The Option Investor Newsletter Wednesday 01-16-2002 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 01-16-2002 High Low Volume Advance/Decline DJIA 9712.27 -211.88 9916.54 9711.10 1.47 bln 1141/2002 NASDAQ 1944.44 - 56.47 1981.81 1944.32 1.88 bln 1187/2392 S&P 100 574.99 - 9.86 584.85 574.89 Totals 2328/4394 S&P 500 1127.57 - 18.62 1146.19 1127.49 RUS 2000 476.42 - 8.58 485.00 476.22 DJ TRANS 2638.34 - 49.74 2693.33 2635.36 VIX 25.26 + 0.84 25.42 24.03 VXN 49.43 + 1.41 50.75 48.58 TRIN 2.41 Put/Call 0.69 ******************************************************************* You Won't Hear Such Nonsense From Me Austin Passamonte Very little makes me cringe more than hearing market reporters say things like, "It was an ugly day in the market". I've seen that incomplete statement all over the place today and it irks me no end. I say incomplete statement because such biased remarks depend squarely on emotional opinion, not logical fact. Today's action wasn't good or bad: it merely was. If traders were long puts or short shares on the right stuff it was good. If they were on the wrong side of market action it was bad. If they were flat it was nothing at all except just another day. Simple as that. Any other attitude places a person with such bias in grave danger of busting out of our profession frustrated, dejected and broke. Money flows both ways every day and in the case of this current and (probably continued) bear market it flows better downhill than up. January put plays on MMM up over +800% intraday for anyone fortunate enough to take them pretty much says it all! On to the future. Forget about anything INTC or EBAY could have possibly said to all who cared last night, and focus on supply/demand for a moment. Both of these stocks had huge 10/1 call-to-put ratios in January and February contracts heading into their reports. That kind of staggering bullish disparity tells us everyone who wanted to buy good news already did. If either company then reports stellar news, so what? Who's left to respond and push prices higher? But if either/both say anything less than incredible things, there might be a sudden rush for the exits now that unrealistic levels of hope are dashed. The days of go-go news momentum via 1999 are dead & gone forever: we can go back to ignoring irrational market reaction and once again measure sentiment levels. Then trade this underlying evidence with high-odds effectiveness. (Weekly Chart: Dow) The Dow has been forming a bear-flag channel these past nine weeks straight and it confirmed with authority this week. Next target ahead is 9,500 area. Stochastic values just starting a reversal from overbought down towards oversold extreme might finish their endless cycle this time with price action well below that. (Daily Chart: Dow) Switching to a daily-chart view, the Dow failed to hold its first mild Fib retracement level in the current bear-market rally and next on the map is 38% near 9,440 area. We are quite apt to see an ultimate retracement of -50% to -62% this entire move, placing the Dow back down near its 9,000 level in the coming weeks ahead. All at once? Not likely: oversold stochastic values suggest the slide will slow or halt and possibly chop its way lower, but that is just an assumption. (Weekly Chart: NDX) We've drawn this year-long channel in the NDX numerous times recently and expect it will last for awhile further. I'd watch that middle line (black) for price action to test when stochastic values reverse near/within oversold extreme for the next sustained rally to begin. Looks like about 1250 level or 31.25 in the QQQ. Seems a bit low to me, but the charts have proven all my "gut feelings" dead-wrong several hundred times before. (Daily Chart: NDX) We could say the NDX has formed a semblance of bearish descending triangle pattern and if so, price action now rests on support. A break from there leaves next stop near 1500 level or roughly 37.50 in the QQQ. (Weekly/Daily charts: XAU) Gold Fever strikes! Not talking about one of my favorite shows on the Outdoor channel, I mean the Gold & Silver Index that Jeff & Eric alerted everyone of back near the 54.00 level. Remember what those "pointy-finger" (point & figure) charts were saying last week? On his birthday, Eric told us in Market Monitor that a print above 55.00 level was a buy signal. Hope he spent some birthday cash on Placer Dome or like kind! Need to watch current levels near 61.00 area as oscillators go toppy in overbought extreme and some old overhead supply areas are reached as well. Conclusion When the September rally stalled in early December and flailed sideways from there, most of us have waited since for the inevitable correction to begin. Looks like we've seen it start. I don't think there will be a straight-down plunge from here for many reasons, not the least of which is momentum players quick to hammer the short side these days that creates tinder for short squeeze explosions. I do know that seasonal patterns tend to strongly repeat. Remember how the last two year's March/April patterns have gone? New yearly lows. May has launched powerful rallies after both plunges as well. Can we expect a hat trick? I would certainly not count that out. Let's just be grateful we're all traders here, able to play either direction with equal aplomb. Don't you feel sorry for biased-bull stock players or call-buyers only trapped in the 1999 time warp? They've had brief moments to profit squeezed between long stretches of giving back those gains to us since then. But, that's just how trading works and no one can change it. Here in OI we all work very hard to educate the above-average individual on how to profit regardless what broad markets decide to do. I have no idea whether we will see the Dow at 5,000 or 15,000 next, and frankly I don't care. I cannot afford to care, because it clouds my judgment terribly and keeps me from making money. Hard enough trying to earn vulgar amounts of profit with emotional baggage weighing me down, and I'm sure you'd agree. So, we'll take what the markets give us because that's what we're all gonna get in the end! Summation Earnings season will create volatility from one session to the next. Big picture via weekly charts is downward strength for now. We have plenty of important price levels to monitor and need to favor the downside on a broad index basis with upside bias for individual stocks along the way. The Dow and S&Ps have lost plenty of ground since failing at recent tops and are due to bounce around soon. I would not fall in love with either market direction right now as that may result in broken hearts or worse. Earning results are merely short-term noise. How the market responds several days later is much more important than what gets said. Along with earnings gyration we have the next FOMC event two weeks from today. The Fed is quite dead to the upside, but a move away from continual cuts must happen eventually or we'll get paid to borrow money soon! Wouldn't that be grand? Don't count on it. We've had fun in Swing Trade model these past couple weeks, and shorting every iShare symbol with bearish long-term charts looks favorable from here as well. For more views of intraday charts if you can't get enough looking at such doodling, please join me within the Gameplan sections each night. There will plenty of opportunities with calls and puts alike this year, so let's do our best to hit those winning entries with gusto both ways! Best Trading Wishes, austinp@OptionInvestor.com ************************ YEAR END RENEWAL SPECIAL ************************ Last Chance! https://secure.sungrp.com/02renewal.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********** OPTIONS 101 *********** Paying Attention To Option Pricing By Mark Phillips Contact Support When trading options, there are a lot more factors to pay attention to, when compared to just trading stocks. Several months ago, I was planning a series of articles on all the factors that we need to pay attention to as option traders. As frequently happens, I got sidetracked and spent a couple months talking about various spread and delta-neutral trade strategies. Now that I've finished with that series, I want to return to the topic of option pricing. To refresh everyone's memory and bring new subscribers up to date, let's start at the beginning. Due to the plethora of additional factors that influence option pricing, most notably "the Greeks", it is possible to enter an option trade that produces a loss, even when a corresponding trade in the underlying equity or index would have produced a profit. Understanding these factors and their influence on option pricing is essential to profitable option trading, especially in the volatile market we currently have at our disposal. So what are the Greeks? In order to answer that question, we need to say a few words about how option prices are calculated. Option prices are determined by applying the standard Black-Scholes pricing model, which uses 5 inputs to create the theoretical price of the option. They are as follows: 1. Time to expiration 2. Strike price 3. Value of the underlying equity or index 4. Implied volatility of the underlying equity or index 5. The risk-free interest rate Discussion of the inner workings of the Black-Scholes model is far beyond the scope of this article, and there have been numerous books written on the subject for the inquisitive student. Rather than delving into theory, I thought it would be far more productive to deal with the practical measures of option pricing and strike selection that can aid us in our pursuit of profits. These measures are commonly referred to as the Greeks and the four most important Greeks, in my opinion, are Delta, Gamma, Theta and Vega. Delta measures the amount that a given option will move with respect to the underlying security and is stated in terms of percentage from 0 to 100. If a stock moves $1 and the option in question increases in value by $0.40, we know that the option had a Delta of 40. At-the-money (ATM) options typically have a delta of 50, while out-of-the-money (OTM) options have a Delta less than 50 and in-the-money (ITM) have a Delta greater than 50. As we move further out-of-the-money, Delta approaches zero, while it approaches 100 as we move deeper in-the-money. Neither of these extremes are met in practical application, but the basic relationship should give us a useful working understanding. Gamma is used to describe the rate-of-change of an option's Delta, and those that understand the relationship can use their knowledge to give their trading profits an extra boost. Putting the relationship in physics terms, Delta is the equivalent of velocity, while Gamma can be equated to acceleration. If you recall your high school physics, you'll remember that acceleration can really boost velocity over time. The same is true of the Delta-Gamma relationship. I'll leave you to ponder that concept and we'll revisit it in exacting detail on our next visit. The one constant in the universe (aside from taxes) is the passage of time, and Theta is the Greek that measures the impact of Father Time on option prices. Options are, by definition, a wasting asset, meaning that the portion of the option premium that is attributable to time, declines day after day. Adding insult to injury, the rate of decay of the time-related portion of an option's value increases as expiration Friday draws near. The majority of an option's time value disappears in the final 30 days of its life and most of that evaporates in the final 2 weeks. During expiration week, an equity must move in your favor substantially, just to offset the loss in value due to Theta-decay in an OTM or ATM option. Volatility is perhaps the most apparent determinant of option pricing; at least it has seemed that way during recent months as we have watched the VIX race from 35 to 57 and then back down to the low 20's. While normal trending markets don't have nearly that kind of volatility movement, when it does occur, it can yield outsized returns for appropriately positioned traders, and exact staggering losses from those unaware of its potential effects. Last week, I highlighted the perils of trading in a high-volatility environment. Traders that sell options in such an environment can reap substantial rewards, but need to be cognizant of the inherent risks that come with the territory. One interesting point about time-value in options is that on a percentage basis, ATM options are the most expensive in terms of time value. So when we buy ATM options, we need to understand that we are buying the most time-value possible for that expiration month, and every last shred of that time-value will melt away by expiration Friday. By expiration, either all the time value will have melted away leaving a worthless option (great for option sellers, but unpleasant for option buyers), or the stock will have appreciated so that the option is ITM, now possessing intrinsic value equivalent to how far in the money the option is. As a simple example, let's take a $50 OCT Call on stock XYZ which is trading for $3.00 one month before expiration. If on expiration Friday, the price of the stock is $48 (even if that is above the price of the stock one month earlier), the option will expire worthless, with no time value and no intrinsic value. On the other hand, if XYZ appreciates to $54 by expiration Friday, the option will be worth $4.00 ($4 intrinsic value, and no time value). In both cases, the time value of the option fades away to nothing by expiration, but if the stock moves sufficiently so that our option is in the money, we have real, as opposed to anticipated value. Delta and Vega are fairly easy to quantify, and there are a number of websites that provide this data for those interested in learning the inter-relationships and how they influence the potential success of option trading. One of my favorite sites is www.ivolatility.com, which provides detailed analysis of option Greeks, as well as historical volatility charts. While this site also provides an option calculator to determine Theta and Gamma for specific options, I think these two Greeks are more important to understand from a qualitative sense, so I tend to focus less on the actual numbers and more on their general influence on option prices. One interesting trend I have noticed in recent months is that online brokers are doing a better job of catering to option traders. All 3 of the brokers that I currently use, have recently added options analysis tools to their trading sites. This provides me with the ability to research the various Greeks on a prospective option trade without ever leaving the trading screen. In addition to basic option calculators that provide the ability to check Delta, Gamma, Vega and Theta for any option, these sites now provide charts of both historical and implied volatility. Using this latter tool, I can see where a stock's volatility is in relation to its historical range, helping me to make sure I am buying low volatility and selling high volatility. We'll devote a future article to just talking about volatility and how to use it to our advantage. When properly understood, the inter-relationship of the Greeks on option pricing can be very useful to option traders (both buyers and sellers) who understand how to capitalize the opportunities provided. This week's article was necessarily general so that I could set the stage for our future discussions, which will delve into greater detail on each of the Greeks. See you next time! Mark ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** IS Swing Trade Model: Wednesday 1/16/2002 Ring The Register Again News & Notes: ------------ Put plays tracked since Thursday afternoon performed quite well today. Markets gapped down at the open and bounced methodically lower from there. A close right on session lows could bode further drop at Thursday's open, but we will call our exit here today and split differences between those who closed today (me included) and others who held over (many). Using 100% risk-loss capital allows one to hold right into expiration itself if directional conviction is strong, but rapid time (theta) decay offsets underlying index movement. To each their own! Featured Markets: ---------------- [60/30-Min Chart: OEX] OEX remains in a short-term channel and may go lower before breaking out. 570 area should see a strong reactionary bounce. 30- min chart stochastic values (right) suggest that may happen soon. [60/30-Min Chart: SPX] And so goes the big S&P as well. Look for a bounce near 1118 – 1120 area at bottom of that channel. I'd consider both measures an excellent place to wager call plays if selling action reaches that far down! [60/30-Min Chart: QQQ] The QQQ follows suit in that next high-odds support seems to lie near the 38.00 area, and we'll watch all of these short-term channels of support quite carefully. If they are tested on Thursday and D/60/30 chart stochastic values all align for possible bullish reversal, we will target call plays using 100% risk-loss capital in the QQQ and OEX alone. Jan SPX and DJX contracts cease trading Thursday night, so they are fit for intraday traders only from here. Summation: --------- Recent put plays could have captured up to +240 Dow points, +12 SPX points, +8 OEX points and +1.20 QQQ points. Anything within that sphere is acceptable to us, and we await the next high-odds entry to let us attempt the same thing again! Let's watch those lower channel lines for possible action points on Thursday. *Note* Both SPX and DJX Jan option contracts cease trading Thursday night at 4:15pm EST and settle in value on Friday's calculated open. 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 - NONE Long: BREAK ABOVE - NONE Stop: Break Below Stop: Break Below Jan Puts: 39 (QQQ-MM) Jan Puts: 99 (DJV-MU) Long: BREAK BELOW - NONE Long: BREAK BELOW - NONE Stop: Break Above Stop: Break Above ===== OEX SPX Jan Calls: 600 (OEY-AT) Jan Calls: 1125 (SPT-AE) Long: BREAK ABOVE - NONE Long: BREAK ABOVE - NONE Stop: Break Below Stop: Break Below Jan Puts: 575 (OEB-MO) Jan Puts: 1140 (SPT-MH) Long: BREAK BELOW - NONE Long: BREAK BELOW - NONE Stop: Break Above Stop: Break Above Open Plays: ---------- Jan Puts: 39 (QQQ-MM) Jan Puts: 99 (DJV-MU) Long: BREAK BELOW: 40.00 Long: BREAK BELOW 9,960.00 Stop: Break Above [Out 38.80] Stop: Break Above [Out 9,720.00] Jan Puts: 575 (OEB-MO) Jan Puts: 1140 (SPT-MH) Long: BREAK BELOW 583.00 Long: BREAK BELOW 1143.00 Stop: Break Above [Out 575.00] Stop: Break Above [Out 1128.00] Sector Share Trade Model: Wednesday 1/16/2002 Short To The Gills! News & Notes: ------------ We decided to press the accelerator on short shares this week and are sitting fairly handsome tonight. Several targets are opened and already at the first measures of support below that we identified. That allows us to trail stops down on short plays to entry point or inside, reducing adverse risk to nil. Featured Plays: -------------- [Weekly/Daily Charts: HHH] The Internet HOLDRs dropped nicely today on a gap-lower move at the open. We could easily see that gap tested on a refill attempt soon, but weekly chart signals suggest further downside action to come. [Weekly/Daily Charts: SMH] Semi-Conductor HOLDRs did fine on a break below our entry at 45.00 and now rest right on both 50 and 200 DMA support. We targeted a bounce near there and saw these values suck price action in like a magnet. With stop-loss set at entry, how much risk is there in this play? Not much. Summation: --------- Tracking a slew of shorts but targeting nothing more for now. We've added Jeff Bailey's SPY short per request of several readers. We'll try to balance trailed stop management in a balance of capturing any further gains with choking out performing plays in the process. Let's have fun from here! Trade Management: ---------------- Entry triggers are points where plays are tracked when price action breaks above for calls or below for puts. Stops are the exact opposite of that. Sell targets are points to exit based on index levels or %gain on share price as noted. No entry targets listed mean the model is idle at that time. * Asterisk means stop-loss level changed since prior posting New Play Targets: ---------------- NONE Open Short Plays: ---------- 01/02 XLI Short: BREAK BELOW 27.70 Stop: Break Above 26.00 01/14 SPY S&P 500 SPDR [*Bailey Play] Short: BREAK BELOW 114.80 Stop: Break Above 113.80 DIA Dow Industrial Diamond Short: BREAK BELOW 99.00 Stop: Break Above 98.50 SMH Semi-Conductor HOLDr Short: BREAK BELOW 45.00 Stop: Break Above 45.00 SWH Software HOLDr Short: BREAK BELOW 48.00 Stop: Break Above 47.00 HHH Internet HOLDR Short: BREAK BELOW 34.00 Stop: Break Above 34.00 01/15 QQQ Nasdaq-100 HOLDr Short: BREAK BELOW 39.50 Stop: Break Above 39.50 IAH Internet Architecture HOLDr Short: BREAK BELOW 39.00 Stop: Break Above 40.00 XLY Cyclical Transport SPDR Short: BREAK BELOW 28.00 Stop: Break Above 30.00 XLV U.S. Consumer SPDR Short: BREAK BELOW 27.00 Stop: Break Above 29.00 IS Position Trade Model: Wednesday 1/16/2002 Looking Good News & Notes: ------------ Still tracking Feb put option contracts and watching them swell in value each day. Had we caught the top of this recent move it'd be more than a double in gains right now, but with 4+ weeks left until expiration, plenty of time remains with bearish long term charts to go! Featured Plays: -------------- Charts pictured in tonight's Market Wrap Summation: --------- No new plays on tap for now, and we'll look to track new put plays on any failed rally attempts ahead. 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 XLI Feb Puts: ITM 28 (XLI-NB) Long: 1.00 Stop: 1.00 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Wednesday 01-16-2002 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** STOP-LOSS UPDATES ***************** ELBO - put Adjust from $35.50 down to $35 THQI - put Adjust from $48.50 down to $45.50 MMM - put Adjust from $114 down to $108 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* PLAY OF THE DAY – PUT ********************* ADRX - Andrx $62.96 -0.22 (-0.86 this 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. Most Recent Update The Biotech Sector Index (BTK.X) was so very close to breaking down below short-term support today. But the bulls came back into the biotechs and carried them higher into the close. A breakdown in the BTK.X would come on a decline below the 530.00 level. Such a decline should trigger selling in the group, including ADRX. For its part, ADRX finished fractionally higher in today's session, but failed to touch its 200-dma as it has done in the last 5 sessions. The failure to trade up to the 200-dma may portend building selling pressure in the stock, but it remains closely tied to the trading in the BTK.X, which is why it's so very important to monitor the trading in the sector. ADRX did make some progress to the downside before the broader sector rebounded later in the day. The traded down to and bounced from the $62 level. We'd like to see an intraday move below the $61 level to trigger more selling in this stock. Conversely, a rollover from the $65 level -- converged 10- and 200-dmas -- is appealing for its ease of risk management. Just make sure that ADRX is trading higher out of sector sympathy when gaming a rollover near resistance, and not on its own. Comments This bearish play on the biotech sector is straightforward. Watch for the Biotechnology Sector Index ($BTK) to trade below 530.00 early tomorrow morning. Such a decline could bring about another wave of selling in biotech issues such as ADRX. Confirm weakness in ADRX below $62, then $61. Target $60 or $59 to the downside, depending upon your specific entry point and attributes. BUY PUT FEB-65*QAX-NM OI=2186 at $5.40 SL=3.50 BUY PUT FEB-60 QAX-NL OI=1162 at $2.95 SL=1.50 Average Daily Volume = 1.54 mln ************** Traders Corner ************** Negative Events and "one-time" Charges Buzz Lynn firstname.lastname@example.org The other night I alluded to the idea that nasty surprises are NOT one-time occurrences in a primary bear market. Surprises are in fact a marked characteristic. Their presence is proof of the bearish trend. If you doubt this, put yourself back in time three years to January 1999. Life was grand, people were great, and business was terrific. Everything fired on all cylinders and stocks were priced to grow forever - priced to perfection, as was often the reference then. A little miss in the earnings from operations? No worries. The CFO could hit the numbers by spinning off a division to the markets and raking in the cash from an investing public eager to snap it up. If there was only a little shortfall, some corporate stock or equity investments in another publicly traded firm could be sold to make up the difference. In other words, the business side could lose money and the investment side could make up the difference so as to "beat analysts estimates" (itself a farce since the estimates were provided to analysts by the company) and keep investors numbly happy. Any idea how CSCO MSFT and INTC were able to consistently "beat by a penny" for so long? Great news! Excluding our ("one-time") losses, we look like we made money! And as long as Wall Street keeps ignoring our outlandish expenses attributable to a business that will never make money, our stock will keep rising! "It's a compelling value with a great story to tell" crowed the analysts. This white wash of financial reporting came to be called pro-forma earnings, which from the Merriam Webster dictionary means, "Made or carried out in a perfunctory manner or as a formality" or "provided in advance to prescribe form or describe items". In other words, it's a fabrication with even worse implications because it didn't PRE-scribe any form. The information was already known but was conveniently swept under the rug so as not to be too obvious. Ahh, for the olden days when it was called "a loss". Investors were and still are lulled to sleep when they ought to be wide-eyed concerned that the pro-forma ether has dulled their senses. CFO's, accountants, analysts, FASB, SEC, and brokers have been performing the equivalent of financial anesthesia on the investing public. As I've noted before, you can't hide an elephant in a cherry tree, and all the white wash can't hide the fact that a company is losing money - at least not for long. For those of you that saw Disney's Jungle Book animated movie, the image going through my mind here is of Kaa, the snake hypnotizing Mogley (the "man-cub" and intended meal) by singing softly to him, "Trust in me. Just in me. Close your eyes. Trust in me. You will sleep, safe and sound Knowing I, am around. Slip into silent slumber. Sail on a silver mist Slowly, your senses will cease - to exist." That about the moment that Kaa put the final squeeze on Mogley. Fortunately, Mogley's guardian panther, Baghera wakes up in time to smack Kaa just in time to save him from being eaten. The point is that we don't have guardian panthers, and when it comes to financial survival we must not be lulled to sleep by those that pass themselves off on TV as fear-placating experts while picking our pockets, or should I say asking us to empty our pockets such that we look forward to it. Back to the subject - negative bear market events - remember we have witnessed Ford's intention to eliminate 35,000 employees worldwide (and its second dividend cut in a year), Merrill's lay- off of 9,000 workers, Enron's failure, Arthur Anderson's shredding evidence in Enron's failure (thus making it an accomplice in the giant fleecing), K-Mart's junk debt status with the looming possibility of bankruptcy, Polaroid's bankruptcy, and today, adding more negative events, JP Morgan's earnings and the pummeling of 3-M over potential asbestos claim liability. I ask rhetorically, please, somebody try to convince me these are accidents. The fact is that they are not. They are symptomatic of a weak worldwide economy, which results in a bear market, not the other way around. The bear market did not cause a weak economy. Because the predominant economic issue is that companies are, have been, and probably will continue losing money, their stock prices can no longer be sustained, thus the bear market. Greenspan, in attacking the symptoms, has missed the cause. In my opinion, he is partially the cause. A doctor should not attempt to make a patient slightly sick by reason that the patient is TOO healthy. But that's for another column. What I really want to get to tonight is the JPM earnings this morning and how particularly dangerous its glossed-over earnings can be to the market. Straight up, they missed consensus estimates by a country mile when they reported earnings this quarter of $0.12* per share compared to estimates of $0.35. Remember they provided those estimates in the first place and failed to warn or revise those numbers prior to the quiet period that began two weeks ago. Sure they missed by a long shot. But, you know, criminy, they had Argentina exposure, got whacked a bit by Enron, had some private equity investments that went bad. It was just a bad quarter. That will never happen again - merely a one-time occurrence, which has nothing to do with their ability to make money. WRONG! They lost money, and a lot more that they thought just two weeks ago! That's the point - they lost money according to analysts because of never-to-happen-again charges. "Things will be fine next quarter." That is the flaw in the logic. The symptoms don't go away without treating the root cause - worldwide economic slowdown. It may be a one-time charge for Argentina. But what do they call a writedown in '97 on Russia, or Mexico, or Brazil, or Japanese real estate loans or any other charges that occurred just "one time"? Wake up JPM and analysts who tout them, including Merrill Lynch who reiterated their Strong Buy rating after the news and just before S&P revised their outlook to Negative from Stable! A series of one-time charges amount to RECURRING SERIES OF CHARGES! And every one-time event is another thread to a rope from which one-time charge reporters will swing, especially in a bear market. As Rosanne Rosanna Danna, a character played years ago by the late Gilda Radner on Saturday Night Live used to say, "If it's not one thing, it's another. It just goes to show you it's always something." The point is to get used to the idea that in this economic environment, one-time charges are not just one time. But what I really want to drive home is that asterisk on the $0.12 earnings. If you can believe this, that asterisk signifies a footnote (that they hope you won't notice) that increased their loan loss reserves by $510 man, which they chose not to include in their $0.12 earnings. Had they done so, with nearly 2 bin share outstanding and roughly a half bin in reserves for bad debt, that amounts to another $0.25 in loss or a REAL loss of $0.13 per share this quarter. That folk is how you lose $1 bin and still report a $0.12 profit. Don't get me wrong - setting aside reserves for bad loans is a responsible act of fiscal conservatism. Not labeling it as a loss is, in my opinion, a crime. Investors should be outraged. Unfortunately, they are not, and many more companies continue to report their earning with nary a complaint from the average shareholder because the practice is so widespread that it has acceptable by default and complacency. Also unfortunately, we have not heard or seen the last of it with Arthur Anderson and JPM as just the tip of the iceberg. Ever hear of a little company called Cisco that trades at about $19? They have no earnings and every quarter report pro-forma losses, which would be even greater if they logged their "one-time" recurring losses accurately. Lots of fallout from this pro-forma thing is yet to come and I would expect a substantial investor backlash as these deceptive reporting incidents come to life in greater numbers. The point here is recognize that negative events are recurring in a bear market and to expect more of them, many of which will stem from deceptive accounting intended to provide a rose colored tint for those with a bent toward reality. It is no accident that many negative events spring to life in a bear market. ************************************************ BIG CAP COVERED CALLS, NAKED PUTS & COMBINATIONS ************************************************ Spread Trading 101: Entry, Exit and Adjustment Strategies By Ray Cummins One of our readers submitted some great questions concerning the techniques used to initiate and manage combination positions. Hello OIN, I have a couple of questions regarding the credit spreads covered in the newsletter and was hoping you could help me out. First, I am never sure how long to leave an order open when trying to enter a spread. I am usually not filled initially when I place the trade within the recommended credit range, but could be filled a day or more later. This is often because the stock is moving toward the sold strike. Can you suggest any guidelines or other resources I might use to help decide when the trade is no longer a good trade to open. Also, I believe leaving these opening orders in place could actually mean getting the order filled directly into a losing position. Any ideas would be welcomed. Thanks! Dave, I am glad to hear you are using the OIN to supplement your search for profitable trading positions. All of us on the newsletter staff pride ourselves in working for a company that offers some of the best stock/option research at a reasonable price. Spread trading is indeed a unique undertaking for less experienced option traders and unfortunately, the ability to profit consistently with this approach is not something I can explain in an E-mail. However, you have asked many of the "right" questions (and it's obvious you are willing to acquire the knowledge necessary to succeed in this unique game we play) so I will try to help you get started on the road to discovery and understanding. Regarding the "target" prices: Obviously, you can't always achieve my target credit in these positions. That's why I call it a target. It is simply a recommended entry point; just MY opinion of what a trader might use as an initial "limit" for the spread order, and it usually a reasonable price to initiate the play even with small changes in the stock and option quotes. The target is always less than the straight BID/ASK numbers (we don't pay "market" for spread orders) and usually, you can expect to shave a minimum of $0.10-$0.20 off the BID/ASK price when opening or closing even the smallest spread order. The margin can be more or less, depending on the price of the options, whether they are ITM or OTM, the time value remaining, the volatility of the stock, etc. I simply try to give the beginning trader an idea of the value of the position because the option prices are always different the next day. You will need to adjust this target based on the activity of the underlying issue, the trading volume of its options or the implied volatility of the series being traded. As you mentioned, the first problem comes when you don't get filled initially (do you chase the play?) or when the issue moves in opposition of the expected trend after just a few sessions (regardless of whether you have actually opened the position). In reality, every decision you make about trading should be based on your analysis of the underlying issue and your forecast for its future movement. That assessment is then factored into the risk- reward outlook for the strategy (or the position) you are using. Of course, that's a very subjective task, thus the best advice I can offer is that, if the current conditions dictate that the position is no longer viable (based on your personal criteria), then it should be closed (or avoided). With regard to opening/initiating new spread and combination orders: I do think it's important to have the correct tools for achieving this task and that means accurate real-time quotes (and theoretical option pricing) and access to a floor specialist who will work on your behalf to get the best entries in combination orders. Most "spread" orders will not get filled at my target (if they do, I have not accurately identified the option values or their trading range) with discount brokerages unless the options actually trade at those prices and the potential for success with a personal online trading platform such as Preferred Trade (which has direct access to the exchange but does not allow simultaneous orders for multiple positions) is based strictly on your skills and the market's volatility. In addition, it is important to have a thorough understanding of the relationship between stock movement and the option's price and for that information, you can consult the many online articles on the subject or the ever-reliable bibles of option trading: "Option Volatility & Pricing: Advanced Trading Strategies and Techniques" by Sheldon Natenberg, and "Options As A Strategic Investment" by Lawrence G. McMillan. Also, the concept of hedging the position with a short of the stock (for the purpose of covering the short put in a "bullish" credit spread) which you suggested is interesting to me. Would it be possible (or wise) to do this during after hours trading using some sort of a stop or stop-limit order. Or is there some sort of service which could alert you via phone or email when a certain threshold has been broken? Covering a short put with the sale of stock when the underlying issue moves through the sold options' strike is a common method for offsetting potential losses in spread positions, but it is not appropriate for everyone. In a bearish issue however, the technique offers a favorable "rescue" strategy if the stock has little chance of finishing the expiration period above the strike price of the sold put. The most common use of this method with retail traders involves selling the underlying stock to hedge or cover losing positions that include short put options. The put writer is "covered" if there is a corresponding short position in the underlying stock, or its equivalent, in his account. If the sold put is exercised, and the stock is delivered, it can be further assigned to replace the previously borrowed equity. Remember, a "short" sale is the sale of a security that is not owned. The investor borrows the stock, through a broker, and then sells it in the open market. When the sold put is assigned, the investor is forced to purchase the stock, which he eventually returns to the broker, replacing the borrowed position. The problem with this technique is the potential loss can be substantial when the share value of the underlying issue rebounds above the initial short price and you do not repurchase the stock in a timely manner. If the issue remains above the strike price of the sold put, it will not be assigned and the trader will be forced to buy the stock in the open market, at the current price, to fulfill his obligation. The absolute necessity of protective trading stops is obvious in this strategy. With a "buy stop" on the stock, the chance of a potential loss in the (recovery) position is much lower if the price of the stock moves significantly higher than the strike price of the sold put. As far as when to use the strategy and the various order types to initiate the trade: short transactions can occur after the market (an advantage over options) and there are lots of unique methods for transmitting stock prices using the latest technology. You can research the various combinations of brokerages and their quote/order communications systems on the Internet. If you find one you really like, send me a note so I can share it with others. I hope I have helped answer some of your questions. For additional information on spread trading, consult these books (in your local library or the OIN bookstore): The Option Advantage and New Option Secret, by David Caplan and The Complete Option Player, by Ken Trester. Good Luck! Summary of Current Positions (as of 01-15-2002): Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield VRTS JAN 40 37.42 45.10 2.58 5.7% NBIX JAN 45 43.35 47.00 1.65 3.9% MRVL JAN 32.5 31.66 39.69 0.84 5.0% MU JAN 32.5 31.14 35.30 1.36 8.3% SEBL JAN 27.5 26.30 33.52 1.20 8.7% Closed Positions: AmeriCredit (NYSE:ACF) Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield VRTS JAN 35 43.80 45.10 1.20 9.8% NVDA JAN 50 48.95 65.34 1.05 6.2% EMLX JAN 27.5 26.80 42.70 0.70 6.5% IGEN JAN 25 24.50 39.75 0.50 6.1% NBIX JAN 40 39.45 47.00 0.55 5.1% ACF JAN 25 24.35 23.25 (1.10) 0.0% EBAY JAN 55 54.10 64.03 0.90 7.4% EMLX JAN 30 29.40 42.70 0.60 9.1% NVDA JAN 55 54.25 65.34 0.75 6.6% VRTS JAN 35 34.45 45.10 0.55 7.5% MRVL JAN 30 29.50 39.69 0.50 11.3% MU JAN 30 29.35 35.30 0.65 11.5% SEBL JAN 25 24.40 33.52 0.60 14.2% NVDA JAN 55 54.60 65.34 0.40 5.1% EMLX JAN 30 29.75 42.70 0.25 5.5% ACDO JAN 45 44.30 49.49 0.70 15.5% MRVL JAN 35 34.75 39.69 0.25 7.6% SYMC JAN 65 64.60 70.40 0.40 6.3% SEBL JAN 30 29.75 33.52 0.25 8.9% BRKS JAN 45 44.50 46.92 0.50 10.6% ACDO FEB 40 39.10 49.49 0.90 6.5% EMLX FEB 35 33.85 42.70 1.15 8.8% MRVL FEB 30 29.35 39.69 0.65 6.0% CHKP FEB 40 38.75 38.68 (0.07) 0.0% SYMC FEB 60 58.90 70.40 1.10 5.1% SEBL FEB 27.5 26.65 33.52 0.85 8.8% BRKS FEB 40 39.15 46.92 0.85 6.0% As we noted last week, the recent upside activity in AmeriCredit (NYSE:ACF) has come to an end and bullish positions in the issue should be closed (or adjusted) to avoid additional losses. Checkpoint Software (NASDAQ:CHKP) plunged $6 Tuesday after announcing that profits fell in the fourth quarter, as expected, but they also warned that revenues would not improve in the first quarter of 2002. Based on the abrupt change in technical character, it may be best to close the position before further downside movement occurs. Positions Closed: Genzyme (NASDAQ:GENZ) Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield ICOS JAN 65 65.95 51.83 0.95 5.1% IMCL JAN 75 75.95 32.08 0.95 7.3% ADI JAN 55 43.85 46.59 0.55 5.8% Synthetic Positions: Stock Pick Last Position Credit C/B G/L Status WMT 58.23 56.87 JAN60C/55P 0.10 54.90 0.10 Open DGX 71.40 72.01 FEB85C/60P 0.10 59.90 0.20 Open MER 57.99 55.91 FEB65C/50P 0.15 49.85 0.15 Open The maximum credit observed in the Wal-Mart (NYSE:WMT) synthetic position was $0.20, well short of our speculative goal. However, Quest Diagnostics (NYSE:DGX) has recovered from the recent selling pressure in biotechnology stocks and the bullish play may provide a favorable profit in the next few weeks. Debit Straddles: Stock Pick Last Position Cost Cur.Val. G/L Status GPT 44.14 43.08 JAN45C/45P 2.00 1.85 (0.15) Open Credit Spreads: Stock Pick Last Position Credit C/B G/L Status ADSK 39.39 39.95 JAN30P/35P 0.50 34.50 0.50 Open KBH 40.10 38.90 JAN30P/35P 0.55 34.45 0.55 Open MCHP 40.33 38.66 JAN30P/35P 0.75 34.25 0.75 Open LXK 58.70 58.45 JAN45P/50P 0.50 49.50 0.50 Open CMA 56.93 56.79 JAN50P/55P 0.65 54.35 0.65 Open IMPH 44.00 40.61 JAN35P/40P 0.80 39.20 0.80 Close? HMC 20.44 19.25 JAN17P/18P 0.11 18.64 0.11 Open *** SPW 138.86 132.50 J125P/130P 0.50 129.50 0.50 Close? CEPH 72.70 71.78 JAN85C/80C 0.60 80.60 0.60 Open SII 55.12 48.60 FEB40P/45P 0.65 44.35 0.65 Open THC 62.10 65.22 FEB55P/60P 0.80 59.20 0.80 Open XAU 58.07 59.56 FEB50P/55P 0.85 54.15 0.80 Open Positions Closed: Dianon Systems (NASDAQ:DIAN); now profitable! *** Last week, J.P. Morgan announced a ratio change for Honda Motor's (NYSE:HMC) American Depositary Receipts. The new ratio is 2 ADRs for 1 share of common stock and to effect the change, shareholders received three (3) additional ADRs for every one (1) ADR held. The position prices have been adjusted accordingly. Smith International (NYSE:SII) slumped with the sell-off in oil service shares and rather than test the sold strike at $50, we decided to move out and down to a FEB40P/45P spread for a small debit. Based on the previous position and the cost to roll out to February options, the current credit in the play is $0.65. Credit-Spread Strangles: Stock Pick Last Position Credit C/B G/L Status OEX 589.62 584.85 FEB640C/630C 0.80 630.80 0.80 Open OEX 589.62 584.85 FEB530P/540P 0.70 539.30 0.70 Open New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Credit Spreads One of our reader's commented that the recent selections in the Healthcare Services group have performed very well and he suggested we list some additional limited-risk positions in that industry segment. Since we have offered relatively few credit spreads over the past month, we will focus on that strategy in today's edition of the newsletter. All of these positions offer favorable risk-reward potential, based on the option premiums and the recent technical indications in the underlying stocks. However, current news and market sentiment will have an effect on these issues, so review each position individually and make your own decision about its future outcome. *************** TRI - Triad Hospitals $31.50 *** On The Rebound! *** Triad Hospitals (NYSE:TRI) provides healthcare services through hospitals and ambulatory surgery centers, located in small cities and selected urban markets, primarily in the Southwestern, Western and South-central United States. In addition to providing capital resources, Triad makes available a variety of management services to its healthcare facilities. These services include ethics and compliance programs, national supply and equipment purchasing and leasing contracts, accounting, financial and clinical systems, governmental reimbursement assistance, information systems, legal support, personnel management and internal audit, access to regional managed care networks and resource management. TRI - Triad Hospitals $31.50 PLAY (conservative - bullish/credit spread): BUY PUT FEB-25 TRI-NE OI=233 A=$0.25 SELL PUT FEB-30 TRI-NF OI=2500 B=$0.75 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% *************** UNH - UnitedHealth Group $73.00 *** New Trading Range? *** UnitedHealth Group (NYSE:UNH) forms and operates markets for the exchange of health services. The company's Health Care Services segment consists of the UnitedHealthcare and Ovations businesses. UnitedHealthcare coordinates network-based health and well being services on behalf of local employers and consumers nationwide. Ovations is a business dedicated to advancing the health and well being goals of Americans age 50 and older. The company also has other businesses including Uniprise, Specialized Care Services and Ingenix. The Uniprise business is devoted to serving the needs of large organizations. The Specialized Services business is an expanding portfolio of health and well being companies, each serving a specialized market need with a blend of benefits, provider networks, services and resources. The Ingenix business is engaged in the field of health care data and information, research, analysis and application. UNH - UnitedHealth Group $73.00 PLAY (conservative - bullish/credit spread): BUY PUT FEB-65 UHB-NM OI=72 A=$0.30 SELL PUT FEB-70 UHB-NN OI=664 B=$0.85 INITIAL NET CREDIT TARGET=$0.65-$0.70 PROFIT(max)=15% *************** WLP - Wellpoint Health $125.16 *** New All-Time High! *** WellPoint Health Networks (NYSE:WLP) is a United States managed healthcare company. Wellpoint offers a range of network-based managed care plans. The company offers these plans to the large and small employer, individual, Medicaid and senior markets. The company's managed care plans include preferred provider organizations, health maintenance organizations and standard point-of-service and hybrid plans and traditional indemnity plans. In addition, the company offers managed care services, including underwriting, actuarial services, network access, medical cost management and claims processing. The company also provides a broad array of specialty and other products, including pharmacy, dental, utilization management, life and specialized healthcare insurance, preventive care, disability insurance, behavioral health services, COBRA and flexible benefits account administration. WLP - Wellpoint Health $125.16 PLAY (conservative - bullish/credit spread): BUY PUT FEB-110 WLP-NB OI=63 A=$0.55 SELL PUT FEB-115 WLP-NC OI=52 B=$1.00 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** WGO - Winnebago $40.27 *** Reader's Request! *** Winnebago Industries (NYSE:WGO) is a United States manufacturer of motor homes, self-contained recreation vehicles used primarily in leisure travel and outdoor recreation activities. Motor home sales by the company represent more than 86% of its revenues. Winnebago motor homes are sold through dealer organizations, primarily under the Winnebago, Itasca, Rialta, and Ultimate brand names. Other products manufactured by the company consist primarily of extruded aluminum, commercial vehicles, and a variety of component products for other manufacturers. Finance revenues consist of profits from floor plan unit financing for a limited number of the company's dealers. One of our subscribers was kind enough to point out the bullish activity in this issue and asked if it would be a good candidate for a covered-call, given the company's excellent fundamental outlook. Indeed the recent technical indications are favorable and today's upside movement was based on news that Winnebago plans to increase production due to a substantial rise in wholesale orders and retail sales. The company said its sales order backlog for Class A and C motor homes was 2,365 units on 1/12/02, a 70% increase over a backlog of 1,390 units at the same time last year. Winnebago also continues to see growth in its motor-home market share and orders are up 50% since the end of the company's first quarter on 12/1/01. Investors were very encouraged by the strong sales data as they pushed the issue up almost 10% in today's session and the heavy volume suggests there is further upside potential for the stock. We recommend that traders target a lower cost basis in position through the use of a "net-debit" order, to allow for a brief consolidation from the rally. WGO - Winnebago $40.27 *** Reader's Request! *** PLAY (buy stock and sell covered call; or sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL FEB 40 WGO BH 25 2.70 37.57 6.3% *** -or- SELL PUT FEB 35 WGO NG 0 0.50 34.50 4.3% "TS" SELL PUT FEB 40 WGO NH 7 2.10 37.90 11.5% *************** ACDO - Accredo Health $49.60 *** Same Play - Different Week! *** Accredo Health (NASDAQ:ACDO) provides specialized contract pharmacy services on behalf of biopharmaceutical manufacturers to patients with chronic diseases. The company's services help simplify the difficult and often challenging medication process for patients with a chronic disease and help ensure that patients receive and take their medication as prescribed. The company's services benefit biopharmaceutical manufacturers by accelerating patient acceptance of new drugs, facilitating patient compliance with the prescribed treatment and capturing valuable clinical information about a new drug's effectiveness. Their services include contract pharmacy services, reimbursement services, clinical services, and delivery services. The Health Services sector has been one of the best performing market segments in recent sessions and the reason is, these companies offer an excellent portfolio hedge when the broader market begins to slump. Accredo Health is one of the leading firms in the group and the issue climbed to new highs last week after the company announced a deal to buy the specialty pharmaceutical services business from Gentiva Health Services. The acquisition makes ACDO the largest specialty distributor of pharmaceuticals, with a market share of over 17%, leaving retail pharmacies as the only companies that have a larger presence. Analysts were optimistic about the announcement and Steven Halper, an analyst at Thomas Weisel Partners LLC, said the deal is a, "landmark transaction for Accredo." We simply favor the recent technical trends and these positions offer a great way to speculate on the future movement of the issue in a conservative manner. Target-shoot a higher premium in the sold put initially, to increase the return on investment in the position. ACDO - Accredo Health $49.60 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT FEB 40 DZU NH 53 0.50 39.50 4.6% "TS" SELL PUT FEB 45 DZU NI 124 1.50 43.50 8.8% http//www.OptionInvestor.com/charts/jan01/charts.asp?symbol=ACDO *************** BEARISH PLAYS - Naked Calls & Combinations The issues are excellent candidates in the "premium-selling" category of options trading. Based on analysis of historical option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for profitable "naked" calls. Each issue has robust option premiums, a well defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. *************** AMAT - Applied Materials $41.55 *** Chip Sector Sell-off! *** Applied Materials (NASDAQ:AMAT) develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry. Many of Applied's products are single-wafer systems designed with two or more process chambers attached to a base platform. The platform feeds wafers to each chamber, allowing the simultaneous processing of several wafers to enable high manufacturing productivity and precise control of the process. Applied has five single-wafer, multi-chamber platforms: the Precision 5000, the Centura, the Endura, the Endura SL and the Producer. These platforms currently support chemical vapor deposition, physical vapor deposition, etch and rapid thermal processing technologies. Customers for their products include semiconductor wafer manufacturers and integrated circuit (or chip) manufacturers. The company's quarterly earnings are due on 2/12/02. AMAT - Applied Materials $41.55 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL FEB 50 ANQ BJ 7,958 0.50 50.50 5.6% *** SELL CALL FEB 47.5 ANQ BW 6,641 0.90 48.40 7.6% SELL CALL FEB 45 ANQ BI 3,842 1.55 46.55 10.3% *************** KLAC - KLA Tencor $50.01 *** Chip Sector Slump! *** KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's large portfolio of products, software, analysis, services and expertise is designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to the company for in-line wafer defect monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer overlay; film and surface measurement; and overall yield and fab-wide data analysis. KLA Tencor's earnings are due on 1/23/02. KLAC - KLA Tencor $50.01 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL FEB 60 KCQ BL 1,661 0.60 60.60 5.5% *** SELL CALL FEB 55 KCQ BK 1,865 1.75 56.75 10.2% SELL CALL FEB 50 KCQ BJ 422 3.70 53.70 15.3% *************** QLGC - Qlogic $49.75 *** It's Time To Take Profits! *** QLogic Corporation (NASDAQ:QLGC) is a designer and supplier of Storage Area Networking infrastructure building blocks. Its SAN infrastructure building blocks, comprised of semiconductor chips, host board adapters and switches, are integrated into storage networking solutions of the world's leading system and storage manufacturers. Companies such as Sun Microsystems, IBM, Dell Computer Corporation, Compaq Computer Corporation, Fujitsu Microelectronics, and Hitachi all use some of its components in the storage and systems solutions they also sell to the world's largest information technology environments. In addition to its original equipment manufacturer relationships with these and other companies, in January 2000 the company started delivering selected Fibre Channel building blocks to leading distributors, systems integrators and resellers, thereby expanding its reach and visibility to the information technology community. The company's quarterly earnings are due on 1/23/02. QLGC - Qlogic $49.75 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL FEB 65 QLC BM 858 0.65 65.65 6.0% *** SELL CALL FEB 60 QLC BL 2,001 1.50 61.50 12.9% SELL CALL FEB 55 QLC BK 1,915 2.80 57.80 15.7% *************** AT - Alltel $56.70 *** Earnings Speculation! *** Alltel Corporation (NYSE:AT) is a customer-focused information technology company that provides wireline/wireless communications and information services. The company operates in two principal areas, communications and information services. The company's communications operations consist of its wireless, wireline (local and long-distance) and emerging businesses segments. Emerging businesses are the company's key product offerings, and include the company's long-distance, competitive local exchange carrier, Internet access, and personal communication system and network management operations. Alltel subsidiaries provide wide-area paging and information processing management services, and advanced application software along with telecommunications products. Another subsidiary publishes telephone directories for affiliates and other independent telephone companies. Alltel's earnings are due next week (1/24/02) and based on the recent downside activity, traders are not expecting a favorable report. In addition, Alltel has issued comments suggesting it would be interested in acquiring more telephone access lines, and it believes consolidation is "critical" for the wireless industry. Unfortunately, acquisitions are rarely seen as a positive share-value event until after the "deal is done" and the benefits are easily recognizable. In any case, the current trend is bearish and unless the company announces surprisingly positive earnings, the issue has little chance of reaching our sold strike in one month. AT - Alltel $56.70 PLAY (conservative - bearish/credit spread): BUY CALL FEB-65 AT-BM OI=84 A=$0.20 SELL CALL FEB-60 AT-BL OI=81 B=$0.70 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=12% *************** MMM - Minnesota Mining $103.47 *** Asbestos Woes! *** Minnesota Mining & Manufacturing (NYSE:MMM), an integrated enterprise, is engaged in the research, manufacturing and marketing of products related to its technology in coating and bonding for coated abrasives. Characterized by substantial inter-company cooperation, 3M's business has developed upon the research and technology of its original product, coating and bonding. This process consists of applying one material to another, such as abrasive granules to paper or cloth (coated abrasives), adhesives to a backing (pressure-sensitive tapes), ceramic coating to granular mineral (roofing granules), glass beads to plastic backing (reflective sheeting) and low-tack adhesives to paper (repositionable notes). A number of industrial companies have been hit by "asbestos woes" in recent months and today shares of MMM plummeted amid fears about the impact of new asbestos litigation against the company. Minnesota Mining was a defendant in roughly 20,000 lawsuits in various courts as of the end of last September, and those cases purport to represent about 85,000 individual claimants. Nine U.S. companies have filed for Chapter 11 bankruptcy protection since January 2000 as a result of the financial burden of asbestos claims and MMM investors became concerned about the effects of current lawsuits after company officials said, "There can be no certainty that the company may not ultimately incur charges for litigation in excess of presently recorded liabilities." Regardless of the outcome, the issue is in a steep downward trend and this conservative position offers a great way to participate in the future (bearish) movement of the issue with relatively low risk. MMM - Minnesota Mining $103.47 PLAY (conservative - bearish/credit spread): BUY CALL FEB-120 MMM-BD OI=546 A=$0.55 SELL CALL FEB-115 MMM-BC OI=508 B=$1.05 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% *************** SUPPLEMENTAL CREDIT-SPREAD CANDIDATES *************** BULLISH PLAYS: Stock Last Long Ask Short Bid Target Target Symbol Price Option Price Option Price Credit Profit LNCR 28.70 FEB-25P 0.50 FEB-27P 0.95 0.50 25% HCA 41.50 FEB-37P 0.30 FEB-40P 0.55 0.30 14% AET 36.25 FEB-30P 0.25 FEB-40P 0.75 0.60 14% FDC 80.03 FEB-70P 0.35 FEB-75P 0.90 0.60 14% BEARISH PLAYS: Stock Last Long Ask Short Bid Target Target Symbol Price Option Price Option Price Credit Profit ADI 42.50 FEB-55C 0.30 FEB-50C 0.80 0.60 14% CDWC 52.49 FEB-65C 0.35 FEB-60C 0.85 0.60 14% FIC 47.81 FEB-60C 0.40 FEB-55C 0.90 0.60 14% MXIM 55.29 FEB-70C 0.40 FEB-65C 0.90 0.60 14% *************** SEE DISCLAIMER ***************************** ************************Advertisement************************* Tired of waiting on trades to execute? 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