The Option Investor Newsletter Sunday 02-10-2002 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 2-8 WE 2-1 WE 1-25 WE 1-18 DOW 9744.24 -163.02 9907.26 + 67.18 9840.08 + 68.23 -215.68 Nasdaq 1818.88 - 92.36 1911.24 - 26.46 1937.70 + 7.36 - 92.12 S&P-100 557.28 - 12.07 569.35 - 5.79 575.14 - .10 - 8.96 S&P-500 1096.22 - 25.98 1122.20 - 11.08 1133.28 + 5.70 - 18.02 W5000 10249.32 -240.85 10490.17 - 86.35 10576.52 + 67.16 -188.86 RUT 466.67 - 13.37 480.04 + .69 479.35 + 4.98 - 15.57 TRAN 2659.94 - 99.39 2759.33 - 20.59 2779.92 +112.67 - 39.52 VIX 25.47 + 2.60 22.87 + .94 21.93 - 2.41 + .36 VXN 49.28 + 6.20 43.08 - 2.59 45.67 - 3.22 + .52 TRIN .64 1.44 .82 1.13 TICK +957 +652 +885 +522 Put/Call .73 .67 .68 .85 ****************************************************************** Short Covering Rally Right on Queue by Jim Brown The five session losing streak was snapped when stocks rebounded from several high level news stories. The markets sold off again in the morning as rumors flew on Honeywell, Qualcomm and Global Crossing. Volume was light however and the gains only powered the averages right back to prior resistance levels. The Dow may have closed the day with a +118 point gain but it finished the week with a -163 point loss. The Nasdaq ended the week at 1818 with a -92 point loss for the week. Friday was another news driven day with rumors and accusations flying everywhere. Leading the list was Qualcomm, which fell to a new low after Maryland based Center for Financial Research and Analysis cited accounting irregularities and potential conflicts of interest between the board and auditors as well as family members working at the company. CFRA was responsible for wiping out nearly $3 billion in market cap at the lows of the day and all their complaints were really already known. The family members had been there for 15 years according to some commentators reports. The "revenue in exchange for non-cash consideration" claims amounted to only $30 million and was previously disclosed in their published accounting papers. The Qualcomm COO complained that they took old data out of context and attempted to create a news event to capitalize on the current accounting witch hunt. QCOM dropped from $40 to $34.60 on the initial report but rebounded to close at $37.46. Honeywell came under attack just before lunch after news broke that a verdict had been rendered in New York in an asbestos case against 36 companies. The jury award was $53 million and the Honeywell portion only $1.1 million. The stock dropped -$4.30 on the initial news even though Honeywell has $2 billion in insurance to cover potential claims. A clear case of investor fright and over reaction. HON recovered from the intraday dip to close down only -1.21. In other asbestos news the major automakers lost their bid to transfer thousands of nationwide cases into one case for ease of processing. Thirty-one companies had asked for some 15,000-20,000 cases to be combined but the District Court Judge ruled that he did not have jurisdiction to make the move. Whirlpool stock lost -$10 over the last two days after rumors of accounting problems were leaked. CEO David Whitwam said on Friday they know the source of the rumor and that it was malicious and they were considering legal action. This type of comment has been rampant over the last two weeks and nearly caused the worst week for the Dow since last September. Tyco, the accounting target of choice for the last week is fighting back. The CEO said on CNBC that they had no problems and no accounting issues. He said they had $4 billion cash in the bank which could grow to $5 billion by quarter end. The company has been the target of several aggressive attacks by short sellers and hedge funds. The stock has dropped from $60 to under $25 in just a month and we think the selling has been way over done. We are initiating TYC as a call play this weekend. Once institutions are convinced there are no problems this $40 billion company will be a buying target. Global Crossing was the target of the alphabet soup groups on Friday with the FBI and SEC announcing investigations of their accounting practices. It appears there is the possibility they deceived investors intentionally with accounting for some bandwidth swaps in the last several quarters. The way I understand it they would swap $100 million in bandwidth across their network for $100 million across other networks. They would book the $100 million as immediate income for the bandwidth they would receive but booked the identical bandwidth they were giving away over much longer periods. They did 13 of these swaps in order to meet earnings estimates on paper even though it was an even swap and no cash changed hands. (details are from news reports believed to be accurate) Their auditors, Arthur Anderson, blessed these "Lazy Susan" deals it appears. On a better note AOL has put together a string of gains for three whole days. The gains came on the news that Steve Case had purchased one million shares in the market in the $24 range bringing his total owned to around eleven million shares. In a prepared statement Case said he had been a net seller of AOL in the past in order to diversify his holdings but as of last week he became a buyer again based on the confidence he has in AOL and its growth prospects. I tried to get the OIN team to make AOL a call play this weekend but Eric was steadfast in his refusal. Even Jeff Bailey likes AOL on a pullback to $26. If AOL is up next week you can pick on Eric in the Market Monitor. If it is down, Jeff and I want you to forget this paragraph!! Dell was one of the few stocks not to participate in the end of day rally. The reason was a note from Lehman that the 4Q gains were really one time gains and not repeatable. Dan Niles thinks current estimates of 17 cents per share are too high. He also expects that guidance will be as much as $400 million below the fourth quarter or about $7.6 billion. He thinks there is a high likelihood Dell will forecast sequentially down revenue when they report on Feb-14th. Will Enron ever go away? With CEO Ken Lay scheduled to testify on Tuesday we will get to see trading come to a halt again as curiosity draws investors to live TV. What they will see is a "baked Lay" as the heat for the entire Enron debacle comes to bear on him. The lights, cameras and lack of action, unless you count watching him sweat, will be anticlimactic to the hype that has gone before. Does anybody really expect him to say anything important? Do they expect him to incriminate himself on national TV? I think they will take the opportunity to flog him verbally and try to win votes for the next election as opposed to actually get information they can use. That comes from real discovery and court proceedings not TV proceedings. If you left your PC/TV at 1:45 on Friday with the Dow at 9580 and heading down, you would have been really surprised to hear that the close was +164 points higher at nearly 9750. Same with the Nasdaq which was trading at 1772 but closed +46 points higher. This is the same Nasdaq that has been on a steep dive since entering February. Advances/decline ratios reversed to 2:1 positive for the first time in ages. So what happened? Multiple events caused the reversal. First the day started out flat to bullish as short sellers tried to decide which way the market was going. When the attacks on HON and QCOM came just before lunch the shorts smelled blood and piled on their positions. When both those companies and others came out and violently denied any problems the shorts got caught going the wrong way down a one way street. Immediately the volume picked up and 90% of it was up volume as those shorts scrambled to cover positions. Not only new positions but when faced with rising volume and sentiment, positions from the entire down week as well. I said Thursday we should expect short covering into the close but the news conditions accelerated this much more than I expected. It did not hurt that several tech stocks received bullish upgrades as well. SUNW, TXN received bullish comments. TQNT beat the street and raised its guidance. Corning said it will meet estimates and that the 1Q will be the bottom in the fiber sector. Even financials struggled back into the green after MER was upgraded to "strong buy" at CSFB. Euphoria, although the weakened version, was breaking out all over. However the $64 question is will it hold. When the markets were dropping like a rock all week it was on high volume. 1.7 bil on the NYSE and 2.0 bil on the Nasdaq. Friday's volume was much weaker at 1.3/1.7 bil respectively. It would have been much less without the HON/QCOM induced volatility. As such we cannot assume the trend has changed. The best example of support holding was the S&P with 1080 holding the line for the last three days. The low on Friday was 1079.91. Talk about a line in the sand! The S&P was probably responsible for the strength of the rally with heavy volume in the futures every time 1080 was hit. Also impacting the rally was the influx of 457 pension money which normally hits on the 10th of the month. Analysts suspect that hedge funds and floor traders were buying in anticipation of selling into this cash influx on Monday. In deciding what will happen next week we need to decide what is different. Corning called a bottom but after missing every call for the last two years are you going to believe them? Dell, AMAT, NTAP and NVDA will announce earnings and traders are likely to avoid those stocks/sectors until after the announcements. No help there. Biotechs rallied from an extreme oversold position with huge short covering gains. They are not likely to repeat this performance. IDPH +5.44, GENZ +4.19, SEPR +3.67, AFFX +3.63, CEPH +3.51, ENZN +3.26. In reality nothing really changed. Stocks are still counting on a 2H recovery that has not come. Accounting problems and suspicions are still with us and will be at the forefront of investors minds next week with the Ken Lay flogging. The economic calendar is light until Thr/Fri where the deck is stacked against us. The bottom line is nothing changed and nobody knows which way the market will move. With two months before the next earnings cycle there are likely more worries than positives. Many analysts are now saying that 1Q earnings could actually be worse than expected due to a drop in activity that began in late January. Great, just something else to worry about. As traders we need to play the trend until the trend changes. The trend as I see it is to watch for another bout of selling if the gains from Friday fail to carry through on Monday. The sell the rally crowd have got to be drooling with excitement after Friday's bounce. The S&P has resistance at 1100, the Dow at 9775. The Nasdaq has resistance at about every 20 point increment between here and 1960. There is no yellow brick road in front of the bulls. They will have to fight for every inch of ground they take. The road ahead is rocky and fraught with negative accounting news. Volume will be light as many traders will be focused on the testimony and the Olympics instead. However, light volume tended to work in the bulls favor on Friday. Despite what I said above about the possibility of another rally failure there is another scenario. The very strong short covering rally on Friday is a symptom of the underlying market. Short interest is very high and for good reason. Should a flood of 457 pension money hit the markets on Monday it could ignite another bout of covering which could ignite another bout, etc. Am I conjuring up too bullish a picture for you? We can dream can't we? The most positive event for me last week was the S&P holding support at 1080. I would venture a guess that if the S&P can break over 1125 again next week there would be a lot of bears deciding to change sides. 1140 would be the last real hurdle and decision point for the bears. I have painted both sides of the market Olympics above and just like the real Olympics starting this weekend we will not know who wins until the finish line is crossed. The lines we should cross as investors seem pretty clear cut today. I am changing them from past recommendations based on Friday's market action. I would go long above Dow 9775, Nasdaq 1870 and S&P 1100. Use those same levels as stops once long positions are open. Unfortunately these three levels may not coincide with each other. When in doubt use the S&P first, Nasdaq and then the Dow simply because of the number of stocks in each. If the markets move down from here I would go flat/short if the S&P breaks 1080 or the Nasdaq breaks 1775. Hope that is clear enough! Enter Very Passively, Exit Aggressively! Jim Brown Editor@OptionInvestor.com Have you tried the Market Monitor yet? http://www.OptionInvestor.com/itrader/marketbuzz/ ******************** INDEX TRADER SUMMARY ******************** Turning Tides? Austin Passamonte Selling all rallies has worked for six weeks and counting but that party may be nearing its end, as all good things eventually do. I think it might get a bit tougher to print money in the near term, as the picture begins to change. Disregarding Friday's short squeeze close, there is evidence that the indexes and sectors will soon begin a sustained push higher in the next few weeks. (Weekly/Daily Charts: BTK) First of all, we've noted for several visits now that tech looks closer to a bottom than the S&Ps and Dow. The Biotech index appears first in line to pop higher and soon. Today's rally was no surprise to OI readers as we've talked about this one plenty for a week. All longer-term chart signals are in the early stages of bullish reversal attempts. Price action has been wedging up in its weekly chart for years and just tested support successfully. First real congestion lies about 50 index points higher, but the BBH shares and call options should have more room to run. Stock players can comb the sector for strongest leaders and buy strength individually as well. Might be a tad early in this move, but downside is minimal compared to upside ahead. (Weekly/Daily Charts: SOX) The SOX is preparing itself for battle as well. Note how both chart's stochastic values are almost ready to turn bullish? A break above that weekly chart wedge would be one confirmation of upward action. I'd be tempted to go long the SOX or its strongest components if the lower wedge line (left chart) was touched once again and holds. Buying support early in the move is a far better idea. If the wedge breaks and price action moves higher, the best entry would come on a pullback to the upper wedge line as test of what is then support. (Daily Chart: BIX) Turning to the old economy, we still have some weakness issues. The BIX Banking index has held within its ascending channel at lower support from late September until this week. Stochastic values are turning bullish and higher prices would be expected, except weekly chart signals (not shown) remain weak to bearish. What does that mean when weekly chart stochastic values head one direction and daily charts oppose them? Usually sideways chop until both align in unison, from which the next strong directional trend resumes. (Weekly/Daily Charts: RXH) Morgan Stanley Healthcare Index (RXH) is also consolidating as well. Looks almost like Banking index in that weekly/daily chart signals diverge. Might be a little early to this bullish party too and I wouldn't be an aggressive long or short until both time frame charts agree. Held at gunpoint I would be long right now near support and short/flat if price action breaks below the wedge. (Daily Chart: SPX) Speaking of divergence, funny you should mention that! We have a case of bullish divergence building in various indexes and sectors. Note how the SPX (and host of others) posted far lower lows than last oversold extreme while oscillator failed to go lower? That tells us internal price strength is relatively stronger now than the last trip down stochastic values posted. This tells us that a snapback move is pending and will happen soon. When? I'd say it's possible to begin next week and more certainly the week after that. On Drugs (Weekly/Daily Chart: PPH) Look what we found in the pharmacy cabinet: a bonafide bullish engulfing candle. That's an outside-day pattern in bar chart lingo, but either way we speak it the result is bullish from here. Look for higher prices in the PPH (and tech sectors) ahead. With all chart signals oversold, it could go lower but odds are the upside comes next. Summation Indexes seem to be at an inflection point. We reveled in easy money these past few weeks but readily recall how choppy things were at the most recent top. I'd expect that same turbulence to visit us right here if this week marked a near-term bottom. Don't expect strong directional trends to break out right away, but let's keep an eye on weekly chart stochastic values. When they turn up and rise above 20% oversold extreme, it's time to buy every dip with gusto. Hey, it's a dynamic market we play in now. Gone are the days of late 1990's when trends ran endlessly. Print c-notes while the brief trends move these days and protect those gains in between. This is our fate for the next many months or years to come, so we had best get good at it! Buy Support, Sell Resistance Until A Trend Resumes 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 ************** Expiration week is here again! Just what we need an expiration week with high volatility! The possibilities are endless. Several high profile names are announcing earnings as well. The first candidate is Dell computer, which announces earnings on Thursday the 14th. Dell was talked down on Friday by Dan Niles who thinks Dell will guide analysts lower for the current quarter. Dell closed at $26.25 giving us several opportunities. The $25 puts are only .45 cents and the $27.50 calls are only .40 cents. Surely one of these options will finish in the money. Possibly by a dollar or two. There is only one day left in February options but at $.85 for the straddle it may be worth the risk. Either option could be in the money by the Thursday earnings and a warning or surprise could make it very profitable. Cautious traders should use the March options to allow any play ample time to develop. The equivalent straddle for March is only $2.10. *************** NTAP announces earnings on Tuesday and based on the price for the calls it appears that investors are expecting a bounce instead of a drop. Using the same strategy outlined for Dell above might not work as well. The March option prices are too expensive for my taste to use in an effective straddle. I got to thinking that there is another way to win this war. You could get nearly a 20% return for one month by simply buying the stock at $15.80 and writing the March $15 covered call. ($2.45 - $.80 (itm) / $7.80 (margin) = 20%) What would happen if the stock fell below the $15 level? First, it would have to fall below $13.35 for you to lose money. That would be easy to do if the earnings were bad. But what if the earnings were good? Then the stock should rise and be called away for a profit. You could protect yourself against the down side by purchasing the Feb $15 put for $.65. This reduces your risk to nearly zero since any drop under $15 will be reflected in the put. The catch here is that the put expires next Friday. The key is that earnings are Tuesday. Assume disaster strikes. When will the stock drop? Wednesday! Assume the worst case and the stock drops to $10. You sell the stock for $15 with the put buy back your calls for pennies on the dollar. You could also expand your profit potential by selling the March $17.50 call instead for $1.50. If the stock drops the result is the same, you exercise your put and close the calls. If the stock goes up the put expires worthless but if the stock closes over $17.50 your profit will be $2.55 ($17.50 - $15.80 (cost) +1.50 call premium, -.65 put cost) That is about a 32% profit if my calculations are right. I have built several complicated scenarios here but I think the best play may simply be buying the Feb $15 put for $.65 and hoping for an earning miss. Considering the state of the storage market lately anything is possible. ******************** As always, these plays are more for education of the possibilities instead of the best plays available on any given day. Good Luck Jim **************** MARKET SENTIMENT **************** Reversal or Not? By Eric Utley The recent issues afflicting the market went away last Friday afternoon. But will they return? And so, too, the bears. The tech sector lead the market higher last Friday. The Nasdaq 100 (NDX.X) gained 2.70 percent on the day. Through last Thursday and most of Friday, the NDX traded down around the 1410 level. That level happens to be the 50 percent retracement of last fall's rally. It's a natural place for the recent selling to have exhausted and for the bears to cover their shorts and take profits. Until we see substantial upside work, it's clear to me that last Friday's rally was short covering and no more. The bullish percent data last Friday supports my view. Across the major averages, bullish percent readings were flat. In other words, stocks neither generated new buy signals nor sell signals. That lack of new buy signals reveals two things. First, stocks were oversold and due for a bounce. Second, the buying wasn't strong enough last Friday to generate new sell signals. Until we see the averages add some points to the bullish percent readings, it remains a short covering bounce. What's more, the aggressive buying of gold in conjunction with bonds revealed continued defensive positioning. If bonds and gold are higher, that's not an indication of inflation. That's an indication of risk aversion. The Gold and Silver Index (XAU.X) finished 1.39 percent higher last Friday. The 10-year yield (TNX.X) finished 1.05 percent lower. Finally, the nearly 8 percent drop in the VIX last Friday was troubling for bulls. The first sign of strength in stocks in this market is calming the bulls. Think contrarian. Until otherwise noted, I think the risk is weighted to the downside and that rallies to resistance, in whatever you're trading, are good opportunities to be bearish. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9744 Moving Averages: (Simple) 10-dma: 9747 50-dma: 9914 200-dma: 10087 S&P 500 ($SPX) 52-week High: 1383 52-week Low : 945 Current : 1096 Moving Averages: (Simple) 10-dma: 1104 50-dma: 1136 200-dma: 1163 Nasdaq-100 ($NDX) 52-week High: 2771 52-week Low : 1089 Current : 1452 Moving Averages: (Simple) 10-dma: 1496 50-dma: 1591 200-dma: 1606 Biotech ($BTK) The biotech sector was by far the best performing sector in last Friday's session. The group, as measured by the $BTK, gained 7.25 percent. Leaders in the sector included Affymetrix (NASDAQ:AFFX) higher by 15.36 percent, Protein Design Labs (NASDAQ:PDLI) better by 14.08 percent, and Genzyme (NASDAQ:GENZ) up by 10.71 percent. 52-week High: 676 52-week Low : 382 Current : 490 Moving Averages: (Simple) 10-dma: 490 50-dma: 554 200-dma: 545 Health Care ($HMO) The $HMO index was the worst performing sector in last Friday's session with its mere 0.38 percent drop. The weakness was most likely profit taking. Friday morning, Trigon Healthcare (NYSE:TGH) reported solid fourth-quarter profits and raised guidance for the its fiscal 2002 financial performance. There's a trend in this group of solid earnings outlook, pay attention to it! 52-week High: 503 52-week Low : 366 Current : 495 Moving Averages: (Simple) 10-dma: 494 50-dma: 556 200-dma: 546 ----------------------------------------------------------------- Market Volatility The fear gauges took a dive in last Friday's session on the broad strength in stocks. The VIX gapped below its 200-dma and headed down to its 10-dma. The VXN finished back below the 50 level, but still quite the distance from its 10-dma below at 46. CBOE Market Volatility Index (VIX) - 25.50 -2.18 Nasdaq-100 Volatility Index (VXN) - 49.26 -1.85 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.73 575,956 418,596 Equity Only 0.65 477,466 310,166 OEX 0.77 22,107 17,059 QQQ 0.62 35,683 21,959 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 50 + 0 Bull Alert NASDAQ-100 30 + 0 Bear Confirmed DOW 53 + 0 Bull Correction S&P 500 54 + 0 Bull Correction S&P 100 54 + 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 1.43 21-Day Arms Index 1.36 55-Day Arms Index 1.23 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 2071 1042 NASDAQ 2328 1190 New Highs New Lows NYSE 86 50 NASDAQ 68 56 Volume (in millions) NYSE 1,369 NASDAQ 1,774 ----------------------------------------------------------------- Commitments Of Traders Report: 02/05/02 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 The prior week was fairly quiet in the S&P. Commercials added a few longs, while small traders added a few shorts. No major changes to report as you'll see the positions remained similar to the prior week. Commercials Long Short Net % Of OI 01/22/02 342,841 394,041 (51,200) (6.9%) 01/29/02 345,583 401,923 (56,340) (7.5%) 02/05/02 347,583 401,569 (53,986) (7.2%) 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 01/22/02 125,451 65,423 60,028 31.4% 01/29/02 128,826 63,127 65,699 34.2% 02/05/02 128,235 64,404 63,831 33.1% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 Commercials added a few more shorts than longs in the last week for a net gain in the group's bearish position. Meanwhile, small traders added longs and subtracted shorts. Commercials Long Short Net % of OI 01/22/02 30,671 34,103 (3,432) (5.3%) 01/29/02 31,577 33,651 (2,074) (3.2%) 02/05/02 32,357 35,405 (3,048) (4.5%) 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 01/22/02 11,885 8,787 3,098 15.0% 01/29/02 9,709 8,293 1,416 7.9% 02/05/02 10,416 8,173 2,243 12.1% 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 traders grew more bullish last week by adding to their longs and taking away from their short positions. The result was a net increase in the bullish position by about 2,000 contracts. Small traders, as they often do, went in the opposite direction by growing more bearish. The group added nearly 1,000 shorts to their net bearish position. Commercials Long Short Net % of OI 01/22/02 18,152 11,013 7,139 24.5% 01/29/02 19,956 12,171 7,785 24.2% 02/05/02 21,868 12,068 9,800 28.9% 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 01/22/02 5,424 8,969 (3,545) (24.6%) 01/29/02 5,872 9,709 (3,837) (24.6%) 02/05/02 5,764 10,528 (4,764) (29.2%) 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: More On Sectors By Eric Utley I wrote last week that I'd get back to reader requests this weekend. I changed my mind. Plus, I haven't been receiving many requests, so I thought I'd do something a little different again this weekend. I keep going back to the January Barometer. That is, the market and sectors that lead in January tend to do so through the remainder of the year. And those that lag in January tend to under perform for the year. I recently wrote that I didn't put much faith in the January Barometer, but I'm changing my stance. Hey, I'm a Capricorn, so be easy on me. Plus, if you can't adapt you're a loser in this game. Right, Darwin? To recall, here's how the major averages finished January, with special emphasis on the S&P 500 ($SPX): Standard & Poor's 500 ($SPX) -1.56% Dow Jones Industrial ($INDU) -1.01% Nasdaq-100 ($NDX) -1.70% Last weekend, we reviewed the best performing sectors through the month of January. If you're a bull and you missed it, shame on you. It's a must read: http://www.OptionInvestor.com/ask/020302_1.asp This weekend, I review January's poorest performing industry groups. Please send your questions and suggestions to: Contact Support ---------------------------- Wireless Services ($YLS) -14.57% I was bearish on wireless stocks in early January after learning of Verizon's (NYSE:VZ) short-fall. The company failed to reach its new subscription target by about 250,000 customers. That was a pretty big miss and I turned my bearish focus on the component makers such as RF Micro Devices (NASDAQ:RFMD), which was a mistake. As it turned out, I should've been more focused on the service providers and carriers. Sprint (NYSE:FON) recently echoed Verizon's earlier sentiments and the former's stock price was the short of the month in early January. End demand remains lackluster and the recent price action of the $YLS certainly reflects that much. That puts risk into the whole sector, ranging from the aforementioned companies to the handset makers such as Nokia (NYSE:NOK), the hybrid Qualcomm (NASDAQ:QCOM), and the component suppliers such as RF Micro and Tellabs (NASDAQ:TLAB). $YLS Components: Aether Systems (NASDAQ:AETH) AT&T Wireless (NYSE:AWE) Crown Castle (NYSE:CCI) China Mobile (NYSE:CHL) Deutsche Telekom (NYSE:DT) Ericsson (NASDAQ:ERICY) Lucent (NYSE:LU) Motorola (NYSE:MOT) Nokia (NYSE:NOK) Nortel (NYSE:NT) Nextel (NASDAQ:NXTL) Palm (NASDAQ:PALM) Sprint PCS (NYSE:PCS) Qualcomm (NASDAQ:QCOM) RF Micro (NASDAQ:RFMD) Tellabs (NASDAQ:TLAB) U.S. Cellular (AMEX:USM) Vodafone (NYSE:VOD) Verizon (NYSE:VZ) Western Wireless (NASDAQ:WWCA) $YLS Daily ---------------------------- Biotechnology ($BTK) -13.88% The biotech sector was hit on several fronts during the month of January. First, missteps in product development hammered stocks like Protein Design (NASDAQ:PDLI) last December. Those fears carried over into January. Second, ImClone's (NASDAQ:IMCL) deceitful management sparked a wave of multiple compression as investors grew weary of the FDA's application process. Third, the seemingly expensive consolidation in the sector was frowned upon by the market. And, finally, accounting fears surfaced with Cephalon (NASDAQ:CEPH), which brought into focus the biotech industry's accounting practices. The contrarian in me thinks this group could be one of the best turnaround sectors over the intermediate-term. But more on that later... $BTK Components: Affymetrix (NASDAQ:AFFX) Amgen (NASDAQ:AMGN) Celera Genomics (NYSE:CRA) Biogen (NASDAQ:BGEN) Cephalon (NASDAQ:CEPH) Chiron (NASDAQ:CHIR) COR Therapeutics (NASDAQ:CORR) Genzyme (NASDAQ:GENZ) Genentech (NYSE:DNA) Gilead Sciences (NASDAQ:GILD) Human Genome (NASDAQ:HGSI) IDEC Pharma (NASDAQ:IDPH) Immunex (NASDAQ:IMNX) Medimmune (NASDAQ:MEDI) Millennium (NASDAQ:MLNM) Protein Design (NASDAQ:PDLI) Vertex Pharma (NASDAQ:VRTX) $BTK Weekly ---------------------------- Natural Gas ($XNG) -9.41% The natural gas stocks were hard hit in January, particularly two of the components in the sector: Dynergy (NYSE:DYN) and Williams (NYSE:WMB). Of course the Enron debacle didn't help, much of which was related to the weakness in the group. Williams' communications group, Williams Communications (NYSE:WCG), is on the brink of bankruptcy. The parent company and component of the $XNG has been raising money recently through asset sales in order to meet the communications' groups obligations. It's an ugly situation that doesn't appear as if it's going to turnaround. Shares of Williams precipitously dropped in the final week of January, dragging the $XNG lower. Dynergy is involved in the trading of energy. So was Enron. The pure play natural gas stocks in the sector haven't fared as poorly as the "diversified" firms mentioned above. For instance, Apache (NYSE:APA), an explorer and producer, has held up relatively well compared to the $XNG. $XNG Components: Anadarko Petro (NYSE:APC) Apache (NYSE:APA) Burlington (NYSE:BR) Dynergy (NYSE:DYN) El Paso (NYSE:EP) Nicor (NYSE:GAS) EOG Resources (NYE:EOG) Kinder Morgan (NYSE:KMI) National Fuel Gas (NYSE:NFG) NiSource (NYSE:NI) Noble Affiliates (NYSE:NBL) Ocean Energy (NYSE:OEI) Pogo Producing (NYSE:PPP) Questar (NYSE:STR) Williams (NYSE:WMB) $XNG Weekly ---------------------------- Telecommunications ($XTC) -8.46% The woes of telecom are continuing. The long distance business is on its way to zero. And I don't know how a company makes money from something that is at least next to free. Declining revenues and a heavy debt load make this sector one to avoid this year. A lot of readers have been sending e-mails, asking whether or not this is a time to bottom fish in telecom stocks. I think not, especially when the risk is so very dynamic and difficult to grasp. If you want to bottom fish, do so with the lone bright spot in the telecom sector and that is Telefonos De Mexico (NYSE:TMX). This Latin America bellwether is not alone. South-of-the- border stocks have been among the strongest in the market recently. It's kind of interesting given that Argentina is on the brink of insolvency. At any rate, I like TMX. $XTC Components: Alltel (NYSE:AT) Bellsouth (NYSE:BLS) Sprint (NYSE:FON) Lucent (NYSE:LU) Level-3 (NASDAQ:LVLT) Nortel (NYSE:NT) Nextel (NASDAQ:NXTL) Qwest (NYSE:Q) SBC Communications (NYSE:SBC) AT&T (NYSE:T) Telefonos De Mexico (NYSE:TMX) Verizon (NYSE:VZ) Worldcom (NASDAQ:WCOM) $XTC Weekly ---------------------------- Box Makers ($BMX) -3.97% Of the pure tech sectors, the box makers traded the worst during January. It was a month that saw IBM miss revenue estimates for the third consecutive quarter. If Big Blue isn't telling of the current state of information technology spending, then I don't know what is. It was thought that Windows XP would spur a new upgrade cycle among businesses, but that hasn't happened yet. Instead, the buyers of information technology equipment and services are more concerned with making it through this downturn than spending money. That's translated into continued weakness in demand. In the meantime, the heavyweights in the group that have financial clout are punishing the weaker competitors. In the mainframe and storage space, IBM is squashing Sun Micro (NASDAQ:SUNW). And in the personal computer space, a business IBM is exiting, Dell is whacking the weaklings in Hewlett-Packard (NYSE:HWP), Gateway (NYSE:GTW), and Compaq (NYSE:CPQ). In a shrinking market, you have to stick with the big boys, and that means IBM and Dell. $BMX Components: IBM (NYSE:IBM) Sony (NYSE:SNE) Veritas (NASDAQ:VRTS) Dell (NASDAQ:DELL) Apple (NASDAQ:AAPL) Hewlett-Packard (NYSE:HWP) Compaq (NYSE:CPQ) Unisys (NYSE:UIS) Sun Micro (NASDAQ:SUNW) Gateway (NYSE:GTW) $BMX 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 AIV Apartment Invest Man Mon, Feb 11 -----N/A----- 1.30 ASN Archstone Communities Mon, Feb 11 Before the Bell 0.51 CNT CenterPoint Prop Trust Mon, Feb 11 After the Bell 0.98 CHTR Charter Communications Mon, Feb 11 Before the Bell -1.08 CHD Church & Dwight Mon, Feb 11 Before the Bell 0.28 CUZ Cousins Properties Mon, Feb 11 After the Bell 0.55 DTE DTE Energy Mon, Feb 11 Before the Bell 1.42 INET Instinet Group Llc Mon, Feb 11 After the Bell N/A IDCO Interactive Data Corp Mon, Feb 11 Before the Bell N/A LNCR Lincare Holdings Mon, Feb 11 After the Bell 0.36 NHY Norsk Hydro Mon, Feb 11 Before the Bell N/A OCR Omnicare Mon, Feb 11 Before the Bell 0.27 PRE PartnerRe Mon, Feb 11 After the Bell 0.56 SCZ Security Capital Group Mon, Feb 11 After the Bell 0.57 TTN Titan Mon, Feb 11 After the Bell 0.14 TKTX Transkaryotic Mon, Feb 11 -----N/A----- -0.67 YUM Tricon Global Rest Mon, Feb 11 After the Bell 1.04 VAL Valspar Mon, Feb 11 -----N/A----- 0.25 WLP WellPoint Health Ntwrk Mon, Feb 11 After the Bell 1.59 ALKS Alkermes Tue, Feb 12 Before the Bell -0.27 AMAT Applied Materials Tue, Feb 12 After the Bell -0.01 BBI Blockbuster Tue, Feb 12 Before the Bell 0.28 BP BP Amoco Tue, Feb 12 -----N/A----- 0.56 CDX Catellus Development Tue, Feb 12 After the Bell N/A CEFT Concord EFS Tue, Feb 12 Before the Bell 0.17 COX Cox Communication Tue, Feb 12 Before the Bell -0.18 CRWN Crown Media Holdings Tue, Feb 12 Before the Bell -0.44 DE Deere & Company Tue, Feb 12 Before the Bell -0.24 EVC Entravisions Com Corp Tue, Feb 12 After the Bell -0.14 EXPD Expeditors Inter WA Tue, Feb 12 -----N/A----- 0.50 FOX Fox Entertainment Tue, Feb 12 After the Bell 0.08 KEA Keane Tue, Feb 12 After the Bell 0.08 KQIP KPNQwest NV Tue, Feb 12 Before the Bell -0.13 LRY Liberty Property Trust Tue, Feb 12 -----N/A----- 0.86 MET Metropolitan Life Ins Tue, Feb 12 Before the Bell 0.58 MLI Mueller Industries Tue, Feb 12 Before the Bell 0.42 NOI National-Oilwell Tue, Feb 12 Before the Bell 0.34 NTAP Network Appliance Tue, Feb 12 After the Bell 0.02 NWS News Corporation Tue, Feb 12 After the Bell 0.17 OSI Outback Steakhouse Tue, Feb 12 -----N/A----- 0.43 OVER Overture Services, Inc Tue, Feb 12 After the Bell 0.19 PER Perot Systems Tue, Feb 12 Before the Bell 0.17 PRU Prudential Finan, Inc. Tue, Feb 12 After the Bell 0.14 STR Questar Tue, Feb 12 After the Bell 0.47 RTRSY Reuters Group Tue, Feb 12 Before the Bell N/A STOSY Santos ADR Tue, Feb 12 -----N/A----- N/A SIAL Sigma-Aldrich Tue, Feb 12 After the Bell 0.44 SPW SPX Tue, Feb 12 Before the Bell 2.03 SWMAY Swedish Match Tue, Feb 12 -----N/A----- N/A SCMR Sycamore Networks Tue, Feb 12 After the Bell -0.12 TMS Thomson Multimedia Tue, Feb 12 -----N/A----- N/A TZH Trizec Hahn Tue, Feb 12 Before the Bell 0.56 VFC VF Tue, Feb 12 After the Bell 0.48 WSH Willis Grp Hldgs Limit Tue, Feb 12 Before the Bell 0.25 XL XL Capital Tue, Feb 12 After the Bell 0.13 ABB ABB Wed, Feb 13 -----N/A----- N/A ACE ACE Limited Wed, Feb 13 Before the Bell 0.15 AW Allied Waste Industres Wed, Feb 13 After the Bell 0.06 APPB Applebee`s Inter Wed, Feb 13 After the Bell 0.44 ATR AptarGroup Wed, Feb 13 After the Bell 0.26 AVE Aventis Wed, Feb 13 -----N/A----- N/A BRCD Brocade Com Systems Wed, Feb 13 After the Bell 0.05 CSG Cadbury Schweppes Wed, Feb 13 -----N/A----- N/A CPB Campbell Soup Wed, Feb 13 Before the Bell 0.49 DCN Dana Wed, Feb 13 -----N/A----- -0.06 DRYR Dreyer's Grd Ice Cream Wed, Feb 13 Before the Bell 0.00 ENZN Enzon Wed, Feb 13 Before the Bell 0.18 FNF Fidelity Nat Financial Wed, Feb 13 Before the Bell 0.97 FAF First American Finan Wed, Feb 13 Before the Bell 0.66 FR First Ind Realty Trust Wed, Feb 13 After the Bell 0.95 FST Forest Oil Wed, Feb 13 After the Bell 0.05 GALN Galen Holdings PLC Wed, Feb 13 -----N/A----- 0.32 HNT Health Net, Inc. Wed, Feb 13 Before the Bell 0.44 HWP Hewlett-Packard Wed, Feb 13 After the Bell 0.16 ITMN InterMune, Inc. Wed, Feb 13 After the Bell -0.71 INTU Intuit Wed, Feb 13 After the Bell 0.57 JBX Jack in the Box Wed, Feb 13 Before the Bell 0.64 LZB La-Z-Boy Wed, Feb 13 -----N/A----- 0.31 LH Laboratory Corp. Wed, Feb 13 After the Bell 0.55 MAR Marriott International Wed, Feb 13 -----N/A----- 0.25 NXY Nexen Wed, Feb 13 After the Bell N/A OO Oakley Wed, Feb 13 -----N/A----- 0.04 ODP Office Depot Wed, Feb 13 -----N/A----- 0.18 RUK Reed International Wed, Feb 13 -----N/A----- N/A RSE Rouse Wed, Feb 13 -----N/A----- 0.93 SCG SCANA Wed, Feb 13 Before the Bell 0.54 SRA Serono S.A. Wed, Feb 13 -----N/A----- 0.12 TFX Teleflex Wed, Feb 13 After the Bell 0.74 TTEC TeleTech Holdings Wed, Feb 13 After the Bell 0.08 TMO Thermo Electron Wed, Feb 13 After the Bell 0.23 THQI THQ Inc Wed, Feb 13 After the Bell 1.08 TLRK Tularik Wed, Feb 13 -----N/A----- -0.40 VIAb Viacom Wed, Feb 13 Before the Bell -0.10 WE Westcoast Energy Wed, Feb 13 -----N/A----- N/A WFMI Whole Foods Market Wed, Feb 13 After the Bell 0.33 YCC Yankee Candle Wed, Feb 13 -----N/A----- 0.63 ABN ABN Amro Holdings Thu, Feb 14 -----N/A----- N/A ADI Analog Devices Thu, Feb 14 -----N/A----- 0.11 BHI Baker Hughes Thu, Feb 14 Before the Bell 0.35 BCS Barclays PLC Thu, Feb 14 -----N/A----- N/A BHP BHP Billiton Ltd Thu, Feb 14 Before the Bell 0.12 BNN Brascan Corporation Thu, Feb 14 Before the Bell N/A CVC Cablevision Systems Thu, Feb 14 Before the Bell -1.12 CNA CNA Financial Corp Thu, Feb 14 Before the Bell -1.08 DF Dean Foods Company Thu, Feb 14 Before the Bell 1.09 DELL Dell Thu, Feb 14 -----N/A----- 0.17 GSK GlaxoSmithKline Thu, Feb 14 Before the Bell 0.58 HRH Hilb, Rogal&Hamilton Thu, Feb 14 Before the Bell 0.20 HRL Hormel Foods Thu, Feb 14 Before the Bell 0.36 IM Ingram Micro Thu, Feb 14 After the Bell 0.08 MTA MATÁV Thu, Feb 14 -----N/A----- N/A MAY May Department Store Thu, Feb 14 -----N/A----- 1.37 NFX Newfield Exploration Thu, Feb 14 -----N/A----- 0.46 NVDA NVIDIA Thu, Feb 14 After the Bell 0.33 PDG Placer Dome Thu, Feb 14 After the Bell 0.09 PDS Precision Drill Corp Thu, Feb 14 Before the Bell 0.36 RMG Rainbow Media Group Thu, Feb 14 Before the Bell N/A IMI SanPaolo IMI SpA Thu, Feb 14 -----N/A----- N/A SBL Symbol Technologies Thu, Feb 14 After the Bell 0.06 TU TELUS Communications Thu, Feb 14 -----N/A----- N/A TEVA Teva Pharmaceutical Thu, Feb 14 Before the Bell 0.61 UBS UBS AG Thu, Feb 14 -----N/A----- N/A UN Unilever N.V. Thu, Feb 14 -----N/A----- N/A BER W.R. Berkley Thu, Feb 14 -----N/A----- 0.23 WPI Watson Pharmaceutical Thu, Feb 14 -----N/A----- 0.36 ABX Barrick Gold Fri, Feb 15 -----N/A----- 0.14 DP Diagnostic Products Fri, Feb 15 Before the Bell 0.35 FS Four Seasons Hotels Fri, Feb 15 Before the Bell 0.12 LYG Lloyds TSB Group Fri, Feb 15 -----N/A----- N/A MAS Masco Fri, Feb 15 -----N/A----- 0.25 NAV Navistar International Fri, Feb 15 Before the Bell -0.94 ZLC Zale Corporation Fri, Feb 15 Before the Bell 2.63 ================================================================= Upcoming Stock Splits This Week & Next... Symbol Company Name Ratio Payable Executable 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 HIBB Hibbett Sporting Goods 3:2 02/18 02/19 HTLD Heartland Express 3.15:2 02/18 02/19 BLL Ball Corp 2:1 02/21 02/22 CEBC Centennial Bank 21:20 02/22 02/25 ACS Affiliated Computer Svcs 2:1 02/22 02/25 ================================================================= Economic Reports We still have a full week of earnings ahead of us but they are starting to wind down. There is also a number of stock splits over the next couple of weeks. The major economic reports that analysts will be following are the retail sales numbers on Wednesday and the PPI report at the end of the week. ================================================================= Monday, 02/11/02 None Tuesday, 02/12/02 None Wednesday, 02/13/02 Retail Sales (BB) Jan Forecast: -0.2% Previous: -0.1% Retail Sales ex-auto (BB)Jan Forecast: 0.2% Previous: -0.1% Thursday, 02/14/02 Business Inventories (BB)Dec Forecast: -0.5% Previous: -1.0% Initial Claims (BB) 02/09 Forecast: N/A Previous: 376K Export Prices ex-ag (BB) Jan Forecast: N/A Previous: -0.4% Import Prices ex-oil (BB)Jan Forecast: N/A Previous: -0.3% Friday, 02/15/02 PPI (BB) Jan Forecast: 0.2% Previous: -0.7% Core PPI (BB) Jan Forecast: 0.1% Previous: -0.1% Industrial Production(DM)Jan Forecast: 0.0% Previous: -0.1% Capacity Utilization(DM) Jan Forecast: 74.3% Previous: 74.4% Mich Sentiment-Prel (DM) Jan Forecast: 94.3 Previous: 93.0 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 02-10-2002 Sunday 2 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** INDEX TRADER GAMEPLANS ********************** IS Swing Trade Model: Friday 2/08/2002 Squeezed At The End News & Notes: ------------ A choppy session today ends with short squeeze rally to cap it off. The indexes were building very nice wedge formations I hoped would hold, but hope seldom pans out when trading. Featured Markets: ---------------- [60/30-Min Chart: OEX] Nice bullish setup in the OEX, but wedges (pink) broke to the upside late in the day. 552 would have been the entry here, but who wants to hold long calls over the weekend? Feb contracts leak theta decay something fierce, and March contracts don't offer the type of gains we seek just yet. [60/30-Min Chart: SPX] Same for the SPX... 1085 was the entry point on any day other than Friday afternoon. [60/30-Min Chart: QQQ] QQQs are topping faster but still have room to run. Summation: --------- A pullback to the top of these wedges and/or channel lines and bounce higher from there is a long play. Failure and drop below is a short play. The wildcard will be stochastic values position at the time. Still bullish now, but could reverse at any time on Monday. We will refer to these points of action during the session as price action unfolds via Market Monitor. 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 none Long: BREAK BELOW none Stop: Break Above none Stop: Break Above ===== 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 none Long: BREAK BELOW none Stop: Break Above Stop: Break Above Open Plays: ---------- None IS Position Trade Model: Saturday 2/09/2002 Tech's Getting Bullish? News & Notes: ------------ We're holding Feb puts and now targeting a few March calls on what appear to be theearly stages of bullish reversals in certain sectors. A complete list is posted in Sector Share model, but the choicest call option plays are filtered below. Featured Plays: -------------- As depicted in Index Wrap & other Gameplans Summation: --------- We will hold current Feb contract put plays to gains or expiration, whichever comes first. Meanwhile, a few sectors are looking to advance so we'll attempt to get ahead of that using March contracts with five weeks of lifespan left. 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: ---------------- QQQ SMH March Calls: 36 (QQQ-CJ) March Calls: 44 (SMH-CI) Long: BREAK ABOVE 36.25 Long: BREAK ABOVE 44.00 Entry: Entry: Stop: 100% risk-loss capital Stop: 100% risk-loss capital BBH HHH March Calls: 125 (GBZ-CE) March Calls: 30 (HHH-CF) Long: BREAK ABOVE 117.75 Long: BREAK ABOVE 31.00 Entry: Entry: Stop: 100% risk-loss capital Stop: 100% risk-loss capital BBH OIH March Calls: 95 (PPH-CS) March Calls: 60 (OIH-CL) Long: BREAK ABOVE 95.00 Long: BREAK ABOVE 56.75 Entry: Entry: Stop: 100% risk-loss capital Stop: 100% risk-loss capital Open Plays: ---------- Feb Puts: 36 (QQQ-NJ) Feb Puts: 96 (DJV-NR) Long: BREAK BELOW 36.00 Long: BREAK BELOW 96.50 Entry: 1.10 Entry: 1.30 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 Entry: 5.40 Entry: 14.00 Stop: 100% risk-loss capital Stop: 100% risk-loss capital Sector Share Trade Model: Friday 2/09/2002 Market Turn? News & Notes: ------------ A short squeeze ending for the week popped out many of our short plays and set up a bunch of longer-term charts for bullish bias, in particular the technology issues. Featured Plays: -------------- (Weekly/Daily Charts: PPH Our highest-odds play of all is the PPH Pharmaceutical HOLDR. With all chart signals oversold extreme, it posted a bullish engulfing candle or outside day. We want to be long this one on a break above Friday highs from here! Summation: --------- A host of long plays were found in tonight's screen and we'll see if the awaited relief rally soon emerges in the continuing bear market. 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: ---------------- LONG QQQ Long: BREAK ABOVE 36.25 Stop: Break below 35.00 SMH Long: BREAK ABOVE 44.00 Stop: Break below 42.00 BHH Long: BREAK ABOVE 3.80 Stop: Break below 2.90 BDH Long: BREAK ABOVE 14.00 Stop: Break below 12.90 HHH Long: BREAK ABOVE 31.00 Stop: Break below 29.75 IAH Long: BREAK ABOVE 35.00 Stop: Break below 33.00 TTH Telecom Long: BREAK ABOVE 39.00 Stop: Break below 37.00 OIH Oil Services Long: BREAK ABOVE 56.75 Stop: Break below 54.00 MKH Market 2000+ Big Caps Long: BREAK ABOVE 57.25 Stop: Break below 55.00 IYH Healthcare Long: BREAK ABOVE 59.75 Stop: Break below 56.50 PPH Drugs Long: BREAK ABOVE 94.75 Stop: Break below 91.50 BBH Biotech Long: BREAK ABOVE 117.75 Stop: Break below 113.00 XLE Energy Long: BREAK ABOVE 25.75 Stop: Break below 24.00 XLB Basic Technology Long: BREAK ABOVE 22.00 Stop: Break below 20.50 Open Short Plays: ---------------- SWH Software HOLDR Short: BREAK BELOW 45.50 Stop: Break Above 41.50 [hit] Result: +4.00 [+08.8%] 02/06 XLV U.S. Cyclical/Transport Short: BREAK BELOW 28.50 Stop: Break Above 27.50 SMH Semi-Conductor HOLDR Short: BREAK BELOW 43.50 Stop: Break Above 42.50 [hit] Result: +1.00 [+02.29%] UTH Utilities HOLDR Short: BREAK BELOW 84.50 Stop: Break Above 85.50 RTH Retail HOLDR Short: BREAK BELOW 96.40 Stop: Break Above 97.00 RKH Regional Banks HOLDR Short: BREAK BELOW 106.90 Stop: Break Above 108.00 [hit] Result: -1.10 [-01.02%] IDU Dow Jones U.S. Utilities Short: BREAK BELOW 60.00 Stop: Break Above 60.50 * IYF Dow Jones U.S. Financials Short: BREAK BELOW 74.50 Stop: Break Above 77.00 * IYR Dow Jones U.S. Real Estate Short: BREAK BELOW 80.00 Stop: Break Above 81.00 IJJ Mid-Cap 400 BARRA SPDRs Short: BREAK BELOW 88.20 Stop: Break Above 89.00 MDY Mid-Cap SPDRs Short: BREAK BELOW 90.00 Stop: Break Above 89.00 [hit 81.10] Result: +0.90 [ +01.00% Open Long Plays: --------------- XLP Consumer Staples Long: BREAK ABOVE 25.30 Stop: Break below 24.75 [hit] Result: +1.55 [+06.13%] *********************************************************** DAILY RESULTS *********************************************************** CALLS Mon Tue Wed Thr Week UPS 56.35 -0.23 0.34 -0.74 -0.53 -0.44 200-dma bounce ASYT 16.24 -0.63 -0.02 0.07 -0.71 -0.63 Needs SOX.X UNH 74.43 -1.07 1.10 -0.40 0.50 -0.54 Watch $75 LH 87.50 0.53 0.67 -0.41 0.82 5.79 Very nice day ESRX 50.05 -0.46 2.50 -0.25 1.18 4.19 New, $50 TYC 29.88 -5.73 -6.80 2.82 2.13 -5.75 New, rebound TRW 42.79 -0.44 -0.41 -0.67 0.69 -0.21 New, defense PUTS IVGN 54.59 -3.04 2.13 -0.33 -0.96 0.44 Dropped GNSS 49.24 -4.80 -1.10 -0.18 -9.48 -10.57 Dropped CCMP 63.53 -1.11 -2.01 0.00 -0.04 -1.59 Entry point GS 83.80 -2.90 -1.46 0.86 -0.79 -1.60 Resistance AT 55.12 -0.94 -0.33 -1.46 1.70 -0.54 Dropped AGN 68.45 -5.41 3.33 -1.05 0.90 -0.46 Dropped VRSN 27.06 -2.10 -2.45 -2.52 0.17 -3.94 Dropped EBAY 58.61 -2.49 -1.06 0.70 -0.24 0.56 Dropped TLAB 13.54 -0.96 -0.67 -0.24 0.15 -1.48 Short covering THQI 42.44 -0.80 -3.02 0.63 0.09 -0.81 Dropped ADI 38.87 -0.86 -0.26 -1.01 -1.67 -4.27 Working well MMS 30.36 -0.50 -2.30 -0.04 -1.11 -4.74 New KLIC 14.69 -0.21 -0.14 0.19 -0.79 -1.16 New A 25.98 -1.03 -1.42 -0.18 -0.59 -3.63 New ************************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: ********************* ESRX – Express Scripts $50.05 (+4.29 last week) See details in play list Put Play of the Day: ******************** KLIC - Kulicke and Soffa $14.69 (-1.16 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ None PUTS ^^^^ AGN $68.45 (-0.46) AGN managed to break and close above its 10-dma last Friday for the first time in ten sessions. The break was on the back of strength in the drug sector. The advance past the 10-dma combined with the close above our stop at $67 gives us reason to drop coverage this weekend. If you weren't stopped out in last Friday's session, watch for a rollover early next week as an exit point to cut losses. AT $55.12(-0.54 ) AT finally managed to close above its 10-dma in last Friday's trading. The continued bounce in the broader telecom space helped the stock higher late last week. One thing we noticed is that volume remained relatively light in Friday's session, which could lead to a rollover next week if the telecom space weakens again. Keep that in mind when searching for an exit point if you weren't already stopped out. EBAY $58.61 (+0.56) Did anyone get the number of that rally truck? After a nice methodical decline over the past month, EBAY punctuated the move with a swift drop to $53.50 on Wednesday before beginning to build a bottom. The warning signs were there with a series of higher intraday lows leading up to Friday's afternoon session, and when the bulls got going, they did so with a vengeance. The stock exploded higher in the final 3 hours, and in the end our $58 stop was taken out, bringing the play to a close. Traders that wisely harvested their profits when the stock began to recover are smiling tonight, while those that tried to milk "just a little bit more" are licking their wounds. Discipline is the name of the game. GNSS $49.24 (-10.56) GNSS gave us a great roller coaster ride down to the $44 level at the close yesterday, making for a nearly $16 decline from the prior week's close. Taking profits at the end of the day yesterday was clearly the way to go, as the stock popped higher this morning on positive analyst comments and continued that recovery right into the closing bell. Going along for the ride as the broad market did some rapid damage control in the final 2 hours on Friday, GNSS pushed through our $48.50 stop (good thing we tightened it up!) to close just off the day highs. While GNSS was a big winner for us, the last day of the play drives home the point that when huge gains are on the table, we need to harvest them, and quickly. IVGN $54.59 (+0.44) With the Biotech sector (BTK.X) being the best performing sector on Friday with a stellar 7.25% advance, it is no wonder that IVGN blasted off for better than a 5% gain of its own. Apparently the $51 support level was too much for the bears to break down. IVGN gave us some nice steady gains as we rode the long-term trend down. Even though this trend hasn't been broken, there was too much strength for our comfort level. With the strong rally on Friday and the BTK starting down the rally path, it looks like it is time to harvest our gains and look for the next winning play. THQI $42.44 (-0.81) Arriving too late to the party, we added THQI just in time to watch the stock drop to the $37 support level and then immediately snap back, denying us the opportunity to enter the play. The past 2 days bullish action along with a violated stop leave us no choice but to relegate the stock to the drop list. Keep a sharp eye on this one, as it will likely give us another opportunity to play the downside next time it rolls over from resistance. VRSN $27.06 (-3.94) As fun as that 30% decline in shares of VRSN was, like all good things it has come to an end. We arrived on the scene just as the stock was breaking down and once it fell under the $30 level, it just picked up speed. The selling frenzy reached a crescendo with the stock's dip to the $21.50 level on Wednesday, before a slow recovery got started. That recovery picked up steam Friday afternoon as the broad markets rallied strongly in the final two hours. This is a perfect example of why you should always fat profits when they are available. Over the past 2 days, VRSN has had a solid bounce, recovering more than $5 of the $9 decline. Don't get greedy, harvest profits and then look for the next winning play. *********** 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 02-10-2002 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 ************** ESRX – Express Scripts $50.05 (+4.29 last week) Express Scripts provides health care management and administration services on behalf of clients that include health maintenance organizations, health insurers, third-party administrators, employers and union-sponsored benefit plans. The company's fully integrated pharmacy benefit management services include network claims processing, mail pharmacy services, benefit design consultation, drug utilization review, formulary management, disease management, medical information management services and informed decision counseling services through its Express Health Line division. Investors looking for a solid bullish play will have to look awfully hard to find a better sector than the Health Care index (HMO.X). Reflecting investors' positive reception of earnings in this sector, the HMO index has rocketed higher over the past month, clearing resistance first at $450, then $480, and on Friday eclipsing its all-time high of $503. There must be some tasty grass in these pastures, because the bulls seem very happy. After consolidating in the wake of its addition to the NASDAQ-100 in late December, shares of ESRX have gone along for the ride, completing their own breakout on Friday by pushing through the $49 resistance level and simultaneously clearing the 200-dma (currently $48.45). While there is definitely some congestion immediately overhead, near $51, resistance doesn't become heavy until the $53 level. Clearly investors were pleased with the company's earnings report last Wednesday, as it was followed by the buying surge that propelled the stock through resistance. Look for a pullback to support in the $48-49 area to provide attractive entry opportunities. Set stops at $47. *** February contracts expire this week *** BUY CALL FEB-50 XTQ-BJ OI=1229 at $1.35 SL=0.75 BUY CALL MAR-50*XTQ-CJ OI= 219 at $2.80 SL=1.50 BUY CALL MAR-55 XTQ-CK OI= 25 at $0.95 SL=0.50 BUY CALL MAY-55 XTQ-EK OI= 101 at $3.30 SL=1.75 Average Daily Volume = 1.47 mln TRW – TRW Inc. $42.79 (-0.21) TRW is an international company that serves the automotive, space and defense, and computer industries. The company serves the auto market (which accounts for 70% of sales) with airbags, antilock brake and traction-control systems, seat belt systems, and steering and suspension systems. TRW's space and defense products include spacecraft and satellite technology, defense communications equipment, and high-energy lasers. The company also provides computer systems to government and private-sector clients through its information technology unit. Defense stocks went vertical again in the final week of January, and now that some consolidation has taken place, there are some good bullish opportunities waiting for us. Although only in existence since late October, the Defense Industry index (DFI.X) shows us just how strong the sector is. After blasting through the $568 resistance level in late January, the DFI has come back to confirm that level as new support. During the latest sector rally, shares of TRW have had quite a run surging from the $35 level to as high as $43 at the end of January. Since then the stock has consolidated those gains and is finding support at the 10-dma ($41.74) and looks ready to run again. Driving the sector higher is the knowledge that drastically increased government spending on defense is going to be the norm for the foreseeable future. Case in point was Wednesday's announcement that TRW received a $47 million missile circuits upgrade contract. While it is tempting to trade the breakout after the stock has demonstrated its ability to surge sharply higher, we need to exercise caution, as there is some heavy resistance in the $44-45 area. The better entry strategy will be to target intraday pullbacks to support for new entries, ideally near $42 or the 10-dma. We can set a nice tight stop at $41, just below the lows from last week, which confirmed that level as strong support. *** February contracts expire this week *** BUY CALL FEB-40 TRW-BH OI=189 at $3.20 SL=1.50 BUY CALL MAR-40*TRW-CH OI= 89 at $3.50 SL=1.75 BUY CALL MAR-45 TRW-CI OI= 59 at $0.95 SL=0.50 BUY CALL JUN-45 TRW-DI OI=512 at $1.30 SL=0.75 Average Daily Volume = 466 K TYC – Tyco International $29.88 (-6.99 last week) Tyco 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. In addition, TYC designs, manufactures, installs and services fire detection and suppression systems and installs, monitors and maintains electronic security systems. In December 2000, TYC acquired Lucent's Power Systems business unit, which provides a full line of energy solutions and power products for telecommunications service providers and the computer industry. Adrenaline junkies that live for volatility have been having the time of their lives with any stock subject to the dreaded "accounting issues" accusation. While Enron is in the news ad nauseum, there are other stocks with questionable accounting practices that have been quite exciting of late. Chief among them is TYC, which has had one press story after another citing how the company's accounting is questionable to company responses that tell us how the stock is grossly overvalued and should be trading much higher. Regardless of the outcome of the accounting debate, what matters is that we have extreme volatility. Since the beginning of the year, TYC has dropped from the $58 area to as low as $22 and in the past 3 days it has recovered back to the $30 level. Make no mistake, this is a very risky play, where we are speculating that the fears have been overblown and TYC is headed back towards the $40 level. There's a powerful trend in place that says we're wrong on this one, with all the major moving averages pointing steeply south. And while buying volume was strong on the initial rebound off the lows, it has been declining the past few days. This may not be a real issue however, as Friday's volume was still almost 75% above the ADV. What we're really focused on is the pattern over the past 3 days where the stock gaps higher and holds onto those gains at the closing bell. We're looking for the pattern to continue, so we'll target new positions on a dip near intraday support at $29 or $28 and will place our stop at $27. Traders looking for conviction will want to wait for TYC to push back through the $31 level (intraday resistance on Friday) before taking a position. *** February contracts expire this week *** BUY CALL FEB-27 TYC-BY OI=11727 at $3.10 SL=1.50 BUY CALL FEB-30 TYC-BF OI=25871 at $1.60 SL=0.75 BUY CALL MAR-27 TYC-CY OI= 8068 at $4.90 SL=3.00 BUY CALL MAR-30*TYC-CF OI=24502 at $3.40 SL=1.75 BUY CALL MAR-32 TYC-CZ OI= 5087 at $2.35 SL=1.25 Average Daily Volume = 26.9 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 $56.35 (-0.44 last week) United Parcel Service Inc. (UPS) is an express carrier, package delivery company and a global provider of specialized transportation and logistics services. Over the course of more than 90 years, the Company has expanded from a small regional parcel delivery service into a global company. UPS delivers packages each business day for 1.8 million shipping customers to six million consignees. The Company's primary business is the time-definite delivery of packages and documents throughout the United States and in over 200 other countries and territories. UPS announced late last week that it would provide trackside services to Nascar. The company said it would deliver on call pick up at weekend events, targeting garage, merchandising and hospitality. Yep, it was a pretty quiet on the news front late last week. Earlier, rumors and reports had surfaced that UPS was interested in Tyco's (NYSE:TYC) finance division. UPS quickly refuted that rumor. Still, our play could have suffered from guilt by association with Tyco last week. More likely, the broad market weakness pressured the stock back down to its 200-dma, where it rebounded from Thursday. The weakness last week was on relatively lower volume, which is normally indicative of profit taking. The rebound from the 200-dma was encouraging as it told us that the buyers are still interested in this stock. Plus it offered traders a most favorable entry into new bullish plays. Those who took entries on the rebound from the 200-dma last week can turn to the Dow and Transport Index ($TRAN) for confirmation in next week's trading. The stock should be able to at least retest the upper end of its trading range in a favorable market next week. Look to take profits near the $57.50 level. Those still waiting for entries can look for an advance past the 10-dma at $56.63. From there we'll address a potential breakout above short-term resistance. ***February contracts expire in two weeks*** BUY CALL FEB-55 UPS-BK OI= 3445 at $1.60 SL=1.00 BUY CALL MAR-55*UPS-CK OI= 890 at $1.95 SL=1.25 BUY CALL MAR-60 UPS-CL OI= 4707 at $0.20 SL=0.00 BUY CALL APR-60 UPS-EI OI=15444 at $0.35 SL=0.00 Average Daily Volume = 1.26 mln ASYT - Asyst Technologies $16.24 (-0.63 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 announced last Friday that it would hold a joint conference call with VLSI Research. The call will detail the current state of the semiconductor fabrication automation business. The conference call is scheduled for Thursday, February 14, at 11:00 a.m. PST. It is scheduled to last for 45 minutes. Traders should be aware of the conference call going into Thursday's session as good or bad news could have an impact on our play. In last Friday's action, ASYT rebounded after weakening earlier in the week. Its weakness stemmed from the pullback in the Semiconductor Sector Index (SOX.X). The stock was able to advance in Friday's session because the SOX.X reversed higher. It's paramount to continue monitoring the SOX.X when gauging this play, for ASYT is closely tied to its sector's price action. In terms of new entries, look for continued bounces on intraday weakness from the $15.75 area. Those in search of confirmation can look for an advance on healthy volume past the short-term congestion above $16.50 to $16.75. ***February contracts expire in two weeks*** BUY CALL FEB-15 QQY-BC OI=854 at $1.50 SL=0.75 BUY CALL MAR-15 QQY-CC OI=238 at $2.15 SL=1.25 BUY CALL MAR-17*QQY-CY OI=378 at $0.75 SL=0.25 BUY CALL JUN-17 QQY-FY OI=146 at $1.90 SL=1.00 Average Daily Volume = 371 K LH – Laboratory Corp. of America $87.50 (+5.79 last week) Laboratory Corporation of America Holdings (LabCorp) is the #2 clinical laboratory service in the world, behind Quest Diagnostics. LH performs 2000 types of tests for more than 100,000 clients, including health care providers, pharmaceutical firms, physicians, government agencies and employers. With 25 major laboratories and some 1200 service sites nationwide, the company emphasizes specialty and niche testing such as allergy tests, HIV tests, blood analyses, and substance abuse screenings. Not wasting any time in getting the party started, shares of LH rocketed higher right from the opening bell on Friday, and by the closing bell the stock had posted better than a 5% gain on nearly triple the average daily volume. So did you jump aboard on the breakout over the $83.50 level? Volume told us in no uncertain terms that the bulls were in chart on this one, making for a nice high-odds entry. The pullback at the end of the day could have just been in sympathy for the Health Care index (HMO.X) which managed to briefly push to a new all time high before pulling back for most of the day. But the sector trend is still bullish and LH looks destined to test the $90 resistance level, and soon. While trading the breakout made sense on Friday, with our proximity to resistance, we now want to focus on buying a dip near support. The stock should have some intraday support near $86, with more support near $84.75. Target a dip near either level for new positions, and move stops up to $84. Remember, LH posts its earnings Wednesday afternoon after the closing bell, so we'll want to be out of the play by that time. *** February contracts expire this week *** BUY CALL FEB-85 LH-BQ OI= 712 at $3.20 SL=1.50 BUY CALL FEB-90 LH-BR OI= 954 at $0.65 SL=0.00 BUY CALL MAR-85 LH-CQ OI= 159 at $4.70 SL=2.75 BUY CALL MAR-90*LH-CR OI= 251 at $2.05 SL=1.00 BUY CALL MAY-90 LH-ER OI= 110 at $4.70 SL=2.75 Average Daily Volume = 551 K UNH – UnitedHealth Group $74.43 (-0.54 last week) Providing a broad range of resources to help people improve their health through all stages of life, UNH forms and operates markets for the exchange of health and well being services. The company's Health Care Services segment consists of the UnitedHealthcare and Ovations businesses. UnitedHealthcare coordinates network-based health services on behalf of local employers and consumers in six broad regional U.S. markets. Ovations is a business dedicated to advancing the health and well-being goals of Americans over the age of 50. Additionally, the company's Ingenix business operates in the field of health care data and information, analysis and application. Is that another entry point brewing? It certainly looks that way, as UNH pulled back from the $75 level again on Friday, bouncing right at the $74 level before recovering strongly into the close. This action should have come as no great surprise, given the fact that the Health Care index (HMO.X) suffered some profit taking as soon as it pushed through its all-time highs near $503. Of course the intraday highs on Friday ($505) push that bar a little higher, but the point is that UNH (which has been riding the positive sector momentum) pulled back as expected following another positive earnings report in the morning (this one from TGH). As long as HMO remains in rally mode, we can continue to buy the dips in UNH. No slacker in the earnings department, UNH is looking like a standout bullish play in the sector, especially after the company reported a 28% rise in 4Q profits and raised its 2002 earnings outlook. Dips near the $74 level are still looking attractive for new entries, and we're keeping our stop set at $73. Momentum players will want to be very careful about trading a breakout in UNH unless volume is on the rise. *** February contracts expire this week *** BUY CALL FEB-75 UHB-BO OI=3599 at $0.75 SL=0.00 BUY CALL MAR-75*UHB-CO OI=2847 at $2.10 SL=1.00 BUY CALL MAR-80 UHB-CP OI=3654 at $0.60 SL=0.00 BUY CALL JUN-80 UHB-FP OI= 446 at $2.30 SL=1.25 Average Daily Volume = 1.58 mln ************* NEW PUT PLAYS ************* MMS - Maximus $30.36 (-4.74 last week) MAXIMUS, Inc. is a provider of program management and consulting services to government agencies throughout the United States. The services that MAXIMUS provides are designed to make government operations more efficient and cost-effective, while improving the quality provided to program beneficiaries. Earnings short falls are increasing in frequency in certain areas of the market. The information technology area remains under pressure. Early last week, Maximus reported first quarter earnings that increased by 72%. The company fell a penny short of its estimates. More importantly, Maximus said that its earnings for this year would fall. The company guided expectations much lower. Analysts had been expecting the firm to earn as much as $2.30 per share for fiscal 2002. But the company warned that it could only make between $2.05 and $2.10 this year. The news sent the stock lower and it hasn't yet shown signs of stabilizing. Volume continued at a healthy clip in last Friday's session when the stock dropped by another $1. Bearish momentum traders can look for the selling to continue in next week's trading by watching for a breakdown below the $30 level on heavy volume. From there, the stock doesn't have support until the $27 level, which will serve as our short-term downside target. Stops are initially set at the 10-dma at $33.25. ***February contracts expire next week*** BUY PUT FEB-30 MMS-NF OI=20 at $0.60 SL=0.00 BUY PUT MAR-30*MMS-OF OI=83 at $1.55 SL=0.75 Average Daily Volume = 274 K KLIC - Kulicke and Soffa $14.69 (-1.16 last week) Kulicke and Soffa Industries Inc. is a supplier of semiconductor assembly interconnect equipment, materials and technology. Chip and wire solutions combine wafer dicing, die bonding and wire bonding equipment with saw blades, die collets, wire and capillaries. The bearish news delivered by Intel and Texas Instruments recently caught up with chip equipment makers last week. The SOX.X was hard hit during last Thursday's broad tech sell off. One of the weaker stocks in the capital equipment segment of the semiconductor sector is KLIC. The company said early last week that it would lay off another 200 employees during the second quarter. The company said it would take a charge for the elimination of jobs in conjunction with announcing a restructuring of some of its manufacturing operations. Clearly the company is not performing financially and its stock reflects that. Its poor relative strength was again displayed in last Friday's session when the stock failed to rally along with the rest of the chips. We're looking for the selling to continue into next week's trading. Watch for signs of weakness in the SOX.X and consider entries into KLIC put plays at current levels. Those seeking confirmation can look for a breakdown below $14 on heavy volume. Our first downside target is $13, where KLIC could find some support. From there, support is non existent to the $10 to $10.50 area. The company will hold a conference call next week on Friday, February 15, at 9:00 a.m. EST. The call could move the stock in Friday's session. Hopefully they'll warn again. Stops are in place at $16. ***February contracts expire next week*** BUY PUT FEB-15 KQS-NC OI=140 at $0.85 SL=0.25 BUY PUT MAR-15*KQS-OC OI=119 at $1.50 SL=0.75 Average Daily Volume = 1.30 mln A – Agilent Technologies $25.98 (-3.63 last week) Agilent Technologies is a global diversified technology company that provides enabling solutions to high growth markets within the communications, electronics, healthcare and life sciences industries. The company provides test instruments, standard and customized test, measurement and monitoring instruments and systems for the design, manufacture and support of electronics and communications devices. Additionally, A provides fiber optic communications devices and assemblies, integrated circuits for wireless applications, application-specific integrated circuits, optoelectronics and image sensors. Agilent also supplies patient monitoring, ultrasound imaging, and cardiology products and systems for the healthcare industry. As if the CIEN earnings warning wasn't bad enough last week, CSCO followed up with a less than inspiring performance on Wednesday, with the net effect being that investors were once again reminded that the Networking sector won't be returning to its glory days any time in the foreseeable future. Despite having a presence in the Health Care field, A really exists in the Communications and Networking world, and with the Networking sector (NWX.X) off sharply from its December highs and still falling, it is clear that sector weakness is in favor of the bears. After last week's breakdown in the stock, A finally caught a decent bounce from the $25 level late on Friday coming to rest just above the 50% retracement of the stock's September-January advance. Lest the bulls get excited from the late day bounce on Friday, we hasten to point out that it came on rather light volume, and there is some pretty solid resistance overhead in the vicinity of $27.50, also the site of the 38% retracement. That's right, we're thinking entry point when the current bounce runs out of steam and rolls over, as the stock works lower. While the current count on the PnF chart (after last week's double bottom sell signal) gives A a bearish target of $19, we may not be fortunate enough to see that level during the life of this play. The company reports earnings on February 19th, leaving us just over a week to play the downside. Set stops at $28. *** February contracts expire this week *** BUY PUT FEB-25*A-NE OI=2231 at $0.45 SL=0.00 BUY PUT MAR-25 A-OE OI= 281 at $1.25 SL=0.50 BUY PUT MAR-22 A-OX OI= 1 at $0.55 SL=0.00 Average Daily Volume = 2.61 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 02-10-2002 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 ***************** CCMP - Cabot Microelectronics $63.53 (-1.59 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. It looked as if CCMP was going to trace its second consecutive inside day in last Friday's session. But the late day pop higher in the Semiconductor Sector Index (SOX.X) induced a round of short covering in the stock which carried it above its 10-dma. The pop higher in CCMP came on relatively light volume which added credence to the notion of shorts covering. The stock never broke below last Wednesday's low, so traders still looking for new entries into this play should focus on entering puts near resistance levels in the very short-term. If the SOX.X continues dragging CCMP higher into early next week, traders can look for a rollover near the 200-dma, which rests overhead at the $66.43 level. Our coverage stop remains at $66.50, so you see why entries near the 200-dma are appealing in terms of risk management. It's possible that CCMP could rollover before hitting its 200-dma, but that will depend on the action in the SOX.X, so keep a close eye on the broader chip space. Momentum traders can continue watching for the breakdown below last Wednesday's low at the $59.90 level. Just make sure that the SOX.X is weak before entering new put plays in CCMP into its own weakness. ***February contracts expire in two weeks*** BUY PUT FEB-65 UKR-NM OI=445 at $3.20 SL=1.75 BUY PUT MAR-60 UKR-OL OI=231 at $3.70 SL=2.25 Average Daily Volume = 1.17 mln TLAB - Tellabs $13.54 (-1.48 last week) Tellabs, Inc. designs, manufactures, markets and services optical networking, next-generation switching and broadband access solutions. The Company also provides professional services that support its solutions. Products provided by Tellabs include optical networking systems, broadband access systems and next-generation switching systems. TLAB bounced back in last Friday's session on what was clearly a short covering rally. The stock only traded 2.26 million shares. Compare that trading total to the days in which TLAB was trading lower. For example, last Tuesday the stock traded 4.79 million shares during its big down day. That tells us that the sellers remain more convinced about this stock than the buyers do. In addition to the relatively light volume last Friday, TLAB traced an inside day. That creates a relatively easy execution for new entries in next week's trading. Traders searching for new put entries have two choices. First, if the tech sector continues higher look for TLAB to advance up to resistance then rollover. That resistance could come at the 10-dma at $14.31. Or, use the inside day from last Friday to gain entries into new positions on weakness. Simply look for TLAB to breakdown below the $13.30 level on increased volume, which would reveal that the sellers have returned. Monitor the telecom space through the Telecom Sector Index (XTC.X) and the Wireless Sector Index (YLS.X) in addition to the Semiconductor Sector Index (SOX.X). ***February contracts expire next week*** BUY PUT FEB-15 TEQ-NC OI=2656 at $1.75 SL=1.00 BUY PUT MAR-15*TEQ-OC OI=2569 at $2.10 SL=1.25 BUY PUT MAR-12 TEQ-OV OI= 934 at $0.70 SL=0.25 Average Daily Volume = 5.60 mln ADI - Analog Devices $38.87 (-4.27 last week) Analog Devices, Inc. is engaged in the design, manufacture and marketing of high-performance analog, mixed-signal and digital signal processing (DSP) integrated circuits (ICs) used in signal processing applications. The Company has a generic list of approximately 2,000 products, with the highest revenue product accounting for approximately 4% of its revenue in fiscal 2000. Analog also designs, manufactures and markets a range of assembled products. Analog Devices formally announced last Friday the time and date of its first-quarter earnings announcement and conference call. The company plans to release its financial results at 4:00 p.m. EST on Tuesday, February 14. That gives us two more days in this play, which is working according to plan. Going into the play, we were very short-term inclined. And that's working just fine through Friday's trading. The stock lost a significant amount of relative strength versus both the broader market as well as the tech sector. The under performance on ADI's part late last week was very encouraging. We're looking for the stock to continue lower into its earnings announcement. Hopefully we'll see selling return to the Semiconductor Sector Index (SOX.X) early next week, which should exacerbate ADI's downside potential. Speaking of which, the stock has potential support around the $37 level. Short-term traders who took entries during ADI's routine decline last Friday might turn to a move down to the $37 level early next week for a possible exit point. However, a breakdown below the $37 level could have ADI measurably lower ahead of its numbers. Watch for a move down to the $35 to $36 range on a breakdown below $37. ***February contracts expire next week*** BUY PUT FEB-40*ADI-NH OI=1044 at $2.40 SL=1.00 BUY PUT MAR-40 ADI-OH OI=1577 at $4.20 SL=2.75 Average Daily Volume = 3.30 mln GS – Goldman Sachs Group $83.80 (-1.60 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. After such a profitable move to the downside, traders may be wondering if we aren't pushing our luck by keeping GS on the put list this weekend. The answer is that we just might be, at that. After declining from the $550 level in early January, the Broker/Dealer index (XBD.X) looks like it is trying to put in a bottom near the $465 level, with the bulls defending that level several times in the past 2 weeks. The real cause for concern is the descending trendline ($490) on the XBD, because the price moved right up to that level on Friday. If it pushes through that level, it will be clear that bullish sentiment in the sector is picking up steam and should have bears getting more cautious. So what does all this have to do with our GS play, you ask? Simple. The downtrend in the stock looks almost identical to that of the XBD and after defending the $80 support level numerous times last week, the bulls managed to stage a rally (with volume too) right to the descending trendline ($83.80) at the close on Friday. Look for the rebound to roll over near current levels before initiating new positions, and make sure that volume is strong. With the PnF chart giving us a bearish target of $78, we want to use any dip into the $78-80 range as an opportunity to harvest the gains we have accrued in the play. Keep stops set at $84.50. *** February contracts expire this week *** BUY PUT FEB-85 GS-NQ OI=4922 at $2.60 SL=1.25 BUY PUT FEB-80 GS-NP OI=3166 at $0.65 SL=0.00 BUY PUT MAR-85 GS-OQ OI= 581 at $4.90 SL=3.00 BUY PUT MAR-80*GS-OP OI=1750 at $2.85 SL=1.50 Average Daily Volume = 3.01 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 ***** Help! I've Fallen And I Can't Get Up! By Mark Phillips Contact Support That statement is an apt description of market action last week, as all the major indices fell through recent support and struggled mightily to recover, but to no avail. It is also an apt description of the state of my computer throughout the week, as I spent more time rebooting and recovering lost work than actually watching the markets. What I originally thought was a problem with my charting application or ISP now looks to be an issue of trying to make a rapidly aging machine perform more and more work. Looks like it is time to do my part to stimulate the economy and buy a new machine. Too bad the solution to our languishing markets isn't that simple. The term "Crisis of Confidence" has been making the rounds with increasing regularity as accounting concerns continue to plague companies, both good and bad. Like it or not, much of the investing public is focused on the Enron hearings and two big fears are driving their investing decisions. The first is that there may be more Enrons and Global Crossings out there and they desperately want to avoid getting burned by the next one. So if a company doesn't have a pristine balance sheet, it is getting sold, and sold hard. Heck, even companies that don't have any accounting issues are being hit hard. Look at the likes of GE and CSCO, both of which are struggling to hold onto support, $36 for the former and $16 for the latter. I tend to watch these two stocks on a regular basis because of my belief that they are each good benchmark's for their respective indices, GE for the DJIA and CSCO for the NASDAQ. The second issue that is getting investors' attention is the question of what remedial action will be taken once all of the evils of Enron's shenanigans are revealed. Will corporate America be saddled with more regulations? How will those possible regulations affect the efficient conduct of business, as we know it? I obviously don't have the answer, and neither does anyone else; hence the uncertainty that plagues the broad markets. When in doubt, stay out! Aside from the Health Care sector (HMO.X) and Gold index (XAU.X), both of which are viewed as defensive areas, few areas of the market are demonstrating any significant strength. This is precisely the type of weakness I've been concerned about for the past few months. The thing I didn't know was when it would commence, or what the catalyst would be. Well, now we know! By the way, remember last year when we were playing LEAPS on Barrick Gold (NYSE:ABX) in anticipation that investors would give gold stocks some serious attention when it became clear that economic recovery is much further away than advertised? We played it from the $14 level and netted a modest profit. Clearly I should have rolled than one back onto the Watch List as we got another great entry on the stock last November, and look at ABX go...testing 2-year resistance on Friday. Coulda, woulda, shoulda! Several sectors have broken down in a big way over the past couple weeks, and therein lies the problem in picking new plays for our Watch List. What sector is going to be next to give up on recent support? What about those that are trading near their lows? Are they likely to find support near those lows again, or is it merely a speedbump on the way to new lows? Will winning sectors continue to shine, or are they setting up for a fall as well? It is all about timing, as we meander along in rangebound markets, lacking a sufficient catalyst to push the pile very far in either direction. Making the point for me in crystal clear fashion is the late-day rally across the broad markets. I wrote the first 5 paragraphs of this commentary during the morning session on Friday, and then a rally comes out of left field. While a large part of it was likely short-covering going into the weekend, you can see what I'm getting at. The markets don't want to break down any further, yet the catalyst to give us a sustained rally is lacking. That leaves us stuck in a range. Buy and hold is a tough proposition in either direction, as you can see by the pain inflicted on our Portfolio this week. Both EMC and NOK got stopped out on mid-week weakness, before snapping back significantly on Friday afternoon. The plays are dropped this weekend, but if you're still holding open positions in those plays, it just might make sense to wait for the current rebound to run out of steam before closing them out. Our put plays aren't faring much better, as each of them stubbornly refused to break down this past week. I'll say it again, RANGEBOUND MARKETS ARE PERILOUS for long-term investors. What we're trying to do here is position ourselves as the markets move from one extreme to the other, and it is a tough proposition. How many times have we watched a play give us a solid entry, move against us just far enough to stop out the play and then head in the direction we initially expected, going on to become quite profitable long after we exited the play? Too many! That's why I put so much effort into trying to pick the optimum entry points for our plays. That way it is far easier to exit a play with a profit when it begins to move against us. At least that is the way it is supposed to work! It almost seems pointless to discuss the VIX with it sitting right in the middle of its historical range at 25.50. There's nothing that we can read into its current reading, except that we are likely to continue to trade in the current range in the markets. Now where have I heard that before? So with that as preamble, I must say that there wasn't much to report relative to our LEAPS plays. Here's where things rest this week. Watch List: Calls: General Electric (NYSE:GE) - Weakness in the weekly Stochastics and the breakdown early in the week, I think GE works lower before it is ready for a sustained bullish move. Broadcom (NASDAQ:BRCM) - Broke down below the $42 level last week and then bounced right at the $36 support level. I do not think this is a meaningful bottom as the weekly Stochastics still has lots of room to fall. Patience on this one. Johnson & Johnson (NYSE:JNJ) - Another breakdown and then tepid recovery. Wait for the next cycle on the daily oscillators. I think we're going to get a nice entry on this one near $54. This should coincide with a better picture on the weekly Stochastics. Goldman Sachs (NYSE:GS) - What do you think of that meltdown in the Broker/Dealer index (XBD.X)? Brought GS down right to the $80 support level, but still some room to go. PnF chart is pointing to a dip near $78 as the eventual target of the move. But weekly Stochastics are starting to recover, so I'm reinstituting our entry target at $78-80. A renewed bounce in that area looks buyable to me, with a stop set at $76. Puts: Eastman Kodak (NYSE:EK) - Daily Stochastics just starting to emerge from oversold. Look for price to rollover with Stochs near the $29-30 level. Note that we have slightly reduced the Entry Target. That just about does it for me this week. Rangebound markets mean that we want to enter call plays near major support and put plays near resistance and harvest profits when they are available. Whether playing with front-month contracts or 2004 LEAPS, we have to play the hand we are dealt. And right now, that means taking profits when they are offered. Let the Olympics begin! Mark Phillips mphillips@OptionInvestor.com LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None Puts: JNY 01/09/02 '03 $ 35 OOR-MG $ 6.70 $ 6.00 -10.45% $35 '04 $ 30 KKZ-MF $ 5.60 $ 5.00 -10.71% $35 GM 01/10/02 '03 $ 50 VGN-MJ $ 6.50 $ 5.60 1.54% $53.50 '04 $ 50 LGM-MJ $ 8.40 $ 8.70 3.57% $53.50 MO 02/04/02 '03 $ 50 VPM-MJ $ 5.40 $ 5.20 - 3.70% $51.50 '04 $ 50 LMO-MJ $ 7.80 $ 7.60 - 2.56% $51.50 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 $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 $78-80 JAN-2003 $ 85 VSD-AQ CC JAN-2003 $ 80 VSD-AP JAN-2004 $ 90 KGS-AR CC JAN-2004 $ 80 KGS-AP IBM 02/03/02 $100, $95 JAN-2003 $110 VIB-AB CC JAN-2003 $100 VIB-AT JAN-2004 $110 LIB-AB CC JAN-2004 $100 LIB-AT BBH 02/10/02 $114-115 JAN-2003 $120 OEE-AD CC JAN-2003 $110 OEE-AB JAN-2004 $120 KBB-AD CC JAN-2004 $120 KBB-AD PUTS: EK 01/27/02 $29-30 JAN-2003 $ 30 VEK-MF JAN-2004 $ 30 LEK-MF New Portfolio Plays MO - Philip Morris $49.32 **Put Play** No matter how many times I say it, I still wonder if I've truly grasped the concept of patience in trading. Did I plunge into new put positions in MO too soon? Only time will tell, but we aren't off to a stellar start with the stock rebounding on Friday to close just above the $50 level. Keep in mind, that we are playing MO for a fairly small decline into the low $40s, as this is the lower end of the range the stock has been stuck in for more than a year. As I mentioned in the Market Monitor early in the week, I decided to take the position based on weekly oscillators topped out in overbought and the daily beginning to roll. Several readers asked me whether it might not be more prudent to wait for the next cycle up on the daily chart before taking a position. That would put us in a position of jumping in with both the daily AND weekly showing signs of weakness. Based on the price action Friday, it seems that my readers have grasped the concept of patience and waiting for the right entry even better than I myself have! Be that as it may, we have a new put position in the portfolio, and we'll track it keeping a tight stop at $51.50, just above the descending 3-year trendline. A rally through that level will tell us that I am clearly wrong on this play, and if so, you'll all be here to witness the event. For those still looking to enter the play, I would advocate waiting for the daily Stochastics to roll over from overbought territory again and then take a position. But ONLY if the price rolls over below the level of our stop. BUY LEAP JAN-2003 $50.00 VPM-MJ $ 5.40 BUY LEAP JAN-2004 $50.00 LMO-MJ $ 7.80 New Watchlist Plays BBH - Biotech HOLDRs $117.70 **Call Play** Market action over the past couple years has shown that the Biotechnology sector (BTK.X) tends to lead the broader NASDAQ up and down, calling the major turning points in the Technology market. If that pattern holds true, then the BTK should be one of the first sectors to bottom in the current decline. And according to our longer-term charts, a potentially important inflection point is drawing near. For those of you that follow the Market Monitor, Eric Utley did a great job of highlighting this inflection point in his commentary on Thursday afternoon. So please forgive the repetition for those that don't have the ability to follow the intraday commentary. The $455 level on the BTK is an important long-term support level, as demonstrated by the current bearish count on the Point and Figure chart. I'm not saying the BTK has to stop at that level, as it could continue to decline to the 10-month ascending trendline near $440 before finding strong bullish arms of support. Fortunately for us, we don't have to try to pick an individual stock in the group (fraught with all the individual company risk), because the Biotech HOLDR (BBH) is one of the few that have LEAPS available. While they are a bit on the pricey side, I think they are worth the price due to the potential reward. The BTK rebounded from the $450 and looks like it has upside potential into the $600 area. Those levels translate to $110 and $140 on the BBH; plenty of room to harvest some profits. With weekly Stochastics bottomed and flattening out, daily Stochastics emerging from oversold again, and solid support just below current levels, this looks like a great long-term balance of risk and reward. After Friday's 7.25% rally, we'd really like to see a bit of a pullback before entering the play. Target new entries on a bounce from the $114-115 area on the BBH. Remember that we want to buy a bounce from support, not a drop through it. If support fails to hold, then we'll stand aside and either buy the rally back through that support level or consider lowering our target. This is clearly a higher risk play, but one that should reward that higher risk with a proportionately higher reward if the sector continues with the rally that looks like it got started on Friday. Once filled, we'll set a fairly tight stop at $108, -- a close below that would give us a broken trendline and tell us that we are in danger of trying to catch a falling knife. BUY LEAP JAN-2003 $120.00 OEE-AD BUY LEAP JAN-2003 $110.00 OEE-AB For Covered Call BUY LEAP JAN-2004 $120.00 KBB-AD BUY LEAP JAN-2004 $120.00 KBB-AD For Covered Call Drops NOK $21.50 While NOK may be the strongest and most stable stock in the Wireless sector (YLS.X), that wasn't enough to keep it from feeling the sector-wide pain last week. With the YLS breaking to new all-time lows, it was all NOK could do to keep from going down with the ship. The bulk of the pain was delivered on Monday and Tuesday, prompting our exit from the play with our violated stop at $22 on Tuesday. While I still like the long-term prospects for NOK when the economy shifts to recovery mode, it is clear from the recent price action that the market isn't yet ready to reward eager bulls in the sector. While there were some significant profits to be had in the short period of time we had the play in the Portfolio, the stock didn't move far enough to allow us to move our stop high enough to guarantee locking in those profits. If not for tightening our stop last weekend, we would be closing the play out for a loss rather than a slight gain. EMC $14.50 There seems to be no end to the negative effects of the current crisis of confidence on Wall Street and Technology stocks continue to bear the brunt of the selling. We thought we had nabbed a very nice entry point on EMC just over a month ago, but the price action last week proved just how wrong we were. Part of the catalyst for the selloff last week may be due to rumors that EMC is losing market share to Hitachi, and is having to cut prices to retain their customers. We all know what that means -- thinner profit margins and subsequently lower earnings. Not a pretty picture. EMC has been building a neutral wedge for some time now, and when the stock broke back below $14.50, the wedge became bearish. Adding insult to injury is the fact that on the Point and Figure chart, this breakdown gives a bearish target of $8.50, a level which would constitute a new 4-year low. UGLY!! This is what stop losses are for, allowing us to stay alive to play another day. In the meantime, we're just glad to be out of the play before things get any worse. ************** TRADERS CORNER ************** Type-A Chart Screening Service Austin Passamonte We get plenty of email questions asking where the chosen stock plays come from for OI. Many seem to think we use some super- secret software that screens out favorable setup plays. Unless someone is keeping me out of the loop, such is not the case. Even if I were in the dark, let me share with you that which has always worked for me. (Weekly/Daily Chart Scan: Index - Sector Shares) Back in the day when I actively traded equity options and stocks as a whole, I ran thru a two or three-step process that takes inside of 30 minutes per night. Mind you now, this is just a filtering process to find potential play setups, not drill down into entry point nuances, etc. First we need to screen out the overburden with our trommel (gold miner's jargon) before finding the nuggets that shine. I have multiple screens setup in my chart service like the one you see above. The first one to look at would be major indexes and their various sectors. This gives us the initial feel for being bullish, bearish or bewildered. These days I log every index, sector, basket share (listed on www.amex.com) and bonds along with volatility indexes, etc. Scanning thru here gives me the first look at what is overbought/oversold on a weekly and daily chart basis for good directional odds. From there I write down symbols aligned in extreme zones across both charts under one of two columns: long or short. Usually one side or the other fills with names. If I find the sheet sort of balanced both directions, that is a warning of near-term top or bottom in the overall market. Loaded to one side suggests a trend is in place, but we don't force the issue just to create our own market reality, either. Then I take this list and dial down to 60/30 min charts and see where viable entry points may lie. With low beta issues like most basket shares there are usually well-defined entries visible, but that's a different series of articles altogether. Make note of the hottest ones (up or down) to be played alone or used in our next step. (Weekly/Daily Chart Scan: Nasdaq 100 Index) Technology addicts can use the same process via NDX setup. Here we have all 100 components arranged in alphabetical order but it could be by volume, price, percent change or any other value your chart service and preference offers. Click, click, click, click, click... one hundred times in about ten minutes or less. We're looking for weekly/daily chart stochastic values aligned together in overbought or oversold extreme. I can do this in less than five minutes if pressed but ten is more viable. I only stop on the ones dually aligned towards extreme and quickly note the symbol under a column for "long" or "short". Can you see yourself doing that? During commercial breaks of any tired sitcom is plenty of time enough if you must multi- task like that. Now we have two sheets with long and short columns: sectors and stocks. Cross reference the bullish sectors and bullish stocks within for best long play candidates. Cross reference bearish sectors and bearish stocks within for best short play candidates. How difficult is that? (Weekly/Daily Chart Scan: S&P 500) I personally prefer to cruise the SPX instead. That gives me the Dow, OEX and most NDX components within, one fell swoop. Do I look thru 500 charts every time? Not at all... just sort the list by volume and stop at 500,000 shares volume or whatever your personal cutoff happens to be. On nights & weekends with plenty of idle time (what's that?) I might cruise all 500 and it doesn't take an hour total for the process. Can't imagine looking at 500 stocks, or even 100 in that stretch? Neither can I. Never said I look at them, more aptly it's a quick glance. Click-click-click-click-stop... click-click-click-stop... is the staccato rhythm used. Both long-term chart stochastic values spread across the range? Click. Not even worthy of two second's glance beyond there. Summation This one's easy to arrange in Qcharts, if I may horn in on Buzz' series there. These indexes are already defaulted in. I just close out all of the junk screens except for Time & Sales chart listed and open two more bar charts. Align vertically, adjust to suit you and arrange chart signals to taste. Click, click, click, click, click... find yourself some high-odds setups to play next week tonight! 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 ************************************************************** ************ MARKET WATCH ************ Going contrarian with two new additions to the Watch List. How about a bullish communication stock and an oil stock? To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/020902.asp ********** 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 02-10-2002 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 ************* Trading Strategies: More Q&A with the Covered-Calls Editor By Mark Wnetrzak The recent volatility in the market has generated some great questions from readers who are interested in our conservative approach to selling covered-calls. Dear OIN, I am new reader participating in a trial of the newsletter and I am interested in your selection method for covered-calls. My question is, when trying to decide which stocks to use for your final (published) list, what criteria do you use? Also, after I have initiated the covered-call, how much loss should I accept before closing the position? Thanks, TR Regarding the Selection of Covered-Call Candidates: In my research, I use a two-pronged approach to produce a list of covered-call candidates to supplement your search for profitable trading positions: technical searches and option premium scans. I search through hundreds of charts looking for technically strong stocks with robust option premiums. Then I sort through several lists of "overpriced" options and identify stocks with favorable technical trends. In evaluating potential positions, I consider the covered write as a single entity and I am not interested so much in stock ownership or bullish movement, but in obtaining a consistent (monthly) return on investment. This means that I am less concerned about the fundamental outlook for a company, and will focus more on the technical aspects of the underlying issue. However, it is also good advice to only purchase stocks you really would like to own, thus you must also conduct thorough research on any potential candidates. You alone must satisfy all the reasons for entering a specific position regardless of whether it is based on favorable technical signals (above a bullish moving average, positive stochastics or MACD, a heavy-volume rally), fundamental strength (strong earnings, cash flow, revenue), or another type of short-term momentum such as a merger, buyout or stock split. Of course, any situation where the covered-write strategy is applied, short-term or longer-term, requires a neutral to slightly bullish outlook on the underlying equity and the overall market. Don't use this approach on any issue which has unfavorable technical indications. As far as position management, most traders suggest limiting the losses in a single position to a percentage that will not severely impact your overall portfolio if there is a catastrophic loss. This could be anywhere from 5% to 20%, depending on one's personal risk-reward tolerance and portfolio size. You will have to decide what level of capital you are comfortable risking in one position. Obviously, no one knows how a particular stock is going to perform in the future and you do not want to have "one ship that sinks the whole fleet." The fact that we really can't predict share values also supports our reasoning in choosing to hedge against downside activity with ITM covered-writes. Best regards, Mark W. OIN Attn: Covered-Calls Editor, First, I must compliment you on your choice of stocks in this difficult market environment. It's hard to find any issues that are moving higher and yet you offer a number of good plays each week. My problem comes in choosing the right call to sell. I don't always agree with the "in-the-money" approach because it seems that some stocks could support a more bullish outlook. To remedy this problem, I have often considered selling a combination different strike options on the stocks you recommend to achieve better upside potential in the overall position. Is this a good strategy for more aggressive investors and if so, how should I divide the sold options among the various strikes? More to the point, is there a common ratio that allows for a higher return at the risk of limited downside loss? Thank You, RB Regarding Multiple Option Strikes in the Covered-Call Position: There is definitely something to be said for diversity, even with regard to combined covered-write positions in a single portfolio. The goal of the covered-call writer is to have a good combination of high potential returns and adequate downside protection. The problem is; selling an "out-of-the-money" call may offer higher returns but affords only a modest amount of downside protection. Selling an "in-the-money call" will provide more downside cushion but generally offers a lower return. Some traders try to overcome this dilemma by writing "out-of-the-money" calls in some plays and "in-the-money calls" with others. This unique approach may work periodically but will not produce superior results on a consistent basis. Indeed, conservative traders may do best by selecting a bullish issue and writing half of the position "in-the-money" and the other half "out-of-the-money." By spreading out the options among different strike prices, the writer may be able to acquire a favorable return potential as well as adequate downside protection. Investors who have large positions in a specific stock can choose even greater diversification by spreading the sold calls over time as well as different strike prices. One can gain several benefits by writing a portion of the calls near-term and the remaining calls further in the future. In the event of large, unexpected move in the stock, the combination of time frames in each position reduce the need to make immediate adjustments. This type of activity may include buying-back one written call and selling another or simply having the stock called away, but with a mixture of sold options, all of the different positions will not need to be adjusted at the same time. Another advantage to this technique is that the level of option premiums may become more favorable than when the original series of calls were written. At worst, only one group of options would be sold when the premiums are small and hopefully they would increase in value before the next expiration period. This type of diversification will also allow you to establish various positions at different strike prices, smoothing the portfolio balance as the market fluctuates cyclically. It also prevents all of one's stock from being committed at a single price. It's obvious the strategy of the "combined" write, whether by time period or strike price, offers an excellent balance between potential return and favorable downside protection. 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 TSTN 5.19 4.95 FEB 5.00 0.55 $ 0.31 9.7% CYMI 37.22 38.88 FEB 35.00 3.50 *$ 1.28 8.2% MONE 14.01 14.63 FEB 12.50 2.25 *$ 0.74 6.8% MONE 14.83 14.63 FEB 12.50 3.20 *$ 0.87 6.5% ELON 16.73 18.20 FEB 15.00 2.40 *$ 0.67 5.1% PLCE 32.00 31.35 FEB 30.00 2.90 *$ 0.90 4.5% ELON 19.50 18.20 FEB 17.50 2.50 *$ 0.50 4.3% PWAV 18.15 17.61 FEB 15.00 3.70 *$ 0.55 4.1% CECO 37.07 36.00 FEB 35.00 2.70 *$ 0.63 4.0% AMZN 14.44 12.52 FEB 12.50 2.25 *$ 0.31 3.7% WEBM 23.07 19.64 FEB 20.00 3.60 $ 0.17 1.9% WEBM 24.20 19.64 FEB 20.00 4.80 $ 0.24 1.8% UCOMA 5.50 4.46 FEB 5.00 1.00 $ -0.04 0.0% RATL 23.92 21.35 FEB 22.50 2.35 $ -0.22 0.0% RBAK 6.20 4.31 FEB 5.00 1.55 $ -0.34 0.0% STOR 5.34 4.23 FEB 5.00 0.65 $ -0.46 0.0% PCLN 5.52 4.16 FEB 5.00 0.85 $ -0.51 0.0% PLUG 10.58 8.65 FEB 10.00 1.40 $ -0.53 0.0% CLRS 5.60 4.10 FEB 5.00 0.95 $ -0.55 0.0% ADIC 18.32 16.00 FEB 17.50 1.70 $ -0.62 0.0% RNWK 8.13 6.15 FEB 7.50 1.30 $ -0.68 0.0% EPNY 10.97 8.68 FEB 10.00 1.50 $ -0.79 0.0% FCEL 18.08 15.95 FEB 17.50 1.25 $ -0.88 0.0% NETA 30.26 26.69 FEB 30.00 1.40 $ -2.17 0.0% PKTR 7.69 7.00 MAR 7.50 0.85 $ 0.16 1.7% *$ = Stock price is above the sold striking price. Comments: As I noted a couple weeks ago, "Lost opportunity is easier to replace than lost equity!" Even Friday's rally did little to change the belief of professional traders that further con- solidation in the major averages will continue. Many stocks have violated their September to January trend-lines such as: Network Associates (NASDAQ:NETA), Webmethods (NASDAQ:WEBM), Rational Software (NASDAQ:RATL), UnitedGlobalCom (NASDAQ: UCOMA), and E.piphany (NASDAQ:EPNY). Depending on your out- look, using any rally to exit or roll down may be prudent. Plug Power (NASDAQ:PLUG), FuelCell Energy (NASDAQ:FCEL)), Redback Networks (NASDAQ:RBAK), and Storagenetworks (NASDAQ: STOR) continue to act worrisome as they forge Stage I bases. If they can hold support, a rally should offer a chance to roll forward, and in the case of Plug Power or FuelCell, roll down. Priceline.Com (NASDAQ:PCLN), has suffered a bit more than expected during these horrid market conditions. We will show the position closed though investors with a long-term bullish outlook may consider lowering their cost basis. Positions Closed: Riverstone Networks (NASDAQ:RSTN), Bruker Daltonics (NASDAQ:BDAL), ADC Telecommunications (NASDAQ:ADCT), Sycamore Networks (NASDAQ:SCMR) and Acacia Research (NASDAQ:ACRI). 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 AVII 10.50 MAR 10.00 QVI CB 1.45 294 9.05 35 9.1% DCTM 20.39 MAR 17.50 QDC CW 3.90 114 16.49 35 5.3% INRG 13.65 MAR 12.50 UME CV 2.00 27 11.65 35 6.3% MDR 12.36 MAR 10.00 MDR CB 3.40 18 8.96 35 10.1% PECS 28.55 MAR 25.00 PQD CE 5.00 21 23.55 35 5.4% VPHM 19.50 MAR 17.50 HPU CW 3.00 65 16.50 35 5.3% XMSR 13.98 MAR 12.50 QSY CV 2.25 502 11.73 35 5.7% 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 12.36 MAR 10.00 MDR CB 3.40 18 8.96 35 10.1% AVII 10.50 MAR 10.00 QVI CB 1.45 294 9.05 35 9.1% INRG 13.65 MAR 12.50 UME CV 2.00 27 11.65 35 6.3% XMSR 13.98 MAR 12.50 QSY CV 2.25 502 11.73 35 5.7% PECS 28.55 MAR 25.00 PQD CE 5.00 21 23.55 35 5.4% DCTM 20.39 MAR 17.50 QDC CW 3.90 114 16.49 35 5.3% VPHM 19.50 MAR 17.50 HPU CW 3.00 65 16.50 35 5.3% 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). ***** AVII - AVI BioPharma $10.50 *** New Drug Speculation *** AVI BioPharma (NASDAQ:AVII) is a development-stage biopharma- ceutical company focusing on developing therapeutic products using two distinct platform technologies, Cancer Immunotheraphy and Gene-targeted drugs, called New-Genes. AVII's principal focus is developing treatments for life-threatening diseases, specifically cancer and heart disease. The company's two plat- forms are specially aimed at solving the challenges faced by pharmaceutical products. AVII's therapeutic cancer vaccine, Avicine, which is in clinical trials, is designed to produce an immune response against human chorionic gonadotropin (hCG). The company has completed the pre-clinical development of two Neu-Gene agents, Resten-NG and Oncomyc-NG, and has filed NDAs with the FDA. AVI BioPharma recently announced the opening of its state-of-the-art good manufacturing practices (GMP) manu- facturing facility for NEUGENEŽ antisense drugs. This pharma- ceutical manufacturing plant will be the site for production of bulk NEUGENE drugs for preclinical and clinical development, product launch and commercialization. We simply favor the support area near our cost basis as this position offers a favorable entry point from which to speculate on the company's new drug pipeline. MAR 10.00 QVI CB LB=1.45 OI=294 CB=9.05 DE=35 TY=9.1% ***** DCTM - Documentum $20.39 *** On The Mend *** Documentum (NASDAQ:DCTM) develops, markets and supports an open, flexible, Internet-scalable content management platform that enables companies to create, deliver, publish and personalize content in various formats across e-business applications. The company shipped the 1st commercial version of its Documentum Server product in late 1992, and since then, substantially all of its revenue has been from licenses of its family of Internet- scale content management system products and related services, which include maintenance and support, training and consulting services. In January, Documentum beat expectations, posting a fourth-quarter loss and said it expects to return to operating profits by the 2nd-quarter of 2002. Merrill Lynch has raised its long-term rating to a "strong buy" from "buy," saying changes in Documentum's sales organization are a significantly positive. Recently, Deutsche Banc Alex. Brown started coverage on DCTM with a "buy" rating and a 12-month price target of $28.50. We simply favor the bullish technical indications and our low risk position offers a method to profit from future bullish movement in the issue. MAR 17.50 QDC CW LB=3.90 OI=114 CB=16.49 DE=35 TY=5.3% ***** INRG - Inrange Technologies $13.65 *** Next Step Up? *** Inrange Technologies (NASDAQ:INRG) designs, manufactures, sells and services switching and networking products for storage, data and telecommunications networks. Their products are designed to address the volume of information that is captured, processed, stored and manipulated over storage, data and telecommunications networks, and to enhance the management capabilities of these networks as they become more essential to business success. The company's key products include the IN-VSN family of directors, switches, channel extenders and optical networking products for storage networks; the Universal Touchpoint family of switches, control systems and management applications used for management of data networks, and their unique 7-View family of equipment for monitoring telecommunications networks. INRG shares rallied early in December after the company upped its fourth-quarter targets and announced a buyback of up to $20 million worth of its common stock. This week, Inrange reported a 4th-quarter net loss (with special charges) while its revenues rose 32%, driven by sales its open storage networking business. Inrange Tech expects full year 2002 pro forma earnings to be approximately $0.12 per share. The stock appears poised to step higher in the coming sessions and traders who believe the issue is destined for a future rally can profit from upside movement with this position. MAR 12.50 UME CV LB=2.00 OI=27 CB=11.65 DE=35 TY=6.3% ***** MDR - McDermott International $12.36 *** Favorable Ruling! *** 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. McDermott International has delayed the release of its financial results until after a court rules on the solvency of its Babcock & Wilcox subsidiary, which has filed for bankruptcy protection. On Friday, the court ruled in McDermott's favor, stating that McDermott was solvent at the time certain assets were transferred from B&W to its parent, Babcock & Wilcox Investment Company, in 1998. McDermott is due to report earnings on Monday, February 11. We favor the bullish technical indications and our conservative position offers a method to participate in the future movement of the issue with relatively low risk. MAR 10.00 MDR CB LB=3.40 OI=18 CB=8.96 DE=35 TY=10.1% ***** PECS - PEC Solutions $28.55 *** Upgrade = Rally! *** PEC Solutions (NASDAQ:PECS) is a professional services company specializing in high-end solutions that help government organiza- tions capitalize on the Internet and other advanced technologies. The company migrates paper-intensive procedures to Web-enabled processes using e-government solutions, which help its clients enhance their productivity and improve the services they offer to the public. PEC Solutions' clients have included every cabinet-level department of the federal government, as well as numerous additional entities at the federal, state and local levels. UBS Warburg on Thursday said it raised its rating on the company to a "buy" rating which resulted in a heavy volume rally. UBS Warburg said it is looking at the company's sales pipeline related to security projects and that it is encouraged about near-term growth opportunities. The long-term up-trend remains intact and our position offers an excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. MAR 25.00 PQD CE LB=5.00 OI=21 CB=23.55 DE=35 TY=5.4% ***** VPHM - ViroPharma $19.50 *** Waiting On FDA Review *** ViroPharma (NASDAQ:VPHM) is a pharmaceutical company dedicated to the commercialization, development and discovery of new anti- viral medicines. The company has focused its current product development and discovery activities on a number of ribonucleic acid, or RNA, virus diseases. These include viral respiratory infection, often referred to as the common cold; hepatitis C; and respiratory syncytial virus disease. The company currently is developing its most advanced product candidate, Picovir (pleconaril), for the treatment of common diseases caused by picornaviruses. In preclinical studies, Picovir has been demonstrated to inhibit picornavirus replication in vitro by a novel, virus-specific mode of action. ViroPharma submitted a new drug application (NDA) for marketing approval of Picovir to the FDA in July 2001. In late September 2001, ViroPharma was notified that the Picovir(TM) NDA submission was accepted for filing. Also in September, ViroPharma and Aventis (NYSE:AVE) signed an agreement to co-develop and co-promote Picovir(TM) in the United States. This week, VPHM and Aventis announced that the NDA for Picovir(TM) is scheduled to be reviewed by the Antiviral Drugs Advisory Committee of the FDA on March 19, 2002, four days after the March options expiration. The current technicals suggest speculators are moving in ahead of the FDA review. This position offers a reasonable reward on a stock that should be range-bound (buy the rumor, sell the news) prior to the FDA meeting. MAR 17.50 HPU CW LB=3.00 OI=65 CB=16.50 DE=35 TY=5.3% ***** XMSR - XM Satellite $13.98 *** Pull Back = Entry Point *** XM Satellite Radio Holdings (NASDAQ:XMSR) is a development stage company that seeks to become a premier nationwide provider of audio entertainment and information programming. The company owns one of two FCC licenses to provide a satellite digital radio service in the United States. It plans to transmit its XM Radio service by satellites to vehicle, home and portable radios. The company will offer a wide variety of music, news, talk, sports and other specialty programming on up to 100 distinct channels. Salomon Smith Barney recently raised its rating on XM Satellite due to the recent pull-back in its share price. XM Satellite is the current leader in providing satellite radio, completing a nationwide rollout in the 4th-quarter of 2001 and concluding an agreement with GM for factory installation in 23 of its 2003 models. Its competitor, Sirius Satellite (NASDAQ:SIRI), has delayed its launch by over a year and pushed out OEM factory installations until late '03. XM Satellite appears to be form- ing a long-term "double bottom" with a support area near $10. This position offers a reasonable entry point for speculators who believe XM Satellite is the best thing since FM radio. MAR 12.50 QSY CV LB=2.25 OI=502 CB=11.73 DE=35 TY=5.7% ***** ***************** 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 5.14 MAR 5.00 ORB CA 0.75 549 4.39 35 12.1% AMZN 12.52 MAR 12.50 ZQN CQ 1.35 3943 11.17 35 10.3% NMSS 5.40 MAR 5.00 YHG CA 0.90 12 4.50 35 9.7% BEAS 16.25 MAR 15.00 BUC CC 2.45 4705 13.80 35 7.6% NETE 13.59 MAR 12.50 UPN CV 2.00 397 11.59 35 6.8% PLMD 18.85 MAR 17.50 PM CW 2.55 497 16.30 35 6.4% SATC 5.59 MAR 5.00 UIG CA 0.90 45 4.69 35 5.7% FCEL 15.95 MAR 15.00 FQG CC 1.80 72 14.15 35 5.2% ***************** NAKED PUT SECTION ***************** Investing 101: Which Type of Analysis is Best? By Ray Cummins New readers are always asking what type of analysis we use and how we choose the candidates for this section. More important however, is that any technique used to evaluate a position be appropriate for the current environment and it should be based on your personal investing criteria and risk-reward outlook. With the recent slump in share prices and the renewed concerns about future corporate earnings, now is an excellent time to review the different types of stock analysis and decide which technique is most appropriate for your investment portfolio. There are three types of information that most traders use to determine a bias or opinion on a specific stock. The first is "fundamental" analysis; income statements, balance sheets, and the future projections for revenues and earnings. The second is "sentiment" analysis; investor expectations of market and individual stock performance, news or upcoming events and other possible activities such as mergers and stock splits. The final category is "charting." This method relies on the history of trading and price movement in a specific stock. The issue can also be a future, index, or industry group. Most analysts (and we agree with this outlook) believe that charts reflect all of the known information and public opinion surrounding a specific stock or security. Technical analysis involves the use of historical pricing to identify trends and patterns. Many different indicators are displayed on price charts. Moving averages, support/resistance lines, envelopes, Bollinger bands, and momentum curves are all common measures. Price, time and volume are basic inputs into these indicators. Price reflects the level of change in the attitude of investors. Time measures the cycle or period of change and volume (relative to its past history) measures the intensity of that change. Together, these indicators reveal buying and selling patterns that are difficult to discern by tracking stock quotes in a textual format. Charting can also display selling pressure that develops when an issue reaches a certain level, or repeated buying at a lower price. There are a variety of simple charting techniques that can help a trader better understand the market and technicians have popular names for the most common patterns. To avoid complexity, new traders should focus on three basic concepts: the stock's price trend; its support and resistance levels (the prices at which a stock typically reverses course); and the relationship between price movement and volume activity. A number of systems have been developed to help traders form an opinion based on chart patterns and predict the future turning points (and the magnitude of movement) in the underlying issue. The analysis begins by determining the strength and direction of a trend. The basis for future predictions is supported by the fact that once a trend is in place, the issue will continue in that direction until a change in character occurs. The more times the stock tests and remains above the current trend-line, the greater the significance of the trend, and any subsequent share price activity that violates the line. Sometimes stocks simply bounce back and forth in a trading range and when that happens, it's helpful to identify the boundaries of the pattern for clues to its future direction. For example, if a specific stock breaks decisively below a support level, it is likely to continue falling until a new level of support is established. In contrast, when an issue rallies above a previous resistance level, it is likely to continue higher as there is no overhead supply to restrict its upward movement. Successful traders will look at various indicators from different perspectives and identify signals that suggest upcoming changes or trend reversals. When you can do this with a minimum measure of accuracy on a regular basis, and adapt the results to your personal trading style, the value of your portfolio will grow consistently, regardless of the overall market character. 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 MDR 12.52 12.36 FEB 10.00 0.25 *$ 0.25 19.8% DGIN 24.77 24.95 FEB 22.50 0.50 *$ 0.50 13.3% PCX 28.30 28.75 FEB 25.00 0.75 *$ 0.75 12.4% ISLE 16.45 15.73 FEB 15.00 0.30 *$ 0.30 12.0% ESST 22.89 20.72 FEB 20.00 0.35 *$ 0.35 11.5% TMCS 21.50 22.03 FEB 20.00 0.60 *$ 0.60 11.3% FCN 29.10 25.13 FEB 25.00 0.40 *$ 0.40 10.9% ENER 23.27 21.10 FEB 20.00 0.30 *$ 0.30 10.3% TYC 35.63 29.88 FEB 27.50 0.35 *$ 0.35 10.2% CRUS 19.15 16.15 FEB 15.00 0.45 *$ 0.45 9.1% SPCT 15.10 14.21 FEB 12.50 0.30 *$ 0.30 8.7% ISSX 39.00 34.82 FEB 30.00 0.30 *$ 0.30 8.0% TMCS 19.78 22.03 FEB 17.50 0.40 *$ 0.40 7.2% SFA 26.70 22.77 FEB 22.50 0.45 *$ 0.45 7.1% ICST 25.69 21.34 FEB 20.00 0.45 *$ 0.45 7.0% FCN 26.85 25.13 FEB 23.38 0.35 *$ 0.35 6.7% TMCS 19.95 22.03 FEB 17.50 0.45 *$ 0.45 6.5% MERQ 37.51 37.65 FEB 30.00 0.35 *$ 0.35 6.5% JDAS 28.10 26.15 FEB 22.50 0.35 *$ 0.35 6.3% IONA 24.25 17.31 FEB 17.50 0.50 $ 0.31 6.3% PPD 23.21 19.75 FEB 17.50 0.35 *$ 0.35 6.1% MEDC 23.34 19.44 FEB 17.50 0.35 *$ 0.35 6.1% IRF 39.19 39.12 FEB 35.00 0.50 *$ 0.50 6.0% MROI 29.20 26.18 FEB 25.00 0.40 *$ 0.40 5.5% LIN 27.64 26.96 FEB 25.00 0.45 *$ 0.45 5.5% SEBL 37.20 34.11 FEB 30.00 0.30 *$ 0.30 5.4% CMNT 23.75 19.84 FEB 20.00 0.50 $ 0.34 4.7% JBHT 28.10 22.65 FEB 25.00 0.40 $ -1.95 0.0% *$ = Stock price is above the sold striking price. Comments: The recent broad-market slump has put pressure on almost all the stocks in the portfolio. With this abrupt change in the overall market character, traders should be wary of remaining in bullish positions that have anything less than outstanding technical strength. Issues currently on the early-exit "watch" list include ESS Tech. (NASDAQ:ESST), Isle of Capris, (NASDAQ:ISLE) and FTI Consulting (NYSE:FCN). Positions in Computer Network Technology (NASDAQ:CMNT) and Iona Technologies (NASDAQ:IONA) finished Friday's session positive, but both plays should have been previously closed due to activity earlier in the week. The position in Tyco (NYSE:TYC), although profitable, was not initiated Monday morning due to the opening gap down in the company's share value (almost $5) and it will be removed from the monthly summary. Positions Closed: Jb Hunt (NASDAQ:JBHT), Digital River (NASDAQ:DRIV), Finisar (NASDAQ:FNSR) and Med-Design (NASDAQ:MEDC); $20 strike, and MIM Corporation (NASDAQ:MIMS). 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 AMZN 12.52 MAR 10.00 ZQN OB 0.50 1075 9.50 35 14.5% ASW 10.81 MAR 5.00 ASW OA 0.35 30 4.65 35 12.1% HAL 13.95 MAR 12.50 HAL OT 0.70 1599 11.80 35 12.6% MANH 29.80 MAR 22.50 MQR OX 0.65 55 21.85 35 8.5% MU 34.90 MAR 27.50 MU OR 0.60 960 26.90 35 6.9% OSIS 22.06 MAR 17.50 UOJ OW 0.70 36 16.80 35 11.9% PMCS 22.50 MAR 15.00 SQL OC 0.30 708 14.70 35 5.4% TXN 30.29 MAR 27.50 TXN OY 0.85 1922 26.65 35 7.3% 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 AMZN 12.52 MAR 10.00 ZQN OB 0.50 1075 9.50 35 14.5% HAL 13.95 MAR 12.50 HAL OT 0.70 1599 11.80 35 12.6% ASW 10.81 MAR 5.00 ASW OA 0.35 30 4.65 35 12.1% OSIS 22.06 MAR 17.50 UOJ OW 0.70 36 16.80 35 11.9% MANH 29.80 MAR 22.50 MQR OX 0.65 55 21.85 35 8.5% TXN 30.29 MAR 27.50 TXN OY 0.85 1922 26.65 35 7.3% MU 34.90 MAR 27.50 MU OR 0.60 960 26.90 35 6.9% PMCS 22.50 MAR 15.00 SQL OC 0.30 708 14.70 35 5.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** AMZN - Amazon.com $12.52 *** Entry Point! *** Amazon.com (NASDAQ:AMZN) is a Website where customers can find and discover anything they may want to buy online. The company lists millions of unique items in categories such as books, music, DVDs, videos, consumer electronics, toys, etc. The company's Amazon Marketplace, Auctions and zShops services, allows any business or individual to sell virtually anything to nearly 30 million cumulative customers, and with Amazon.com Payments, sellers can accept credit card transactions. The company also operates four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. AMZN also operates the Internet Movie Database (www.imdb.com), a thorough source of information on movies and entertainment titles, and cast and crewmembers. Amazon.com rallied strongly in January after posting its first ever net profit following strong holiday sales. The company also benefited when Moody's Investors Service raised AMZN's ratings to reflect improved operating measures and a sharply lower cash drain from operations. This position offers a low risk entry point with a cost basis near technical support. MAR 10.00 ZQN OB LB=0.50 OI=1075 CB=9.50 DE=35 TY=14.5% ***** ASW - A.C.L.N. Ltd. $10.81 *** Speculation Only! *** A.C.L.N. Ltd. (NYSE:ASW) is an independent logistics provider and wholesale automobile dealer operating primarily between Europe and North and West Africa. The company operates in the following two business segments, with individuals and port agents in 15 ports located in 13 countries in North and West Africa, from four ports in established markets in Northern Europe: door-to-door logistics services for cars and light trucks consisting of the delivery of new and pre-owned cars and light trucks to purchasers; and wholesale automobile business consisting of the delivery of new cars, which the company purchased on a bulk-discounted basis, against pre-existing orders, to purchasers. Based on the recent bullish technical indications, it appears all of the "bad" news has finally been "priced" into this issue. Traders who favor speculative "premium selling" plays should consider this position. MAR 5.00 ASW OA LB=0.35 OI=30 CB=4.65 DE=35 TY=12.1% ***** HAL - Halliburton $13.95 *** Bottom Fishing! *** Halliburton (NYSE:HAL) provides services and equipment to energy, industrial and governmental customers. The company operates in two business segments: Energy Services Group and Engineering and Construction Group. The Energy Services Group provides a range of discrete services and products for the exploration, development and production of oil and gas. The segment serves independent, integrated and national oil companies. The Engineering and Construction Group segment, consisting of Kellogg Brown & Root and Brown & Root Services, provides a range of services to energy and industrial customers and government entities worldwide. The company has been under pressure due to widespread concerns over asbestos-related lawsuits but Halliburton argues that asbestos claims won't ruin their finances. Ole Slorer, a Morgan Stanley Dean Witter analyst agrees. He estimates that future asbestos claims against the company will be less than $1 billion, or $2.30 a share, well under Halliburton's insurance coverage for asbestos claims. Investors can speculate on the company's future with this conservative position. MAR 12.50 HAL OT LB=0.70 OI=1599 CB=11.80 DE=35 TY=12.6% ***** MANH - Manhattan Associates $29.80 *** Outstanding Earnings! *** Manhattan Associates (NASDAQ:MANH) a provider of technology-based solutions to improve supply chain effectiveness and efficiencies. The company's solutions enhance distribution efficiencies through the integration of supply chain constituents; manufacturers, distributors, retailers, suppliers, transportation providers and consumers. Their solutions focus on supply chain execution, which begins with the execution of an order and ends with the fulfillment of the order to the end customer. The company's solutions consist of software, including products to enable the execution, fulfillment and delivery of customer orders, the optimization of distribution center operations and the collaboration between and among trading partners; services, including design, configuration, implementation, and training services, plus customer support services and software enhancement subscriptions; and hardware. Shares of MANH soared more than 18% Friday, after the company reported quarterly earnings that beat analysts' expectations on strong revenue. The company received upgrades from J.P. Morgan and Bear Stearns and traders can profit from the new upside momentum in the issue with this position. MAR 22.50 MQR OX LB=0.65 OI=55 CB=21.85 DE=35 TY=8.5% ***** MU - Micron Technology $34.90 *** 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 position offers an excellent way to speculate on the future movement of the issue with relatively low risk. MAR 27.50 MU OR LB=0.60 OI=960 CB=26.90 DE=35 TY=6.9% ***** OSIS - OSI Systems $22.06 *** Bomb Detection! *** OSI Systems (NASDAQ:OSIS) is a vertically integrated, worldwide provider of devices, subsystems and end products based on optoelectronic technology. The company designs and manufactures optoelectronic devices and value-added subsystems for original equipment manufacturers for use in a broad range of applications, including security, medical diagnostics, fiber optics, telecom, gaming, office automation, aerospace and defense electronics, computer peripherals and industrial automation. In addition, the company utilizes its optoelectronic technology and design capabilities to manufacture security and inspection products that are used to inspect people, baggage, cargo and other objects for weapons, explosives, drugs and other contraband. In the medical field, OSI manufactures and sells bone densitometers, which are used for bone loss measurements in the diagnosis of osteoporosis. Rapiscan Security Products, a subsidiary of OSI, and a worldwide leader for providing security solutions to airports, customs facilities, correctional facilities, and governments, said Friday it received a bridge order for FAA certified carry-on baggage X-ray screening systems outfitted with Threat Image Projection (TIP) valued at approximately $5 million. The increased interest in these types of products may result in additional, future revenues for OSI and traders can speculate on that outcome with this position. MAR 17.50 UOJ OW LB=0.70 OI=36 CB=16.80 DE=35 TY=11.9% ***** PMCS - PMC-Sierra $22.50 *** Entry Point! *** PMC-Sierra (NASDAQ:PMCS) is a provider of high speed broadband communications semiconductors and MIPS-based processors for Enterprise, Access, Metro Optical Transport and Wireless network equipment that makes up the backbone of the Internet. PMC-Sierra offers worldwide technical and sales support, including a network of offices throughout North America, Europe and Asia. Goldman Sachs recently added PMC-Sierra to its "recommended list" after the communications chip maker reported fourth-quarter results in line with expectations. Goldman raised its target price on the stock to $30 based on significant operating leverage and future revenue improvements. Investors who wouldn't mind owning PMCS can establish a discounted basis in the stock with this position. MAR 15.00 SQL OC LB=0.30 OI=708 CB=14.70 DE=35 TY=5.4% ***** TXN - Texas Instruments $30.29 *** Major Upgrade! *** Texas Instruments (NYSE:TXN) is a global semiconductor company and a designer and supplier of digital signal processors and analog integrated circuits, the engines driving the digitization of electronics. These two types of semiconductor products work together in digital electronic devices such as digital cellular phones. TI also designs and manufactures other semiconductor products. Their many products include standard logic devices, application-specific integrated circuits, reduced instruction-set computing microprocessors, microcontrollers and digital imaging devices. In addition to semiconductors, TI has two other primary segments. Sensors & Controls markets electrical and electronic controls, sensors and radio-frequency identification systems to commercial and industrial markets. Educational & Productivity Solutions is a supplier of graphing and educational calculators. Shares of TXN rallied Friday after UBS Warburg said it upgraded the world's leading maker of computer chips for mobile phones to a "buy" and raised its price target to $37, based on a improving earnings. Analysts are now forecasting higher operating margins than previously expected, do to "cost-of-sales" improvements and management's plan to control operating expenses. Traders can speculate the future movement of TXN shares with this position. MAR 27.50 TXN OY LB=0.85 OI=1922 CB=26.65 DE=35 TY=7.3% ***** ***************** 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 PECS 28.55 FEB 25.00 PQD NE 0.30 99 24.70 7 16.0% MRVL 36.46 MAR 30.00 UVM OF 1.40 187 28.60 35 12.8% SONE 14.59 MAR 12.50 FBZ OV 0.60 15 11.90 35 12.0% NEWP 23.25 MAR 20.00 NZZ OD 0.80 10 19.20 35 10.1% RMCI 22.95 MAR 20.00 UHU OD 0.80 5 19.20 35 9.9% IDXC 13.10 MAR 12.50 XQW OV 0.55 0 11.95 35 9.2% SEBL 34.11 MAR 27.50 SGQ OY 0.75 515 26.75 35 8.4% CELG 28.14 MAR 22.50 LQH OX 0.40 90 22.10 35 5.8% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ A Late-Session Surge Ends The Recent Slump! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, February 8 The major equity averages roared back to life today on the wings of an unexpected buying spree as investors shopped for bargains among recently downtrodden issues. The Dow Jones Industrial Average led the afternoon rally, up 118 points to finish at 9,744. Strength in the blue-chip segment came from J.P. Morgan Chase (NYSE:JPM), General Motors (NYSE:GM), International Paper (NYSE:IP), AT&T (NYSE:T), American Express (NYSE:AXP), Citigroup (NYSE:C), Walt Disney (NYSE:DIS) and Alcoa (NYSE:AA). Technology stocks also advanced with semiconductor, networking and computer hardware companies leading the NASDAQ to a 36 point gain at 1,818. The S&P 500 stock index rose 16 points to close at 1,096 as financial shares rallied and biotechnology stocks soared after recent precipitous declines. Shares of gold companies also continued their astonishing upward trajectory as gold futures reached $304, a level that hasn't been seen for two years. Trading volume came in at 1.36 billion on the Big Board and at 1.8 billion on the technology exchange. Market breadth was bullish with winners pacing decliners 2 to 1 on the NYSE and 23 to 12 on the NASDAQ. In the treasury market, bonds regained traction after an early morning slump with the 10-year note up 11/32 to yield 4.89% while the 30-year long bond rose 1/2 point to yield 5.37%. One analyst noted that the lack of a "flight to quality" bid in bonds amid growing anxiety in the stock arena is telling. Tony Crescenzi, the chief bond market strategist at Miller Tabak noted, "The signals coming from the bond market are significant and suggest the anxieties in the (equity) markets are likely to dissipate." (I, for one, favor of that opinion!) Last week's new plays (positions/opening prices/strategy): C.R. Bard (NYSE:BCR) FEB50C/FEB50P $3.75 debit straddle Elan (NYSE:ELN) MAR30C/MAR30P $0.00 debit straddle Waste Mgmt. (NYSE:WMI) MAR25C/MAR25P $2.60 debit straddle Cephalon (NSDQ:CEPH) MAR80C/MAR75C $0.55 credit bear-call Gilead (NSDQ:GILD) MAR55P/MAR60P $0.75 credit bull-put L-3 Comm. (NYSE:LLL) MAR90P/MAR95P $0.80 credit bull-put Our new straddle issues were an active group but unfortunately, the best play in the portfolio did not offer a viable entry opportunity as the company posted its quarterly profits before Monday's market open. After a very unfavorable earnings report, shares of Elan plunged from $29.85 to $14.85 in one session; an unbelievable $15 move! The movement in C.R. Bard was far less extreme, but the straddle came close to hitting the break-even points on both sides of the neutral position in only 5 days. With a recent trading range of almost $6, aggressive straddle players should have little difficulty in achieving a profitable exit in the position. The WMI straddle did not offer the target entry price until late in the week, but the company's quarterly report is not expected until February 26, so traders had time to be patient. The new credit spreads were a mixed lot with only L-3 and Gilead offering the suggested opening credits and both of those issues experienced unfavorable downside activity in the process. Cephalon traded just as expected, but Monday's brisk sell-off reduced the available premium in the position. Portfolio Activity: The recent volatility in the market has been an unexpected boon for straddle traders and the Spreads/Combos portfolio enjoyed a number of winning positions this week. Neutral plays in Agilent (NYSE:A) and BEA Software (NASDAQ:BEAS) achieved gains of 25% or more and our previously struggling position in Jabil (NYSE:JBL) moved into the "profitable" category with a credit of $1.00 on $4.40 invested. The bearish portion of the straddle easily paid for the entire position and traders who were wondering how they might escape the play with limited losses were more than happy with a 20% profit. Juniper (NASDAQ:JNPR), Mirant (NYSE:MIR) and J.P. Morgan Chase (NYSE:JPM) were the most successful straddles of the month with each position offering profits in excess of 60% on the initial investment. The neutral-outlook play in Schering Plough (NYSE:SGP) provided a favorable "early-exit" opportunity Wednesday when the straddle credit moved as high as $3.00, a 20% gain on the $2.50 invested in only two weeks. The speculative position in Intervoice-Brite (NASDAQ:INTV) also offered traders an acceptable "break-even" exit when the stock fell to $8.75 in Thursday's session. The activity boosted the bid price of the bearish portion of the straddle (FEB-10P) to the $1 range, very near the overall cost of the play. Reader's Write: One of our more observant subscribers was kind enough to mention that the strategy explanation in last week's "Editors Note" was incorrect. The description (which was summarized from a recent article on Long Synthetic Straddles) should have read: For those of you who are unfamiliar with this technique, synthetic straddles use the "long" options of your choice (ATM, ITM, or OTM) to offset the fixed delta of the underlying stock. Since buying 100 shares of stock produces a delta of 100, a trader would buy 2 ATM puts to create an overall position delta of zero. Conversely, going short 100 shares creates a delta of -100, which requires the PURCHASE of 2 ATM calls to create a perfectly delta neutral trade. We apologize for the oversight with this late addition to the narrative and I would like to personally thank the perceptive trader for bringing this error to my attention. Readers of the Spreads/Combos section are always welcome to submit comments and questions (and any corrections!) to: Contact Support Until Next Week... ****************************************************************** - NEW PLAYS - One of our readers asked for some speculative "earnings-related" straddles in the technology group and despite the recent market volatility, there are a number of great candidates for neutral, option-buying strategies. Here are three favorable candidates, based on analysis of historical option pricing and technical background. Each company is scheduled to announce quarterly earnings late next week, thus providing an increased potential for volatility. As with any recommendations, they should also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** CVTX - CV Therapeutics $41.32 *** Big Mover! *** CV Therapeutics (NASDAQ:CVTX) is a biopharmaceutical company engaged in the discovery and development of new small-molecule drugs to treat cardiovascular disease. The company is conducting clinical trials for three of its drug candidates. Ranolazine, the first in a new class of compounds known as partial fatty acid oxidation (pFOX) inhibitors, is in Phase III clinical trials for the potential treatment of chronic angina. CVT-510, an A1 adenosine receptor agonist, is in Phase II clinical trials for the potential treatment of atrial arrhythmias. CVT-3146, an A2A adenosine receptor agonist, is in Phase I clinical trials for the potential use as an adjunctive pharmacologic agent in cardiac perfusion imaging studies. The Delta or "hedge ratio" in the position suggests we should buy 1 call for every 2 puts (1:2 ratio) to maintain a neutral outlook. However, any downward trading activity in the issue Monday should allow both sides of the position to be purchased at similar prices. In addition, the current bid/ask spreads are very large, so target a slightly lower debit in the play to allow for a consolidation in the option premiums. PLAY (extremely speculative - neutral/debit straddle): BUY CALL FEB-40 UXC-BH OI=411 A=$2.65 BUY PUT FEB-40 UXC-NH OI=448 A=$1.20 INITIAL NET DEBIT TARGET=$3.50-$3.60 TARGET PROFIT=15%-25% ****************************************************************** LTXX - LTX Corporation $19.95 *** Cheap Options! *** LTX Corporation (NASDAQ:LTXX) designs, manufactures, markets and services semiconductor test equipment. The company sells its systems to semiconductor designers and manufacturers worldwide, such as Texas Instruments, Philips Semiconductor, National Semi, Motorola, NEC, Vitesse Semiconductor, Agere Systems, Infineon Technologies and Hitachi. These customers use semiconductor test equipment to test every semiconductor device at two different stages during the manufacturing process. These devices are also incorporated in a range of products including data communications equipment such as switches, routers and servers, broadband access products such as cable modems and Ethernet accessories, personal communication devices such as cell phones and personal digital assistants, consumer products such as televisions, videogame systems, digital cameras and automobile electronics, and personal computer accessory products such as disk drives and 3-D graphics accelerators. PLAY (very speculative - neutral/debit straddle): BUY CALL FEB-20 UXT-BD OI=392 A=$0.90 BUY PUT FEB-20 UXT-ND OI=984 A=$0.95 INITIAL NET DEBIT TARGET=$1.75 TARGET PROFIT=15%-25% ****************************************************************** AGIL - Agile Software $12.35 *** Straddle With A Twist! *** Agile Software (NASDAQ:AGIL) develops and markets collaborative manufacturing commerce solutions that speed the "build" and "buy" process across the virtual manufacturing network. The Agile Products are Agile Anywhere Product Suite, Agile eHub, Agile Integration Products, Agile EMSdirect Service, and Agile Buyer Solution. The company's customers include, among others, Amkor, Altera, Dell Computer, Flextronics International, GE Medical Systems, Hewlett-Packard, Jabil Circuit, Lucent Technologies, Philips, SCI and Texas Instruments. There is very little "Open Interest" in the near-term options, so we thought this position would be a great opportunity to try the Long Synthetic Straddle mentioned in last week's narrative. In this case, the trader would buy AGIL stock for the bullish portion of the position and two (2) ATM put options for each 100 shares of AGIL purchased. For more information about the strategy, read the description in the summary narrative above and refer to the previous edition of the OIN Spreads/Combos section (2/3/02): http://members.OptionInvestor.com/combos/020302_1.asp PLAY (very speculative - long synthetic straddle): BUY SHARES STOCK NASDAQ:AGIL LAST=$12.35 BUY PUTS (2 PER 100 SHARES AGIL) MAR-12.50 AUG-OV OI=15 A=$1.35 INITIAL NET DEBIT TARGET FOR OPTIONS=$1.25 TARGET PROFIT=25% ****************************************************************** - SPREADS & COMBOS - ****************************************************************** SEE - Sealed Air Corporation $40.62 *** Time Selling! *** Sealed Air Corporation (NYSE:SEE, operating through its many subsidiaries, is engaged in the manufacture and sale of a wide range of food, protective and specialty packaging products. The company conducts substantially all of its business through two direct wholly owned subsidiaries, Cryovac, Inc. and Sealed Air Corporation. These two subsidiaries directly and indirectly own substantially the assets of the business and conduct operations themselves and through subsidiaries around the globe. Sealed Air operates in the United States and in 45 other countries, and its products are distributed in those countries as well as in other parts of the world. In recent years, the company has extended its protective packaging operations into countries where the company previously had established food packaging operations, including several European, Latin American and Asia/Pacific countries and South Africa, as well as also extending its protective packaging operations into Israel. It's rare these days to see a candidate for a "time-selling" play but this issue emerged in a scan for neutral to bullish issues with premium disparities between different expiration periods. The differences in front-month implied volatility are relatively small but in the current environment, they seem extreme. With the favorable technical outlook and recent resistance near the sold strike price, this position may appeal to those of you who like to participate in low risk calendar spreads. In this case, the underlying issue is some distance below the strike price of the options, providing a speculative position with low initial cost and large potential profits. Two favorable outcomes can occur: the stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long options' strike price, thus yielding a positive return. The cost basis of the long option can also be reduced through the sale of additional calls prior to its expiration in July. PLAY (conservative - bullish/calendar spread): BUY CALL JUL-45 SEE-GI OI=221 A=$3.20 SELL CALL MAR-45 SEE-CI OI=45 B=$0.90 INITIAL NET DEBIT TARGET=$2.00-$2.10 TARGET PROFIT=50% ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and its recent technical history or trend. Current news and market sentiment will have an effect on these issues so review each position individually and make your own decision about its future outcome. ****************************************************************** ESRX - Express Scripts $50.05 *** Solid Earnings = Rally! *** Express Scripts (NASDAQ:ESRX) provides health care management and administration services on behalf of clients that include health organizations, health insurers, third-party administrators, employers and union-sponsored benefit plans. The company's fully integrated pharmacy benefit management services include network claims processing, mail pharmacy services, benefit consultation, drug utilization review, formulary management, disease management, medical and drug data analysis, medical information management services, disease management support and outcome assessments and informed decision counseling services through its Express Health Line division. Express also provides non-PBM services including distribution services through its Specialty Distribution Services subsidiary. PLAY (conservative - bullish/credit spread): BUY PUT MAR-40 XTQ-OH OI=16 A=$0.25 SELL PUT MAR-45 XTQ-OI OI=69 B=$0.80 INITIAL NET CREDIT TARGET=$0.65-$0.70 PROFIT(max)=16% ****************************************************************** SLM - USA Education $91.50 *** Hot Sector! *** USA Education (NYSE:SLM) is the nation's largest private source of funding and servicing support for higher education loans for students and their parents. The company provides a wide range of financial services, processing capabilities and information technology to meet the needs of educational institutions, lenders, students, and guarantee agencies. The company's managed portfolio of federally insured student loans totals billions of dollars and the company also has commitments to purchase a large number of of additional student loans. Primarily a provider of education credit, the company serves a diverse range of clients, including approximately 5,500 educational and financial institutions and state agencies. The company serves millions of borrowers through its ownership and management of approximately $67.5 billion in student loans. PLAY (conservative - bullish/credit spread): BUY PUT MAR-80 SLM-OP OI=22 A=$0.30 SELL PUT MAR-85 SLM-OQ OI=44 B=$0.80 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% ****************************************************************** FNM - Fannie Mae $79.50 *** Range-Bound? *** Federal National Mortgage Association (NYSE:FNM), commonly known as "Fannie Mae", is a private, shareholder-owned company that works to assure that mortgage money is readily available for existing and potential homeowners in the United States. Fannie Mae does not directly lend money to homebuyers, but works with lenders to make sure that there is no shortage of funds available for mortgage loans. The method in which Fannie Mae accomplishes this is by purchasing mortgages from a variety of institutions that make up the primary mortgage market. Primary market lenders include mortgage companies, savings and loans, commercial banks, credit unions, and state and local housing finance agencies. These are the businesses where the mortgages are originated and the funds are loaned directly to the borrower. Fannie Mae then buys the mortgage, thus allowing the primary market lender to replenish their funds and lend more money to homebuyers. PLAY (conservative - bearish/credit spread): BUY CALL MAR-90 FNM-CR OI=1706 A=$0.10 SELL CALL MAR-85 FNM-CQ OI=2993 B=$0.55 INITIAL NET CREDIT TARGET=$0.50-$0.60 PROFIT(max)=11% ****************************************************************** ************************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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