The Option Investor Newsletter Sunday 02-03-2002 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 2-1 WE 1-25 WE 1-18 WE 1-11 DOW 9907.26 + 67.18 9840.08 + 68.23 9771.85 -215.68 -272.21 Nasdaq 1911.24 - 26.46 1937.70 + 7.36 1930.34 - 92.12 - 36.92 S&P-100 569.35 - 5.79 575.14 - .10 575.24 - 8.96 - 14.41 S&P-500 1122.20 - 11.08 1133.28 + 5.70 1127.58 - 18.02 - 26.91 W5000 10490.17 - 86.35 10576.52 + 67.16 10509.36 -188.86 -234.10 RUT 480.04 + .69 479.35 + 4.98 474.37 - 15.57 - 9.36 TRAN 2759.33 - 20.59 2779.92 +112.67 2667.25 - 39.52 -123.43 VIX 22.87 + .94 21.93 - 2.41 24.34 + .36 + 1.96 VXN 43.08 - 2.59 45.67 - 3.22 48.89 + .52 + 1.51 TRIN 1.44 .82 1.13 1.44 TICK +652 +885 +522 +290 Put/Call .67 .68 .85 .68 ****************************************************************** Will The Next Enron Please Stand Up by Jim Brown The markets treaded water all day on Friday after receiving mixed economic news. More accounting rumors made the rounds as investors, who were afraid lightning was going to strike their stock next, took money off the table. Resistance held but so did the major averages with only a minor dip after the two big days of gains last week. Investors should be grateful that Friday was such a lazy day after a week of extreme volatility. Leading the news on Friday was the conflicting numbers on the Jobs Report. The economy lost more than 89,000 jobs in January but the unemployment rate FELL to 5.6%. Payrolls declined in every sector except Retail. The drop in unemployment while jobs are still being lost was credited with a drop in the labor force from people deciding to quick looking for work due to the frustration of not finding a job and from those who have exhausted their benefits and have dropped off the unemployment rolls. The median duration of unemployment grew to 8.8 weeks indicating that finding jobs is becoming increasingly difficult. Despite a warm January even the construction sector lost -54,000 jobs indicating home sales may be slowing as well as commercial construction. Average hours worked, which is an indicator of production, fell to 148.1 in January, which would mean GDP was still declining. Contradicting the negative job news was a rise in the NAPM numbers, now called the ISM Index, to 49.9 and only .2 below a technical expansion in manufacturing. The index has risen for three months from a low of 39.5 in October. While it is the 18th straight month of contraction it does appear the bottom may be behind us. New orders fell slightly but the backlog of orders grew substantially from 39.5 to 44.5. The headline number was the highest value since the decline began in August 2000. It is possible that the ISM will show growth in the February number but the percentage of change is very small which does not portray a rapid recovery. The Consumer Confidence numbers increased again to 94.2 from 88.8 in December. The large gain was totally due to the expectations portion of the index which jumped from 82.3 in Dec to 91.7 in Jan. This is the highest level for the headline number since last January and up significantly from its low of 81.8 in September. This post attack high indicates the consumer is positive things will get better even thought the current conditions have only changed slightly. Analysts still fear that rising debt loads and continued high unemployment will delay any consumer powered recovery. They feel any recovery will not be accompanied by a burst of spending as consumer demand is still very weak. Waste Management (WMI) was the disaster of the day and dropped -13% after warning that it would miss estimates on lower revenue. Just too many people shredding and burning those documents instead of trashing them I guess! The CEO said the economic downturn had cut their volume and most of their current business was in the low margin services. They also said they would take a charge related to the Enron bankruptcy. Does this hit home to anyone? If trash haulers were impacted by Enron who else might be sitting on losses that they have yet to disclose? Worldcom (WCOM) headed south again, closing at $9.61 on volume of 75 million shares. The WSJ reported on Friday that CEO Ebbers could be forced to sell some of the 27 million shares he owns to repay $183 million in loans from Bank of America. According to SEC documents the loan is due and payable on the first business day after WCOM closes under $10, which would have been Friday. Considering the history of margin calls Ebbers has seen, analysts think he may capitulate and sell the shares to liquidate the debt thereby putting further pressure on the stock. However considering that WCOM traded in the $50-$60 range over the last two years it is entirely possible Ebbers is significantly underwater on his margin and even selling all of them ($250 million worth) may not clear his total debt. The BofA loan is only one of his problems. The WCOM board bailed him out last time with a loan to cover the margin call. Investors are also concerned that should he sell then his interest in the company would wane leading into further problems. Today was the first time since 1995 that WCOM closed under $10. The bankruptcy of MCLD and GX along with numerous other smaller players is weighing heavily on the WCOM business. TMPW, the Monster.com parent, demanded an apology and a correction from Forbes after an article critical of their accounting practices was printed. The company said it corrected the information in the article before publication but was ignored. Evidently the author had already decided that an "accounting practices" article was needed to bolster readership and did not want the facts to get in the way. Maybe the author should consider a career change to Barrons. Many bears have suggested that Cisco is the next house of cards to collapse due to funny accounting practices. While I would doubt it, there was an interesting comment from Chambers on Friday. He was doing an interview on CNBC and Ron Insana asked him point blank if he would like to take the opportunity to tell investors once and for all that there was no funny numbers in Cisco financials. Chambers, very smoothly, ducked the question completely with "Ron, that is a loaded question." "I think investors should look at CASH FLOW as the real health of the company...." and he proceeded to brag about $1 billion of free cash per quarter and $20 billion in the bank, BUT he would not answer the question. You would think that with rumors flying about their accounting he would take the opportunity to say something credible about their "practices" and not try to shift the focus to a different topic. There was a hundred comments he could have made about conforming to GAAP or being conservative in accounting for acquisitions, etc. He didn't! I am not trying to claim any wrongdoing but I was surprised by the clear misdirection. Hiding something John? Speaking of hiding something Enron ex CEO Ken Lay is scheduled to testify on Monday and word is that he will not take the fifth. While I doubt he will disclose many details on the 4,300 partnerships that so skillfully hid income and losses from auditors he is going to be the center of investor attention. The betting line assumes he will claim ignorance of the problems because his employees did not tell him about them. As one of the highest paid CEOs in corporate America he would be better off claiming stupidity. If he turns his employees against him they are liable to turn on him with a vengeance and disclose far more recollections than he would like. Either way the circus, excuse me, testimony should be interesting. The economic calendar is slim next week, which will leave market direction to focus on earnings and recovery hopes. While most major earnings are over there are still several hundred announcements next week. Most of these are second and third level companies which do not generally have the breadth and depth of the majors to withstand the recent economic drop. While a GE or United Technology or Procter & Gamble have a wide range of products and sectors many of the current announcers have only one. This could lead to a rash of earnings misses and more market depression. The exception to this scenario is the CSCO earnings on Wednesday. If they give decent guidance it could be positive for the beleaguered networking sector. However, Chambers passed up a chance to do this in the CNBC interview. He said visibility was still very limited, there was no recovery in progress but no further drop either. In short he did not have anything concrete to say while trying to remain neutral. This does not bode well for the guidance since he does not pass up a chance to say good things if they are applicable. I think the markets performance on Friday was very good considering the flood of conflicting reports and political events. Next week however is when the rubber meets the road. The Dow closes exactly on resistance at 9900 again with a minimal -12 point loss. Considering the nearly +400 point rebound from Wednesday's lows that was a good performance. While the Dow managed to post a higher high than the prior week the Nasdaq was not so lucky. In a four day period 24th-29th the Nasdaq managed to touch 1959 three times but was only able to hit 1942 on Thursday at the peak of the rebound. This was the same story with the S&P. The broader market Wilshire-5000 index also failed to hit the last weeks highs. The Dow was the only index able to post a new relative high. This is not a good sign for next week. The Nasdaq bigcaps generally look weak with SUNW setting a new three month low of $10. Dell is threatening to break support at $26, MSFT is struggling to stay above $62, QCOM is heading for $40 and WCOM could hit $9 again if Ebbers is forced to sell. The problem as I see it is the cash outflow from funds and the lack of excitement on behalf of the retail investor. The bottom may be behind us and the recovery underway but it is riding on the back of a tortoise and not a hare. As investors we have been conditioned to want immediate improvement, instant gratification and quick profits. Those profits have been fleeting unless you happen to be standing on the right side of the street when the direction changed. I doubt the roller coaster markets are over and next week could be a repeat. While Friday may have been encouraging we need to keep our emotions in check until a new direction appears. The Nasdaq is the key for me. If it moves up from here the other indexes will follow. I would want a close over 1960 on strong volume for confirmation before going long. Should it roll over from here in front of the CSCO earnings then I would go flat or short below 1900. The Dow advance will not get far if the Nasdaq continues to bleed and with 27% of the S&P represented by tech stocks that index will follow the Nasdaq as well. Investors will also be watching the Enron testimony and waiting for the next cockroach to appear. That will continue to weigh on the markets just like the fear of a terrorist attack on the Superbowl was an unspoken selling pressure on Friday. Should both events proceed without a problem, bullish sentiment could return quickly. Enter Very Passively, Exit Aggressively! Jim Brown Editor@OptionInvestor.com Beginning this Sunday we have started a watch list of plays that are on our radar screens but not yet plays. The list contains trigger points and brief play descriptions to let the reader plan his entries in advance. Some will become plays and some will not but it should provide you with another weapon in your trading arsenal. http://members.OptionInvestor.com/watchlist/020302.asp ******************** INDEX TRADER SUMMARY ******************** Taking A Breather Austin Passamonte Major indexes didn't muster much of a move on Friday, but after three large-range sessions before it was time for a pause to catch collective breaths. Thursday's ramp into the close was little more than short covering and mutual fund "window dressing" as they propped up their core holdings to paint the monthly statements green. A few million naive U.S. investors will get their January mutual fund statements, think their boy running the show over there is doing a bang up job and file it away without second thought. Big mistake. Friday saw some profit-taking and unwinding of those shenanigans. But more than that lies behind the scenes, as our nightly scan of the indexes and sectors always shows. Want to put your finger on the internal heartbeat of a market? Pick the sectors apart and see which is doing what. (Weekly/Daily Charts: BTK) For example, the biotech sector looks poised to break out on the upside soon. Wednesday's low bounced clean off a long-term line of support (pink) that extends way back to pre-bubbleonian times of October 1998. It has only been touched a few times since and close below one week in September before bouncing back above the next. Both stochastic values in the time frames are oversold and poised for bullish reversals, a sign of price strength. And the daily chart candlestick pattern is a fairly good "Morning Star" bullish reversal formation as well. We went long the BBH Biotech HOLDR shares for this reason in Sector Share model, and added call option plays to Position Trade model tonight. (Weekly/Daily Charts: DRG) The DRG Pharmaceutical Index resembles biotechs pretty close. Also oversold and posting bullish reversal patterns, we tracked the PPH HOLDR shares open on Friday and will add their options to Position Trade model tonight. (Weekly/Daily Charts: XAU) "Gold Fever's Got You!" Eric Utley's favorite song (he hates it) from the Gold Fever show on Outdoor Channel I very seldom miss. Looks like we need to pan & sluice some of those placer deposits out of the Colorado streams here this spring from the looks of XAU. Precious metal stocks are catching fire all over the place, or should we say they glitter? The current move looks extended with oscillators pinned in overbought extreme, but moving averages rising and bullish trends suggest the recent lows are behind us for now. (Daily Chart: DFI) And our final bull phase for this session here is the Defense Index. A relative newcomer to the scene, it didn't take long to form a bull-flag channel, make the classic five-wave touches and break out in dramatic fashion. All that money flowing from Capital Hill to these components is spiking share prices impressively. Summation The only bullish sectors I could find breaking out to the upside are Biotechs, Drugs, Precious Metal and Defense. Know what they all have in common? They are all sectors of haven for nervous money during perilous market times. Drugs and gold in particular should be selling off like crazy while money screams into SOX, NWX, DDX, GSTI, CYC, BIX and a host of other sectors poised to explode during the "sure thing" economic recovery just ahead. Is "The Market" purported to be all-knowing telling us something we need to heed? Can't say for sure, but defensive sectors are poised to break out in bullish fashion according to what we see in front of us here. Don't fall in love with either direction because if you do, one of them is bound to break your heart! Best Trading Wishes, austinp@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** Editor's Plays ************** Buy Stop Triggers Before I start today's comments here is a brief recap of last weeks suggestions. The AOL straddle for $2.45 did not rebound with earnings as expected. The outlook was not exciting and several analysts downplayed the stock. The $1.20 Feb $27.50 put rocketed to $3.50 during the Wednesday abyss and was still trading as high as $2.50 on Friday. The call has dropped to $.40 from $1.25 and would take a $3 move in the stock to regain any of its former glory. Still this would have been a profitable play and had you not sold the put for a profit yet there is a very good chance it will be worth more next week than last. It would have been hard to lose on this play since the options were cheap and the stock was bound to move significantly in one direction after the earnings. The Enron meltdown continued to taint JPM and the March-$35 put was trading $3.50x$3.80 at the close on Friday and the stock appears headed for $30 and a triple on the option which was quoted at $1.85 in last Sunday's article. The asbestos play was GRA and with no liability limits suggested in the State of the Union speech the volatility was huge with big swings in both directions. Still it is trending up and right where it was last week which is a positive sign in my opinion. Triggers I have written about this before and starting this week we are implementing a watch list in the newsletter that uses this strategy. Basically when a stock is trading in a pattern that is moving toward a breakout or breakdown there is usually a specific point that provides support or resistance. When that point is broken there is a flurry of activity as shorts/longs race to switch sides or go flat. The best way to implement these plays is with stop orders on the stock price. I use Preferred Trade and this works great! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Using the chart below you can see that Boeing is about to retest the $42 level and possibly break out to a new post attack high. By entering the stop order like this you can trigger a buy for the $40 call option when and IF the breakout occurs. BUY 5 contracts of BA-CH at market when BA trades at $42.25. I use $42.25 to prevent execution on a "ping" at $42. A ping is when the stock hits a round number where other retail investors have entered orders to buy/sell the stock. For instance, if you had missed the sell at the previous high near $42 you may feel like "if it ever hits $42 again I want out." You put in your limit order at $42 and keep your fingers crossed. Multiple this by hundreds if not thousands of traders and you see why $42 could be hit and the stock could roll over again immediately under the flood of orders. By setting your buy stops above/below those round numbers you prevent being executed only to see the stock trading lower five minutes later. Wait for the real breakout over $42 before getting executed. Using the same concept with MCAF and it would look like this. Buy 5 contracts of CFU-CE at market if MCAF trades at $23.25. This avoids the ping and executes the order only when the breakout occurs. The same concept can be used on puts and CERN is showing a classic floor at $47. If that floor breaks it could fall all the way to $40. Set your buy stop at $46.85 or $46.75 and be sure that the breakdown is in process before getting executed. I use market orders because you have no idea what the option price will be when the stock trades at the trigger price. It could be Monday or it could be several days later after having attempted the breakout/breakdown several times. Option premiums could have inflated/deflated several times before the stock actually makes the break. Having buy stops based on option prices could trigger an execution before the break occurs and open a position you really did not want. Good Luck Jim **************** MARKET SENTIMENT **************** Seeking Solace By Eric Utley The market took a defensive stance in last Friday's session. For the most part, stocks finished lower. The Dow Jones Industrial Average ($INDU) traded up to its 50-day moving average at 9937 only to rollover. The S&P 500 (SPX.X) traded up to the 1130 level, which has become a significant resistance level. And the Nasdaq-100 (NDX.X) was the weakest of the three with its 1.42 percent drop. Technology shares were weak across the board, led by losses in Optical (FOP.X), Networking (NWX.X), and Internet (INX.X). The sectors catching bids last Friday were all defensive in nature. Health care (DRG.X, BTK.X, HMO.X), Gold (XAU.X), and Energy (OIX.X, XNG.X, UTY.X) were the only recipients of buying interest. Meanwhile, Treasury yields dropped across the curve, which means they were buying bonds. The flight to bonds in addition to the defensive sectors of the market again revealed an avoidance of risk on the part of market participants. This in spite of positive economic data last week. Going into next week's trading, I'll be watching for the flight to defensive sectors of the market. If bonds, gold, and health care continue higher, stocks in general may be in trouble. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9907 Moving Averages: (Simple) 10-dma: 9793 50-dma: 9937 200-dma: 10104 S&P 500 ($SPX) 52-week High: 1383 52-week Low : 945 Current : 1122 Moving Averages: (Simple) 10-dma: 1124 50-dma: 1142 200-dma: 1166 Nasdaq-100 ($NDX) 52-week High: 2771 52-week Low : 1089 Current : 1528 Moving Averages: (Simple) 10-dma: 1542 50-dma: 1604 200-dma: 1614 Gold and Silver ($XAU) The $XAU continued to shine in last Friday's session, once again earning the day's top spot among bullish sectors. There's a trend emerging here. Have you seen it? In all reality, the $XAU is ripe for a natural reaction, a pullback. But any dip in this index looks buyable for the time being. The news last Friday was that several large hedgers would reduce their forward selling, alleviating some pressure on the price of the commodity. Top gainers in the sector included Meridian Gold (NYSE:MDG) +5.12 percent, Newmont Mining (NYSE:NEM) +4.44 percent, and Agnico Eagle Mines (NYSE:AEM) +4.26 percent. 52-week High: 67 52-week Low : 46 Current : 63 Moving Averages: (Simple) 10-dma: 59 50-dma: 56 200-dma: 56 Networking ($NWX) The broader telecom space has been trading very, very bearishly for the last month. So it's only natural that networking shares would follow suit. After all, most networking concerns are highly levered to the telecom business. The $NWX was the most bearish sector in last Friday's session. Leading the way down Riverstone (NASDAQ:RSTN) -7.90 percent, ONI Systems (NASDAQ:ONIS) -6.34 percent, Ciena (NASDAQ:CIEN) -5.51 percent, and Corning (NYSE:GLW). 52-week High: 843 52-week Low : 201 Current : 310 Moving Averages: (Simple) 10-dma: 317 50-dma: 331 200-dma: 336 ----------------------------------------------------------------- Market Volatility The VIX finished fractionally higher in last Friday's session during which stocks finished lower. Its gain, however, was very small. Additionally, the index traded as low as 22.51 during intraday action. The VXN remained mired near its all-time lows in last Friday's session. The index hit an intraday low of 42.50 before reversing and finishing the day slightly higher. CBOE Market Volatility Index (VIX) - 22.92 +0.08 Nasdaq-100 Volatility Index (VXN) - 43.08 +0.62 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.75 478,022 360,125 Equity Only 0.60 432,289 259,173 OEX 1.31 10,661 13,937 QQQ 1.97 23,557 46,483 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 52 + 0 Bull Alert NASDAQ-100 36 - 2 Bear Confirmed DOW 57 + 0 Bull Correction S&P 500 58 + 0 Bull Correction S&P 100 57 + 0 Bull Correction 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 1.43 10-Day Arms Index 1.20 21-Day Arms Index 1.34 55-Day Arms Index 1.17 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 1443 1670 NASDAQ 1554 2000 New Highs New Lows NYSE 136 26 NASDAQ 125 28 Volume (in millions) NYSE 1,379 NASDAQ 1,693 ----------------------------------------------------------------- Commitments Of Traders Report: 01/29/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercial interests added to their net bearish position by more than 5,000 contracts last week. % of OI increased by 0.6 percent in the same period. Meanwhile, small traders picked up a few longs and dropped a few shorts for a net increase of more than 5,000 contracts to the group's bullish position. Commercials Long Short Net % Of OI 01/15/02 340,005 397,024 (57,019) (7.7%) 01/22/02 342,841 394,041 (51,200) (6.9%) 01/29/02 345,583 401,923 (56,340) (7.5%) 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 01/15/02 129,987 64,311 65,676 33.8% 01/22/02 125,451 65,423 60,028 31.4% 01/29/02 128,826 63,127 65,699 34.2% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 Commercial interests' net bearish position dropped last week, but the % of OI short increased to 11.7 percent. Small traders reduced their net bullish position by about 1,500 contracts. Commercials Long Short Net % of OI 01/15/02 32,068 34,859 (2,791) ( 4.2%) 01/22/02 30,671 34,103 (3,432) ( 5.3%) 01/29/02 31,577 33,651 (2,074) (11.7%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: 7,774 - 12/21/01 Small Traders Long Short Net % of OI 01/15/02 10,230 9,782 448 2.2% 01/22/02 11,885 8,787 3,098 15.0% 01/29/02 9,709 8,293 1,416 7.9% 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' net position remained flat in the prior week, with an increase in both long and short positions. Small traders mirrored the commercial's last week. Commercials Long Short Net % of OI 01/15/02 15,866 9,175 6,691 26.7% 01/22/02 18,152 11,013 7,139 24.5% 01/29/02 19,956 12,171 7,785 24.2% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 01/15/02 4,979 8,747 (3,768) (27.5%) 01/22/02 5,424 8,969 (3,545) (24.6%) 01/29/02 5,872 9,709 (3,837) (24.6%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** January Barometer: Sector Emphasis By Eric Utley In the last 50 years, the January Barometer has been incredibly accurate. It's based on whether the market, as measured by the S&P 500 ($SPX), ends the first month of the new year higher or lower. In essence, as goes January, so goes the rest of the year; if January ends lower, so will the year. Excluding six flat years, the indicator has only been wrong four times since 1950. Two of those errors were arguably caused by the Vietnam War, while the fourth occurred last year. For the January just ended, the major averages finished like this: Standard & Poor's 500 ($SPX) -1.56% Dow Jones Industrial ($INDU) -1.01% Nasdaq-100 ($NDX) -1.70% (I'm more concerned with the $SPX than the other two.) There's more to the January indicator than its implication on the broader market. History has shown that the sectors that out perform the market during the month of January tended to continue to out perform throughout the remainder of the year. On average, the out performing sectors during the month of January have out performed the broader market by almost nine percent during the remaining eleven months of the year. Let's take a look at the five best performing sectors of January '02 this weekend. I'll get back to reader requests next weekend. Please send your questions and suggestions to: Contact Support ---------------------------- Gold and Silver ($XAU) +12.68% Congratulations gold bugs! Gold stocks have been moving and the commodity has followed suit. The commodity spiked big last Friday on news that hedged companies, such as Barrick (NYSE:ABX) and Anglogold (NYSE:AU), were reducing their forward hedges. Quite simply, decreased forward selling reduces the supply in the market, boosting prices. The climb in gold equities and the commodity through January was a combination of defensive positioning and hedging against inflation. As accounting fears increased, investors sought safety in the form of gold shares. And believe it or not, some still use a little "color" to hedge against inflation. There has also been some consolidation in the group, which has helped to boost margins. $XAU Components: Barrick Gold (NYSE:ABX) Agnico Eagle Mines (NYSE:AEM) Anglogold Limited (NYSE:AU) Freeport Mcmoran (NYSE:FCX) Harmony Gold (NASDAQ:HGMCY) Meridian Gold (NYSE:MDG) Newmont Mining (NYSE:NEM) Phelps Dodge (NYSE:PD) Placer Dome (NYSE:PDG) Apex Silver (NYSE:SIL) $XAU - Daily ---------------------------- Defense ($DFI) +9.16% The unfortunate and cowardly acts of September 11 created a new boom in the defense industry. The U.S. government is spending increasing amounts on building out its defense infrastructure. But it's becoming much more deliberate in its spending. Late last week, Defense Secretary Donald Rumsfield spoke before the National Defense College, calling for a need to reduce base structure and instead focus on becoming more nimble in fighting the new war against terrorism. The government's strides to focus its spending have been revealed in recent earnings reports from major contractors. Last week L-3 Communications (NYSE:LLL) reported an incredibly strong quarter and indicated more upside in earnings. The defense sector has the earnings and the support of a bi-partisan government. It's one to watch this year. $DFI Components: Alliant Tech Systems (NYSE:ATK) Boeing (NYSE:BA) Rockwell Collins (NYSE:COL) DRS Technologies (AMEX:DRS) Engineered Support (NASDAQ:EASI) EDO Corp. (NYSE:EDO) Embracer Empresa (NYSE:ERJ) Esterline Tech (NYSE:ESL) FLIR Systems (NASDAQ:FLIR) General Dynamics (NYSE:GD) ITT Industries (NYSE:ITT) L-3 Communications (NYSE:LLL) Lockheed Martin (NYSE:LMT) Northrup Gruman (NYSE:NOC) Raytheon (NYSE:RTN) Stewart & Stevenson (NASDAQ:SSSS) Teledyne Tech (NYSE:TDY) Titan Corp. (NYSE:TTN) United Industries (NYSE:UIC) $DFI - Daily ---------------------------- Health Care ($HMO) +8.10% Just for a moment, imagine that the U.S. economy won't come roaring back with four or five percent growth this year. Wouldn't the 20 percent industry average earnings growth that the health care sector offers sound appealing? Another result of the September 11 attacks is that Americans are placing a greater value on health and security. As a result, demand for health care premiums has skyrocketed in the last quarter, resulting in expectations for the aforementioned double digit growth in many providers' bottom-lines. The companies best positioned for big earnings growth this year are those not exposed to rising medical costs and those who don't negotiate premiums several months in advance. $HMO Components: Aetna (NYSE:AET) Apria Healthcare (NYSE:AHG) Athem (NYSE:ATH) Cardinal Health (NYSE:CAH) Cigna (NYSE:CI) First Health (NASDAQ:FHCC) Humana (NYSE:HUM) Mid Atlantic Medical (NYSE:MME) Oxford Health (NYSE:OHP) Option Care (NASDAQ:OPTN) PacifiCare (NASDAQ:PHSY) Trigon Health (NYSE:TGH) Tenet Health (NYSE:THC) United Health (NYSE:UNH) Wellpoint Networks (NYSE:WLP) $HMO - Daily ---------------------------- Semiconductors ($SOX) +7.03 Semiconductors have grown ubiquitous, which is why the group is so very appealing to tech bulls. It's filled with emotion and analysts use it as a battling ground. Poor semis. The $SOX is the only tech sector in the top five of January '02 top performers. The good news from major manufactures helped the group higher during January. But the metrics from the group haven't been outright bullish. The chip producers across the board reduced capital expenditure budgets for this year by a large amount. That translates into less money for the equipment makers. Then there are valuations. Intel (NASDAQ:INTC), the largest manufacturer, currently trades for 51 times this year's estimated earnings. The stock trades for nine times last year's sales. Applied Materials (NASDAQ:AMAT), the largest equipment maker, currently trades for 205 times this year's expected earnings. Any way you slice it, the chips are expensive. I think that's a problem, but the market disagrees. I'm going with the market's view. If you must be bullish on tech shares, semis are the way to go this year. $SOX Components: Altera (NASDAQ:ALTR) Applied Materials (NASDAQ:AMAT) Advanced Micro Devices(NYSE:AMD) Intel (NASDAQ:INTC) KLA-Tencor (NASDAQ:KLAC) Linear Technology (NASDAQ:LLTC) Lattice Semi (NASDAQ:LSCC) LSI Logic (NYSE:LSI) Motorola (NYSE:MOT) Micron (NYSE:MU) National Semi (NYSE:NSM) Novellus (NASDAQ:NVLS) Rambus (NASDAQ:RMBS) Teradyne (NYSE:TER) Texas Instruments (NYSE:TXN) Xilinx (NASDAQ:XLNX) $SOX - Daily ---------------------------- Airlines ($XAL) +6.16% Major carriers have a long ways to go before fully recovering after the September 11 event. For instance, UAL (NYSE:UAL) reported the biggest loss in aviation history last week with its $2.1 billion loss for the year. But the road to recovery is shortening. Bookings have rebounded faster than expected as American travelers returned to the sky. Low energy prices have helped to mitigate recent losses, although some analysts suggest that fuel accounts for only a minority of most carriers' cost structures. The regionals are the strongest, especially Frontier (NASDAQ:FRNT) and Southwest (NYSE:LUV). Both companies operate with a very unique business model which allows them to, get this, actually make money. $XAL Components: Alaska Air (NYSE:ALK) AMR Corp. (NYSE:AMR) America West (NYSE:AWA) Continental (NYSE:CAL) Delta (NYSE:DAL) Frontier (NASDAQ:FRNT) KLM Airlines (NYSE:KLM) Southwest (NYSE:LUV) Northwest (NASDAQ:NWAC) US Airways (NYSE:U) UAL Corp. (NYSE:UAL) $XAL - Daily ---------------------------- 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 ACDO Accredo Health Mon, Feb 4 -----N/A----- 0.23 AFC Allmerica Financial Mon, Feb 4 -----N/A----- 0.62 BWA BorgWarner, Inc. Mon, Feb 4 -----N/A----- 0.72 BAB British Airways Mon, Feb 4 Before the Bell N/A FUN Cedar Fair LP Mon, Feb 4 After the Bell -0.17 CMS CMS Energy Mon, Feb 4 Before the Bell -0.18 EPN El Paso Energy Partnrs Mon, Feb 4 -----N/A----- 0.16 ELN Elan Mon, Feb 4 -----N/A----- 0.56 GGP General Growth Prop Mon, Feb 4 After the Bell 1.59 GOLD Gold Fields Limited Mon, Feb 4 Before the Bell 0.06 HUM Humana Mon, Feb 4 Before the Bell 0.20 JP Jefferson-Pilot Mon, Feb 4 After the Bell 0.79 LPNT LifePoint Hospitals Mon, Feb 4 After the Bell 0.23 LZ Lubrizol Mon, Feb 4 -----N/A----- 0.40 MCY Mercury General Mon, Feb 4 -----N/A----- 0.57 TUNE Microtune, Inc. Mon, Feb 4 After the Bell -0.13 MCO Moody`s Mon, Feb 4 After the Bell 0.35 NFS Nationwide Fin Servcs Mon, Feb 4 After the Bell 0.78 OXY Occidental Petroleum Mon, Feb 4 Before the Bell 0.10 PCLN Priceline.com Mon, Feb 4 Before the Bell 0.00 IQW Quebecor World Mon, Feb 4 -----N/A----- 0.39 ROH Rohm and Haas Mon, Feb 4 Before the Bell 0.20 FON Sprint (FON Group) Mon, Feb 4 After the Bell 0.30 PCS Sprint (PCS Group) Mon, Feb 4 After the Bell -0.31 TIN Temple Inland Mon, Feb 4 -----N/A----- 0.46 UDR United Dominion Realty Mon, Feb 4 After the Bell 0.40 ZBRA Zebra Technologies Mon, Feb 4 -----N/A----- 0.53 AES AES Corporation Tue, Feb 5 After the Bell 0.28 AEE Ameren Tue, Feb 5 Before the Bell 0.31 ASD American Standard Tue, Feb 5 Before the Bell 0.78 AMH AmerUs Group Tue, Feb 5 After the Bell 0.78 AVZ AMVESCAP PLC Tue, Feb 5 Before the Bell 0.28 RMK ARAMARK Corporation Tue, Feb 5 After the Bell 0.26 ARI Arden Realty Tue, Feb 5 After the Bell 0.75 BOX BOC Group PLC Tue, Feb 5 -----N/A----- N/A BSX Boston Scientific Tue, Feb 5 After the Bell 0.20 CHRW C.H. Robinson Wrldwide Tue, Feb 5 After the Bell 0.25 CMX Caremark Rx Tue, Feb 5 Before the Bell 0.21 CLX Clorox Tue, Feb 5 -----N/A----- 0.36 CL Colgate-Palmolive Tue, Feb 5 Before the Bell 0.52 CVS CVS Tue, Feb 5 -----N/A----- 0.24 CYMI Cymer Tue, Feb 5 After the Bell -0.09 DASTY Dassault Syst SA (ADR) Tue, Feb 5 Before the Bell 0.40 EDMC Education Management Tue, Feb 5 Before the Bell 0.56 EW Edwards Lifesciences Tue, Feb 5 After the Bell 0.27 EMR Emerson Electric Tue, Feb 5 -----N/A----- 0.61 ETS Enterasys Networks,INC Tue, Feb 5 After the Bell 0.05 ETM Entercom Comm Tue, Feb 5 After the Bell 0.14 EOP Equity Office Prop Tue, Feb 5 Before the Bell 0.82 FLS Flowserve Tue, Feb 5 Before the Bell 0.56 HCA HCA Inc. Tue, Feb 5 Before the Bell 0.42 HB Hillenbrand Industries Tue, Feb 5 -----N/A----- 0.95 HMC Honda Motor Tue, Feb 5 Before the Bell N/A N Inco Tue, Feb 5 -----N/A----- -0.03 INRG INRANGE Tech Corp Tue, Feb 5 Before the Bell 0.00 LNC Lincoln National Tue, Feb 5 Before the Bell 0.87 MFC Manulife Financial Tue, Feb 5 During the Market 0.41 MKL Markel Tue, Feb 5 -----N/A----- 1.05 MXIM Maxim Integ Products Tue, Feb 5 After the Bell 0.18 MBI MBIA Tue, Feb 5 Before the Bell 1.02 MEDQ Medquist Tue, Feb 5 Before the Bell 0.31 MON Monsanto Co. Tue, Feb 5 Before the Bell 0.08 NBIX Neurocrine Biosciences Tue, Feb 5 -----N/A----- -0.50 OCAS Ohio Casualty Tue, Feb 5 Before the Bell -0.28 OMG OM Group Incorporated Tue, Feb 5 Before the Bell 0.81 OHP Oxford Health Plans Tue, Feb 5 Before the Bell 0.78 PCAR Paccar Tue, Feb 5 -----N/A----- 0.49 PZL Pennzoil-Quaker St Co Tue, Feb 5 Before the Bell 0.17 PFGC Performance Food Tue, Feb 5 -----N/A----- 0.31 PHA Pharmacia Corporation Tue, Feb 5 Before the Bell 0.38 PXD Pioneer Natural Res Tue, Feb 5 Before the Bell -0.03 RRI Reliant Resources Tue, Feb 5 -----N/A----- 0.03 RYG Royal Group Tech Tue, Feb 5 -----N/A----- 0.18 RYAAY Ryanair Holdings Tue, Feb 5 -----N/A----- 0.21 TWTC Time Warner Telecom Tue, Feb 5 Before the Bell -0.30 RIG Transocean Sedco Forex Tue, Feb 5 Before the Bell 0.21 UMC United Micro Corp Tue, Feb 5 Before the Bell -0.02 UPM UPM-Kymmene Group Tue, Feb 5 Before the Bell 0.52 WSTC West Corporation Tue, Feb 5 After the Bell 0.28 WHR Whirlpool Tue, Feb 5 Before the Bell 1.54 ZMH Zimmer Inc. Tue, Feb 5 Before the Bell 0.27 TW 21st Century Insurance Wed, Feb 6 After the Bell -0.14 ADO Adecco SA Wed, Feb 6 -----N/A----- N/A ALL Allstate Wed, Feb 6 Before the Bell 0.46 ATH Anthem, Inc. Wed, Feb 6 Before the Bell 0.89 ASTSF ASE Test Limited Wed, Feb 6 After the Bell -0.17 ATTC AT&T Canada Wed, Feb 6 After the Bell -1.20 AVP Avon Products Wed, Feb 6 Before the Bell 0.74 EAT Brinker International Wed, Feb 6 After the Bell N/A CLU Canada Life Financial Wed, Feb 6 -----N/A----- 0.48 CSL Carlisle Companies Wed, Feb 6 After the Bell 0.25 CD Cendant Wed, Feb 6 After the Bell 0.21 CRL Charles River Lab Wed, Feb 6 After the Bell 0.24 CSB CIBA SPECIALTY CHEM Wed, Feb 6 Before the Bell N/A CINF Cincinnati Financial Wed, Feb 6 Before the Bell 0.35 CSCO Cisco Systems Wed, Feb 6 After the Bell 0.05 CMCSK Comcast Wed, Feb 6 -----N/A----- -0.30 CTV CommScope Wed, Feb 6 After the Bell 0.15 CVH Coventry Health Care Wed, Feb 6 Before the Bell 0.32 DNB D&B Wed, Feb 6 After the Bell 0.67 DVN Devon Energy Wed, Feb 6 -----N/A----- 0.10 EDS Electronic Data System Wed, Feb 6 After the Bell 0.79 EQR Eq Resident Prop Trst Wed, Feb 6 -----N/A----- 0.65 ESRX Express Scripts A Wed, Feb 6 After the Bell 0.42 GEMP Gemplus Inter S.A. Wed, Feb 6 -----N/A----- -0.04 GETY Getty Images Wed, Feb 6 After the Bell -0.33 GRP Grant Prideco Wed, Feb 6 Before the Bell 0.15 GXP Grt Plains Energy Inc. Wed, Feb 6 After the Bell 0.10 HET Harrah`s Entertainment Wed, Feb 6 -----N/A----- 0.47 JHF John Hancock Fin Serv Wed, Feb 6 After the Bell 0.69 JNY Jones Apparel Wed, Feb 6 Before the Bell 0.21 MGM Metro-Goldwyn-Mayer Wed, Feb 6 Before the Bell 0.05 NEM Newmont Mining Wed, Feb 6 Before the Bell 0.10 PAS PepsiAmericas Wed, Feb 6 After the Bell 0.10 PEP Pepsico Wed, Feb 6 Before the Bell 0.42 PPS Post Properties Wed, Feb 6 After the Bell 0.80 PP Prentiss Properties Wed, Feb 6 After the Bell 0.85 PFG Principal Fin Grp Wed, Feb 6 Before the Bell 0.46 PLD ProLogis Trust Wed, Feb 6 After the Bell 0.61 PTZ Pulitzer Inc. Wed, Feb 6 Before the Bell 0.16 QLTI QLT Wed, Feb 6 After the Bell 0.06 O Realty Income Corp Wed, Feb 6 Before the Bell 0.70 REG Regency Centers Corp Wed, Feb 6 After the Bell 0.76 REI Reliant Energy Wed, Feb 6 Before the Bell 0.32 SNRA Sonera Group plc Wed, Feb 6 -----N/A----- N/A JOE St. Joe Company Wed, Feb 6 Before the Bell N/A UNM UNUMProvident Wed, Feb 6 After the Bell 0.62 WEC Wisconsin Energy Wed, Feb 6 Before the Bell 0.55 RKY Adolph Coors Thu, Feb 7 -----N/A----- 0.33 AG AGCO Thu, Feb 7 Before the Bell 0.29 AZ ALLIANZ AG Thu, Feb 7 -----N/A----- N/A AIG American Inter Group Thu, Feb 7 -----N/A----- 0.78 AWK American Water Works Thu, Feb 7 -----N/A----- 0.41 AN AutoNation Thu, Feb 7 Before the Bell 0.19 BTY British Telecomm PLC Thu, Feb 7 -----N/A----- N/A VNT C. A. Nac Tel VenCANTV Thu, Feb 7 After the Bell 0.19 CCJ Cameco Thu, Feb 7 After the Bell N/A CB Chubb Thu, Feb 7 Before the Bell 0.55 CNH CNH Global N.V. Thu, Feb 7 Before the Bell -0.31 CFB Commercial Federal Thu, Feb 7 Before the Bell 0.49 CTB Cooper Tire & Rubber Thu, Feb 7 Before the Bell 0.19 EQT Equitable Resources Thu, Feb 7 Before the Bell 0.45 FLR Fluor Thu, Feb 7 After the Bell 0.40 GCI Gannett Thu, Feb 7 Before the Bell 0.92 GENU Genuity Inc. Thu, Feb 7 Before the Bell -0.31 GSPN GlobespanVirata, Inc. Thu, Feb 7 After the Bell -0.05 GG Goldcorp Thu, Feb 7 After the Bell 0.14 HAS Hasbro Thu, Feb 7 Before the Bell 0.37 HNI Hon Industries Thu, Feb 7 Before the Bell 0.38 ICI Imperial Chemical Thu, Feb 7 -----N/A----- N/A KIM Kimco Realty Thu, Feb 7 After the Bell 0.77 LECO Lincoln Electric Thu, Feb 7 Before the Bell 0.45 MX Metso Corporation Thu, Feb 7 -----N/A----- N/A MTD Mettler Toledo Intern Thu, Feb 7 After the Bell 0.67 MITSY Mitsui & Co Ltd Thu, Feb 7 -----N/A----- N/A MHK Mohawk Industries Thu, Feb 7 After the Bell 0.92 MNY MONY Group Thu, Feb 7 Before the Bell 0.10 NVS Novartis AG Thu, Feb 7 -----N/A----- N/A NVO Novo-Nordisk Thu, Feb 7 Before the Bell N/A OCA Orthodontic Cen of Am Thu, Feb 7 -----N/A----- 0.33 PNR Pentair Thu, Feb 7 -----N/A----- 0.22 PIXR Pixar Thu, Feb 7 After the Bell 0.18 RL Polo Ralph Lauren Thu, Feb 7 Before the Bell 0.44 POT Pt Crp of Saskatchewan Thu, Feb 7 -----N/A----- 0.06 RD Royal Dutch Petroleum Thu, Feb 7 -----N/A----- 0.60 PHG Royal Philips Thu, Feb 7 -----N/A----- N/A R Ryder System Thu, Feb 7 Before the Bell 0.40 SCIO Scios Thu, Feb 7 Before the Bell -0.64 SC Shell Transport Thu, Feb 7 -----N/A----- 0.51 SHW Sherwin-Williams Thu, Feb 7 -----N/A----- 0.29 SIGY Signet Group Thu, Feb 7 -----N/A----- 2.20 SPG Simon Property Group Thu, Feb 7 Before the Bell 1.11 SNN Smith & Nephew Thu, Feb 7 -----N/A----- 0.88 SUP Superior Industries Thu, Feb 7 -----N/A----- 0.55 PNX The Phoenix Companies Thu, Feb 7 -----N/A----- 0.17 TBL Timberland Thu, Feb 7 Before the Bell 0.81 TMK Torchmark Thu, Feb 7 Before the Bell 0.80 TRH Transatlantic Holdings Thu, Feb 7 Before the Bell 0.25 TMIC Trend Micro Thu, Feb 7 -----N/A----- N/A TQNT TriQuint Semiconductor Thu, Feb 7 After the Bell -0.02 UCU UtiliCorp United Thu, Feb 7 Before the Bell 0.45 VRTX Vertex Pharmaceuticals Thu, Feb 7 After the Bell -0.19 VSH Vishay Intertechnology Thu, Feb 7 -----N/A----- -0.04 ZL Zarlink Thu, Feb 7 Before the Bell -0.13 BLC Belo Fri, Feb 8 Before the Bell -0.03 BSY BritishSky Brdcstg Grp Fri, Feb 8 Before the Bell -0.04 CRE CarrAmerica Realty Fri, Feb 8 -----N/A----- 0.84 CI CIGNA Fri, Feb 8 Before the Bell 1.81 ELUX Electrolux AB ADR Fri, Feb 8 -----N/A----- 0.44 GT Goodyear Tire & Rubber Fri, Feb 8 Before the Bell -0.28 HTV Hearst-Argyle TV Fri, Feb 8 Before the Bell 0.03 NRD NORANDA INC Fri, Feb 8 Before the Bell N/A ORH Odyssey Re Hldng Corp. Fri, Feb 8 After the Bell -0.07 SHU Shurgard Storage Fri, Feb 8 Before the Bell 0.70 TGH Trigon Healthcare Fri, Feb 8 Before the Bell 1.04 UVV Universal Fri, Feb 8 -----N/A----- 0.88 VOLVY Volvo AB Fri, Feb 8 -----N/A----- N/A WEN Wendy`s International Fri, Feb 8 -----N/A----- 0.42 ================================================================= Upcoming Stock Splits In The Next Two Weeks... Symbol Company Name Ratio Payable Executable FRED Freds Inc 3:2 02/01 02/04 HOTT Hot Topic, Inc. 3:2 02/05 02/06 SONC Sonic Corp 3:2 02/08 02/11 MGAM Multimedia Games Inc. 3:2 02/10 02/11 RSC REX Stores 3:2 02/11 02/12 ================================================================= Economic Reports Most of the major economic reports came out last week, along with the FOMC meeting where Wall Street had expected no rate change. Positive indications may offer investors hope despite the weight of the Enron collapse still on the markets. Earnings season is still in full bloom. ================================================================= Monday, 02/04/02 Auto Sales (BB) Jan Forecast: 6.0M Previous: 5.2M Truck Sales (BB) Jan Forecast: 6.8M Previous: 7.8M Tuesday, 02/05/02 ISM Services (DM) Jan Forecast: 50.5 Previous: 54.2 Factory Orders (DM) Dec Forecast: 0.5% Previous: -3.3% Wednesday, 02/06/02 Productivity-Prel (BB) Q4 Forecast: 1.9% Previous: 1.1% Thursday, 02/07/02 Initial Claims (BB) 02/02 Forecast: 395K Previous: 390K Consumer Credit (AB) Dec Forecast: $7.7B Previous: $19.9B Friday, 02/08/02 Wholesale Invntries (DM) Dec Forecast: N/A Previous: -1.1% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 02-03-2002 Sunday 2 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** INDEX TRADER GAMEPLANS ********************** IS Swing Trade Model: Saturday 2/02/2002 Slight Gains Today News & Notes: ------------ Friday's action was rather calm and offered only meager gains at best. Our S&P put plays tracked were closed at trailed stops below entry for slight gains or minimal loss at worst. Featured Markets: ---------------- [60/30-Min Chart: OEX] Price action still trades near the top of its channel (blue line) and stochastic action is weak. Note how the 568 area (pink line) has offered support on Thursday & Friday... our next near-term pivot point. [60/30-Min Chart: SPX] That measure would be 1120 for the SPX. Price action clung to it these past two sessions, and will likely take the next direction away in either direction. [60/30-Min Chart: QQQ] The QQQ is suspended in space. Following its sideways pattern on Friday, best estimate is that the direction continues on down from the coil in harmony with bearish stochastic values. Summation: --------- We are still tracking open put plays in the QQQ and DJX indexes, but new put play triggers are listed in all four targets for those who are flat right now. No assurance any immediate market direction will ensue, but the downside is heavily favored via chart prediction as of our foresight tonight. 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: 38 (QQQ-BL) Feb Calls: 98 (DJV-BT) Long: BREAK ABOVE none Long: BREAK ABOVE none Stop: Break Below Stop: Break Below Feb Puts: 37 (QQQ-NK) Feb Puts: 98 (DJV-NT) Long: BREAK BELOW 38.00 Long: BREAK BELOW 99.00 Stop: Break Above 39.00 Stop: Break Above 100.00 ===== OEX SPX Feb Calls: 570 (OEB-BN) Feb Calls: 1125 (SPT-BE) Long: BREAK ABOVE none Long: BREAK ABOVE none Stop: Break Below Stop: Break Below Feb Puts: 560 (OEB-NL) Feb Puts: 1100 (SPQ-NO) Long: BREAK BELOW 568.00 Long: BREAK BELOW 1120.00 Stop: Break Above 571.00 Stop: Break Above 1126.00 Open Plays: ---------- QQQ Feb Puts: 37 (QQQ-NK) Long: BREAK BELOW 38.00 Stop: Break Above 39.00 DJX Feb Puts: 98 (DJV-NT) Long: BREAK BELOW 99.00 Stop: Break Above 100.00 OEX Feb Puts: 560 (OEB-NL) Long: BREAK BELOW 572.00 Stop: Break Above 570.00 [hit] SPX Feb Puts: 1100 (SPQ-NO) Long: BREAK BELOW 1129.00 Stop: Break Above 1124.00 [hit] IS Position Trade Model: Saturday 2/02/2002 Defensive Posture News & Notes: ------------ As depicted in tonight's Index Wrap, the BTK and DRG indexes are poised to rally soon. We will target the BBH and PPH HOLDR options for each sector respectively. Featured Plays: -------------- See Index Wrap Summation: --------- We are targeting low-price calls for each sector using 100% risk loss capital and no initial stops. We are prepared to track only the number of contracts a total price would be acceptable to lose if we're wrong. Should subsequent gains accrue, we will initiate stops to protect capital & more at that time. 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. *No entry targets listed means the model is idle at this time. New Play Targets: ---------------- BBH March 130 Call: (GBZ-CF) Entry: Break Above 122.00 Stop: none - 100% risk-loss capital PPH May 100 Call: (PPH-ET) Entry: Break Above 97.00 Stop: none - 100% risk capital Open Plays: ---------- None Sector Share Trade Model: Saturday 2/02/2002 Consolidation Day News & Notes: ------------ All of our targeted long and short play listings triggered today. It was a sideways to slightly lower session as the large-range week needed time to rest & consolidate. Featured Plays: -------------- No new plays Summation: --------- We are tracking defensive sectors to the upside and technology down as depicted in Index Wrap. Might be a bit choppy this week, but Wednesday forward could see continued directional action ahead. 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: ---------------- HHH Internet HOLDR Short: BREAK BELOW 34.00 Stop: Break Above 31.50 IYR Dow Jones Real Estate Short: BREAK BELOW 79.75 Stop: Break Above 80.00 [hit] Result: -0.25 SWH Software HOLDR Short: BREAK BELOW 45.50 Stop: Break Above 47.00 IYV U.S. Internet Short: BREAK BELOW 13.75 Stop: Break Above 15.00 Open Long Plays: --------------- BBH Biotech HOLDR Long: BREAK ABOVE 120.00 Stop: Break below 114.00 PPH Pharmaceutical HOLDR Long: BREAK ABOVE 97.00 Stop: Break below 93.00 IYH Dow Jones U.S. Healthcare Long: BREAK ABOVE 60.90 Stop: Break below 57.50 XLP Consumer Staples Long: BREAK ABOVE 25.30 Stop: Break below 23.50 *********************************************************** DAILY RESULTS *********************************************************** CALLS Mon Tue Wed Thr Week TGH 73.61 -0.81 -0.23 0.83 0.24 0.11 Still strong DPMI 49.08 0.62 -1.35 1.66 0.34 0.37 Waiting on $50 RATL 23.42 -0.02 0.25 0.01 -0.74 -0.20 10-dma bounce UPS 56.79 0.07 -0.70 0.53 0.55 -0.24 Back to support NOK 23.57 0.33 -0.76 0.51 0.27 0.45 50-dma overhead ASYT 16.97 0.62 -0.50 0.78 0.17 1.18 Strong semi GILD 69.81 0.11 -2.02 1.25 -1.59 2.15 New, split run UNH 74.97 -0.20 -1.05 -0.45 1.75 0.77 New, bullcare PUTS ADRX 59.06 -3.26 1.26 0.35 -0.78 -2.01 Dropped IVGN 54.15 -2.91 -0.17 -0.31 -0.64 -3.74 Lower trend GNSS 59.81 4.08 -2.24 -0.31 2.77 3.64 50-dma entry CCMP 65.12 0.26 -2.65 2.64 2.48 1.72 Rollover pt. CIMA 25.73 -1.12 -0.03 0.24 -0.84 -2.12 Dropped GS 85.40 0.55 -3.37 1.52 0.98 -1.90 Rolled over AT 55.68 -0.25 -1.63 -0.24 1.10 -0.82 Weak wireless AGN 68.91 -1.43 -1.75 0.34 -1.40 -2.08 Valuation VRSN 31.00 -1.43 -1.15 -0.33 -0.90 -3.67 New, lows EBAY 58.05 -0.95 -0.38 -1.62 1.52 -2.60 New, bearish ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* GILD - Gilead Sciences $69.81 (+2.15 last week) See details in play list Put Play of the Day: ******************** EBAY - eBay, Inc. $58.05 (-2.60 this 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 ^^^^^ PUTS ^^^^ ADRX $59.06 (-2.01) ADRX made its big move lower last Monday then traded sideways for the remainder of the week. We don't want to sit around and watch time value decay on open positions. Traders with gains can look to lock in plays on any weakness early next week. Or, raise stops down to conservative levels to protect against any upside potential. CIMA $25.73 (-2.12) Another bounce up to $27 resistance started the day out with an entry for nimble day traders, as the stock then proceeded to fall throughout the morning. But support materialized near $25.50 and the stock traded sideways for the remainder of the session, resulting in a higher low. While there may be some more downside available in the play, we don't want to press our luck with the Biotech sector starting to find a bid. We're closing the play this weekend and harvesting our gains. Take advantage of any early dip on Monday to do likewise. *********** 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************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 02-03-2002 Sunday 3 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** NEW CALL PLAYS ************** GILD - Gilead Sciences $69.81 (+2.15 last week) Gilead Sciences, Inc. is a biopharmaceutical company that seeks to provide accelerated solutions for patients and their caregivers. The Company discovers, develops, manufactures and commercializes therapeutics for challenging infectious diseases (viral, fungal and bacterial infections) and cancer. Gilead also has expertise in liposomal drug delivery technology. Some biotech concerns have been struggling. Others have been hitting on all cylinders. Gilead falls into the latter camp. The company reported quarterly results late last week that impressed the Street. The company said that revenues rose 42% to $74.3 million from the year earlier, while product sales increased by 57%. The company reported a net loss from operations of 24 cents per share, which was narrower than analysts had expected. Looking forward, the company's guidance for fiscal 2002 was bullish. Officials said that sales could reach $400 million for the year given the company's current product mix. A day prior to its earnings announcement, Gilead announced a 2-for-1 stock split, its second in as many years. The stock is set to split as of the close of business on February 14. The combination of favorable earnings news and the stock split could carry GILD higher in the next two weeks. The stock has held up remarkably well during the recent weakness in biotech issues, which is all the more reason to like this play. Bullish biotech traders can look for an advance in the BTK.X early next week in conjunction with a breakout in GILD above near-term congestion. Watch for a breakout above $71.15. From there, a retest of the stock's all time high at $73.67 is possible. After that, it's clear sailing. Keep close tabs on the sentiment in the BTK.X. Our stop is initially in place at $65. ***February contracts expire in two weeks*** BUY CALL FEB-65 GDQ-BM OI=2720 at $5.80 SL=3.50 BUY CALL FEB-70*GDQ-BN OI=3209 at $2.45 SL=1.00 BUY CALL FEB-75 GDQ-BO OI=2207 at $0.85 SL=0.25 BUY CALL APR-70 GDQ-CN OI= 917 at $5.10 SL=3.25 Average Daily Volume = 2.04 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** UPS - United Parcel Service $56.79 (-0.24 last week) United Parcel Service Inc. (UPS) is an express carrier, package delivery company and a global provider of specialized transportation and logistics services. Over the course of more than 90 years, the Company has expanded from a small regional parcel delivery service into a global company. UPS delivers packages each business day for 1.8 million shipping customers to six million consignees. The Company's primary business is the time-definite delivery of packages and documents throughout the United States and in over 200 other countries and territories. The world's largest package carrier reported last week that its fourth-quarter earnings fell 12% below the same period one year ago. The company's poor results were blamed on the weak economic environment. However, the results were better than analysts had previously expected. The company earned 57 cents per share, while the consensus had UPS pegged to earn 50 cents per share. The news was initially received poorly by the market, noting the gap down last Tuesday morning, but the stock soon rebounded on the better-than-expected guidance delivered by management. Shares have been trading effectively sideways for the last two months, between support down around $55 and resistance near immediate overhead levels. The good guidance delivered by the company, in conjunction with the bullish price action in the broader Transportation Sector ($TRAN) could lift shares into the coming weeks as the economic outlook improves. Indeed, last week's economic data, especially the fourth-quarter gross domestic product (GDP) number, was encouraging. Further strength in UPS should have the stock positioned to test relative highs just above the $58 level. From there, a run on $60 is possible. Traders looking to gain entries into this play can look for UPS to stabilize around current levels, possibly around the $56.50 area. Such entries can be managed with a tight stop below the $55.50 mark, which is the current site of the 200-dma. ***February contracts expire in two weeks*** BUY CALL FEB-55*UPS-BK OI= 3859 at $2.10 SL=1.25 BUY CALL MAR-55 UPS-CK OI= 994 at $2.60 SL=1.50 BUY CALL MAR-60 UPS-CL OI= 4687 at $0.30 SL=0.00 BUY CALL APR-60 UPS-EI OI=15661 at $0.60 SL=0.25 Average Daily Volume = 1.26 mln ASYT - Asyst Technologies $16.97 (1.18 last week) Asyst Technologies, Inc. is a provider of integrated automation systems for the semiconductor manufacturing industry. The Company designs systems that enable semiconductor manufacturers to increase their manufacturing productivity and protect their investment in silicon wafers during the manufacture of integrated circuits. The Company offers isolation systems, work-in-process materials management, substrate-handling robotics, automated transport and loading systems, and connectivity automation software. The Company has incorporated the technologies from these areas to create its Plus-Portal System for OEMs (original equipment manufacturers). Asyst reported results for its most recent quarter that were in line with analyst expectations and previous guidance delivered by the company. It also gave guidance for future financial performance that was in line with what the company had previously forecast. The consistency with which Asyst's officials have guided financial performance has been well received by Wall Street. The stock remains one of the stronger in the semiconductor sector. The company has taken the necessary strides to reduce costs and position for the rebound in the economy and the chip business. Preliminary signs of improvement are showing up from other chip producers, such as Intel and Texas Instruments. The positive sentiment produced recently should continue to lend a bid to the group and minimize any downside potential. Additional positive news will serve as the catalyst to break shares of ASYT out of their recent base. The stock traded strongly last Friday, bucking the overall weakness in the broader market. Its relative strength was encouraging and we'll look for further upside progress to be made in next week's trading. Look for an advance past the $17.50 level in conjunction with strength in the SOX.X. Make sure that volume confirms any breakout attempt. For those waiting for a pullback, look for support to materialize between the $15.50 and $16 levels on any sustained pullback. ***February contracts expire in two weeks*** BUY CALL FEB-15*QQY-BC OI=845 at $2.40 SL=1.25 BUY CALL FEB-17 QQY-BY OI=457 at $0.75 SL=0.25 BUY CALL MAR-17 QQY-CY OI=307 at $1.40 SL=0.75 BUY CALL MAR-20 QQY-CD OI=374 at $0.50 SL=0.25 Average Daily Volume = 371 K DPMI - DuPont Photomasks $49.08 (+0.37 last week) DuPont Photomasks manufactures photoblanks and photomasks for the Semiconductor industry. Photomasks are high-purity quartz or glass plates containing precise, microscopic images of integrated circuits that are used as masters (similar to negatives in a photographic process) to optically transfer the image of circuit patterns onto semiconductor wafers during the fabrication process. Photomasks are made from photoblanks, which are highly polished quartz or glass plates coated with ultra-thin layers of chrome and photoresists. The film is typically precision-coated with an anti-reflective layer to improve optical performance characteristics. Just like clockwork, our stealth chip equipment play pulled back from resistance at $50 on Friday. After two days of gains in the broad markets, a bit of consolidation was to be expected and that is precisely what we got. Recall that we're playing DPMI to the upside due to its recent relative strength against the makers of capital equipment in the Semiconductor industry like AMAT. DPMI makes the stuff that chip companies need to implement new designs, without requiring the purchase of new capital equipment, hence its recent outperformance. Will the strength continue, allowing the stock to break out to new recent highs? We think so, and that's why it is on the call list. DPMI has been riding a trend of higher lows since early October, and bounced right on that ascending trendline at $44 a week and a half ago. That bounce has brought the stock right to the $50 resistance level several times over the last week, and it looks ready to break out. Either a renewed bounce from the $48 level or a breakout over $50 look good for fresh entries. Just remember that there is one more obstacle to clear (the January highs near $52.50) before the stock is in new high territory. One note of caution is that volume has been rather light over the past week, and if you want to play the breakout, you'll want to see volume running closer to the ADV. *** February contracts expire in two weeks *** BUY CALL FEB-45 DUD-BI OI=407 at $4.80 SL=3.00 BUY CALL FEB-50*DUD-BJ OI=224 at $1.55 SL=0.75 BUY CALL MAR-50 DUD-CJ OI=140 at $2.75 SL=1.50 BUY CALL MAR-55 DUD-CK OI= 6 at $1.05 SL=0.50 Average Daily Volume = 270 K NOK - Nokia Corporation $23.57 (+0.45 last week) Nokia is a mobile phone manufacturer and a supplier of mobile, fixed and Internet protocol (IP) networks and related services. The company has two primary business groups, Nokia Networks and Nokia Mobile Phones. Nokia Networks is a supplier of mobile, broadband, IP network infrastructure and related services. It also develops mobile Internet applications and solutions for operators and Internet service providers. Nokia Mobile Phones is the world's leading mobile phone manufacturer, having won the war of attrition against rivals Motorola and Ericsson. If there's one bright spot in the Wireless Telecom industry, it would have to be handset maker, Nokia. The company released earnings 3 cents ahead of analyst estimates last week, but more importantly spoke of increasing their market share and forecast global handset sales in the 420-440 million range for 2002. While the company admitted that the next quarter will be a bit on the weak side, the bullish longer-term forecast put investors in a buying mood, and the stock has continued to work higher. This is despite the fact that the Wireless Telecom sector (YLS.X) continues to drift lower, getting closer and closer to the September lows near $76. But that isn't holding NOK back. After bouncing from the $22 level on Wednesday's market-wide selloff and rebound, NOK is chipping away at the $23.50 resistance level. We're looking for the stock's relative strength to help the bulls challenge the January highs near $27 over the near term, but first they'll need to clear some overhead supply between the current level and $24.50. The best entries will likely come from buying a dip and bounce in the $22.50-23.00 area. Otherwise, you'll want to wait for the stock to clear $24.50 and move into the gap left behind on January 8th. Stops are set at $22. *** February contracts expire in two weeks *** BUY CALL FEB-22 NAY-BX OI=12294 at $1.55 SL=0.75 BUY CALL FEB-25 NAY-BE OI=29229 at $0.40 SL=0.00 BUY CALL MAR-22*NAY-CX OI= 2440 at $2.25 SL=1.00 BUY CALL MAR-25 NAY-CE OI= 6626 at $1.00 SL=0.50 BUY CALL APR-25 NAY-DE OI=34129 at $1.65 SL=0.75 Average Daily Volume = 12.5 mln RATL - Rational Software $23.72 (-0.20 last week) Rational Software is a provider of integrated solutions that automate the software development process. The company's integrated solutions include unified tools, software engineering best practices, and services that allow customers to successfully and efficiently develop and deploy software. RATL serves customers in 3 principal categories that it refers to as business applications, infrastructure, ad embedded systems and devices. Business applications customers include those that are leveraging the power of the Internet to build business-to-business (B2B) or business-to-consumer (B2C) software. Infrastructure clients are building the physical and software infrastructure for the Internet and include communications as well as operating system and "middleware" software vendors. Embedded systems and devices customers are building devices with embedded software that provide connectivity to the Internet and other specialized networks. It has been a bit stubborn about getting started, but now that the January 24th gap has been filled, RATL looks ready to run. All we need now is for the Software sector (GSO.X) to get up off the floor and convince us that it still has some bullish power behind it. After pulling back from the $200 level in early January, the GSO is starting to form a H&S top, which is not a good sign for our RATL play. If the GSO breaks the neckline support at $180, it is a good bet that our RATL play will be in serious trouble. But if support holds, RATL looks primed to continue its bullish run that began with the September lows. The stock hasn't given a PnF sell signal since bouncing near $8 and has been consistently working its way higher. The stock's relative strength chart relative to the GSO is a thing of beauty, especially since the beginning of the year. Target new entries on intraday dips near $23, but wait for the bounce before playing. Our stop is set at $22. *** February contracts expire in two weeks *** BUY CALL FEB-22 RAQ-BR OI=1293 at $2.15 SL=1.00 BUY CALL FEB-25 RAQ-BE OI=1400 at $0.75 SL=0.00 BUY CALL MAR-22 RAQ-CR OI= 33 at $3.20 SL=1.75 BUY CALL MAR-25*RAQ-CE OI= 206 at $1.90 SL=1.00 BUY CALL MAR-30 RAQ-EF OI= 686 at $0.60 SL=0.25 Average Daily Volume = 4.31 mln TGH - Trigon Healthcare $73.61 (+0.11 last 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. We've had a nice little run out of TGH over the past couple weeks, but time is running out for this little Health Care play. A late reporter, TGH is scheduled to release its earnings next Friday, so we've only got one more week to go. The Health Care index (HMO.X) has been a haven of safety for bullish traders for the first month of the year. After bouncing from the $435 level, HMO has cleared resistance at $450, and on Friday snuck above the $480 level, posting its highest close in 11 months. TGH has been riding the strength of its sector higher, and is now flirting with resistance at $75, after coming within 25 cents of that level on Thursday. The stock has been riding its ascending 10-dma ($72.54) higher for the past month and looks like it will continue to do so right into its earnings report. The best approach for initiating new positions will be to buy into the dips near intraday support, first at $73.50 and then at $72.50. Raise stops to $72 this weekend. *** February contracts expire in two weeks *** BUY CALL FEB-70 TGH-BN OI=205 at $4.50 SL=2.75 BUY CALL FEB-75*TGH-BO OI= 77 at $1.45 SL=0.75 BUY CALL MAR-75 TGH-CO OI= 7 at $2.75 SL=1.50 Average Daily Volume = 179 K ************* NEW PUT PLAYS ************* EBAY - eBay, Inc. $58.05 (-2.60 this week) After developing a Web-based community in which buyers and sellers are brought together in an efficient format, EBAY has emerged as the dominant online auction site. The eBay dynamic pricing format permits sellers to list items for sale, buyers to bid on items of interest and all eBay users to browse through listed items. Items listed on eBay include collectibles, automobiles, art objects, jewelry, consumer electronics and a host of practical and miscellaneous items. Although based in the United States, through its subsidiaries, EBAY also operates trading platforms in Germany, the United Kingdom, Australia, Japan, Canada, France, Austria, Italy and South Korea. One of the big by-products of the Enron-related accounting concerns is making its rounds through the equity markets, and that effect is valuation compression. Combine that with the fact that the Internet sector (INX.X) is underperforming the rest of the Technology market, and we have the makings of another put play. EBAY took a nasty spill from the letdown after its earnings report in January, and now the afore mentioned factors are starting to exert bearish pressure on the stock. Bullish investors tried mightily to defend the $60 support level, but an excess of supply overwhelmed those buyers, and it now looks like that level will act as resistance, rather than support over the near-term. Adding credence to that theory is the fact that the stock is now below the 200-dma ($59.54) and is not showing any signs of being able to regain the upper side of that level in the near term. EBAY has given up a lot of the relative strength that enabled it to outperform the broad market and Technology sector for most of 2001, and that makes it easier to play the downside in this cult-ish stock. Use any failed rally near the $60 level, (or even as high as the $61.50 level) to initiate new positions and set stops at $62. Traders that would prefer to enter on weakness will want to wait for the stock to break below the $57.50 support level before playing. The current count on the PnF chart is giving us a bearish target of $46, although the bears will have their work cut out for them in pushing EBAY below the $52 level. Consider a near-term drop to that level as a good opportunity to harvest profits and then wait for the next bounce to re-initiate your position. *** February contracts expire in two weeks *** BUY PUT FEB-60 QXB-NL OI=14622 at $3.70 SL=2.00 BUY PUT FEB-55*QXB-NK OI=15355 at $1.50 SL=0.75 BUY PUT MAR-55 QXB-OK OI= 1462 at $2.95 SL=1.50 Average Daily Volume = 6.30 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 02-03-2002 Sunday 4 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** CURRENT PUT PLAYS ***************** AGN - Allergan $68.91 (-2.08 last week) Allergan, Inc. is a provider of eye care and specialty pharmaceutical products throughout the world with products in the eye care pharmaceutical, ophthalmic surgical device, over-the-counter contact lens care, movement disorder and dermatological markets. The Company's worldwide consolidated revenues are principally generated by prescription and non-prescription pharmaceutical products in the areas of ophthalmology and skin care, neurotoxins, intraocular lenses and other ophthalmic surgical products and contact lens care products. Allergan reported an increase in its fourth-quarter earnings about two weeks ago and at the same time said it would spin off its non pharmaceutical businesses. The earnings report was met with several downgrades from Wall Street's sell side. Prior to the lackluster earnings report, Wall Street had already turned cautious on Allergan. Salmon Smith Barney reduced its investment rating on the stock from a buy rating to an outperform rating. The brokerage firm was cautious on the company's limited pipeline of new products and also its relatively high valuation given the growth outlook for this year. The company is expected to grow earnings by 19% this year, which is much better than the pharmaceutical sector's average expected growth rate of 10%. But investors are fearing that the good news may already be priced into the stock. That and the recent blow-ups among high profile drug makers have turned the bears on to shorting drug stocks. The Drug Sector (DRG.X) broke to a relative low last week below the 370 level before rebounding. Further weakness in the DRG.X should again pressure AGN lower as the sellers return. Look for the stock to rollover near current levels or for an intraday rollover on relatively lighter volume at the 10-dma, overhead at the $70.44 level. A breakdown below near-term lows at $66.70 in conjunction with weakness in the DRG.X could offer momentum based entries. ***February contracts expire in two weeks*** BUY PUT FEB-70*AGN-NN OI=1149 at $2.65 SL=1.25 BUY PUT FEB-65 AGN-NM OI= 273 at $0.70 SL=0.25 Average Daily Volume = 759 K AT - Alltel $55.68 (-0.82 last week) Alltel Corporation is a customer-focused information technology company that provides wireline and wireless communications and information services. The Company operates in two principal areas, communications and information services. The Company's communications operations consist of its wireless, wireline (local and long-distance) and emerging businesses segments. Late last week, wireless giant Verizon reported a $2 billion loss. The biggest local telephone company offered guidance that was less than bullish. Verizon's ugly earnings report last week underscored the sentiment in the telephone space. Both the North American Telecommunications Index (XTC.X) and the Wireless Services Sector Index (YLS.X) finished substantially lower in last Friday's session. Both sectors finished a sour week on a sour note. It doesn't appear as if the selling momentum in the group is abating. The last two days have seen AT rally, which still appears to be short covering noting the lighter than usual volume and the stock's inability to advance and hold above its 10-dma, now at the $56.06 level. AT briefly traded above its 10-dma last Friday but was pressured lower by the weakness in the broader telecom measures. We're looking for the sector weakness to continue weighing on shares of AT in next week's trading. Watch for the stock to fall under selling pressure again early next week with a decline below last Friday's intraday low at $55.35. Otherwise continue to look for rollovers and entries near the 10-dma. ***February contracts expire in two weeks*** BUY PUT FEB-55*AT-NK OI=163 at $1.05 SL=0.50 BUY PUT MAR-55 AT-OK OI= 51 at $1.90 SL=1.00 Average Daily Volume = 811 K CCMP - Cabot Microelectronics $65.12 (+1.72 last week) Cabot Microelectronics Corporation is a supplier of high performance polishing slurries used in the manufacture of the most advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization. The Company supplies slurries to IC device manufacturers worldwide. Most of the Company's CMP slurries are used to polish insulating layers and the tungsten plugs that go through the insulating layers and connect the multiple wiring layers of IC devices. Valuations concerns are springing up in the semiconductor sector despite high profile upgrades of Intel recently. Two weeks ago, Salmon Smith Barney reduced its outlook on CCMP to reflect its lofty valuation. The firm cut its investment outlook on CCMP from a buy rating to an outperform rating. Salomon Smith Barney was also cautious on CCMP's ability to grow sales of its copper slurries during the second half of this year. CCMP currently trades with a price to earnings ratio of 56.65 even after the recent pullback in shares. Last week, the stock paused its descending trend in what appeared to be a short-term consolidation before the next move lower. It was helped by relatively strong trading in the SOX.X and a rebound in the broader market following the Fed's announcement. Going into next week, we're looking for the stock's rebound to fail and for CCMP to head lower. It rolled over last Friday at its converged 10-dma and 200-dma. Plus, volume was relatively light on the way back up. The short covering notion will prove right on wrong next week. Watch for pressure from the SOX.X and look for low risk entries near the 200-dma. A breakdown below the $64 level could offer trend traders an entry point. ***February contracts expire in two weeks*** BUY PUT FEB-65*UKR-NM OI=450 at $2.85 SL=1.50 BUY PUT FEB-60 UKR-NL OI=454 at $1.35 SL=0.75 Average Daily Volume = 1.17 mln GNSS - Genesis Microchip $59.80 (+3.63 last week) Genesis Microchip designs, develops and markets integrated circuits that receive and process digital video and graphic images. Its integrated circuits are typically located inside a display device and process images for viewing on that display. The company also supplies reference boards and designs that incorporate its proprietary integrated circuits. GNSS is focused on developing and marketing image-processing solutions and targets the flat-panel computer monitor and other potential mass markets. Uh-oh! Things were looking grim for our play on GNSS on Friday as the Chip stock worked through our stop at $61 and continued up to brush the $62 level before investors came to their senses. By the closing bell, GNSS had fallen back below $60, allowing us to breath a bit easier. But the play is definitely on probation, and we need to see the bears flex their muscles soon or this one will be headed for the drop list. The thing that is keeping us interested in the play is the fact that as price has essentially drifted sideways for the past week, daily Stochastics are on a steady ascent, and that is an inherent sign of weakness. Now that Stochastics are nearing overbought again, it has released the upward pressure, giving the stock room to fall back towards critical support at $52.50, the site of the 38% retracement level, which has provided strong support 2 weeks ago. While aggressive traders can target new positions on a rollover near current levels, those who would prefer a bit of confirmation first will want to see GNSS drop below near-term support at $58.75 before playing. Look for weakness in the Semiconductor index (GSO.X) to confirm our bearish stance as well. *** February contracts expire in two weeks *** BUY PUT FEB-60 QFE-NL OI= 966 at $3.40 SL=1.75 BUY PUT FEB-55*QFE-NK OI=1101 at $1.55 SL=0.75 BUY PUT MAR-55 QFE-OK OI= 835 at $4.00 SL=2.50 Average Daily Volume = 2.81 mln GS - Goldman Sachs Group $85.40 (-1.90 last week) The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net-worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. One of the hardest hit sectors in the market decline last week was the Securities Broker/Dealer index, which got slammed for more than a 5% loss on Tuesday, falling to its lowest level since early December. That weakness persisted on Wednesday, with the XBD falling right to the 38% retracement ($463.50) of its September-December rally before finally catching a bid. Our GS play went on a roller coaster ride with the XBD, falling as low as $81.60 before bouncing with the rest of the markets and giving nimble day-traders a quick profit. But GS hasn't been able to keep pace with its sector, heading south on Friday, while the XBD continued to advance. Make no mistake, the XBD is weak relative to the broad market, and GS is demonstrating some serious weakness relative to the XBD. Sounds like the perfect recipe for a bearish play, don't you think? It is interesting to note that on the rebound from the week's lows, GS was unable to hold above the 200-dma ($86.78), and it appears this level will act as resistance over the near term. Target failed rallies near this level or even a bit higher near $88.50. On the downside, new positions can be opened as the stock drops back below $85, but watch out for another bounce near $82. Stops are in place at $89. *** February contracts expire in two weeks *** BUY PUT FEB-85*GS-NQ OI=5769 at $2.30 SL=1.00 BUY PUT FEB-80 GS-NP OI=2074 at $0.95 SL=0.50 BUY PUT MAR-85 GS-OQ OI= 496 at $4.10 SL=2.50 BUY PUT MAR-80 GS-OP OI= 361 at $2.35 SL=1.25 Average Daily Volume = 2.95 mln IVGN - Invitrogen Corporation $54.15 (-3.74 last week) IVGN develops, manufactures and markets more than 10,000 products for the life sciences markets. The company's products are principally research tools in reagent and kit form, biochemicals and media, which the company sells to corporate academic and government entities. IVGN focuses its business on two principal segments, Molecular Biology and Cell Culture Products. The company markets a broad portfolio of products that are designed to enable rapid, efficient cloning of DNA fragments and eliminate certain time-consuming steps in genetic research. Somebody has forgotten to inform IVGN investors that the Biotech index (BTK.X) is trying to bounce. While the BTK is up more than 6% from its intraday lows on Wednesday, IVGN just continues to weaken. Support in the $55-56 level is only a memory, and it is only a matter of time until it is proven that this level is now resistance. While the rate of descent is rather slow, the downtrend is well-established, with the trendline now resting at the $57 level. But even that trendline hasn't been challenged for the past week, as resistance has been coming in the form of the 10-dma (currently at $56.16). Once again we have a stock underperforming its sector, which in itself is weak relative to the broader market. Continue to ride the trend lower as long as it lasts, initiating new positions on failed rallies near resistance. Look out for a profit taking bounce near $52 (just below Friday's lows). If that bounce doesn't materialize, consider new entries on a drop below $52 if it comes on increasing volume. Stops should be set at $57. *** February contracts expire in two weeks *** BUY PUT FEB-55*IUV-NK OI=293 at $2.75 SL=1.25 BUY PUT FEB-50 IUV-NJ OI=319 at $0.90 SL=0.50 BUY PUT MAR-50 IUV-OJ OI=145 at $2.15 SL=1.00 Average Daily Volume = 1.25 mln VRSN - VeriSign, Inc. $31.00 (-3.67 this week) VeriSign is the leading provider of Internet trust services and digital certificate solutions needed by Web sites, enterprises and individuals in order to conduct secure electronic commerce and communications over IP networks. VRSN has used its secure online infrastructure to issue over 100,000 of its Website digital certificates and over 3.5 million of its digital certificates for individuals. The company also offers the VeriSign Onsite service, which allows an organization to leverage the company's trusted service infrastructure to develop and deploy customized digital certificate services for use by an organization's employees, customers and business partners. To date, over 300 enterprises have subscribed to the OnSite service and VRSN has strategic relationships with industry leaders including Cisco, Microsoft ,RSA, Security Dynamics, and VISA. Despite a continual decline in price over the past 8 months, shares of VRSN can't seem to find any serious buying interest as the stock flirts with a breakdown to new yearly lows. It isn't there yet, but the way the stock continues to work lower off of one failed rally after another, is proof that all the excesses haven't yet been worked out of the Internet sector. VRSN is actually classified as a Software stock, but it doesn't matter which sector you compare to, VRSN is showing that popular bearish quality, relative weakness. As long as this weakness persists, all we have to do is sell into the rallies each time they fail. Target a rollover from resistance at either the $33 level or the 20-dma ($34.45) We have our stop set at $35.50, and it appears unlikely that level will be tested anytime soon. Momentum traders can use a breakdown under the $30 level to initiate new plays, but will want to watch for a reflexive bounce near the $26.50 April lows. *** February contracts expire in two weeks *** BUY PUT FEB-30 QVR-NF OI=5115 at $1.25 SL=0.50 BUY PUT MAR-30*QVR-OF OI=2427 at $2.45 SL=1.25 BUY PUT MAR-25 QVR-OE OI=1553 at $0.85 SL=0.00 Average Daily Volume = 10.4 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** What Do You Call Volatility In The VIX? By Mark Phillips Contact Support How about uncertainty? There sure was plenty of that to go around this week, as the Enron disease became more widespread midweek, driving the broad markets sharply lower before a dramatic rebound back to resistance. The action of the VIX was truly amazing, traveling from below 22 to nearly 30 and then back to sub-23 territory in 3 short days. I must say that I can't remember seeing such a wild ride in the VIX within the historical normal range of 20-30. From complacency to rampant fear and back again. What I found perhaps even more interesting is the fact that the VXN.X (NASDAQ-100 Volatility Index) traced a new all time low on Thursday of 42.46. While the VXN is only a year old, I find the extreme reading rather interesting, as it says Technology investors are the least concerned they've been in the past year. Or does it mean that there are a lot less players in the old "new economy" arena? I don't have any answers, but I do find it interesting. Here's a brief recap of what I see as the pivotal market-moving influences last week. Increasing fears about accounting issues and ANYTHING IRREGULAR sent the market into a tailspin on Tuesday and Wednesday, with Tyco International (NYSE:TYC) being the poster child for accounting issues for the week. Boy am I glad I got that one off the Watch List before it became a disaster! The CEO and CFO announced that they would each be purchasing 500,000 with their own money. That announcement halted the TYC slide and helped to put a floor under the DOW's slide right at the 9550 support level. That vote of confidence helped stocks with potential accounting-related issues, but the overall market firmed somewhat into the announcement following the FOMC meeting. When the announcement came out that the Fed was leaving interest rates unchanged, the market greeted the news with the customary volatility before the bulls latched onto the more upbeat commentary accompanying the interest rate announcement. While still couched in double-speak, the Fed appears to be encouraged by what it calls improving signs of economic recovery. And with that, the bulls were off to the races, driving the DOW back above 9900 by the closing bell on Thursday. Even the lagging NASDAQ went along for the ride, climbing back within reach of the 1950 resistance level. So is this the beginning of the next big rebound? I sincerely doubt it. As I mentioned last week, I'm looking for more rangebound action ahead. Anticipation of economic recovery in the first half of 2002 drove our precious markets too high, and now that it has become clear that the recovery is more likely to emerge in the second half of the year. Not only that, but the recovery is widely expected to be tepid rather than robust. While my commentary may sound bearish, that isn't an accurate reflection of my current thinking. While I'm looking for near-term weakness, I do not expect a violation of the September lows (except for those stocks that have serious problems), and am looking for the near term weakness to provide profits to the downside, while we await the next set of high-odds bullish entries. I think the current action in the broad markets looks eerily reminiscent of the May-June timeframe last year. From there, it took just over 3 months to reach the September lows. With the SPX putting in its high just after the first of the year, it looks to me like the same time cycle could bring us to our relative lows in the March-April timeframe, in conjunction with the next earnings cycle. Time will tell whether my belief is warranted. Hey, it's better than another worthless projection from Abbey Joseph Clueless, don't you think? So with that as preamble, I must say that there wasn't much to report relative to our LEAPS plays. Here's the quick synopsis. Watch List: Calls: General Electric (NYSE:GE) - As I noted last week in the Market Monitor, I don't think GE is an entry at current levels due to the action in the weekly Stochastics. There is an asymmetric Head & Shoulder pattern with neckline at roughly $37 that price action broke last week. Simple calculation now gives an anticipated downside target of $32, so we are moving our entry target accordingly. Broadcom (NASDAQ:BRCM) - Flirting with a breakdown under the $42 level, with the next logical level of support resting near $36 (50% retracement). Target still in place at $31-32 (62% retracement) until we see how far the stock falls with the weekly Stochastics still in free fall. Johnson & Johnson (NYSE:JNJ) - Last week we moved our target areas up to $56/54 in conjunction with the rise in the ascending trendline and the 200-dma. I really can't say which of these levels is most likely to provide our entry, as the weekly Stochastic looks like it is rolling again, portending more weakness. So even with the dailies heading north again over the past couple days, I want to see the weekly oscillator flatten out before contemplating new positions. If I had to provide my best guess, it would be that we revisit the 200-dma before mounting a serious challenge to the 200-dma. Goldman Sachs (NYSE:GS) - What can I say other than Broker/Dealer index (XBD.X)? The XBD suffered a major blow last week, and GS traded as low as $81.60 before catching a bit of a bounce. This one is still on hold until we see healthier action in both the XBD and the stock. I still expect GS to be one of our better performing plays as the economy moves into recovery mode later this year, but I think it is too early to be gaming new entries. Puts: Philip Morris (NYSE:MO) - The waiting game is nearing its end, where we'll get the answer as to whether calling a near-term top in MO was a prudent strategy. The stock has been dancing around the $50 level for the past week, as the weekly Stochastics has finally started to round out a bit in overbought territory. I seriously considered taking a position on the weakness on Friday, but decided not to rush things. That said, we could be taking a position early next week. Eastman Kodak (NYSE:EK) - While the stock caught a bit of a post-earnings pop, the fact that it was so short-lived reaffirms my bearish outlook on the stock. Weekly Stochastics will be a less reliable gauge of entries on this one, so we need to keep an eye on the daily. I want to wait for the next daily cycle to overbought, which should coincide with the stock trading near the $30-31 area. Portfolio: There just wasn't much action here throughout the week that got my attention. Nokia (NYSE:NOK) continued to move up gradually, while EMC Corp (NYSE:EMC) edged lower. No significant price levels hit for either stock, although I did decide to tighten up our stops. And on the downside, we saw our 2 put plays firm somewhat. General Motors (NYSE:GM) crawled through the $51 level on Friday, giving us an early indication that we may be on the wrong side of the play. I'm keeping our stop in place at $53.50. Declining sales will be the eventual outcome of all the front-loaded free-financing sales over the past several months, and that turkey is going to come home to roost. Time will tell whether I'm too early to that game. As the Retail sector (RLX.X) continues to vacillate between support and resistance, so does our put play on Jones Apparel Group (NYSE:JNY). The bulls attempted a breakout in the RLX on Thursday, but that was probably due to end of month window dressing by the funds, as the sector reversed sharply on Friday. If the RLX does breakdown under the $895 level, specialty retailers like JNY should Underperform, allowing our position to outperform. On a related note, did you catch Jeff's comments in the Market Monitor on Friday related to the RLX and the big gun in the sector, Wal-Mart (NYSE:WMT)? Apparently there are some determined sellers at the $60 level that refuse to let the stock work higher. A breakout of WMT over $60 would be the early indication that bulls are getting more aggressive on the Retailers and that there is a problem with our JNY play. So there you have it. Rangebound markets kept our current playlist essentially unchanged. I only added one new play, and bullish readers will be encouraged to see that it is a call play. International Business Machines (NYSE:IBM) has been one of the more solid stocks in the Technology sector for the past 2-years, and I'm looking at the current weakness as an opportunity to play for a return to the recent highs. So, as much as I wish I had something else to offer, it still looks like rangebound action for the near future, with the broad markets holding within their recent ranges, lacking a sufficient catalyst to break either way. Use the extremes of that range to initiate new positions according to your gameplan, in anticipation of near-term weakness and recovery later this year. Have a great week! Mark Phillips mphillips@OptionInvestor.com 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 $ 5.30 + 8.16% $14.50 '04 $12.5 LUE-AV $ 6.10 $ 6.80 +11.48% $14.50 NOK 01/22/02 '03 $ 25 VOK-AE $ 3.00 $ 4.40 +46.67% $22 '04 $ 25 LOK-AE $ 4.80 $ 6.50 +35.42% $22 Puts: JNY 01/09/02 '03 $ 35 OOR-MG $ 6.70 $ 6.30 - 5.97% $35 '04 $ 30 KKZ-MF $ 5.60 $ 5.50 - 1.79% $35 GM 01/10/02 '03 $ 50 VGN-MJ $ 6.50 $ 5.80 -10.77% $53.50 '04 $ 50 LGM-MJ $ 8.40 $ 7.80 - 7.14% $53.50 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: GE 08/12/01 $32 JAN-2003 $ 40 VGE-AH CC JAN-2003 $ 30 VGE-AF JAN-2004 $ 40 LGR-AH CC JAN-2004 $ 30 LGR-AF 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 $56, $54 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 HOLD JAN-2003 $ 90 VSD-AR CC JAN-2003 $ 85 VSD-AQ JAN-2004 $ 90 KGS-AR CC JAN-2004 $ 80 KGS-AP IBM 02/03/02 JAN-2003 $110 VIB-AB CC JAN-2003 $100 VIB-AT JAN-2004 $110 LIB-AB CC JAN-2004 $100 LIB-AT PUTS: MO 12/09/01 $50 JAN-2003 $ 50 VPM-MJ JAN-2004 $ 50 LMO-MJ EK 01/27/02 $30-31 JAN-2003 $ 30 VEK-MF JAN-2004 $ 30 LEK-MF New Portfolio Plays None New Watchlist Plays IBM - International Business Machines $108.00 **Call Play** IBM is one of the most diversified Technology companies in our stock universe, and has actually held up quite well in what has been a difficult economic climate over the past 2 years. While the stock has been subject to sharp sell-offs, each of these has yielded an attractive entry point for the subsequent rally. Helping to keep the company from suffering the fate of so many other Technology companies, especially those in the PC market, CEO Lou Gerstner has steered the company towards greater emphasis in the service area, which has beefier profit margins. The price chart of IBM has not been pretty over the past month, declining sharply from the $125 level all the way to $101 last week. While the decline was largely driven by disappointment over the company's earnings a couple weeks ago, there was a bit more weakness introduced with the announcement that Gerstner will be retiring in March, to be replaced by current President, Sam Palmisano. Changes in management at solid companies always give investors a bit of indigestion, but from what I can see, Palmisano is up to the job of keeping innovation alive at Big Blue. He is credited with leading a complete redesign of the company's server computer lineup, including its adoption of more open industry standards such as the Linux operating system. Along with Gerstner, he fostered growth in the services area, a key source of IBM's revenue. The rebound in shares of IBM in the latter half of last week looks like a sucker's rally to me, especially given the fact that the weekly Stochastics haven't yet bottomed. Look to initiate new positions near the $100 support level, as the daily Stochastics recover from oversold AFTER the weekly Stochastics flatten out in oversold territory and show signs of turning up. The other thing that I like about the price chart of IBM is the very long-term ascending trendline that continues to provide support on the major pull backs. I connected the lows in July of 1996 and the lows in April 1997. That trendline has been tested twice in the past 14 months and I wouldn't rule out another test in the relatively near future. The trendline currently rests at $95, right on major support. Notice that I've listed 2 different price targets in the Watch List. I'm expecting a solid entry near $100, as the dip last Spring only fell to the 200-week moving average(currently $100.42) before bouncing -- I don't want to miss this entry. But if the $100 level fails as support before the weekly flattens out, then I'd look to target new entries near the $95 support level. If the entry comes at the $95 level, then I would suggest ratcheting down the selected strike by one. For instance, instead of buying the 2003 $110 Call, we would want to use the $100 call. Similarly, for those that are looking to write covered calls against the position, consider moving down to the $90 strike, rather than the $100 strike. We'll decide on a stop after we see where we get our entry. Be sure to check in on the Market Monitor, as that will be your first indication of when we are looking to take an entry. Given the fact that IBM recently traded above $125 on expectation of a first half economic recovery, I see it as entirely plausible for the stock to trade back to that level once investors start to see more concrete evidence of that recovery coming to fruition. BUY LEAP JAN-2003 $110.00 VIB-AB BUY LEAP JAN-2003 $110.00 VIB-AT For Covered Call BUY LEAP JAN-2004 $110.00 LIB-AB BUY LEAP JAN-2004 $110.00 LIB-AT For Covered Call Drops None ************** TRADERS CORNER ************** Get Out Before Getting In Austin Passamonte Our visit tonight centers on a very, very common question all of us at OI field each week. How about a group answer for all? As follows: "Austin, Is there any reference book I can buy that deals with option trading on indexes or have you written anything on indexes 101? I just don't know when to hold on if I, for example, long on Friday (today) and I am down about 20% on my trade. Instead of taking a loss and closing out my position, it is wise to see how the market opens Monday or not leave the position open? In most of the advice you are giving for options do you suggest closing out all positions at the end of each day? Thanks, [R]" Seems like most traders have a much easier time getting into trades than they do getting out. Very soon we all realize that getting into a trade is not nearly important as getting out properly! I have written hundreds of articles archived in OI over the past two years and some of them address this topic in pieces or at length. Which ones and when I cannot recall, so have fun searching the archives if you choose. I have never found a really good book on trading indexes or options, as the ones in print are very generic or simply rehashed plagiarism from what I can see. Matter of fact, I've yet to find a book on option trading that covers all the real nitty-gritty little details only discovered once we're in the trenches under live fire. But that's another story. "R" asked a base question that transcends the symbol being traded. The root question is, "where do I get out?" That decision must be made before a trade is ever entered, a critical step too many traders miss. In our haste not to miss out on profits we just buy some options and hope to figure it out later once the profits accrue. Then we discover it's entirely possible the profits will be prefaced by a temporary loss first. The loss is only temporary if we don't take it, so why not hold on awhile and see if the market "comes back"? Sometimes it does, sometimes it doesn't. Any veteran option trader can tell you the market always comes back when you have light positions on and never comes back when all your capital is out at risk. Trust me on this one: it always happens that way! Limiting Risk Here's a better approach. Why don't we begin with the exit in mind and go from there? Assuming our hypothetical option trading account balance is $10,000 we will accept risking 5% or $500 total on any single play. That does not mean $500 each risked on JDSU, LU and GLW. Nor does it mean $500 each risked on QQQ, SMH and SWH as well. That would be $1,500 risked on the exact-same play split three ways. The second fact to consider is how we want to risk that $500 amount. We could buy $500 worth of options, however many it would afford and use that as our stop. This is what we refer to as 100% risk-loss capital instead of a stop. We are willing to risk $500 to total loss, so spending that on options is one way of limiting risk. No matter what on earth happens, we cannot lose more than $500 in the market. We could also buy $1,000 worth of option contracts and set a –50% stop on the entire position. If/when the underlying market goes against us and $500 is lost, our stop-loss order kicks in and the trade is closed. This gives us twice the leverage for profits that only buying $500 worth of options would. We might also choose to buy $1,500 worth of options contracts and set a –33% stop on the entire position. If/when the underlying market goes against us and $500 is lost, our stop-loss order kicks in and the trade is closed. This gives us three times the leverage for profits that only buying $500 worth of options would. However, added leverage comes at a cost. There is no guarantee that our stop-loss order will get us out of any trade for only $500 lost. Many times a trade will gap thru our stop and leave us with greater loss than expected, what we suffer as "slippage". How does this happen? Many different ways. Maybe the symbol we are in is somewhat illiquid and no buyer exists to take the other side of our trade when the stop level is hit. Most brokers execute a stop order of any kind when the "ask" price matches our stop. But by then the "bid" price is below our stop, so that lower price than what we expected is our actual fill. Does that make sense? If we want to exit and option at 5.00 on our stop loss and someone else places an order to buy one at that price, our stop is executed on the mark. But if no buyers exist to take the other side, the "ask" price must fall to 5.00 before most brokers trigger the stop. By this time the "bid" price might be 4.50 or even 4.00 and that's what our fill price would be. Please don't ask me any broker-specific questions on who does what because I cannot answer those. That is a topic of conversation you must have directly with any brokerage in question yourself. So with this in mind we have a point of reference on where our exit should be. Most trading methods suggest setting stops on the far side of support or resistance points to keep stop-loss orders from inadvertently getting hit by normal market noise. That is sound advice, but only part of the picture. Where a trader enters the market dictates stop-loss levels more than where support or resistance protection lies. For example, if I buy five IBM $120 calls at 2.00 each, that's $1,000 at risk in the market. Maybe I bought them when the stock was at $119 and support lies down at $116 below. The experts tell me to place my stop on these calls below the $116 level to prevent having my stops get hit by normal market action. But what if the $116 level is not support? What if it's only a speed bump to $108 or lower like we recently saw? Where will my 2.00 call options be priced at IBM $115.50 like they suggest stops should be? Those 2.00 calls would be more like 0.50 when IBM breaks below $116 level. That times five equals $250 out of the $1,000 I placed at risk. Was I prepared to risk $750 to loss? No... only $500 loss was the plan. What went wrong? One of two things. Either my entry was too high above support, which left my call play dangling in space or I should have only bought three call options instead of five. Then I would have $600 total exposed instead of $1,000, which was too much for this specific entry on this specific play. IBM could fall below $116, my three call options will fetch 0.50 apiece and I'm out -$450 total as planned. Can you see the many variables associated with determining a trade exit that MUST be made before entry? Reality is that some of our trades will lose. I know – perish the thought but that's reality. How we handle our future losses is far more important than how we handle the wins. Eight or nine winning trades can be easily erased with one big loser at the end. So when "R" asked what to do about a trade that is down –20% right now, what is the answer? We don't know. What was the exit plan, worst-case scenario to begin with? How much absolute dollar amount capital is "R" willing to lose? At what point is capital preservation of X-remaining balance more critical than future potential of the trade resulting in profit? Option traders have a few more factors to deal with than stock or futures traders. Time decay and wider bid/ask spreads with options is the downside they have versus unequalled leverage for gain. I think it makes more sense to focus on maximum dollars risked versus points of support or resistance. Option values with extrinsic and intrinsic factors add another element of pricing fluctuation to manage. It would take lengthy book chapter to cover proper trading account money management. I know, because I'm chipping away at a trading book covering all the "little things" I've never seen in print before. It may never get finished because every time I think of another topic to explore, three more branch off from that one. Time or space does not exist in here to exhaust every nuance on proper stops and exits. But the basics to trade exit are simple: pick an absolute dollar amount you cannot lose more than, and stick with it. When the market reaches that point, stops you out and reverses on a dime to roar off deep into the profit zone it hurts. I can tell you from multiple experience what hurts several times more than that a market that bounces around a stop-loss point several times while we pull the order to "see what happens" and then steamrolls the position for massive loss. All option veterans have made that mistake and some of us higher threshold for pain types took longer to cure. I believe it takes a strong emotional experience to etch itself over any equally strong one to offset. A high degree of greed can only be cured with a high degree of painful loss. None of us learn by other's words; we learn by our own experience. Hopefully, words of others ring true and save us from having to repeat the learning lesson too many times instead! In summation, when to exit a trade must be decided upon before it is ever taken. Can't decide on exit scenarios? Pass up the trade. Wait for one that fits your parameters to come along or you will surely regret a few of them that get caught along the way. Hope This Helps, austinp@OptionInvestor.com ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 02-03-2002 Sunday 5 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Investing 101: Simple Rules For Success! By Mark Wnetrzak With the recent volatility in the market, it has become more important than ever to utilize proven investing strategies and trading techniques. Since we often receive requests for a list of guidelines for new readers, we have assembled a small collection of common principles used by successful traders. While it is impossible to list every idea or methodology that might be beneficial, understanding these concepts will help any investor become more profitable on a consistent basis. First, you should always be mentally and physically prepared to participate. The decision-making ability and emotional control necessary to be successful is so great that it is impossible to manage a portfolio during periods of serious health or personal problems. Having achieved a keen and enthusiastic state of mind, the next step is to assume full responsibility for all actions you initiate. A well-known characteristic of professional money managers is their willingness to assume personal accountability for any trading decisions. Those who routinely blame their losses on unexpected events or failures by other entities, such as the broker for "bad fills," are never successful. It's also important to have realistic expectations. When one anticipates results that are far too optimistic, objective decision-making becomes nearly impossible, eventually resulting in emotionally driven "reaction" trading. If it seems like that might be a problem, ask yourself what you really want. Is your goal well defined and achievable? Are you serious about devoting the necessary time and effort to become a successful trader? Can you overcome the urgent desire to always be "in the market?" In short, can you eliminate the destructive compulsions that doom novice players long before they have time to learn (and absorb!) the various techniques required for profitable trading. When you begin to explore trading strategies, keep it simple and consistent. Be sure that you clearly understand the risk-reward ratio of any potential position and use only those methods that conform to your portfolio outlook and personal trading style. Always check the overall market indicators for primary direction. Analyze the sector and industry in which your issue resides and study the performance of similar groups to make sure it coincides with your forecast. Before making any trade, check the trend and character of the issue against other time periods. In some cases, this extra step will identify areas of support or resistance that were not previously apparent, substantially changing the outlook for the position. Understand that new investors often study too many indicators and they listen to such a variety of differing opinions that "information overload" ultimately paralyses their judgment. The incessant deluge of facts and figures (financial fodder) by the media, whose true goals are to simultaneously hype, shock, and entertain, often leave traders unable to make sensible and unbiased decisions. In fact, few people realize that most of the top fund managers focus primarily on two or three fundamental indicators and they rarely listen to the opinions of the popular market "gurus." Timing is everything and there is much to be said for the ability to wait for the correct entry opportunity. For most investors, profit comes from the successful participation in specific plays and as with any investment or speculative venture, the key is to remain alert for signs of changes in character or direction, and respond promptly and decisively, when and if such events occur. Professional traders know they will encounter very few clear-cut opportunities in a lifetime and yet they train themselves to wait for the absolute best conditions before committing any funds to a prospective position. In this manner, they can identify the most important elements of technical analysis and market signals that afford the highest possible probability of a successful outcome. When it comes to specific trading axioms, one important guideline that new traders should adhere to is the need to outline an exit strategy, before initiating any position, to eliminate emotional decisions. Using predetermined targets for profit (and potential loss) addresses a number of problems. First, it eliminates the need for "judgment under fire." Second, it keeps one from selling too soon, thus eliminating potential upside profits. Finally, a sound exit strategy will help you lock-in previous gains, rather than exposing the position to a possible loss. Trade Wisely! 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 UCOMA 5.50 6.10 FEB 5.00 1.00 *$ 0.50 12.1% TSTN 5.19 5.51 FEB 5.00 0.55 *$ 0.36 11.2% PLUG 10.58 11.20 FEB 10.00 1.40 *$ 0.82 7.8% PCLN 5.52 6.32 FEB 5.00 0.85 *$ 0.33 7.7% MONE 14.01 15.15 FEB 12.50 2.25 *$ 0.74 6.8% CLRS 5.60 4.93 FEB 5.00 0.95 $ 0.28 6.5% MONE 14.83 15.15 FEB 12.50 3.20 *$ 0.87 6.5% RATL 23.92 23.72 FEB 22.50 2.35 *$ 0.93 6.2% ELON 16.73 19.74 FEB 15.00 2.40 *$ 0.67 5.1% RBAK 6.20 4.89 FEB 5.00 1.55 $ 0.24 4.5% WEBM 24.20 23.07 FEB 20.00 4.80 *$ 0.60 4.5% PLCE 32.00 31.90 FEB 30.00 2.90 *$ 0.90 4.5% ELON 19.50 19.74 FEB 17.50 2.50 *$ 0.50 4.3% PWAV 18.15 17.71 FEB 15.00 3.70 *$ 0.55 4.1% AMZN 14.44 13.73 FEB 12.50 2.25 *$ 0.31 3.7% ADCT 5.38 4.85 FEB 5.00 0.75 $ 0.22 3.4% ADIC 18.32 16.94 FEB 17.50 1.70 $ 0.32 1.7% RNWK 8.13 6.87 FEB 7.50 1.30 $ 0.04 0.5% SCMR 5.85 4.61 FEB 5.00 1.20 $ -0.04 0.0% EPNY 10.97 9.25 FEB 10.00 1.50 $ -0.22 0.0% BDAL 15.81 13.81 FEB 15.00 1.60 $ -0.40 0.0% RSTN 20.55 15.72 FEB 17.50 3.90 $ -0.93 0.0% ACRI 13.11 10.47 FEB 12.50 1.60 $ -1.04 0.0% *$ = Stock price is above the sold striking price. Comments: Though the major equity averages rebounded strongly mid-week, the near-term outlook remains neutral at best and possibly bearish. All three indices have become somewhat "toppy" due to the uncertainty of the economic recovery and threatening political news. It is definitely time to monitor your trading portfolio closely. Clarus (NASDAQ:CLRS) dropped drastically this week but did hold at technical support. The position remains speculative with earnings due 2/13. Rational Software (NASDAQ:RATL) exhibited strong volume when it was added to the S&P 500 Index at the close of trading on Thursday. Redback Networks (NASDAQ:RBAK) is testing its 50-dma - a key moment. Powerwave Technologies (NASDAQ:PWAV) is another stock at a key moment. A break below the 50- and 150-dmas could signal a move to previous support at $14. The violation of the SEP-DEC trend-line by ADC Telecommunications (NASDAQ:ADCT) could be an early exit signal, depending on your long-term outlook. The same can also be said of E.piphany (NASDAQ:EPNY), though the technical indications remain bullish and the stock did rally back above its 50-dma. Both Acacia Research (NASDAQ:ACRI) and Sycamore Networks (NASDAQ:SCMR) are above their support areas (the DEC low) and may offer a favorable opportunity to lower your cost basis next month. Bruker Daltonics (NASDAQ:BDAL) continues to act horrid and may test the September or July low. The position will be closed on further weakness. Riverstone Networks (NASDAQ:RSTN) appears to be forming a short-term "head-n-shoulders" top (and a long-term double-top) and has violated its 50-dma. We will show the position closed in the interest of capital preservation. 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 CECO 37.07 FEB 35.00 CUY BG 2.70 15 34.37 14 4.0% CYMI 37.22 FEB 35.00 CQG BG 3.50 281 33.72 14 8.2% FCEL 18.08 FEB 17.50 FQG BT 1.25 668 16.83 14 8.6% NETA 30.26 FEB 30.00 CQM BF 1.40 5429 28.86 14 8.6% PKTR 7.69 MAR 7.50 XOU CU 0.85 3 6.84 42 7.0% STOR 5.34 FEB 5.00 OSU BZ 0.65 3728 4.69 14 14.4% WEBM 23.07 FEB 20.00 UUW BD 3.60 150 19.47 14 5.9% 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 STOR 5.34 FEB 5.00 OSU BZ 0.65 3728 4.69 14 14.4% FCEL 18.08 FEB 17.50 FQG BT 1.25 668 16.83 14 8.6% NETA 30.26 FEB 30.00 CQM BF 1.40 5429 28.86 14 8.6% CYMI 37.22 FEB 35.00 CQG BG 3.50 281 33.72 14 8.2% PKTR 7.69 MAR 7.50 XOU CU 0.85 3 6.84 42 7.0% WEBM 23.07 FEB 20.00 UUW BD 3.60 150 19.47 14 5.9% CECO 37.07 FEB 35.00 CUY BG 2.70 15 34.37 14 4.0% 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). ***** CECO - Career Education $37.07 *** Blue-Sky Territory! *** Career Education (NASDAQ:CECO) is a provider of private, for- profit postsecondary education, with 38 campuses throughout the United States and Canada, the United Kingdom and the United Arab Emirates. The company's educational programs consist of Visual Communication and Design Technologies, Information Technology, Business Studies, and Culinary Arts. CECO has approximately 33,400 students enrolled, as of January 31, 2001, and its schools offer a variety of master's degree, bachelor's degree, associate degree and diploma programs in career-oriented disciplines. Career Education rallied sharply on Friday after reporting a 62% jump in quarterly net income on a surge in new enrollments. The company also said that it expected 2002 revenue to be 28% to 32% above 2001's and said full-year 2002 per share earnings should be up 35% to 40%, helped by new accounting rules allowing elimination of amortization expenses. The favorable earnings report prompted Banc of America Securities to upgrade CECO to a "strong buy." We simply favor the move to a new, all-time high on heavy volume with "blue-sky" territory above. FEB 35.00 CUY BG LB=2.70 OI=15 CB=34.37 DE=14 TY=4.0% ***** CYMI - Cymer $37.22 *** Earnings Speculation *** Cymer (NASDAQ:CYMI) is a supplier of excimer laser illumination sources, the essential light source for deep ultraviolet (DUV) photolithography systems used in the manufacture of semi- conductors. Cymer's lasers are incorporated into step-and-repeat and step-and-scan photolithography systems for use in the manu- facture of semiconductors with critical feature sizes below 0.35 microns. Cymer believes that its excimer lasers constitute a substantial majority of all excimer lasers incorporated in DUV photolithography tools. Cymer's products consist of photo- lithography light sources, replacement parts and service. Investors are speculating that Cymer will benefit as the semiconductor industry has begun ordering new equipment. We favor the bullish technicals and the move above resistance near $35 (the Jan. and May highs) which now offers support. With earnings due Feb. 6, this position offers a reasonable entry point from which to speculate on the company's future. FEB 35.00 CQG BG LB=3.50 OI=281 CB=33.72 DE=14 TY=8.2% ***** FCEL - FuelCell Energy $18.08 *** Alternate Energy Source *** FuelCell Energy (NASDAQ:FCEL) is a developer of carbonate fuel cell technology for stationary power generation. The company has developed a proprietary patented carbonate fuel cell, which the company believes has significant advantages in terms of fuel efficiency and cost over competing fuel cells for stationary power generation. The company manufactures carbonate fuel cells, generally on a contract basis. Its revenue is primarily generated from agencies of the U.S. government and customers throughout the world. Alternate energy source stocks have gained attention after reports that the U.S DOE plans to invest in research of fuel cells as an energy substitute. General Motors (NYSE:GM) recently added to the bullish momentum when it unveiled a new car which uses fuel cell technology. FCEL has formed a five-month base with support near $16 and this position offers a reasonable entry point for those wishing to add an alternate energy stock to their portfolio. FEB 17.50 FQG BT LB=1.25 OI=668 CB=16.83 DE=14 TY=8.6% ***** NETA - Networks Associates $30.26 *** Rally Still Secure *** Networks Associates (NASDAQ:NETA) is a supplier of security and availability solutions for e-business. The company's products focus on two important areas of e-business: network security and network management. The majority of the company's revenue has historically been derived from its McAfee anti-virus product group and its Sniffer network availability and performance management product group. These two flagship product groups form the customer base and product base from which the balance of the company's product line has developed. Network Associates reported solid December-quarter results, posting revenue of $241 million and earnings of $0.23 per share before charges, well ahead of consensus estimates. A recent Barron's article said technology security is sure to "take center stage" because of the terrorist threat and recent computer viruses. This position offers favorable short-term speculation on a bullish Stage II stock in a favorable sector. Note: Network Associates said that beginning Feb. 12, its shares will cease trading on the Nasdaq and begin trading on the NYSE. Look for a new ticker. FEB 30.00 CQM BF LB=1.40 OI=5429 CB=28.86 DE=14 TY=8.6% ***** PKTR - Packeteer $7.69 *** Bottom-Fishing Part I *** Packeteer (NASDAQ:PKTR) is a provider of application performance infrastructure systems that are designed to provide enterprises and service providers a layer of control for applications delivered across intranets, extranets and the Internet. PKTR's PacketShaper family of products, the PacketShaper and AppVantage systems, integrates application discovery, analysis, control and reporting technologies that are required for proactive application performance and bandwidth management. The AppCelera family of Internet acceleration appliances employs SSL acceleration and advanced content compression, transformation and caching tech- nologies to improve response times of mission-critical enterprise, e-business and e-commerce Web applications. Packeteer earned a couple upgrades last week after reporting decent earnings. The company said net revenues for the 4th-quarter were up 5% to $11.5 million and for the year, were up 14% to $46.7 million. With a strong balance sheet, the company expects to benefit as economic conditions continue to improve. Favorable speculation on an improving stock. MAR 7.50 XOU CU LB=0.85 OI=3 CB=6.84 DE=42 TY=7.0% ***** STOR - StorageNetworks $5.34 *** Bottom-Fishing Part II *** StorageNetworks (NASDAQ:STOR) along with its subsidiaries, is a provider of storage management services and developer of storage management technology. The company provides both managed storage services and professional services to its customers. Through its proprietary software and technology, the company delivers storage management services that enable it to manage its customers' data storage environments. Its professional services assist customers in assessing their data storage needs and designing appropriate data storage systems. StorageNetworks rallied strongly after reporting a 156% increase in revenue for the year. The company also signed a long-term strategic STORfusion(SM) deal with EDS for their data storage management software. With several new customer and partner relationships as well as a restructured balance sheet, the company believes that it has turned the corner to future success. For those investors who agree, this position offers a conservative entry point. FEB 5.00 OSU BZ LB=0.65 OI=3728 CB=4.69 DE=14 TY=14.4% ***** WEBM - webMethods $23.07 *** Still A Hot Sector! *** webMethods (NASDAQ:WEBM) is a provider of infrastructure software and services for comprehensive end-to-end integration solutions that enable its customers to achieve comprehensive automation of business processes by integrating their systems in real-time. Its customers use its software, webMethods Enterprise, webMethods B2B, and webMethods Mainframe Integration Server, to integrate business processes among different systems within their enterprise and to work more closely with their customers, suppliers and other business partners through the real-time exchange of information and transactions. webMethods reported a smaller operating loss than expected and saw a pickup in customer spending during the 3rd-quarter. Investors and analysts were pleased and rallied the stock to a new 4-month high on heavy volume. Our outlook remains bullish and this position offers another chance at a low risk cost basis in the issue. FEB 20.00 UUW BD LB=3.60 OI=150 CB=19.47 DE=14 TY=5.9% ***** ***************** 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 ORB 5.88 FEB 5.00 ORB BA 1.05 309 4.83 14 7.6% WEBX 27.00 FEB 25.00 UWB BE 2.85 858 24.15 14 7.6% UCOMA 6.10 MAR 5.00 QUW CA 1.55 150 4.55 42 7.2% ISSX 39.00 FEB 35.00 ISU BG 5.10 2340 33.90 14 7.0% ANEN 16.12 FEB 15.00 EVB BC 1.55 61 14.57 14 6.4% TSTN 5.51 MAR 5.00 TUW CA 0.90 10 4.61 42 6.1% SWFT 23.85 FEB 22.50 SDU BX 1.95 385 21.90 14 6.0% PLUG 11.20 MAR 10.00 PQL CB 1.95 443 9.25 42 5.9% ISRG 10.15 MAR 10.00 AXQ CB 0.85 0 9.30 42 5.5% CALP 13.85 FEB 12.50 DQQ BV 1.65 0 12.20 14 5.3% ***************** NAKED PUT SECTION ***************** Trading Basics: Q&A With The Naked-Puts Editor By Ray Cummins One of our new subscribers asked about portfolio diversity and the use of trading stops for position management when selling naked puts. All experienced traders agree on the wisdom of diversification. Investors who have limited capital should divide their portfolio efficiently among a few positions in different groups or sectors. By spreading out across industries, you can avoid the agony of violent swings in a particular stock or market segment and limit losses when the unexpected occurs. When your portfolio value is small, you must manage the collateral effectively and it has been our experience that most of the issues in a specific sector will perform in a similar manner. For example, if one or two of the primary companies in a given industry move in a bullish manner, the rest of the stocks in that segment or category also have a high probability of performing well. In contrast, when a stock performs poorly, the odds are high that the rest of the issues in that sector will react in a comparable manner. Some traders believe that diverse portfolios should also contain a few issues which will react differently to changes in economic conditions or the outlook for a specific sector or industry. We identify these candidates as "hedge" positions and one way to illustrate the concept involves the oil sector. A conservative investor might hedge a portfolio by initiating positions in both an electric utility and a major oil service company. Higher fuel costs will have negative impact on the utility, but will boost the value of the oil service issue. Obviously, the reverse is also true; lower oil prices will impact the oil service company negatively while improving the utility's outlook. This strategy not only protects your portfolio against unexpected downturns in a particular industry, it also enables you to take greater risks with a few positions, which in some cases can increase your total return. Regardless of the manner in which you diversify your portfolio, it's important to remember that the activity is more than just a one-time event. In all cases, you should follow a precise and well-developed trading plan and you must adjust that process when a change is warranted due to unexpected conditions. The need for a system to limit losses in any trading strategy is obvious but with a limited-profit/unlimited-loss technique such as selling "naked" puts, the requirement is even more critical. In fact, it is so important that each week we publish a warning concerning the sale of naked puts and the use of trading stops: "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." Of course, it is necessary to be familiar with the basic forms of trading stops: mental and mechanical. A "mechanical" stop is an order to close a specific position any time it moves beyond a specified price. This order is placed electronically with your online brokerage or a through a personal broker, but the physical execution of the trade generally goes through a floor specialist at one of the major exchanges. A stop order to "buy" becomes a market order when the option contract trades, or is bid at or above, the stop price. A stop order to "sell" becomes a market order when the contract trades, or is offered at or below, the stop price. Using a mechanical stop order is generally the best method to limit losses or protect profits as it does not require the position to be monitored on a continuous basis. In contrast, using a "mental" stop loss places all the responsibility on the trader. The investor determines a specific stop loss and closes the position if the option trades beyond that price. Considering the market activity we have experienced over the past few weeks, it's obvious a trader using mental stops would need to constantly oversee the position. There is another alternative for investors who use proprietary systems (such as the one at Preferred Trade) that allow option orders to be triggered by the price of the underlying issue. In that type of system, the guidelines for establishing protective stops suggest that the initial or opening limit should be placed at a point where important technical support (or a recent trading range bottom) is evident. Most often, this will be a relatively small range reflecting the low of a basing pattern or trend-line established prior to entering the position. In all cases, the fundamental objective of the stop-loss technique is to preserve capital if the play goes badly and yet provide every opportunity for the position to achieve its profit potential. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield DRIV 21.33 18.51 FEB 17.50 0.55 *$ 0.55 15.2% PCX 28.30 28.08 FEB 25.00 0.75 *$ 0.75 12.4% TMCS 21.50 25.32 FEB 20.00 0.60 *$ 0.60 11.3% MIMS 20.63 17.75 FEB 17.50 0.70 *$ 0.70 10.5% IONA 24.25 20.00 FEB 17.50 0.50 *$ 0.50 10.2% CRUS 19.15 18.17 FEB 15.00 0.45 *$ 0.45 9.1% SPCT 15.10 16.10 FEB 12.50 0.30 *$ 0.30 8.7% FNSR 14.19 10.69 FEB 10.00 0.30 *$ 0.30 8.3% TMCS 19.78 25.32 FEB 17.50 0.40 *$ 0.40 7.2% SFA 26.70 27.05 FEB 22.50 0.45 *$ 0.45 7.1% ICST 25.69 23.87 FEB 20.00 0.45 *$ 0.45 7.0% CMNT 23.75 20.79 FEB 20.00 0.50 *$ 0.50 7.0% JBHT 28.10 26.73 FEB 25.00 0.40 *$ 0.40 6.8% FCN 26.85 29.10 FEB 23.38 0.35 *$ 0.35 6.7% TMCS 19.95 25.32 FEB 17.50 0.45 *$ 0.45 6.5% MERQ 37.51 38.62 FEB 30.00 0.35 *$ 0.35 6.5% JDAS 28.10 27.40 FEB 22.50 0.35 *$ 0.35 6.3% PPD 23.21 20.65 FEB 17.50 0.35 *$ 0.35 6.1% MEDC 23.34 22.00 FEB 17.50 0.35 *$ 0.35 6.1% IRF 39.19 40.92 FEB 35.00 0.50 *$ 0.50 6.0% MEDC 25.76 22.00 FEB 20.00 0.30 *$ 0.30 6.0% MROI 29.20 27.47 FEB 25.00 0.40 *$ 0.40 5.5% LIN 27.64 28.41 FEB 25.00 0.45 *$ 0.45 5.5% SEBL 37.20 35.74 FEB 30.00 0.30 *$ 0.30 5.4% *$ = Stock price is above the sold striking price. Comments: The recent bearish activity in the broader equity markets has brought investors back to reality with regard to the potential time frame for an economic recovery. The optimistic outlook for future corporate earnings has been subdued and the current apprehensive stance among traders has been reflected in share values. The major stock indices are still mired in relatively bearish trends and with that perspective in mind, it would be prudent to exit all but the most favorable positions. Issues in which we are planning "early exits" include: Digital River (NASDAQ:DRIV), on a close below $17; Finisar (NASDAQ:FNSR), on any move below $10; Computer Network Technology (NASDAQ:CMNT), as Friday's close below recent support at $21 suggests further downside activity; and MIM Corporation (NASDAQ:MIMS), which was rocked on Wednesday by an unexpected sell-off after some bizarre trading activity. Reports suggested the stock was pressured by a large "block" sell order and also a market-maker's clerical error. As you might expect, the specialist responsible for the error could not immediately be determined and Barry Posner, a spokesman for MIM, said he could not explain the activity. It may be a case of: "Where there's smoke, there's fire" and you don't want to get burnt by unexpected news before the February expiration. The recent rally in Med-Design (NASDAQ:MEDC) has come to an end and any further downside movement should be seen as an early exit signal in the (FEB-$20P) position. The same scenario applies to Iona Technologies (NASDAQ:IONA), which is at a "key" moment and should be closed on any move below the current support area at $20. 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 DGIN 24.77 FEB 22.50 UGU NX 0.50 10 22.00 14 13.3% ENER 23.27 FEB 20.00 EQI ND 0.30 61 19.70 14 10.3% ESST 22.89 FEB 20.00 SEQ ND 0.35 833 19.65 14 11.5% FCN 29.10 FEB 25.00 FCN NE 0.40 605 24.60 14 10.9% ISLE 16.45 FEB 15.00 QEP NC 0.30 46 14.70 14 12.0% ISSX 39.00 FEB 30.00 ISU NF 0.30 555 29.70 14 8.0% MDR 12.52 FEB 10.00 MDR NB 0.25 3618 9.75 14 19.7% TYC 35.63 FEB 27.50 TYC NY 0.35 1956 27.15 14 10.2% 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 MDR 12.52 FEB 10.00 MDR NB 0.25 3618 9.75 14 19.7% DGIN 24.77 FEB 22.50 UGU NX 0.50 10 22.00 14 13.3% ISLE 16.45 FEB 15.00 QEP NC 0.30 46 14.70 14 12.0% ESST 22.89 FEB 20.00 SEQ ND 0.35 833 19.65 14 11.5% FCN 29.10 FEB 25.00 FCN NE 0.40 605 24.60 14 10.9% ENER 23.27 FEB 20.00 EQI ND 0.30 61 19.70 14 10.3% TYC 35.63 FEB 27.50 TYC NY 0.35 1956 27.15 14 10.2% ISSX 39.00 FEB 30.00 ISU NF 0.30 555 29.70 14 8.0% 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). ***** DGIN - Digital Insight $24.77 *** Solid Earnings! *** Digital Insight (NASDAQ:DGIN) provides Internet banking services to banks, credit unions and savings and loans associations. The company's primary products are Internet retail and business banking and automated lending applications. These applications allow a financial institution to create a customized Internet banking presence using an array of standard and optional features. The company complements its primary banking applications with additional tools, such as target marketing, portal Websites, wireless capability, online statements, check imaging, and with implementation and Website services. Last week, DGIN reported results for the fourth quarter with revenues of $27 million, an increase of 49% compared with $18 million reported in the fourth quarter of 2000. The CEO said last year positioned the company for continued strong growth and allows DGIN the opportunity to capitalize on the industry's consolidation opportunities to build on an already strong leadership position. Analysts at J.P. Morgan Chase upgraded the issue and this position offers a conservative way to speculate on the company's near-term share value activity. FEB 22.50 UGU NX LB=0.50 OI=10 CB=22.00 DE=14 TY=13.3% ***** ENER - Energy Conversion Devices $23.27 *** Big Mover! *** Energy Conversion Devices (NASDAQ:ENER) is a unique technology and manufacturing company engaged in the invention, engineering, development and commercialization of new materials, products and production technology. The company has established a role in the development of proprietary materials, products and production technology based on its atomically engineered amorphous and other disordered materials, using chemical and structural disorder to provide extra degrees of freedom that result in the ability to make many new materials. ECD develops ovonic materials that allow it to design and commercialize new products such as nickel metal hydride batteries, thin-film solar cell products and phase-change optical memory media. ENER has enabling proprietary technologies in the fields of alternative energy technology comprised of energy storage and energy generation, as well as in information technology. There was no public news to explain Friday's rally but the trading volume can't be overlooked. Investors can profit from continued upside activity with this low-risk position. FEB 20.00 EQI ND LB=0.30 OI=61 CB=19.70 DE=14 TY=10.3% ***** ESST - ESS Technology $22.89 *** Stock Offering *** ESS Technology (NASAQ:ESST) designs, markets and supports highly integrated mixed-signal semiconductor solutions for multimedia applications in the Internet, personal computer and consumer marketplaces. The company offers comprehensive solutions for networking and Digital Versatile Disk (DVD), Internet-related semiconductor, Communications, Video Compact Disk (VCD)/Super Video Compact Disk (SVCD) and PC Audio applications. The company and its subsidiaries operate in two primary business segments, the semiconductor segment and the Internet segment. ESS Technology recently announced a 4.8 million share offering of stock priced at $19.38 a share and that activity should keep the share value of the issue above our cost basis for the next few weeks. In addition, the recent heavy-volume rally suggests further upside potential in the near future. FEB 20.00 SEQ ND LB=0.35 OI=833 CB=19.65 DE=14 TY=11.5% ***** FCN - FTI Consulting $29.10 *** Premium Selling! *** FTI Consulting (NYSE:FTN) is a multi-disciplined consulting firm with practices in financial restructuring, litigation consulting and engineering and scientific investigation. FTI's Consulting division serves financially distressed companies and financial institutions that are involved in ongoing litigation or regulatory, bankruptcy or other proceedings. FTI's Litigation Consulting division advises clients in all phases of litigation, including discovery, jury selection, trial preparation and the actual trial. The company's Applied Sciences division offers forensic engineering and scientific investigation services; accident reconstruction, fire investigation and product failure analysis. FCN's shares were recently split 3-for-2 and now its seems as if investors can't get enough of the stock. The bullish activity has pushed the issue up and out of the previous trading range near $22 and that will be the new support area in the near-term. In addition, the premiums in FCN's options have also increased in recent weeks and the inflated prices allow us to speculate on the company's quarterly earnings (due 2/13) in a conservative manner. FEB 25.00 FCN NE LB=0.40 OI=605 CB=24.60 DE=14 TY=10.9% ***** ISLE - Isle of Capri Casinos $16.45 *** Hot Sector! *** Isle of Capri Casinos (NASDAQ:ISLE) is a developer, owner and operator of branded gaming and related lodging and entertainment facilities. The company owns and operates 12 gaming facilities located in Lake Charles and Bossier City, Louisiana; Biloxi, Vicksburg, Tunica, Natchez and Lula, Mississippi; Bettendorf, Marquette, and Davenport, Iowa; Kansas City, Missouri; and Las Vegas, Nevada. The company also owns a large interest in and operates a casino and hotel facility in Black Hawk, Colorado. The company also owns and operates a pari-mutuel harness racing facility in Pompano Beach, Florida. Gaming stocks are "hot" and since one of our readers asked us to recommend some conservative issues in the group, we have decided to publish this position in the newsletter portfolio. The company's earnings are due on 2/14. FEB 15.00 QEP NC LB=0.30 OI=46 CB=14.70 DE=14 TY=12.0% ***** ISSX - Internet Security Systems $39.00 *** Web Security *** Internet Security Systems (NASDAQ:ISSX) is a global provider of security management solutions for protecting digital business assets. Their continuous-lifecycle approach to information security protects distributed computing environments, such as internal corporate networks, inter-company networks and electronic commerce environments, from attacks, misuse and security policy violations, while ensuring the confidentiality, privacy, integrity and availability of proprietary information. The company delivers an end-to-end security management solution through its SAFEsuite security-management platform of software products, its 24-hour remote security monitoring and its professional services, comprised of both consulting and education services. ISSX beat expectations in its quarterly earnings report and the company was upgraded by a number of analysts including CIBC World Markets, SunTrust Robison Humphrey and Wachovia Securities. We simply favor the low risk cost basis in the issue. FEB 30.00 ISU NF LB=0.30 OI=555 CB=29.70 DE=14 TY=8.0% ***** MDR - McDermott International $12.52 *** Earnings Speculation! *** McDermott International (NYSE:MDR) is the parent company of the McDermott group of companies that includes J. Ray McDermott, S.A., McDermott Incorporated, Babcock & Wilcox Investment Company, BWX Technologies, Inc., and The Babcock & Wilcox Company. The company operates in four business segments, Marine Construction Services, Government Operations, Industrial Operations and Power Generation Systems. McDermott's significant customers include oil and gas companies, including several foreign government-owned companies, oil and natural gas producers, the electric power generation industry, petrochemical and chemical processing companies, state and federal government agencies and nonprofit utility groups. The company's earnings are due on 2/14 and traders who want to establish a low-risk entry point in the issue should consider this position. FEB 10.00 MDR NB LB=0.25 OI=3618 CB=9.75 DE=14 TY=19.7% ***** TYC - Tyco International $35.63 *** Speculation Only! *** Tyco International (NYSE:TYC) is a diversified manufacturing and service company. Through its subsidiaries, the company designs, manufactures and distributes electrical and electronic components and multi-layer printed circuit boards; designs, engineers, manufactures, installs, operates and maintains undersea cable communications systems; designs, manufactures and distributes disposable medical supplies and other specialty products; designs, manufactures, installs and services fire detection and suppression systems and installs, monitors and maintains electronic security systems; and designs, manufactures and distributes flow control products and provides environmental consulting services. Shares of Tyco have been hammered in recent sessions on concerns about accounting practices and corporate ethics. Most analysts believe the selling was overdone and traders who agree with that outlook can speculate on the company's near-term share price activity with this position. FEB 27.50 TYC NY LB=0.35 OI=1956 CB=27.15 DE=14 TY=10.2% ***** ***************** 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 ISRG 10.15 FEB 10.00 AXQ NB 0.35 0 9.65 14 17.9% MERQ 38.62 FEB 35.00 RQB NG 0.80 5214 34.20 14 13.8% FTI 16.13 FEB 15.00 FTI NC 0.30 1100 14.70 14 11.6% ELON 19.74 FEB 17.50 EUL NW 0.30 320 17.20 14 10.9% SAH 27.81 FEB 25.00 SAH NE 0.30 34 24.70 14 7.6% SEBL 35.74 FEB 30.00 SGQ NF 0.25 6298 29.75 14 6.2% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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