The Option Investor Newsletter Wednesday 02-06-2002 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 02-06-2002 High Low Volume Advance/Decline DJIA 9653.39 - 32.04 9733.10 9608.21 1.67 bln 1134/1930 NASDAQ 1812.71 - 25.81 1853.13 1805.01 2.06 bln 1206/2364 S&P 100 550.20 - 2.18 555.04 546.89 Totals 2340/4294 S&P 500 1083.51 - 6.51 1093.58 1077.78 RUS 2000 462.41 - 6.41 469.48 461.67 DJ TRANS 2621.98 - 80.45 2707.45 2615.84 VIX 28.05 + 1.28 28.66 27.14 VXN 49.06 + 2.32 49.20 47.33 TRIN 1.21 Put/Call 0.70 ******************************************************************* "Slip Slidin' Away" Austin Passamonte Can't recall the singer, album or era but I do remember that being title to a song. Might as well moniker the markets with it too, while we're at it. Tonight's market report is easy: we can forego all the news items fluff from last night until now and sum it up with four picture windows instead. How's that sound? (Weekly/Daily Charts: SPX) In no particular order we'll review trends based on accumulation and distribution. First up, the SPX. A homogenous blend of all the other indexes to follow below, it's a nice place to begin. Weekly chart (left) shows price action at or slightly below some key retracement levels measuring year 2001 highs in May to lows in September. Stochastic values are still pointing straight down, telling us the market is under distribution right now. That visual fact is reinforced by its daily chart (right) with stochastic values also rolling straight down in bearish fashion. Moving averages are miles above and ultimate support may come in around the 1036 area if 1050 doesn't hold first. We are talking about downside targets only because the trend and price strength are both in pure harmony across all time frames: down. If and when the signals shown turn bullish reversals ahead, we'll be targeting upside points of reference from there. (Weekly/Daily Charts: OEX) The OEX, mirror index of the SPX is of course exactly the same. We could and probably will see 528 area in the next few weeks or so. Zero signs of sustained bullish potential right now. (Weekly/Daily Charts: Dow) The Dow is slightly different, but not much. Weekly chart signals are trying to cease the halt but daily charts speak otherwise. The halfway mark of last year's price range just gave way and now serves as resistance. Looks like 9,300 area could be the next price magnet ahead. (Weekly/Daily Charts: QQQ) I'd guess the NDX/QQQ and primary sectors will be first to find a bottom and stabilize. Just as they were the first to break down, so shall tech sectors be first to flatten out. Bounce from there? Bulls should just be grateful for sideways action right now and that could come relatively soon. Odds & Ends You could stop right there and click out of this page with all that needs be known about the markets to make money. TYCO secures more credit to dig a deeper hole? CSCO conveniently slips out earnings before the markets open and way before any conference call? Bullish economic reports before the opening bell? Who really cares? Did price action seem to care? Not much longer than the first few minutes before prevailing trend resumed its course. Thoughts to ponder: WCOM on its way to bankruptcy? Sure seems that way, and I expect the majority of current telecom and wireless components to follow suit. No one will buy anyone else out in that hapless sector because the few companies left with money don't need or want the other loser's overpriced, out-dated mess. I'm just hoping these dead stocks still walking can pop back up to resistance so I can ride them down the hill without missing the fun this time! Wonder how CSCO's conference call is going? Maybe they didn't slip the markets a mickey today after all. Perhaps that inadvertent earnings release was not a ploy to prop up the stock before bad news leaks after all. I've had CNBC on mute since 2:00pm, my preferred mode of listening. Can't say as I tapped into the CSCO conference call, either. If I had that kind of idle time to fritter away it would've been spent napping on the couch instead. Let's see how well CSCO pleased the analysts.... hmmm... gotta be a price in the post-market ticker soon... ah yes, 17.30 and falling. Is that where CSCO closed today or did it pop up a couple bucks higher after the bell? All those sell side fundies keep telling us how much cash CSCO has on hand. Maybe they'll buy back a huge chunk of their float if things are looking so rosy over there. Can you think of a better investment CSCO could make instead of a record-breaking buy back? Alex Henderson of Salomon Smith Barney can't think of any. He's the analyst on CNBC last night at this very hour pounding the table on CSCO as a strong buy. His firm's price target is $27 to $35 by year's end and implored us to buy it today, before the monster earnings tonight so all we ignorant folk don't miss the huge spike up to follow. Thanks anyway Allie, but I'll stick with shorting the S&P for now. Up just over +70 index points since last Monday and would like to bank +100 by this week's end. I'll invest in your CSCO call some other time. None Of It Matters At All Market news and analyst mantra amuses me much as the next person. I cruise various fundamental news sites to see how the other half lives but for gosh sakes never base any of my trades on that inane stuff. I want to, check that... I NEED TO see price action in the charts before ever making a single trading decision that involves my money and other people's too. Long ago I learned nothing else matters when chart action is clear, and clarity reigns right now. The trend is down, chart signals are all heading down in unison. Short every single rally attempt from now until chart signals turn bullish. That's all any of us need to know. The rest is pure noise & distraction. I'm going out on an editorial limb saying such strong words and I know for an absolute fact some readers are bristling. That's the price I'm willing to pay for saving others who are intent on trying to catch a bounce with index calls. Every day with no exception I get email asking if readers should buy index calls here or there, is this the bottom, etc. I also get more than a few notes from those who bought calls, are trapped with painful loss and ask me for a solution to save them that does not exist. My job in here is to try and help shelter aspiring traders from fiscal harm first & foremost, and strong words are sometimes required. (60/30 Min Chart: OEX) Skilled, knowledgeable, daring intraday traders can attempt call plays for brief scalps but rest assured that is bucking the dominant trend. On the 60-min chart (left) you'll see stochastic values crossing over in or near overbought zones three times. Swing Trade model played the downside on those first two and hit some fairly big moves with absolute ease. Two other times there were upside pops from oversold extreme of tradable distance that lasted a few hours or less each time. Be quick or be dead when fading weekly/daily charts trending powerfully as they are right now. What does this tell us? Play the trend. This afternoon there was a third viable put play entry as the OEX failed near 555 and broke below S/R price magnet of 552.50 area. Puts long at 552.00 and held over the close might work real well tomorrow. Stops set at 555.25 just above the last high would limit risk fairly well. I did not take this play myself, but sure wish I had. With CSCO bleeding red all over the post-market ticker, it could be another very methodical day tomorrow once more. Summation You are fully armed & ready for the market. Watch your favorite stock, index or sector for weekly/daily charts just like these. Wait for 60/30 min charts to line up in overbought and turn bearish just like the ones above. Get short, set stops and hold on. Trading the downside right now is slightly easier than printing crispy, new $100 bills of your laser printer, and you will sleep easier at night knowing the Secret Service isn't about to pay a visit. If that sounds brazen or cocky I apologize. But we are right in the middle of a beautiful trend to trade and most people I talk with have been looking upwards for the past two weeks. Turn around, look down, short every rally and fire up the printing presses in your home. The trend is your friend and we've all got a party going on with our friend right now! Sell Every Rally With Gusto, 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 ************************************************************** *********** OPTIONS 101 *********** Greekus Interruptus By Mark Phillips mphillips@OptionInvestor.com I know I was planning to cover the next of our infamous Greeks, Theta (time decay) this week, but I've got to put it on hold for a week due to what I think are a couple of really interesting reader questions. Usually I just answer these individually, but I think both of these questions will be beneficial to all. The best part is the fact that both questions came from the same reader! So let's dive right in, shall we? Just so everyone knows what to expect, the first question has two parts, just like those standardized tests we took in school. Taking literary license, I've broken up the question into its parts so that we can cover each issue in turn. BACKGROUND "Mark, When one company buys another would you please explain what happens to the options and what strategies may be more applicable after an announced purchase. For example: In the biotechnology area MLNM bought CORR, MEDI bought AVIR, and AMGN bought IMNX. The AMGN-IMNX offer has not closed yet and the offer to IMNX owners is 0.44*(closing share price AMGN) plus $4.50 per share. Today AMGN closed at 56.37 and IMNX closed at 28.04. When I do the multiplication I get 0.44 times 56.37 = 24.03. Adding that number to 4.50 = 29.30. The difference between the offered price to IMNX owners and the closing price of IMNX is (29.30 - 28.04)= 1.26. So IMNX is trading 1.26 less than the offering price." Q&A Q1: "I guess the market assigned the risk that the deal does not go through as this price? Do you have an explanation?" A1: Absolutely correct. The difference between the theoretical price of the company that is being acquired and the actual price on any given day is the "risk premium" that the market has assigned to the possibility that the merger will fail to go through. Since the stock price of the company doing the acquiring normally drops following the announcement and the price of the acquired company normally rises, if the deal were to fall through, this effect would likely be reversed. With a breakdown in the merger (for whatever reasons) the price of the acquirer will likely rise and the acquired will drop. This is the net result of the acquiring company paying a premium for their acquisition, which will likely be dilutive to earnings in the near term. So naturally, if the deal fell apart, that dilutive effect would be reversed. Q2: "Since we do not know the exact date of the approval of the purchase (clearing regulatory agencies, etc.) one can sell options for January 2003 or 2004 that will expire worthless long before these dates with a company purchase. Is this an example where the option seller has an additional edge as this is not typically one of the factors in the option calculations (unless there is less volatility because of the company purchase?). Would you please comment on my thinking and let me know whether I am misunderstanding something or whether one can really sell a Jan 2004 that will expire within 6 months." A2: Ah, now I see where you're going...I'm sorry to say that there are two erroneous conclusions there. If I understand the question correctly (and I think I do), my reader is under the mistaken impression that once the acquisition is completed, any options on the acquired company will be wiped out. Not so. While the acquired company's stock and underlying options will no longer trade, they are simply converted to new symbols at the closing prices as of the date that the acquisition is completed. So if the acquisition was completed with AMGN trading at $60, all the IMNX shares would be converted to AMGN shares at the 0.44 ratio plus $4.50, or $30.90. That means that 100 shares of IMNX would convert to 44 shares of AMGN at $60 and the shareholder would be paid the $4.50 per share in the form of a dividend. The issue of the options is a little stickier, as the actual conversion involves a change in the option symbol (and strike) and is usually determined by the listing exchange, usually the CBOE. Normally, the options on the acquired company are converted to options on the acquiring company with a different strike price; in this case, any outstanding options on IMNX would be converted to AMGN options at a different strike price (at a ratio close to the 0.44, taking into account the $4.50 cash dividend). This is a highly individualized conversion process, and if you are holding options on a company that is going to be acquired, you'll want to check with the listing exchange to see how they will convert and what the new option symbols will be. But the important point is that the options DO NOT cease to exist. They just change, based on the acquisition. I mentioned above that there were two misconceptions. The other one is that the stocks will continue to trade near their current value all the way through the completion of the acquisition. While this may in fact be true, external events could act to dramatically change the price of BOTH stocks. Negative news relating to any drugs under development could crater both stocks. Remember Imclone Systems (NASDAQ:IMCL)? The company was set to be acquired by Bristol Myers (NYSE:BMY) before news of IMCL's FDA rejection of its ERBITUX license application. IMCL shares are more than 75% off of their early December highs due to that very negative development, while BMY has dropped more than 20%. The point here is that just because an acquisition value is set and the 2 stocks are trading at a given ratio to one another, it doesn't mean that there can't be substantial changes to that relationship. In late October, when the planned acquisition was announced, IMCL was trading at roughly 1.1 times the price of BMY. Now three months later, IMCL is trading at just 0.36 times the price of BMY. This effect could work the other way too, especially with the volatile Biotechs. If the company being acquired were to announce the discovery of a cure for cancer, it is a safe bet that both stocks would then trade substantially higher. Initiating an option trade on the expectation that the stocks of 2 companies engaged in the acquisition process will remain near current values right up through the completion of the deal is an exercise in flawed logic. Both stocks could fluctuate wildly in the intervening time, based on factors totally unrelated to the proposed acquisition. All right, hopefully that clears up that issue. Now let's move on to my reader's final question. Q3: "One other totally different question. When one sees an option transaction of 31,400 contracts on a contract that rarely has this type of volume what's going on? Look at OPWV. The March 5 Put contract traded 31,400 contracts today (UGE-OA). It typically does not trade like Intel contracts. There appears to be no spread involved." A3: Sure enough, that option saw some huge volume on Monday. Looking at my chart of the option, I can see that the heavy put option activity began last Wednesday, and clearly somebody has been buying this contract with wild abandon for the past 6 sessions -- total volume in that time is in excess of 72,000 contracts, as open interest has surged to a whopping 65,000 contracts. Adjacent strikes have open interest measured in the 0-300 contract range. There does not appear to be any corresponding interest on the call side of the equation or in other expiration months, so this is interesting. Unfortunately that is all we can infer from this option activity. Somebody is buying A LOT of the $5 puts for the March expiration cycle, and it is apparently not a part of a spread or straddle combination position. The problem is that we don't know WHY such a large volume of options is being purchased (or sold). It could be pure, unbridled speculation or it could be somebody hedging a large equity position on fears that the stock may be going to $0. We just don't know. We could even be looking at a trader (or multiple traders) that think the stock doesn't go any lower and they are selling naked puts to take in the premium. But given the bearish stock chart and the fact that the option has been increasing in price, and the fact that there is such a small premium being collected ($0.20-0.40), I don't think that is the case. My bet is that it is a hedge of an existing stock position, but again, we just don't know. Watching block trades of options on individual equities does not provide the same high-odds trade filter that Austin employs in the SPX option market, where he can use large ITM block trades to tell him where the smart money is going in the SPX market, but that filter doesn't necessarily work so well in equity land. Watching for unusual option volume tells us that SOMETHING is up, but most of the time we have no way to determine what trades are being implemented or for what reason. I hope that helps to clear things up, rather than add to the confusion. I love getting questions like this, as it tells me that readers are thinking outside the box and looking for unusual developments and trying to learn from them. That's the process that helps each of us along the path towards trading success. Keep it up guys! Next week, I promise we'll get back to our discussion of the Greeks, picking up with Theta, or time decay. In the meantime, keep those great questions coming! Mark ************************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 ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** IS Swing Trade Model: Wednesday 2/06/2002 Solid Gains Today News & Notes: ------------ From last night's Summation: "Indexes got pretty noisy today on several rally attempts. Regardless, it still looks as if general price action will continue to chop its way lower from here. We track open put plays into Wednesday's action with trailed stops at or below entry levels and expect favorable action from there." And favorable action it was. After just missing our stop-loss prices by fractions of a point, index levels promptly reversed and dove deep in our favor from there. Trailed stops were taken out towards low levels of the day for DJX, OEX and SPX while the QQQ play remains alive & well. Featured Markets: ---------------- [60/30-Min Chart: OEX] The OEX has wedged itself up once again and appears poised to break lower once more. The ideal entry was near 552.00 as depicted in tonight's Market Wrap, but a break below 549 should work as well. [60/30-Min Chart: SPX] Same for the SPX, as usual. Short the break below 1083 if the index doesn't take a large gap-down at the open [60/30-Min Chart: QQQ] If the QQQ breaks below 36.00 on Thursday it looks good for another point from there as well. Summation: --------- Indexes are getting choppy right now and entry points need to be crisp & defined. We have new triggers listed for those who are flat, but only if the markets don't open Thursday on a large gap- down move. It's tough to place a specific value on that, as a slight gap-down could be tradable. There is no black & white rule to give in here, but I'd say greater than –2.00 SPX index points or –1.00 OEX index point below listed triggers would be excessive slippage. Better to short a failed pop instead of gapped drop right now during volatile times the past two sessions and possibly more. 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: 36 (QQQ-NJ) Feb Puts: 96 (DJV-NR) Long: BREAK BELOW 36.00 Long: BREAK BELOW 96.50 Stop: Break Above 37.00 Stop: Break Above 97.25 ===== 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: 540 (OEB-NH) Feb Puts: 1075 (SPQ-NO) Long: BREAK BELOW 549.00 Long: BREAK BELOW 1083.00 Stop: Break Above 552.50 Stop: Break Above 1090.00 Open Plays: ---------- Feb Puts: 37 (QQQ-NK) Feb Puts: 97 (DJV-NS) Long: BREAK BELOW 37.00 Long: BREAK BELOW 97.50 Stop: Break Above 36.00 Stop: Break Above 96.50 [hit] Feb Puts: 550 (OEB-NJ) Feb Puts: 1100 (SPQ-NO) Long: BREAK BELOW 557.00 Long: BREAK BELOW 1098.00 Stop: Break Above 550.00 [hit] Stop: Break Above 1083.00 [hit] IS Position Trade Model: Wednesday 2/06/2002 Poised For Another Drop? News & Notes: ------------ We have listed the major indexes for Feb put plays tracked from Thursday until next week at expiration or solid gains ahead, whichever comes first. Featured Plays: -------------- As depicted in Swing Trade Gameplan Summation: --------- No stops will be used: we are tracking the exact dollar amount of option contracts one would risk the entire purchase amount on. If/when gains accrue we will switch to a stop-loss approach from there. If they lose right from the open, no harm done as loss is totally quantified at the start. 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: ---------------- Feb Puts: 36 (QQQ-NJ) Feb Puts: 96 (DJV-NR) Long: BREAK BELOW 36.00 Long: BREAK BELOW 96.50 Stop: 100% risk-loss capital Stop: 100% risk-loss capital Feb Puts: 540 (OEB-NH) Feb Puts: 1075 (SPQ-NO) Long: BREAK BELOW 549.00 Long: BREAK BELOW 1083.00 Stop: 100% risk-loss capital Stop: 100% risk-loss capital Open Plays: ---------- None Sector Share Trade Model: Wednesday 2/06/2002 Weakening Still News & Notes: ------------ We continue to track short share plays on every bounce the market offers before another leg down resumes. Hard to say how much longer this incredibly predictable trend will last, but savor it while we can! Featured Plays: -------------- None Summation: --------- Tracking a slew of short share plays across various sectors and long-term charts still appear favorable from here. Trade Management: ---------------- Entry triggers are points where plays are tracked when price action breaks above for calls or below for puts. Stops are the exact opposite of that. Sell targets are points to exit based on index levels or %gain on share price as noted. No entry targets listed mean the model is idle at that time. * Asterisk means stop-loss level changed since prior posting New Play Targets: ---------------- None Open Short Plays: ---------------- HHH Internet HOLDR Short: BREAK BELOW 34.00 Stop: Break Above 29.00 * SWH Software HOLDR Short: BREAK BELOW 45.50 Stop: Break Above 42.50 * IYV U.S. Internet Short: BREAK BELOW 13.75 Stop: Break Above 12.00 * 02/06 XLV U.S. Cyclical/Transport Short: BREAK BELOW 28.50 Stop: Break Above 29.50 SMH Semi-Conductor HOLDR Short: BREAK BELOW 43.50 Stop: Break Above 45.75 UTH Utilities HOLDR Short: BREAK BELOW 84.50 Stop: Break Above 87.00 RTH Retail HOLDR Short: BREAK BELOW 96.40 Stop: Break Above 99.50 RKH Regional Banks HOLDR Short: BREAK BELOW 106.90 Stop: Break Above 110.00 IDU Dow Jones U.S. Utilities Short: BREAK BELOW 60.00 Stop: Break Above 62.50 IYF Dow Jones U.S. Financials Short: BREAK BELOW 74.50 Stop: Break Above 77.50 IYR Dow Jones U.S. Real Estate Short: BREAK BELOW 80.00 Stop: Break Above 82.50 IJJ Mid-Cap 400 BARRA SPDRs Short: BREAK BELOW 88.20 Stop: Break Above 91.00 IJK Mid-Cap 400 BARRA Growth Index Short: BREAK BELOW 88.20 Stop: Break Above 91.00 MDY Mid-Cap SPDRs Short: BREAK BELOW 90.00 Stop: Break Above 93.00 Open Long Plays: --------------- BBH Biotech HOLDR Long: BREAK ABOVE 120.00 Stop: Break below 116.00 PPH Pharmaceutical HOLDR Long: BREAK ABOVE 97.00 Stop: Break below 94.00 IYH Dow Jones U.S. Healthcare Long: BREAK ABOVE 60.90 Stop: Break below 59.00 XLP Consumer Staples Long: BREAK ABOVE 25.30 Stop: Break below 24.75 * ************************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. 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The Option Investor Newsletter Wednesday 02-06-2002 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** STOP-LOSS UPDATES ***************** AT - put Adjust from $56 down to $54.85 VRSN - put Adjust from $31 down to $26.50 ************* DROPPED CALLS ************* RATL $21.53 -0.71 (-2.19) RATL was trading weak due to the broader technology sector early today, but fell under dramatic volatility when rumors arose that the company's financials were in question. The talk caused a steep drop in shares on extremely heavy trade. The stock traded down to its 200-dma before staging an incredible intraday rebound. Not by surprise, we're dropping the play in light of the swing today. Not to mention that the stock closed below our stop. ************ DROPPED PUTS ************ None ************************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 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** AGN - Allergan $65.78 -1.05 (-3.14 this 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. Most Recent Update AGN was knocked down in yesterday's session based on the broader weakness in the biotech and pharmaceutical sectors. The Elan (NYSE:ELN) news added to AGN's weakness. The stock traded as low as $62.75 in yesterday's session on significant volume. Trading activity was also heavy in today's session, when Banc of America upgraded AGN. The firm said that it liked the prospects for its spin-off the medical device business that we've been writing about. AGN retraced the majority of its sell-off from Monday, but slipped lower in the last hour of trading today. We're looking for the stock to head lower and retest its low from Monday sometime later this week. Traders can look for entries at current levels with weakness in the Drug Sector (DRG.X). Comments AGN retraced Tuesday's rebound during today's session. Volume remained active during the stock's 1.57% drop. Continued pressure from the Drug Sector (DRG.X) should pressure AGN lower in tomorrow's session. Watch for the DRG.X to break below 368 and confirm weakness in AGN with a trade below $64. ***February contracts expire next week*** BUY PUT FEB-70*AGN-NN OI=1148 at $4.70 SL=3.25 BUY PUT FEB-65 AGN-NM OI=1399 at $1.40 SL=0.75 Average Daily Volume = 759 K ************************************************ BIG-CAP COVERED CALLS, NAKED PUTS & COMBINATIONS ************************************************ Stocks Struggle Yet Another Day by Ray Cummins The major equity averages fought diligently to limit losses today in the wake of continued selling pressure in almost every market segment. The Dow Jones Industrial Average was among the better performers, down only 32 points on strength in defensive issues such as Alcoa (NYSE:AA), Boeing (NYSE:BA), Honeywell (NYSE:HON), and United Technologies (NYSE:UTX). Leading the downside activity were AT&T (NYSE:T), American Express (NYSE:AXP), Intel (NASDAQ:INTC), Hewlett-Packard (NYSE:HWP) and SBC Communications (NYSE:SBC). In technology trading, shares of computer software stocks slid lower after some unexpected news from Moody's Investors Service on the outlook for Computer Associates (NYSE:CA). The popular software maker fell more than 10% despite a reaffirmation of its quarterly financial targets when Moody's announced it planned to review the company's debt rating. The news affected a number of bellwether stocks in the software industry and weighed heavily on the NASDAQ. On the bright side, networking behemoth Cisco Systems (NASDAQ:CSCO) announced that its fiscal second-quarter results would exceed the current consensus estimate in both earnings-per-share and revenue. The company also told analysts that booked orders for the quarter ending January amounted to $3.9 billion, slightly above its target of $3.75 billion. In the broader market, investors continued to unload airline, biotechnology, financial, drug and retail stocks while oil, oil service and natural gas issues saw limited buying pressure. Gold stocks also remained volatile throughout the day as traders moved in and out of the defensive group in reaction to the broader market's gyrations. Analysts say the best investors can hope for is a short-term bounce off of "oversold" levels but there is no reason to expect any substantial upside to develop in the coming weeks. That's sobering news for those who thought the bottom was established last October. *************** Summary of Current Positions (as of 02-05-2002): *************** Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield SEBL FEB 27.5 25.25 33.70 2.25 6.0% MU FEB 32.5 30.04 34.45 2.46 5.5% MRVL FEB 32.5 30.36 37.68 2.14 4.8% WGO FEB 40 37.57 39.35 1.78 4.6% *** Micron Technology's (NYSE:MU) recent bearish activity ended with a technical rebound near the current support area (at $30), so long-term investors are once again in a relatively safe position. However, a move below $32 (the 30-dma) should be considered an initial indication of a new downward trend. Winnebago's (NYSE:WGO) close below a recent support area suggests a new downtrend may be underway. Conservative investors should consider exiting the position to lock-in profits or limit future losses. Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield ACDO FEB 40 39.10 54.97 0.90 6.5% EMLX FEB 35 33.85 42.36 1.15 8.8% MRVL FEB 30 29.35 37.68 0.65 6.0% SYMC FEB 30 29.45 36.09 0.55 5.1% SEBL FEB 27.5 26.65 33.70 0.85 8.8% BRKS FEB 40 39.15 46.30 0.85 6.0% ACDO FEB 40 39.50 54.97 0.50 4.6% WGO FEB 35 34.50 39.35 0.50 4.3% SEBL FEB 27.5 26.95 33.70 0.55 9.3% MRVL FEB 32.5 32.10 37.68 0.40 5.7% INVN FEB 30 29.20 43.52 0.80 16.6% INVN MAR 25 24.20 43.52 0.80 7.2% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield AMAT FEB 50 50.50 44.44 0.50 5.6% KLAC FEB 60 60.60 57.81 0.60 5.5% *** QLGC FEB 65 65.65 46.18 0.65 6.0% ADI FEB 50 50.45 42.02 0.45 6.2% The semiconductor sector continues to perform very well, despite the selling pressure in the broad-market issues. Traders should watch for any activity (KLAC would be a good example, as it has reversed its recent downtrend) that challenges the near-term technical resistance in these issues and, if necessary, take action to limit losses or lock-in current profits. Debit Straddles: Stock Position Debit Target Value Gain Status QCOM FEB45C/45P 3.80 4.55 5.65 1.85 Open The Qualcomm (NASDAQ:QCOM) straddle was our big winner this week, providing up to a 50% gain on $3.80 invested in only 6 days. Index Credit Spreads: Stock Pick Last Position Credit C/B G/L Status SII 55.12 53.30 FEB40P/45P 0.65 44.35 0.65 Open THC 62.10 64.85 FEB55P/60P 0.80 59.20 0.80 Open TRI 31.50 31.90 FEB25P/30P 0.60 29.40 0.60 Open UNH 73.00 75.00 FEB65P/70P 0.65 69.35 0.65 Open WLP 125.16 127.84 F110P/115P 0.55 114.45 0.55 Open AT 56.70 54.41 FEB65C/60C 0.60 60.60 0.60 Open MMM 103.47 108.68 F120C/115C 0.65 115.65 0.65 Open HSIC 43.26 44.42 FEB35P/40P 0.40 34.60 0.40 Open KSWS 37.38 37.09 FEB30P/35P 0.75 34.25 0.70 Open GNSS 58.68 53.73 FEB75C/70C 0.50 70.50 0.50 Open FIC 55.75 59.60 FEB45P/50P 0.40 49.60 0.40 Open NOC 106.81 108.08 FE95P/100P 0.50 99.50 0.50 Open ROOM 54.72 51.04 FEB45P/50P 0.60 49.40 0.60 Open Hotel Reservations Network (NASDAQ:ROOM) is now in a period of (expected) consolidation after the recent rally. However, a move below the sold strike at $50 would be an indication of further downside activity, thus suggesting an early exit or adjustment in the position. A transition to the MAR-$45 strike is a viable adjustment, due to the recent support at that price range. Positions Closed: Banc Of America (NYSE:BAC) rallied for two days after our exit recommendation, allowing traders close or adjust the position with a favorable (low cost/risk) outcome. Index Credit Spreads: Stock Pick Last Position Credit C/B G/L Status XAU 58.07 67.83 FEB50P/55P 0.85 54.15 0.80 Open PPH 98.60 95.70 FEB90P/95P 0.45 94.55 0.45 Open The Pharmaceutical Holdrs Trust (AMEX:PPH) is still above the sold strike in our bullish position and with the relatively oversold market conditions, there is potential for a technical bounce in the coming sessions. However, traders should consider any further downside activity as an early-exit/adjustment signal. Synthetic Positions: Stock Pick Last Position Credit C/B G/L Status DGX 71.40 69.60 FEB85C/60P 0.10 59.90 0.20 Open WMT 59.86 58.80 MAR65C/55P 0.25 54.75 0.20 Open The bullish position in Merrill Lynch (NYSE:MER) was closed when the issue moved through near-term support (and its 30-dma) at $53. Credit-Spread Strangles: Stock Pick Last Position Credit C/B G/L Status OEX 589.62 552.38 FEB640C/630C 0.80 630.80 0.80 Open OEX 589.62 552.38 FEB530P/540P 0.70 539.30 0.70 Open BBH 127.58 117.24 FEB145C/140C 0.50 140.50 0.50 Open BBH 127.58 117.24 FEB100P/115P 0.55 114.45 0.55 Closed The bullish position in the Biotechnology Holdrs Trust (AMEX:BBH) was closed to protect profits and/or limit future losses. New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations Semiconductor and chip-equipment stocks have been among the few resilient technology groups during the recent market slump and one of our readers suggested that we offer some candidates in those sectors for traders who want to speculate on a rebound in the NASDAQ. All of these issues are excellent candidates in the "premium-selling" category of options trading and each position meets our fundamental criteria for profitable naked-puts. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. *************** KLAC - KLA Tencor $58.90 *** On The Rebound! *** KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's large portfolio of products, software, analysis, services and expertise is designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to the company for in-line wafer defect monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer overlay; film and surface measurement; and overall yield and fab-wide data analysis. KLAC has been "on the rebound" in recent sessions and the buying pressure in the issue, amid the broad-market sell-off, suggests further upside potential. In addition, KLAC is once again near a 52-week high and the long-term technical trend is favorable. The premiums in these options provide excellent reward potential at the risk of owning the issue at an acceptable cost basis. KLAC - KLA Tencor $58.90 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT MAR 45 KCQ OI 1,622 0.70 44.30 4.6% "TS" SELL PUT MAR 50 KCQ OJ 2,051 1.45 48.55 7.4% *** SELL PUT MAR 55 KCQ OK 1,681 2.75 52.25 10.1% *************** MU - Micron Technology $36.69 *** Chip Sector Favorite! *** Micron Technology (NYSE:MU) and its subsidiaries are principally engaged in the design, development, manufacturing and marketing of semiconductor memory products. The company offers products that include dynamic random access memory, synchronous dynamic random access memory, double data rate dynamic access memory, legacy dynamic random access memory products, static random access memory products and Flash products. Dynamic random access memory (DRAM) is the Company's primary semiconductor memory product. DRAMs are high-density, low-cost-per-bit, random access memory components that store digital information and provide high-speed storage and retrieval of data and DRAMs are a widely used semiconductor memory component in computer systems. DRAM sales represented approximately 87%, 94% and 95% of the company's net sales in 2001, 2000 and 1999, respectively. Micron has been a popular position in our portfolio over the past few weeks and the recent recovery in the company's share value has brought it back in favor with technology investors. The current technical outlook for Micron is bullish and our target position offers an excellent way to participate in the future movement of the issue with relatively low risk. MU - Micron Technology $36.69 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT MAR 27.5 MU OR 884 0.40 27.10 4.2% "TS" SELL PUT MAR 30 MU OF 6,572 0.80 29.20 7.5% *** SELL PUT MAR 32.5 MU OS 956 1.30 31.20 9.1% *************** NVDA - Nvidia $62.02 *** The Best Graphics Chips! *** Nvidia (NASDAQ:NVDA) designs, develops and markets unique graphics processors and related software for personal computers and digital entertainment platforms. Nvidia provides a "top-to-bottom" family of performance graphics processors and graphics processing units that has set the standard for performance, quality and features for a broad range of desktop PCs, from professional workstations to low-cost PCs, and mobile PCs, to performance laptops. Nvidia is one of the top companies in the Specialty Semiconductor group and among our readers, it is also a popular portfolio issue. The fundamental outlook for the company is excellent and the chip sector will likely be a top performer in the technology segment in the coming year; both factors that lead us to a bullish outlook for the issue. NVDA - Nvidia $62.02 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT MAR 45 RVU OI 1,610 0.70 44.30 4.4% "TS" SELL PUT MAR 47.5 RVU OW 286 1.05 46.45 6.4% *** SELL PUT MAR 50 RVU OJ 4,148 1.45 48.55 8.4% *************** CYMI - Cymer $41.37 *** Earnings Rally! *** Cymer (NASDAQ:CYMI is a supplier of excimer laser illumination sources, the essential light source for deep ultraviolet (DUV) photolithography systems used in the building of semiconductors. DUV lithography is a key enabling technology, which has allowed the semiconductor industry to meet the exacting specifications and manufacturing requirements for volume production of today's most advanced semiconductor chips. Cymer's lasers are used in step-and-repeat and step-and-scan photolithography systems for the manufacture of semiconductors with critical feature sizes below 0.35 microns. Cymer believes its excimer lasers constitute a substantial majority of all excimer lasers incorporated in DUV photolithography tools. Cymer's various products consist of photolithography light sources, replacement parts and service. There was not quite enough "premium" in the CYMI options to offer multiple naked-put positions, however the issue rallied today after the company announced favorable earnings and we believe it deserves consideration for a bullish position. CYMI - Cymer $41.37 PLAY (conservative - bullish/credit spread): BUY PUT MAR-30 CQG-OF OI=41 A=$0.40 SELL PUT MAR-35 CQG-OG OI=152 B=$1.10 INITIAL NET CREDIT TARGET=$0.75-$0.80 PROFIT(max)=17% *************** Credit Spreads Traders who are interested in more conservative plays should consider these limited-risk positions on issues in the major drug, healthcare and defense industries. All of these positions are based on the current price or trading range of the underlying issue and its recent technical trend. The probability of profit in these positions may also be higher than other plays in the same strategy based on disparities in option pricing. However, current news and market sentiment will have an effect on these issues so review each play carefully and make your own decision about the future outcome of the position. *************** AZN - AstraZeneca $47.60 *** Solid Earnings! *** AstraZeneca PLC (NYSE:AZN) is a pharmaceutical company that provides products to fight disease in important areas of medical need. The company focuses on seven major therapeutic areas: cancer (oncology); cardiovascular; central nervous system; gastrointestinal; infection; pain control and anesthesia, and respiratory. The company's non-pharmaceutical businesses are Astra Tech, Salick Health Care, and Cellmark Diagnostics. Astra Tech develops and markets advanced medical devices and implants, focusing primarily on urology, surgery, dental implants and diagnostic imaging. SHC provides a broad range of services to health insurers, oncologists, other specialists and their patients in the U.S., principally in the diagnosis and treatment of cancer and the treatment of kidney failure. Cellmark Diagnostics is engaged in DNA fingerprinting outside the U.S. AZN - AstraZeneca $47.60 PLAY (very conservative - bullish/credit spread): BUY PUT MAR-40 AZN-OH OI=0 A=$0.25 SELL PUT MAR-45 AZN-OI OI=104 B=$0.60 INITIAL NET CREDIT TARGET=$0.45-$0.50 PROFIT(max)=9% Investors should target a higher premium in this position to allow for some consolidation in the underlying issue and increase the overall return on investment. *************** PG - Procter & Gamble $82.50 *** The Ultimate Safety Stock! *** The Procter & Gamble Company (NYSE:PG) manufactures and markets a broad range of consumer products in many countries throughout the world. The company categorizes its business operations as follows: Baby Care, Beauty Care, Fabric and Home Care, Feminine Care, Food and Beverage, Health Care, and Tissues and Towel. In November 2001, the company acquired Clairol, a manufacturer of hair color and hair care products, from Bristol-Myers Squibb. PG - Procter & Gamble $82.50 PLAY (moderately aggressive - bullish/credit spread): BUY PUT MAR-75 PG-OO OI=684 A=$0.45 SELL PUT MAR-80 PG-OP OI=2466 B=$1.35 INITIAL NET CREDIT TARGET=$1.00-$1.10 PROFIT(max)=25% *************** NOC - Northrop Grumman $109.32 *** Hot Sector! *** Northrop Grumman Systems (NYSE:NOC) is a global aerospace and defense company. The company provides technologically advanced products, services and solutions in defense and commercial electronics, systems integration, information technology and non-nuclear shipbuilding and systems to United States and international military, government and commercial customers. The company acquired Litton Industries, making Litton a 97%-owned subsidiary of Northrop Grumman. Litton designs, builds and also overhauls non-nuclear surface ships and provides defense and commercial electronics technology, components and materials. In January 2002, the company acquired Newport News Shipbuilding. Newport News Shipbuilding is engaged in the design, construction, repair, overhaul and refueling of nuclear-powered submarines and aircraft carriers for the United States Navy. NOC - Northrop Grumman $109.32 PLAY (moderately aggressive - bullish/credit spread): BUY PUT MAR-95 NOC-OS OI=184 A=$0.85 SELL PUT MAR-100 NOC-OT OI=198 B=$1.55 INITIAL NET CREDIT TARGET=$0.80-$0.90 PROFIT(max)=19% *************** TGH - Trigon Healthcare $77.00 *** Pre-Earnings Rally! *** Trigon Healthcare (NYSE:TGH) through its subsidiaries, is a managed healthcare company in Virginia, serving over two million customers 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 company's 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 programs segment includes the Federal Employee Program, which is the company's largest customer. All of the investment portfolios of the consolidated subsidiaries are managed and evaluated collectively within the investment segment. The company's other health-related business, including disease management programs, third-party administration for medical and workers compensation, health promotions and similar products, is reflected in an "all other" category. The company's quarterly earnings are due on February 8, 2002. TGH - Trigon Healthcare $77.00 PLAY (very conservative - bullish/credit spread): BUY PUT MAR-65 TGH-OM OI=5 A=$0.35 SELL PUT MAR-70 TGH-ON OI=0 B=$0.70 INITIAL NET CREDIT TARGET=$0.45-$0.50 PROFIT(max)=9% Investors should target a higher premium in this position to allow for some consolidation in the underlying issue and increase the overall return on investment. *************** BEARISH PLAYS - Naked Calls & Combinations *************** VRTS - Veritas $36.20 *** Sector Sell-Off! *** Veritas Software (NASDAQ:VRTS) is a supplier of data availability software products. Its unique products are designed to enable continuous productivity for computing environments ranging from desktop computers to the large enterprise data center, including storage area networks. The company offers a wide range of data availability software products to manage the growth of available data and increasing complexity and size of networked environments that its customers face. Its products allow businesses to improve the management of their data, to protect their data and increase the availability of their data. Veritas develops products for operating systems, including versions of UNIX, Windows NT and Linux. Its software solutions are used by customers across a wide range of industries, including many global corporations and other e-commerce businesses. The company also provides a full range of services to assist its customers in planning and implementing their data availability solutions. Veritas is recognized as one of the leading independent storage software companies in the industry but recent comments by the CEO at a Goldman Sachs conference and today's negative news concerning Computer Associates (NYSE:CA) have conspired against its share value. The broad-market sell-off pushed the issue into a sharp downward trend and traders who agree that the near-term outlook is less than favorable can use these positions to speculate on the stock's future activity. VRTS - Veritas $36.20 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL MAR 45 VIV CI 2,039 0.80 45.80 8.2% *** SELL CALL MAR 40 VIV CH 530 1.95 41.95 12.7% *************** BVF - Biovail $42.05 *** Technicals Only! *** Biovail Corporation (NYSE:BVF) is an international, integrated pharmaceutical company with capabilities in the development, manufacture, sale and marketing of branded pharmaceutical products. Building on its strengths in the development of drugs using advanced controlled-release and FlashDose technologies, its primary business strategy is to expand its sales and marketing presence in the U.S. and Canada to support the commercialization of its product development pipeline, which the company intends to complement by the acquisition of established pharmaceutical products and the in-licensing, from third parties, of products in earlier stages of development. The company seeks to capitalize on opportunities in the pharmaceutical industry arising from consolidation initiatives being undertaken by larger companies in the industry. The company also intends to pursue acquisitions that will add to its product offerings, product pipeline or sales and marketing capability. This play is simply based on the current price or trading range of the underlying stock and its recent technical history. The near-term BVF price trend is bearish and reflects a pronounced negative divergence from an intermediate-period moving average. In addition, the decline has come on increasing volume and a recent support level near $45-$46 has been violated. With the previous trading range near $47, and the overhead supply at $52, the share value has little chance of moving above our sold strike price in the coming month. BVF - Biovail $42.05 PLAY (conservative - bearish/credit spread): BUY CALL MAR-55 BVF-CK OI=229 A=$0.25 SELL CALL MAR-50 BVF-CJ OI=896 B=$0.75 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% *************** WHR - Whirlpool $65.50 *** Bad News On A Bad Day! *** Whirlpool Corporation (NYSE:WHR) is a worldwide manufacturer and marketer of major home appliances. The company manufactures in 13 countries under 11 major brand names, and markets products to distributors and retailers in more than 170 countries. Whirlpool manufactures and markets a full line of major appliances and related products, primarily for home use. Whirlpool's principal products are home laundry appliances, home refrigerators and freezers, home cooking appliances, home dishwashers, and room air-conditioning equipment, mixers and other small household appliances. The company also produces hermetic compressors and plastic components, mainly for the home appliance and electronics industries. Whirlpool was in the news today as rumors "whirled" around the company's recent quarterly report. The appliance maker posted earnings that claim to show dynamic "core" earnings growth but there are concerns about excluded "one-time" costs and charges that appear to affect the company's bottom-line performance. Regardless of the actual fundamental results, investors are not showing favor with the issue and the sell-off may be the beginning of a new bearish trend. Traders who agree with a negative outlook for WHR in the near-term can speculate on that activity with this limited-risk position. WHR - Whirlpool $65.50 PLAY (very speculative - bearish/credit spread): BUY CALL MAR-75 WHR-CO OI=209 A=$0.65 SELL CALL MAR-70 WHR-CN OI=343 B=$1.70 INITIAL NET CREDIT TARGET=$1.10-$1.20 PROFIT(max)=28% *************** SUPPLEMENTAL CREDIT-SPREAD CANDIDATES (Back By Popular Demand!) *************** BULLISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain BLL 79.74 MAR-75P 1.35 MAR-70P 0.50 0.90 21% FAST 69.81 MAR-65P 1.35 MAR-60P 0.55 0.80 19% HRB 46.95 MAR-45P 1.05 MAR-40P 0.30 0.80 19% LLL 103.93 MAR-95P 1.55 MAR-90P 0.90 0.70 16% SII 54.58 MAR-50P 1.25 MAR-45P 0.65 0.65 15% BEARISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain GS 81.90 MAR-90C 1.20 MAR-95C 0.60 0.65 15% ACS 90.26 MAR-100C 1.45 MAR-105C 0.90 0.60 14% THQI 40.06 MAR-50C 0.80 MAR-55C 0.30 0.55 12% GILD 62.48 MAR-75C 0.90 MAR-80C 0.40 0.55 12% THQI 40.06 MAR-50C 0.80 MAR-55C 0.30 0.55 12% ENZN 47.10 MAR-55C 0.70 MAR-60C 0.25 0.50 11% *************** INDEX-OPTION SPREADS *************** As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific industry group or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options and professional traders also employ index spreads in hedge strategies. We favor spreads on the S&P 500 index (SPX) and the S&P 100 index (OEX) for premium-selling plays and hedging. We also favor "out-of-the-money" credit spreads on the major sector indexes and other exchange-traded stock instruments such as HOLDRS (Holding Company Depositary Receipts), when the risk-reward outlook is acceptable. *************** OIH - Oil Service Holders Trust $56.65 *** Range-Bound? *** The Oil Service Holders Trust (AMEX:BBH) is a unique instrument that represents an investor’s ownership in the stock of specified companies in the biotechnology sector. HOLDRS allow investors to own a diversified group of stocks in a single investment that is highly transparent, liquid and efficient. Each HOLDR is a fixed basket of 20 stocks (except the Telebras HOLDR, which holds 12 companies). They work operate much like ADRs; American Depositary Receipts, which allow U.S. investors to purchase foreign-owned companies on the U.S. exchanges in dollar denominated amounts. In just the same way, the investor actually owns the shares of each underlying company, receives dividends, proxies, and annual reports from each. The HOLDRs are not managed, and once the companies and amounts have been determined they are fixed, no companies will be substituted. In this way, the HOLDRs differ somewhat from Spiders (SPDRs), or Standard & Poor Depositary Receipts and other exchange traded funds, which will add and delete stocks on a regular basis, usually in conjunction with an index that they are tracking. A complete description of this issue, including the companies that make up each HOLDRS' particular industry, sector or group can be found here: http://www.holdrs.com/holdrs/main/index.asp?Action=Definition Traders who participate in credit-spreads often utilize sector indexes as they provide an underlying instrument less prone to "gapping" moves and because the strategy profits if the index remains above a specific price range. From a technical viewpoint, the oil service segment of the oil industry is starting to show signs of a stable support near area $50-$52 and those who agree with a neutral to bullish outlook for this industry group can profit from that activity with this low-risk position. OIH - Oil Service Holders Trust $56.65 PLAY (conservative - bullish/credit spread): BUY PUT MAR-45 OIH-OI OI=0 A=$0.30 SELL PUT MAR-50 OIH-OJ OI=80 B=$0.85 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% *************** SEE DISCLAIMER ***************************** ************************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 ************************************************************** ************** TRADERS CORNER ************** PE ratios and Hope Buzz Lynn buzz@OptionInvestor.com PE ratios and hope. The two seem to go hand in hand. I was cruising through some old watch lists that I used over two years ago wondering if I might find some tradable nuggets. You know, some symbols I should have been watching but hadn't because I rarely used that particular list anymore. As Fundamentals Guy is prone to do, I got quite an education on a basic ratio, as I veered off course from my search. The ratio? Price to Earnings, often expressed as the PE ratio. While not exactly in search of funky numbers, I found a bunch of groupings with similarities - certain sectors with no earnings, some sectors with high PE', and some with low PE's that actually paid decent dividends. It was not just the numerical values that I found interesting, but also the consistency of some sectors, which lead me to the conclusion that the market is still overvalued by historical standards. How so? Well for starters, when I'm not trading, I tend to think of stocks as ownership interests in a going concern designed to produce a return for its owner. So instead of actually owning the neighborhood pizza parlor with $1 mln in sales that produces $100,000 net after ALL expenses at the end of the year, I have the opportunity to own one one-thousandth of one percent of Philip Morris (the parent of Tombstone Pizza) that represents about $1 mln of MO's nearly $90 bln in annual sales. My fractional net is about $90,000 annually, from which I will earn a dividend of $47,500. The balance is retained by the business as retained earnings and adds to the share price. While on the surface, that would appear to be less money than the actual pizza parlor, I don't have to work 12 hours per day, 6 days per week at MO to insure that income like I would at Godfather's. I also need not worry how I'll grow sales at roughly 10% annually with MO. Management handles that for me. In short, they can produce a "safer" return with much less effort than I can at my own pizza parlor, and the value of my fractional interest in MO is growing as a result. (Yes, tax benefits of owning your own business are great as are the other intangible benefits like sponsoring the little league team and enjoying community prestige in having made a difference in your neighborhood through your efforts. But this is about PE ratios.) But for comparison purposes, my pizza parlor would have a true PE of 10 if the market values the business at $1 mln based on $100,000 in net income available for distribution. The market values MO at a 12.9 PE for having $3.88 of net income for every $50 share. Nearly as good in my book as a pizza parlor and for much less effort. While PE is ratio expressed as the price of a stock divided by earnings, think of it also as an inverted rate of return. If we own a $100 stock that earns $1 per share, that's a PE of 100! It is also a meager 1% return on our money ($1 divided by $100). But in the case of MO with a PE of 12.9 (not trying to plug the stock here), $3.88 in earnings divided by $50 per share is a 7.76% return, and that's if the share price never grows. Those in the income property business will understand this because of the similar relationship of a rent multiple to a rate of capitalization. It too is an inverse relationship on a net basis. Of course, there are other companies out there that have sales, but also have expense far in excess that produce a consistent net loss. They have no E in which to compute a ratio! Therefore they have no PE ratio. Zero earnings. I can stomach that if doesn't become a bad habit. For instance if a major tire company gets nailed in a lawsuit. They'll still make tires with similar margins. Likewise with disclosing the write-off of a bad investment every once in a blue moon. I'll save the "abuse of one-time charges" speech tonight. There are also plenty of companies out there that have exorbitant PE ratios in the 100's or higher. I can't fathom buying a pizza parlor for $1 mln and earning a paltry $10,000 per year, or less, on that invested money. Why would anyone want to buy a fractional interest in any other business with the same return? Well, all that digested, here's what I found. Drug companies: Company PE ratio Merck 18.92 Pfizer 34.42 Shering Plough 24.48 Lilly 28.66 Glaxosmithkline 24.98 Ahem. . .Anybody overly excited about earning roughly 3.5% based on the PE ratios here? While these are fine companies that will cater to demographic sweet spot in years to come, that's already reflected in the price. Where is the upside? Nowhere that I can see. How about a few old favorites? Internet Companies: Company PE ratio Ariba N/A Commerce One N/A Tibco Software N/A Freemarket's Inc. N/A AOL/TimeWarner N/A Amazon N/A Yahoo! 225.29 E-Bay 170.31 Notice a pattern here? These companies were barely profitable in their heyday (if they even reached profitability). The only thing that can possibly be driving EBAY and YHOO is speculation since it will be a cold day in Hades when these two actually have real earnings to match their current stock price. No catalyst for upward movement that I can see. Maybe some retailers would look better? Let's take a look. Retail Companies: Company PE ratio Home Depot 31.46 Costco 35.05 Gap Stores 22.11 Target 30.68 Wal-Mart 40.72 Circuit City 41.94 Best Buy 34.59 Autozone 35.29 Wow! These are pretty pricey too reflecting investor's acceptance of a 2.5%-3.0% return at these PE's. Owners of these companies are betting on recovery that will justify these prices. But if the recovery is shallow or doesn't happen soon enough? No thanks. Here are more of my favorites (not!) in the communications/connectivity industry. Routers/switches Companies: Company PE ratio Cisco N/A (until today, now roughly 51 annualized) Juniper 27.02 Foundry 307.00 F5 Networks N/A Extreme Networks N/A Sycamore N/A Ciena N/A JDS Uniphase N/A Nortel N/A Corning N/A Lucent N/A CSCO is the soundest of them all and as of this evening trades at roughly 51 times annualized earnings - rich for a company that can offer no visibility past Q3 and only notes then that revenue growth will be "flat to low-single digit" sequentially. It doesn't appear that earnings are likely to rise enough to make the current price seem reasonable. Hmmm. . .conclusion? The price will fall or remain stagnant. Neither is a pleasant choice for those desiring to go long. Last, the stodgies. I like these, but think even they will get less expensive with time. Stodgy Companies: Company PE ratio Philip Morris 12.90 (with a 4.75% dividend yield, I like it) US Tobacco 11.53 (ditto with a 5.37% yield) ConAgra Foods 19.66 (3.86% yield) Cemex 6.83 (3.82% yield) WD-40 Co. 22.07 (3.93% yield) By no means am I offering a "Buy" rating on any of these, but they are interesting given their yields and ability to produce an income for their owners. Consumer goods like Gillette, Proctor and Gamble, and Clorox are interesting too. But with PE's pushing 30, I think they too are overpriced, and major economic recovery isn't going to improve the sale of deodorant or bleach that much. There you have it. Bargains are still few an far between given a company's ability to produce a return for its owners. Even with economic recovery and earnings growth in any of the above, prices will only then approach "reasonable" based on business values. A better deal exists in your own well-located pizza parlor with few exceptions. Thus, I refrain from going long for the "long-term" anytime soon. Even at current levels, the values still are not there. But that leaves plenty of fodder for shorting! See you tomorrow in another installment of Milking Q-charts. ************ MARKET WATCH ************ We're sticking with what's been working. A strong health care and weak financial stock make their way onto the list To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/020602.asp ******************* 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. 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