The Option Investor Newsletter Sunday 01-20-2002 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 ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 1-18 WE 1-11 WE 1-4 WE 12-28 DOW 9771.85 -215.68 9987.53 -272.21 10259.74 +122.75 +101.65 Nasdaq 1930.34 - 92.12 2022.46 - 36.92 2059.38 + 72.12 + 41.92 S&P-100 575.24 - 8.96 584.20 - 14.41 598.61 + 6.86 + 5.34 S&P-500 1127.58 - 18.02 1145.60 - 26.91 1172.51 + 11.49 + 16.13 W5000 10509.36 -188.86 10698.22 -234.10 10932.32 +113.75 +173.64 RUT 474.37 - 15.57 489.94 - 9.36 499.30 + 5.68 + 9.60 TRAN 2667.25 - 39.52 2706.77 -123.43 2830.20 +187.15 + 37.82 VIX 24.34 + .36 23.98 + 1.96 22.02 - .31 - .96 VXN 48.89 + .52 48.37 + 1.51 46.86 + .92 - 5.02 TRIN 1.13 1.44 .94 .73 TICK +522 +290 +996 +1098 Put/Call .85 .68 .67 .69 ****************************************************************** Confidence Crisis? by Jim Brown The markets followed though on the drop in futures from Thursday night and opened down with crushing losses on IBM and MSFT. Despite the positive comments by SunMicro and 3M before the open the die was already cast. Even a surprising rebound in consumer confidence failed to sway investor opinion. IBM was the big tech loser of the day with a -5.65 loss after losing revenue for the third year in a row. The intraday low of $112.81 coincided closely with the bottom set in the last three weeks of November. Several analysts felt it was a buying opportunity but few traders took advantage of it. Microsoft also took a hit with a -3.75 drop to close near the lows of the day. The warning about lower revenues in some products and higher costs in others (Xbox) weighed on investor consciousness. Microsoft went counter to the recent recovery sentiment by saying they were even move pessimistic now than in the past about the PC market. Investors did not like the message and over 53 million shares traded hands. SunMicro bucked the negative trend with positive comments with their earnings announcement saying they expected revenues to rise slightly in the current quarter. They also said they expect to be profitable again by the June quarter. Revenues would be slightly above the $3.1 billion in the last quarter. The CFO for SUNW said they were still seeing "extreme levels of competition" among network computer makers and that could slow IT spending in the near term. SUNW dropped a quarter on the day to close near $12, a level where retail traders feel there is little risk. Over 77 million shares traded in SUNW. Not to be left out of the tech free for all, Dell announced that they would beat revenue and profit estimates for last quarter. Dell issued a press release stating that sales would reach $8 billion and earnings 17 cents per share. They said sales in the holiday season were stronger than expected, thank you Steven. Dell said shipments would run +50% over the third quarter and revenue would increase +40%. Dell was the only computer systems company to attain year over year growth in global shipments both for Q4 and the year. Industry analysts rate Dell's market share in the U.S. between 27% and 30%. Investors did not exactly cheer the Dell announcement and the stock lost -.85 cents for the day. Any other time Dell and SUNW could have gained on their news but the negative outlook from IBM and MSFT was just too thick a cloud to pierce. Intel lost another -1.05 on the IBM/MSFT outlook and continued an eight day slide. Adding to the negative outlook on the chip sector was an announcement from Taiwan Semiconductor that they were going to cut capital expenditures along the same guidelines as Intel. The chip equipment makers like AMAT, NVLS, KLAC all dropped to new lows along with the SOX.X which closed at the low for January, 523, and well below the 200 DMA at 553. How does that fairy tale go about the SOX leading any tech recovery? IMCL got kicked again on Friday. Eric talked me out of making IMCL a put play on Thursday night but to be fair I also wanted to drop QCOM as a put because it would not break $46 and he talked me out of that also. QCOM dropped -2.35, IMCL fell -9.09. Of course nobody knew that IMCL would be halted around midday after it received a letter of inquiry from a house subcommittee about the drug Erbitux. The biotech sector just can't get a break recently appears headed for support at 480. There should be some real values there once the sector stabilizes. The markets are definitely experiencing mood swings and this is evidenced by the cash inflows into equity funds. In the five days ending Jan-17th U.S. equity funds saw +$2.3 billion flow into their accounts. However only two of those five days saw positive flows. The flood of retirement cash has turned into a trickle and the markets are reflecting this event. This is contrary to the general consumer sentiment, which exploded in the University of Michigan report on Friday. The index shot up to 94.2 and the highest level in twelve months. This was the fourth month of improvement and the highest point since the 81.8 low in September. Consumers feel better off after purchasing a new home or consolidating debt with a low interest refinance. Gas prices are down, millions are driving new cars for zero interest and the terrorist problem at home appears to be under control. Jobless claims fell again this week as well as continuing claims leading some analysts to think that a broad based recovery is really beginning. Despite the rising consumer confidence stocks got killed over the last two weeks. Investors have a good memory of the losses they sustained in 2000/2001 and are not rushing back into the markets just yet. When I started my research for today's commentary I was bearish. As I compiled all the facts and looked at hundreds of charts I am now cautiously bullish again. First, I know that a lot of readers will disagree with me. That is your choice however you pay me to interpret the signals and express my opinion. If it was always the same as yours we would both lose. Also, just because I am "cautiously" bullish it does not mean I think the markets will go up on Tuesday. Everyone interprets my comments as gospel and we all know that is not correct. Nobody can call exact tops and bottoms until after the fact and then some people still get it wrong. Now lets review the facts. IBM and MSFT said there were still difficult times ahead BUT they would still make their numbers even if a recovery did not appear. GE is still projecting 17% growth WITHOUT a recovery. MMM is looking for 8% growth. SUNW said the bottom was behind them and they were expecting growth. Dell shipped 50% more computers in the fourth quarter than the prior year. Compaq likes their chances going forward. Corning is starting two plants back up to handle the expected 2H business. Do you see a common trend here? Warnings are slowing. Companies have cut to the bone and are prepared to be profitable with no recovery ahead. Inventory levels are dropping to critical levels with only consumer buying. Once corporate customers see daylight and start buying again the ramp to cover those orders will be huge. Companies will be even more profitable in the coming recovery than they were in the bubble days. They have lowered costs and dropped unprofitable businesses. The IBM announcement was just another in a long line of "reduced revenue" excuses. Mainframe sales are giving way to servers and personal computers with a cheaper price tag. No problem for profits since the services business with its $100 billion order backlog has a much higher profit margin. I do believe the drop in IBM is a buying opportunity, once it firms. Microsoft on the other hand has an ulterior motive. Man, business was so good we don't know what to do with the money! Cha-ching! Regulators and class action lawyers just added another billion to the price tag for settlement. Microsoft was just managing expectations. Seventeen million installs on WindowsXP is not bad business. Microsoft said it was their best windows launch ever. Chalk up the Microsoft comments to damage control instead of global economic worry. You want to see the real strength of the economy look at GE. CEO Immelt came close to saying things were recovering in his interview on Thursday. He stole a line from the Graduate and said "plastics" is where it is at. When his plastics business exhibits a growth spurt he will know the recovery is underway. Still he expects to grow +18% for the year. Not bad and the stock is cheap. Much of the Dow drop over the last two weeks was due to asbestos worries. Several of the Dow companies came out this week and dismissed those claims as false. MMM said they were not material. DOW said they had plenty of reserves. DD, HON, UTX had all taken asbestos hits and now appear to be ready to move back up as those fears ease. The Fed is making noises about another rate cut at the end of January as insurance to guarantee a solid recovery. Glad they care because most investors don't, at least not on the surface. Just remember that while we may not be excited about another quarter point cut now, that cut stretched out another year will have impact. That takes another monthly meeting cycle to retract each one which means it could be two years before the Fed gets back to the market killing rates we had just a short time ago. Take anything they give us and say thank you. There is also a rumor that Greenspan may have misspoke last week and gave a more negative view of the economy then he intended. The Washington Post has an article on this in the weekend edition. Does this mean he will correct this impression soon? The sell off of the last two weeks was expected. Nobody should be alarmed or worried because of it. The post 9/11 drop pushed the already falling markets into severe oversold territory. Once the initial bounce was over the 4Q earnings run began as dozens of analysts predicted a V bottom recovery. The euphoria grew as traders, feeling like the worst was behind them, took positions expecting better earnings than anybody should have. When those earnings came in at the estimates and without glowing guidance those investors raced to take profits. Heated investor expectations met the cold light of reality and we got almost a -600 point Dow drop. Add in the asbestos problems, Enron, Kmart and a couple cautious outlooks and suddenly Nasdaq 2000 was a lot closer then 3000. Where we go from here may not be as bad as many expect. The not so dire warnings from IBM and MSFT failed to push the Dow back to Wednesday's support lows. The Nasdaq broke support at 1950 and fell below the 200 DMA at 1933 but only barely. Many of the hundreds of charts I looked at on Friday night finished well off their lows BUT many also finished at the lows of the day. This means that the selling may not yet be over. We do not know where it will stop but I think it is close. The Dow has strong support just above 9700 and without a significant Dow event I think that may hold. Any major earnings miss or warning could break that support but if IBM/MSFT/INTC could not break it, who can? The Nasdaq is weaker due to the triple whammy of Chips, Software and Biotech. I did not include the PC sector since the Compaq, Dell and SUNW comments appear to have put a bottom under it. Still the Nasdaq could easily trade between here at 1930 and bottom support at 1880, a 50 point range. In order to break support at 1880 the majority of the biggest Nasdaq components would have to break their next support levels. The following graphic shows where those stocks are and where their next support levels would be. Of those nine stocks only two are showing a probable chance of breaking that support, AMGN and QCOM. Four are showing only a possibility, INTC, CSCO, SUNW, MXIM. While ORCL, MSFT and DELL are not likely to break support levels. This means that we could see a further sell off to 1880 but it would take another major change in sentiment to push below it. Anything is possible but as Austin says, we are looking at higher odds that 1880 will hold if tested. For the S&P-500 at 1127 the next support is at 1118 and not far away. This is pretty decent support from the middle of December and should at least provide an interim bounce. Despite what traders believe the markets have moved exactly sideways for the last two months. The Dow is exactly where it was trading on November-13th. The Nov/Dec gains have vanished in a puff of profit taking smoke. The "earnings" anticipation gains are gone and we are back to trading on reality as scary as that may be. The internal indicators were ugly on the surface with decliners beating advancers substantially on both major averages. The down volume was 2:1 over up volume. However those internals produced some positives as well. The put/call ratio is the most bullish it has been in the last four Fridays at .85. It is normally a decent indicator. The Arms Index (TRIN) 5 & 10 DMA are both above 1.50 which is also somewhat bullish. Both the put/call ratio and the TRIN are indicators of oversold conditions. The VIX is hovering in the 25 range, which while not bullish it is not bearish either. The bottom line here is a possible change in the trend coming soon. I am not confident enough to say it will be Tuesday morning since there are still negatives in play but it could easily come any day. The trick here is to play what we see not what we believe. Just because my screen of the available facts suggests there may be a bounce in our future does not mean we should ignore market direction. The market is oversold but can get more oversold. There is no trigger on the trading floor that sets off the "buy alarm" when a certain level is reached. It is all subjective and without buyer conviction of better earnings ahead the prices can just keep falling. The instructions for Tuesday are play the trend. If the trend continues down be aware of the support levels mentioned above as possible exits for bearish plays. If you are looking for the bounce then wait until after amateur hour for confirmation of any upward moves. Gentlemen choose your weapons, it should be an interesting week! (Gentlewomen also!) Enter Passively, Exit Aggressively! Jim Brown Editor@OptionInvestor.com Tried our Market Monitor yet? Mark Phillips joins the team Tuesday! http://www.OptionInvestor.com/itrader/marketbuzz/ ************* EDITORS PLAYS ************* Betting on Direction The direction is still uncertain but some stocks are holding their ground. Lets start with a play with earnings on the way. As always, sell before the actual earnings announcement to avoid problems like the IBM/MSFT results last week. Long Call Expedia $44.49 As usual I like the ITM call at $5.60 with only $1.10 of premium to decay if the stock does nothing. If Expedia rises to $48.40 I would see a 50% gain of $2.80 on the ITM option. The ATM option would gain $1.00 for a 41% gain. While the percentages would be close the difference in profits would be considerably greater. Still the cost of ownership and the amount of money at risk is greater with the ITM option. I would set my stop at $43.25 which is under the low of the last three days. *************** Speculative put Panera Bread Officers and directors are selling stock like crazy. They just announced results for the year which appeared good but it looks like everyone who knows is dumping. Could be just spreading the wealth but with strong gains like this I become suspicious. I like the Feb-$55 put for $2.10. If you want to hedge your bet that the trend continues you could buy the Feb-$60 call for $1.75. This is pure speculation that something may happen soon to depress this stock price. http://biz.yahoo.com/t/p/pnra.html trade data ****************** Long Call - Deluxe Corp The chart on Deluxe looks great but if you look close it is a slow mover. The options are cheap and for $1.45 you could afford to hold over earnings on Jan-31st and hope for a bump. Still a risky play. With earnings around the corner you might want to wait until after the event to enter a position. You risk missing a bump or a dip but at least have a clearer idea of post earnings direction. April $45 call is only $1.45 with three months of time to play. Target shoot the April $45 puts for $1.00 on the next strong day and turn it into a straddle for insurance against an unexpected event. ****************** These are all high-risk plays so be sure to only use HIGH RISK capital to play them. Good Luck Jim ******************** INDEX TRADER SUMMARY ******************** Wading Through Waves Of Expiration Austin Passamonte This morning's gap-down move was about reality of our current economic state. Midday action was typical sideways behavior and into the close was all about January option expiration. Massive amounts of equity calls were dumped in the market by disenchanted buyers faked out of their accounts by Thursday's bull-trap rally. Others who held for weeks, months and even years in the case of January contracts that were once LEAPS contracts finally capitulated late today. Lest anyone think that extra, extra time premium in an option gives one a measure of insurance against risk, pour thru some gargantuan equity option strikes deep OTM that once seemed like low-risk LEAP play "investments". A lesson for all of us on the vital importance of stop-loss usage. Proper account balance management as priority number one. (Weekly Chart: SPX) The SPX shed a bit more than 50 index points from last week's high to this week's low. We've seen that done in one session or even two minute's time on Jan 3rd last year in that surprise rate cut folly by the Fed. Still, a decent directional move we're in the midst of. Retracing from the last relative high to ultimate low sees this latest bear market rally failed right at 62% of the span and now rests right below 50%. Drawing a trendline down from then (and earlier) forward projects next support near the 1085 area, which coincides with a 38% retrace of September's low towards May high. With two key measures of prediction bisecting there, it's more than equal odds we'll see the SPX touch there in the next couple of weeks or so. Would make those Position Trade model SPX 1125 Feb put plays then valued at $4,000 intrinsic plus Theta & Vega added in. Time will tell from here, but stochastic values have plenty of room to run. (Weekly Chart: SOX) SOX index has had the cotton beat out of it. Poor attempt at humor spun like wool. Oops, there I go again! Seriously, we last looked at this when it rested near 560 and said it might reach 540 area in a day or two. Forget that minor speed bump as it blew thru and reached 523 to close instead. Next support is on that mid-line value (black) inside the channel near 430 area and slanting lower each week. No reason to think it won't be visited soon. (Weekly Chart: BTK) And now the Biotechs, where hot money flocks and valuations are fast & loose. Imclone is the latest to prove how explosive these issues are and put players revel in that fact for now. This tech sector's decline precedes the NDX, SOX and most others via measurement of stochastic decline. Much like the DRG index, biotechs have formed a years' long neutral wedge that finally broke to the upside last fall, but has since fallen back into the consolidation range. If 500 area fails to hold, I'd immediately look for the ascending wedge line near 425 to be revisited next. Summation What a difference a month makes. This time in December, all we heard about was Santa Claus rallies and IBM at $150. Next we may see Punxatawny Phil and Dow 9,000 or less. No telling what the Easter Bunny may bring in his basket but the last two visits brought new recent lows each time. For now we have Dr. King Day to relax & reflect. All of Year 2002 lies ahead with massive opportunity for profit running both ways. Do your best to stay on the right side of market direction and I promise to attempt the same! Best Trading Wishes, austinp@OptionInvestor.com ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES AT OPTIONSXPRESS * EASY screens for spreads, collars, covered calls or butterflies! * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor010 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** **************** MARKET SENTIMENT **************** The Arms Index By Eric Utley The Arms Index is named after its creator, Richard Arms. A very nice gentleman, who I've had the pleasure of speaking with on a few occasions. Mr. Arms developed the index in 1967. It measures the relationship between stocks increasing or decreasing in price and the volume that accompanies the movement in price. The Arms Index reveals whether volume is moving with stocks that are advancing or stocks that are declining. Most traders use the index reading with a smoothed moving average. The 5-day moving average is best-used by short-term traders. The 21-day moving average is more appropriate for intermediate-term traders. And the 55-day moving average is intended for a relatively longer-term view. The index is most effective at extreme overbought or oversold levels. Readings above 1.5 are considered buying opportunities in a market that is oversold. Readings below 0.85 are indicative of an overbought market and one that is about to reverse lower. The readings should be viewed in the context of the time period in which they are observed. For instance, a reading above 1.5 in the 5-day ARMS Index is more important to a short-term trader than a long-term trader, who should be more concerned with the 55-day number. Short-term traders: the 5- and 10-day Arms Index is above 1.5 The Arms Index is predicting a rally from oversold conditions in the short-term. That much is contradictory to the bullish percent dynamic I've been writing about in terms of bias, not timeframe. The 5- and 10-day Arms Index numbers concern the short-term. The bullish percent data, while useful in the short-term, is not as pertinent to three or four day moves. It concerns the bigger picture. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9772 Moving Averages: (Simple) 10-dma: 9965 50-dma: 9926 200-dma: 10105 S&P 500 ($SPX) 52-week High: 1383 52-week Low : 945 Current : 1128 Moving Averages: (Simple) 10-dma: 1146 50-dma: 1144 200-dma: 1167 Nasdaq-100 ($NDX) 52-week High: 2771 52-week Low : 1089 Current : 1548 Moving Averages: (Simple) 10-dma: 1619 50-dma: 1607 200-dma: 1612 ----------------------------------------------------------------- Market Volatility The VIX traced a curious inside day Friday. It's still trapped in between its overhead 50-dma and supporting 10-dma. Watch for a crossover in the moving averages. The VXN traced an inside day Friday, too. The VXN was higher by about 4 percent in a day the $NDX was down by 3.37 percent. I thought it would've been higher. It's possible that Friday's expiration of JAN paper kept the index lower. Next week's trading should be more telling as it relates to the market's sentiment. CBOE Market Volatility Index (VIX) - 24.37 +0.63 Nasdaq-100 Volatility Index (VXN) - 48.83 +1.86 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.85 951,846 810,830 Equity Only 0.77 874,041 673,045 OEX 1.18 34,389 40,630 QQQ 1.13 66,212 75,064 ----------------------------------------------------------------- Bullish Percent Data There was an error in the S&P 500 Bullish Percent Data last Thursday. The index did not enter Bull Correction. The S&P 500 remains in Bull Confirmed through last Friday. Current Change Status NYSE 54 + 0 Bull Alert NASDAQ-100 46 - 1 Bear Confirmed DOW 63 + 0 Bull Correction S&P 500 63 + 0 Bull Confirmed S&P 100 63 +10 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 1.56 10-Day Arms Index 1.50 21-Day Arms Index 1.28 55-Day Arms Index 1.14 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 1236 1872 NASDAQ 1126 2321 New Highs New Lows NYSE 83 36 NASDAQ 86 30 Volume (in millions) NYSE 1,371 NASDAQ 1,853 ----------------------------------------------------------------- Commitments Of Traders Report: 01/15/02 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 traders grew less bearish last week by adding to their long positions and subtracting from the short position. The net drop in the group's short position amounted to roughly 7,500 contracts. Small traders reduced their net long position by about 4,000 contracts. Commercials Long Short Net % Of OI 12/28/01 338,288 407,017 (68,729) (9.2%) 01/08/02 333,742 398,286 (64,544) (8.8%) 01/15/02 340,005 397,024 (57,019) (7.7%) 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 12/28/01 127,419 55,576 71,843 39.3% 01/08/02 130,335 60,780 69,555 36.4% 01/15/02 129,987 64,311 65,676 33.8% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 Nasdaq commercial interests reduced their net bearish position in the most recent reporting period by more than 5,000 contracts. The group both added longs and dropped shorts. Small traders adopted a neutral stance, with a net long position of only 448 contracts. Small traders added more than 3,000 short positions, while essentially maintaining the prior period's long position. Commercials Long Short Net % of OI 12/28/01 29,801 37,497 (7,696) (11.4%) 01/08/02 30,786 38,913 (8,127) (11.7%) 01/15/02 32,068 34,859 (2,791) ( 4.2%) 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 12/28/01 10,649 5,913 4,736 28.6% 01/08/02 10,073 6,404 3,669 22.3% 01/15/02 10,230 9,782 448 2.2% 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 maintained their total long position from the prior reporting period. The group added about 1,200 contracts to the total short position for a decline in their net bullish position. Small traders went in the opposite direction by closing a number of short positions for a decline in their net bearish stance. Commercials Long Short Net % of OI 12/28/01 15,820 7,553 8,267 35.7% 01/08/02 15,921 7,981 7,940 33.2% 01/15/02 15,866 9,175 6,691 26.7% 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 12/28/01 3,368 8,668 (5,300) (44.0%) 01/08/02 4,380 9,188 (4,808) (35.4%) 01/15/02 4,979 8,747 (3,768) (27.5%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck" * IRA Accounts Available * 8 different FREE options pricing, strategy, and charting tools * Real-Time Buying Power, Account Balances or Cancels * EASY screens for spreads, collars, covered calls or butterflies! Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor013 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** *************** ASK THE ANALYST *************** The January Barometer By Eric Utley For the benefit of those without a Stock Trader's Almanac, I thought I'd pass along a time-tested phenomenon. It's been incredibly accurate in the last 50 years. The premise of the January Barometer is that the first month of the year dictates how the market will finish the year. If the market is lower in January, then it will end the year lower. If the market is higher in January, it will end higher for the year. The market is defined by the S&P 500 ($SPX) for the purposes of the study. The January Barometer has been wrong four times in the last 50 years: In 1966, the SPX finished higher in January by 0.5 percent. It ended 1966 lower by 13.1 percent. In 1968, the SPX finished 4.4 percent lower in January. The SPX ended 7.7 percent higher in 1968. In 1982, the SPX started the year 1.8 percent lower. It finished 14.8 percent higher in 1982. The fourth error was observed last year. "Bear markets began or continued when Januarys had a loss," observes the almanac. The SPX is lower by 1.7 percent through last Friday's close. The point and figure charts that appear in this column were created using www.StockCharts.com. Please send your questions and suggestions to: Contact Support ---------------------------- Big Blue - (NYSE:IBM) Perhaps you can look at IBM for me. It seems to be forming a long pole warning, after fulfilling its [price objective]. Does it look as if it's going to stumble, along with everything else, or we won't know until after it gives us a lower projection, which would take a while. Thanks again for your cerebral analysis. - Stan Very cool comment, Stan. Cerebral, huh? I can comfortably live with that. Thank you. A Tech Macrocosm IBM reported fourth-quarter numbers last Thursday evening. The company eked out a penny better-than-expected earnings per share number but missed revenue estimates by about $1 billion. The bellwether blamed its short-fall on slow personal computer (PC) sales and original equipment manufacturer (OEM) business weakness. Forecasting the weakness in its PC business, IBM farmed out the manufacturing process for its NetVista PC, a consumer product, to Sanmina (NASDAQ:SANM) a few weeks back. IBM's aim is to reduce costs by passing along the manufacturing process to Sanmina. The reason for the cost reduction stride was because of the horrid sales in the group last year. Revenues from IBM's PC division fell by about 30 percent last year. It's interesting to view IBM's PC-related weakness in light of the recent reports from others involved in the market, such as Intel (NASDAQ:INTC) and Dell (NASDAQ:DELL). The latter raised guidance intraday last Friday, refuting IBM's slump in sales. By backing out of the consumer PC market, IBM is shifting its full PC focus on the corporate market. It can't compete with the smaller firms, such as Dell and Compaq (NYSE:CPQ), in the consumer space, so it's a good move for Big Blue. But it may come at the cost of losing recognition from corporate buyers, who aren't in the buying mood to begin with. It's becoming increasingly evident that businesses aren't back to their spending ways. Remember, this is or was a business-led recession. The build out at the turn of the millennium left virtually every segment of technology filled with capacity. Corporate buyers just don't need to buy new boxes for their employees. They are more concerned with cutting costs and making it through this downturn. The PC market as a whole can be volatile, especially with spikes in consumer spending trends. The corporate PC market is, in my opinion, a good gauge of corporate spending altogether. An up-tick in corporate PC purchases would reveal an expansion in business, which would carry on down the tech chain. But spending isn't up-ticking. When will corporate buyers start spending again? They were expected to return sometime near the midway point of this year. But the recovery date has been pushed out in the last week by IBM, as well as Intel and Microsoft (NASDAQ:MSFT). Intel slashed its spending plans by 25 percent. IBM operates in many markets, but its corporate PC business is worth monitoring as it relates to the rest of technology and the eventual return of corporate spending. Judging by what IBM reported, that may not happen until next year. The company hit its earnings numbers through cost reductions, but missed for the third consecutive quarter on the top-line. IBM's revenue miss by about $1 billion last Thursday reinforces the difficulties that lie ahead for tech companies. Tracking Tech For its breadth and size ($200 billion market cap), IBM is a natural choice for tracking the technology segment of the market. If you have time to only follow one stock in tech, IBM is the one. Through dissecting IBM's price action, perhaps readers can make their own inferences into how the stock relates to the rest of technology. IBM has traded sideways to lower in the last three years. The stock hit its peak at $139 in 1999. It proceeded to rally up to near that level in the following year, but fell a bit short, resulting in a descending trend being formed. The trend remains well intact today. Support in the past three years has been solid at the $80 level on the occasions that IBM has dipped that low. It's spent the better part of the period trading between the $100 and $120 levels. (IBM - Weekly) The stock rallied recently from a low at $87.50 traced in late September to a high of $126.50 earlier this month. A 45 percent move in IBM in the space of three months is big. The premise behind the stock's advance was based upon a strong recovery in the economy and IBM's business lines. While its business has improved from September's and October's levels, it's far from outright bullish judging by the report last week. What the market said last week was, "Hey, things are better now than a few months ago, but not that good." We can continue listening to what the market is "saying" about IBM through using a retracement bracket. The one I've used is a simple bracket, anchored from the September low to the January high. The levels of retracement were fairly consistent on the way up, so I'd expect that they will be accurate on the way back down. For instance, IBM hung around the $119 level early last week before gapping lower in Friday's session. The establishment of support at the $112 level through November is reinforced by the 38.2 percent retracement level on the chart. Other observations can be made going all the way down to the 80.9 percent retracement at roughly the $95 level. (IBM - Daily) A trader or investor can monitor the business outlook through using the retracement bracket. If IBM were to fall below the 38.2 percent retracement level in the short-term, then the market will be saying that either business is getting worse for the tech giant or the recovery in spending is moving further into the future. The progression of risk down the retracement bracket will help tell us when IBM's business improves. The employment of the point and figure charting method in IBM is especially effective because the stock is very liquid and highly-watched by institutional types. The stock tends to conform to its patterns, levels, and price objectives pretty closely. IBM's rally from its September lows through early October generated a bullish price objective of $122. Yes, the stock exceeded its vertical count in early January, but only by $4. Very close. The rally through late October and into early January resulted in one very big column of Xs on the chart. The reversal last week was IBM's first in three months. I think the reversal in and of itself speaks a lot about the current sentiment in technology stocks. (As you view IBM's point and figure chart, notice the correlation with levels on the retracement bracket I used, such as the 38.2 percent retracement level at $112 and the 80.9 percent retracement level at $95.) (IBM - P&F) Does IBM look as if it's going to stumble? There's been a significant shift in the stock's supply and demand dynamic as signaled by the reversal on the point and figure chart. Where does the risk lie in the stock? The way to answer that question is by monitoring the retracement levels. A decline below the next retracement level (38.2) would indicate that IBM is going to stumble. ---------------------------- 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 ************* ----------------------------------------------------------------- Major Earnings This Week... ----------------------------------------------------------------- Symbol Company Date Comment EPS Est ASH Ashland Mon, Jan 21 -----N/A----- 0.86 CP Canadian Pacific Rail Mon, Jan 21 After the Bell 0.44 XRAY DENTSPLY International Mon, Jan 21 After the Bell 0.58 DOV Dover Mon, Jan 21 After the Bell 0.16 DPL DPL Mon, Jan 21 -----N/A----- 0.31 ESA Extended Stay America Mon, Jan 21 After the Bell 0.10 FISV Fiserv Mon, Jan 21 After the Bell 0.27 HE Hawaiian Electric Mon, Jan 21 -----N/A----- 0.77 IFX Infineon Tech AG Mon, Jan 21 Before the Bell N/A KEM Kemet Mon, Jan 21 After the Bell 0.00 PWAV Powerwave Technologies Mon, Jan 21 -----N/A----- -0.04 VMC Vulcan Materials Mon, Jan 21 After the Bell 0.49 ACXM Acxiom Tue, Jan 22 Before the Bell 0.13 ADVS Advent Software Tue, Jan 22 After the Bell 0.32 ACS Affiliated Comp Serv Tue, Jan 22 Before the Bell 0.84 APD Air Products & Chem Tue, Jan 22 Before the Bell 0.55 AL Alcan Inc. Tue, Jan 22 -----N/A----- 0.18 AGN Allergan Tue, Jan 22 Before the Bell 0.60 ALTR Altera Corporation Tue, Jan 22 -----N/A----- 0.03 AMZN Amazon.com Tue, Jan 22 -----N/A----- -0.07 AMB AMB Property Tue, Jan 22 After the Bell 0.70 DOX Amdocs Limited Tue, Jan 22 After the Bell 0.35 AEP American Elec Power Tue, Jan 22 -----N/A----- 0.39 AMTD Ameritrade Holding Tue, Jan 22 Before the Bell 0.01 AOT Apogent Tue, Jan 22 Before the Bell 0.28 AMCC Applied Micro Cir Corp Tue, Jan 22 After the Bell -0.04 ARBA Ariba Tue, Jan 22 Before the Bell -0.05 AVB Avalonbay Communities Tue, Jan 22 After the Bell 1.03 AVY Avery Dennison Tue, Jan 22 During the Market0.60 ACLS Axcelis Technologies Tue, Jan 22 -----N/A----- -0.17 BAC Bank of America Tue, Jan 22 Before the Bell 1.24 BKNG Banknorth Group Tue, Jan 22 Before the Bell 0.45 BLS BellSouth Tue, Jan 22 Before the Bell 0.60 BSYS BISYS Group Tue, Jan 22 After the Bell 0.43 BJS BJ Services Tue, Jan 22 Before the Bell 0.42 BXP Boston Properties Tue, Jan 22 After the Bell 0.94 BG Bunge Limited Tue, Jan 22 Before the Bell 0.46 BNI Burlington N. Santa Fe Tue, Jan 22 Before the Bell 0.57 CDN Cadence Design Systems Tue, Jan 22 After the Bell 0.26 CBM Cambrex Tue, Jan 22 After the Bell 0.34 CNI Canadian National Rail Tue, Jan 22 After the Bell 0.84 CWG CanWest Global Comm Tue, Jan 22 -----N/A----- N/A CAH Cardinal Health Tue, Jan 22 -----N/A----- 0.63 CDWC CDW Computer Centers Tue, Jan 22 After the Bell 0.46 CEY Certegy Tue, Jan 22 Before the Bell 0.38 CF Charter One Financial Tue, Jan 22 After the Bell 0.59 CKFR CheckFree Tue, Jan 22 After the Bell -0.02 CMRC Commerce One Tue, Jan 22 After the Bell -0.15 CA Computer Assoc Inter Tue, Jan 22 After the Bell 0.60 CPWR Compuware Tue, Jan 22 After the Bell 0.11 COC Conoco Tue, Jan 22 Before the Bell 0.36 CSX CSX Tue, Jan 22 Before the Bell 0.48 DHI D.R. Horton Tue, Jan 22 -----N/A----- 0.77 DTL Dal-Tile International Tue, Jan 22 Before the Bell 0.29 DV DeVry Tue, Jan 22 -----N/A----- 0.24 DO Diamond Offshore Drill Tue, Jan 22 Before the Bell 0.28 DFXI Direct Focus Tue, Jan 22 After the Bell 0.48 ELNK EarthLink, Inc. Tue, Jan 22 -----N/A----- -0.11 ETN Eaton Tue, Jan 22 Before the Bell 0.61 EMLX Emulex Tue, Jan 22 -----N/A----- 0.09 FCS Fairchild Semi Inter Tue, Jan 22 -----N/A----- -0.04 FRE Freddie Mac Tue, Jan 22 Before the Bell 1.12 GMT GATX Tue, Jan 22 -----N/A----- 0.24 GSF GlobalSantaFe Corp. Tue, Jan 22 After the Bell 0.43 HCP Health Care Property Tue, Jan 22 Before the Bell 0.83 HMA Health Man Ass, Inc. Tue, Jan 22 Before the Bell 0.19 HUBb Hubbell Tue, Jan 22 -----N/A----- 0.29 ICBC Indep Community Bank Tue, Jan 22 After the Bell 0.41 IDTI Integrated Device Tech Tue, Jan 22 -----N/A----- -0.13 IP International Paper Tue, Jan 22 Before the Bell 0.02 IFIN Investors Fin Services Tue, Jan 22 -----N/A----- 0.42 JNJ Johnson & Johnson Tue, Jan 22 -----N/A----- 0.39 LAF Lafarge North America Tue, Jan 22 After the Bell 0.90 LR Lafarge S.A. Tue, Jan 22 After the Bell N/A LEE Lee Enterprises Tue, Jan 22 -----N/A----- 0.37 LU Lucent Technologies Tue, Jan 22 Before the Bell -0.25 MCK McKesson Corporation Tue, Jan 22 Before the Bell 0.36 MRK Merck Tue, Jan 22 Before the Bell 0.81 MERQ Mercury Interactive Tue, Jan 22 After the Bell 0.12 MCHP Microchip Technology Tue, Jan 22 After the Bell 0.17 MLNM Millennium Pharm Tue, Jan 22 After the Bell -0.19 MOT Motorola Tue, Jan 22 After the Bell -0.05 NCC National City Tue, Jan 22 Before the Bell 0.58 NAP National Processing Tue, Jan 22 Before the Bell 0.32 NCR NCR Tue, Jan 22 Before the Bell 0.72 NTIQ NetIQ Tue, Jan 22 After the Bell 0.18 NU Northeast Utilities Tue, Jan 22 -----N/A----- 0.39 NVLS Novellus Systems Tue, Jan 22 After the Bell 0.11 OPWV Openwave Systems Tue, Jan 22 After the Bell -0.10 PKG Packaging Corp of Am Tue, Jan 22 Before the Bell 0.21 PRK Park National Tue, Jan 22 -----N/A----- N/A PCZ Petro-Canada Tue, Jan 22 -----N/A----- N/A PPP Pogo Producing Tue, Jan 22 -----N/A----- 0.03 PEG Public Service Ent Gr Tue, Jan 22 During the Market0.92 RYN Rayonier Tue, Jan 22 After the Bell 0.20 RETK Retek Tue, Jan 22 Before the Bell 0.06 RGS RGS Energy Group Tue, Jan 22 -----N/A----- N/A RHI Robert Half Inter Tue, Jan 22 After the Bell 0.09 ROK Rockwell Automation Tue, Jan 22 Before the Bell 0.15 SLB Schlumberger Tue, Jan 22 Before the Bell 0.33 SLAB Silicon Laboratories Tue, Jan 22 After the Bell -0.01 SWBT Southwest Bancorp TX Tue, Jan 22 -----N/A----- 0.41 STK Storage Technology Tue, Jan 22 -----N/A----- 0.31 TPP Teppco Tue, Jan 22 Before the Bell 0.45 UBSI United Bankshares Tue, Jan 22 Before the Bell 0.49 VIGN Vignette Tue, Jan 22 After the Bell -0.06 VTSS Vitesse Semiconductor Tue, Jan 22 After the Bell -0.13 WWY Wm. Wrigley Jr. Tue, Jan 22 -----N/A----- 0.39 ATVI Activision Wed, Jan 23 -----N/A----- 0.58 AMG Affiliated Man Group Wed, Jan 23 -----N/A----- 0.92 AGRa Agere Systems Wed, Jan 23 -----N/A----- -0.22 ALB Albemarle Wed, Jan 23 -----N/A----- 0.31 ABK Ambac Financial Wed, Jan 23 Before the Bell 1.07 AHC Amerada Hess Wed, Jan 23 -----N/A----- 1.12 AMGN Amgen Wed, Jan 23 After the Bell 0.31 ABI Applied Biosystems Wed, Jan 23 After the Bell 0.24 ADM Archer Daniels Mid Co Wed, Jan 23 Before the Bell 0.24 BARZ BARRA Wed, Jan 23 Before the Bell 0.46 BCE BCE Wed, Jan 23 Before the Bell 0.26 BDX Becton Dickinson Wed, Jan 23 After the Bell 0.34 BA Boeing Wed, Jan 23 Before the Bell 0.89 BOKF BOK Financial Wed, Jan 23 -----N/A----- 0.51 EAT Brinker International Wed, Jan 23 Before the Bell 0.34 BRCM Broadcom Wed, Jan 23 After the Bell -0.12 BR Burlington Resources Wed, Jan 23 Before the Bell 0.04 CFFN Capitol Federal Fin Wed, Jan 23 -----N/A----- 0.27 CAT Caterpillar Wed, Jan 23 Before the Bell 0.76 CRA Celera Genomics Wed, Jan 23 After the Bell -0.40 CTX Centex Corporation Wed, Jan 23 Before the Bell 1.39 CEN Ceridian Wed, Jan 23 Before the Bell 0.15 CRUS Cirrus Logic Wed, Jan 23 After the Bell -0.22 CTXS Citrix Systems Wed, Jan 23 After the Bell 0.20 COH Coach Wed, Jan 23 Before the Bell 0.96 GLW Corning Wed, Jan 23 After the Bell -0.22 CFR Cullen/Frost Bankers Wed, Jan 23 Before the Bell 0.49 CUM Cummins Inc. Wed, Jan 23 Before the Bell 0.07 DBD Diebold Wed, Jan 23 -----N/A----- 0.62 DD DuPont Wed, Jan 23 Before the Bell 0.11 DYN Dynegy Wed, Jan 23 Before the Bell 0.41 SSP E.W. Scripps Wed, Jan 23 Before the Bell 0.48 EFII Electronics Imaging Wed, Jan 23 After the Bell 0.16 XOM Exxon Mobil Corp Wed, Jan 23 Before the Bell 0.41 FO Fortune Brands Wed, Jan 23 -----N/A----- 0.74 FBN Furniture Brands Inter Wed, Jan 23 After the Bell 0.36 GGG Graco Wed, Jan 23 Before the Bell 0.53 HAL Halliburton Wed, Jan 23 After the Bell 0.33 HP Helmerich & Payne Wed, Jan 23 -----N/A----- 0.42 IMNX Immunex Wed, Jan 23 -----N/A----- 0.08 ISSX Internet Security Sys Wed, Jan 23 Before the Bell 0.07 KMG Kerr-McGee Wed, Jan 23 -----N/A----- 0.14 KLAC KLA-Tencor Wed, Jan 23 -----N/A----- 0.24 KRON Kronos Incorporated Wed, Jan 23 -----N/A----- 0.29 LSI LSI Logic Wed, Jan 23 After the Bell -0.24 MKC McCormick & Co Wed, Jan 23 Before the Bell 0.94 MMM Minnesota Min & Manu Wed, Jan 23 Before the Bell 0.97 NATI National Instruments Wed, Jan 23 -----N/A----- 0.13 NSCN Netscreen Tech Inc. Wed, Jan 23 After the Bell N/A NYCB New York Comm Bancorp Wed, Jan 23 Before the Bell 0.37 GAS Nicor Wed, Jan 23 After the Bell 0.97 NSC Norfolk Southern Wed, Jan 23 -----N/A----- 0.23 PTV Pactiv Wed, Jan 23 After the Bell 0.28 PMI PMI Group Wed, Jan 23 Before the Bell 1.81 PNM PNM Resources Wed, Jan 23 After the Bell 0.35 PLCM Polycom Incorporated Wed, Jan 23 -----N/A----- 0.14 PX Praxair Incorporated Wed, Jan 23 Before the Bell 0.69 PGN Progress Energy Wed, Jan 23 Before the Bell 0.54 PGR Progressive Wed, Jan 23 After the Bell 1.81 QLGC QLogic Wed, Jan 23 After the Bell 0.19 RDN Radian Group Wed, Jan 23 After the Bell 0.98 RTN Raytheon Co. Wed, Jan 23 After the Bell 0.41 RGIS Regis Corporation Wed, Jan 23 -----N/A----- 0.37 REY Reynolds&Reynolds Wed, Jan 23 -----N/A----- 0.34 SAP SAP A.G. ADS Wed, Jan 23 -----N/A----- 0.23 SEPR Sepracor Wed, Jan 23 Before the Bell -1.16 SIB SI Bank & Trust Wed, Jan 23 After the Bell 0.32 SEBL Siebel Systems Wed, Jan 23 After the Bell 0.09 SI Siemens Wed, Jan 23 -----N/A----- N/A SOV Sovereign Bancorp Wed, Jan 23 After the Bell 0.27 SPC St. Paul Companies Wed, Jan 23 Before the Bell -2.20 STM STMicroelectronics Wed, Jan 23 Before the Bell 0.06 SUN Sunoco Wed, Jan 23 08:00 am ET 0.14 TLAB Tellabs Wed, Jan 23 Before the Bell 0.02 VSEA Varian Semiconductor Wed, Jan 23 -----N/A----- -0.39 VVC Vectren Wed, Jan 23 After the Bell 0.50 WB Wachovia Wed, Jan 23 Before the Bell 0.59 WEBM WebMethods Wed, Jan 23 After the Bell -0.17 WBST Webster Financial Wed, Jan 23 -----N/A----- 0.71 WY Weyerhaeuser Wed, Jan 23 Before the Bell 0.01 WIN Winn-Dixie Stores Wed, Jan 23 After the Bell 0.25 ADPT Adaptec Thu, Jan 24 After the Bell 0.06 ATG AGL Resources Thu, Jan 24 -----N/A----- 0.43 ARG Airgas Thu, Jan 24 After the Bell 0.16 ACV Alberto-Culver Thu, Jan 24 During the Market0.49 ALEX Alexander&Baldwin Thu, Jan 24 After the Bell N/A ALE Allete Thu, Jan 24 Before the Bell 0.29 ATK Alliant Techsystems Thu, Jan 24 Before the Bell 0.93 AT Alltel Corporation Thu, Jan 24 After the Bell 0.74 AXL Am Axle & Manu Hold Thu, Jan 24 -----N/A----- 0.53 AHP American Home Products Thu, Jan 24 Before the Bell 0.62 ABC AmerisourceBergen Thu, Jan 24 Before the Bell 0.62 ACI Arch Coal Thu, Jan 24 Before the Bell 0.15 ASFC Astoria Financial Thu, Jan 24 Before the Bell 0.61 ATML Atmel Thu, Jan 24 After the Bell -0.07 ALV Autoliv Thu, Jan 24 -----N/A----- 0.21 BLL Ball Thu, Jan 24 Before the Bell 0.65 BRL Barr Laboratories Thu, Jan 24 -----N/A----- 1.32 BOL Bausch & Lomb Thu, Jan 24 -----N/A----- 0.42 BAX Baxter International Thu, Jan 24 Before the Bell 0.53 BMS Bemis Thu, Jan 24 Before the Bell 0.68 BGEN Biogen Thu, Jan 24 Before the Bell 0.48 BMC BMC Software Thu, Jan 24 After the Bell 0.07 BORL Borland Thu, Jan 24 After the Bell 0.07 BMY Bristol-Myers Squibb Thu, Jan 24 Before the Bell 0.59 CBT Cabot Thu, Jan 24 After the Bell 0.48 CCMP Cabot Microelectronics Thu, Jan 24 Before the Bell 0.38 CERN Cerner Thu, Jan 24 After the Bell 0.29 CPS ChoicePoint Thu, Jan 24 Before the Bell 0.35 CIN Cinergy Thu, Jan 24 -----N/A----- 0.69 CNX CONSOL Energy Thu, Jan 24 -----N/A----- 0.14 CVG Convergys Corporation Thu, Jan 24 Before the Bell 0.37 CBE Cooper Industries Thu, Jan 24 Before the Bell 0.65 CVD Covance Thu, Jan 24 After the Bell 0.16 CR Crane Thu, Jan 24 Before the Bell 0.30 CY Cypress Semiconductor Thu, Jan 24 Before the Bell -0.11 DL Dial Thu, Jan 24 Before the Bell 0.26 DLTR Dollar Tree Stores Thu, Jan 24 After the Bell 0.64 D Dominion Resources Thu, Jan 24 -----N/A----- 0.87 DJ Dow Jones Thu, Jan 24 Before the Bell 0.30 EK Eastman Kodak Thu, Jan 24 Before the Bell 0.12 EMC EMC Thu, Jan 24 Before the Bell -0.07 EEP Enbridge Energy Part Thu, Jan 24 -----N/A----- 0.27 ENR Energizer Holdings Thu, Jan 24 During the Market0.53 ESV ENSCO International Thu, Jan 24 Before the Bell 0.17 EFX Equifax Thu, Jan 24 Before the Bell 0.32 EXLT EXULT Thu, Jan 24 After the Bell -0.05 FDC First Data Thu, Jan 24 Before the Bell 0.73 BEN Franklin Resources Thu, Jan 24 After the Bell 0.41 GTW Gateway Thu, Jan 24 After the Bell 0.00 GNTX Gentex Thu, Jan 24 -----N/A----- 0.22 GP Georgia-Pacific Thu, Jan 24 Before the Bell 0.02 HSY Hershey Foods Thu, Jan 24 -----N/A----- 0.90 ITWO i2 Technologies Thu, Jan 24 -----N/A----- -0.10 NDE IndyMac Bancorp Inc. Thu, Jan 24 Before the Bell 0.57 IR Ingersoll-Rand Co. Ltd Thu, Jan 24 Before the Bell 0.52 ICST Integrated Circuit Sys Thu, Jan 24 -----N/A----- 0.15 IGT Inter Gaming Tech Thu, Jan 24 Before the Bell 0.65 IRF International Rect Thu, Jan 24 After the Bell 0.16 ITT ITT Industries Thu, Jan 24 Before the Bell 0.85 JDSU JDS Uniphase Thu, Jan 24 After the Bell -0.02 KSE KeySpan Energy Thu, Jan 24 Before the Bell 0.76 KMB Kimberly Clark Thu, Jan 24 -----N/A----- 0.80 LRCX Lam Research Thu, Jan 24 After the Bell 0.00 LSCC Lattice Semiconductor Thu, Jan 24 Before the Bell 0.05 LXK Lexmark Inter, Inc Thu, Jan 24 Before the Bell 0.44 MYG Maytag Thu, Jan 24 Before the Bell 0.41 MCDTA McData Corporation Thu, Jan 24 After the Bell N/A MCD McDonald`s Thu, Jan 24 -----N/A----- 0.34 MDU MDU Resources Thu, Jan 24 -----N/A----- 0.40 MEDI MedImmune Thu, Jan 24 -----N/A----- 0.46 MENT Mentor Graphics Thu, Jan 24 After the Bell 0.42 MIL Millipore Thu, Jan 24 After the Bell 0.40 MYL Mylan Laboratories Thu, Jan 24 -----N/A----- 0.55 NBR Nabors Industries Thu, Jan 24 -----N/A----- 0.40 NFG National Fuel Gas Thu, Jan 24 After the Bell 0.48 NOK Nokia Thu, Jan 24 Before the Bell 0.18 NST NSTAR Thu, Jan 24 -----N/A----- 0.72 OLDB Old National Bancorp Thu, Jan 24 -----N/A----- 0.42 PSFT PeopleSoft Thu, Jan 24 After the Bell 0.16 PBG Pepsi Bottling Group Thu, Jan 24 Before the Bell 0.04 PRGN Peregrine Systems Thu, Jan 24 -----N/A----- -0.08 PKI PerkinElmer Thu, Jan 24 Before the Bell 0.30 P Phillips Petroleum Thu, Jan 24 Before the Bell 0.71 PMCS PMC-Sierra Thu, Jan 24 After the Bell -0.16 POM Potomac Electric Thu, Jan 24 After the Bell 0.30 QGENF QIAGEN Thu, Jan 24 Before the Bell 0.07 QCOM Qualcomm Thu, Jan 24 After the Bell 0.23 DSS Quantum-DLT & St Group Thu, Jan 24 After the Bell 0.01 QTRN Quintiles Trans Thu, Jan 24 Before the Bell 0.11 RJR R.J. Reynolds Tob Hold Thu, Jan 24 -----N/A----- 0.92 RDA Reader`s Digest Ass Thu, Jan 24 Before the Bell 0.75 RGA Reinsurance Grp of Am Thu, Jan 24 After the Bell 0.63 RNR RenaissanceRe Holdings Thu, Jan 24 After the Bell 1.91 RESP Respironics Thu, Jan 24 Before the Bell 0.32 RSAS RSA Security Thu, Jan 24 After the Bell 0.00 SANM Sanmina-SCI Corp. Thu, Jan 24 After the Bell 0.06 SLE Sara Lee Thu, Jan 24 Before the Bell 0.39 SBC SBC Communications Thu, Jan 24 Before the Bell 0.62 SGP Schering-Plough Thu, Jan 24 Before the Bell 0.36 SMG Scotts Thu, Jan 24 Before the Bell -1.85 SEE Sealed Air Thu, Jan 24 Before the Bell 0.47 SRE Sempra Energy Thu, Jan 24 Before the Bell 0.50 SJR Shaw Communications Thu, Jan 24 Before the Bell N/A SOI Solutia Thu, Jan 24 After the Bell -0.06 SO Southern Company Thu, Jan 24 Before the Bell 0.15 SWK Stanley Works Thu, Jan 24 Before the Bell 0.57 SBUX Starbucks Thu, Jan 24 After the Bell 0.15 STE Steris Thu, Jan 24 -----N/A----- 0.20 SY Sybase Thu, Jan 24 After the Bell 0.24 TXT Textron Thu, Jan 24 Before the Bell 0.44 TRB Tribune Thu, Jan 24 Before the Bell 0.19 TRW TRW Thu, Jan 24 Before the Bell 0.67 UNP Union Pacific Thu, Jan 24 Before the Bell 0.95 VARI Varian, Inc. Thu, Jan 24 Before the Bell 0.32 VRSN VeriSign Thu, Jan 24 After the Bell 0.19 VVI Viad Thu, Jan 24 Before the Bell 0.19 WAT Waters Corporation Thu, Jan 24 Before the Bell 0.42 WDC Western Digital Thu, Jan 24 After the Bell 0.03 ZION Zions Bancorp Thu, Jan 24 After the Bell 0.83 DST DST Systems Fri, Jan 25 After the Bell 0.40 EAS Energy East Fri, Jan 25 After the Bell 0.61 ERICY Ericsson LM Telephone Fri, Jan 25 -----N/A----- -0.03 HR Healthcare Realty Trst Fri, Jan 25 -----N/A----- 0.67 IKN Ikon Office Solutions Fri, Jan 25 Before the Bell 0.17 IMO Imperial Oil Limited Fri, Jan 25 -----N/A----- N/A KRI Knight-Ridder Fri, Jan 25 -----N/A----- 0.89 LMT Lockheed Martin Fri, Jan 25 -----N/A----- 0.48 MRO Marathon Oil Corp Fri, Jan 25 -----N/A----- 0.44 MEA Mead Fri, Jan 25 -----N/A----- -0.24 OEI Ocean Energy Fri, Jan 25 Before the Bell 0.11 PGL Peoples Energy Fri, Jan 25 Before the Bell 0.95 SNE Sony Fri, Jan 25 Before the Bell N/A X United State Stl Corp. Fri, Jan 25 -----N/A----- -0.86 UST UST Inc Fri, Jan 25 During the Market0.81 ================================================================ Upcoming Stock Splits This Week... Symbol Company Name Ratio Payable Executable CHS Chicos FAS Inc 3:2 01/18 01/21 CVB Financial CVBF 5:4 01/18 01/21 =============================================================== Economic Reports As the second major week of the 4Q earnings season begins, investors are still trying to digest the earnings numbers and 2002 guidance from the big cap companies that announced last week. Using this week as a guide, we're likely to see big one day moves fueled by earnings victories one day and earnings disasters the next. Trade cautiously! =============================================================== Monday, 01/21/02 -- none -- market is closed Tuesday, 01/22/02 Leading Indicators (DM) Dec Forecast: 0.7% Previous: 0.5% Treasury Budget (DM) Dec Forecast: $24.0B Previous: $32.7B Wednesday, 01/23/02 None Thursday, 01/24/02 Initial Claim (BB) 01/19 Forecast: 400K Previous: 384K Friday, 01/25/02 Existing Home Sales (DM)Dec Forecast: 5.16M Previous: 5.21M Definitions: DM= During the Market BB= Before the Bell AB= After the Bell ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES AT OPTIONSXPRESS * EASY screens for spreads, collars, covered calls or butterflies! * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor010 Note: Options involve risk. 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The Option Investor Newsletter Sunday 01-20-2002 Sunday 2 of 5 ************************Advertisement************************* BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck" * IRA Accounts Available * 8 different FREE options pricing, strategy, and charting tools * Real-Time Buying Power, Account Balances or Cancels * EASY screens for spreads, collars, covered calls or butterflies! Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor013 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ********************** INDEX TRADER GAMEPLANS ********************** IS Swing Trade Model: Saturday 1/19/2002 Another Wasted Day News & Notes: ------------ From Thursday's Summation: "Very unlikely any swing trade attempts will be made within Friday's session, as we have no plans to track Feb option contracts until next week. That leaves current action suitable for nimble day traders only, and observations that could aid such will be noted in Market Monitor window." Sadly enough, most of Friday's indexes move was blown away at the open. Those holding long puts bought at Thursday's close made money, while intraday scalpers struggled to pocket some change between Friday bells. Featured Markets: ---------------- [60/30-Min Chart: OEX] The OEX (and others) are in no man's land right now. Oversold too far for shorts and call plays in this downtrend are not in the cards. 30-min chart (right) shows a bull-flag formation that could pop in relief early next week to set up our next viable entry. [60/30-Min Chart: SPX] Mirror image in the sister index. [60/30-Min Chart: QQQ] Pretty close in the Qs as well, with some semblance of a pennant instead. Summation: --------- Nothing remotely resembles a high-odds swing trade entry in the indexes right now. Should have at least one or two viable setups in the short week ahead, but with maximum amount of worthless time premium packed into Feb option contracts, we won't be highly aggressive for now. 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 Feb Calls: 40 (QQQ-BN) Feb Calls: 98 (DJV-BT) Long: BREAK ABOVE - NONE Long: BREAK ABOVE - NONE Stop: Break Below Stop: Break Below Feb Puts: 38 (QQQ-NL) Feb Puts: 96 (DJV-NR) Long: BREAK BELOW - NONE Long: BREAK BELOW - NONE Stop: Break Above Stop: Break Above ===== OEX SPX Feb Calls: 580 (OEY-BP) Feb Calls: 1150 (SPT-BJ) Long: BREAK ABOVE - NONE Long: BREAK ABOVE - NONE Stop: Break Below Stop: Break Below Feb Puts: 570 (OEB-NN) Feb Puts: 1100 (SPT-NT) Long: BREAK BELOW - NONE Long: BREAK BELOW - NONE Stop: Break Above Stop: Break Above Open Plays: ---------- NONE IS Position Trade Model: Saturday 1/19/2002 Bouncing Down News & Notes: ------------ What Thursday's rally undid from Wednesday's decline, Friday's slide negated. February put plays tracked from here look better all the time. Featured Plays: -------------- No viable changes in market picture tonight. Summation: --------- No new plays on tap for now, and we'll look to track new put plays on any failed rally attempts that sets up for us in the shortened week 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 Sector Share Trade Model: Saturday 1/19/2002 Popped & Dropped News & Notes: ------------ We got a little too cute with stop-loss orders on the SWH and QQQ short HOLDRs Thursday, which just barely nicked our stops. Then Friday's favorable action arrived to smash them further down without us on board! Featured Plays: -------------- (60-Min Charts: SWH & QQQ) Both the Software and NASDAQ 100 markets just barely took out our tight stops on Thursday before the trend resumed. Lesson learned! Summation: --------- No material changes tonight as we follow the trend and await what comes our way next week! 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 [hit 47.55] Result: +0.45 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 [Hit] Result: PAR 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 *********************************************************** DAILY RESULTS *********************************************************** CALLS Mon Tue Wed Thr Week ACS 108.08 -0.52 2.95 -2.70 1.96 1.12 Dropped, EPS LLY 74.59 0.60 0.05 -0.99 -0.63 -1.81 Dropped, stop EPNY 10.60 -0.10 0.10 -0.47 0.47 -0.37 Held at 10.50 MRVL 42.45 -1.87 0.04 -1.04 3.53 0.93 Break at $43 PVN 4.54 0.27 0.19 -0.46 0.26 0.21 Consolidating BRCM 48.52 -1.34 1.52 -2.45 1.41 -0.80 SFA sentiment TGH 71.41 -0.42 0.70 0.09 -0.94 -0.01 Rebounded LPNT 34.77 1.31 1.20 1.39 0.68 4.35 Profit taking LLL 93.55 -0.84 1.83 -0.48 2.31 4.56 New, defense PNC 61.26 -0.45 1.23 -0.43 0.63 1.31 New, wedged up LTR 60.15 0.33 1.28 -0.32 -0.33 2.25 New, breakout PUTS ADRX 60.96 -0.67 0.03 -0.22 -0.93 -2.84 Bad news out ELBO 33.30 -1.87 0.33 -0.98 0.84 -1.27 Dropped, worry QCOM 44.95 0.64 -0.60 -0.95 1.77 -1.56 Breakdown!!! AZO 64.42 -1.01 1.29 -0.76 -0.39 -0.44 Still waiting KBH 39.52 0.56 0.65 -0.35 0.70 1.83 Dropped, break THQI 43.03 -2.03 -0.04 -1.66 1.86 -2.85 Rollover at 45 PCSA 24.85 -3.70 0.17 -1.99 -0.31 -8.52 New, trending ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES AT OPTIONSXPRESS * EASY screens for spreads, collars, covered calls or butterflies! * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor010 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* LLL - L-3 Communications $93.55 (+4.56 last week) See details in play list Put Play of the Day: ******************** PCSA – AirGate PCS, Inc. $24.85 (-8.52 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 ^^^^^ ACS $108.08 (+1.12) ACS reports after the open Tuesday morning at 11:00 a.m. EST. If the market trades higher early next week, then traders might get a quick pop out of ACS, just make sure to be out of positions before the earnings announcement. After the earnings announcement, we'll revisit ACS for another possible call play as its trend remains strong. LLY $74.59 (-1.81) Well we sounded the warning bell on Thursday, and it turns out we were right in initially wanting to drop LLY. Pressured by continued weakness in the Pharmaceutical sector (DRG.X), LLY fell through its long-term ascending trendline at $75. Not only did Friday's drop bring our play to a close with a violated stop, it marked the first time LLY violated its trendline on a closing basis since September of 2000. Clearly it is time to go, especially with the recent spate of bad news on the product front from both the Drug and Biotech sectors. Use any reflexive bounce on Tuesday to gain a better exit if you didn't get out on Friday. PUTS ^^^^ ELBO $33.30 (-1.27) ELBO traded higher for the second consecutive session last Friday while the rest of the market was struggling to stay afloat. The stock's strength in the face of broad market selling has us worried now. A rollover next week at $34 is possible. Watch for the sellers to return there again. Or use any weakness early next week to exit plays. KBH $39.52 (-1.83) So much for our expected weakness in the housing stocks. After adding KBH to our put list, it has just inched its way higher for the past week, and on Friday managed to crest the 20-dma and close near the top of the day's range. Our $40 stop hasn't been tested yet, but given the stock's impressive resilience in an otherwise weak market, we think the best approach is to drop coverage of the stock before anyone is tempted to take a position. *********** 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************************* BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck" * IRA Accounts Available * 8 different FREE options pricing, strategy, and charting tools * Real-Time Buying Power, Account Balances or Cancels * EASY screens for spreads, collars, covered calls or butterflies! Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor013 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ********** 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 01-20-2002 Sunday 3 of 5 ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES AT OPTIONSXPRESS * EASY screens for spreads, collars, covered calls or butterflies! * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor010 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************** NEW CALL PLAYS ************** LLL - L-3 Communications $93.55 (+4.56 last week) L-3 Communications Holdings, Inc., including its wholly owned subsidiary L-3 Communications Corp., is a merchant supplier of sophisticated secure communication systems and specialized communication products. Its customers include the United States Department of Defense (DoD), certain United States government intelligence agencies, major aerospace and defense contractors, foreign governments and commercial customers. The Company has two business segments, Secure Communication Systems and Specialized Communication Products. The Defense Sector (DFI.X) finished fractionally higher last week while the broader market languished. Bullish interest is returning to the group. Leading the way is LLL. The company reported early last week that it was buying the defense aviation electronics and communications division of Raytheon (RTN) for a total of $1.3 billion. LLL said it planned to raise money to pay for the deal sometime in May or June. LLL's acquisition of Raytheon's division will help LLL cater to the needs of the Defense Department. LLL expects the deal to add about 20 cents to earnings in the current fiscal year. The stock initially sold off on the news early last week, but quickly rebounded from its 50-dma at $86.87, then continued higher into the end of the week. LLL cleared most of its near-term resistance, with only the $95 level in the way of yearly highs up around the $98 mark. With bullish sentiment brewing in the DFI.X and LLL's acquisition received favorably by the market last week, the stock could continue higher into next week's trading. Momentum traders can look for entries at current levels or on an advance past the $94 level. Make sure to confirm direction in the DFI.X before entering new positions into strength above current levels. Dip buyers can look for an aggressive entry on a bounce from the $93 level. If the DFI.X pulls back early next week and LLL follows it lower, then wait for the stock to stabilize between the $90 and $92 levels. The 10-dma at $90.60 is a possible spot to watch for a bounce. Our stop is initially set at $89. BUY CALL FEB- 90 LLL-BR OI=453 at $5.90 SL=3.75 BUY CALL FEB- 95 LLL-BS OI=229 at $3.00 SL=1.75 BUY CALL FEB-100 LLL-BT OI= 22 at $1.25 SL=0.50 BUY CALL APR- 95 LLL-DS OI=594 at $6.40 SL=4.50 Average Daily Volume = 651 K PNC - PNC Financial Services $61.26 (+1.31 last week) PNC Financial Services Group, Inc. is a bank holding company and a financial holding company. The Company is a diversified financial services company operating community banking, corporate banking, real estate finance, asset-based lending, wealth management, asset management and global fund services businesses. The Company provides certain products and services nationally and others in PNC's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. The Company also provides certain products and services internationally. Financial services firms are on the mend. The Fed's actions last year of slashing interest rates and injecting liquidity into the financial systems is starting to work through the pipeline. Companies are using the steep yield curve to re-liquefy there balance sheets, improving their financial positions. Aside from the Enron-related risks and exposure to Argentina, the diversified financials are looking up. PNC's trend since early last September has been consistently strong, taking the stock higher. The stock's price target was raised earlier this month by UBS Warburg based on the company's move to diversify its revenue streams away from credit businesses. The stock responded on big volume with a breakout above the $60 level. After a two week consolidation, PNC is poised to continue working higher. The stock completed an ascending wedge last week and worked above the top of the pattern, which is at $61 and may serve as support going forward, reinforced by the 10-dma at $60.36. The stock could have upside in the very short-term to its 200-dma overhead at the $62.25 level. Beyond the 200-dma, it's blue skies until the $70 level. Since the company just recently announced earnings, we have time to let this play work in our favor, so be patient when searching for a good entry point. Breakout traders can look for follow-through early next week. Those who prefer entering on pullbacks can look for bounces from $60. Our stop is initially in place at $59. BUY CALL FEB-60*PNC-BL OI= 953 at $2.80 SL=1.50 BUY CALL FEB-65 PNC-BM OI=1696 at $0.55 SL=0.00 Aggressive! BUY CALL MAY-60 PNC-EL OI= 357 at $4.40 SL=3.25 BUY CALL MAY-65 PNC-EM OI= 587 at $2.05 SL=1.00 Average Daily Volume = 998 K LTR – Loews Corp. $60.15 (+2.25 this week) Loews Corporation is a holding company with subsidiaries engaged in property, casualty and life insurance (CNA Financial Corporation); the production and sale of cigarettes (Lorillard, Inc.); the operation of hotels (Loews Hotels Holding Corporation); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling), and the distribution and sale of watches and clocks (Bulova Corporation). Who says you can't find a breakout in a weak market? After declining with the rest of the broad market in the wake of the September attacks, shares of LTR have made quite a comeback. The first stage of the rally brought the stock to the 200-dma near $57 in November. After some mild profit taking and consolidation in December, the stock is back in rally mode. It broke above the November highs just over a week ago, and by Friday's close it was knocking on the door of a breakout over the $60 level. Technically it made it, but we'll want to see confirmation next week with a push through the $60.25 level. The company has a pretty diversified income stream, but it’s a safe bet that the incentive for the stock to continue its rally is the recent strength in Transportation stocks. Afterall, if travel is picking up, that is going to be good for two areas of LTR's business, Energy and Hotels. Adding more to the bullish bias for the stock is the announcement that the company plans to raise $1 billion by issuing tracking stock for its Lorillard Tobacco unit later this year. Take advantage of near-term weakness (intraday dips) to establish new positions. First level of support comes in at $58, near the 10-dma. Although an even better entry can be had if profit taking drops LTR back to the $57.25 support level, just above the 200-dma. We're initiating the play with our stop set at $57. Earnings are set for January 31st. BUY CALL FEB-60*LTR-BL OI= 576 at $2.15 SL=1.00 BUY CALL FEB-65 LTR-BM OI= 4 at $0.55 SL=0.00 BUY CALL MAR-60 LTR-CL OI=3530 at $3.20 SL=1.50 BUY CALL MAR-65 LTR-CM OI= 85 at $1.10 SL=0.50 Average Daily Volume = 665 K ************************Advertisement************************* BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck" * IRA Accounts Available * 8 different FREE options pricing, strategy, and charting tools * Real-Time Buying Power, Account Balances or Cancels * EASY screens for spreads, collars, covered calls or butterflies! Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor013 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ****************** CURRENT CALL PLAYS ****************** EPNY - E.piphany $10.60 (-0.37 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. E.piphany reports quarterly earnings after the bell next Thursday, January 24. The company is expected to lose 17 per share, with a high estimate at a loss of 13 cents and the low estimate at a loss of 21 cents per share. The company has surprised to the upside in three of its last four quarters and may do it again next week. Revenues are expected to come in around $28 million for the quarter. It's possible that anticipation for a good quarterly report could take EPNY higher into Thursday evening. The stock continued to hold above the $10.50 support level in last Friday's session. The stock's performance was on par with the broader tech space. EPNY shed 3.37% while the Software Sector (GSO.X) shed 3.16%. As we've been writing in the past week, we need to see the Software Sector move higher if EPNY is going to gain substantial ground to the upside ahead of its earnings report. Conversely, continued weakness in the GSO.X could pressure EPNY below its short-term support level at $10.50. On its own, the stock's consolidation last week on declining volume was encouraging for a move higher into next week's trading, but that will grow increasingly difficult without participation from the GSO.X. The resistance level to continue monitoring is $11.15. If EPNY breaks out above that level early next week, a move above the $12 historical resistance level is possible. An advance beyond $12 could serve as an exit point next week for trades taken near the $10.50 support level or on scalp trades on an advance past $11.15. BUY CALL FEB-10*UEP-BB OI=1562 at $1.45 SL=0.75 BUY CALL FEB-12 UEP-BV OI= 273 at $0.55 SL=0.00 BUY CALL APR-10 UEP-DB OI= 610 at $2.30 SL=1.75 BUY CALL APR-12 UEP-DV OI= 290 at $1.25 SL=0.75 Average Daily Volume = 1.06 mln MRVL - Marvell Tech $42.45 (+0.93 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 (SOX.X) shed 45 points last week, or about 8%. The primary driver behind the weakness in chip issues was Intel's news early last week that it would reduced its fiscal 2002 capital expenditures budget by about 25%, or more than $2 billion. The news sent chip shares, especially equipment makers, reeling lower as investors read into Intel's announcement as bearish on the semiconductor industry this year. MRVL spiked lower the day after Intel's report, but rebounded back above the $38 level. For the week, the stock ended about $1 higher. Its string of out performing the SOX.X is certainly encouraging and should lead the stock higher when the chip sector rebounds. The advance past the $43 level that we had been looking for amazingly happened last Friday, when the SOX.X finished lower by more than 3%. The stock's relative strength is impressive. The volume was adequate to support the move as more than 4 million shares exchanged hands while MRVL's 30-day average volume is around 2.5 million. Aside from the fact that the broad market and tech space were so weak last Friday, the breakout in MRVL looked good and should follow-through into next week's trading IF the SOX.X and Nasdaq rebound. That's the biggest risk in this play currently: broad market action. With support from the market, MRVL could work its way up to the $45 in the short-term, and above $50 in the intermediate-term. As for new entry points, there was a short-term range established last Friday between $42 and $43. In a supportive market, bounces from $42 can be used as entry points, while another advance past $43 could be used to gain entry but only in a rising market. If MRVL declines below the $42 level, it could work back down to the $40 level on market weakness. If you got in the play on the advance past $43 last week, consider placing a stop beneath the $42 level, depending on your risk tolerance. The company announces earnings at the end of February, so we have some time to play MRVL. BUY CALL FEB-40 UVM-BH OI=1386 at $5.30 SL=3.50 BUY CALL FEB-42*UVM-BR OI= 375 at $3.80 SL=2.25 BUY CALL FEB-45 UVM-BI OI= 580 at $2.80 SL=1.50 BUY CALL MAY-45 UVM-EI OI=1801 at $6.20 SL=4.25 Average Daily Volume = 2.65 mln BRCM - Broadcom $48.52 (-0.80 last week) Broadcom Corporation is a provider of highly 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. BRCM traded exceptionally well in last Friday's session, despite the broad tech sector weakness. The Semiconductor Index (SOX.X) shed 3.05% in last Friday's session, and the Networking Index (NWX.X) lost 2.79%. BRCM is linked to both. The stock finished fractionally higher in last Friday's session, which was a minor victory for the bulls. BRCM's strength stemmed from the bullish earnings report from Scientific Atlanta (SFA). The maker of set-top boxes beat estimates by 5 cents per share. BRCM is a maker of chips used in set-top boxes. The bullish report and outlook from Scientific Atlanta could portend a similar report from BRCM next week. The company is slated to report earnings after the bell on Wednesday, January 23. That leaves us with only two more trading days for a last minute earnings run into the company's announcement. If the tech sector at least stabilizes next week, then BRCM should make its way higher based on the positive sentiment from the SFA report. The stock bounced from the $47 area last Friday, which looks like the site to look for entry points on weakness early next week. The stock has short-term resistance at the $49.50 level. If that resistance is cleared, watch for the stock to test the $50 level. After $53, the next level of resistance is at the stock's relative highs up around $53. BUY CALL FEB-45*RCQ-BI OI=9830 at $6.80 SL=5.00 BUY CALL FEB-50 RCQ-BJ OI=8523 at $3.70 SL=2.25 BUY CALL MAY-50 RCQ-EJ OI=5075 at $8.50 SL=7.00 BUY CALL MAY-55 RCQ-EK OI=2220 at $6.30 SL=4.50 Average Daily Volume = 15.2 mln LPNT – LifePoint Hospitals $34.77 (+4.35 this week) LifePoint Hospitals operates 21 acute care hospitals in growing non-urban communities in Alabama, Florida, Kansas, Kentucky, Tennessee, Utah and Wyoming. The hospitals usually provide commonly available medical and surgical services, as well as diagnostic, emergency and outpatient services. The company also makes available a variety of management services to its facilities including information systems, leasing contracts, accounting, financial and clinical systems, as well as internal auditing and resource management. It has been hard to find a sector with more consistent strength than Health Care, and that strength is readily apparent by looking at the daily chart of the Morgan Stanley Healthcare index (HMO.X), which just recently broke out above its $450 resistance level. The past week has seen the index adding to those gains, and our LPNT play has definitely been tagging along for the ride. Since mid-November, LPNT has been stuck in a range between $29.50 and $34.90, but the surge in buying volume on Thursday pushed the stock through the top of that range, ending the day right at $35. Although it suffered some minor profit taking on Friday after charging a bit higher, it was certainly nothing to be concerned about. Even with increasing selling pressure towards the end of the day, LPNT held above the $34.75 level and the weakness could be just attributed to normal consolidation after a 17% 6-day rally. With just over 2-weeks until the company reports earnings on February 4th, we could be set for a run into the announcement, especially if the company holds true to its form of consistently beating estimates. Use intraday dips near the $34.50 or even $34 levels to initiate new positions for the resumption of the rally. We are playing with a tight stop at $33, as a drop below that level would call into question the current momentum run. BUY CALL FEB-30 PUN-BF OI= 14 at $5.60 SL=3.50 BUY CALL FEB-35*PUN-BG OI=233 at $1.95 SL=1.00 BUY CALL MAY-35 PUN-EG OI= 12 at $4.00 SL=2.50 BUY CALL MAY-40 PUN-EH OI= 3 at $1.90 SL=1.00 Average Daily Volume = 670 K PVN – Providian Financial $4.54 (+0.21 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. So what's it going to be? Does PVN have enough gas in the tank to continue its rally, or is it running out of gas? After breaking out above the $4.00 resistance level, the stock spent the past week bouncing between the $4.30-4.85 levels. Investors are waking up to the fact that the company is likely not headed for bankruptcy, but the current price stagnation is likely a reflection of their fears that it might not see solid income growth either, despite all that high-interest debt that they are paid on each and every month. As we mentioned last week, the natural spot for the stock to run into problems if the rally continues will be the bottom of its mid-October gap, near $6.70. Until we near that level, use intraday dips near the intraday support (currently $4.30) to initiate new positions. Keep in mind that the company announces earnings on January 29th, so we only have another week to play. If the market starts pricing in another rate cut by the Fed at the end of the month, PVN could get another boost from anticipation of that event. Stops are currently set at $3.90, as a close below that level would break the back of the current bullish run. BUY CALL FEB-5 PVN-BA OI=6552 at $0.55 SL=0.00 BUY CALL MAR-5*PVN-CA OI=8874 at $0.85 SL=0.50 BUY CALL JUN-5 PVN-FA OI=4253 at $1.30 SL=0.75 BUY CALL JUN-7 PVN-FU OI= 966 at $0.70 SL=0.25 Average Daily Volume = 8.53 mln TGH – Trigon Healthcare $71.41 (-0.01 this week) Based in Virginia, TGH is a managed healthcare company, serving over two million members primarily through statewide and regional provider networks. The company divides its business into four segments, which include health insurance, government programs, investments and all other. The health insurance segment provides a comprehensive spectrum of managed care products primarily through three network systems with a range of utilization and cost-containment controls. The government is TGH's largest customer, as the company services the Federal Employee Program. The 'all other' category includes disease management programs, third-party administration for medical and workers compensation, and health promotions. It took a week to get the job done, but TGH has come full circle, ending the week just a penny below where it ended last week. Has anything really changed? Not really. The dip on Thursday, confirmed support at $70, keeping the breakout alive. Of note is the fact that the buying on Friday came on much heavier volume (even above the ADV) than the profit taking on Thursday. Recall that the motivation behind this play is to take advantage of the strength in the Morgan Stanley Healthcare index (HMO.X), which recently broke out above the $450 level. And that's where we see the rally continuing. The HMO index pushed to a new 8-month high on Friday, and if that strength continues, our TGH play ought to be able to tag along for the ride. Afterall, it is trading near its year high, after having set a new yearly intraday high last week at $72.70. Playing a strong stock in a strong sector; it doesn't get any simpler than this. Target renewed dips to the $70 support level for initiating new positions, or else jump aboard as the stock pushes above last week's intraday highs. If you're going to chase TGH higher, make sure that the HMO index is continuing to work higher in bullish fashion. Given the company's history of beating earnings estimates, we could even have a run into the company's earnings release, currently scheduled for February 8th. BUY CALL FEB-70 TGH-BN OI=240 at $3.80 SL=2.50 BUY CALL FEB-75 TGH-BO OI= 31 at $1.60 SL=0.75 BUY CALL APR-70 TGH-DN OI= 56 at $6.10 SL=4.00 BUY CALL APR-75 TGH-DO OI=219 at $3.60 SL=1.75 Average Daily Volume = 191 K ************* NEW PUT PLAYS ************* PCSA – AirGate PCS, Inc. $24.85 (-8.52 last week) AirGate PCS markets and provides digital personal communication services (PCS). The company is a network partner of Sprint PCS, the PCS group of Sprint Corp. Through the company's management agreement with Sprint PCS, it has the exclusive right to provide Sprint PCS products and services under the Spring and Sprint PCS brand names in a territory that covers almost the entire state of South Carolina, parts of North Carolina and the eastern Georgia cities of Augusta and Savannah. PCSA's territory encompasses 21 contiguous markets and approximately 7.1 million residents, of which more than 235,000 are network subscribers. The new year is not off to a good start for the Wireless service company's. It was bad enough that they couldn't keep pace with the broader Technology sector (relative weakness), but then the brokers piled into the bearish party this week. Following news that new handsets are seeing slower adoption than at first hoped, the entire basket of Wireless Service companies, including our new play, PCSA last Monday. That's just the tip of the iceberg though, when taken in the context of the series of downgrades leading up to it. In addition to the comments from Lehmann, PCSA has had downgrades from Wachovia Securities, Credit Lyonnais Securities and Robert W. Baird. One look at the price chart and you can see why. PCSA has been in a steep decline since the first of the year, having given up nearly half its value. Selling volume remains heavy, and it looks like the stock could break to new all time lows in the next week. The stock is currently resting on support at $24.50, and after breaking the $23 level PCSA will be setting new all-time lows. The company reports earnings on January 29th, so this will have to be a quick play. Given the sharp decline the stock has just endured, it is due for an oversold bounce. Use such a bounce to gain a better entry on a rollover from intraday resistance at $26.50 or $28. Should PCSA continue its decline unabated, wait for the stock to fall below $23 before jumping on board. We're initiating the play with our stop set at $30.50. BUY PUT FEB-25*CQO-NE OI= 0 at $3.10 SL=1.50 BUY PUT APR-25 CQO-PE OI=360 at $4.30 SL=2.75 Average Daily Volume = 611 K ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES AT OPTIONSXPRESS * EASY screens for spreads, collars, covered calls or butterflies! * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor010 Note: Options involve risk. 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The Option Investor Newsletter Sunday 01-20-2002 Sunday 4 of 5 ************************Advertisement************************* BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck" * IRA Accounts Available * 8 different FREE options pricing, strategy, and charting tools * Real-Time Buying Power, Account Balances or Cancels * EASY screens for spreads, collars, covered calls or butterflies! Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor013 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ***************** CURRENT PUT PLAYS ***************** ADRX - Andrx $60.96 (-2.84 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. Andrx said Friday morning that a federal appeals court reversed a ruling by a lower Florida court in 2000 that permitted Andrx to market its generic version of Biovail's hypertension drug Tiazac. The U.S. Court of Appeals reversed the ruling, but said that Andrx could bring an action to the court requesting the FDA to approve its generic version of Tiazac. The option of another appeal by Andrx may have tempered the sell-off in last Friday's session, in addition to Buckingham Research upgrading ADRX to an accumulate rating from a neutral rating. ADRX shed 1.72% in Friday's session, but the Biotechnology Sector Index (BTK.X) fared worse. The BTK.X slid lower by 2.63%. We would've liked to have seen ADRX trader lower than it did on the news, but we're willing to hold it over the weekend to see if the bearish sentiment persists. In addition, the bearish news concerning ImClone (IMCL) late last Friday may continue to weigh on investor sentiment in the group. We're still watching for ADRX to breakdown below the $60 level, which it came close to doing last Friday. Continued weakness in the BTK.X should pressure the stock below its support level. Traders looking for new entry points can watch for a breakdown below $60. Rollovers up around the 10-dma at $63.32 can also be used as entry points on any sector strength. BUY PUT FEB-65 QAX-NM OI=2337 at $6.30 SL=4.50 BUY PUT FEB-60*QAX-NL OI=1106 at $3.50 SL=1.75 Average Daily Volume = 1.54 mln AZO – AutoZone, Inc. $64.42 (-0.44 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. The waiting game continues as the trading range in shares of AZO continues to narrow. Despite being one of the high-flying stocks of 2001, it can't seem to find enough buying interest to lift above the $66 level. At the same time, the bears haven't been able to gain enough traction to push AZO under the $63.50 level. Recall that we are simply playing the stock due to the fact that it is under distribution in the new year, in contrast to the heavy buying interest for the latter half of 2001. Once AZO breaks below the $63.50 level, it ought to fall fairly quickly to the next level of support near $59, interestingly the 50% retracement of the stock's rally off the September lows. The highs and lows have been getting progressively lower for the past week, so it looks like it is only a matter of time before it breaks down. Use intraday rallies near the $65 level to establish your position and then wait for the breakdown. With the tight trading range, we can easily manage risk with our stop still sitting at $66. Of course, if momentum trading is your strategy, you'll want to wait for the $63.50 level to fail as support. BUY PUT FEB-65*AZO-NM OI=951 at $3.30 SL=1.75 BUY PUT FEB-60 AZO-NL OI=769 at $1.35 SL=0.75 Average Daily Volume = 1.35 mln QCOM – Qualcomm, Inc. $44.95 (-1.56 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. A breakdown a week, that's all we ask, 2 weeks ago we were eyeing a breakdown under the $50 level and we got it. Last week we were eyeing a breakdown under $46 and we got that on Friday, finally! While it wasn't a huge drop, the fall below $45 marks the lowest level for QCOM since early October. Fundamental news in the Wireless space continues to deteriorate with slower adoption rates than expected for new handsets and new services. A series of downgrades for the Wireless service providers last Monday just increased the downward pressure, and QCOM continued to deteriorate. The stock hasn't been able to put together more than 2 consecutive bullish days for the past 2 months, and that pattern is showing no sign of reversing. So what does that mean to us? That's right! It makes initiating new positions on the up days the optimal entry strategy, so long as the buying volume continues to be weaker than the selling that preceded it. Over the past week, QCOM has been building intraday resistance near $47.50, coincidentally the 62% retracement of the stock's October-November gains. We can target failed rallies near this level for initiating new positions, with an eye towards a retest of the $43 level, followed by a retest of the October lows near $38. Don't forget, QCOM reports earnings this Thursday after the market closes, so we only have a few more days to play. BUY PUT FEB-45*AAO-NI OI=7645 at $2.90 SL=1.50 BUY PUT FEB-40 AAW-NH OI=3348 at $1.40 SL=0.75 Average Daily Volume = 14.1 mln THQI – THQ Inc. $43.03 (-2.85 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. Even positive XBOX sales figures from MSFT in their earnings report Thursday night couldn't help THQI. While the stock staged an anemic rally into Thursday's close (in anticipation of MSFT's earnings), the enthusiasm was short-lived. Falling back near the $43 level at the end of the day on Friday, we can see THQI is going to need some concrete positive news to break out of its downtrend. Since the company doesn't report earnings until the middle of February, there won't be any help coming from that direction any time soon. We knew the $43 level was going to provide some tangible support for the stock and the bears are currently in the process of working through that level. In the meantime, we can take advantage of failed intraday rallies to the $45 or $46 intraday resistance levels to initiate new positions for the next leg down. Note how the bounce on Thursday and Friday came on rather light volume, particularly when compared with the heavy volume that initially brought the stock down to the $43 level. Look for an increase in selling volume to confirm weakness before initiating new positions. With all of the shorter-term moving averages now crossing down through the 200-dma, THQI is clearly becoming a favorite target of the bears. Below $43, look for support to materialize (providing opportunities to harvest profits) at $40 and then again at $37.50 (the site of the September lows). BUY PUT FEB-45*QHI-NI OI=508 at $4.80 SL=3.00 BUY PUT MAR-40 QHI-NH OI= 37 at $2.55 SL=1.25 Average Daily Volume = 1.60 mln ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES AT OPTIONSXPRESS * EASY screens for spreads, collars, covered calls or butterflies! * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor010 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ***** LEAPS ***** Not A Good Week To Be Bullish By Mark Phillips Contact Support But we saw this coming, didn't we? Based on the tepid evidence of economic recovery, the September-December rally was way overdone, and the initial earnings reports are starting to drive the point home. Actually there are 2 points. The first is that recovery is likely to be in the second, not the first half of 2002. How many times since the beginning of the tech collapse in early 2000 have we heard from self-proclaimed experts that the recovery would begin 1-2 quarters from now. It isn't any different now, as they are once again shifting the date to keep the sheep ignorant. My good friend, Buzz Lynn does a far better job of laying out the incredible deception, so I won't preach from his soapbox tonight. It's hard to say what deserves the most credit for the broad market indices' fall from grace over the past couple weeks. Economic reports have been slightly favorable, and we have Alan Greenspan getting ready to hand out his 12th interest rate cut in 13 months. There's just been a constant steady stream of negative news in the marketplace. As Buzz (alias Fundamentals Guy) pointed out in his last 2 Wednesday Articles, it isn't a coincidence. These are the sort of events that occur with greater frequency in a primary bear market. Things like Enron's destruction, numerous companies heading towards bankruptcy on the heels of having their credit ratings downgraded to junk, concerns about asbestos liability hitting any company with the slightest exposure to the substance, whether real or implied, and of course increasingly frequent accusations of "accounting irregularities". Speaking of accounting irregularities, you'll notice that we wiped Tyco International (NYSE:TYC) off the Watch List this week. This is an issue that has come up periodically over the past couple years, and each time the stock drops right to its ascending trendline, also the site of the 200-week moving average before staging an impressive recovery. I don't know if the bulls are going to be able to pull it off this time, so the sharp afternoon recovery on Friday has me rather nervous. Rather than try to gamble when the stock is potentially subject to wild swings on accusations of impropriety, I'd rather have it off my radar screen. There were several other plays that got wiped off the radar screen this week, resulting in a fairly large drop list. American International Group (NYSE:AIG) finally stopped us out after a successful rebound from the $76 level, while Eli Lilly (NYSE:LLY) stopped us out after last week's head fake rally. What I think is more important though is the fact that we also axed AOL Time Warner (NYSE:AOL) and Worldcom (NASDAQ:WCOM) from the Watch List for their dismal price performance recently. Rather than take a chance on these stocks, I want them off the list, so that I can focus on better plays, both to the upside and downside. Speaking of better plays, you'll notice that most of our remaining Watch List plays are stubbornly refusing to drop down to the area of our entry targets. I don't think this pattern is going to last, with the broad markets starting to fray around the edges. But you'll also notice that I haven't changed the entry targets either. It's a waiting game right now, and I think the current earnings reporting period is going to be pivotal for many stocks. Not for what they earned in the most recent quarter, but for what they have to say going forward. And speaking of going forward, I refrained from adding any new Watch List plays this weekend. Oh there were plays that are looking attractive both to the upside and downside, but I don't think they're quite ripe for the picking. The markets are really trying to decide where they want to go, and it wouldn't surprise me to see range-bound action between now and the Fed meeting at the end of the month. The simple point is that we have time on our side. So I'm going to take some of that time this weekend (much to my wife's chagrin) and winnow down my personal favorites until I have a list that I feel comfortable putting on the Watch List. Two Watch List plays that have recently gotten my attention are Philip Morris (NYSE:MO) and Goldman Sachs (NYSE:GS). MO has been approaching our $50 entry target as investors have searched for quality, but I suspect we could still see a couple more weeks before the high-odds entry arrives. The basis for my conjecture is the fact that the weekly Stochastics is still ascending towards overbought. Give this one some time. On the other end of the spectrum, GS is below our target and threatening to break down under the $88. If that were to happen, bulls would be put in the unenviable position of having to defend the 200-dma again. Rather than lower our entry target, I want to see the Brokerage stock prove that it has the strength to run (by rallying through our $93 target) before we open a position. The dismal earnings miss by JP Morgan last week is really the root cause behind my caution. Could it be that other Brokers like GS have undiscovered skeletons in their closets too? I've been really impressed with the resilience of Broadcom Corp. (NASDAQ:BRCM) over the past couple weeks, with the stock refusing to break the $46 support level, even with the weakness in the Semiconductor index. But I'm not in any hurry to raise our entry target. Let's wait until we get through the company's earnings report, and see how it and other stocks in the sector fare. I still can't see this market running away from us, at least not without a dramatic upturn in ACTUAL earnings. Based on the less than inspiring earnings report from chip giant Intel (NASDAQ:INTC), I don't see that as being a serious concern. Time is on our side and patience will be rewarded, so long as we stick to our game plan. And here's what I hope will be an improvement to our game plan going forward. Several of you have written to me asking if I can comment in the Market Monitor whenever we make a change (open or close a position) in the LEAPS Portfolio. Well, we're going to give it a shot. We're setting up the interface this weekend, and I'll be attempting to make my contribution starting next week. The Monitor is primarily used for short-term traders, but I think we can find some longer-term developments appropriate for discussion, and I will make a point to mention whenever we add/drop a position. Just make sure to keep in mind how the Portfolio works. We enter and exit positions based on closing prices, not in the middle of the day. The other important point is that our LEAPS Portfolio is not a real Portfolio. While I sometimes actually take positions in concert with the Portfolio, it should be treated as a paper portfolio. If you have any questions on these issues, let me point you to the Strategy section on the website, accessible from the link at the top of this week's LEAPS column. Let me close out today by taking a quick peek at the VIX. After briefly topping 25, it has been drifting lower for the past week, and if firmly mired in the middle of its historical range. Remember that when the VIX is high, it typically forecasts market bottoms and when low, forecasts market tops. Since it is meandering around in no-man's land at 24.37, it is hard to use it to develop a strong directional bias, and therefore hard to pick whether bullish or bearish plays are the way to go. But as we go through the earnings season, it should become easier to develop a perspective based on what corporate leaders have to say about the future. Until the markets decide which way they want to move, remember to trade them, don't keep them! 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 $ 5.40 +10.20% $13.50 '04 $12.5 LUE-AV $ 6.10 $ 6.90 +13.11% $13.50 Puts: JNY 01/09/02 '03 $ 35 OOR-MG $ 6.70 $ 6.80 + 1.49% $35 '04 $ 30 KKZ-MF $ 5.60 $ 5.90 + 5.36% $35 GM 01/10/02 '03 $ 50 VGN-MJ $ 6.50 $ 6.60 + 1.54% $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 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 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 $50 JAN-2003 $ 50 VPM-MJ JAN-2004 $ 50 LMO-MJ New Portfolio Plays None New Watchlist Plays None Drops AIG $79.61 So much for resistance! It looks like the bounce at the $76 support level was for real, as AIG has been marching steadily higher for the past 2 weeks. Investors that took advantage of the dip near $76 managed to pocket a modest gain, although the Portfolio ended up near break-even with our exit at the close on Thursday. While there is still plenty of overhead resistance and the 200-dma is looming just about $1 overhead, we just aren't motivated to stick with the play. Weekly Stochastics are reversing again, and the current round of buying seems to be running out of steam. But the descending trendline that has been in place since October was violated on Thursday, substantially weakening the case for the bears. With daily Stochastics topping out in overbought, investors with open positions will want to take advantage of any price weakness on the next cycle down to oversold to exit the play at a more favorable level. AOL $29.58 When we added AOL to the Watch List a few weeks back, we mentioned that it was a higher risk play, due to the possibility that it could just keep heading lower. What attracted me to the stock was a chart patter with weekly Stochastics bottoming in oversold, daily close to that and the stock continuing to find support at the ascending trendline just below $31. With AOL's admission of the huge writedown related to the merger with Time Warner 2 years ago, the sellers started flexing their muscles. The past week has been a reminder of reality, as the stock fell below the trendline and is threatening to break to new 3-year lows. The chart just doesn't have any appealing characteristics and rather than hope for a good entry point, I'm going to remove it from the Watch List this weekend so that nobody takes an ill-advised entry into the stock. LLY $74.59 In a disappointing reversal of fortunes, LLY gave us what we asked for and then promptly quit performing. We successfully played LLY last year on bounces from its long-term ascending trendline, and the bounce from that $75 level last week looked like an opportunity to do so again. It looked like the weekly Stochastics was bottoming just above oversold and the daily was just starting to emerge from oversold. Well, we should have waited for the weekly to truly turn up before playing, because LLY reversed at the $78 resistance level and plunged lower for most of this week, violating our $75 stop on Friday. With the broad market weakness seen all week, it was interesting to see the Pharmaceutical index head lower as well. It is once again testing the $374 support level and if it fails, there could be some serious pain in store. With inconsistent performance from both the stock and its sector, it is no wonder we have to drop the play this weekend. TYC $46.30 While several of the large conglomerate companies are having problems with concerns about asbestos liability, TYC is having problems of its own. The "accounting irregularities" issue has been plaguing the company for the past couple years, and in light of the Enron disaster, it is making its rounds again. Since the first of the year, the stock has lost nearly a third of its value, and it doesn't look like the pain is likely to end anytime soon, regardless of what soothing words come out of the mouths of corporate management. Recall when we initiated this play on the Watch List back in September, and we were looking for a bounce from the $43-44 level? TYC just kept working higher, refusing to let us on board. I refused to chase the stock higher, and a look at the chart over the past couple weeks should show you exactly why. Now we're back near major support, and you may be wondering why we don't just lower our price target and get a better entry. I say, not a chance. Not with the huge increase in selling volume and the weekly Stochastics still in a steep dive. The risks are just to high to try to game the stock here, so we'll remove the temptation to try catching a falling knife, by removing it from the Watch List. WCOM $12.78 What can I say except "Yuck!" After building what looked like a solid base and moving up to the 200-dma last month, it looked like WCOM might be on the road to recovery. Wrong! After spending 3 weeks dancing just above our entry target, WCOM has spent the past the past week plunging back to earth, negating all the positive base-building I originally saw on the charts. It is nearing its 6-year lows again and unless somebody has something good to say at the earnings report, I expect the $12 level to fail as support. This was a speculative play to start with, but I'm not that bold. It is time to say goodbye to WCOM, making room on the Watch List for better plays. ************** TRADERS CORNER ************** Limiting Risk Trading OTM Options Austin Passamonte People who are ignorant of their proper use often label option contracts the "riskiest" of all financial instruments. Truth is, options were actually CREATED as tools to hedge, limit or even eliminate risk entirely. On the other hand, beginning traders lose more money trading options than just about anything else. This is not opinion but fact touted by brokers and industry professionals alike. So which is it? Are options an instrument to suck hapless traders dry or are they the very means for keeping precious capital safe in a trading account? It all depends. Most of us do not use options for hedging or offsetting risk as the intent for which they were conceived. We choose to use their unparalleled leverage as tools for speculation instead. Does that make them high-risk vehicles? Nope, options are benign & neutral akin to broad market direction. How we place our money at risk within each creates the bias that exists from there. I commonly read excerpts from market reporters who obviously learned the options game at arm's length from the trenches. Invariably they warn about buying In-The-Money or ITM option contracts with plenty of time value left before expiration. These are considered "safer" to play than OTM options, especially those with only days or even hours left before time expires. Hogwash! I have numerous friends and acquaintances who lost big money, I mean huge money playing calls or puts with months or even years of time value left. More than a few traders have lost small and moderate fortunes buying LEAPS on solid, blue chip companies only to watch them gradually waste away to zero by expiration. I can think of little more painful than having six or seven-figures worth of LEAPS on Dow components wither away to nothing while watching it happen day after day, week after week, month after month. How this happens is topic for another time. The true fact that it occurs proves one very valid point: time value is NOT a cure for "safer" option trading. An ITM option being safer is the other myth we'll bust right now as well. Say we have a $100K trading account balance and only wish to risk a maximum of 5% loss on any given trade. We think the broad market is going up and poised to make its move soon. Should we buy April expiration option contracts if our expected time to hold the trade is one or two weeks here in January? Of course not: we would be tying up and exposing too great a percentage of precious capital in worthless time premium we don't need. Our time to hold the play is end of January, so why pay for three extra months of time value? There is this misconception that buying ITM option contracts lets us begin with some intrinsic value already captured, therefore we hold an option worth "something". Folks, where we begin with an option's intrinsic or extrinsic value have less than nothing to do with anything concerned about managing risk. The path its underlying symbol takes to get from entry to trade execution is everything. Our second choice in the $100K equation is to buy OTM or ITM option contracts. We could take $5,000 and buy ten slightly OTM options for $500 each and place no stops on that trade. Using the entire 5% of our balance dedicated to loss means that if they expire worthless, that is our total amount at risk. I'm here to tell you that most neophyte option traders hate that choice and later I'll explain the emotional reason why. We could also buy ten slightly ITM contracts for $1,000 each that would cost us $10,000 in capital at risk. No matter, let's just use a –50% stop on the entire purchase that also "limits" our risk to a mere $5,000 instead. Most option traders prefer this choice and I'll also explain why. Traders are taught to feel safer with ITM plays because they own something of intrinsic value. I mean if it were to expire right now, this very minute they would have actual value locked in. But we aren't trading for here & now when buying options long... we are trading for the future. If that underlying symbol begins to move in adverse direction against the trade, actual dollar losses mount much quicker in ITM options due to higher delta correlation to underlying market action. Does that make sense? An ITM option sheds value by percentage of its cost much faster on an adverse market move than OTM options do because of a higher delta. The variable of trade safety is not dependent on ITM intrinsic value here, it's totally dependent on underlying market movement. So we've established the fact that ITM option contracts lose a greater percentage of their value compared to OTM options when underlying markets move against them. Must be the reward for that weakness is ITM options also gain value faster when markets move in their favor? Wrongo! Here's where the ITM option double-whammy comes to whack those who play that game. A very important option Greek factor called "Gamma" has interesting effects on option contracts. It changes the value of delta via rate of underlying market movement. Options with higher deltas experience a much slower percentage of increase in price gain than lower delta options do when underlying markets move decidedly in their favor. Forget Greek for a moment and let me explain that in English: OTM option contracts INCREASE their value by percentage much faster than ITM options do when the underlying symbol moves in their favor. Got it? When markets go against ITM options they shed value quicker. When markets go in favor of ITM options they gain value slower in relative comparison to OTM contracts every time. The catch? There is none. Both ITM and OTM option buyers need to be correct about underlying market direction AND the time frame which it will happen in order to profit. Both stand to lose money if these two parameters are not met, and ITM options will lose more by percentage most every time. Now, back to our $100K account and its 5% balance risked example. If Trader A buys ten OTM options for $500 each, she risks a total of $5,000 capital total loss no matter what. Regardless what happens next, that predetermined amount of loss is quantified. If Trader B buys ten ITM options for $1,000 each he may feel secure in that some intrinsic value already exists. A stop-loss order placed at -$5,000 also equals the amount of predetermined risk as well. Or does it? Not hardly. What if both traders in this scenario held respective put options long on Jan 3rd and April 16th, 2001? Those were the two infamous surprise rate cuts our blessed Fed foolishly thought would cure the market of all bearish ills. The only affect it had was to blow shorts out of the water before reality sank in and indexes resumed course. During January's fiasco I actually owned some SPX puts (too many, as it turned out) bought at $1,500 that were trading for $1,740 with a stop-loss set at $1,350 to protect. Ten minutes after the cut and about sixty SPX index points higher, the first few trades that went off took me out of my stop at $460 instead. That's a far cry from $1,350 where my stop was, wouldn't you say? Actually, it's –66% lower than my worst-case scenario. What if Trader B with his -$5,000 stop was in puts that day? –66% below $5,000 would be another $3,300 now wouldn't it? That means Trader B holding all those "safer" ITM options with intrinsic value suddenly sucked away in a hurricane would lose -$8,300 of the original $10,000 at risk. Right or right? Please check my math. Meanwhile, Trader A who owned $5,000 worth of puts could probably sell them for $50 if she were lucky, which wouldn't even cover the commission. But she still only lost a maximum of –$5,000 in the disaster, which was $3,300 less than Trader B and his ITM option play. Money at work is money at risk, stops be darned! In the April rate cut I actually lucked out buying a few (not enough, as it turned out) SPX call options one-strike OTM minutes before markets exploded. I covered my $1,600 contracts at $4,000 minutes later but the call options two strikes out went from $500 to $2,500 or gained +500% on cost at the very same time. I'm happy with +250% gains via slightly OTM calls, but the further OTM play would have doubled my return again. See the dual benefit OTM contracts offer when compared to ITM options? They lose less total capital when times are bad, and they make greater percentage profits (the only measure that counts) when times are good. What then might we ask is the benefit of ITM options if any? They lose less money when the underlying symbol goes nowhere. Now let me ask you this: when was the last time you bought long calls or puts and EXPECTED the underlying symbol to go nowhere? Have you ever said to yourself, "Gee, I think this stock or index will go nowhere, I wonder if buying calls or puts is a good idea?" I've made many stupid trades in my career and have a few more to go, but this example above has never been one of them! The main reason any trader buys extra time value is to offset time decay. They do this because it's unknown to them exactly when the underlying symbol might make its anticipated move. If that were known, it would permit a better entry point and negate the need for all that time insurance in the process. The only reason any trader buys ITM options is a fear of sideways action or lack of understanding how Gamma and Delta change option values. They probably never had an unexpected move blow them out of ITM plays for huge capital loss, as many ITM September call holders suffered on September 18th. Yes, there are valid reasons for buying LEAPS and other distant- month option investments, not the least being capital gains tax. Also, low beta plays need ample time to work directionally as well but I never meant to say we should never buy time premium. We just shouldn't buy too much of it for the false sense of security it lulls us with. And nothing is wrong with holding ITM option contracts that were once purchased OTM but worked fantastically in our favor since then. I'm sure many option traders out there are comfortable buying ITM contracts with loads of time value left. So long as that makes money, it's a far cry from methods that don't. However, I would encourage everyone to understand that the proper OTM options with just enough time premium existing poised to move offer greatest profit and least risk loss parameters. Pure laws of mathematics at work. Finding the ideal scenario for each option trade we take keeps us on course for maximum trading capital efficiency. Hope This Helps! austinp@OptionInvestor.com ************************Advertisement************************* BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck" * IRA Accounts Available * 8 different FREE options pricing, strategy, and charting tools * Real-Time Buying Power, Account Balances or Cancels * EASY screens for spreads, collars, covered calls or butterflies! Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor013 Note: Options involve risk. 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The Option Investor Newsletter Sunday 01-20-2002 Sunday 5 of 5 ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES AT OPTIONSXPRESS * EASY screens for spreads, collars, covered calls or butterflies! * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor010 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************* COVERED CALLS ************* Success Basics: Managing Fear, Hope And Greed By Mark Wnetrzak With the recent downturn in the market, a number of readers have asked about exit and adjustment strategies for their positions. Since the current activity seems to be driven more by impulsive investors rather than fundamental valuations, it's a great time to review the need for proper planning, in order to reduce reaction-based judgments in difficult situations. When it comes to exiting a trade, there are a number of important issues which have to be addressed prior to entering the position. Perhaps the most critical concepts to examine are the risk-reward outlook and the means to identify when the trade has gone astray. Examining the potential profits and inherent loss limits of the position helps you define the target exits and also provides a mechanical basis for the determining the point at which you will ultimately close a losing trade, often the most difficult task to perform successfully on a consistent basis. There are a number of reasons why it is so difficult to close a losing trade and most of them are psychological. When it comes time to enter a position, almost everyone experiences the feeling of optimism that the transaction will yield a profitable result. Unfortunately, when the first indications of a negative outcome surface, many traders fail to react in a timely manner and losses are often incurred as a result of mental paralysis. After the initial failure to react, the trait becomes easier and in many cases, the position is allowed to continue eroding portfolio value until it eventually causes a major loss in capital. Complacency is just one of the evils that all traders must face but there is also an opposing characteristic that can be equally dangerous: The lack of patience, or an urgency to bail out of a position too early, when a much greater profit potential is available. One of the most common obstacles that traders encounter when trying to take profits or limit losses is the tendency to covet a position. We all have an affinity for particular stocks or industries and occasionally that bond affects our decision-making ability. This characteristic is usually seen in "buy-and-hold" strategies, such as owning LEAPS (long-term options), where the trader begins to identify closely with a company's products, or the specific sector in which it operates. In those unique situations, it's important to watch for signs of a reluctance to close a position, especially when the decision to hold is based on relatively shallow reasons. The key is to focus on all your positions with the same degree of objectivity, regardless of how much you like a specific issue or its industry, products or management. The art of exiting a position requires one to process and accept information that substantially changes his or her past perception of a particular trend or movement. For many traders, this can be difficult because successful position management always involves a small amount of "contrarian" thinking. One problem that occurs regularly in directional trading is that you must buy in a market that is technically weak and sell when the market exhibits strong "bullish" momentum. In addition, there is little chance that you will exit at precisely the right moment and even when the issue trades for just a few pennies more than your selling price, it is obvious that profits have been left on the table. In some cases, the market will move much higher before a substantial retreat and that gives traders all the more reason to find fault with their ability to execute a particular strategy. The fact is, nobody is perfect, and even the best traders rarely pick the absolute tops or bottoms more than a few times in their careers. That doesn't mean you should accept regular losses because of poor technique or improper placement of trading stops. On the contrary, successful participation in the market requires that you learn to correctly manage portfolio positions; maximizing gains while limiting losses. Market professionals establish pre-determined limits when entering new positions, but retail traders are far less proficient in this practice. Using planned entry and exit points eliminates the risk of emotional or reaction-based judgments in difficult situations and removes fear, hope and greed from the equation. Most traders employ some form of trailing stop and the initial placement of these simple exit orders requires a thorough knowledge of chart analysis and primary market trends or cycles. After the position is open, a review of the trend-lines and regression channels will provide the basic information for timely and accurate adjustments. In this manner, the potential for profit is maintained without the possibility of losing previous gains and the use of this technique provides a mechanical and disciplined method for achieving profits. With all of the intricate emotions that affect a human's judgment, allowing the market to make the exit decision is much more precise than relying on our complex intuition. Trade To Profit! 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 5.52 JAN 5.00 0.95 *$ 0.58 11.4% NPRO 11.81 9.90 JAN 10.00 2.70 $ 0.79 9.4% MANU 19.47 17.51 JAN 17.50 3.30 *$ 1.33 8.9% SPWX 10.99 12.12 JAN 10.00 1.70 *$ 0.71 8.3% NPRO 11.70 9.90 JAN 10.00 2.60 $ 0.80 7.6% MDR 11.37 11.50 JAN 10.00 2.00 *$ 0.63 7.3% NPRO 11.81 9.90 JAN 10.00 2.70 $ 0.79 6.3% FALC 8.81 7.73 JAN 7.50 1.90 *$ 0.59 6.2% VRTY 19.56 19.20 JAN 17.50 3.00 *$ 0.94 6.2% PEGS 15.90 17.12 JAN 15.00 1.30 *$ 0.40 6.0% MOGN 15.65 15.90 JAN 15.00 1.20 *$ 0.55 5.5% OAKT 13.53 14.96 JAN 12.50 1.90 *$ 0.87 5.4% DCTM 21.98 20.96 JAN 20.00 2.70 *$ 0.72 5.4% SPWX 11.49 12.12 JAN 10.00 1.85 *$ 0.36 5.4% OAKT 15.75 14.96 JAN 15.00 1.15 $ 0.36 5.4% CAMP 6.36 5.90 JAN 5.00 1.65 *$ 0.29 5.4% VSNX 16.58 14.39 JAN 12.50 4.80 *$ 0.72 5.3% MRVL 36.96 42.45 JAN 32.50 6.60 *$ 2.14 5.1% NTAP 21.04 18.34 JAN 17.50 4.50 *$ 0.96 5.0% LMNX 17.94 17.66 JAN 17.50 1.00 *$ 0.56 4.8% ENZ 24.05 23.70 JAN 22.50 2.25 *$ 0.70 4.7% ACXM 15.63 17.12 JAN 15.00 1.35 *$ 0.72 4.4% SEBL 28.82 34.26 JAN 25.00 4.50 *$ 0.68 4.0% GPS 15.45 14.27 JAN 15.00 0.95 $ -0.23 0.0% FCEL 18.20 15.12 JAN 17.50 1.35 $ -1.73 0.0% MONE 14.83 14.01 FEB 12.50 3.20 *$ 0.87 6.5% ADCT 5.38 4.98 FEB 5.00 0.75 $ 0.35 5.5% PLUG 10.58 9.73 FEB 10.00 1.40 $ 0.55 5.2% EPNY 10.97 10.60 FEB 10.00 1.50 *$ 0.53 4.9% RNWK 8.13 7.21 FEB 7.50 1.30 $ 0.38 4.8% ADIC 18.32 17.23 FEB 17.50 1.70 $ 0.61 3.2% RSTN 20.55 17.15 FEB 17.50 3.90 $ 0.50 2.6% SCMR 5.85 4.60 FEB 5.00 1.20 $ -0.05 0.0% RBAK 6.20 4.50 FEB 5.00 1.55 $ -0.15 0.0% ACRI 13.11 11.20 FEB 12.50 1.60 $ -0.31 0.0% *$ = Stock price is above the sold striking price. Comments: The major equity averages continue to weaken and consolidate after the tremendous recovery rally off the September low. With the near-term outlook becoming bearish, controlling losses becomes paramount to capital preservation. Probably the biggest disappointment this week was the horrid action in FuelCell Energy (NASDAQ:FCEL). We will monitor the February positions closely and watch for violations of support. Those investors with a longer-term outlook will look for favorable conditions in which to roll forward and/or down. Their goal is to lower the cost basis in any issues they wish to own at the risk of locking-in a loss. Positions Closed Early: DigitalThink (NASDAQ:DTHK), Sirius (NASDAQ:SIRI) - for a small profit, Xicor (NASDAQ:XICO), Trico Marine (NASDAQ:TMAR), Genzyme Transgenics (NASDAQ:GZTC). 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 CLRS 5.60 FEB 5.00 RPU BA 0.95 690 4.65 28 8.2% ELON 16.73 FEB 15.00 EUL BC 2.40 399 14.33 28 5.1% MONE 14.01 FEB 12.50 MOU BV 2.25 75 11.76 28 6.8% PCLN 5.52 FEB 5.00 PUZ BA 0.85 654 4.67 28 7.7% PWAV 18.15 FEB 15.00 VFQ BC 3.70 528 14.45 28 4.1% UCOMA 5.50 FEB 5.00 QUW BA 1.00 1641 4.50 28 12.1% 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 UCOMA 5.50 FEB 5.00 QUW BA 1.00 1641 4.50 28 12.1% CLRS 5.60 FEB 5.00 RPU BA 0.95 690 4.65 28 8.2% PCLN 5.52 FEB 5.00 PUZ BA 0.85 654 4.67 28 7.7% MONE 14.01 FEB 12.50 MOU BV 2.25 75 11.76 28 6.8% ELON 16.73 FEB 15.00 EUL BC 2.40 399 14.33 28 5.1% PWAV 18.15 FEB 15.00 VFQ BC 3.70 528 14.45 28 4.1% 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). Remember: Lost opportunity is easier to replace than lost equity! ***** CLRS - Clarus $5.60 *** Starting At The Bottom *** Clarus (NASDAQ:CLRS) develops, sells and supports Internet-based business-to-business e-commerce solutions targeted for large to mid-size enterprises that automate the procurement, sourcing and settlement of goods and services. The company's software helps organizations reduce the costs associated with the purchasing and payment settlement of goods and services and helps maximize procurement economies of scale. The company's unique digital marketplace solution provides a framework that allows customers to create trading communities and additional revenue sources. The company's solutions also benefit suppliers by reducing sales costs and providing the opportunity to increase revenues. Their products have been licensed by Comcast, Burlington Northern Santa Fe Railroad, Gjensidige NOR and Mastercard International. The recent recovery rally in CLRS began in early December and the bullish trend developed slowly until mid-month when the company's share value jumped on news that the business-to-business arm of Barclays (NYSE:BBC) had hired Clarus to provide sourcing software. Clarus is forming a Stage I base and recent technicals suggest increased accumulation in the issue. This position offers a reasonable cost basis from which to speculate on the future. Earnings are due February 13. FEB 5.00 RPU BA LB=0.95 OI=690 CB=4.65 DE=28 TY=8.2% ***** ELON - Echelon $16.73 *** Excellent Earnings! *** Echelon (NASDAQ:ELON) develops, markets and supports products and services that allow everyday devices, such as light switches, washing machines, conveyor belts, thermostats, door locks, motion sensors, air conditioners, pumps and valves, to be made "smart" and to communicate with one another and across the Internet. The company's products and services are based on its LonWorks tech- nology. Echelon's products and services may be used across many industries to network together devices in homes, buildings, fact- ories and transportation systems. Echelon offers a comprehensive set of over 90 products and services marketed under the LonWorks brand name. Echelon rallied strongly on Friday after reporting a sixth consecutive profitable quarter. Revenues for the quarter ended December 31, 2001 were $32.1 million, an increase of 147% over revenues of $13.0 million for the same period in 2000. Net income for the quarter ended December 31, 2001 was $5.2 million. We simple favor the move to the top of a four-month base on very heavy volume. FEB 15.00 EUL BC LB=2.40 OI=399 CB=14.33 DE=28 TY=5.1% ***** MONE - MatrixOne $14.01 *** 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=2.25 OI=75 CB=11.76 DE=28 TY=6.8% ***** PCLN - Priceline.com $5.52 *** Is The Bad News Priced-In? *** Priceline.com (NASDAQ:PCLN) has pioneered an e-commerce pricing system, known as a demand collection system, where consumers use the Internet to save money on a range of products and services, while enabling sellers to generate incremental revenue. Using its consumer proposition, "Name Your Own Price," Priceline.com collects consumer demand, in the form of individual customer offers, for a particular product or service at a price set by the customer. Priceline.com then either communicates that demand directly to participating sellers or accesses a pro- prietary database of inventory and elects whether or not to accept a customer's offer. Consumers agree to hold their offers open for a specified period of time and, once fulfilled, offers generally cannot be canceled. Recent reports suggest some stability returning to the airline industry that has been suffering from the September attack. Priceline.com, which is one of the only pure-play Internet companies, dropped severely from its August high and has recently shown improvement. This position offers cheap speculation on an improving stock and industry group. With earnings due February 4th, the question is: Is the bad news already factored into the share value? FEB 5.00 PUZ BA LB=0.85 OI=654 CB=4.67 DE=28 TY=7.7% ***** PWAV - Powerwave Tech. $18.15 *** Earnings Surprise! *** Powerwave Technologies (NASDAQ:PWAV) designs, manufactures and markets ultra-linear radio frequency (RF) power amplifiers for use in the wireless communications market. RF power amplifiers, which are key components of wireless communications networks, increase the signal strength of wireless transmissions from the base station to the handset while reducing interference, or "noise." Powerwave manufactures both single and multi-carrier RF power amplifiers for a variety of frequency ranges and transmission protocols. Powerwave surprised analysts on Thursday, reporting a 4th-quarter operating profit instead of a loss and said revenues rose 30% from the 3rd-quarter. With a new bullish outlook, analysts believe that the revenue-ramping opportunities reduce risk in the company and create the opportunity for better growth. Several firms have upgraded their recommendations such as UBSWarburg, which raised its price target to $20. We favor an entry point closer to technical support. FEB 15.00 VFQ BC LB=3.70 OI=528 CB=14.45 DE=28 TY=4.1% ***** UCOMA - UnitedGlobalCom $5.50 *** Merger Speculation *** UnitedGlobalCom (NASDAQ:UCOMA) is engaged in broadband communi- cations, providing video distribution services in 26 countries worldwide, and telephone and Internet access services in a growing number of its international markets. The company's operations are grouped into three major geographic regions, Europe, Asia/ Pacific and Latin America. UnitedGlobalCom also operates a number of earlier-stage broadband businesses. An affiliate of Liberty Media (NYSE:L) recently said it had raised its cash offer for UCOMA and extended the offer's expiration date. Pursuant to the terms of that agreement, a subsidiary of New UnitedGlobalCom ("New United"), a new corporation, will merge into United and Liberty will contri- bute certain assets to New United. Following the closing of the merger and the tender offer, New United will acquire Liberty's interest in IDT United. Our position offers a reasonable way to speculate on the future outcome of this unique consolidation pact. FEB 5.00 QUW BA LB=1.00 OI=1641 CB=4.50 DE=28 TY=12.1% ***** ***************** 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 HLIT 11.19 FEB 10.00 LOQ BB 1.95 3317 9.24 28 8.9% SBYN 11.17 FEB 10.00 QYS BB 1.85 840 9.32 28 7.9% OSIS 19.94 FEB 17.50 UOJ BW 3.50 88 16.44 28 7.0% PWER 10.91 FEB 10.00 OGU BB 1.50 25 9.41 28 6.8% RMCI 19.44 FEB 17.50 UHU BW 2.80 47 16.64 28 5.6% SFA 26.70 FEB 25.00 SFA BE 2.90 437 23.80 28 5.5% MEDC 25.76 FEB 22.50 MQH BX 4.30 160 21.46 28 5.3% SEBL 34.26 FEB 30.00 SGQ BF 5.50 11641 28.76 28 4.7% RATL 22.61 FEB 20.00 RAQ BD 3.40 135 19.21 28 4.5% ***************** NAKED PUT SECTION ***************** Trading 101: A System For Success! By Ray Cummins The recent downpour in share values has many investors rushing for cover to wait out the passing storm. However, those who develop an orderly and effective trading plan, and implement it with discipline, can be successful during any market conditions. Most professional traders utilize a systematic plan to select their positions and generate entry and exit signals. These sophisticated market participants, who often manage funds worth millions of dollars, have no margin for faulty judgment or excessive capital exposure. A proven trading system helps prevent these problems by taking the human element out of the transaction. In addition, a trader that uses a well designed plan can be wrong about market movement and still be successful. Of course, nobody wants to be wrong in any position, but it's the size of your portfolio at the end of the month that matters most. The first step in developing a practical method for participating in the market is to determine your comfort threshold and stress level. Think about the unique emotional effects of your trading activities and managing an investment portfolio. Are you usually a cautious person or do you feel comfortable traveling at warp speed? How will a specific type of trading affect you mentally? Can you handle the volatility of day-trading options or are you happier with conservative, longer-term plays. After you identify the appropriate trading attitude, it is important to decide what type of market activity is most favorable to your personal style. Some traders prefer strategies that profit from trending markets such as those characterized by a sustained advance or decline. Techniques that benefit from this type of movement include put or call buying and high-potential spreads or combinations. Another tactic might be to focus on changes in volatility. Traders using this approach buy or sell "premium" in an attempt to profit from transitions in market character. Some utilize neutral positions such as calendar or ratio spreads when the technical outlook for the underlying issue is range-bound or static. Regardless of the method you prefer, each category of price action demands a unique type of trading system. The key to success is to specialize in a specific kind of market activity and utilize trading strategies that perform well in that particular environment. A successful trading plan will limit losses, maximize profits and yield favorable returns over extended periods in varying market conditions. A complete system generally includes several parts: a specified period or time frame, the proper setup, signals for both entry and exit points, and any additional components that make the plan more efficient and easy to use. All systems begin with a target time frame, which establishes the specific period used in the technical indicators to generate individual trading signals. You should choose a time frame that fits your personal portfolio outlook and risk tolerance. The proper setup entails a group of circumstances that clearly define the overall condition in which the trade can be initiated. For those who use technical indicators explicitly, this portion of the system identifies the type of chart pattern that must be observed before the position is viable. While the setup defines the basic parameters for the position, the entry signal actually triggers the initial buy or sell transaction. Once the opening trade has occurred, the exit point determines when the position will be liquidated. Orders to close portions of the position at predetermined targets are placed immediately after the opening transaction and a "trailing" method is used to adjust these in a timely and effective manner. The study of historical charts and basic technical analysis can be used to correctly position the trailing stops and the primary price support areas and short-term (18 to 40-dma) moving averages are the main indicators that determine the initial target exits. After a trend had been established with the stock price above the moving average, the sell-stop is simply adjusted higher with each successive rally. As long as the stock price remains above its rising moving average, the trend is intact. As the moving average begins to level, the effects of short-term weakness become more apparent and the consolidation period begins. When the issue enters this high-risk area, the complexity of decision-making increases exponentially. Rather than trying to distinguish the differences between a healthy dip and a full-scale reversal, an experienced trader will focus on the positioning of the sell-stop, exiting the position when it becomes apparent that it is not performing as expected. A common trait among new traders is they lose money because they they do not have a plan for when and how to exit their positions. Maximizing profits from winning trades is critical to successful trading and that task is very difficult without a well-defined system for locking-in gains. In addition, a trading plan helps you avoid the pitfalls of emotion-based decision-making and it also allows you to review entry/exit techniques and evaluate the performance of specific strategies. Of course, the best trading system is only as good as its execution. If you enter a position that does not fit your risk/reward profile, or you initiate a trade before the appropriate setup criteria is in place, you have obviously not followed the plan. While these oversights may seem like minor infractions, they can seriously impact the performance of your portfolio. Regardless of the type of trading system you favor, the best methods are those that achieve consistency with a high percentage of profitable trades and at the same time, prevent winners from turning into losers. 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 14.01 JAN 10.00 0.45 *$ 0.45 21.4% GSPN 17.08 15.39 JAN 15.00 0.35 *$ 0.35 14.9% MEDC 20.42 25.76 JAN 17.50 0.55 *$ 0.55 13.7% VRTY 20.03 19.20 JAN 17.50 0.55 *$ 0.55 13.2% OSUR 12.38 10.35 JAN 10.00 0.45 *$ 0.45 12.9% IDNX 13.77 12.05 JAN 10.00 0.45 *$ 0.45 12.2% PPD 20.77 22.00 JAN 17.50 0.80 *$ 0.80 11.9% NTAP 22.60 18.34 JAN 17.50 0.55 *$ 0.55 11.8% EMBT 25.00 19.96 JAN 20.00 0.65 $ 0.61 11.7% EMC 16.85 15.50 JAN 15.00 0.25 *$ 0.25 10.6% CALP 16.82 15.98 JAN 15.00 0.25 *$ 0.25 10.5% SEBL 32.70 34.26 JAN 27.50 0.40 *$ 0.40 10.5% IGEN 39.91 40.05 JAN 25.00 0.40 *$ 0.40 10.4% INRG 13.77 13.00 JAN 10.00 0.35 *$ 0.35 9.8% ADBE 35.90 34.58 JAN 32.50 0.50 *$ 0.50 9.5% RCOM 11.85 10.50 JAN 10.00 0.25 *$ 0.25 8.6% RCOM 11.14 10.50 JAN 10.00 0.45 *$ 0.45 8.6% CC 24.16 28.33 JAN 20.00 0.60 *$ 0.60 8.5% EMLX 39.45 42.82 JAN 27.50 0.65 *$ 0.65 8.3% MANU 21.42 17.51 JAN 15.00 0.25 *$ 0.25 8.0% ASA 20.50 22.10 JAN 20.00 0.75 *$ 0.75 7.7% OCAS 16.05 15.96 JAN 15.00 0.30 *$ 0.30 7.7% COGN 23.30 24.83 JAN 20.00 0.45 *$ 0.45 7.6% OAKT 14.69 14.96 JAN 12.50 0.35 *$ 0.35 7.5% NTAP 22.95 18.34 JAN 17.50 0.25 *$ 0.25 7.5% JDAS 22.39 28.10 JAN 17.50 0.30 *$ 0.30 6.8% IGEN 40.44 40.05 JAN 25.00 0.50 *$ 0.50 6.3% ALOY 19.06 20.90 JAN 15.00 0.35 *$ 0.35 6.1% ICST 20.55 23.42 JAN 15.00 0.30 *$ 0.30 5.9% CC 26.32 28.33 JAN 20.00 0.30 *$ 0.30 5.9% AGIL 18.05 13.26 JAN 15.00 0.25 $ -1.49 0.0% MICC 13.92 10.44 JAN 12.50 0.25 $ -1.81 0.0% MIMS 20.63 20.01 FEB 17.50 0.70 *$ 0.70 10.5% CRUS 19.15 17.57 FEB 15.00 0.45 *$ 0.45 9.1% FNSR 14.19 12.00 FEB 10.00 0.30 *$ 0.30 8.3% ICST 25.69 23.42 FEB 20.00 0.45 *$ 0.45 7.0% CMNT 23.75 22.52 FEB 20.00 0.50 *$ 0.50 7.0% TMCS 19.95 19.78 FEB 17.50 0.45 *$ 0.45 6.5% PPD 23.21 22.00 FEB 17.50 0.35 *$ 0.35 6.1% MEDC 23.34 25.76 FEB 17.50 0.35 *$ 0.35 6.1% *$ = Stock price is above the sold striking price. Comments: As we noted last Sunday, the recent bearish activity continued to plague the broader markets this week and there was little buying support for technology stocks, due to early results in the quarterly earnings season. There have been very few upside surprises among the reporting companies, and until the revised outlook for corporate earnings is factored into stock values, there will be additional selling pressure in all but the most bullish issues. Only one of our early-exit candidates survived the January expiration but the issue, Embarcadero Technologies (NASDAQ:EMBT) closed today's session $0.04 below the sold (put) strike price. Forest Oil (NYSE:FST), Millicom (NASDAQ:MICC), Agile (NASDAQ:AGIL) and Network Appliance (NASDAQ:NTAP); $20.00 and $22.50, were among the "watch-list" positions closed during the week. The big surprise occurred in the (previously losing) Identix (NASDAQ:IDNX) position, which finished the expiration period with a small profit. Issues currently under scrutiny for the coming month are Finisar (NASDAQ:FNSR) and Integrated Circuit Systems (NASDAQ:ICST). 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 IONA 24.25 FEB 17.50 YWQ NW 0.50 20 17.00 28 10.2% JDAS 28.10 FEB 22.50 QAH NX 0.35 0 22.15 28 6.3% LIN 27.64 FEB 25.00 LIN NE 0.45 92 24.55 28 5.5% MEDC 25.76 FEB 20.00 MQH ND 0.30 13 19.70 28 6.0% MROI 29.20 FEB 25.00 UPJ NE 0.40 0 24.60 28 5.5% SFA 26.70 FEB 22.50 SFA NX 0.45 662 22.05 28 7.1% SPCT 15.10 FEB 12.50 QCS NV 0.30 61 12.20 28 8.7% TMCS 19.78 FEB 17.50 QMF NW 0.40 25 17.10 28 7.2% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield IONA 24.25 FEB 17.50 YWQ NW 0.50 20 17.00 28 10.2% SPCT 15.10 FEB 12.50 QCS NV 0.30 61 12.20 28 8.7% TMCS 19.78 FEB 17.50 QMF NW 0.40 25 17.10 28 7.2% SFA 26.70 FEB 22.50 SFA NX 0.45 662 22.05 28 7.1% JDAS 28.10 FEB 22.50 QAH NX 0.35 0 22.15 28 6.3% MEDC 25.76 FEB 20.00 MQH ND 0.30 13 19.70 28 6.0% LIN 27.64 FEB 25.00 LIN NE 0.45 92 24.55 28 5.5% MROI 29.20 FEB 25.00 UPJ NE 0.40 0 24.60 28 5.5% 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). ***** IONA - IONA Technologies $24.25 *** Earnings Speculation! *** IONA Technologies (NASDAQ:IONA) is a provider of software and services that allow companies to integrate computer systems, applications and networks. The company's products and services enable these companies to share selected information internally and over the Internet. Iona's product set, the IONA Suite, enables customers to: integrate their existing enterprise applications; develop new Web-based application logic; and present these integrated applications to their employees, customers, partners and suppliers in a secure and personal manner via the Internet. Iona's recent technical trend has been very favorable but the company's quarterly earnings are due next week. Traders who wouldn't mind owning the issue can speculate on the outcome of that report with this conservative position. FEB 17.50 YWQ NW LB=0.50 OI=20 CB=17.00 DE=28 TY=10.2% ***** JDAS - JDA Software $28.10 *** Entry Point! *** JDA Software Group (NASDAQ:JDAS) is a provider of sophisticated software solutions designed specifically to address the demand and supply chain management, business process, analytic application and e-commerce requirements of the retail industry and its suppliers. The JDA Portfolio consists of comprehensive, integrated software solutions that are designed to specifically address the demand and supply chain management, business process and decision support, as well as e-commerce and collaborative planning requirements of the retail industry and their suppliers. JDAS shares rallied after the company said it expects fourth-quarter earnings to exceed analysts' estimates by at least 50%, due to strong demand from its grocery and sporting goods retail customers. The news prompted brokerage firm U.S Bancorp Piper Jaffray to upgrade its rating for JDA to "outperform" and we agree with that outlook for the issue. FEB 22.50 QAH NX LB=0.35 OI=0 CB=22.15 DE=28 TY=6.3% ***** LIN - Linens 'n Things $27.64 *** Reader's Request! *** Linens 'n Things (NYSE:LIN) is a national large-format retailer of home textiles, housewares and home accessories, operating 283 stores in 40 states and three Canadian provinces as of year-end 2000. The company's store prototype ranges between 35,000 and 40,000 gross square feet in size, and such stores are located in strip centers, malls and as stand-alone stores. Linens 'n Things maintains a selection of over 28,000 stock-keeping units in its superstores, offering brand name "linens" (bedding, towels and pillows) and "things" (housewares and home accessories). A large number of brand names are sold by LIN and the company also markets an increasing amount of merchandise under its own private label, LNT Home, which is designed to supplement its offering of brand name products. One of our readers asked if we would search for some favorable stocks in the retail group and LIN is our top pick in that category. The company's quarterly earnings are due 1/30. FEB 25.00 LIN NE LB=0.45 OI=92 CB=24.55 DE=28 TY=5.5% ***** MEDC - Med-Design $25.76 *** On The Move! *** 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 in early January on speculation that 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. More recently, the company signed an agreement with Sultan Chemists, a leader in manufacturing infection control products and oral therapeutics, that will give MEDC the right to exclusively market their Safety Dental Pre-filled Cartridge Injector for ten years. Our position allows a conservative entry point into this unique issue. FEB 20.00 MQH ND LB=0.30 OI=13 CB=19.70 DE=28 TY=6.0% ***** MROI - MRO Software $29.20 *** Hot Sector! *** MRO Software (MROI) is a provider of solutions for powering industrial collaboration. MRO Software has the technology and in-depth understanding of issues among capital asset-intensive industries needed to connect all participants in the industrial value chain. The company's solutions are designed to help make e-business easy, practical and affordable. The company's main products, Online Commerce Management, and Enterprise Catalog Management solutions are helping customers streamline internal processes and compete more efficiently in a collaborative and electronic market. MAXIMO, the company's flagship Strategic MRO system, is creating value in more than 8,000 organizations by extending asset life, decreasing operating costs and enabling efficient supplier collaboration. MRO Software recently posted better-than-expected first-quarter pro forma earnings as revenue for the period rose 12% to $46 million. The software maker also raised its full-year guidance, saying it now expects earnings of $0.30 to $0.35 a share for the year, up from its previous forecast of $0.17 to $0.22 a share. The optimistic outlook has investors interested in the company and this position offers a conservative cost-basis from which to speculate on its future. FEB 25.00 UPJ NE LB=0.40 OI=0 CB=24.60 DE=28 TY=5.5% ***** SFA - Scientific Atlanta $26.70 *** On The Rebound! *** Scientific-Atlanta (NYSE:SFA) provides customers with broadband transmission networks, digital interactive subscriber systems, content distribution networks and worldwide customer service and support. SFA has evolved from a manufacturer of electronic test equipment for antennas and electronics to a producer of a wide variety of products for the cable television industry, including digital video, voice and data communications products. SFA is changing the way consumers interact with their televisions, and is a supplier of transmission networks for broadband access to the home, digital interactive subscriber systems for video, high speed Internet, voice over IP networks, and worldwide customer service and support. Scientific-Atlanta is also applying its expertise to the current convergence of the personal computer and the television, and helping to extend multimedia broadband applications to new platforms via the set-top. Shares of SFA rebounded strongly last week after the company reported profits that beat consensus forecasts due to better-than-expected set-top box shipments and cost controls. Investors who think the company is on the way to a long-term recovery can establish a discounted basis in the issue with this position. FEB 22.50 SFA NX LB=0.45 OI=662 CB=22.05 DE=28 TY=7.1% ***** SPCT - Spectrian $15.10 *** Chip Sector Speculation! *** Spectrian (NASDAQ:SPCT) designs, manufacturers and markets high power radio frequency (RF) amplifiers for the global wireless communications industry. The company's power amplifiers support a wide range of transmission standards, including Advanced Mobile Phone Services (AMPS), Time Division Multiple Access (TDMA), Code Division Multiple Access (CDMA), Personal Communications System (PCS), Global System for Mobil Communications (GSM), Wireless Local Loop (WLL), Universal Mobile Telephone Service (UMTS) and IMT-2000. Spectrian's power amplifiers are utilized as part of the infrastructure for both wireless voice and data networks. The company's power amplifiers boost the power of a signal so that it can reach a wireless phone or other device within a designated geography. Despite the recent bullish activity, SPCT has been the subject of very negative comments from columnist Herb Greenburg of TheStreet.com. Herb contends that the company has been less than honest in their accounting practices. We prefer to let the "tape tell the tale" and traders can speculate along with us through the sale of this conservative (OTM) position. FEB 12.50 QCS NV LB=0.30 OI=61 CB=12.20 DE=28 TY=8.7% ***** TMCS - Ticketmaster $19.78 *** Own This One! *** 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 earlier this month and the recent technical indications suggest the rally has additional upside potential. Investors who wouldn't mind owning the issue can speculate on its continued bullish movement with this low risk position. FEB 17.50 QMF NW LB=0.40 OI=25 CB=17.10 DE=28 TY=7.2% ***** ***************** 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 ELON 16.73 FEB 15.00 EUL NC 0.70 323 14.30 28 13.4% WEBM 21.48 FEB 17.50 UUW NW 0.60 420 16.90 28 12.5% IDCC 11.97 FEB 10.00 DAQ NB 0.30 226 9.70 28 10.5% SEBL 34.26 FEB 27.50 SGQ NY 0.70 1853 26.80 28 9.9% QSFT 24.45 FEB 20.00 QUD ND 0.50 370 19.50 28 9.3% INVN 34.62 FEB 22.50 FQQ NX 0.60 111 21.90 28 8.7% RATL 22.61 FEB 17.50 RAQ NQ 0.30 196 17.20 28 6.8% ORCL 16.48 FEB 15.00 ORQ NC 0.30 7222 14.70 28 6.0% ************************ SPREADS/STRADDLES/COMBOS ************************ Profit Woes Temper Optimistic Outlook By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, January 18 The recent downward bias in stock prices was sustained by renewed selling pressure today as investors continued to fret over the outlook for corporate earnings. The blue-chip industrial average ended 78 points lower at 9,771 amid concerns over downbeat forecasts from technology giants IBM and Microsoft. Shares of Hewlett-Packard (NYSE:HWP), J.P. Morgan Chase (NYSE:JPM), and Intel (NASDAQ:INTC) were also among the big losers on the Dow as worries about the time frame for an economic recovery resurfaced after a one-day respite. The NASDAQ slumped 55 points to 1,930, even after Dell Computer (NASDAQ:DELL) upped its revenue targets for the coming year. Technology companies in the networking, data storage and Internet sectors suffered the worst losses. The broad-market S&P 500 Index slid 1% lower as biotechnology, financial and oil shares endured persistent bearish activity. Trading volume closed at 1.31 billion on the NYSE and at 1.69 billion on the NASDAQ. Market breadth was austere, with decliners outpacing advancers 19 to 12 on the NYSE and 23 to 12 on the technology exchange. The 10-year Treasury added 10/32 to yield 4.88% while the 30-year bond rallied 24/32 to yield 5.35%. On the fund flow front, Trim Tabs estimated that all equity funds had inflows of $3.2 billion in the week ending 1/16 compared with inflows of $5.9 billion in the prior week. Last week's new plays (positions/opening prices/strategy): NSDQ-100 (NSDQ:QQQ) JAN41C/JAN41P $1.75 debit straddle Broadcom (NSDQ:BRCM) JAN50C/JAN50P $3.80 debit straddle Jabil (NSDQ:JBL) FEB25C/FEB25P $4.40 debit straddle Juniper (NSDQ:JNPR) FEB20C/FEB20P $4.40 debit straddle Biogen (NSDQ:BGEN) FEB45P/FEB50P $0.60 credit bull-put Caliper (NSDQ:CALP) FEB20C/FEB15P $0.10 debit synthetic The recent volatility in technology stocks provided some great opportunities for straddle traders. Our new position in the NASDAQ-100 Index (QQQ) offered a profitable outcome for short term speculators and the (February) straddles in Juniper and Jabil have also experienced excellent movement over the past week. The only disappointment occurred in the Broadcom play as it remained in a relatively small range from $46-$50, thus failing to achieve a gain in either portion of the position. The bullish spread in Biogen was available at the target credit and the speculative synthetic position in Caliper Technologies also offered an acceptable entry price, although the issue may eventually succumb to the widespread selling pressure in the equity markets. Portfolio Activity: The first month of 2002 was a humbling period for optimists as the market failed to live up to expectations of a recovery in the new year. All of the major equity averages have slumped since the beginning of January and there is little reason to believe the trend will improve significantly in the near term. Despite the lackluster performance of broad-market stocks, the Spreads/Combos section enjoyed a relatively successful month, due to a number of bearish and neutral-outlook positions, as well as some speculative momentum-based plays and limited-risk credit spreads. The top performing play in January was the bullish synthetic position in Speechworks (NASDAQ:SPWX) with a profit potential of over 50% in a two-week period. Other successful plays in that group included Aware (NASDAQ:AWRE), I2 Technologies (NASDAQ:ITWO), and 3com (NASDAQ:COMS); all of which offered favorable "early-exit" profits during the first few sessions after they were initiated. In addition, traders that chose to remain in those positions for future potential have over three months until they expire (4 months with ITWO). Among the bullish credit spreads, all of the selections were profitable except for Abgenix (NASDAQ:ABGX), which issued an unexpected article stating that its experimental anti-body based drug failed to produce enough improvement in rheumatoid arthritis patients to merit further study. Traders who went "short" after the announcement finished the expiration period with a favorable outcome but those who rolled out and down in hopes of a future recovery are in danger of needing another adjustment. My comments last week certainly did not help as I put the curse of Murphy's Law on the play by noting that, "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." (I guess I should learn to keep my optimism in check...) In the neutral-outlook category, Affymetrix (NASDAQ:AFFX) was a big winner, providing up to a $1.25 gain on $4.00 invested in less than two weeks. The speculative debit straddle was a popular position among the subscribers who participate in that strategy and I received some positive comments for offering the play. Another candidate in that group, Mirant (NYSE:MIR) achieved a notable accomplishment when the straddle reached the break-even point in the bearish portion of the position. Traders who sold the puts on Tuesday, when the stock moved below $12, now have a bullish "no-risk" play in the issue. The premium-selling positions (credit strangles) in Biogen (NASDAQ:BGEN), Semtech (NASDAQ:SMTC), Idec Pharmaceuticals, and Invitrogen (NASDAQ:IVGN) all finished at maximum profit. Calendar spreads in Price Communications (NYSE:PR) and Clarus (NASDAQ:CLRS) did not provide any gains but it is interesting to note how well the CLRS options have held their value, even as the underlying issue has retreated after the recent rally. Since the long ($7.50 call) options do not expire until August, there is plenty of time to achieve a profit. Despite the fact that Microsoft (NASDAQ:MSFT) was hammered on the last day of the expiration period, the covered-calls with LEAPS position in the issue has provided exceptional returns and the current gain is $4.00 on $6.45 invested in less than four months. In the bearish group of positions, all of the selections were winners including both plays in Andrx (NASDAQ:ADRX), and the bear-call credit spreads in Amgen (NASDAQ:AMGN) and KLA-Tencor (NASDAQ:KLAC). Of course there were a few losers in the portfolio, primarily in the category of Reader's Request speculation plays. The bullish "January Effect" positions that did not profit prior to the second week of the new year were hard-pressed to rally in the more recent market environment. Tellium (NASDAQ:TELM) and Pivotal (NASDAQ:PVTL) were the two positions (expiring in January) in that group. Looking forward, there is little hope for a sharp recovery in the coming weeks so traders should be prepared to exit any bullish positions in which the technical outlook for the underlying issue suggests there is a low probability of a profitable outcome in the play. As most of you know (or will soon learn), the reason professional traders are successful is they make money by taking small profits on a regular basis and they don't let losing positions significantly erode capital. If that sounds like a difficult task, don't feel discouraged; we all have trouble following that advice. Questions & comments on spreads/combos to Contact Support ****************************************************************** Option Trading 101: Strategy Selection Next week will be the most active period for earnings reports in the first quarter of 2002 with over 155 companies in the S&P 500 index and nearly half of the 30 blue-chip Dow stocks revealing their profit results. In addition, the overwhelming number of quarterly announcements will compressed into only four days due to the observance of the Martin Luther King Jr. Holiday. Since the current market environment favors option "buying" strategies, it is a great time to review the most common technique in the category of conservative, neutral-outlook positions. ****************************************************************** The Debit Straddle ****************************************************************** One of the most popular strategies for conservative option traders is the debit straddle. This neutral-outlook approach consists of purchasing both a put and a call, generally with the same strike price and the same expiration month. The position will benefit from a large move in one direction (or the other) and based on the size and timeliness of the move, it can generate large profits. The risk, if little or no movement occurs, is limited to the initial amount paid for the straddle. By carefully identifying undervalued options and making reasonable assumptions about future movements in the underlying security, this can be a profitable strategy with very limited risk. Before we can begin a discussion on the proper techniques for purchasing straddles, there are a few fundamental concepts that must be understood. Option Pricing: The primary influence on an option's price is the movement of the underlying security. The next important factor is time value. An option's price decays each day it is in existence. The closer the option gets to expiration, the faster it decays. There are other, less important factors that affect the price of an option including interest and dividend rates. Volatility: The volatility component of option pricing is a measure of the range the underlying security is expected to change over a given period of time. The actual measurement is the standard deviation of the daily price changes in the issue. Historical (statistical) Volatility: A measure of how quickly the underlying security has moved in the past. It is a mathematical definition based on historical prices. In most cases, the higher the statistical volatility, the more an option is worth. Implied Volatility: The market's estimate of future volatility of the underlying security. Implied volatility calculators start with the current option price and extrapolate the theoretical value of volatility. Even though it is a computed value, it is still just an estimate and is subject to errors (or irregularities) when the market performs unexpectedly. In general terms, implied volatility is the volatility value that makes an option's fair value equal to its actual market price. Position Selection There are three rules to identifying favorable conditions for a straddle purchase. First, the trader should select options that are undervalued (cheap). Next, the underlying security should have the potential to move (high or low) enough to make the straddle profitable. Finally, the underlying stock should have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk-reward of the position. The first step in this process is to determine how fairly the options are priced. This may be done with sophisticated pricing software or by simply comparing the current levels of implied volatility to past levels of implied volatility. In simple terms, when the relative implied volatility is low, the options are effectively under-priced. After identifying a series of inexpensive options, the trader must determine if the underlying stock has the ability to move to a profitable position in the required amount of time. A few weeks is usually the shortest recommended period for conservative debit straddles; shorter-term plays suffer from time decay too quickly. With a probability calculator, it is easy to estimate the chance of the underlying stock finishing outside the break-even points at expiration. But, one thing you must realize when using these tools is that historical volatility measures are generally based on 10, 20, 50 and 100 day statistics, thus it is important to use a conservative estimate so as to not to artificially inflate the probability of profit. The next step is to look at a price chart of the stock to see if it has a history of moving the required distance in the allotted time frame. The important thing to examine is how often the issue moves through the necessary profit range in each of the past four or five "target" periods. Again, simple option analysis software will do this automatically and more importantly, it will forecast the probability of actually profiting from the position. Remember, you are always looking for volatility that is low with respect to its historic levels. The reason is the tendency for volatility to return to its historical trend or median. It is sometimes called the "Rubber Band" effect and it basically means there is a high probability that when it's pulled too far in one direction, it will eventually reverse and start moving the other way. This pattern of behavior is the main reason why experienced traders use volatility based positions to make money. They construct plays that take advantage of the future volatility of an issue, when the current value is high or low compared to its recent history. Volatility is a predictable and powerful component for options traders and understanding this concept is a must for consistent profits in the derivatives market. Common Exit and Adjustment Strategies One thing to be aware of when buying any option is that time decay becomes greatest during the last month before expiration. A three month debit straddle will have lost approximately 50% of its value before the beginning of the worst erosion period, even if the stock remains exactly at the original price when the position was opened. This makes it very important to use a mental loss limit (generally near 50% of the initial cost of the straddle purchase) to preserve capital in the event the underlying issue does not perform as expected. After the position is open and the underlying stock begins to make a move, it is necessary to decide whether to "ride the trend" to the break-even point or trade against the straddle. One technique is to hold the position until the value of either option pays for the whole straddle, then the remaining (long) option is risk-free with unlimited profit potential. A similar method bases the target exit on the sum total of both positions. When one option is worth the total initial debit, both positions are closed and the premium from the lower-priced option is profit. The latter strategy works well when there is ample time until the options expire. Trading the trend is considered the more profitable technique for experienced straddle buyers but it involves additional risk and requires knowledge of basic technical analysis. The most common approach to this strategy is to monitor the underlying issue for a breakout or key reversal through a technical support or resistance level. When the new trend has been positively identified, the lower priced options (losing side) are sold along with one-half of the higher-priced options (profitable side). The remaining position is held until a reasonable profit target is met and downside protection is maintained with a trailing stop. Advanced traders favor this simple follow-up technique because it is based on known technical trends and the action generally occurs near the position's break-even points. When one of these points is reached, two simple transactions lower the overall cost basis while retaining a high probability of eventual profit. Determining how and when to exit a play is a matter of personal preference but in most cases, if the underlying issue performs poorly, the play should be liquidated before time-value decay erodes the value of the position significantly. As the last month of option life approaches, you should begin to plan an exit. Study the daily movement of the underlying issue and use it to your advantage to close the play; selling each option for whatever you can get when the market (not emotion!) tells you it's right. It's very difficult to learn to exit losing plays early but the simple fact is; there is no reason to hang on to a losing position when there are so many other profitable plays that deserve your time and money. Accept your losses; learn from your mistakes (and evaluate each one critically); then move on! Profitable Straddles: How to Find Them Most of the candidates in the OIN come from recent reports on options activity, volume, and volatility; proprietary software programs that provide premium disparity algorithms; and research from other professionals in our field. The best way to search for potential straddle issues is through the use of mathematical scan/sort tools that compare the current implied volatility versus historical volatility and these products can be found on a number of sites and in various software programs. Probability calculators and charting programs are also helpful in sorting through the large number of possible candidates to identify undervalued options and make assumptions about future movements in the underlying security. There are many useful sources of information on the Internet and one of the best ways to find new candidates is to follow the mainstream activity. News articles on extremes in option trading volume and volatility are listed at many sites (Yahoo!, The Street.com, and CBS Marketwatch are some examples) and the major exchanges; The CBOE, PHLX, and AMEX all have excellent resources for historical and statistical option pricing. The key to success is to use all the sources available to find the most favorable straddle issues and utilize the strategy when the conditions meet your standards for risk versus reward. Event-Driven Straddles: Cheap Speculation! A straddle is also appropriate strategy for situations in which one believes that the stock price will move substantially but does not know in which direction it will go. A straddle can work very well in situations where important news is about to be released and it is expected that it will be either very favorable or extremely unfavorable. Corporate earnings announcements, new drug approvals, merger or takeover speculation and annual board meetings (splits/spin-offs) are other examples of situations in which straddles can profit from uncertain information that will be released on a specific date. The most important thing to remember when evaluating a straddle is to understand that the greater uncertainty associated with the previous examples are known by everyone. The options may already be priced according to a higher stock volatility, making the play unfavorable. The most attractive straddles will be those in which the trader is confident that the stock will be more volatile than everyone else. Simply A Great Strategy... Favorable debit straddles are relatively simple to uncover. The basic requirements are inexpensive options on issues that have proven historical volatility. The techniques for initiating and managing a straddle position are very simple and perfect for the novice trader, providing he or she understands option-pricing basics and follows a few simple guidelines. In addition, this conservative, neutral-outlook strategy can generate excellent returns over the long term because losses are limited to the initial investment and potential profits are constrained only by time and volatility in the underlying issue. 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