The Option Investor Newsletter Sunday 01-13-2002 Copyright 2001, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** WE 1-11 WE 1-4 WE 12-28 WE 12-21 DOW 9987.53 -272.21 10259.74 +122.75 10136.99 +101.65 +224.19 Nasdaq 2022.46 - 36.92 2059.38 + 72.12 1987.26 + 41.92 - 7.34 S&P-100 584.20 - 14.41 598.61 + 6.86 591.75 + 5.34 + 14.03 S&P-500 1145.60 - 26.91 1172.51 + 11.49 1161.02 + 16.13 + 21.82 W5000 10698.22 -234.10 10932.32 +113.75 10818.57 +173.64 +201.37 RUT 489.94 - 9.36 499.30 + 5.68 493.62 + 9.60 + 12.73 TRAN 2706.77 -123.43 2830.20 +187.15 2643.05 + 37.82 + 28.13 VIX 23.98 + 1.96 22.02 - .31 22.33 - .96 - 2.68 VXN 48.37 + 1.51 46.86 + .92 45.94 - 5.02 - 1.83 TRIN 1.44 .94 .73 1.08 TICK +290 +996 +1098 +1184 Put/Call .68 .67 .69 .69 ****************************************************************** Irrational Exuberance Meets Rational Confusion? by Jim Brown The markets were Greenspamed again on Friday as the master of disaster took the podium to warn against "significant risks in the near term." Traders held their breath as his words were dissected for the real meaning beneath the constant barrage of adjectives, adverbs and $10 words. Unfortunately the most pertinent points came out crystal clear. The recession may not be over and rocky times may still lay ahead. Even the fact that Greenspan laid the ground work for yet another rate cut in late January could not prevent the Dow from closing under 10000 for the first time in 2002. Greenspan was not the only harbinger of doom on Friday. Ford surprised the markets with a restructuring program that was almost twice as severe as analysts expected. Ford announced a cut of 35,000 jobs and the elimination of five plants and four cars from their product line. The massive restructuring including cutbacks at 20 plants, which will remain open, will produce a massive $4.1 billion charge in the 4Q of 2001. The cuts will take 15% off their North American production capacity and eliminate the Escort, Cougar, Villager and the Lincoln Continental from their product line. This huge admission that things are not going well at Ford plus the huge economic impact of the changes started the markets off in a bad mood. Adding to this bad mood was a comment from Merrill Lynch that 70% of their tech universe was over valued since the September bounce. Leading their list of expensive stocks was CMVT, ORCL, MSFT, MXIM and LLTC to name a few. They said an aggressive recovery and return to strong earnings was already priced into most techs and there was little upside for investors. They did say that some stocks were still in the buy category including EDS, CSC, HWP, PSFT and surprisingly CSCO. They said that based on projected growth rates for CSCO the stock was undervalued. Still the blanket pronouncement of "over priced" for 70% of tech stocks put a lid on any bullish sentiment at the open. There was also a rumor that Cisco made some bearish comments in an upcoming Business Week article. Still not depressed? A federal judge killed the proposed Microsoft class action settlement agreement where MSFT was to have donated over $1 billion in hardware and software to schools across the U.S. Microsoft foe Apple Computer won on the argument that giving MSFT software to educational systems would have been very noncompetitive. It was like starting kids on drugs while in school to insure they will be addicts to your brand later. I had written about this unbelievable win by MSFT in the past and why it would probably not fly so this was not a surprise. Microsoft is now faced with coming up with an entirely new plan or fighting each case on its own merit. Expect a new plan and another year of legal wrangling before any clouds are lifted from MSFT stock. The judge called the offer "critically under funded" which means more bucks when the next offer is negotiated. By far the biggest depressant for the day was the Greenspan comments. While he tried to skillfully to walk the line between optimism and pessimism, the negative points attracted bears like Al Queda attracts bombs. The frustrated English professor tried to say things had gone from bad to mixed but he came off sounding like Tommy Franks when asked about Osama's whereabouts. Tommy Franks, "we just don't know what we don't know." Greenspan's "we just don't know" of course took several paragraphs to accomplish the same result. "Our economy has not been weakening in recent weeks and is seeing signs of stabilization in many respects." So far so good. However in closing, "I would emphasize that we continue to face significant risks in the near term." There was about 25 paragraphs between those two sentences but the closing comment was the damaging one. Greenspan feels that there are five things that will weigh heavily on the economy going forward. Rising mortgage rates will stifle home sales. Auto sales are already slowing with the majority of the buyers having been coerced into buying in the last three months leaving a black hole in sales going forward. Energy prices have fallen about as far as they are going to fall so manufacturing will not have the benefit of future price cuts. Unemployment is rising with well over 50,000 cuts announced this week alone. This will put a lid on consumer spending without a significant economic rebound. And lastly something investors know all too well. The wealth effect from the falling stock market will impact consumer spending as well. This impact lags the occurrence by about a year meaning the 2001 drop has yet to be felt in the economy. This will curb household spending and remain a dampening force until stocks rebound. That rebound will require an improvement in corporate earnings to something more than is already reflected in the share prices. (See the Merrill Lynch comments above). All this pessimism triggered the shorts which had been ready to react to any negative Greenspan revelations and as they say, the rest is history. The fear of darkness set in as the weekend approached and even the psychological 10000 level on the Dow failed to put a bottom under the markets. The event risk over the weekend, Eneron news, Pakistan- India, Argentina, Japanese banks, Arab/Israeli conflict and the continuing terrorist war, was too much for traders to handle. There was a brief short covering rally and a small buy program in the last hour of trading but neither were able to push the Dow back over 10040. The Dow closed under 10,000 for the first time this year and only 37 points above decent support at 9950. Should that support fail it will not be a pretty picture. 9725 could become the handwriting on the wall. Liquidity is still a problem. Thursday saw yet another outflow of cash from mutual funds. Only $500 million but remember this is a period when cash is supposed to be flowing into funds like water from a tap. The Nasdaq stopped right on interim support at 2020 but should that fail it could be a quick drop to 1940. The earnings picture will become much more clear next week as over 300 companies announce. There will be some giants including GE, INTC, APPL, CPQ, YHOO, IBM, MSFT, NT, UTX, SUNW. Some of the contract manufacturers and smaller chip companies announce as well which should provide a leading indicator for health of the tech sector. At 9987 and 2020 the indexes closed right on my bearish bounce objectives. The markets are oversold, on support and in the case of the Dow, down for five straight days. If it were not for the Greenspan comments I would have bet on a positive day. We are ripe for a bounce but obviously traders are fearing some negative earnings surprises or there would be more underlying support and more money flowing into funds. Last Sunday I warned about excessive bullishness built on wishful thinking and the probable desire by traders to take some profits off the table before the end of the week. The markets broke below my exit points and are now threatening to start a new leg down if these support levels do not hold. This sets up a key situation for us. I would go long on Monday on any positive move upward. This would be a trading bounce only but one that could turn into a longer term play if the first few earnings reports surprised to the upside. Plan B. If those levels fail (9950/2020) I would remain flat and wait for a new support level to show up. That level could be significantly lower if those first few earnings surprise to the downside. This is going to be an exciting week and one that should prove the worth of the Market Monitor to all Option Investor readers. If you have not tried our new streaming commentary offering you owe it to yourself to do it next week. Click here for directions. No password is required. http://www.OptionInvestor.com/itrader/marketbuzz/ Here are some comments from readers last week; I am finding your site fascinating and very informative ..I am watching the Market Monitor the past few days and enjoy all the interesting info.. I have been day trading for 2 years. I must say that your site has more bang for the buck that many sites I view on a daily basis.... Larry W.. I truly think that your current Option Investor site is better than ever. In particular, I've been enjoying the Market Monitor for the past several days. You have a very witty, insightful, and talented staff. Scott What a great idea this is! I just found the Market Monitor on the website last week. I owe most of my success in the markets during a very bad year to Jeff, Austin and Eric. Thank you for such clear and easily understandable trades. Without you guys, it would have been a far less profitable year. Daniel M I wrote yesterday how much I liked the new Market Monitor feature provided by OI. I'm so excited about it that I'm writing again, just in case someone is thinking of terminating the feature. I have already made money this year thanks to the Monitor. Utley, Bailey, and Passamonte always do a great job with the intra day updates, but this real time reporting is far more effective for me and very, very welcomed. Thanks again, John B. Click here for directions. No password is required. http://www.OptionInvestor.com/itrader/marketbuzz/ Today is the last time you will have to put up with the commercial for the End of Year renewal special. It disappears for another year on Monday so you need to act fast to take advantage of this opportunity. Buckle your seat belts as we head into earnings next week because it could be an exciting ride. Enter Passively, Exit Aggressively! Jim Brown Editor@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Orderly Decline Austin Passamonte I almost hate to say it, but market action since the first of this year has been very orderly in nature. After living thru the wild volatility and gyrations of 2001, we see a return to predictability in short-term market timing. While unable to capitalize on viable swing trades this session, we were able to pick points of resistance on Thursday night and suggest put-play entry scenarios that intraday traders could have taken advantage of. It was a droll to boring session in the early going and I had great concern for SPX and DJX put plays that survived Thursday's close, but once again a late-day selloff tossed a gift in our laps as puts entered Thursday or Friday morning worked quite well indeed. Can we have another serving of high-odds swing trade setups next week? Expiration week is usually good for one significant move offering several hundred to one thousand percent gains on contract cost over two sessions time. We'll do our dead-level best to harvest our chunk from the middle if it happens! Which direction might that be? Let's see: (Weekly Chart: OEX) The OEX (S&P 100) is a great proxy example for all major indexes from which it is comprised, so let's ply this one for example. Weekly charts are mixed to bearish right now. The long-term descending channel from March 2001 held until last week before finally breaking out last week. Nix that now, as five sessions later saw a return below support on a Friday close this time. Next viable, solid support? I'd say the 570 area below. (Daily Chart: OEX) Switching the exact-same chart to daily time frame instead, we see the channel lines acting as price magnets before and then ahead. If support breaks from current level tonight I'd wager we see the 575 area next. Looks like I was off a bit on my weekly chart support line guess (light blue) as it's easier to see in this picture. With daily-chart stochatic values in a power-dive with no sign of recovery I'd look for lower prices on Monday. That 575 area could see an oversold bullish reversal bounce and we'll watch for that. Should price action fail to reverse from there, we could be looking at a very profitable down-move to the 550 area in the not-too-distant future. Close Jan, Hold Feb & Later Option Contracts More than a few readers asked me why we closed out Jan puts in Swing Trade model today for modest gains when it appears price action will open lower on Monday due to closing on session lows Friday. First, time (theta) decay will shrivel those options if held over the weekend, especially from inflated prices juiced up by the fast drop into Friday's close. It would take a large gap-down open on Monday to offset closing out today and reentering on Monday. Second, Monday morning opens often reverse Friday's action due to sentiment changes caused by two days for human emotions to regroup and major media outlets to spin their stories. When solid gains are in the account and no opening bell is slated for the next morning, sell first, count the money and ask questions later! Summation Long-term charts are very weak but mixed right now. If daily- chart stochastic values turn higher this week we'll play calls, and if they remain downward we'll play puts with equal abandon. One thing is for sure: if markets keep up their methodical ways thru most of this year we won't be counting our money... we'll have to weigh it! 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 ************************************************************** ************** Editor's Plays ************** Target Shooting Results and Expiration Week Plays? Remember the premise for last weeks plays: The premise here is that the Dow/Nasdaq/SOX has spiked up to a level where profit taking may occur at any moment. I expect the markets to rally at the open on Monday assuming we do not get any negative surprises. If they do rally that will put them even more overbought and hopefully fill our put options for cheap prices as the bulls overextend themselves. 1-6-02 The profit taking came but we had two big bullish spikes that would have triggered all our entry points. DOW (DJX) Jan-$103 put - Entry $1.25 Profit stop $1.95 The DJX missed the $1.25 entry on Monday by a dime but easily hit it on Wednesday. Both Thursday and Friday would have provided an exit at well over our $1.95 profit stop with a $2.75 and $3.20 high respectively. Nasdaq - (QQQ) Nasdaq QQQ Jan-$42 Put $1.25 entry, $1.90 Profit stop The QQQ triggered the entry on Monday with a low of $1.10 and again on Wednesday with a low of $.80. However the exit of $1.90 has yet to be hit with highs on three days just under at $1.75-$1.80. The almost 100% swings twice during the week would have been nice swing trades. We still have a good chance on Monday of seeing the $1.90 exit at the open. Time will tell. Semiconductor Holders (SMH) Jan-$47.50 puts $1.50 entry, $2.45 profit. The SMH missed our entry of $1.50 on Monday but easily hit it on Wednesday. The $2.45 exit would have been triggered on both Thursday and Friday. All of the target shooting plays from last week would have been very profitable with very little risk. The indexes were very oversold and spiked to even more oversold on Wednesday. I hope you see how options do not have to be expensive to be profitable and a $1.50 move in a cheap option can be very rewarding. ************ Providian Financial - Back from the Dead? Remember PVN? When I profiled it back in November in this section it was trading at $3.00. Since mid-December it has been trending up and the P&F chart is showing a bullish target of over $8.00. My point at the time was buying a $3.00 stock with no expiration provided very little risk as long as you were comfortable with the company. PVN traded over 10 million shares on Thursday and 8 mil on Friday with 3 mil being the average volume. Is it all blue skies ahead for PVN? I don't know but we added it as a call play in OIN this weekend. Stay tuned! The Jan-03 $5 leap was selling for $1.15 when I first profiled this stock. Is that cheap enough for a lottery play? It is $1.75 today. I feel a homerun coming for somebody. ****************** Expiration week plays This may be a tough one to play. With the market likely to make a huge move, direction unknown, it will be hard to pick the right options. If support holds on Monday and the first few earnings are positive then we could blast back over 10000. Should those earnings be ugly then a retest of 9750 could easily be in the cards. The best bet is to find some stocks that are likely to be in the news and are sitting on a strike price and use a straddle strategy. Intel is one of these stocks. With earnings next week and the stock stuck at $35 we can play for a $2 move in either direction. We have an added bonus event with the announcement of their new P4 on Monday/Tuesday. The downside to this play is also huge. There are nearly 600,000 open call contracts between $22.50 and $40.00. This represents a huge overhead burden for Intel to carry according to conventional wisdom. However, many of those may have been written naked thinking that 4Q PC sales would be down and INTC was sure to suffer. Should INTC surprise to the upside a major short squeeze could develop. This is a risky play in my opinion but with the call side only bid at $.85 cents it is one that I might roll the dice on the upside only. I have spent $.85 in a lot worse places before. ************** Juniper Another long shot with a possible big payoff could be Juniper. Currently at $19.26 with strong support at $19 the Jan-$20 call is only $.85 cents. Juniper also has earnings this week and a positive comment or two could cause another short squeeze. If you want to cover yourself on the downside I would not go long the $20 put at $1.55 but skip to the $17.50 at $.45 cents. If they say something very negative the next support is in the $15 range. That $.45 put could be $2.45 by weekend. *************** Broadcom This stock has been trying to break out over $50 for a week. It pulled back some on Friday but held firm just under the line. I would try and target shoot the $50 call at $1.25 to $1.50 on any weakness on Monday. ************ Nortel NT also announces earnings this week and has got to say something either very positive or very negative. There is no middle ground for NT. The $7.50 call is already $.53 in the money and is going for $.70. Insurance on the play in the form of the $7.50 put is only $.20. It is almost worth just throwing a couple $20 bills at the put and hoping they lower guidance again. A drop back to the low $6 range again would be a huge win in percentage terms. Caution - Don't bet a bundle here just because they are cheap. If they don't die on earnings the premium will instantly evaporate. ****************** These are all high-risk plays so be sure to only use HIGH RISK capital to play them. Good Luck Jim **************** MARKET SENTIMENT **************** A Shift In Sentiment? By Eric Utley Ford (NYSE:F) announced 35,000 job cuts. The Enron (NYSE:ENE) debacle continued to unravel. Greenspan said that the U.S. economy faces "significant risks in the near-term." The Dow Jones Industrial Average ($INDU) closed below the psychologically significant 10,000 level. Are the bears back in business? The fear gauges of the market are creeping higher, but remain near the lower-end of their recent historical ranges. Put/call ratios aren't revealing signs of fear and only the Nasdaq-100 bullish percent ($BPNDX) is in bearish territory. By most measures, the bears are not back in business. Consolidating last fall's massive rally is needed, and it feels like that's what the market is currently doing or starting to do. The biggest variables are how much the market will pullback by and for how long will the consolidation last. The S&P 500 ($SPX), for example, could fall all the way back to 1085 and not cause so much damage as to negate the new bull market. In fact, such a pullback might be healthy. But 1085 is quite a distance from the current $SPX level. I'm not suggesting that it's going to happen, just trying to keep an open mind about last week's weakness. The last thing I want to see is the bubble from 1998 to March of 2000 re-inflated. A market that goes straight up would push a lot of air back into the balloon. And the last bursting of the bubble was bad enough. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9988 Moving Averages: (Simple) 10-dma: 10116 50-dma: 9877 200-dma: 10103 S&P 500 ($SPX) 52-week High: 1383 52-week Low : 945 Current : 1146 Moving Averages: (Simple) 10-dma: 1160 50-dma: 1137 200-dma: 1167 Nasdaq-100 ($NDX) 52-week High: 2771 52-week Low : 1089 Current : 1634 Moving Averages: (Simple) 10-dma: 1641 50-dma: 1593 200-dma: 1614 ----------------------------------------------------------------- Market Volatility The VIX again spiked to the 25 level in last Friday's session, only to fall back to its recent range near the close of trading. It does appear that fear is on the rise, however, judging by the recent ascending trend established in the VIX. The VXN finished lower in last Friday's session, never reaching the 50 level, which is the very short-term relative high in the index. CBOE Market Volatility Index (VIX) - 23.98 +0.85 Nasdaq-100 Volatility Index (VXN) - 48.44 -0.22 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.68 599,812 408,524 Equity Only 0.57 523,039 298,327 OEX 1.85 11,358 20,977 QQQ 0.73 36,090 26,370 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 56 + 0 Bull Alert NASDAQ-100 63 + 0 Bear Correction DOW 70 + 3 Bull Confirmed S&P 500 68 + 0 Bull Confirmed S&P 100 69 + 2 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.45 10-Day Arms Index 1.33 21-Day Arms Index 1.16 55-Day Arms Index 1.12 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1304 1829 NASDAQ 1517 2100 New Highs New Lows NYSE 77 23 NASDAQ 103 18 Volume (in millions) NYSE 1,203 NASDAQ 1,607 ----------------------------------------------------------------- Commitments Of Traders Report: 01/08/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercial interests shed 4,500 long an 8,734 short positions in the most recent reporting period. Their net bearish position grew to 64,544 contracts. Meanwhile, small traders added more than 5,000 short positions while adding a fewer number of longs, for a net decrease in their bullish position. Commercials Long Short Net % Of OI 12/18/01 391,995 456,968 (64,973) (7.6%) 12/21/01 412,581 471,239 (58,658) (6.6%) 01/08/02 333,742 398,286 (64,544) (8.8%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 12/21/01 152,521 79,444 73,077 31.5% 12/28/01 127,419 55,576 71,843 39.3% 01/08/02 130,335 60,780 69,555 36.4% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 Commercial interest remained decidedly bearish for the second consecutive week in the Nasdaq-100 market. Their net bearish position grew by about 400 contracts. Small traders remained bullish, but reduced their net position by more than 1,000 contracts. Commercials Long Short Net % of OI 12/21/01 55,250 47,476 7,774 7.6% 12/28/01 29,801 37,497 (7,696) (11.4%) 01/08/02 30,786 38,913 (8,127) (11.7%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: 7,774 - 12/21/01 Small Traders Long Short Net % of OI 12/21/01 15,810 25,687 (9,877) (23.8%) 12/28/01 10,649 5,913 4,736 28.6% 01/08/02 10,073 6,404 3,669 22.3% Most bearish reading of the year: (9,877) - 12/21/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Commercial interests added a small number and a few more short positions. Their net bullish position dropped by a small amount from the prior reporting period. Small traders added about 1,000 longs and roughly 500 short positions for a net reduction to their bearish position. Commercials Long Short Net % of OI 12/21/01 15,492 7,335 8,157 35.7% 12/28/01 15,820 7,553 8,267 35.7% 01/08/02 15,921 7,981 7,940 33.2% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 12/21/01 4,293 9,086 (4,793) (35.8%) 12/28/01 3,368 8,668 (5,300) (44.0%) 01/08/02 4,380 9,188 (4,808) (35.4%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** Lost Dogs By Eric Utley I lost four of my puppies a few weeks back. And I'm all broken up about it. Of course my puppies are sector indices. The Chicago Board Options Exchange (CBOE) ceased trading on four sectors a few weeks back. Those four sectors: The S&P Transportation Index ($TRX) The S&P Health Care Index ($HCX) The S&P Insurance Index ($IUX) The S&P Chemical Index ($CEX) The loss of the $TRX wasn't that big of a deal because I can track the Dow Jones Transports ($TRAN). The loss of the $HCX wasn't that big of a deal because I can track the AMEX Biotech ($BTK), the Pharma Index ($DRG), and MS Healthcare Index ($HMO). The losses of the $IUX and $CEX, however, really upset me. Especially the $IUX for its inclusion a few months ago in this column and the fact that the trade has been working recently. Yes, I'm still tracking American International Group (NYSE:AIG). I don't know why the CBOE ceased trading on the four. It's been a pain. Let me know if you find a replacement for the insurance sector. Please send your questions and suggestions to: Contact Support ---------------------------- SPX Corp. - (NYSE:SPW) The stock has been rising all the time. Where do you think resistance lies? - Thanks, Sunil Thanks, Sunil. SPX, not to be confused with the ticker for the S&P 500, is a diversified company whose stock Option Investor covered on the call list in the recent past. The company is amazingly diverse. Here are just a few of its products and services: Networking and Switching products used in data storage and telecom applications. Building safety systems used for fire detection and life safety systems. Automated fare collection systems used for bus and rail transit systems. Large and medium power transformers. Diagnostics systems used by original equipment manufacturers. High-integrity aluminum and magnesium die-castings, forgings, automatic transmission and small engine filters. I didn't list the company's products to take up space. My point was to reveal SPX's diversity of operations because the company can be used for a gauge of economic activity, much in the same way General Electric (NYSE:GE) is used. The price action of SPX since September has discounted a significant reversal in its businesses. Accordingly, I think the stock adds credence to the prospects of an economic rebound this year. Where does resistance rest? In order to find a potential level of resistance in SPW, I've employed the use of a Weekly chart and my trusty retracement bracket. I've anchored the upper-end (100%) of my bracket at the August 2000 high, around $186. The lower-end (0%) of my bracket is anchored at September 2001's low, around $74.61. This particular bracket shows me the progress of SPW's long-term rebound. The stock has, through Friday, retraced more than 50 percent of its decline. It's now working on the 61.8 percent retracement level around $143. Thereafter, it's the 80.9 percent retracement level around $165. ---------------------------- Pixelworks - (NASDAQ:PXLW) Based on the action of GNSS, (hot LCD flat screen sector) I have been watching PXLW as a possible lower priced candidate for a run. Just acquired a company and chart has been looking reasonably good. PEG ratio is 1.13. Entry here? Thanks for your thoughts. - Ed Thank you, Ed. Pixelworks makes software and semiconductors used in advanced display applications. It competes with the previously-alluded to Genesis (NASDAQ:GNSS) and STMicro (NYSE:STM), among others. The flat panel display market is growing through applications in HD-TV, DVD players, and Internet appliances. The cost of flat panel displays is coming down with new technology and increased competition. The increased demand for flat panel displays has obviously filtered down to the component makers such as Genesis and Pixel. But Genesis, who is in the process of acquiring Sage (NASDAQ:SAGI), is by far and away the dominant player in the space. Once the acquisition closes, it's been suggested that the combination of Genesis and Sage will command about 65 percent of the market for flat panel display components. That's big! If you're bullish on this particular segment, I think it's smarter to go with the leader, who is Genesis. PXLW has fallen into a descending trend since early December. The stock broke down in Friday's session. If you take a look at the point and figure chart, you'll see bullish support at $13.50. If you are bullish on this company, you can try an entry at $13.50 for a short-term bounce. Beyond that, I don't like the lack of relative strength or price action. The stock acts like it's under distribution. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* Monday, 01/14/02 None Tuesday, 01/15/02 Retail Sales Dec Forecast: -1.1% Previous: -3.7% Retail Sales ex-auto Dec Forecast: 0.0% Previous: -0.5% Wednesday, 01/16/02 CPI Dec Forecast: 0.1% Previous: 0.0% Core CPI Dec Forecast: 0.2% Previous: 0.4% Business Inventories Nov Forecast: -0.5% Previous: -1.6% Industrial Production Dec Forecast: 0.0% Previous: -0.3% Capacity Utilization Dec Forecast: 74.6% Previous: 74.7% Fed’s Beige Book Thursday, 01/17/02 Initial Claims 01/12 Forecast: N/A Previous: 395K Housing Starts Dec Forecast: 1.610M Previous: 1.645M Building Permits Dec Forecast: 1.570M Previous: 1.564M Philadelphia Fed Jan Forecast: 0.0 Previous: -12.6 Friday, 01/18/02 Trade Balance Nov Forecast:-$28.5B Previous: -$29.4B Mich Sentiment-Prel. Jan Forecast: 89.6 Previous: 88.8 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 01-13-2002 Sunday 2 of 5 ************************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 GAMEPLANS ********************** IS Swing Trade Model: Friday 1/11/2002 Saved At the Bell News & Notes: ------------ From last night's outlook: "I would look for an early pop to the 592 - 595 zone where any failure from there as both stochastic values turn bearish would be a high-odds put play... Same thought for the SPX. A failed pop to 1160 area and break back below would make an ideal put-play entry. We will watch for that as well. Similar story with the QQQ. An attempt to fill the gap between 41.50 and 42.00 is likely, and failure from there is a short I'd play in a heartbeat." Both S&P indexes behaved perfectly for day traders watching 60/30 charts and price action resistance levels for quick, intraday trades. No January index option contracts of any kind should be held over the close if long. Time (theta) decay between Friday's close and Monday's open will eat away several index point's move in the underlying symbol, at best. Thursday put play entries saw the OEX and QQQ barely hit their stops on a late-session spike while the SPX and DJX plays barely squeaked thru into Friday. From there we saw markets tread water for hours before the afternoon slide allowed us to exit them near the close for modest gains. What had all the makings of a droll, boring session ended in profitable fashion again for aggressive traders playing hour's long trades with no time for error. Featured Markets: ---------------- [60/30-Min Chart: OEX] The OEX tested upside resistance right from the open and hovered up there for half the session. A break below 590 after that when both stochastic values turned bearish was a screaming put play entry. However, that trade came with a very short time-span to perform before the 4:00pm close. Not even close to swing trade parameters, but intraday scalpers could have caught roughly six index points of quick downside action. [60/30-Min Chart: SPX] Same for the SPX (as usual) when it broke below 1156 and fell eleven index points beyond there. An excellent day trade in hindsight by high-risk players in a short time-span to execute. [60/30-Min Chart: QQQ] The QQQ broke below 41.00 area and signaled entry we would have happily swung with one more trading session to hold into before the weekend loomed. Summation: --------- Nice swing trade entries this afternoon after early price failure, but the lack of one more session to hold over into negated them from being anything more than quick day trades. Probable downside continuation if this weren't Friday, but Monday opens commonly reverse Friday's close due to weekend interruption of emotion and sentiment. We enjoyed modestly predictable market patterns for most of the past two weeks. Unfortunately, that does not exist tonight. We have no chart signals or price pattern consolidation points of reference to look towards for Monday's action from here. Signs point to a market bounce early next week but more downside first is very probable. Monday may offer Swing Trade setups for later in the week. We've seen several recent trades for small moves and modest gains but continue to wait for the next solid, directional move that lets us capture bigger fish. With expiration week up next, there should be at least once viable chance to catch a move good for several hundred percent gains and we'll do our best to catch it! 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 Long: BREAK BELOW Stop: Break Above Stop: Break Above ===== 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 Long: BREAK BELOW Stop: Break Above Stop: Break Above Open Plays: ---------- Jan Puts: 100 (DJV-MV) Long: BREAK BELOW 100.80 Stop: Break Above 102.00 [Exit: 99.70] Jan Puts: 1150 (SPT-MJ) BREAK BELOW 1155.25 Stop: Break Above 1152.00 [Exit 1147] IS Position Trade Model: Friday 1/11/2002 Sliding Lower News & Notes: ------------ Our Feb put play contracts were never threatened today. Markets popped higher at the open, traded sideways and slid lower into the close. We didn't catch the top of this recent move to track distant month puts with, but all are resting comfortably away from danger tonight except for PPH. Drug index popped in defense of broad market action and exited that play at stop-loss measure. Featured Plays: -------------- Charts in Index Wrap Summation: --------- We don't have conditions for buy & hold option plays to track tonight, but that may change in one or two sessions ahead. We will also trail up stop-loss orders to minimize/eliminate gains as market action permits. 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 [hit] XLI Feb Puts: ITM 28 (XLI-NB) Long: 1.00 Stop: 1.00 Sector Share Trade Model: Friday 1/11/2002 Falling Further News & Notes: ------------ Broad markets continued to shed ground today and may not be finished yet. Featured Plays: -------------- [Weekly/Daily Charts: XLI] The XLI SPDR shorted over a week ago continues to slide and broke below its 50-DMA at the close. Looks like another point or two on the downside over the next short while ahead. Summation: --------- We are nearly flat right now as range-bound action now sees price levels trading near recent support. Some signs point to a possible bounce next week, but it's likely there will be testing of some key pivot points in broad indexes and narrow sectors ahead. No viable buy & hold play entries exist right now, although we might be getting close. 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 27.60 *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thr Week ACS 106.96 -0.75 1.80 2.18 0.55 2.21 Sailing higher CCMP 78.27 -0.46 -0.03 0.98 -1.43 -5.48 Dropped MANU 20.15 -0.09 0.17 0.13 -0.21 0.09 Still at $20 MCAF 38.65 0.99 2.53 -0.48 1.06 1.77 Earnings 01/16 EMLX 45.61 -0.14 1.65 0.43 -0.81 1.12 Still strong GNSS 72.11 -0.74 1.54 2.96 -0.97 3.36 Above $70 VRTS 46.48 0.37 0.89 -1.67 -0.19 -1.73 Dropped RSTN 20.55 1.13 0.07 0.28 0.49 2.07 Network-ing LLY 76.40 -0.85 -1.20 -0.28 1.48 -1.30 Ready to rotate EPNY 10.97 -0.73 0.11 1.50 -0.17 1.95 New, breakout MRVL 41.52 0.03 0.35 1.10 0.35 2.67 New, chipper PVN 4.33 0.00 0.17 0.10 0.54 1.00 New, rebound PUTS CORR 22.33 -0.70 0.21 -0.31 0.31 -1.12 Dropped ADRX 63.82 1.39 -1.35 -0.92 0.90 -0.32 Watch 200-dma ELBO 34.57 -2.42 1.57 -1.56 0.81 -2.43 Playing games EBAY 63.87 -1.70 0.74 -0.65 -0.90 -4.63 Break down QCOM 46.51 -3.21 0.99 -1.98 0.48 -3.90 Bad wireless AZO 64.86 -0.86 -0.85 -1.09 1.00 -2.14 Mark down BBOX 49.19 -2.66 -0.08 -0.74 -1.48 -5.13 Big goose KBH 37.69 -0.05 -0.51 0.61 -0.41 -1.32 New, bad group THQI 45.88 -0.50 -0.65 -1.25 -1.28 -5.87 New, steady ************************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 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* PVN – Providian Financial $4.33 (+1.00 last week) See details in play list Put Play of the Day: ******************** THQI – THQ Inc. $45.88 (-5.87 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ CCMP $78.27 (-5.48) Salomon Smith Barney downgraded CCMP last Friday and the stock tumbled, shedding more than 6% on the day. The downgrade was valuation-based, the worst kind in our opinion for its subjectivity and analyst-based presumptions. If your stop wasn't triggered last Friday, look to any strength early next week as an exit opportunity to trim losses. VRTS $46.48 (-1.73) As Technology stocks seemed to lose some of their lustre last week, shares of VRTS tried to buck the trend, taking one last run at the $49 resistance level on Wednesday. But there wasn't enough juice to get the job done, and the past few days have seen the stock continuing to work lower. Daily Stochastics are in full descent mode, and the stock is getting ever closer to a serious test of support at the 200-dma. VRTS has given us several opportunities for short-term profits over the past 3 weeks, but its inability to mount a serious breakout has us growing impatient. While our stop is still intact, the bearish action on the broader Software index (GSO.X) has us thinking the best move is to close out the play this weekend. Take advantage of any rebound on Monday to exit the play at a more favorable level. PUTS ^^^^ CORR $22.33 (-1.12) MLNM and CORR have appeared to reach a short-term bottom. Instead of risking the $2 we've captured in the last roughly two weeks, we're dropping coverage this weekend with CORR finishing near support last Friday. Look for an intraday dip down around $22 to exit plays. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 01-13-2002 Sunday 3 of 5 ************************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 ************************************************************** ************** NEW CALL PLAYS ************** EPNY - E.piphany $10.97 (+1.95 last week) E.piphany develops, markets, and sells the E.piphany E. 5 System, an integrated suite of customer relationship management (CRM) software solutions. These CRM solutions provide capabilities for the analysis of customer data, the creation of inbound and outbound marketing campaigns and the execution of sales and service customer interactions. These little software stocks have been acting like it's 1999 again. Maybe that's a bad thing. In any case, we're looking to get while the getting's good in these stocks back from the dead. EPNY is one of those stocks. It broke above its 200-dma in early December. The move above the 200-dma was EPNY's first in about 19 months. Since breaking above the 200-dma about one month ago, EPNY pulled back to consolidate its run from September lows. But that pullback ended last Thursday when EPNY broke back above its 200-dma in a big way, reaching as high as $11.15 in last Friday's session. Volume was extremely heavy on the follow-through into Friday's session, adding credence to the breakout. Overhead, there exists resistance around the $12.50 level. But beyond $12.50, it looks like a clear shot to the $15 level. While a $4 potential move may not sound like a lot, consider the fact that EPNY is a very low price stock. Accordingly, its options are cheap and responsive to movement in the underlying. Given the breakout, this is clearly a momentum play. Readers enter positions accordingly. Look for a strong market and Software Sector (GSO.X) early next week and a break above last Friday's high at $11.15. A pullback down into the $9.75 range could offer dip buyers an entry opportunity. Our stop is initially in place at $9. BUY CALL FEB-10*UEP-BB OI=142 at $1.70 SL=0.75 BUY CALL FEB-12 UEP-BV OI= 30 at $0.65 SL=0.00 BUY CALL APR-10 UEP-DB OI=605 at $2.65 SL=1.75 BUY CALL APR-12 UEP-DV OI= 88 at $1.55 SL=0.75 Average Daily Volume = 1.06 mln MRVL - Marvell Tech $41.52 (+2.67 last week) Marvell Technology Group 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 Semiconductor Sector Index (SOX.X) pulled back by about 3.5% in last week's trading. The index tried to breakout above the 600 level in last Wednesday's session, but was unable to follow through thanks to weakness in the broader markets. The SOX.X pulled back to its 10-dma at 564 in last Friday's session. Despite the weakness in the SOX.X last week, some chip shares were able to reach new high ground. Some encroached upon a breakout. MRVL was one such stock. Bullish analysts comments and actions early in the week helped MRLV along. Frost Securities initiated coverage last Monday and CIBC Markets issued a Buy rating last Wednesday. The stock traded higher in all five sessions last week, displaying its awesome relative strength versus the SOX.X. If the SOX.X can mount a small reversal next week and trade higher, MRVL should be able to clear its very short-term overhead resistance and breakout to new relative highs. The stock traded up to $42 at the beginning of 2001, which is where the stock traded up to again last week. With a little help from its sector next week, MRVL should be able to clear the $42 level and head for blue sky overhead. This is a pretty straightforward breakout play. Watch for strength in the SOX.X and look for MRVL to advance past the $43 level on heavy intraday volume. Pullbacks on market and sector related weakness to the 10-dma at $38.75 can be used to gain entry. Our stop is in place at $38.50. BUY CALL FEB-37 UVM-BT OI= 434 at $6.50 SL=4.25 BUY CALL FEB-40*UVM-BH OI=1497 at $4.90 SL=3.25 BUY CALL FEB-42 UVM-BR OI= 330 at $3.60 SL=2.25 BUY CALL FEB-45 UVM-BI OI= 443 at $2.50 SL=2.25 Average Daily Volume = 2.65 mln PVN – Providian Financial $4.33 (+1.00 last week) As one of the top ten US credit card companies, PVN issues mainly secured credit cards to more than 12 million customers, many of whom have spotty credit histories. The company also offers standard and premium crecit cards to those with better credit. In addition to credit card products, the company also offers a suite of loan products and membership services. Soliciting new customers via direct mail, phone calls, and online advertising, PVN has more than $27 billion in assets under management and over 14 million customers. Does anybody else remember playing PVN when it was still a triple-digit stock (not counting the decimal places)? Those days seem long-gone, as the stock is trading at a mere fraction of its former self, after a 2-1 stock split followed by persistent concerns about credit defaults. Jim commented about it a couple months ago, highlighting the low probability that the company was headed for bankruptcy, with all of that high-interest debt on its books. It's hard to argue with cash flow, and Jim appears to be right, even if a bit early. It took awhile for the market to wake up, but judging from the strong buying volume over the past 2 days, PVN is garnering quite a bit of bullish interest. Now clear of the 10-week resistance level at $4.00, the stock should start working towards the bottom of the gap left in mid-October at $6.70. Options are so cheap on this one that stops hardly make sense, but we listed them just the same. With earnings set to be released on January 29th, there is the distinct possibility that PVN could run into the announcement, especially with the likelihood that the Fed will slash rates again at its next meeting on the 30th. Target intraday dips near the $4.00 level, or possibly a more substantial pullback to the $3.50-3.75 area. Of course, we'd prefer to continue riding this one higher, and if PVN rocks higher on Monday, we'd give consideration to entering new positions on a rally through the $4.50 level. We are initially placing our stop at $3.25, just below the 20-dma ($3.36). Consider using the March or June contracts to give yourself some insulation from time decay. BUY CALL FEB-5 PVN-BA OI=4715 at $0.60 SL=0.00 BUY CALL MAR-5*PVN-CA OI=8018 at $0.95 SL=0.50 BUY CALL JUN-5 PVN-FA OI=3701 at $1.35 SL=0.75 BUY CALL JUN-7 PVN-FU OI= 750 at $0.70 SL=0.00 Average Daily Volume = 8.65 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** ACS - Affiliated Computer Services $106.96 (+2.21 last week) Affiliated Computer Services is a global company that delivers comprehensive business process outsourcing and information technology outsourcing solutions, as well as system integration services, to both commercial and federal government clients. ACS reports Tuesday, January 22nd, before the market opens. The stock performed well last week despite the pullback in the broader market averages. For the week, ACS tacked on another $2.21, en route to tracing another all-time high in last Thursday's session at $108.60. It wasn't out of character for ACS to trade higher last week without the support of the market, it's been doing that for more than a year. However, we would feel more comfortable pursuing bullish positions in ACS in a bullish market. With a bullish market, ACS probably could've traded up to $110 late last week. It's still attainable early next week. Traders holding positions over the weekend might continue to target an upside move to the $110 area for an exit point. Conversely, continued market weakness into early next week could pressure ACS back down to a favorable entry point. Depending on your risk tolerance, bounces from between the $104 or $106 levels could be used to gain entries on weakness. Watch for open interest in the FEB and APR contracts to build in the coming week. BUY CALL FEB-105*ACS-BA OI=0 at $5.40 SL=4.25 Wait for OI! BUY CALL FEB-110 ACS-BB OI=0 at $2.85 SL=1.25 Wait for OI! BUY CALL APR-105 ACS-DA OI=0 at $8.90 SL=7.00 Wait for OI! BUY CALL APR-110 ACS-DB OI=0 at $6.50 SL=4.50 Wait for OI! Average Daily Volume = 586 K MANU - Manugistics $20.15 (+0.09 last week) Manugistics is a global provider of Enterprise Profit Optimization solutions, which is a category of solutions for enterprise management. Manugistics is also a provider of solutions for supply chain management, pricing and revenue optimization and electronic marketplaces. Did you watch MANU last Friday? There were some interesting un-happenings in the stock. Most notably, while the broader market sold-off into the close, MANU continued to gyrate around the $20 level. More specifically, the stock rebounded from exactly the 200-dma. Friday's intraday low as set at $19.66. The level of the 200-dma last Friday was $19.66. Traders with open positions or those looking for entry points might continue to use the 200-dma into next week's trading as a guide for measuring and managing risk. A breakdown below the 200-dma could be used as a stop for those with open positions, while a trade down to and subsequent bounce from the 200-dma could be used as an entry point. The relative strength of MANU is most impressive and hopefully will continue to prop up the stock into next week. In addition to the 200-dma, continue using the Software Sector Index (GSO.X) to time entries and exits in MANU. BUY CALL FEB-20*ZUQ-BD OI=607 at $2.65 SL=1.25 BUY CALL FEB-22 ZUQ-BR OI=244 at $1.60 SL=1.00 BUY CALL APR-20 ZUQ-DD OI=528 at $4.20 SL=2.75 BUY CALL APR-22 ZUQ-DR OI= 37 at $3.20 SL=2.25 Average Daily Volume = 2.95 mln MCAF - McAfee.com $38.65 (+1.77 last week) McAfee.com provides online personal computer management products and services for consumers. Through its Web site, the company allows consumers to secure, repair, update and upgrade their computers. MCAF is scheduled to report earnings this coming Wednesday after the bell, so make sure to keep that in mind when planning entries and exits early next week. MCAF pulled back in a big way during last Friday's late sell-off in the broader market. The stock stopped just short of the $38.50 level, which is where it bounced from early last Thursday morning. We'll see if the buyers return again early next week and carry this stock higher into its earnings report. If MCAF breaks down below the $38.50 level early next week, it might be a good indication that the stock is going lower in the short-term and signal that traders with open positions might consider exiting. Conversely, if the $38.50 support level does hold, traders might consider one last short-term entry into this play ahead of Wednesday's report. If you're gaming a bounce from $38.50, make sure to confirm strength in the broader Nasdaq as well as the broader software sector through monitoring the GSO.X. The stock has been bumping into resistance around the $42 level. If a bounce does occur, look for exits around $42. BUY CALL FEB-35*CFU-BG OI= 12 at $6.30 SL=4.25 BUY CALL FEB-40 CFU-BH OI= 85 at $3.60 SL=2.25 BUY CALL MAR-35 CFU-CG OI=179 at $7.30 SL=5.75 BUY CALL MAR-40 CFU-CH OI=195 at $4.70 SL=3.25 Average Daily Volume = 565 K RSTN - Riverstone Networks $20.55 (+2.07 last week) Riverstone Networks builds routers that convert raw bandwidth into profitable services for Metropolitan Area Networks. The company's products enable the creation of profitable services and the delivery of these services over next-generation and legacy networks. RSTN bucked the trend in the broader technology space and the networking sector last Friday and for the week. In last week's trading, RSTN tacked on more than $2, or about 11%. In comparison, the Networking Index (NWX.X) shed about 5% last week. RSTN's relative strength is encouraging. We're in the right stock with RSTN, so it's just a matter of getting the broader tech space and the NWX.X cooperating and moving in our favor. For its part, the NWX.X pulled back to its converged 10- and 200-dmas last Friday. The level of those two averages is right around 342. That's where the NWX.X stopped dropping last Friday, so we may be in store for a bounce early next week in networking shares. If that level continues holding, look for RSTN to start working higher. Conversely, if the NWX.X breaks down below its moving averages, then traders might consider waiting for the NWX.X to stabilize before attempting to swim against the tide with RSTN. On the part of RSTN, traders might look for an advance past the $21.10 level, just make sure that the market and its sector is supporting such a breakout attempt. A market and sector-related pullback could have RSTN back down to the $20 level, where bounces can be monitored. BUY CALL FEB-17 RQJ-BW OI= 149 at $4.10 SL=2.75 BUY CALL FEB-20*RQJ-BD OI= 500 at $2.35 SL=1.25 BUY CALL FEB-22 RQJ-BX OI= 492 at $1.30 SL=0.75 BUY CALL APR-20 RQJ-DD OI=1349 at $3.90 SL=2.75 Average Daily Volume = 3.37 mln EMLX – Emulex Corporation $45.61 (+1.12 last week) A leading networking company, EMLX designs, builds and distributes three types of connectivity products: network access servers, printer servers, and high-speed fibre channel products. It's fibre channel products, which are based on internally developed ASIC technology, are deployable across a variety of network configurations and operating systems to support increasing volumes of stored data. EMLX sells its products directly throughout the world to OEMs and end users, as well as through system integrators and industrial distributors. Profit taking has been the name of the game over the past 3 days in the market, but our EMLX play has held up remarkably well. After tagging a new post-attack high of $48.17 on Wednesday, the stock has been consolidating near $45, as bullish traders prepare for the next assault on the May highs, at $49.55. Volume has fallen off substantially in the past couple days, and on Friday it fell to just above 50% of the ADV. That's a good sign for the consolidation theory, and it is entirely possible that investors are planning on giving EMLX an earnings run into its announcement on January 22nd. During this waiting period, the 10-dma ($43.85) has been creeping higher and now is in a position to provide initial support at $44 before any bearish probe can take a shot at our $43 stop. So despite the fact that daily Stochastics are falling from overbought territory, with price essentially holding firm, we still have a bullish picture to deal with. Target intraday dips into the $43-44 level, although a rally that commences from the $45 level is tradable too. We would be hesitant to trade the breakout over recent resistance ($48) due to its proximity to the May highs. If you want to buy the breakout, we'd recommend waiting until EMLX manages to clear $49.50. Keep a sharp eye on the Networking sector (NWX.X) as well. It is currently resting just above its 200-dma ($342), and a violation of that level could spell trouble for our play. BUY CALL FEB-45 UMQ-BI OI= 710 at $5.50 SL=3.50 BUY CALL FEB-47*UMQ-BW OI= 322 at $4.40 SL=2.75 BUY CALL FEB-50 UMQ-BJ OI=1221 at $3.20 SL=1.50 BUY CALL APR-50 UMQ-DJ OI=1238 at $6.70 SL=4.75 BUY CALL APR-55 UMQ-DK OI= 992 at $5.00 SL=3.00 Average Daily Volume = 9.19 mln GNSS – Genesis Microchip $72.11 (+3.36 last week) Genesis Microchip designs, develops and markets integrated circuits that receive and process digital video and graphic images. Its integrated circuits are typically located inside a display device and process images for viewing on that display. The company also supplies reference boards and designs that incorporate its proprietary integrated circuits. GNSS is focused on developing and marketing image-processing solutions and targets the flat-panel computer monitor and other potential mass markets. Proving that patience pays off, GNSS finally gave us the breakout that we were hoping for last week, blasting through the $71 resistance level, trading almost to the $75 level on Wednesday before that pesky profit taking started. Traders that saw it coming harvested a tidy profit and were ready to plunge in when the next opportunity presented itself with a dip down to support. Both Thursday and Friday afternoons saw GNSS dipping to the $71.50 level, and we got mild rebounds into the close. While nothing exciting, it is encouraging in light of the action in the Semiconductor sector (SOX.X). The SOX has been giving up ground on a daily basis after the sharp afternoon selloff on Wednesday and is once again threatening to break below its 10-dma. While we are willing to give GNSS some room to breath in terms of price (hence our stop is still down at $68, just below the 20-dma), we're running out of time. The company reports earnings on January 17th after the closing bell, so we only have a few more days to play. Consider opening new positions on a dip and bounce near the $70-71 support level, but don't chase the stock higher unless the SOX reverses its decline and the bulls go on a buying spree. Win, lose or draw, we'll be bringing the play to a close before GNSS' earnings announcement. BUY CALL FEB-70 QFE-BN OI=418 at $8.10 SL=5.75 BUY CALL FEB-75*QFE-BO OI=438 at $5.40 SL=3.50 BUY CALL FEB-80 QFE-BP OI=122 at $3.60 SL=1.75 Average Daily Volume = 2.53 mln LLY - Eli Lilly $76.40 (-1.30 last week) LLY discovers, develops, manufactures and sells Pharmaceutical products targeted at the diagnosis, prevention and treatment of human diseases. The company's best known commercial product is the anti-depressant Prozac, although there are numerous other lesser-known drugs that treat conditions such as Parkinson's disease, diabetes, osteoporosis along with a broad range of antibiotics. The company also conducts research to find products to treat diseases in animals and to increase the efficiency of animal food production. What a disappointing performance LLY handed us on Friday. It was looking good to follow through on Thursday's rally when the stock just ran out of willing buyers. After tagging a high of $78 only 90 minutes into the trading day, the action was pretty dismal, with the stock posting a series of lower highs and lows until coming to rest at the closing bell fractionally below Thursday's closing value. While this may be setting us up for a great entry point, we have to be concerned about the timeframe. LLY announces earnings on January 17th before the opening bell, which means we only have 3 trading days left on this defensive play. We're looking for a near-term rally to the 200-dma ($79.75) to put some quick cash in the trading account, but we'll be taking our leave of the play Wednesday night to avoid any surprises from the earnings announcement. Look to initiate new positions on a rebound from the $76 level, but keep in mind that we're playing with a tight stop at $75. Don't try to catch a falling knife. Wait for the rebound on solid volume and then jump aboard. LLY has been really gap-happy over the past month, so we would avoid chasing any gap moves higher. And given the failed rally on Friday, you can see why we're favoring buying the dips, rather than chasing LLY higher. BUY CALL FEB-75*LLY-BO OI= 194 at $3.50 SL=1.75 BUY CALL FEB-80 LLY-BP OI= 629 at $1.00 SL=0.50 BUY CALL APR-80 LLY-DP OI=6436 at $2.50 SL=1.25 Average Daily Volume = 3.60 mln ************* NEW PUT PLAYS ************* KBH – KB Home $37.69 (-1.32 last week) KB Home is a homebuilder with domestic operating divisions in California, Arizona, Nevada, New Mexico, Colorado and Texas. Kaufman & Broad, the company's majority-owned subsidiary, is a homebuilding in France. In fiscal 2000, the company delivered homes to 22,847 families in the U.S. and France. KBH also operates a full-service mortgage company, Kaufman and Broad Mortgage Company, for the convenience of its buyers. The company builds homes that cater primarily to first-time homebuyers, generally in medium-sized developments close to major metropolitan areas. The housing sector has been a bit of an anomaly over the past year, continuing to show impressive strength in the face of the painful slide in the broader economy. With record housing sales continuing to impress analysts and investors alike, shares of KBH rocketed to a new all-time high in late December, finally topping out near the $41 level. Judging by the recent price action though, it looks like all the good news was already factored in and once the calendar rolled over to 2002, investors started taking profits. The company reported earnings on Thursday, a whopping 20 cents ahead of estimates and after the initial euphoric pop higher on the news, the stock continued heading lower. Now we've got the daily Stochastics buried deep in oversold territory, but there isn't any tangible support for the stock until it reaches the $36 level, and that support is weak. This looks like a fairly easy downside play to the $34 support level, although it could continue as low as $32, where support becomes much stronger. Ideal entries will come from another failed rally near the 20-dma (currently $39.39), although entering on a breakdown below Friday's low of $37.15 looks good as well. Set stops at $40. BUY PUT FEB-40 KBH-NH OI=15 at $3.70 SL=2.00 BUY PUT FEB-35*KBH-NG OI=12 at $1.20 SL=0.75 Average Daily Volume = 571 K THQI – THQ Inc. $45.88 (-5.87 last week) THQ Incorporated is a developer, publisher and distributor of interactive entertainment software for hardware platforms in the home video game market. The company publishes titles for Sony's Playstation 2, Nintendo 64, Nintendo Game Boy Color and personal computers in most interactive software genres, including children's, action, adventure, driving, fighting, puzzle, role playing, simulation, sports and strategy. Its customers include Wal-Mart, Toys "R" Us, Electronics Boutique, Target, Kmart Stores, Best Buy, as well as other national and regional retailers, discount store chains and specialty retailers. Despite encouraging sales numbers from the likes of Best Buy, shares of game-maker THQI have been in a steady decline since running out of gas in early December. Since tagging an intraday high of $65.10, the share price is down nearly 30%. And judging by the way selling volume has been on the rise, the end is not yet in sight. The first week of the new year saw the stock battle back above its 200-dma and it looked like it might have put in a bottom near the $46-47 level. But bullish enthusiasm was short-lived as the stock rolled over at its declining 20-dma (now $51.09) last week and headed sharply lower, breaking below the 200-dma ($49.28) on Thursday and closing on Friday below $46. So much for support. With the 10-dma ($49.17) crossing below the 200-dma and the 20-dma not far behind, it looks like the stock is going to have a hard time regaining the half-century mark. A bounce and rollover in the vicinity of the 200-dma would make for an ideal entry, but we may not get that lucky. Looking at a retracement of the stock's rise between mid-September and early December, we can see the 62% level resting at $47.73, and a failed rally near that level certainly makes sense as an entry into the play. While momentum traders can take advantage of a continued decline below $45, they'll want to keep a sharp eye out for buying support near the $42 support level, also the site of the 81% retracement. We're initially placing our stop at $50. BUY PUT FEB-45*QHI-NI OI= 67 at $3.70 SL=2.00 BUY PUT MAR-45 QHI-OI OI=114 at $4.80 SL=3.00 BUY PUT MAR-40 QHI-OH OI= 32 at $2.80 SL=1.50 Average Daily Volume = 1.56 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 01-13-2002 Sunday 4 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** CURRENT PUT PLAYS ***************** ADRX - Andrx $63.82 (-0.32 last week) Andrx formulates and commercializes controlled-release oral pharmaceuticals using its proprietary drug delivery technologies. Andrx markets and sells Catria XT and Dilitia XT, its generic or bioequivalent versions of Cardizem CD and Dilacor XR. ADRX once again attempted to trade and stay above its 200-dma last Friday but once again failed. The stock reached as high as the $65.69 level in last Friday's session, but ended below the $64 level. The site of the 200-dma last Friday was $64.99; let's just call it $65. The 200-dma capped every rally attempt last week, which amounted to four tries. The continued failure of ADRX to close above its 200-dma is the reason we're maintaining coverage this weekend. Although the Biotechnology Sector Index (BTK.X) finished fractionally higher last Friday, we focused on the divergence in ADRX, which finished fractionally lower. Weakness in the BTK.X early next week should pressure this stock lower. But we first want to see the series of higher relative lows broken before pressing our bearish stance. Look first for weakness in the BTK.X next week, then watch for ADRX to breakdown below the $63.70 level. If that happens, look for confirmation of selling by watching for a decline below the $63 level. From there, a retest of breakdown below relative lows should take place if weakness persists in the BTK.X. In the event of sector strength, watch for additional rollovers at the 200-dma. BUY PUT FEB-65*QAX-NM OI= 574 at $5.30 SL=3.50 BUY PUT FEB-60 QAX-NL OI=1077 at $3.00 SL=1.50 Average Daily Volume = 1.54 mln AZO – AutoZone, Inc. $64.86 (-2.14 last week) AutoZone is a retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. Each of its more than 2900 stores in 42 states and Mexico carries an extensive product line for cars, vans and light trucks, including new and re-manufactured automotive hard parts, maintenance items and accessories. Approximately half of its domestic stores also have a commercial sales program, which provides commercial credit and prompt delivery of parts and other products to local repair garages, dealers and service stations. Will it or won't it? AZO has been bouncing around the $65 level over the past few days, trying to decide if it will continue the decline the really got started on December 31st. With Stochastics buried in oversold and the candles unable to make up their mind, we need to turn to recent support and resistance to nail down our entry triggers. A failed rally near $67.50 would make for the best entry scenario, especially with the sharply declining 10-dma ($67.28) reinforcing that level. On the downside, the stock continues to find support at $64, so we'd like to see a drop below that level on strong volume before initiating new momentum positions. Once below that level, AZO could quickly decline to the $60 level and possibly $58, which would make for a great location to harvest some profits. Our stop is still resting at $68, as a move back above that level would indicate the bulls are feeling frisky again. BUY PUT FEB-65*AZO-NM OI=858 at $3.10 SL=1.50 BUY PUT FEB-60 AZO-NL OI= 86 at $1.20 SL=0.75 Average Daily Volume = 1.39 mln BBOX – Black Box Corporation $49.19 (-5.13 last week) As a technical services company, Black Box Corp. designs, builds and maintains network infrastructure systems. The Black Box team serves more than 150,000 clients in 132 countries, providing technical services on the phone, on site and online. Through its catalogs and Website, the company offers more than 90,000 infrastructure and networking products, and designs and builds more than 650,000 custom products each year. With the clock ticking towards earnings on January 15th before the opening bell (yes, that's Tuesday), BBOX laid a big goose egg on Friday, ending virtually unchanged and still sitting right on support. While nimble traders could have milked a little bit out of the play by entering when the stock rolled over just above $50, there just wasn't much to do. And with earnings to contend with, we only have one more market day to contend with. If you decide to play, make sure that you have all positions closed by the closing bell on Monday. With that out of the way, BBOX could still give us a decent entry if it pops early and the rally runs out of steam. Use a failed rally near the $50-51 area to initiate new positions or consider chasing the stock lower if it breaks below $49. We're lowering our stop to $52 this weekend. BUY PUT FEB-50*QBX-NJ OI=176 at $4.00 SL=2.50 BUY PUT MAR-50 QBX-OJ OI= 32 at $5.10 SL=3.00 BUY PUT MAR-45 QBX-OI OI=102 at $2.95 SL=1.50 Average Daily Volume = 349 K EBAY – eBay, Inc. $63.87 (-4.63 last week) After developing a Web-based community in which buyers and sellers are brought together in an efficient format, EBAY has emerged as the dominant online auction site. The eBay dynamic pricing format permits sellers to list items for sale, buyers to bid on items of interest and all eBay users to browse through listed items. Items listed on eBay include collectibles, automobiles, art objects, jewelry, consumer electronics and a host of practical and miscellaneous items. Although based in the United States, through its subsidiaries, EBAY also operates trading platforms in Germany, the United Kingdom, Australia, Japan, Canada, France, Austria, Italy and South Korea. You've just got to love it when a play comes together the way EBAY has for us. Recall that we added the play near the $70 level in anticipation of a rollover, and did we ever get it! It took a little while to get going, but the past 3 days have been nearly picture-perfect as the stock ran out of steam near $69 and fell all the way to (and through) the $64 support level by Friday's close. After kissing the 50-dma ($63.78) Friday afternoon, the big question is whether there is more downside in the play. If EBAY can break below $63, it has pretty good odds of testing the $61 level, but we've got time working against us. EBAY reports earnings on Tuesday after the closing bell, and we don't want to hold over the announcement. That means we'll be dropping the play on Tuesday. But that doesn't mean we can't try to squeeze a bit more profit out of the play. If you're in the play from the highs on Wednesday, consider tightening up those stops, possibly to the $65 level. We're tightening our stop on the play to $66, near Friday's opening price. Use caution initiating new positions near current levels. With such a short fuse on the play, target a failed intraday rally near the 20-dma ($66.43), but monitor the play closely. BUY PUT FEB-65*QXB-NM OI=1558 at $5.00 SL=3.00 BUY PUT FEB-60 QXB-NL OI=1557 at $2.95 SL=1.50 Average Daily Volume = 7.49 mln QCOM – Qualcomm, Inc. $46.51 (-3.90 last week) Based on its proprietary CDMA technology, QCOM is engaged in developing and delivering digital wireless communications services. The company's business areas include integrated CDMA chipsets and system software and technology licensing. QCOM owns patents that are essential to all of the CDMA wireless telecommunications standards that have been adopted or proposed for adoption by the worldwide standards-setting bodies. Currently, QCOM has licensed its CDMA patent portfolio to more than 80 telecommunications equipment manufacturers around the world. While last week we were eyeing a breakdown below $50 in shares of QCOM, which we got due to the deteriorating fundamental picture in the Wireless space, now the stock is consolidating just above the $46 level. Could we be so lucky as to get another breakdown next week? With the weakening of the broad market, anything is possible. Should the NASDAQ push below the 2000 level, QCOM will likely take another hit due to its relative weakness over the past month. The one fly in the ointment is the fact that QCOM reports earnings on January 24th, and investors may start trying to establish a position for a possible earnings run. Hey, stranger things have happened! But in the absence of that sort of buying pressure, QCOM looks destined to continue working lower. The bearish target from the PnF chart comes in at $38, and the column of O's used to calculated that target is still growing. With the stock trying to build a base near current levels and daily Stochastics buried in oversold, the best entry strategy is still to enter on a failed intraday rally, possibly at the 62% retracement ($47.63) or as high as the $50 level, also the site of the 50% retracement and our stop. Of course, given the stock's refusal to break below the $46 level this week, we could use a drop below that level to initiate new momentum-based positions, looking out for support to form at $45 and then $43. BUY PUT FEB-50 AAO-NJ OI=1973 at $5.50 SL=3.50 BUY PUT FEB-45*AAO-NI OI=4792 at $2.90 SL=1.50 BUY PUT FEB-40 AAW-NH OI=2748 at $1.35 SL=0.75 Average Daily Volume = 14.7 mln ELBO - Electronics Boutique $34.57 (-2.43 last 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. It was a wild week in ELBO last week. When it was finally over, ELBO shed $2.43 for the week. The stock's big and fast drop to its 200-dma in Thursday's session could've served up some decent short-term gains for quick and nimble traders. Hopefully we'll get a retest of the 200-dma in next week's trading for those who didn't get the chance to exit last Thursday morning. We've been noticing a pattern of tech stocks bouncing from their 200-dmas on the first retest since last September. After the initial bounce, such as ELBO's last Thursday, a lot of the stocks have retested their 200-dmas. That's what we'll be watching for next week. Another trade down to the 200-dma at $32.41 is the move to be on the alert for next week. For new entries, short-term traders can look for a quick breakdown below the $34 level early next week for about a $1.50 move down to the 200-dma. A rally and subsequent rollover up around the $36.50 area could serve as an entry on intraday strength. Several of the game makers broke down in a big way last Friday, most notably ERTS. Continue to watch others in the group when gaming entries and exits in ELBO. Those others can include ERTS, THQI, TTWO, ATVI, and MGAM. BUY PUT FEB-40 LQB-NH OI=35 at $6.70 SL=4.75 BUY PUT FEB-35*LQB-NH OI=32 at $3.50 SL=2.25 Average Daily Volume = 545 K ************************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 ************************************************************** ***** LEAPS ***** As The Bulls Tire, It's Time To Play Defense By Mark Phillips Contact Support What more can I say except that the bulls appear to be losing their resolve. All three of the major indices pulled back from their respective levels of resistance, but I think the most notable of those is the S&P500 (SPX.X), as it failed to move through the 1175 level. There is going to be a pitched battle fought in this vicinity before the SPX moves substantially higher, and the increasing discussion in the media of the recovery being pushed back to the latter half of 2002 is going to really make the bulls earn any further ground they hope to gain. Did you catch the theme from the Federal Reserve over the past couple weeks. It seems every person related to the central bank that could find a microphone (Alan Greenspan included), was doing their level best to talk down hopes of a substantial economic recovery in the near term. Inquiring minds might be asking why, and I think I have the answer. Looking into their collective crystal balls, they can see that the economy has a lot of problems to deal with, and flooding it with liquidity can only do so much. And with long-term rates already so low, there isn't much more that can be done in that direction. The Fed knows this and is trying to warn investors that hopes for a robust recovery in 2002 are not going to be met. In fact, in his speech on Friday, Uncle Alan actually said some very bearish things about the Housing sector, including his expectations that refinances and new home purchases are going to be down significantly in the year ahead. I'm going to dispense with the usual market commentary tonight, because Jim will handle that better than I can in his Market Wrap. And we have plenty of excitement to talk about here with respect to our various plays. And with 3 new Portfolio plays, I'm going to try to keep it rather brief this weekend. So let's get to it, shall we? That was quite an ugly move in shares of Tyco International (NYSE:TYC) on Friday, now wasn't it? More than a 6% drop and we saw some serious volume too! Not only that, but the stock sliced through the 200-dma ($52.32) like a hot knife through butter. While we're keeping it active on the Watch List, we need to exercise caution. The 38% retracement from the September lows to December highs was right at $52.13, and barring a snapback rally next week, this level could become near-term resistance. We're still looking to take a long position near $50, also the site of the 50% retracement ($49.67). Note that weekly Stochastics are still diving, so I wouldn't be in a hurry. Wait for some sign of stabilization in price with the long-term oscillators showing some sign of life before venturing into new positions. While the decline in shares of TYC was pretty dramatic, our hesitancy about bottom fishing on that play is a bit of a theme here this weekend. We reached our entry targets on several Watch List plays this week, some of which we took, and others we let pass due to unfavorable price action. The theme that seemed to be developing as the week wore on was nervousness on the part of investors. AOL Time Warner (NYSE:AOL) gave us a little pop early in the week, but something just didn't feel right about it. And it was nothing tangible that I could put my finger on. The stock continued its rebound from the week before and volume remained strong, but I couldn't bring myself to pull the trigger. And I'm glad for that now! After Monday's brief rally, AOL spent the remainder of the week drifting lower, coming to rest on Friday right on its long-term ascending trendline just above $30.50. While in the middle of our target zone, I'm glad we're waiting until next week to target an entry on this one. Then there was the action in shares of Goldman Sachs (NYSE:GS). On Tuesday, shares of the Brokerage firm gapped down and spend the next 3 days consolidating just above the 20-dma, before giving up the ghost on Friday to close just above $91. Notice that this is below our entry target, and the strong volume on the drop doesn't leave me with a good feeling. We're leaving the entry target in place, but only want to target new positions on a volume-backed rally (not a gap) through the $93 level. How about our WorldCom (NASDAQ:WCOM) play? The stock finally fell into our target zone ($13.50-14.00), but I sure wasn't motivated to dip my toes into that one, especially with selling volume running more than 50% above the ADV. Weekly Stochastics are almost back to oversold territory, so we could be setting up for a nice entry. Look for price to firm above $13.50 along with daily Stochastics turning up. That could make for a nice entry over the next couple weeks if volume supports the rebound. Otherwise, prudence demands that we wait. We actually took a position in the Portfolio in Eli Lilly (NYSE:LLY) on the positive price action right off of our $75 target level on Thursday. What happened on Friday? Sharp reversal, which already has me nervous. I just don't like these supposedly favorable moves that reverse sharply one or two days later. But I think you can see the theme developing. Helped along by the weak markets, there just wasn't much strong buying action this week. But we're in the position and will play it accordingly with our stop at $75. As I mention in the play below, more cautious players may want to wait for the results of the company's earnings report on January 17th, targeting new positions on a renewed bounce from support if it materializes. One of the few standouts was EMC Corporation (NYSE:EMC) this week. While it didn't really go very far, it was notable that the stock managed a fractional advance as it continued to chip away at the $18 resistance level. While I'm only raising stops to $13.50 until we see the stock crest that resistance level, traders that got in near the $13 level should be looking to tighten their stops to ensure at least a break-even play. I like the $14.75 level, as it is the bottom of the gap from last Thursday, a significant support level and just below the 20-dma. Of course, with all the bullish failures in various sectors last week, you'd think there were some significant developments on the Put side of the equation, and you'd be right. First up is our trusty Insurance play on American International Group (NYSE:AIG). The stock is getting ever closer to that meaningful breakdown (in my opinion), but it didn't happen this week, as the stock once again found support near $76. It has been bouncing for the past 3 days, but I'd look for one more rollover before closing this chapter. Afterall the price is pulling further away from the descending trendline, and the weekly Stochastics are continuing to drift lower. Use the next trip down to $76, or ideally the 62% retracement near $74 to harvest profits and get set for the next play. We're lowering our stop this weekend to $79.50. We actually added 2 new Put plays to the portfolio this week and I won't bore you with the details here. I ran amuck at the keyboard describing the gory details down below. Both General Motors (NYSE:GM) and Jones Apparel Group (NYSE:JNY) gave us what I would call picture-perfect bearish entries last week. Neither of them are going to be home runs, but we'll take any opportunity to profit while we wait for oscillators to cycle down and give us bullish entries on some of those plays on the Call list. Coming back to the call list, other than those plays I discussed above, I think it is worth mentioning both General Electric (NYSE:GE) and Nokia (NYSE:NOK) here. Both of these stocks failed at resistance again and are approaching our entry targets. All we need to see in conjunction with favorable price action is for those pesky weekly Stochastics oscillators poking back down into oversold territory. Then we'll be ready to join the bullish party -- at least a little bit. I mentioned the theme of investor nervousness up above, and that really is the key point on which I think we should end our discussion for the weekend. All we need for proof that investors are not rampantly bullish is the recent action of the VIX. While it was flirting with new multi-month lows last week, it trudged steadily higher this week, reaching an intraday high of 25.20 on Friday. While that is still just in the middle of its historical range, it shows that investors are not blindly bullish. That may be providing just the wall of worry we need for this market to continue trudging higher. Until we see signs to the contrary, this is a rangebound market, so we have to pick our plays (and entries and exits) carefully. Nimble trading will be the theme for some time to come, so don't get married to either a position or a market philosophy. Trade the opportunities as they come along and harvest profits when they are available. Have a great week! Mark Phillips Contact Support LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: EMC 01/02/02 '03 $12.5 VUE-AV $ 4.90 $ 7.00 +42.86% $13.50 '04 $12.5 LUE-AV $ 6.10 $ 8.20 +34.43% $13.50 LLY 01/10/02 '03 $ 80 VIL-AP $ 7.70 $ 7.10 - 7.79% $75 '04 $ 80 LZE-AP $12.90 $11.50 -10.85% $75 Puts: AIG 11/07/01 '03 $ 80 VAF-MP $ 8.40 $ 8.80 + 4.76% $79.50 '04 $ 80 LAJ-MP $10.60 $11.40 + 7.55% $79.50 JNY 01/09/02 '03 $ 35 OOR-MG $ 6.70 $ 6.80 + 1.49% $35 '04 $ 30 KKZ-MF $ 5.60 $ 5.80 + 3.57% $35 GM 01/10/02 '03 $ 50 VGN-MJ $ 6.50 $ 6.70 + 3.08% $53.50 '04 $ 50 LGM-MJ $ 8.40 $ 8.70 + 3.57% $53.50 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: GE 08/12/01 $36 JAN-2003 $ 40 VGE-AH CC JAN-2003 $ 30 VGE-AF JAN-2004 $ 40 LGR-AH CC JAN-2004 $ 30 LGR-AF TYC 09/16/01 $50 JAN-2003 $ 55 VYL-AK CC JAN-2003 $ 50 VYL-AJ JAN-2004 $ 60 LPA-AL CC JAN-2004 $ 50 LPA-AJ NOK 09/23/01 $20-21 JAN-2003 $ 25 VOK-AE CC JAN-2003 $ 20 VOK-AD JAN-2004 $ 25 LOK-AE CC JAN-2004 $ 20 LOK-AD BRCM 10/28/01 $31-32 JAN-2003 $ 35 OGJ-AG CC JAN-2003 $ 30 OGJ-AF JAN-2004 $ 35 LGJ-AG CC JAN-2004 $ 30 LGJ-AF JNJ 12/09/01 $54, $52.50 JAN-2003 $ 55 VJN-AK CC JAN-2003 $ 50 VYN-AJ JAN-2004 $ 55 LJN-AK CC JAN-2004 $ 50 LJN-AJ WCOM 12/16/01 $13.50-14 JAN-2003 $ 15 VQM-AC CC JAN-2003 $12.5 VQM-AV JAN-2004 $ 15 LQM-AC CC JAN-2004 $ 10 LQM-AB AOL 01/06/02 $30-31 JAN-2003 $ 30 VAN-AF CC JAN-2003 $ 25 VAN-AE JAN-2004 $ 30 LOL-AF CC JAN-2004 $ 25 LOL-AE GS 01/06/02 $92-93 JAN-2003 $ 90 VSD-AR CC JAN-2003 $ 85 VSD-AQ JAN-2004 $ 90 KGS-AR CC JAN-2004 $ 80 KGS-AP PUTS: MO 12/09/01 $48, $50 JAN-2003 $ 50 VPM-MJ JAN-2004 $ 50 LMO-MJ New Portfolio Plays LLY - Eli Lilly $76.80 **Call Play** It wasn't so long ago that we profitably played LLY to the upside, and it looks like we're getting another chance to do so now. As bullish enthusiasm is cooling for Technology stocks, the natural tendency is for defensive plays, such as Drug stocks to find favor with bullish investors looking for a bit more safety. On Thursday, the Pharmaceutical index appeared to complete a double-bottom at the $375 level, which coincided nicely with LLY's bounce from just above the $75 level. LLY's bounce seems to have stemmed from the announcement that Xigris (the company's new Sepsis drug) sales are coming in on target. What makes this level so important for LLY is that it just happens to be the site of the ascending trendline that has been supporting the stock since September of 2000. Not only did this give us an attractive entry point, but it also makes it easy to manage our risk by placing our stop just below the trendline at $74, a consistent level of support since last spring. While the weekly Stochastics never reached oversold, they appear to be flattening out just above that level, which is an inherently bullish sign. And with daily Stochastics vigorously emerging from oversold, it looks like everything is in alignment for another successful play. I would have preferred to nab our entry closer to the $75 level, but Thursday's sharp rebound left me no choice but to buy after the one-day rally. There just wasn't any sign of the bounce the day before. If you missed this entry, consider renewed bounces in the $75-76 area to be a favorable second chance. One thing to keep in mind is that the company announces earnings on January 17th. Cautious traders may want to wait until after the announcement to avoid any surprises. BUY LEAP JAN-2003 $80.00 VIL-AP $ 7.70 BUY LEAP JAN-2004 $80.00 LZE-AP $12.90 GM - General Motors $50.07 **Put Play** After twice failing to push through the $51 resistance level last week, it looks like the bulls are finally losing their grasp on the stock. Of course, it didn't help that Ford is still nowhere near correcting its internal problems, and news of more layoffs and restructuring at that troubled auto maker are surely weighing on shares of GM. The fundamental picture does not favor the automotive sector here at all, but I covered my rationale pretty thoroughly in the Watch List write up on December 16th. What we want to cover here is what actually ushered us into the play. Simply put, all the technical indicators appear to be lining up for a nice low-stress put play -- I hope! By Thursday's close, the daily Stochastics had finally fallen out of overbought territory, and price appeared to be weakening. Coupled with a weekly Stochastic that is once again weakening midway back to oversold, and I think there is definitely some downside ahead of us. While we took our entry on Thursday, the price action just helped to confirm that decision on Friday as it fell back below the 38% ($50.11) retracement level of the stock's decline from July to mid-September. That just confirms this level as an area of resistance. Note that the 50% level ($53.49) rebuffed the bulls advance in early December, and coupled with the declining 200-dma ($53.21), will make the $53.50 level a tough obstacle to climb. So while it is a bit on the generous side, I like the $53.50 level for a stop, as it should give GM a little wiggle room before it really starts to perform. I'm not looking for a home run here, but I think there is the likelihood of returning to the $42-43 support level from October-November, as investors begin to see the dismal fundamental picture play out. The first technical hurdle we need to watch is the stock's behavior at its 20-dma ($48.56). Should this level fail to support the price, (As I expect), we'll be watching for a breakdown under the 50-dma, currently $47.53. BUY LEAP JAN-2003 $50.00 VGN-MJ $ 6.50 BUY LEAP JAN-2004 $50.00 LGM-MJ $ 8.40 JNY - Jones Apparel Group $33.62 **Put Play** With the holiday season over, the sales results from that period are gradually becoming known. And investors are starting to realize that while sales figures may have been better than expected, in many instances, those better numbers were due to incentives and discounts. Logic is working its magic and those same investors are putting 2 and 2 together and figuring out that the net result will be a detrimental effect to many retailers' (especially specialty retailers like JNY) earnings results. This realization can be most plainly seen in the daily chart of the Retail index (RLX.X). After failing once again to clear the $940 resistance level, the RLX is once again challenging the ascending trendline that has been supporting the price action since the September lows. If this support level gives way, it will most likely put the whole sector into a corrective mode, and that brings us back to our JNY play. Recall from the commentary when we added the play 2 weeks ago that it looked like the stock was substantially under performing the RLX, so when the RLX rolled over, we expected to see a magnified decline in shares of JNY. Add in the fact that the JNY chart is bearish on its own merits and I think you can see what drew me to it. Weekly Stochastics are just starting to roll over as are the dailies, and we have the added benefit of bearish divergence. And all of this is taking place just below the still-descending 200-dma ($34.97). We could have taken our entry on either Monday or Wednesday, but I opted to wait for the second bearish candle before taking the plunge. Note that the current top in price for JNY is occurring right at the bottom of the gap left in early August. It appears to me that there is more overhead resistance overhead than the bulls have the strength to push through, and with the close proximity of the 200-dma, we can effectively control our risk with a tight stop at $35. BUY LEAP JAN-2003 $35.00 OOR-MG $ 6.70 BUY LEAP JAN-2004 $30.00 KKZ-MF $ 5.60 New Watchlist Plays None Drops None ************** TRADERS CORNER ************** Looking At The Future(s) Austin Passamonte Will you forgive me if I cheat a little bit tonight? I had the day from heck with home office technology crashing all around me, but two new DELL towers en route should help thwart thwart future hardware issues. Meanwhile, I'd like to scribe this visit on a topic I'm able to do in my sleep and more importantly, one that garners plenty of email questions. OI readers are a diverse crew. While options are of course the core focus in here, we do have numerous fellow peers who only trade stocks or futures contracts instead. Which is better and why? That is a question with no definable answer: each financial vehicle has great benefit and disadvantage to another when compared. Rock, paper and scissors is the best way I can equate these three. All have strengths and weakness alike, but let's stick with some basic description for the vast majority who've never visited the electronic futures market but have always wanted to. First and foremost, tons of general information is available at the public website www.cme.com that covers all of the index futures contracts. There are numerous electronic miniature contracts (hence, "e-mini") traded on the GLOBEX exchange, including debt instruments and more. You can read all about any of them, but let's brush across the NASDAQ 100 and S&P 500 for now. When we see pre and post-market futures pricing flashing across CNBC screens each day, it is these GLOBEX traded electronic futures contracts tracked. Basically, the market tries to guess where "fair value" is going to be at the open and beyond while the actual open outcry pits remain closed. This guesswork outside live trading action is based upon innumerable market pricing dynamics from everything that happens on a global basis while U.S. equity markets remain closed. The electronic markets are based upon full-size contracts traded in Chicago at the Mercantile Exchange. A full-size S&P 500 contract is valued at $250 per underlying index point. The cash market is $100 per point while the e-mini is 1/5th size the full futures contract or $50 per underlying index point. Using the cash index as a basis, the e-mini contract gains or loses $50 in value each time the cash index moves one point. By comparison, an SPX index option gains or loses $100 intrinsic value per each index point move. S&P e-mini contracts trade with a tiny 0.25 bid/ask spread and are all electronic execution. Market orders placed with platform brokers enjoy lightening fast fills unsurpassed in the equity world. An NDX e-mini contract gains or loses $20 per each underlying index point of the cash index. It too has a small bid/ask spread of 0.50 points and fills at the speed of fiber as well. Instead of paying a premium cost like we do to purchase an option, we merely keep enough money in our trading account to hold a position called "margin". This is not margin in the sense of borrowed money used for stocks we pay interest on, it is totally different. Margin held in a futures trading account is our cash used as a "down payment" to hold a contract long or short. Each contract has a three-month expiration cycle without time decay, so to speak. They are subject to higher or lower margin requirements to trade based upon underlying market volatility. Right now the margins for each contract to trade is roughly $3,000+ and that fluctuates slightly all the time. However, there is no concern for wasting premium as margins do not decay. And margin capital used actually earns interest when held in T-Bills form instead of costing us like equity margin does! Speaking of accounts, no futures contracts can be traded within equity trading accounts. We must have a specific futures trading account that is held to CFTC regulations instead of SEC rules. Hence, we need a special account for trading e-mini futures in addition to what we have for stocks and their options now. One nice thing about these futures contracts (and true index options as well) is the IRS classification of 1256 Event. In English that means index option and e-mini futures traders pay 60% long-term capital gains and 40% short-term capital gains regardless of the time frame each trade is held. A stock trader holding CSCO shares or calls long for 11.5 months will pay 100% short-term capital gains on the trade. An OEX, SPX or MNX option trader and those who play e-minis might hold a trade for ten minutes duration, but 60% of that transaction profit is long-term capital gains. If that doesn't matter to you now, do a couple $100K in profits next year and that 60% long term gains will explain itself to you! (60-Minute Chart: ES02H) Here's a recent example of price action in both e-mini markets, S&Ps first. On January 2nd the markets broke higher in New Year euphoria and ran higher from there. Of course, the rally failed and soon crashed back to reality but traders who bought the wedge break near 1142 and covered towards the top near 1172 captured 30 index points of gain. Each index point is a $50 profit, so the whole move would have yielded +$1,500 on a $3,000 margin requirement. Cash index options did better, but managing risk is easier in here. When the index broke above 1142 and we filled on the long side, a move up to 1150 or so allows us to advance or "trail" our stop-loss to just above entry at 1143. That gives the play 7 index points breathing room and locks in a "free play". If the index suddenly reverses and smashes back down against us, we would make $100 to offset the 0.25 bid/ask spread and +/- $20 round-trip commission as well. Trying to keep stops that tight in the SPX options would have us kicked put if price action slid back to 1146 area due to the wider bid/ask spread options trade with. More on that later. Here's a Time & Sales chart of Friday's action at the close. This type of action goes on all day, and note the high liquidity and volume traded here. E-mini S&P 500 daily volume dwarfs most stock or index options on a daily basis. (60-Minute Chart: NQ02H) Same picture for the e-mini NDX futures contract. Exact-same move from Jan 2nd thru the 4th offered a +$2,000 profit as the NDX outperformed the S&P 500 during that time. Again, a $2,000 profit on $3,000+ margin is a nice return indeed. QQQ call options more than doubled during the same period and also have a tiny bid/ask spread, but suffer time decay when sharp moves like this don't happen fast. Also, during times when the VIX reading is high and then falls while markets rally, premium value erodes from call options while e-mini contracts remain totally unaffected. Time & Sales sheet for the EQ02H, March 2002 e-mini NDX contract. Far less liquidity than the e-mini S&P but still plenty of action for anyone to easily enter & exit on. Which Should I Trade? That's the question I field most often. The best answer I can offer is that e-mini futures are somewhere between stocks and options to trade. Stocks have no leverage (without margin) but suffer no time decay, volatility loss or any of the extrinsic value variances options have. Options have the greatest leverage advantage of all trading vehicles but the reverse side of that coin is a degree of difficulty higher than simply trading stocks. This is due to the many nuances that affect extrinsic value pricing on what is truly a wasting asset. E-mini futures lie right in the middle. Better capital leverage than stocks. Instant, electric execution. Pure delta move in price value based on underlying action alone. Greater liquidity than most stocks or options and tiny bid/ask spreads as well. They also trade across pre and post-market time frames outside of 9:30am to 4:15pm EST that U.S. equity markets do, offering more opportunity than stocks or options for trading. Does that make e-mini contracts the best trading vehicle of all? No. There is no best or perfect vehicle, as each have their time in the sun. However, using these contracts as part of an overall trading approach does offer distinct advantages as all parts combined make the greatest whole of all. We'll be sure to follow up this topic in our next visit soon. For now I'm out of time, space and production deadlines all at once! Hope This Helps, austinp@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 01-13-2002 Sunday 5 of 5 ************************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 ************************************************************** ************* COVERED CALLS ************* Option Trading 101: A Conservative Approach to Covered-Calls By Mark Wnetrzak Some of our new readers have been asking why we focus entirely on "in-the-money" covered-calls: Hello OIN, I have a question about covered calls. It's about figuring out profit/loss potential. I am fairly new to options trading. I have been trading stocks for a while and started studying options during the big tech run but never felt comfortable - and then the bottom fell out. So I never actually traded options with real money. I went looking for the Split Trader web-site; I liked the concept and using this info and other research and I was able to produce good results. This is how I found Option Investor (I was ready to get back into the market more aggressively... I have done pretty well so far and am very happy with the free trial. Happy enough to sign up for a years worth and hopefully gain more knowledge by reading the books that come with the renewal offer. I am very grateful for the free trial. I don't think I would have tried your service without it. There are a lot of people out there trying to sell something; it is so nice to actually see what you are getting, not some old newsletters that have been picked to show great results... Back to my question, the covered-call play (from what I have read) seems like a good strategy for people who might not have the time to sit in front of the computer/TV all day. I am thinking, once I find a job this would be ideal for me. If you could give examples or formulas for figuring out potential profit/loss. I am having a hard time with the selling an ITM call on a stock that I own. First what are the chances of getting called early? And second, I just don't see how buying a stock above the strike price you're selling the call at, is going to make you money? I understand there is the time decay but you would be selling the stock at a lower price than what you paid, if you get called out? Thanks in advance, RZ RZ, First, I am including a narrative with the "return on investment" formulas (published in last Sunday's newsletter) to explain the target yield calculations. Second, the strategy we use in selecting our candidates is based on a conservative covered-write using the "total return" concept that Lawrence McMillan adeptly describes in his original book, "Options: As a Strategic Investment." With this conservative approach, an investor considers the covered write as a single entity and is not interested so much in stock ownership or bullish movement, but in obtaining a consistent return on investment. Some investors prefer to strive for higher potential returns with an aggressive outlook, writing "out-of-the-money" calls on stocks in their portfolios. These (OTM) positions offer greater rewards but also have less downside protection. The maximum potential profit of an OTM position, while greater than that of an "in-the- money" (ITM) position, will always require an increase in price by the underlying stock. Thus, by utilizing an OTM option, the success of the overall position depends more on the movement of the stock price and less on the benefits of writing the call. Since the premium generated from the sale of the call is smaller, the overall position will be more susceptible to loss if the stock price declines. ITM plays are plainly more conservative, offering less risk but also smaller reward potential. Though our strategy is less aggressive, it still requires a disciplined approach and sound money management techniques, as there is risk of loss in all trading. If you aren't worried about keeping the stock, having it called away early is not a problem and will actually increase your target yield by providing the maximum return in a shorter time frame. Generally, as long as there is time premium left in the call, the risk of early assignment is relatively small (and you are earning time premium by staying with the original position). Once the option trades at parity or a discount (or nears expiration), there is a significant probability of exercise by arbitrageurs (floor traders who don't pay commissions). An option writer has several choices at this point: do nothing, get called out and accept the original profit established; if appropriate, close the position early (evaluate extra commissions versus an increased annualized return); or roll the call up/down and/or forward. "Options: As a Strategic Investment" is an excellent resource and covers all aspects of the "covered write" strategy and should be available at the local library or the OIN bookstore. Larry covers in detail the strategy of selling calls on long-term portfolio holdings. Remember, it is very important to completely understand any strategy you intend to use and, as with all recommendations, it remains your responsibility to perform due diligence and thoroughly research any issue you are interested in. Also, it is still sound advice not to enter a position on an issue you wouldn't mind owning, as there is always that possibility. Regards, Mark W. OIN Editors Note: The reader sent these final comments... Thanks for the excel spreadsheet calculator. I also want to thank you for the personal response. I had read the newsletter article (which helped) and now reading your response helps some more. I was thinking more long-term, that I would sell covered calls on stock I own and want to keep LT. Now I see that it is more of a short-term/less aggressive play than just outright buying naked calls or puts. I was also thinking I don't want to get called out on this stock but now realize that this is not the case. Thanks again, RZ Here is another excellent question about our approach to writing covered-calls and the effects of commissions on "in-the-money" positions. Attn: Covered-calls Editor In your newsletter it says that you write covered calls that are in-the-money. Why wouldn't you write them one strike price out-of-the-money? The time value is about the same. If the stock sort of "sits" around you don't have to buy back the option at the end of the month, and if it goes up and over the strike price you get bonus cash, and if it goes lower than the strike price you lose either way. I don't have a lot of money to put in the stock market and so I can't afford a lot of shares. This means that commissions (even deep discount ones) sting bad. Example: stock xyz is 8.00 a share 100 shares is 800 plus 20 in commission I sell the 10 Feb call for 1.00 so I get 100 back less 30 for commission (option commissions are higher than stock ones) I'm up 50 on an 800 investment. If the stock goes above 10 I win again. If I sell the in the money Feb 7.5 for 1.6, I get 160 yea! 60 more $$$ but if I get called out I lose 50 on the stock, or I can go to buy the option back IF it low enough and I get "whacked" for another 30 in commission plus what ever the option is. If the stock drops below 7.5 I'm in bad shape either way. Anyways I'm wondering why you guys think in the money is better than one out. EO Regarding commissions and the use of "in-the-money" covered-calls: Again, the strategy we use in selecting our candidates is based on a conservative covered-write using the "total return" concept. With this conservative approach, we are interested solely in obtaining a consistent return on investment. Generally, our recommendations require the purchase of 500 to 1000 shares to reduce the impact of commissions. On a 1000 share position, the cost of the transaction at E*trade (2 stock commissions plus 1 option commission) would be about $78.00, or $0.08 a share. It is simply our personal preference to target a high probability of obtaining a low return, which melds with our own risk-reward tolerance. Investors who wish to apply a different strategy, or are more bullish, or have a higher risk tolerance can always move up to the next strike, use OTM strikes, or a combination of ITM and OTM strikes, thereby increasing the potential reward -- at the expense of downside protection. It is up to you to find a strategy that fits your risk-reward tolerance. "Options: As a Strategic Investment" is an excellent resource and covers all aspects of the "covered write" strategy and should be available at the local library or the OIN bookstore. McMillan explains in detail the various strategies of writing calls on long-term portfolio holdings, selling different strike calls, making position adjustments, etc. Good Luck, Mark W. OIN SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield PCLN 5.37 5.71 JAN 5.00 0.95 *$ 0.58 11.4% NPRO 11.81 11.25 JAN 10.00 2.70 *$ 0.89 10.6% MANU 19.47 20.15 JAN 17.50 3.30 *$ 1.33 8.9% NPRO 11.70 11.25 JAN 10.00 2.60 *$ 0.90 8.6% SPWX 10.99 13.49 JAN 10.00 1.70 *$ 0.71 8.3% SIRI 8.98 7.62 JAN 7.50 2.00 *$ 0.52 8.1% GZTC 5.72 4.95 JAN 5.00 1.10 $ 0.33 7.8% GPS 15.45 15.78 JAN 15.00 0.95 *$ 0.50 7.5% MDR 11.37 12.90 JAN 10.00 2.00 *$ 0.63 7.3% NPRO 11.81 11.25 JAN 10.00 2.70 *$ 0.89 7.1% FALC 8.81 10.49 JAN 7.50 1.90 *$ 0.59 6.2% VRTY 19.56 21.99 JAN 17.50 3.00 *$ 0.94 6.2% PEGS 15.90 18.02 JAN 15.00 1.30 *$ 0.40 6.0% OAKT 15.75 14.99 JAN 15.00 1.15 $ 0.39 5.8% FCEL 18.20 19.12 JAN 17.50 1.35 *$ 0.65 5.6% MOGN 15.65 15.49 JAN 15.00 1.20 *$ 0.55 5.5% OAKT 13.53 14.99 JAN 12.50 1.90 *$ 0.87 5.4% DCTM 21.98 22.54 JAN 20.00 2.70 *$ 0.72 5.4% SPWX 11.49 13.49 JAN 10.00 1.85 *$ 0.36 5.4% CAMP 6.36 6.78 JAN 5.00 1.65 *$ 0.29 5.4% VSNX 16.58 15.30 JAN 12.50 4.80 *$ 0.72 5.3% MRVL 36.96 41.52 JAN 32.50 6.60 *$ 2.14 5.1% NTAP 21.04 22.55 JAN 17.50 4.50 *$ 0.96 5.0% ENZ 24.05 24.79 JAN 22.50 2.25 *$ 0.70 4.7% ACXM 15.63 18.55 JAN 15.00 1.35 *$ 0.72 4.4% SEBL 28.82 34.94 JAN 25.00 4.50 *$ 0.68 4.0% XICO 14.00 12.21 JAN 12.50 2.35 $ 0.56 3.5% LMNX 17.94 17.25 JAN 17.50 1.00 $ 0.31 2.7% DTHK 11.11 9.55 JAN 10.00 1.80 $ 0.24 2.2% TMAR 7.65 7.16 JAN 7.50 0.50 $ 0.01 0.3% ACRI 13.11 12.61 FEB 12.50 1.60 *$ 0.99 6.2% ADCT 5.38 5.15 FEB 5.00 0.75 *$ 0.37 5.8% SCMR 5.85 5.20 FEB 5.00 1.20 *$ 0.35 5.5% *$ = Stock price is above the sold striking price. Comments: Hmmm...one week to go before the January expiration and the major averages are looking a bit suspect. Next week is also the start of earnings season, though I believe that investors will be more influenced by the "future guidance" offered by companies. There are two issues that I would consider as prime early exit candidates. Sirius Satellite NASDAQ:SIRI) continues to exhibit bearish technicals and the horrid action in DigitalThink (NASDAQ:DTHK) suggests that investors are no longer anticipating Wednesday's earnings report. Some other stocks remain on the watch list such as Xicor (NASDAQ:XICO), Luminex (NASDAQ:LMNX), and Trico Marine (NASDAQ:TMAR). These stocks may offer an opportunity to roll forward and/or down. Oak Technology (NASDAQ:OAKT) is moving towards a key moment; the trend-line from the September low. Genzyme Transgenics (NASDAQ:GZTC) should offer favorable premiums in the future for those with a long-term outlook -- if it can remain above the early-December support area. NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ADIC 18.32 FEB 17.50 QXG BS 1.70 258 16.62 35 4.6% EPNY 10.97 FEB 10.00 UEP BB 1.50 142 9.47 35 4.9% MONE 14.83 FEB 12.50 MOU BV 3.20 20 11.63 35 6.5% PLUG 10.58 FEB 10.00 PQL BB 1.40 273 9.18 35 7.8% RBAK 6.20 FEB 5.00 BUK BA 1.55 1534 4.65 35 6.5% RNWK 8.13 FEB 7.50 QRN BU 1.30 2108 6.83 35 8.5% RSTN 20.55 FEB 17.50 RQJ BW 3.90 149 16.65 35 4.4% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield RNWK 8.13 FEB 7.50 QRN BU 1.30 2108 6.83 35 8.5% PLUG 10.58 FEB 10.00 PQL BB 1.40 273 9.18 35 7.8% MONE 14.83 FEB 12.50 MOU BV 3.20 20 11.63 35 6.5% RBAK 6.20 FEB 5.00 BUK BA 1.55 1534 4.65 35 6.5% EPNY 10.97 FEB 10.00 UEP BB 1.50 142 9.47 35 4.9% ADIC 18.32 FEB 17.50 QXG BS 1.70 258 16.62 35 4.6% RSTN 20.55 FEB 17.50 RQJ BW 3.90 149 16.65 35 4.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ADIC - Advanced Digital Information $18.32 *** Data Storage *** Advanced Digital Information (NASDAQ:ADIC) provides hardware and software data storage solutions to the open systems marketplace. Along with its value-added resellers, OEM partners and customers, the company incorporates its products and services and supports operations with third-party hardware and software products to deliver reliable, flexible and scalable storage solutions. Its storage solutions are designed to enable companies to organize, protect and retrieve complex mission-critical data. ADIC's storage management software is an integrated family of inter- national software products. The Data Storage sector is per- forming well and ADIC is one of the leading companies in the industry. We favor the current bullish momentum and this position offers a reasonable cost basis in the issue. FEB 17.50 QXG BS LB=1.70 OI=258 CB=16.62 DE=35 TY=4.6% ***** EPNY - E.piphany $10.97 *** Suddenly...A BREAK-OUT! *** E.piphany (NASDAQ:EPNY) develops, markets and sells the E.piphany E.5 System, an integrated suite of CRM software solutions. These solutions provide capabilities for the analysis of customer data, the creation of inbound and outbound marketing campaigns and the execution of sales and service customer interactions. The E.5 System includes multiple CRM software solutions designed to solve specific business problems in areas, such as marketing, service and sales. Not much news to explain the strong rally over the last few days but the message is crystal clear: somebody wants to own E.piphany. The extremely heavy volume on Friday combined with the move above the 150-dma is very bullish. Not to mention that a "head-n-shoulders" bottom is readily apparent from August through October. Can any clearer message be given? FEB 10.00 UEP BB LB=1.50 OI=142 CB=9.47 DE=35 TY=4.9% ***** MONE - MatrixOne $14.83 *** On The Rebound! *** MatrixOne (NASDAQ:MONE) is a provider of product collaboration software. The company's primary offerings include its eMatrix collaboration platform, Value Chain Portfolio, Application Exchange Framework, development tools and integration products. The company's products facilitate collaboration among employees of global organizations and with an organization's customers, suppliers and other business partners through the Internet. The company's products also allow the integration of different business processes and facilitate the exchange of information, ideas and knowledge among parties collaborating on business activities. This collaboration allows customers to quickly and cost-effectively bring the right products and services to market. ThinkEquity Partners recently issued a "strong buy" rating on MONE with a $15 target price, based on expectations of a future recovery in revenue and earnings. Our outlook is also bullish, due to the recent technical strength and this position offers a low risk cost basis in the issue. Earnings are due Jan. 23. FEB 12.50 MOU BV LB=3.20 OI=20 CB=11.63 DE=35 TY=6.5% ***** PLUG - Plug Power $10.58 *** The Energy Substitute *** Plug Power (NASDAQ:PLUG) is a designer and developer of on-site, energy generation systems utilizing proton exchange membrane fuel cells for stationary applications. The company's goal is to manufacture reliable, efficient and safe fuel cell systems at affordable cost for mass-market consumption. Plug is focusing its efforts on overall system design, component and subsystem integration, assembly, as well as quality control processes. The company was formed as a joint venture between Edison Development Corp., a DTE Energy Company, and Mechanical Tech. Incorporated. Plug intends to manufacture residential and small commercial stationary systems that will be sold globally through a joint venture with GE MicroGen Inc. DTE Energy Tech. will distribute these systems in Michigan, Illinois, Ohio and Indiana. Alternate energy source stocks rallied this week on reports that the U.S DOE plans to invest in research of fuel cells as an energy sub- stitute. Also, at Detroit's annual auto show this week, GM unveiled a new car which uses fuel cell technology. We simply favor the bullish move on heavy volume which suggests further upside potential. FEB 10.00 PQL BB LB=1.40 OI=273 CB=9.18 DE=35 TY=7.8% ***** RBAK - Redback Networks $6.20 *** On The Rebound *** Redback Networks (NASDAQ:RBAK) is a provider of advanced net- working systems that enable broadband service providers to rapidly deploy high-speed access to the Internet and corporate networks. The company's product lines, which consist of the Subscriber Management System, the SmartEdge, and the Service Management product families, combine networking hardware and software. Together, these product families are designed to enable its customers to create end-to-end regional and national networks that support major broadband access technologies, as well as the new services that these high-speed connections support. Redback's shares have rallied recently on Wall Street's belief the company appears on track with its 4th- quarter results. Redback reports earnings on 1/16 and this position offers a reasonable way to speculate on Redback's potential recovery. FEB 5.00 BUK BA LB=1.55 OI=1534 CB=4.65 DE=35 TY=6.5% ***** RNWK - RealNetworks $8.13 *** Another Break-Out! *** RealNetworks (NASDAQ:RNWK) is a global provider of software products and services for Internet media delivery. The company is engaged in the development of streaming media systems that enable the creation, real-time delivery and playback of audio, video and multimedia content on the Web. RealNetworks is the manufacturer of streaming media systems such as RealAudio, RealVideo and other RealNetworks formats. The Company has several services such as RealSystem iQ, RealPlayer, QuickTime, etc., and two main websites, Real.com and RealNetworks.com. Several new contracts and alliances over the last few months have investors speculating on RealNetworks' future. A recently announced deal with TiVo (NASDAQ:TIVO) should help RNWK expand beyond its traditional PC market and bring digital music and video to new gadgets. We simply favor the bullish break-out above a 5-month base and our conservative position offers a method to participate in the future movement of the issue with relatively low risk. Earnings are scheduled for Jan. 29. FEB 7.50 QRN BU LB=1.30 OI=2108 CB=6.83 DE=35 TY=8.5% ***** RSTN - Riverstone Networks $20.55 *** Earnings Rally! *** Riverstone Networks (NASDAQ:RSTN) builds routers that convert raw bandwidth into profitable services for Metropolitan Area Networks. Riverstone's products enable the creation of profitable services and the delivery of these services over next-generation and legacy networks, including SONET/SDH, Gigabit Ethernet, T1/E1, T3/E3, ATM, and Dense Wavelength Division Multiplexing (DWDM). RSTN products bring together fourth-generation Application Specific Integrated Circuits, battle-tested routing software, and media versatility to deliver comprehensive solutions for Metropolitan Area Networks. In December, Riverstone posted 3rd-quarter results at the high end of Wall Street estimates and said it was confident sales and profits would meet expectations in the current quarter, driven by demand in Asian markets. This week the company said it had made its biggest sale yet, shipping 1,000 network routers to a subsidiary of Korea Electric Power Corp. The strong earnings report resulted in several upgrades with new coverage started this week. We simply favor a conservative entry point in a bullish stock. FEB 17.50 RQJ BW LB=3.90 OI=149 CB=16.65 DE=35 TY=4.4% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield SONS 5.36 FEB 5.00 UJS BA 1.05 6038 4.31 35 13.9% ITWO 8.34 FEB 7.50 JQ BU 1.50 3786 6.84 35 8.4% CALP 17.66 FEB 17.50 DQQ BW 1.70 59 15.96 35 8.4% IMNY 8.80 FEB 7.50 MQN BU 1.90 1624 6.90 35 7.6% VISG 8.90 FEB 7.50 TUM BU 1.90 325 7.00 35 6.2% RMBS 8.99 FEB 7.50 BNQ BU 1.90 955 7.09 35 5.0% RATL 23.05 FEB 20.00 RAQ BD 4.00 151 19.05 35 4.3% ***************** NAKED PUT SECTION ***************** Option Trading 101: Strategy Selection By Ray Cummins This week I received a request for more information on spreads and combination plays. Since this section is focused on the sale of puts, most readers are familiar with the put-credit spread. However, there is another popular combination strategy that works well with bullish issues. One of the best methods for speculating on directional issues with options is the synthetic position. The simplest way to explain synthetic positions in the financial world is to say that they are simply alternate ways of constructing the same risk/reward outlook with different instruments. The term "synthetic" is an appropriate description because a unit of the underlying issue is simply being synthesized. Futures traders often use combinations of various derivatives to produce similar profit/loss characteristics with commodities and fund managers utilize many of the same techniques to reduce the risk of adverse market movements in large equity portfolios. Retail traders can also benefit from those strategies by creating positions that mirror the activity of specific stocks and indexes. With the purchase of a call and the sale of a put of the same strike and duration, traders can capitalize on anticipated stock movement without investing as much capital as they would when buying the underlying issue on the open market. Recall that when you buy stock, you are considered "long", as you own it outright and will participate fully in any price appreciation of the stock. With a synthetic position, the leverage of options magnifies any gain in the underlying issue, thus providing exponential returns on any upside activity. These graphs illustrate a synthetic long position as compared to ownership of the underlying stock. Although the charts appear equal, the line for the position constructed with options is usually slightly below that for the stock position because of the added cost of time value (premium) in the call options. However, this expense can often be negated through the careful selection of favorably priced positions; selling expensive puts and buying discounted calls. At the same time, the synthetic position generally requires a smaller capital outlay than the underlying stock, thus the remaining funds can be used to produce profits in other short-term investments. The advantages to this unique strategy are numerous but the major incentive for this type of approach is that its payoff structure is very similar to holding a long stock position and yet traders are not required to take physical delivery of the issue to benefit from its activity. Second, the initial capital requirements for a synthetic position are much lower than being long on the stock, even when using maximum margin in the purchase. Finally, since the synthetic delivers the same performance as a long position in the underlying issue, there is no additional risk in using derivatives to duplicate the basic stock ownership strategy. Of course, there are some basic requirements for participating in this strategy, such as having a margin account and the ability to sell cash-secured or "naked" options. Another aspect that traders should be aware of is the ongoing collateral requirement for the sold (short) options due to the possibility of assignment. That expense must be factored into the final analysis of the strategy when comparing it to other techniques, such as buying the issue outright or using a combination of stocks and options to produce a similar position. Splitting The Strikes: An Aggressive Approach! For most traders, the ability to profit from a stock's movement at a fraction of the cost of owning the issue is the primary reason for utilizing options. The bullish, limited-risk approach falls into two primary categories: option buying and (covered) option selling, and the most common method of option trading among retail participants has always been the purchase of calls. That technique can be very profitable but it requires an initial capital outlay and in the case of in- or at-the-money options, leaves the trader exposed to a large amount of downside risk. In addition, traders who purchase options during a strong directional movement in the underlying will be forced to pay higher premiums, greatly reducing the probability of profit. Those who realize the unique difficulty associated with this type of approach are forced to remain on the sidelines until they discover an alternative method. Fortunately, there are numerous combination strategies that can help limit the overall cost of the trade and simultaneously benefit from inflated premiums. One of these techniques is a variation of the synthetic position using "out-of-the-money" options to construct a more speculative outlook play with lower probability of profit and reduced risk. In this case, you buy an out-of-the-money call to take advantage of any extreme or rapid upward movement in the underlying issue, and you sell an out-of-the-money put to pay for the call. Buying an OTM call costs less, at the expense of position Delta, but the drawback is offset by the sale of an OTM put, which provides a greater margin of downside risk. As with any naked-put position, you must be willing to own the underlying stock in the event of an unexpected downturn but, by using OTM options, you will have a larger cushion to absorb additional volatility in the issue. At first glance, this strategy may appear far too speculative to be viable for conservative traders, but in truth, it works very well with trending issues that have large upside potential and the risk is little more than if you sold the identical cash-secured put to collect premium on a bullish stock. The great feature of options is they can be used in a number of ingenious ways to create the most appropriate position for the current market outlook and your personal risk/reward attitude. The right combination of puts and calls can produce an effective position with results that are similar to being long on the stock, with less expense, and portfolio collateral can be used to finance the entire transaction. This approach also has the potential for unlimited gain, thus providing an opportunity (one you don't have with naked-puts alone) to overcome a number of losing plays. As with any speculative strategy, be sure to thoroughly explore the various outcomes and potential risk, so you can comfortably execute the technique to its fullest potential. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield MONE 13.00 14.83 JAN 10.00 0.45 *$ 0.45 21.4% GSPN 17.08 16.61 JAN 15.00 0.35 *$ 0.35 14.9% MEDC 20.42 23.34 JAN 17.50 0.55 *$ 0.55 13.7% VRTY 20.03 21.99 JAN 17.50 0.55 *$ 0.55 13.2% OSUR 12.38 11.20 JAN 10.00 0.45 *$ 0.45 12.9% EMBT 25.00 21.60 JAN 20.00 0.65 *$ 0.65 12.5% MICC 13.92 12.59 JAN 12.50 0.25 *$ 0.25 12.3% IDNX 13.77 11.77 JAN 10.00 0.45 *$ 0.45 12.2% PPD 20.77 23.21 JAN 17.50 0.80 *$ 0.80 11.9% NTAP 22.60 22.55 JAN 17.50 0.55 *$ 0.55 11.8% NTAP 26.73 22.55 JAN 22.50 0.35 *$ 0.35 11.2% EMC 16.85 17.19 JAN 15.00 0.25 *$ 0.25 10.6% CALP 16.82 17.66 JAN 15.00 0.25 *$ 0.25 10.5% SEBL 32.70 34.94 JAN 27.50 0.40 *$ 0.40 10.5% IGEN 39.91 42.15 JAN 25.00 0.40 *$ 0.40 10.4% INRG 13.77 12.45 JAN 10.00 0.35 *$ 0.35 9.8% ADBE 35.90 36.03 JAN 32.50 0.50 *$ 0.50 9.5% RCOM 11.85 10.70 JAN 10.00 0.25 *$ 0.25 8.6% RCOM 11.14 10.70 JAN 10.00 0.45 *$ 0.45 8.6% CC 24.16 28.51 JAN 20.00 0.60 *$ 0.60 8.5% EMLX 39.45 45.61 JAN 27.50 0.65 *$ 0.65 8.3% AGIL 18.05 16.65 JAN 15.00 0.25 *$ 0.25 8.2% MANU 21.42 20.15 JAN 15.00 0.25 *$ 0.25 8.0% ASA 20.50 20.95 JAN 20.00 0.75 *$ 0.75 7.7% OCAS 16.05 15.95 JAN 15.00 0.30 *$ 0.30 7.7% COGN 23.30 25.67 JAN 20.00 0.45 *$ 0.45 7.6% OAKT 14.69 14.99 JAN 12.50 0.35 *$ 0.35 7.5% NTAP 22.95 22.55 JAN 17.50 0.25 *$ 0.25 7.5% JDAS 22.39 25.25 JAN 17.50 0.30 *$ 0.30 6.8% IGEN 40.44 42.15 JAN 25.00 0.50 *$ 0.50 6.3% ALOY 19.06 21.96 JAN 15.00 0.35 *$ 0.35 6.1% ICST 20.55 25.69 JAN 15.00 0.30 *$ 0.30 5.9% CC 26.32 28.51 JAN 20.00 0.30 *$ 0.30 5.9% FST 27.52 25.00 JAN 25.00 0.45 $ 0.45 5.5% *$ = Stock price is above the sold striking price. Comments: This week's tumble in broad-market equity values is providing a preview of the trend for the next few weeks as the quarterly earnings season gets underway. Without some significant upside surprises among the first few reporting companies, there will likely be continued selling in all but the most bullish stocks. In light of that outlook, we recommend "early exits" in any of the issues you DO NOT want to own, and based on the flagging technical indications, we also suggest you consider closing these positions to lock-in profits and/or avoid future losses: Forest Oil (NYSE:FST), Network Appliance (NASDAQ:NTAP); $22.50P, and Embarcadero Technologies (NASDAQ:EMBT). Issues currently on the watch-list (for further downside activity) include: Agile (NASDAQ:AGIL), Inrange Technologies (NASDAQ:INRG), Register.com (NASDAQ:RCOM), Globespan (NASDAQ:GSPN), Millicom (NASDAQ:MICC), and Orasure (NASDAQ:OSUR). Positions Closed: Identix (NASDAQ:IDNX); $12.50 Put NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CMNT 23.75 FEB 20.00 QDO ND 0.50 0 19.50 35 7.0% CRUS 19.15 FEB 15.00 CUQ NC 0.45 151 14.55 35 9.1% FNSR 14.19 FEB 10.00 FQY NB 0.30 308 9.70 35 8.3% ICST 25.69 FEB 20.00 IUY ND 0.45 20 19.55 35 7.0% MEDC 23.34 FEB 17.50 MQH NW 0.35 100 17.15 35 6.1% MIMS 20.63 FEB 17.50 OQX NW 0.70 77 16.80 35 10.4% PPD 23.21 FEB 17.50 PPD NW 0.35 1209 17.15 35 6.1% TMCS 19.95 FEB 17.50 QMF NW 0.45 0 17.05 35 6.5% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield MIMS 20.63 FEB 17.50 OQX NW 0.70 77 16.80 35 10.4% CRUS 19.15 FEB 15.00 CUQ NC 0.45 151 14.55 35 9.1% FNSR 14.19 FEB 10.00 FQY NB 0.30 308 9.70 35 8.3% CMNT 23.75 FEB 20.00 QDO ND 0.50 0 19.50 35 7.0% ICST 25.69 FEB 20.00 IUY ND 0.45 20 19.55 35 7.0% TMCS 19.95 FEB 17.50 QMF NW 0.45 0 17.05 35 6.5% MEDC 23.34 FEB 17.50 MQH NW 0.35 100 17.15 35 6.1% PPD 23.21 FEB 17.50 PPD NW 0.35 1209 17.15 35 6.1% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** CMNT - Computer Network Technology $23.75 *** Rally Mode! *** Computer Network Technology (NASDAQ:CMNT) is a provider of unique hardware and software products, related professional services and managed services in the growing storage networking market. The company focuses mainly on helping its customers design, develop, deploy and manage storage networks, a high speed network within a business' existing computer system that allows the business to manage its expanding data storage needs with greater efficiency and less disruption. The company designs, manufactures, markets and supports a range of products for critical storage networking applications including remote disk mirroring, or the real-time backup of data to remotely located disks, and remote vaulting, or the backup of data to remotely archived tapes. CMNT climbed to an 11-month high Friday on heavy volume after positive comments from a conference with RBC Capital Markets. Analysts say the company is destined to profit from its status as the "largest storage networking solutions provider in the world" and investors who agree with that outlook can establish a discounted basis in the issue with this position. FEB 20.00 QDO ND LB=0.50 OI=0 CB=19.50 DE=35 TY=7.0% ***** CRUS - Cirrus Logic $19.15 *** On The Move! *** Cirrus (NASDAQ:CRUS) is a supplier of high-performance analog and DSP chip solutions for consumer entertainment electronics that allow people to see, hear, connect and enjoy digital entertainment. Building on its position in audio integrated circuits and its rich mixed-signal patent portfolio, Cirrus targets mainstream audio, video and web/online entertainment applications in the consumer entertainment market. A report from the Consumer Electronics Show in Las Vegas suggested that Cirrus may become a leader in wireless home entertainment through the use of their unique manufacturing platform that enables the rapid development of inexpensive consumer devices that support high-quality video streams on wireless home networks. Analysts at SG Cowen endorse that outlook and with the company's recent affirmation of this quarter's earnings, traders are flocking to the issue. Technology investors can profit from future upside activity in the stock with this low-risk position. FEB 15.00 CUQ NC LB=0.45 OI=151 CB=14.55 DE=35 TY=9.1% ***** FNSR - Finisar $14.19 *** Bottom-Fishing! *** Finisar (NASDAQ:FNSR) is a provider of fiber optic subsystems and network test and monitoring systems that enable high-speed data communications over local area networks, storage area networks and metropolitan access networks. They are focused on the application of digital fiber optics to provide a broad line of sophisticated, reliable, value-added optical subsystems for data networking and storage equipment manufacturers. Their line of optical components and subsystems supports a large range of network applications, transmission speeds, distances and physical mediums. The company provides network performance test and monitoring systems, which assist networking and storage equipment manufacturers in the most efficient design of reliable, high-speed networking systems and the testing and monitoring of the performance of these systems. CSFB said it has raised its investment rating on Finisar to a "buy" due to improvements in the outlook for OEMs in the storage business. The analysts' note said the company's strong design activity was encouraging and they expect positive reports from Finisar over the next few quarters, along with an increase to financial forecasts. This position allows investors to speculate on that outcome in a conservative manner. FEB 10.00 FQY NB LB=0.30 OI=308 CB=9.70 DE=35 TY=8.3% ***** ICST - Integrated Circuit Systems $25.69 *** Chip Sector! *** Integrated Circuit Systems (NASDAQ:ICST) is engaged in the business of designing and marketing custom application specific integrated circuits (ASICs) for various industrial customers. The company's business is divided into two categories: Core and Non-Core Segments. The Core segment supplies a broad line of timing products for use in PC motherboard and also peripheral applications. The Non-Core segment sells mixed-signal (analog and digital) integrated circuits customized to the specific requirements of a broad range of customers and applications. Despite the recent slump in technology issues, the semiconductor industry is expected to perform well during the coming year and this company is one of the more favorable, low-cost issues in the group. ICST recently raised its fiscal second-quarter revenue projections due to strong demand for personal computer and game market products and traders can speculate on the earnings report, due 1/24/01, with this conservative position. FEB 20.00 IUY ND LB=0.45 OI=20 CB=19.55 DE=35 TY=7.0% ***** MEDC - Med-Design $23.34 *** Speculation Play! *** Med-Design (NASDAQ:MEDC) principally is engaged in the design, development and licensing of safety medical devices intended to reduce the incidence of accidental needle sticks. Each safety medical device the company designs and develops incorporates its proprietary needle retraction technology. The company's technology enables health care professionals to retract a needle into the body of the medical device for safe disposal without any substantial change in operating technique. The company's unique products can be categorized into four main groups: hypodermic syringes used to inject drugs and other fluids into the body; fluid collection devices used to draw blood or other fluids from the body; venous and arterial access devices used to provide access to patients' veins and arteries; and specialty safety devices for other needle based applications. Med-Design rallied last week on speculation that partner Becton Dickinson (NYSE:BDX) would soon launch a syringe using Med-Design's technology. The company could receive as much as $10 million per year in royalty payments if the syringes are hot-sellers and based on the recent activity, traders are expecting that outcome. Our OTM position allows a conservative entry point into this speculative issue. FEB 17.50 MQH NW LB=0.35 OI=100 CB=17.15 DE=35 TY=6.1% ***** MIMS - MIM Corporation $20.63 *** Hot Sector! *** MIM (NASDAQ:MIMS) is a pharmacy benefit management, specialty pharmaceutical and fulfillment and e-commerce organization that partners with healthcare providers and other sponsors to control prescription drug costs. MIM's pharmacy benefit products and services use clinically sound guidelines to ensure cost control and quality care. MIM's pharmaceutical business specializes in serving the chronically ill patients who are afflicted with life threatening diseases and genetic impairments. MIM's fulfillment and e-commerce pharmacy specializes in serving individuals that require long-term maintenance medications. MIM's online pharmacy, www.MIMRx.com, develops private-label Websites to offer affinity groups and healthcare providers with customized health information services and products on the Internet for the benefit of their members. The Specialized Health Services group is performing well and MIMS has rallied in recent sessions in the wake of favorable company news. Investors who agree with a bullish outlook for the issue can establish a low-risk cost basis in the issue with this position. FEB 17.50 OQX NW LB=0.70 OI=77 CB=16.80 DE=35 TY=10.4% ***** PPD - Pre-Paid Legal Services $23.21 *** Premium Play! *** Pre-Paid Legal Services (NYSE:PPD) was one of the first companies in the United States organized solely to design, underwrite and market legal expense plans. The company's legal expense plans (referred to as Memberships) currently provide for a variety of legal services in a manner similar to medical reimbursement plans. Plan benefits are provided through a network of independent law firms, typically one firm per state or province. Members have direct, toll-free access to their Provider law firm rather than having to call for a referral. Legal services include unlimited attorney consultation, traffic violation defense, auto-related criminal charges defense, letter writing/document preparation, will preparation and review and a general trial defense benefit. Prepaid's options are always at a premium and the past volatility in the issue makes it a aggressive position for both stock and derivatives traders. Those who agree with a bullish outlook for the company can profit from continued upside activity in its share value with this speculative play. FEB 17.50 PPD NW LB=0.35 OI=1209 CB=17.15 DE=35 TY=6.1% ***** TMCS - Ticketmaster $19.95 *** Entry Point! *** Ticketmaster (NASDAQ:TMCS) is engaged in two business segments: ticketing, which includes both online and offline ticketing and camping reservations operations, and city guides and classifieds, which includes all of Ticketmaster's other online properties. Within its ticketing segment, Ticketmaster provides automated ticketing services worldwide, with over 6,200 domestic and foreign clients, including many entertainment facilities, promoters and professional sports franchises. Ticketmaster Group and its major operating subsidiaries, Ticketmaster Corporation and Ticketmaster LLC were organized for the purpose of developing "stand-alone" automated ticketing systems for sale to individual facilities. Ticketmaster is also a local web portal and electronic commerce company that provides in-depth local content and services online. Shares of TMCS traded at a 16-month high Thursday and the recent technical indications suggest the rally has more upside potential. Investors who wouldn't mind owning the issue can speculate on its continued bullish movement with this conservative position. FEB 17.50 QMF NW LB=0.45 OI=0 CB=17.05 DE=35 TY=6.5% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield WEBM 21.96 FEB 17.50 UUW NW 0.75 397 16.75 35 12.7% CALP 17.66 FEB 15.00 DQQ NC 0.50 25 14.50 35 8.9% SEBL 34.94 FEB 27.50 SGQ NY 0.70 1371 26.80 35 7.9% INVN 27.75 FEB 17.50 FQQ NW 0.50 112 17.00 35 7.2% VRTY 21.99 FEB 17.50 YQV NW 0.40 23 17.10 35 7.2% RATL 23.05 FEB 17.50 RAQ NQ 0.40 128 17.10 35 6.9% SKIL 28.78 FEB 22.50 QKT NX 0.45 0 22.05 35 6.3% BEAS 20.35 FEB 15.00 BUC NC 0.30 753 14.70 35 6.0% MCDT 32.80 FEB 22.50 DXZ NX 0.45 15 22.05 35 5.6% MU 35.13 FEB 27.50 MU NR 0.45 180 27.05 35 5.2% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, January 11 The major equity averages finished the week on a sour note after Federal Reserve Chairman Alan Greenspan issued a cautious outlook for the U.S. economy. Despite favorable inflation data, comments from the Nation's top central banker helped push the Dow lower for the fifth straight session and drove the industrial-stock barometer to its first close below 10,000 in three weeks. The blue-chip average slid 80 points to 9,987 on weakness in Eastman Kodak (NYSE:EK), Boeing (NYSE:BA), Hewlett-Packard (NYSE:HWP), Exxon Mobil (NYSE:XOM), J.P. Morgan Chase (NYSE:JPM) and Wal-Mart (NYSE:WMT). Technology stocks fared even worse on a percentage basis, finishing down 24 points at 2,022 as software and networking shares retreated from recent lofty valuations. The Standard & Poor's 500 Index closed little changed with mixed results as airline, oil service, retail, bank and natural gas issues declined while biotechnology and gold stocks enjoyed limited buying pressure. Trading volume came in at 1.2 billion shares on the NYSE and at 1.6 million on the NASDAQ. Market breadth was negative, with losers pacing winners 18 to 13 on the NYSE and 21 to 15 on the technology exchange. On the fund flow front, Trim Tabs estimated that all equity funds had inflows of $5.9 billion during the week, compared with outflows of $9.5 billion in the prior week. Bond prices ended with steep gains as Greenspan's remarks appeared to leave the door open to additional rate cuts. The 10-year Treasury note jumped 26/32 to yield 4.87% while the 30-year government bond tacked on 21/32 to yield 5.37%. Last week's new plays (positions/opening prices/strategy): Andrx (NSDQ:ADRX) JAN75C/JAN70C $0.60 credit bear-call Affymetrix (NSDQ:AFFX) JAN40C/JAN40P $4.00 debit straddle Adv. Dig. (NSDQ:ADIC) FEB20C/FEB17P $0.10 credit synthetic Descartes (NSDQ:DSGX) FEB10C/FEB7P $0.10 debit synthetic Knight (NSDQ:NITE) FEB15C/FEB12P $0.15 credit synthetic Transwitch (NSDQ:TXCC) MAY5C/MAY7C $0.75 debit bull-call With only one bearish play in the portfolio, the credit spread in Andrx couldn't help but get top billing this week after the recent downside activity in the broader market. The position offered an excellent entry point during Monday's brief technical rally and there is little indication that ADRX is going to recover in the near future. We can only hope the same fate is in store for our new straddle issue Affymetrix as the bearish portion (JAN-$40P) of the neutral position traded near break-even Thursday when the stock fell to a weekly low. Now the issue is testing support at $37 and a move below that price should produce continued downside activity, and a favorable profit, in the straddle. Among the new "Reader's Request" speculation plays, Advanced Digital was the strongest issue while Descartes Systems and Knight Trading both retreated with their respective industry groups. The lone debit spread in Transwitch also suffered as the issue pulled back from recent gains however, we have over four months for the stock to recover from last year's precipitous sell-off. Portfolio Activity: The recent bullish recovery in the broad-market came to an abrupt end this week as investors decided the potential for an economic recovery may already be factored into current share values. In the span of just a few days, the optimistic outlook among retail traders turned to an attitude of doubt and insecurity, and the less confident stance has turned the tables against equities in the near term. Our portfolio was fortunate to enjoy some small gains early in the week, before the selling began in earnest. A number of small-cap issues moved higher including: I2 Technologies (NASDAQ:ITWO), which hit a recent high near $10 Thursday; Aware (NASDAQ:AWRE), which experienced similar results Wednesday; and Redback Networks (NASDAQ:RBAK), the top "January Effect" issue in the portfolio with a 60% rally since the beginning of the new year. Speechworks (NASDAQ:SPWX) continued its winning ways, reaching a high near $15.18 Wednesday and the speculative synthetic position in that stock produced over $2 of profit in less than one month. Honorable mention should go to Sonus (NASDAQ:SONS), which bounced back to the $6 range in conjunction with the upside activity in the networking group and 3com (NASDAQ:COMS), an issue that has remained surprisingly strong even in the wake of recent selling pressure among communication-equipment stocks. With only one week until the January expiration, bearish credit spreads in Amgen (NASDAQ:AMGN), KLA-Tencor (NASDAQ:KLAC), and Andrx (NASDAQ:ADRX) are at maximum profit and the suggested adjustment in Wellpoint Health (NYSE:WLP) is comfortably above the sold strike (JAN-$105). The premium-selling plays in Biogen (NASDAQ:BGEN) and Semtech (NASDAQ:SMTC) are performing very well but, at the same time, we are clinging to relatively small profit margins in Idec Pharmaceuticals (NASDAQ:IVGN) and Invitrogen (NASDAQ:IVGN). Calendar spreads in Price Communications (NYSE:PR) and Clarus (NASDAQ:CLRS) have slipped into hibernation during the recent market downtrend but fortunately, the Covered-calls with LEAPS position in Microsoft (NASDAQ:MSFT) is continuing to profit as each option period provides a new premium-selling opportunity with the near-term ($70) calls. The only real surprise this month came in the Abgenix (NASDAQ:ABGX) "bull-put" credit spread but based on the recent activity, it appears the volatile issue may provide a respectable finish for both bullish and bearish traders as the stock is now established in a range that benefits the majority of potential adjustment strategies. Questions & comments on spreads/combos to Contact Support ****************************************************************** - STRADDLES - Option-trading guru Larry McMillan noted this week that the VIX, or Volatility Index, continues to decline and he also commented that the recent low level suggests option traders are complacent; a condition that often precedes a large market movement. Indeed, the current volatility levels are moving towards multi-year lows and with the upcoming quarterly earnings announcements, we have discovered some good candidates for "Earnings Season" straddles. Each of these issues meets our criteria for a favorable straddle; cheap option premiums, a history of adequate price movement and the potential for volatility in the stock or its industry. This selection process provides the foremost combination of low risk and potentially high reward but, as with any position, each play must also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** JNPR - Juniper Networks $19.26 *** An Old Favorite! *** Juniper Networks (NASDAQ:JNPR) is a provider of purpose-built Internet infrastructure solutions that meet the scalability, performance, density and compatibility requirements of rapidly evolving, optically enabled Internet Protocol networks. Unlike conventional routers, originally developed for enterprise applications, the company's products are specifically designed, or purpose-built, for service provider networks and also to accommodate the size and scope of the Internet. The company's next-generation Internet backbone routers offer their customers reliability, performance, scalability, interoperability and flexibility. The company's products combine high-performance, ASIC-based packet-forwarding technology, the features of the JUNOS Internet software and an Internet-optimized architecture into a purpose-built solution for the service provider market. The company's quarterly earnings announcement is on 1/15/02. PLAY (conservative - neutral/debit straddle): BUY CALL JUX-ND FEB-20 OI=1394 A=$1.90 BUY PUT JUX-BD FEB-20 OI=1920 A=$2.65 INITIAL NET DEBIT TARGET=$4.40-$4.40 TARGET PROFIT=25% ****************************************************************** BRCM - Broadcom Corporation $49.32 *** Semiconductor Sector *** Broadcom Corporation (NASDAQ:BRCM) is a provider of integrated silicon solutions that enable broadband communications and networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies system-on-a-chip solutions for applications in digital cable set-top boxes and cable modems, high-speed local, metropolitan and wide area and optical networks, home networking, Voice over Internet Protocol (VoIP), carrier access, residential broadband gateways, direct broadcast satellite and terrestrial digital broadcast, digital subscriber line (xDSL), wireless communications, server solutions, and network processing. Broadcom's earnings are not scheduled for release until the week after these options expire but the prices are very favorable and the volatility in the semiconductor group should provide the necessary catalyst for activity in this issue. PLAY (very speculative - neutral/debit straddle): BUY CALL JAN-50 RDZ-AJ OI=9010 A=$1.70 BUY PUT JAN-50 RDZ-MJ OI=4510 A=$2.35 INITIAL NET DEBIT TARGET=$3.75-$3.90 TARGET PROFIT=20% ****************************************************************** JBL - Jabil Circuit $24.78 *** Probability Play! *** Jabil Circuit (NYSE:JBL) is an independent provider of electronic manufacturing services. The company designs and manufactures electronic circuit boards and systems for original equipment manufacturers (OEMs) in the communications, computer peripherals and personal computer, automotive and also the consumer products industries. The company serves its OEM customers with dedicated work cell business units that combine volume, highly automated continuous flow manufacturing with advanced electronic design and design for manufacturability technologies. Its work-cell business units are capable of providing integrated design and engineering services, component selection, sourcing and procurement, automated assembly, design and implementation of product testing, parallel global production, systems assembly and direct order fulfillment services, repair and warranty services. Jabil's earnings report is not due until March but once again, the options premiums are very favorable and the volatility in the computer hardware segment should provide a catalyst for activity in the issue. PLAY (conservative - neutral/debit straddle): BUY CALL FEB-25 JBL-BE OI=832 A=$2.20 BUY PUT FEB-25 JBL-NE OI=140 A=$2.40 INITIAL NET DEBIT TARGET=$4.30-$4.40 TARGET PROFIT=25%-30% ****************************************************************** QQQ - Nasdaq-100 Trust Series $40.85 *** Trade The NASDAQ! *** The Nasdaq-100 Trust Series I is a pooled investment designed to provide investment results that generally correspond to the price and yield performance of the Nasdaq-100 Index. With Nasdaq-100 Index Tracking Stock, you can buy or sell shares in the collective performance of the Nasdaq-100 Index and the transaction gives you ownership in the 100 stocks of the Nasdaq-100 Index. When you purchase Nasdaq-100 Index Tracking Stock, you're investing in the Nasdaq-100 Trust, a unit investment trust that holds shares of the companies in the Nasdaq-100 Index. The Trust is designed to track the price and yield performance of the Index, thus you can expect your Nasdaq-100 Index Tracking Stock to move up or down in value when the Index moves up or down. 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. Traders who think the volatility in technology stocks will increase this week as the quarterly earnings season begins can attempt to profit from that activity with this neutral-outlook position. PLAY (speculative - neutral/debit straddle): BUY CALL JAN-41 QQQ-AO OI=75791 A=$0.80 BUY PUT JAN-41 QQQ-MO OI=46135 A=$1.00 INITIAL NET DEBIT TARGET=$1.70-$1.75 TARGET PROFIT=20% ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. However, current news and market sentiment will have an effect on these issues so review each play individually and make your own decision about the future outcome of the position. ****************************************************************** BGEN - Biogen $55.94 *** Trading Range! *** Biogen (NASDAQ:BGEN) is a biopharmaceutical company principally engaged in the business of developing, manufacturing and selling drugs for human healthcare. Biogen currently derives revenues from sales of its Avonex (Interferon beta-1a) product for the treatment of relapsing forms of multiple sclerosis, and from royalties on worldwide sales by the company's licensees of a number of products covered under patents controlled by Biogen. Such products include forms of alpha interferon, hepatitis B vaccines and hepatitis B diagnostic test kits, among others. Biogen continues to have an active development program related to Avonex, and is conducting several important clinical trials of the product. Biogen also continues to devote significant resources to its other ongoing development efforts. Biogen surfaced again this week in a scan/sort for issues with stable trading patterns and inflated option premiums. Based on analysis of historical option pricing and the issue's technical background, this position meets the fundamental criteria for a bullish credit-spread. The stock has been forming a Stage I base for almost two years; trading in a range from $50 to $70. More recently, Biogen has also formed a strong support area at $52 with overhead resistance near $60. The technicals suggest the current lateral consolidation is likely to continue but, as with any recommendation, the position should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - bullish/credit spread): BUY PUT FEB-45 BGQ-NI OI=178 A=$0.35 SELL PUT FEB-50 BGQ-NJ OI=257 B=$0.85 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% ****************************************************************** CALP - Caliper Technologies $17.66 *** On The Move! *** Caliper Technologies (NASDAQ:CALP) is engaged in lab-on-a-chip technologies. The company's LabChip systems are designed to miniaturize, integrate and automate many laboratory processes and put them on a chip that could fit in the palm of one's hand. Each chip contains a network of microscopic channels, through which fluids and chemicals are propelled, using electricity or pressure, in order to perform experiments. The chips are the key components of the Company's LabChip systems, which also include reagents, as well as instruments and software, that control and read the chips. Caliper shares have been "on the move" in recent weeks after the company adopted a "shareholder rights" plan to provide for fair and equal treatment for all the stockholders, in the event any unsolicited attempt is made to acquire Caliper. Investors may believe the move is in response to an acquisition offer but more likely the company is just implementing a policy that should previously have been in place. In any case, we favor the recent technical indications as Caliper has reversed the downtrend with a rally above its 150-dma on increasing volume. The stock has also moved above previous resistance (near the March/April lows, which coincides with the consolidation area near the August and October highs) and that price range should now provide support on any pullback. A test of the July highs near $20 is next and trader who agree with a bullish outlook for the issue can profit from further upside movement with this position. Target a lower premium (debit) initially, to allow for a consolidation from the recent rally. PLAY (speculative - bullish/synthetic position): BUY CALL FEB-20 DQQ-BD OI=5 A=$1.00 SELL PUT FEB-15 DQQ-NC OI=25 B=$0.50 INITIAL NET CREDIT TARGET=$0.10-$0.25 TARGET PROFIT=$0.50-$0.75 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $465 per contract. ****************************************************************** ************************Advertisement************************* Tired of waiting on trades to execute? 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