailouts they seek. The inevitable result is inflation and stagnation. It amounts to economic poison "accidentally" administered as medicine. In fact, Forbes equates them doctors 200 years ago that "bled" their patients at the first sign of illness. Bleeding them only made things worse and hastened a death that need not have happened. Same with economies that go to the IMF for help. Solution to the ills that might turn around the market? None that look like a very short-term fix that would restore the economies around the world. While I was really interested in finding out his views about what happens next, he offered none, and my written question asking the same evaded the moderator's selection. Oh well. While artfully dodging a prediction, he did offer five principles that would lead to progress if implemented. 1. Implement and enforce the rule of law that would allow simple inalienable property right to free up the $9 trillion in real estate values worldwide. It would thus be possible to enter long- term contracts and offer security for borrowed capital. 2. Implement a sound currency based on gold or the dollar 3. Lower or eliminate, and simplify taxes. 4. Make it easy to set up a business in a foreign country. For instance, Bulgaria currently requires permits from 16 different agencies to operate the simplest of businesses. Not much commercial activity as a result. 5. Drop trade barriers. Were we to start by doing all of those things in our own country, we would be setting a great example in which the rest of the world could follow and would want to follow. That's it from Fundamentals Guy's field trip. While not finding the answer I was looking for, it certainly was interesting to hear Forbes live in person. More to the point, it got me away from the trading screen and opened my eyes to a bigger universe than just Wall Street so that perhaps a tidbit of outside knowledge would seep in and help me make better business and trading decisions. That is why we spend time ON the business rather than all of our time IN the business. Until next time. . . F.G. Oh, and one more thing - should Forbes be elected, he promised to replace Alan Greenspan. No argument from me! ************************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 ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** IS Swing Trade Model: Wednesday 1/09/2002 So Much For Methodical Markets News & Notes: ------------ I had to go and open my mouth! Celebrating methodical markets over the past few sessions and thinking that could last forever. Silly me! Call plays would have worked a bit from the open and put plays even better towards the close. A true day-trader's session at a time when actual swing trades are still tough to find. Featured Markets: ---------------- [60/30-Min Chart: OEX] The OEX popped early, went flat and fell out of bed like all the others. looks like more downside action is possible, especially with a daily chart (depicted in Market Wrap) turned bearish as well. [60/30-Min Chart: SPX] Same story here... looks to break lower. [60/30-Min Chart: QQQ] Likewise the QQQ. All are sitting on support but daily charts are poised for further decline from here, albeit possibly limited. Summation It goes without saying we'd have loved to short the top of this market, but that didn't happen. Conservative traders may opt to wait for new put play entries if/when Wednesday session lows are broken below. however, we will list put play entries right below current closing prices and hope to catch a flat to slightly higher open that falls thru our triggers somewhat above support to give us "breathing room" should an upside bounce emerge from there. These are not what I consider screaming plays, but based on daily chart bearishness shown in Market Wrap coupled with intraday closes below recent support, chances are good we start off lower from here. For those who wish to play whenever the chance arises to tip scales in our favor, I'd say downside continuation is the most likely scenario judging from here. Trade Management: ---------------- Option traders may choose listed In-The-Money (ITM) or Out-The- Money (OTM) contracts by personal preference. They are selected based on volume, open interest and "Delta" values in that order. Our preference is usually OTM contracts except for the last few days of expiration when ATM or ITM contracts are preferred. Entry triggers are points where plays are tracked when price action breaks above for calls or below for puts. Stops are the exact opposite of that. Sell targets are points to exit based on index levels or %gain on option contract price as noted. *No entry targets listed mean the models are idle at that time. New Play Targets: ---------------- QQQ DJX Jan Calls: 41 (QQQ-AO) Jan Calls: 102 (DJV-AX) Long: BREAK ABOVE Long: BREAK ABOVE Stop: Break Below Stop: Break Below Jan Puts: 41 (QQQ-MM) Jan Puts: 100 (DJV-MV) Long: BREAK BELOW 41.00 Long: BREAK BELOW 100.80 Stop: Break Above 41.75 Stop: Break Above 102.00 ===== OEX SPX Jan Calls: 600 (OEY-AT) Jan Calls: 1125 (SPT-AE) Long: BREAK ABOVE Long: BREAK ABOVE Stop: Break Below Stop: Break Below Jan Puts: 580 (OEB-MP) Jan Puts: 1150 (SPT-MJ) Long: BREAK BELOW 589.00 Long: BREAK BELOW 1155.25 Stop: Break Above 592.25 Stop: Break Above 1162.00 Open Plays: ---------- None IS Position Trade Model: Wednesday 1/09/2002 Here We Go Again News & Notes: ------------ Like a rerun soap opera with bad actors, the indexes popped right up to resistance and fell back to support within Wednesday's session. If ever there was a market treading water, this is it. A directional break is imminent somewhere in the future and it gets closer every day, but we're glad to be tracking put options with 5+ weeks of time value left until expiration! Featured Plays: -------------- No charts... nothing material has changed. Summation: --------- No real changes as we bounce within the range looking for favorable execution of open plays tracked. With all long term chart signals looking bearish right now, odds are with us for current plays working soon. Trade Management: ---------------- Option traders may choose listed In-The-Money (ITM) or Out-The- Money (OTM) contracts by personal preference. They are selected based on volume, open interest and "Delta" values in that order. Position Trade model usually tracks OTM contracts with several weeks of time premium left until expiration for buy & hold plays. Entry triggers are points where plays are tracked when price action breaks above for calls or below for puts. Stops are the exact opposite of that. Sell targets are points to exit based on index levels or %gain on option contract price as noted. *No entry targets listed mean the models are idle at that time. New Play Targets: ---------------- None Open Plays: ---------- DJX Feb Puts: OTM 98 (DJV-NT) Long: 2.00 Stop: 1.00 SPX Feb Puts: OTM 1125 (SPT-NE) Long: 24.60 Stop: 13.00 RTH Feb Puts: ITM 41 (RTH-NR) Long: 1.60 Stop: 0.90 PPH Feb Puts: ITM 95 (PPH-NS) Long: 1.70 Stop: 0.90 XLI Feb Puts: ITM 28 (XLI-NB) Long: 1.00 Stop: 0.60 Sector Share Trade Model: Wednesday 1/09/2002 Directionless News & Notes: ------------ Another pop & drop session took out our PPH HOLDR short play at the trailed stop for a 1.00 gain from entry. Our intention here is not to dink & dunk for a point or two either way: we would love to open and track plays in a trending market that swell with impressive gains over time. Pipe dreams for now! Featured Plays: -------------- No charts: see Market Wrap Summation No new plays at this time, but Thursday could offer a different picture from here. Trade Management: ---------------- Entry triggers are points where plays are tracked when price action breaks above for calls or below for puts. Stops are the exact opposite of that. Sell targets are points to exit based on index levels or %gain on share price as noted. No entry targets listed mean the model is idle at that time. * Asterisk means stop-loss level changed since prior posting New Play Targets: ---------------- None Open Short Plays: ---------- 01/02 XLI Short: BREAK BELOW 27.70 Stop: Break Above 29.00 PPH Short: BREAK BELOW 98.50 Stop: Break Above 97.50 [hit] Result: +1.00 ************************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. 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. 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The Option Investor Newsletter Wednesday 01-09-2002 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ************************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 ***************** ACS - call Adjust from $101 up to $102 CCMP - call Adjust from $78.50 up to $80 MANU - call Adjust from $18 up to $18.25 EMLX - call Adjust from $42 up to $43 GNSS - call Adjust from $65.50 up to $68 CORR - put Adjust from $25 down to $24.60 ADRX - put Adjust from $67 down to $65.50 CERN - put Adjust from $51 down to $50 AZO - put Adjust from $70 down to $68 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* ELBO - Electronics Boutique $34.59 -1.56 (-2.41 this week) Electronics Boutique is a specialty retailer of electronic games. The company sells video games and PC entertainment software, supported by the sale of video game hardware, PC productivity software, PC accessories and related products. Most Recent Update ELBO reported less than impressive December sales figures Monday which caused the stock to trade substantially lower. We were obviously pleased with the way our bearish play began on ELBO. But the stock rebounded in today's session. Two others in the group traded higher in Tuesday's session, MGAM and TTWO. There may have been a sector sympathy bid in ELBO or simply a retracement of yesterday's big drop. Because of ELBO's gap lower yesterday morning, the stock may have not offered the most ideal entry point. Those looking for new entries might consider rollovers near the site of the gap, around the $36.50 level. Also look for a breakdown below $35.50 after confirming weakness in others, such as ERTS, ATVI, and THQI. Comments ELBO, like most Nasdaq stocks, sharply reversed during Wednesday's session. The stock traded above our coverage stop at $37 early in the day, but fell off a cliff into the close. The stock's reversal could lead to further downside in the short-term if selling continues in the Nasdaq. Watch others in the video gaming sector for industry sentiment and consider entries on a decline below Wednesday's intraday low at $34.10. Target the 200-dma at $32.25 to the downside. ***January contracts expire in less than two weeks*** BUY PUT JAN-40 LQB-MH OI=48 at $5.80 SL=4.00 BUY PUT FEB-35*LQB-NG OI=12 at $3.50 SL=2.00 Average Daily Volume = 545 K ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Option Trading 101: Understanding Premium Disparities By Ray Cummins One of our readers submitted a great question about the small variations in option pricing and the need to take advantage of excess premiums to create the best possible position. Dear OIN, I have a question. I recently read a passage from your E-mail replies (concerning spread trading and combinations): "When opening any type of spread, it's important to take advantage of disparities in option pricing to create the best possible position. Always try to initiate new positions when there is little premium in the long option and excess value in the sold option." I am under the impression that all options (long and short) are undervalued when implied volatility for a given security is low and all options are overvalued when implied volatility is high. How can one enter a spread when there is "little premium in the long option and excess value in the sold option"? Thank you. MN Regarding Option Pricing Disparities: First, I am glad to hear you are using the OIN to supplement your search for profitable trading positions. All of us at Premier Investing Group pride ourselves in working for a company that offers some of the best stock/option research at a reasonable price. As far as your question about option pricing disparities, it is true in a general sense that most options (long and short) in a given class or series are undervalued when implied volatility for the underlying security is low and vice-versa. That condition exists because the prices for exchange-listed options are initially determined by computerized pricing models however, buyers and sellers (and the economic interplay between supply and demand) do exert a strong influence on the actual market value of the options. Derivatives, being highly leveraged, exaggerate the emotional optimism or pessimism of the market, causing prices to vary widely from their true worth and that effect occasionally produces disparities in option pricing, even among options in the same series. This condition creates opportunities for spread traders to enter positions with a theoretical edge and as I noted, "It's important to take advantage of disparities in option pricing to create the best possible position." A good example of this approach can be seen in the recent, speculative calendar-spread candidate; Clarus (NASDAQ:CLRS), where the front-month options are substantially inflated when compared to the longer-term options. In this case, the near-term implied volatility is at the upper extreme and that's the underlying basis for choosing a spread strategy; the ability to take advantage of under/over pricing, premium disparity, and time decay. The most important factors in option trading are market movement, option volatility, and time decay, and understanding and utilizing these concepts correctly can result in a theoretical edge for traders. Since we have the ability to measure the fair value and the rate of decay of an option through mathematical calculations, we should be able to reduce our primary risk to that of market movement. Clearly, there are always stocks that are moving in well-defined trends, as opposed to moving randomly and if you can identify those stocks (and the strategies/positions that will benefit most from their movement), you can achieve an edge in the options market. Much of our effort at the OIN is devoted to finding stocks that will continue moving in such trends, so our subscribers can profit from buying undervalued options, selling overvalued options, or initiating limited-risk spreads on those issues. Good Luck! Summary of Current Positions (as of 01-08-2002): 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 48.73 2.58 5.7% NBIX JAN 45 43.35 50.54 1.65 3.9% ACF JAN 30 27.65 28.60 0.95 3.5% MRVL JAN 32.5 31.66 39.23 0.84 5.0% MU JAN 32.5 31.14 35.30 1.36 8.3% SEBL JAN 27.5 26.30 33.30 1.20 8.7% With the recent consolidation in AmeriCredit (NYSE:ACF), a transition to the FEB-$30 Option (to lower the cost basis in the position) or an early exit (to avoid any losses) may be prudent. Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield VRTS JAN 35 43.80 48.73 1.20 9.8% NVDA JAN 50 48.95 68.55 1.05 6.2% EMLX JAN 27.5 26.80 46.00 0.70 6.5% IGEN JAN 25 24.50 39.93 0.50 6.1% GENZ JAN 55 53.90 53.41 (0.49) 0.0% NBIX JAN 40 39.45 50.54 0.55 5.1% ACF JAN 25 24.35 28.60 0.65 8.8% EBAY JAN 55 54.10 67.54 0.90 7.4% EMLX JAN 30 29.40 46.00 0.60 9.1% NVDA JAN 55 54.25 68.55 0.75 6.6% VRTS JAN 35 34.45 48.73 0.55 7.5% MRVL JAN 30 29.50 39.23 0.50 11.3% MU JAN 30 29.35 35.30 0.65 11.5% SEBL JAN 25 24.40 33.30 0.60 14.2% NVDA JAN 55 54.60 68.55 0.40 5.1% EMLX JAN 30 29.75 46.00 0.25 5.5% Genzynme (NASDAQ:GENZ) tanked on the first trading day of the year after analyst Mark Augustine at US Bancorp Piper Jaffray cut his rating on the stock to "market perform," citing competitive pressure on two of the company's key medications. With the widespread slump in biotechnology shares, it was a good time to exit the bullish position. Traders who favor the long-term outlook for the company can roll down and forward to a FEB-$50 Put (short) for a potential "break-even" exit. Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield ICOS JAN 65 65.95 53.47 0.95 5.1% IMCL JAN 75 75.95 36.85 0.95 7.3% ADI JAN 55 55.55 46.59 0.55 5.8% Synthetic Positions: Stock Pick Last Position Credit C/B G/L Status DGX 71.40 67.85 FEB85C/60P 0.10 59.90 0.10 Open WMT 58.23 57.84 JAN60C/55P 0.10 54.90 0.10 Open Credit Spreads: Stock Pick Last Position Credit C/B G/L Status ADSK 39.39 39.38 JAN30P/35P 0.50 34.50 0.50 Open KBH 40.10 38.45 JAN30P/35P 0.55 34.45 0.55 Open MCHP 40.33 41.15 JAN30P/35P 0.75 34.25 0.75 Open LXK 58.70 59.00 JAN45P/50P 0.50 49.50 0.50 Open CMA 56.93 57.62 JAN50P/55P 0.65 54.35 0.65 Open DIAN 61.51 53.85 JAN50P/55P 0.60 54.40 (0.65) Open IMPH 44.00 44.51 JAN35P/40P 0.80 39.20 0.80 Open SII 55.12 51.57 JAN45P/50P 0.70 49.30 0.70 Open HMC 81.78 79.50 JAN70P/75P 0.45 74.55 0.45 Open SPW 138.86 145.00 J125P/130P 0.50 129.50 0.50 Open CEPH 72.70 77.24 JAN85C/80C 0.60 80.60 0.60 Open Shares of Dianon Systems (NASDAQ:DIAN) were hammered on 1/2/01 after Credit Suisse First Boston slashed its rating on the stock, citing possible cutbacks in Medicare and Medicaid programs, and the potential for a weakening of reimbursement rates in the private sector. The unexpected news dealt a severe blow to the recent rally and the precipitous decline left little opportunity to exit the play with a profit. Some traders rolled-out to the FEB-$50 Put (short) for a basis near $49.75 and that may provide a sufficient margin of downside protection, based on the previous trading-range "top" near that price. 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 ***). *************** HEALTH SECTOR - READER'S REQUEST One of our readers asked if we would look for some bullish plays in the Health Services segment. Here are two positions that offer favorable speculation on bullish issues in that industry. *************** ACDO - Accredo Health $50.79 *** A Valuable Acquisition! *** Accredo Health (NASDAQ:ACDO) provides specialized contract pharmacy services on behalf of biopharmaceutical manufacturers to patients with chronic diseases. The company's services help simplify the difficult and often challenging medication process for patients with a chronic disease and help ensure that patients receive and take their medication as prescribed. The company's services benefit biopharmaceutical manufacturers by accelerating patient acceptance of new drugs, facilitating patient compliance with the prescribed treatment and capturing valuable clinical information about a new drug's effectiveness. Their services include contract pharmacy services, reimbursement services, clinical services, and delivery services. Accredo Health climbed to a new, all-time high today in the wake of recent buying pressure after the company announced a deal to purchase the specialty pharmaceutical services business from Gentiva Health Services. The deal makes ACDO the largest specialty distributor of pharmaceuticals, with a market share of over 17%, leaving retail pharmacies as the only companies that have a larger presence. Analysts were optimistic about the announcement and Steven Halper, an analyst at Thomas Weisel Partners LLC, said the deal is a, "landmark transaction for Accredo." The Health Services sector is an excellent broad-market hedge and in addition to being one of the leading companies in the industry, Accredo Health is a stock we would love to have in our long-term growth portfolio. ACDO - Accredo Health $50.79 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT JAN 45 DZU MI 256 0.70 44.30 15.5% SELL PUT FEB 40 DZU NH 32 0.90 39.10 6.5% *** SELL PUT FEB 45 DZU NI 115 1.85 43.15 9.0% *************** THC - Tenet Healthcare $62.10 *** Solid Earnings! *** Tenet Healthcare is the second largest investor-owned healthcare services company in the United States. Tenet's subsidiaries and affiliates own or operate over 110 general hospitals with 27,000 licensed beds and related healthcare facilities serving urban and rural communities in 17 states, and they hold investments in other healthcare companies. The related healthcare facilities include a small number of rehabilitation hospitals, specialty hospitals, long-term care facilities, a psychiatric facility and many medical office buildings located on the same campus as, or nearby, its general hospitals, physician practices and various ancillary health care businesses, including outpatient surgery centers, home healthcare agencies, occupational and rural healthcare clinics and health maintenance organizations. Shares of Tenet Healthcare traded at record highs earlier this week after the company announced that second-quarter earnings were up 42% from the previous year's quarter and fiscal 2002 earnings are expected to be 35% more than 2001. The robust numbers surprised analysts and news that admissions to Tenet's hospitals jumped 5.9% overall was also completely unexpected. With the excellent fundamental outlook for the company and the recent bullish technical indications, many investors believe the issue will move up and out of its recent trading range near $60 in the next few weeks. Those who agree with that outlook can speculate on the future movement of the stock with this combination position. THC - Tenet Healthcare $62.10 PLAY (moderately aggressive - bullish/credit spread): BUY PUT FEB-55 THC-NK OI=1115 A=$0.55 SELL PUT FEB-60 THC-NL OI=128 B=$1.30 INITIAL NET CREDIT TARGET=$0.80-$0.85 PROFIT(max)=19% *************** BULLISH PLAYS - Naked Puts Galore! Today's late-session retreat in the technology segment produced a number of excellent "premium-selling" opportunities and based on recent technical indications and favorable option pricing, all of these positions offer excellent risk versus reward for traders who are bullish on the underlying issues. *************** BRKS - Brooks Automation $49.19 *** Rally Underway! *** Brooks Automation (NASDAQ:BRKS) is a supplier of integrated tool and factory automation solutions for the global semiconductor and related industries such as the data storage and flat panel display manufacturing industries. The company's offerings have grown from individual robots used to transfer semiconductor wafers in advanced production equipment to fully integrated automation solutions that control the flow of resources in the factory from process tools to factory scheduling and dispatching. Quarterly earnings for Brooks are due on 1/23/02. BRKS - Brooks Automation $49.19 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT JAN 45 BQE MI 100 0.50 44.50 10.6% SELL PUT FEB 40 BQE NH 0 0.85 39.15 6.0% *** SELL PUT FEB 45 BQE NI 0 2.35 42.65 10.5% *************** CHKP - Check Point Software $47.14 *** New Trading Range? *** Check Point Software Technologies (NASDAQ:CHKP), together with its subsidiaries, develops, sells and supports Internet security solutions for enterprise networks and service providers (Telcos, ISPs, ASPs and MSPs) including virtual private networks (VPNs), firewalls, intranet and extranet security. The company delivers solutions that enable secure and reliable business-to-business communications over any Internet protocol network, including the Internet, intranets and extranets. Check Point product offerings also include traffic control/quality of service and IP address management. Check Point products are fully integrated as a part of the company's secure virtual network architecture and provide centralized management, distributed deployment and comprehensive policy administration. The company's quarterly earnings are due on 1/15/02. CHKP - Check Point Software $47.14 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT FEB 35 KEQ NG 1,825 0.50 34.50 4.0% "TS" SELL PUT FEB 40 KEQ NH 878 1.25 38.75 7.7% *** SELL PUT FEB 45 KEQ NI 1,007 2.80 42.20 11.5% *************** EMLX - Emulex $46.43 *** New 6-month High! *** 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. The company's quarterly earnings are due on 1/22/02. EMLX - Emulex $46.43 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT FEB 32.5 UMQ NZ 50 0.65 31.85 5.2% SELL PUT FEB 35 UMQ NG 291 1.15 33.85 8.8% *** SELL PUT FEB 40 UMQ NH 680 2.45 37.55 13.4% *************** MRVL - Marvell Technology $40.33 *** Industry Leader! *** Marvell Technology Group (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed-signal and digital signal processing technology for communications-related markets. The company's products provide the critical interface between analog signals and the digital information used in computing and communications systems and enables its customers to store and transmit digital information reliably and at high speeds. The company designs, develops and markets integrated circuits using proprietary communications mixed-signal processing and digital signal processing technologies for communications-related markets. Marvell Technology also makes high-performance communications internetworking and switching products for the broadband communications market. MRVL - Marvell Technology $40.33 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT JAN 35 UVM MG 450 0.25 34.75 7.6% SELL PUT FEB 30 UVM NF 165 0.65 29.35 6.0% *** SELL PUT FEB 33 UVM NZ 38 1.10 31.40 9.4% SELL PUT FEB 35 UVM NG 231 1.75 33.25 11.2% *************** SEBL - Siebel Systems $34.56 *** Application Software Giant! *** Siebel Systems (NASDAQ:SEBL) is a provider of unique eBusiness applications software. Siebel Business Applications comprise a family of Web-based applications software designed to meet the sales, marketing and customer service information requirements of even the largest multinational organizations. The company's eBusiness Applications enable organizations to sell to, market to, and service customers across multiple channels, including the Web, call centers, field, resellers, retail and other dealer networks. By employing comprehensive eBusiness applications to better manage their customer relationships, Siebel's customers achieve high levels of customer satisfaction and continue to be competitive in their markets. SEBL - Siebel Systems $34.56 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT JAN 30 SGQ MF 4,723 0.25 29.75 8.9% SELL PUT FEB 25 SGQ NE 1,668 0.45 24.55 4.9% SELL PUT FEB 28 SGQ NY 1,373 0.85 26.65 8.8% *** SELL PUT FEB 30 SGQ NF 3,566 1.35 28.65 10.2% *************** SYMC - Symantec $73.25 *** 2-for-1 Stock Split! *** Symantec (NASDAQ:SYMC) provides a broad range of content and network security solutions to individuals and enterprises. The company is a provider of virus protection, firewall, virtual private network, vulnerability management, intrusion detection, remote management technologies and security services to consumers and enterprises around the world. The company currently views its business in five operating segments: Consumer Products, Enterprise Security, Enterprise Administration, Services and Other. The company's quarterly earnings are due on 1/16/02 and a 2-for-1 stock split will occur 2/1/02. SYMC - Symantec $73.25 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT JAN 65 SYQ MM 902 0.40 64.60 6.3% *** SELL PUT FEB 60 SYQ NL 417 1.10 58.90 5.1% SELL PUT FEB 65 SYQ NM 92 2.00 63.00 6.9% *************** BULLISH PLAYS - Synthetic Positions *************** MER - Merrill Lynch $57.99 *** Brokerage Sector Rally! *** Merrill Lynch (NYSE:MER) is a holding company that, through its subsidiaries and affiliates, provides investment, financing, advisory, insurance and related products and services on a global basis. Merrill Lynch provides these products and services to a wide array of clients, including individual investors, small businesses, corporations, governments, governmental agencies and financial institutions. Merrill Lynch has three major business segments, the Corporate and Institutional Client Group, the Private Client Group and Merrill Lynch Investment Managers. The company provides financial services worldwide through various subsidiaries and affiliates that frequently participate in the facilitation and consummation of a single transaction. Merrill Lynch has organized its operations outside the U.S. into five regions, Europe, Middle East, and Africa; Pacific/Australia; Asia and Japan; Canada, and Latin America. Shares of Merrill Lynch, the #1 U.S. brokerage, rallied today after the company announced it will cut 9,000 jobs, or 16% of its work force, and take a $2.2 billion charge as it tries to reduce costs and achieve a profit in the flagging U.S. economy. Merrill officials said the decisive action, which includes the resizing of selected businesses and other structural changes, is necessary to position the company for improved profitability and growth. Analysts from J.P. Morgan were bullish on the news, upping the company's rating to a "BUY", based on Merrill's cost capitulation and subsequent expense savings. JPM also raised its 2002 earnings estimates and set a new 12-month price target of $71, amid a belief that, "the removal of a potential charge overhang should provide some positive energy for the stock." The recent technical trends are favorable and this position offers a great way to speculate on the future movement of the issue in a conservative manner. MER - Merrill Lynch $57.99 PLAY (speculative - bullish/synthetic position): BUY CALL FEB-65 MER-BM OI=871 A=$0.55 SELL PUT FEB-50 MER-NJ OI=5788 B=$0.60 INITIAL NET CREDIT TARGET=$0.15-$0.25 TARGET PROFIT=$1.00-$1.25 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1575 per contract. *************** Neutral Plays - Straddles & Strangles *************** GPT - GreenPoint Financial $34.14 *** Cheap Speculation! *** GreenPoint Financial (NYSE:GPT), a bank holding company, is a national specialty housing finance company that provides a variety of financial services, primarily through its three subsidiaries, GreenPoint Bank (the Bank), a chartered savings bank, and GreenPoint Mortgage Funding, and GreenPoint Credit, which are both wholly owned by the Bank. GPM originates both adjustable and fixed rate mortgage loans, primarily through a network of mortgage brokers, mortgage bankers, attorneys and other real estate professionals and, to a lesser extent, from customers and members of the local communities in GreenPoint's lending area. GPC is also engaged in originating and servicing manufactured housing loans. Their revenues are derived mainly from interest on its loan portfolio and investment securities, proceeds from the sales or securitizations of mortgage and also manufactured housing loans and fees from servicing these loans. Shares of Greenpoint Financial soared last week after the firm said it will take $663 million in after-tax charges and slash 400 jobs, almost 10% of its work force, as it exits the risky business of making loans to buyers of prefabricated homes. The New York-based specialty housing finance and banking company, a leader in the prefab lending business, said the charges would leave it with net losses for the 2001 fourth quarter and full year but the company also noted it had a strong fourth quarter in its continuing operations with GreenPoint Mortgage providing a record $8.5 billion of residential mortgages, up $5 billion from a year earlier and up $1.7 billion from the third quarter. After the announcement, a slew of analysts exchanged opposing viewpoints on the company's outlook but for now, it appears the bullish proponents have won the day. Regardless of Greenpoint's future performance, the issue has been very active in recent sessions and with so much confusion as to its fundamental value, there may be some more volatility prior to the upcoming earnings report (1/17) and the January options' expiration. GPT - GreenPoint Financial $34.14 PLAY (very speculative - neutral/debit straddle): BUY CALL JAN-45 GPT-AI OI=138 A=$0.80 BUY PUT JAN-45 GPT-MI OI=26 A=$1.40 INITIAL NET DEBIT TARGET=$2.00 TARGET PROFIT=20%-25% Note: The Delta or "hedge ratio" in the position suggests that we should buy 3 calls for every 2 puts (3:2 ratio) to maintain a neutral outlook. However, any upward movement in the issue on thursday should allow both sides of the position to be purchased at similar prices. *************** SUPPLEMENTAL CREDIT-SPREAD CANDIDATES *************** BULLISH PLAYS: Stock Last Long Ask Short Bid Target Target Symbol Price Option Price Option Price Credit Profit VLO 41.65 FEB-35P 0.40 FEB-37P 0.70 0.35 16% IRF 40.20 FEB-30P 0.45 FEB-35P 1.00 0.60 14% DFXI 35.09 FEB-25P 0.35 FEB-30P 0.80 0.55 12% WLP 118.86 FE-105P 1.00 FE-110P 1.50 0.55 12% BEARISH PLAYS: Stock Last Long Ask Short Bid Target Target Symbol Price Option Price Option Price Credit Profit QCOM 46.21 FEB-60C 0.35 FEB-55C 0.85 0.55 12% LLY 75.32 FEB-85C 0.20 FEB-85C 0.70 0.55 12% ATK 76.01 FEB-90C 0.60 FEB-85C 1.05 0.50 11% *************** INDEX-OPTION SPREADS As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific industry group or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options and professional traders also employ index spreads in hedge strategies. *************** OEX - S&P 100 Index $589.62 *** OTM Credit-Spreads *** The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. Traders who participate in OTM credit-spreads often utilize S&P 100 (OEX) options because they generally contain more premium than options on individual stocks and also provide an underlying instrument less prone to huge, gapping moves. The strategy will profit if the underlying remains in a relatively small range and from a technical viewpoint, the overall market seems likely to move in constrained price pattern as the long-term outlook is somewhat uncertain. Review the OIN's Market Sentiment section for more specific technical information on the current trends in equities. A Conservative, Neutral-Outlook Strategy: By combining two credit-spread positions, you can participate in a popular neutral strategy known as the "Long Iron Condor." It is often used with range-bound issues and it is a limited risk, limited profit position that gives you a wide range for success. The benefit to this technique is that some brokers require less collateral for the combined position, as only one spread can lose money at expiration. You should consult your brokerage to determine the maximum margin requirements before initiating the position. Target a higher premium in the bullish portion of the position, due to the large BID/ASK spreads in the option prices. OEX - S&P 100 Index $589.62 PLAY (very conservative - bearish/credit spread): BUY CALL FEB-640 OEY-BH OI=711 A=$1.25 SELL CALL FEB-630 OEY-BF OI=1578 B=$2.00 NET CREDIT TARGET=$0.80-$0.95 PROFIT(max)=8% - and - PLAY (very conservative - bullish/credit spread): BUY PUT FEB-530 OEB-NF OI=64 A=$3.40 SELL PUT FEB-540 OEB-NH OI=3674 B=$3.90 NET CREDIT TARGET=$0.65-$0.85 PROFIT(max)=7% *************** XAU - PHLX Gold & Silver Sector $58.07 *** Bullish Outlook? *** The PHLX Gold & Silver Sector is a capitalization-weighted index composed of the common stocks of 9 companies involved in the gold and silver mining industry. XAUSM was set to an initial value of 100 in January 1979 and options on the index commenced trading on December 19, 1983. More information on the index and its options can be found at: http://www.phlx.com/products/xau.html The gold index was "on the move" today with gold futures up more than $5 an ounce to their highest levels in three months as new strength in demand and recent gains in silver prices combined to push the precious metal over $284 an ounce. Erik Gebhard, an analyst at Altavest.com, said the bullish activity was technical and that a close over $282 an ounce could prompt further short covering and a "stab" toward $300 an ounce. He also noted that, "With equities a bit stronger, the implication is that the economy will strengthen soon, and therefore maybe demand for gold in retail and industrial uses looks more favorable in the near future." In addition, gold has seen steady physical demand in major consuming areas with reports of increased interest in the Far East and as of late Tuesday, Comex gold inventories were down 257 at 1.21 million ounces. Indeed, the technical indications of the XAU appear favorable and traders who agree with a bullish outlook for gold and silver prices can profit from that activity with this conservative position. XAU - PHLX Gold & Silver Sector $58.07 PLAY (conservative - bullish/credit spread): BUY PUT FEB-50 XAU-NJ OI=56 A=$0.35 SELL PUT FEB-55 XAU-NK OI=280 B=$1.10 INITIAL NET CREDIT TARGET=$0.80-$0.90 PROFIT(max)=19% *************** SEE DISCLAIMER ***************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. 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