The Option Investor Newsletter Sunday 02-17-2002 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 ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 2-15 WE 2-8 WE 2-1 DOW 9903.04 +158.80 9744.24 -163.02 9907.26 + 67.18 Nasdaq 1805.20 - 13.68 1818.88 - 92.36 1911.24 - 26.46 S&P-100 559.65 + 2.37 557.28 - 12.07 569.35 - 5.79 S&P-500 1104.18 + 7.96 1096.22 - 25.98 1122.20 - 11.08 W5000 10315.48 + 66.16 10249.32 -240.85 10490.17 - 86.35 RUT 469.25 + 2.58 466.67 - 13.37 480.04 + 0.69 TRAN 2684.23 + 24.29 2659.94 - 99.39 2759.33 - 20.59 VIX 24.09 - 1.38 25.47 + 2.60 22.87 + .94 VXN 44.99 - 4.29 49.28 + 6.20 43.08 - 2.59 TRIN 1.89 .64 1.44 TICK -128 +957 +652 Put/Call .90 .73 .67 ****************************************************************** Trade, Don't Invest By Buzz Lynn buzz@OptionInvestor.com Notice anything funny about the box score numbers posted on the indexes above? Before you read on, glance up and take a look at those numbers. The Dow, NASDAQ, S&P, Wilshire, Russell, and Dow Tranports have traded in a tight range for the last three weeks. This is not environment in which we want to invest. With turning or rising long-term oscillator patterns, we would expect the candles to be leading the charge up the charts. They have not, as we'll see in a minute, and the charts are turning weak. Getting long-term points from this market is like getting blood from turnips. And based on Friday's methodical selling, might I suggest the turnip is getting blood from long-term investors? This is a market made for trading. Not to be a pessimist here and drone on about old news, but accounting issues born of casual contact with "Enronitis" sufferers are infecting the brains of the investment community. Call it headline risk. What were once considered to be safe investments (and especially speculative ones) now have investors on edge in anticipation of a sudden price implosion. One can't protect against that (except to buy protective puts, which cost money), so the logical course of action is to protect capital, sit out, and let the dust settle. Trouble is the dust may not settle too quickly. Where you find one accounting cockroach, you usually find many - each one kicking up a new dust cloud as it scurries across the trading floor and front page news. They are virulent little buggers This is not going to end anytime soon as the companies engaged in opaque accounting techniques usually cloaked as "pro forma" income now face the choice to come clean and take a stock price hit, or be found out and take a bigger hit - caught between the devil and the deep blue sea. We can see the resultant hesitancy of investors' commitment in the lack of volume on the NYSE and the NASDAQ. If the rally that began in October represented a true anticipation of an economic bottom, volume should have been much stronger over the past few months. This is not the stuff of which sustained bull markets are made. The volume says that many would- be participants are not participating. By default, conviction is not there. But back to the immediate Enronitis problem -- many news bits popped up last week that left investors feeling a bit anxious. For instance, SEC documents revealed that Warren Buffet's Berkshire Hathaway (BRK.A) sold most of its Citigroup (C) holdings, which put pressure on the financials upon the news release. Think Warren and Charlie have high hopes for an accounting recovery or economic recovery in which banks are SUPPOSED to lead the way? Don't bet on it. That sale was as much a vote for economic non-recovery as it was to decrease exposure to bad loans and accounting cockroaches. Well, let them eat steak! And so they shall as BRK.A also filed notice that they had acquired at least a 5% stake in Outback Steakhouse (OSI). In my read between the lines, there's a vote that the economy isn't going into depression either as Berkshire believes that particular brand of dining will continue to grow without major economic recovery. Recovery or not, the Telecom-related companies are going to burn a bigger hole in planet Earth and perhaps vaporize their bankers in the process (unless they are wearing asbestos bunny suits). Rumors - OK, forget rumors - facts of Qwest Communications (Q) accounting practices surfaced too, which revealed Q had drawn on its bank lines of credit because they could not refinance their commercial paper. It suggests investors' lack of faith in Q's ability to repay loans and gives the banks major heartburn as their contingent liability get converted to a real one. Look for banks to begin writing down telecom failures in bigger numbers. Neither sector should see any recovery until more pain is inflicted. If you thought things were tough on JPM who had exposure to K-mart, Enron, and Global Crossing, stay tuned as the dominos continue to fall in banking and telecom. WCOM ought to be on our "ball of flames" lists too. IBM also took a big hit on accounting reports in the New York Times that it failed to book a subsidiary sale to JDSU as a one- time gain, and instead, used the sale as regular income. To boot, they are said to have applied it to the reduction of expense thereby manufacturing falsely inflated earnings when they last reported. IBM was single-handedly responsible for roughly 25 points loss in the Dow as it traded down $5 to $102.89 on nearly three times its average daily volume (ADV). The company reports no SEC investigation (as though investors should have confidence in that factoid). Hard to buy into that as a virtue though as the SEC also didn't investigate ENE and GX until after it was too late. Just as a matter of note, rumors - only rumors - permeated some trading circles that Intel's (INTC) sales were off thanks to lower selling prices of the P4 chips. While that would not surprise me, INTC declined comment until their mid-quarter update scheduled in early March. I would be cautious on this stock for any continued upside action as INTC, along with CSCO and MSFT, have a long history of "managing" earnings. I don't worry as much about MSFT because they still make money and have $36 bln cash - soon to be more I presume. On the economic front, output fell in January though the decline was the smallest in the last eight months. More disconcerting was the downward revision of December's figures to -0.3% from -0.1%. (OK, so the government makes them up as they go along too. They ought to call them "pro forma" economic figures. Take them with a grain of salt.) However, industrial capacity utilization also fell to its lowest level since 1983. The number itself (74.2%) isn't important, but it does go to show that huge capacity is meeting with little demand. There is no pricing power, thus no inflation, and many think the Fed ought to be lowering rates still. Flat to declining prices rule, which will make profits tough to grow organically. That said, stock prices would have a hard time advancing in the long run if they remain at parody (oops, "parity") with earnings. Other than a slightly down Preliminary Michigan Consumer Sentiment (from 93.0 to 90.9) mostly born of expectations rather than current conditions, Ken Lay taking the 5th, and Sharon Watkins Enron testimony helping Lay look like a Fastow/Skilling dupe, not much else to talk about. And I'll bet you are glad about that! Summary: Finance and techs are weak. Strength not likely to return soon. So much for fundamentals and news. Let's turn to technicals. The battle cry in the previous week was to short every rally. That turned into choppy but slightly up in the first four trading days of the past options expiration week. What to expect this coming week? Shall we take a peak at the charts? [Note: U.S markets will be closed Monday in observation of a President's Day] Dow Industrials weekly/daily (INDU): Starting with the weekly Dow on the left, notice the tight candle range between roughly 9700-9900 with stray days of volatility displayed by the wicks. The 5-period stochastic did manage to turn up, but not from oversold territory, indicating the move is suspiciously weak. As noted earlier, low volume suggests the same. The 10-period stochastic is still pointed down. The daily chart however, appears to have reached the top of its game last week and is having a difficult time holding over 10,000. Points of resistance are plenty, which make bullish trading a bit dicey. The first inflection point was 9712, which fell, became resistance for a short period of time, and now looks like it could act as support again. Then there is the 50-dma (magenta line), currently 9925, which failed to hold as support. Look for it to act as the first point of resistance. After that, the upper Bollinger band (tagged and reversed by price action Thursday) at 10,031 and the 200-dma (gray line) at 10,070 will be really tough to break without any volume to back it up. If accounting and volume remain issues (bet on it), a break is extremely unlikely. Couple that with daily stochastic oscillators that now have entered overbought, and the next sustained move appears to be down, especially given the non-committal condition of the weekly chart. Nothing says the Dow is going bullish this week. However, there has been a great deal more strength in the cyclical index. Take a look. Cyclical Index weekly/daily (CYC.X): Weekly oscillators are a bit stronger for the CYC than the Dow. However, note that it has nearly reached its declining top trendline, which could spell trouble for bulls at the 550-552 level. The daily is a bit mixed as oscillators, including the upper Bollinger band, suggest these have topped out and are ready for a roll down. Friday's final candle - that golf club looking thing - doesn't help the bullish cause. Since the charts don't generally lie, there may be some downside action here too. However, my optimism is based on the candles giving very little back and continuing to find support for the last two days at the 542 level. Individual stocks like IP, DD, and X bucked the trend and made impressive gains on Friday despite the Dow's loss. More optimism is based on the point and figure chart that reversed from a column of O's to a column of X's that has now exceeded the column of O's. It already went green with one double-top breakout. Risk/reward measures could take cyclicals bullishly to 550 and perhaps another breakout at 555, while the downside support looks to be 535. Thank Stockcharts.com for this one and see below: PF chart on Cyclicals (CYC): Some good strength here and pullbacks to 535 on the index makes individual hard resource issues - chemicals, steel, paper - look buyable. Follow Eric and Jeff's comments in the Market Monitor next week, as I'll bet these show up bullish on many radar screens. NASDAQ composite (COMPX) weekly/daily chart: NASDAQ bulls. . .TOAST! Declining trend line, rolling or already diving long-term stochastics, bullish divergence on the daily chart. 'Nuff said. Bulls became steers long ago on the COMPX. Attractive short candidates will likely be had on any strength in the tech market, particularly among the walking dead telecom related companies. Whirling knife blades - watch fingers! S&P 500 (SPX) weekly/daily chart: Sadly for bulls, wither the SPX too. With so many financials and tech stocks included in the broad market, the bearish side looks to be more profitable in the coming week. Evening star reversal on Thursday at the declining trend line with bearish divergence and rolling overbought stochastics on the daily chart favor bears. Weekly chart is already pointed down stochastically with 1100 about to be mashed into the S&P cowcatcher and 1080 the next major support. This along with the OEX make for great put opportunities on any strength. But watch the upper trend line to see if it holds at 1120. A breakout while highly unlikely would send all above indicators the way of the Dodo and T-Rex - extinct. Any clue from indicators of volatility, the VIX and VXN? Not much. The VIX is at 24.09 and possibly climbing based on oversold stochastic reversal. The VXN is in the same boat. Oscillators suggest they will climb, which would show investor favoritism toward puts and away from calls. While it corroborates the coming bearishness in the air, it is no guarantee. So for the coming week, all appearances are for bulls to buckle their seatbelts and bears to get honey pots at the ready. Though it could always turn out different that's the way I see it in the charts this weekend. Fear not, be happy! For this is the making of a profitable albeit short week, as long as we adhere to our charts, which objectively favor the bears. Remember, no U.S. markets will be open Monday. Be well this President's Day extended weekend. See you at the Tuesday morning bell! ******************** INDEX TRADER SUMMARY ******************** Less Than One Week Austin Passamonte Last Friday afternoon saw the SPX bounce from an intraday low of 1177 to close considerably higher. Monday followed thru in full rally fashion. Daily chart stochastic values began to emerge from oversold extreme and signaled a rally would continue. (Weekly/Daily Charts: SPX) But that didn't happen. Price action rose on Wednesday and maxed out Thursday before the afternoon slide began that ended at Friday's closing bell. Meanwhile, stochastic values ran the gamut from one extreme to the other via daily charts. What next? 1096 area is a nearby floor that could be tested and from there we'd expect a visit to recent lows. No sign of upward strength at this point, and any further excuse will send index price action back down the hill. (Weekly/Daily Charts: SOX) The Sox is coiling into a lengthy wedge that promises to break soon. Meanwhile, price action sits on a 50% Fib retrace along with 50 and 200 DMAs joining to offer strong arms below. If this support breaks it will become solid resistance instead. (Weekly/Daily Charts: XBD) One of the weakest sectors by far is the broker/dealers. A big breakdown on Friday looks to be merely a good start over here. I would avoid the long side of this at all costs and weak components should make excellent short candidates besides. Could easily shed another 50+ index points if Friday's close cannot hold, and daily chart stochastic values tell us it most assuredly won't! Summation Price action fell out of bed on Friday and never climbed near the covers again. I took 13 trades in round trip fashion to accomplish what only three of the right ones would have done: short, long and shoooorrrt was the order for that day. Next week ahead looks like a continuation of volatile markets with a distinct downside bias if daily charts roll bearish some more. I'll enjoy a long weekend to recover from Friday's exhaustion and hope you do the same. Whatever happened to the times of position trading for days and weeks on end? Perhaps they are still here in front of us, and downside plays will likely be it. Trouble is the whole world is trying to short this market as well, and the crowd is seldom correct in a big way! Should be interesting from here to say the least... Best Trading Wishes, austinp@OptionInvestor.com ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************** Editor's Plays ************** Due to technical difficulties, there are no editor’s plays this week. **************** MARKET SENTIMENT **************** Fear Returns In The Same Form By Eric Utley Accounting woes resurfaced late last week, which brought an end to the recent round of optimism. Late Thursday, NVIDIA (NASDAQ:NVDA) said that it was conducting an internal review. And Friday morning, IBM (NYSE:IBM) fell under investor scrutiny. These accounting fears appear far from resolved as even the most prestigious of American corporations, such as Big Blue, are coming under suspicion. The first wave of accounting fears primarily concerned companies heavy in financing operations and those who are acquisitive by nature. Tyco (NYSE:TYC) and General Electric (NYSE:GE) are good examples of the companies that bore the brunt of the first wave. Now those fears are spreading to the likes of NVIDIA and IBM, which puts into question the rest of the market. The fears, whether founded or not, have to be factored into a market thesis because perception is reality in the marketplace. The confidence crisis, which began with Enron, puts into question the preliminary signs of bullishness we saw in the bullish percent data last week, specifically in the Nasdaq-100 Bullish Percent ($BPNDX). The Nasdaq-100 Bullish Percent reversed into Bull Alert from its long-held Bear Confirmed stance. That had me warming up to the idea of being bullish on tech stocks, but unfortunately the indicator can't be viewed in a vacuum and does not discount investor psychology. The indicator lost one stock in Friday's sell-off, which was led by tech shares. If we see the indicator hold up in the face of continued weakness early next week, then we might begin to draw some conclusions about the internals of the Nasdaq, which could lead to a strengthening of a bullish stance. More to come next week... ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9903 Moving Averages: (Simple) 10-dma: 9804 50-dma: 9926 200-dma: 10071 S&P 500 ($SPX) 52-week High: 1383 52-week Low : 945 Current : 1104 Moving Averages: (Simple) 10-dma: 1100 50-dma: 1134 200-dma: 1160 Nasdaq-100 ($NDX) 52-week High: 2771 52-week Low : 1089 Current : 1437 Moving Averages: (Simple) 10-dma: 1459 50-dma: 1579 200-dma: 1597 Defense ($DFI) Defense stocks were the best performing group in last Friday's session. The $DFI finished 1.03 percent higher, far out pacing the weakness in the broader market. Leaders in the sector included Embraer Empresa (NYSE:ERJ), higher by 6.06 percent, Northrup Gruman (NYSE:NOC), better by 5.01 percent, and Alliant Tech (NYSE:ATK), up by 3.82 percent. 52-week High: 594 52-week Low : 497 Current : 589 Moving Averages: (Simple) 10-dma: 578 50-dma: 540 200-dma: N/A Networking ($NWX) The deterioration of the networking sector continued last week, led lower by the weakness in the telecom segment of the market. The NWX finished lower by 4.24 percent. Losers in the group included Symbol Tech (NYSE:SBL), shedding 28.75 percent, Riverstone Networks (NASDAQ:RSTN), lower by a chunky 18.51 percent, and Tellabs (NASDAQ:TLAB), off by 7.53 percent. 52-week High: 707 52-week Low : 201 Current : 254 Moving Averages: (Simple) 10-dma: 272 50-dma: 319 200-dma: 328 ----------------------------------------------------------------- Market Volatility Both volatility measures climbed in last Friday's session, reversing the week-long slide. However, with expiration of February contracts, some of the spike in the VIX could've been attributed to positioning into March contracts. We'll track the two closely next week. CBOE Market Volatility Index (VIX) - 24.09 +1.20 Nasdaq-100 Volatility Index (VXN) - 44.99 +2.77 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.15 730,639 840,499 Equity Only 1.08 642,312 693,379 OEX 1.13 38,543 43,511 QQQ 2.06 41,938 86,464 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 52 + 0 Bull Alert NASDAQ-100 38 - 1 Bull Alert DOW 53 + 0 Bull Correction S&P 500 58 + 0 Bull Correction S&P 100 58 - 1 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 1.20 10-Day Arms Index 1.31 21-Day Arms Index 1.25 55-Day Arms Index 1.24 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 1546 1536 NASDAQ 1421 2053 New Highs New Lows NYSE 122 64 NASDAQ 50 61 Volume (in millions) NYSE 1,358 NASDAQ 1,589 ----------------------------------------------------------------- Commitments Of Traders Report: 02/12/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercial traders grew more bearish last week with a net increase in the group's bearish position by about 3,600 contracts. Small traders grew more bullish by shedding more shorts than longs. The group's net bullish position increased by about 3,000 contracts. Commercials Long Short Net % Of OI 01/29/02 345,583 401,923 (56,340) (7.5%) 02/05/02 347,583 401,569 (53,986) (7.2%) 02/12/02 355,276 412,868 (57,592) (7.5%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 01/29/02 128,826 63,127 65,699 34.2% 02/05/02 128,235 64,404 63,831 33.1% 02/12/02 126,730 59,902 66,828 35.8% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 Commercial traders shed a small number of shorts and added a few longs for a decline in the group's net bearish stance. Small traders' actions resulted in a small decline in their net bullish position. Commercials Long Short Net % of OI 01/29/02 31,577 33,651 (2,074) (3.2%) 02/05/02 32,357 35,405 (3,048) (4.5%) 02/12/02 32,712 34,841 (2,129) (3.2%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: 7,774 - 12/21/01 Small Traders Long Short Net % of OI 01/29/02 9,709 8,293 1,416 7.9% 02/05/02 10,416 8,173 2,243 12.1% 02/12/02 9,009 7,415 1,594 9.7% Most bearish reading of the year: (9,877) - 12/21/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Commercial interests increased both long and short positions for a net increase in the group's bullish position. However, % of OI dropped. Small traders grew more bearish with an increase in the group's net short position as well as % of OI. Commercials Long Short Net % of OI 01/29/02 19,956 12,171 7,785 24.2% 02/05/02 21,868 12,068 9,800 28.9% 02/12/02 26,811 16,488 10,323 23.8% 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 01/29/02 5,872 9,709 (3,837) (24.6%) 02/05/02 5,764 10,528 (4,764) (29.2%) 02/12/02 4,562 10,038 (5,476) (37.5%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** *************** ASK THE ANALYST *************** Crystal Ball By Eric Utley The market has an uncanny way of predicting the future. It is, after all, a forward-looking medium. Good and bad news is often priced in before the fact. That's why stocks often defy logic. The market even has the ability to discount events outside of the business world and in the realm of politics. Three observations from last Friday's session caught my attention: the rallies in bonds, defense, energy shares. The combination portends trouble. Since the State of the Union address, the market has been on alert for rising tensions in the Middle East. There was a bid in oil shares through most of last week that stemmed from the potential for a disruption in supply from the Middle East. The defense stocks stand to benefit from increased military activity. Finally, bonds are a good place to park money during times of conflict. I think this complex, let's call it the "Axis of Evil Bid," is worth monitoring into the next few weeks. I'm not drawing any conclusions just yet, but most certainly working the bid into my market thesis. The point and figure charts that appear in this column were created using www.StockCharts.com. Please send your questions and suggestions to: Contact Support ---------------------------- Harley Davidson (NYSE:HDI) The fundamentals of HDI are reported to be deteriorating, after hitting a 52-week high fairly recently. What does the technicals say? - Thanks, Dan Thanks for the thoughtful question, Dan. I worked at an oil refinery two summers while I was going to school. There were more than a few Harley riders at the plant. The brand was, and I believe still is, synonymous with the hard working American. The Harley represented more than a motorcycle. I remember a few of the guys at the refinery were on two and three year waiting lists for the new model year. I don't know if Harley's strategy was scarcity, thus raising the price of its bikes, or if the scarcity was merely a product of a supply/demand inefficiency, resulting from the essence that is Harley, which was the appeal to the guys at the refinery. Whichever the case, the stock has performed incredibly well over the last five years; it's higher by more than 600 percent. Short sellers have been jumping all over the stock up near its all-time highs. The reason behind the short activity is due to the rising inventory levels. What some short sellers have spotted is rising inventory levels at dealers, which Harley explains as positioning ahead of an economic rebound and in front of its 100th anniversary bike. I haven't researched the company's inventory levels enough to give an intelligent opinion, but I have heard that the waiting list for new Hogs is not long, if existent at all. The dealer I called here in Denver seemed to have more than enough bikes in stock. It's a risky bet for Harley to put a bunch of inventory onto its dealers because if demand doesn't return, then the company may run the risk of losing its image of scarcity. From there, I would think that the brand runs into danger of losing its luster. I don't know how the story is going to play out at Harley. And I'm not going to guess. The best I can give you, Dan, is the technical progression of the stock. What I find truly amazing is that Harley has been trading better relative to the S&P 500 (SPX.X) since early 1997. In other words, Harley hasn't given a sell signal on its relative strength chart versus the S&P 500 since January of 1997. The stock has been a picture of strength, which is why I don't like the notion of shorting it right now. A sell signal versus the S&P 500 might reveal the inflection point if Harley's plan doesn't pan out and its business takes a turn for the worse. The market can be as simple as buying strong stocks and shorting weak stocks. Right now, Harley is strong. That doesn't mean you should run out and buy it, but it does mean that the risk in the stock is weighted to the upside. HDI versus SPX.X - 1997 ---------------------------- Countrywide Credit (NYSE:CCR) What is your opinion on Countrywide Credit these days? It's on a quadruple bottom breakdown since it printed 38 and broke below support...I'm thinking short below $37.94...Of course I'm sure I've left something important out, what do you think? - Thanks, Michael Very cool, intelligent question, Michael. Credit quality is a concern among consumer finance firms. That's because personal bankruptcies remain at relatively high levels, although they are expected to ease this year. Last year personal bankruptcies grew by 19 percent, while they're expected to grow by about 15 percent this year. The deteriorating economic conditions and heavy debt burdens have left many individuals with no alternative. That has put aggressive consumer lenders at risk. Enter Countrywide. The company is not a bank or a broker, so it's somewhat difficult to make a comparison to broader gauges. The company is a specialty lender and that group as a whole has been trading poorly. Others in the group include Household International (NYSE:HI), Americredit (NYSE:ACF), and some of the credit card issuers such as Capital One (NYSE:COF). CCR is trading poorly to relative the broader market (SPX.X), which is one filter to either confirm or deny a bearish stance. The quadruple bottom that was broken about two weeks ago, in my mind, increases bearish conviction. The bearish resistance line on the chart below would make for an entry with quantifiable and manageable risk, while offering good downside potential. CCR - P&F ---------------------------- 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 DA Groupe Danone Mon, Feb 18 11:30 am ET N/A NZT Telecom New Zealand Mon, Feb 18 Before the Bell N/A ANF Abercrombie&Fitch Tue, Feb 19 After the Bell 0.72 ADCT ADC Tue, Feb 19 Before the Bell -0.05 A Agilent Technologies Tue, Feb 19 After the Bell -0.50 CEPH Cephalon Tue, Feb 19 After the Bell 0.14 KOF Coca-Cola FEMSA, Tue, Feb 19 Before the Bell 0.42 RE Everest Reinsurance Tue, Feb 19 After the Bell 0.75 FMX FEMSA Tue, Feb 19 Before the Bell 0.82 FHCC First Health Group Tue, Feb 19 Before the Bell 0.26 GPC Genuine Parts Tue, Feb 19 -----N/A----- 0.51 IPCR IPC Holdings Tue, Feb 19 After the Bell 0.64 KG King Pharmaceuticals Tue, Feb 19 Before the Bell 0.30 MDT Medtronic Tue, Feb 19 -----N/A----- 0.30 MTGNY Modern Times Group Tue, Feb 19 Before the Bell N/A OMC Omnicom Group Tue, Feb 19 Before the Bell 0.87 QGENF QIAGEN Tue, Feb 19 -----N/A----- 0.07 SRCL Stericycle Tue, Feb 19 After the Bell 0.31 TLTOB Tele2 AB Tue, Feb 19 -----N/A----- N/A TMPW TMP Worldwide Tue, Feb 19 After the Bell 0.24 TRI Triad Hospitals Tue, Feb 19 Before the Bell 0.17 WMT Wal-Mart Tue, Feb 19 After the Bell 0.49 WTW Weight Watchers Int’l Tue, Feb 19 After the Bell 0.04 WTM White Mntns Ins Grp Tue, Feb 19 After the Bell N/A YRK York International Tue, Feb 19 -----N/A----- 0.61 AAP Advance Auto Parts Wed, Feb 20 -----N/A----- 0.03 AOG Alberta Energy Wed, Feb 20 Before the Bell 0.13 ALD Allied Capital Wed, Feb 20 Before the Bell 0.45 AIB Allied Irish Banks Wed, Feb 20 -----N/A----- N/A ARW Arrow Electronics Wed, Feb 20 -----N/A----- -0.03 BFb Brown-Forman Wed, Feb 20 Before the Bell 0.81 CYH Community Health Sys Wed, Feb 20 After the Bell 0.16 DCX DaimlerChrysler Wed, Feb 20 -----N/A----- 0.37 DCI Donaldson Wed, Feb 20 After the Bell 0.45 ASR Grupo Aero Del Sureste Wed, Feb 20 -----N/A----- 0.12 HIW Highwoods Properties Wed, Feb 20 After the Bell 0.95 IIT Indonesian Satellite Wed, Feb 20 Before the Bell N/A JS Jefferson Smurfit Wed, Feb 20 -----N/A----- 0.64 MCCC Mediacom Wed, Feb 20 Before the Bell -0.50 PCX PanCanadian Energy Co Wed, Feb 20 Before the Bell N/A PDCO Patterson Dental Wed, Feb 20 Before the Bell 0.36 PRS Pure Resources, Inc. Wed, Feb 20 -----N/A----- -0.13 SNPS Synopsys Wed, Feb 20 After the Bell 0.26 TKP Technip-Coflexip Wed, Feb 20 After the Bell N/A TK Teekay Shipping Wed, Feb 20 -----N/A----- 0.84 WPPGY WPP Group PLC Wed, Feb 20 Before the Bell 1.07 XTO XTO Energy Wed, Feb 20 Before the Bell 0.40 AET Aetna Thu, Feb 21 Before the Bell -0.41 ADSK Autodesk Thu, Feb 21 -----N/A----- 0.55 BEAS BEA Systems Thu, Feb 21 After the Bell 0.07 BRG BG Group Thu, Feb 21 Before the Bell N/A BVF Biovail Corporation Thu, Feb 21 Before the Bell 0.43 CBRL CBRL Group Thu, Feb 21 During the Market 0.35 CIEN CIENA Thu, Feb 21 Before the Bell -0.20 CKC Collins&Aikman Thu, Feb 21 -----N/A----- -0.10 CNC Conseco Thu, Feb 21 Before the Bell 0.14 CXR Cox Radio Thu, Feb 21 Before the Bell 0.03 CEI Crescent R Est Eq Co Thu, Feb 21 Before the Bell 0.50 DEG Delhaize Group Thu, Feb 21 Before the Bell N/A DEO Diageo PLC ADS Thu, Feb 21 -----N/A----- N/A ENL Elsevier NV ADS Thu, Feb 21 -----N/A----- N/A HAN Hanson PLC Thu, Feb 21 -----N/A----- N/A HCC HCC Insurance Holdings Thu, Feb 21 After the Bell 0.38 JDEC J.D. Edwards Thu, Feb 21 -----N/A----- -0.01 JCP JC Penney Thu, Feb 21 Before the Bell 0.30 LIZ Liz Claiborne Thu, Feb 21 Before the Bell 0.48 CLI Mack Cali Realty Thu, Feb 21 Before the Bell 0.92 MC Matsushita Electric Thu, Feb 21 Before the Bell N/A NXTL Nextel Communications Thu, Feb 21 Before the Bell -0.45 JWN Nordstrom Thu, Feb 21 After the Bell 0.31 PCG PG&E Thu, Feb 21 -----N/A----- 0.62 PWG PowerGen plc Thu, Feb 21 Before the Bell N/A PHCC Priority Healthcare Thu, Feb 21 Before the Bell 0.18 ROIA Radio One Thu, Feb 21 -----N/A----- -0.21 RSH Radio Shack Corp Thu, Feb 21 Before the Bell 0.66 RUK Reed International Thu, Feb 21 -----N/A----- N/A ROP Roper Industries Thu, Feb 21 After the Bell 0.46 SCRI SICOR Thu, Feb 21 Before the Bell 0.17 TD Toronto Dominion Bank Thu, Feb 21 -----N/A----- N/A TP TPG NV Thu, Feb 21 -----N/A----- 0.33 UBB Unibanco Thu, Feb 21 -----N/A----- 0.67 VCI Valassis Thu, Feb 21 Before the Bell 0.51 WRE WA Rl Est Invst Trst Thu, Feb 21 After the Bell 0.51 WGR Western Gas Resources Thu, Feb 21 Before the Bell 0.29 WIND Wind River Systems Thu, Feb 21 After the Bell -0.01 AKZOY Akzo Nobel ADR Fri, Feb 22 Before the Bell N/A DDR Developer Divers Rlty Fri, Feb 22 Before the Bell 0.62 ETP Enterprise Oil PLC Fri, Feb 22 -----N/A----- N/A HSP Hispanic Brodcstng Co Fri, Feb 22 Before the Bell 0.05 PSS Payless ShoeSources Fri, Feb 22 Before the Bell 0.36 RG Rogers Communications Fri, Feb 22 Before the Bell N/A RCN Rogers Wrls Comm Inc. Fri, Feb 22 Before the Bell -0.34 RY Royal Bank of Canada Fri, Feb 22 -----N/A----- 0.54 ================================================================= Upcoming Stock Splits Over the Next Two Weeks Symbol Company Name Ratio Payable Executable 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 FINB First India Corp 5:4 02/26 02/27 FBCI Fidelity Bancorp 3:2 02/28 03/01 CCBN Central Coast Bancorp 5:4 02/28 03/01 NJR New Jersey Resources 3:2 03/01 03/04 ================================================================= Economic Reports Earnings continue to pour in but investor focus has soured as accounting concerns are popping up in the likes of IBM while more Enron exposure hits TV during the day. The big economic report this week is the CPI. Don't forget that markets are closed on Monday. ================================================================= Monday, 02/18/02 None -- Markets Closed -- Tuesday, 02/19/02 Housing Starts (BB) Jan Forecast: 1.59M Previous: 1.57M Building Permits (BB) Jan Forecast: 1.60M Previous: 1.65M Wednesday, 02/20/02 CPI (BB) Jan Forecast: 0.2% Previous: -0.2% Core CPI (BB) Jan Forecast: 0.2% Previous: 0.1% Thursday, 02/21/02 Initial Claims (BB) 02/16 Forecast: N/A Previous: N/A Trade Balance (BB) Dec Forecast:-$28.5B Previous: -$27.9B Leading Indicators (DM) Jan Forecast: 0.6% Previous: 1.2% Philadelphia Fed (DM) Feb Forecast: 10.0 Precious: 14.7 Treasury Budget (AM) Jan Forecast: $52.0B Previous: $76.4B Friday, 02/22/02 None Definitions: DM= During the Market BB= Before the Bell AB= After the Bell ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Sunday 02-17-2002 Sunday 2 of 5 ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ********************** INDEX TRADER GAMEPLANS ********************** IS Swing Trade Model: Saturday 2/16/2002 Selling Rallies Again? News & Notes: ------------ Friday's action offered more put than call play entries for day traders looking for solid returns. I didn't play the downside enough as market action began with a quick plunge and posted lower session highs from there. Where does that leave us for the week ahead? As noted in the weekend Index Wrap, longer-term charts are getting pretty bearish. That is our cue to eye the downside once again, but when & from where? Featured Markets: ---------------- [60/30-Min Chart: OEX] The indexes are trading within a slightly adjusted channel versus the one that held for six weeks. Meanwhile, price action has coiled itself into a tightly-packed bullish wedge and suggests an upside breakout is next. But is it a call play setup? Expect a bounce from 556 or higher but 570 area will likely offer solid rejection of any upward attempt from here. [60/30-Min Chart: SPX] Same for the SPX. 1094 area offers "solid" support while 1120 area will almost assuredly turn any rally over right there. In each case there is tradable room to the upside but it could end in a hurry from there. [60/30-Min Chart: QQQ] The QQQ is sitting right on channel support and looks to break higher from current consolidation next week. But when price action reaches the top of that channel near 37.25 we can look out below! Summation: --------- The outlook is cloudy. I would play calls on any oversold bounce from depicted lines of support as a preference and probably on a clean break out of the wedges as a lesser choice. I would refuse to buy any large gap-up opens no matter what. But expect call plays to wither quickly, and put plays will become our focus if price action reaches resistance and meets rejection there with chart signals turning bearish at the same time. We'll keep an eye on these levels of interaction and do our best to stay on the proper side when things get rolling! 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 Mar Calls: 37 (QQQ-CK) Mar Calls: 99 (DJV-CA) Long: BREAK ABOVE Long: BREAK ABOVE Stop: Stop: Feb Puts: 35 (QQQ-OI) Feb Puts: 97 (DJV-OR) Long: BREAK BELOW Long: BREAK BELOW Stop: Stop: ===== OEX SPX Mar Calls: 570 (OEB-CN) Mar Calls: 1125 (SPT-CE) Long: BREAK ABOVE Long: BREAK ABOVE none Stop: Stop: Mar Puts: 550 (OEB-OJ) Mar Puts: 1075 (SPQ-OO) Long: BREAK BELOW none Long: BREAK BELOW none Stop: Stop: Open Plays: ---------- None IS Position Trade Model: Saturday 2/16/2002 Nearly Flat For Now News & Notes: ------------ Friday's market dive went low enough to take out stops on most March calls but stayed high enough to negate any intrinsic gains on Feb put contracts. So goes the volatile chop! Featured Plays: -------------- None Summation: --------- We are flat for now with mixed to weak longer-term charts. Looks like the indexes are setting up for another trip down the ladder but remains to be seen from here. No high-odds setups tonight. Trade Management: ---------------- Option traders may choose listed In-The-Money (ITM) or Out-The- Money (OTM) contracts by personal preference. They are selected based on volume, open interest and "Delta" values in that order. 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: ---------------- None Open Plays: ---------- QQQ SMH March Calls: 36 (QQQ-CJ) March Calls: 44 (SMH-CI) Long: BREAK ABOVE 36.25 Long: BREAK ABOVE 44.00 Entry: 2.10 Entry: 2.15 Stop: 2.10 [hit 2.00] Stop: 2.15 [hit] BBH HHH March Calls: 125 (GBZ-CE) March Calls: 30 (HHH-CF) Long: BREAK ABOVE 117.75 Long: BREAK ABOVE 31.00 Entry: 2.10 Entry: 2.50 Stop: 2.10 [hit] Stop: 2.50 [hit] PPH OIH March Calls: 95 (PPH-CS) March Calls: 60 (OIH-CL) Long: BREAK ABOVE 95.00 Long: BREAK ABOVE 56.75 Entry: 2.20 Entry: 1.50 Stop: 2.20 Stop: 1.50 Sector Share Trade Model: Saturday 2/16/2002 Faltering News & Notes: ------------ Broad indexes and numerous sectors gave up ground on Friday. Be it due to option expiration or factors larger than that will not be known until Tuesday, but it's safe to say upward strength does not exist in current market action. Featured Plays: -------------- None Summation: --------- A number of our current longs tracked met their trailed stops on Friday and are out. Our nightly scan of the indexes and sectors show little in the way of clear entry points for buy & hold fashion. Intraday trades for a point or two real quick? Never a problem. Entries that will stick & stay for several sessions or longer? None exist tonight. Trade Management: ---------------- Entry triggers are points where plays are tracked when price action breaks above for calls or below for puts. Stops are the exact opposite of that. Sell targets are points to exit based on index levels or %gain on share price as noted. No entry targets listed mean the model is idle at that time. * Asterisk means stop-loss level changed since prior posting New Play Targets: ---------------- None Open Short Plays: ---------------- None Open Long Plays: --------------- LONG QQQ Long: BREAK ABOVE 36.25 Stop: Break below 36.50 [hit] Result: + 0.25 SMH Long: BREAK ABOVE 44.00 Stop: Break below 45.00 [hit] Result: +1.00 BHH Long: BREAK ABOVE 3.80 Stop: Break below 3.80 [hit] Result: Par HHH Long: BREAK ABOVE 31.00 Stop: Break below 30.25 [hit] Result: - 0.75 IAH Long: BREAK ABOVE 35.00 Stop: Break below 35.00 [hit] Result: Par TTH Telecom Long: BREAK ABOVE 39.00 Stop: Break below 38.00 [hit] Result: -1.00 OIH Oil Services Long: BREAK ABOVE 56.75 Stop: Break below 58.00 * MKH Market 2000+ Big Caps Long: BREAK ABOVE 57.25 Stop: Break below 57.00 IYH Healthcare Long: BREAK ABOVE 59.75 Stop: Break below 60.00 PPH Drugs Long: BREAK ABOVE 94.75 Stop: Break below 96.00 [hit] Result: +1.25 BBH Biotech Long: BREAK ABOVE 117.75 Stop: Break below 120.00 [hit] Result: +2.25 XLB Basic Technology Long: BREAK ABOVE 22.00 Stop: Break below 21.50 *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thr Week UPS 57.00 1.43 -0.08 -0.02 0.27 0.65 Still strong ASYT 17.30 0.95 -0.29 0.78 -0.36 1.06 RS Improving UNH 74.31 -0.03 1.16 -0.36 -0.67 -0.12 Consolidating ESRX 51.71 3.08 -0.52 -0.61 0.43 1.66 Pausing TRW 45.04 1.18 -0.16 0.94 -0.11 2.25 Solid bull CTX 56.21 -0.04 1.28 -0.22 0.21 0.21 Near support IBM 102.89 2.39 -0.85 1.50 -0.18 -2.12 Dropped, acct SII 57.88 2.39 -0.78 1.04 0.78 3.32 Pause in trend APA 51.03 1.17 -0.47 0.83 0.48 2.24 New, energy PUTS TLAB 12.03 0.69 -0.48 0.20 -0.52 -1.51 Poor fundies A 27.50 0.76 -0.58 0.70 0.44 0.52 Dropped, EPS KSS 68.50 1.69 -0.08 0.79 0.40 1.80 Rolled over CHKP 29.80 -1.03 -1.25 0.38 -0.99 -3.97 Breakdown Fri. GNSS 44.76 0.92 -3.31 0.34 -2.19 -4.48 Watch $43 SFA 22.10 0.99 -0.72 0.28 -0.35 -0.67 New, poor GS 82.76 1.05 -1.35 1.08 0.53 -1.04 New, broken ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* APA - Apache $51.03 (+2.24 last week) See details in play list Put Play of the Day: ******************** SFA – Scientific-Atlanta $22.10 -0.87 (-0.67 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 ^^^^^ IBM $102.89 (-2.12) IBM unfortunately entered the spotlight early Friday when fears surfaced over the way it had accounted for the sale of one of its division to JDS Uniphase. Reports suggested that the accounting procedures allowed IBM to lower its operating costs and boost its earnings report. The fears caused IBM to gap substantially lower early Friday, from where the stock drifted lower into the weekend. We're obviously dropping coverage in the wake of the news. Look for any strength early next week to cut losses. PUTS ^^^^ A $27.50 +0.20 (+1.52) Relative weakness in reverse is relative strength and that is what A has been delivering all weak. The stock has been marching steadily higher, despite the fact that the Networking sector (NWX.X) broke down again over the past 3 days and seems intent on retesting its September lows. In the face of that sector weakness, A continues to march towards resistance a little bit at a time. While we haven't broken through any meaningful resistance levels, time is marching along swiftly, and with A reporting earnings Tuesday after the closing bell, it seems the prudent course of action is to exit the play this weekend in favor of higher odds candidates. *********** 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************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 02-17-2002 Sunday 3 of 5 ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************** NEW CALL PLAYS ************** APA - Apache $51.03 (+2.24 last week) Apache Corporation is an energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. In North America, Apache's exploration and production interests are focused on the Gulf of Mexico, the Anadarko Basin, the Permian Basin, the Gulf Coast and the Western Sedimentary Basin of Canada. Outside of North America, Apache has exploration and production interests offshore Western Australia and in Egypt, and exploration interests in Poland and offshore The People's Republic of China. Signs of improvement in the price of natural gas have been showing up recently. Oversupply and slacking demand pressured prices through last year. But that trend may be showing signs of reversing. Supply pressures appear to be easing in the natural gas market. Analysts are predicting another drop in production this, on average by about 3%. That drop in supply combined with the possibility for an economic recovery could have the price of the commodity firming. Equities have been firming in anticipation of such a development which leads us to Apache. The stock has formed a solid base over the last eight months, which resembles an inverted head-and-shoulders. It closed above its 200-dma late last week for two consecutive days, which could reveal that the stock is under institutional accumulation. We're looking for the recent trend to continue into next week's trading with help from the broader energy sector. Turn to the Oil Index (OIX.X) and Natural Gas Index (XNG.X) for sector confirmation. Look for bounces on weakness from the 200-dma currently at $50.37, or an advance past the $52 level on sector strength. Our stop is initially in place at $48.50. BUY CALL MAR-50*APA-CJ OI=1033 at $2.75 SL=1.50 BUY CALL MAR-55 APA-CK OI= 9 at $0.80 SL=0.25 BUY CALL APR-50 APA-DJ OI=3445 at $3.90 SL=2.25 BUY CALL APR-55 APA-DK OI=1711 at $1.50 SL=0.75 Average Daily Volume = 1.14 mln ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ****************** CURRENT CALL PLAYS ****************** UPS - United Parcel Service $57.00 (+0.65 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 Thursday night that its Board of Directors had approved the use of up to $1 billion for share repurchases. The news was welcomed by bulls who bid the stock fractionally higher in last Friday's session. Sure, it was only a fractional gain the stock last Friday, but a gain of any magnitude during such an ugly day should've been viewed with encouragement. With its slight advance last Friday, on healthy volume no less, the stock edged back up to its resistance zone around the $57 level. We continue to believe that it's going to take the participation of the broader market as well as the Dow Jones Transports Average ($TRAN) to push UPS above its short term resistance zone. A breakout would be signaled with an advance past the $58 level. If the broader market and $TRAN turn bullish next week, then look for UPS to work its way out of the congestion zone around the $57 level. An advance past $57.50 might set up the stock for a breakout attempt. Those looking for new entries into this play can continue to look for pullbacks near support. Use the 10-dma at $56.57 in the short-term for support. BUY CALL MAR-55*UPS-CK OI= 2599 at $2.30 SL=1.50 BUY CALL MAR-60 UPS-CL OI= 4707 at $0.20 SL=0.00 BUY CALL APR-55 UPS-DK OI=22277 at $2.90 SL=1.75 BUY CALL APR-60 UPS-DL OI=17492 at $0.45 SL=0.00 Average Daily Volume = 1.26 mln ASYT - Asyst Technologies $17.30 (+1.06 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). ASYT continues to trade very well broader to the relative market as signaled by its relative strength in last Friday's session. The stock finished only a penny lower for the day, which was in contrast to the weakness seen in the broader averages. The semiconductor sector as a group also continues to hold up well relative to the broader market. But we can't stress enough the need for strength in the markets if this play is going to be successful. It's becoming clear that ASYT leads to the upside on positive days in the market, but without participation from the rest of tech, the stock's upside will most likely be limited. Going into next week's trading, look for strength up above the $18 level for possible exit points for those who are holding positions from the dip early last week. In terms of new entry points, turn to pullbacks on market and sector related weakness. A light volume retreat to the 10-dma at $16.74 could be used as an entry point, provided that the stock bounces from that level. Wait for confirmation from the Semiconductor Sector Index (SOX.X) before gaming an entry on weakness. BUY CALL MAR-15 QQY-CC OI=258 at $2.85 SL=1.50 BUY CALL MAR-17*QQY-CY OI=453 at $0.90 SL=0.25 BUY CALL MAR-20 QQY-CD OI=374 at $0.25 SL=0.00 BUY CALL JUN-17 QQY-FY OI=146 at $2.40 SL=1.25 Average Daily Volume = 371 K SII - Smith Int'l $57.88 (+3.32 last week) Smith International, Inc. is a worldwide supplier of products and services to the oil and gas exploration and production industry, the petrochemical industry and other industrial markets. The Company provides a comprehensive line of technologically advanced products and engineering services, including drilling and completion fluid systems, solids-control equipment, waste management services, three-cone and diamond drill bits, fishing services, drilling tools, underreamers, casing exit and multilateral systems, packers and liner hangers. Oil stocks finished fractionally higher as whole in last Friday's session, capping off a strong week for the group. The continued strength in the energy sectors stems from fears over heightened tensions in the Middle East between the United States and Iraq and Iran. In the futures market last Friday, crude rose modestly to finish the week at $21.50 a barrel. The strength in crude went against data released by the American Petroleum Institute, who reported that inventories had been rising in the last week. The rally in energy stocks in the face of the fundamental data reinforces the notion that the move is being driven by fear and could lead to a sharp move if military action is taken. Separately, fears over asbestos were dampened when a court issued a temporary restraining order on claims against Haliburton. That news may help to lift some of the pressure of off the oil service group as a whole. For its part, SII flirted around the unchanged line for most of trading last Friday. The stock remains technically strong and last Friday's action was most likely a pause in the recent trend. Traders looking for new entries can watch for an advance in the Oil Service (OSX.X) group next week and look for SII to breakout above $59. Such entries can be accompanied with a tight stop below $57.30. If the sector pulls back next week, look for the stock to bounce from its 200-dma, which is reinforced by the 10-dma, around the $55 area. BUY CALL MAR-55*SII-CK OI= 525 at $4.90 SL=3.75 BUY CALL MAR-60 SII-CL OI= 414 at $2.25 SL=1.25 BUY CALL APR-55 SII-DK OI=1706 at $6.20 SL=4.75 BUY CALL APR-60 SII-DL OI=3731 at $3.70 SL=2.25 Average Daily Volume = 1.14 mln CTX – Centex Corporation $56.21 -1.02 (+0.21 last week) The top home builder in the U.S., CTX operates in 20 states and Washington DC, as well as in Latin America and the UK. The company builds almost 19,000 homes a hear with an average price tag of $190,000 for both first-time and move-up buyers. The company has subsidiaries that offer home security systems and pest-control services, as well as construction contracting for hospital, school, office building and hotel projects. Rounding out the picture, CTX has interests in land development, mortgage banking, commercial real estate, and construction supply manufacturing. Behold the mighty homebuilders. One of the few sectors of the economy that hasn't felt the bite of the current recession (no matter what the government calls it, it is still a recession), the housing sector has continued to fire on all cylinders over the past year. Nowhere is this more apparent than in the current picture depicted by the DJ U.S. Home Construction index ($DJUSHB). The index rallied off the September lows in fine fashion, setting new all time highs in December before undergoing a bit of necessary consolidation near the $300 level (the site of its breakout). Then in the last week of January, the DJUSHB took off again, propelled by continued strong housing numbers, breaking out above resistance near $323 and running up near $347. Although there has been a bit of consolidation over the past couple weeks, the index is still finding support at its 20-dma ($330) and appears ready to run towards its highs again. CTX is trading near its all-time highs and we're looking for the stock to bounce from its ascending trendline near $55.50, providing us with attractive entries to the long side. With further support coming in from the rising 50-dma ($55.33) and the February lows just below $55, odds are favoring the bulls here. Target new entries on a renewed bounce from support, using the DJUSHB as your guide to sector strength. Our stop remains at $54.75, just below the lows from a week ago. BUY CALL MAR-55 CTX-CK OI= 22 at $3.70 SL=2.00 BUY CALL MAR-60*CTX-CL OI= 183 at $1.35 SL=0.75 BUY CALL APR-55 CTX-DK OI=1397 at $4.90 SL=3.00 BUY CALL APR-60 CTX-DL OI= 92 at $2.60 SL=1.25 BUY CALL APR-65 CTX-DM OI= 137 at $1.15 SL=0.50 Average Daily Volume = 844 K ESRX – Express Scripts $51.71 -1.00 (+1.66 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. While the consolidation continues, it isn't likely to do so for long. After its sharp run upwards a little over a week ago, shares of ESRX have been trying to decide what to do next. With significant resistance just overhead at the $53.50 level, the bulls haven't been able to make any headway. And the bears aren't having much success at eroding ESRX's price with the solid strength in the Health Care sector (HMO.X). Although the HMO has pulled back from its attempt at a breakout over the $503 level, there hasn't been a rush for the exits, as the index has drifted lower, allowing the daily Stochastics to drop out of overbought and give the bulls room to run. Even with our bullish conviction and the fact that ESRX belongs to a strong sector, we've got to be careful not to give back our gains from last week. We're willing to take new entries on a decent bounce near the $51.50 level, but don't forget that is also the level of our stop. If it is violated on a closing basis, we'll be moving ESRX to the drop list. Let the market be your guide as to whether to play. A volume-backed rebound from support with the HMO index likewise strengthening will open the door for new entries. Otherwise, stand aside and look for a play that is demonstrating more conviction. BUY CALL MAR-50*XTQ-CJ OI=571 at $3.60 SL=1.75 BUY CALL MAR-55 XTQ-CK OI=628 at $0.90 SL=0.50 BUY CALL MAY-55 XTQ-EK OI=209 at $2.55 SL=1.25 Average Daily Volume = 1.35 mln TRW – TRW Inc. $45.04 +0.40 (+2.25 last week) 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. What do you do in an uncertain market? Why, play defense of course! In this case, the Defense sector, which has been a favorite of the bulls ever since America went to war against terrorism. The Defense Industry index (DFI.X) is relatively new, but up sharply since the first of the year. On Friday, it actually broke out to a new all time high and looks like it wants to keep on running. Shares of TRW show a similar picture, with the stock breaking out above $45 on Friday to its highest closing price since the middle of 2000. What we're seeing here is money rotating into a sector of the economy that the government is virtually guaranteeing will see solid spending increases over the long term. All we have to do is ride the wave until it crests. With TRW's daily Stochastics overbought and the stock trading right near resistance, it wouldn't be at all surprising to see a bit of a pullback before the stock continues higher. Target an intraday dip and bounce in the vicinity of $44.50, or even as low as $44. We've been following the stock up with our stop, and this weekend it rises to $43.75, just below Tuesday's close. BUY CALL MAR-45*TRW-CI OI= 89 at $1.60 SL=0.75 BUY CALL APR-45 TRW-DI OI=699 at $2.20 SL=1.00 BUY CALL JUL-50 TRW-GJ OI=293 at $1.65 SL=0.75 Average Daily Volume = 458 K UNH – UnitedHealth Group $74.31 -0.22 (-0.12 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. The waiting game continues, as Health Care related stocks continue to show their relative immunity to market weakness. Sure, the HMO index has pulled back a bit from its highs of just over a week ago, but the decline looks like nothing more than much-needed consolidation before the bulls take their next shot at new yearly highs. Shares of UNH are essentially trading sideways after pushing through the $75 level last week. In fact, things were looking a bit dicey in the middle of the day on Friday near the lows, but the bulls came through, lifting UNH to close back above the $74 level. It looks like targeting new entries near the $73.50 area continues to be the way to play this one. UNH will eventually gather its strength and blast to a new all-time high, and taking a position ahead of that event is the way to profit from it. Of course, taking profits when the surge runs its course is also a part of the formula for success. Keep a sharp eye on the HMO index, as renewed strength here will likely presage the next breakout move in UNH. Keep stops set at $73.50. BUY CALL MAR-75*UHB-CO OI=3368 at $1.60 SL=0.75 BUY CALL MAR-80 UHB-CP OI=3754 at $0.25 SL=0.00 BUY CALL JUN-75 UHB-FO OI= 547 at $5.00 SL=3.00 BUY CALL JUN-80 UHB-FP OI=1197 at $1.95 SL=1.00 Average Daily Volume = 1.54 mln ************* NEW PUT PLAYS ************* GS – Goldman Sachs Group $82.76 -2.35 (-1.04 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. When you find a consistent performer, it just makes you want to come back for more. We've frequently pointed out that the Financial stocks need to participate in any sort of rally that is going to have staying power. Well the Financials are NOT heading higher. In fact, they really had a rough go of things on Friday, with Broker/Dealer index (XBD.X) taking it on the chin to the tune of 4%. This makes perfect sense too. Trading volumes are still low and there is almost zero investment banking business to be had. Sure there are some small IPOs sprinkled here and there, but hardly enough to even recall some of the heady times in 1999 and 2000. No matter how you slice it, the Brokers are in a bad way and the XBD is on its way to testing the $465 support level over the near term. Which brings us to our new play, GS. The home of everyone's favorite myopic market forecaster, Abbey Joseph Cohen. The stock has been stumbling lower since early January, and we got a nice confirmation of the fact the bears are in control last Thursday. GS ran right up to its 200-dma near $86 before reversing sharply lower. While there is some support in the $81-82 level, this appears likely to give way over the near term, allowing the stock to trade down to the $78 level, the site of its PnF bearish price target. Adding to our conviction is the fact that the daily Stochastics are just rolling down out of overbought territory and volume is on the rise. Use intraday rallies near resistance (currently near the 20-dma) to gain a more favorable entry and set stops initially at $86.50. BUY PUT MAR-85 GS-OQ OI=8429 at $5.00 SL=3.00 BUY PUT MAR-80*GS-OP OI=2616 at $2.70 SL=1.25 Average Daily Volume = 3.03 mln SFA – Scientific-Atlanta $22.10 -0.87 (-0.67 last week) SFA provides its customers with broadband transmission networks, digital interactive subscriber systems, content distribution networks and worldwide customer service and support. The company has evolved from a manufacturer of electronic test equipment for antennas and electronics to a producer of a wide variety of products for the cable television industry, including digital video, voice and data communication products. SFA is changing the way consumers interact with their televisions, and is a supplier of transmission networks for broadband access to the home, digital interactive subscriber systems for video, high speed Internet and voice over IP (VoIP) networks. It seems like it wasn't so long ago that all a company had to do to ensure success was to list something to do with broadband in the company's function. That has changed significantly over the past 2 years, and now any mention of broadband is an excuse to sell the stock and ask questions later. Witness the share price of SFA, which is languishing its way lower near the $22 level. That's a far cry from the hey-day of the tech mania that saw SFA trading north of $90 per share. After bottoming in mid-September near the $16 level, SFA managed to work its way higher, all the way to the $31 level before the bears swooped in for another party in early December. Since then the stock has been building a nice neutral triangle that just broke last week to the downside. It is a bit tough to see on the candle chart, but is crystal clear on the PnF chart. With the bearish breakdown, SFA is giving us a fresh bearish price target of $16. With the stock's weakness relative to almost any measure of the market you might choose and a fresh PnF sell signal, you'd think we'd be done. But we've got more. The daily Stochastics are just rolling over again, without even traveling above the halfway mark -- confirmation of weakness. Consider new entries on either a failed rally attempt near $23, or possibly higher in the vicinity of $24. Momentum traders will want to watch for a drop below Friday's lows ($21.50) on strong volume before initiating new positions. If playing the breakdown, be on the lookout for buying support near $20.50, as this level halted the stock's decline in both late October and then again in the middle of December. Our stop is initially in place at $25. BUY PUT MAR-22 SFA-OX OI=1183 at $1.90 SL=1.00 BUY PUT MAR-20*SFA-OD OI=1626 at $0.85 SL=0.25 BUY PUT MAR-17 SFA-OW OI=1450 at $0.40 SL=0.00 Average Daily Volume = 2.29 mln ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. 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The Option Investor Newsletter Sunday 02-17-2002 Sunday 4 of 5 ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ***************** CURRENT PUT PLAYS ***************** TLAB - Tellabs $12.03 (-1.51 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. The latest trouble in telecom land surrounded Qwest communications last week. The company outlined capital spending cuts, which is a theme we've been hearing over and over again from the big telecom carriers. With less money floating around, that pinch will eventually find its way down to the food chain to the component suppliers such as Tellabs, which is what investors realized late last week. The Networking Sector Index (NWX.X) and Telecom Sectors (YLS.X and XTC.X) were among the worst performing industry groups in last Friday's session, a trend that has been repeating for most of this year. For its part, TLAB finally broke below its very short-term support and steadily declined through Friday's session. Hopefully readers found acceptable entries in last Friday's session. To the downside, we're now turning our attention to potential support levels. Probably the best chance for support exists at the $11 level in the very short-term. Depending on entries and risk tolerance, the $11 level may offer a short-term exit point. Below there, TLAB doesn't have much support to speak of until its September lows, which are down around the $9 area. That level could be used as a good intermediate-term downside target. For new entries, we have rollovers near resistance given the breakdown late last week. Look for resistance near $13. BUY PUT MAR-15*TEQ-OC OI=2538 at $3.20 SL=1.75 BUY PUT MAR-12 TEQ-OV OI=1009 at $1.20 SL=0.50 Average Daily Volume = 5.60 mln KSS - Kohls $68.50 (+1.80 last week) Kohl's Corporation currently operates 354 family oriented, specialty department stores that feature quality, national brand merchandise priced to provide value to customers. The Company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than traditional, full-line department stores, but offer customers dominant assortments of merchandise displayed in complete selections of styles, colors and sizes. Several negative developments pressured retail stocks in last Friday's session. Gap Stores saw its debt rating downgraded to junk status. While an isolated event, it did spark some fears in the sector. The prospect of rising interest rates later this year may stem consumer spending and borrowing, the two have been the driver behind the recent move in retail stocks. Finally, and probably most importantly, the preliminary Michigan consumer sentiment reading declined for the first time since last September. The news sparked fears that the consumer may curb spending habits. The shift in sentiment sparked a pullback in retail stocks across the board. The RLX.X finished the day lower than the S&P 500 in terms of percent, which was a positive development for our KSS put play. For its part, KSS slightly out performed the RLX.X to the downside. We're obviously happy with the slight loss of relative strength in the RLX.X and into KSS. We'll be looking for that trend to continue into next week's trading. In the very short-term, KSS may find support at its converged 10-dma and 50-dma, which are currently in the zone between $67.50 and $68.50. A breakdown below the 10-dma could usher in the retest of recent lows that we've been targeting. Use the 10-dma as an action point and confirm weakness in the RLX.X before entering KSS put plays into weakness. Market and sector strength could lead to additional entry opportunities near resistance at $70. BUY PUT MAR-70*KSS-ON OI= 591 at $3.50 SL=2.25 BUY PUT MAR-65 KSS-OM OI=1543 at $1.40 SL=0.75 Average Daily Volume = 1.78 mln CHKP - Check Point Software $29.80 –1.08 (-3.97 last week) Check Point provides Internet security. The company provides secure enterprise networking solutions that enable customers to implement centralized policy-based management with enterprise- wide distributed deployment. Simply put, CHKP has benefited from rising demand for its virtual private networks software which lets remote workers, business allies and customers securely access corporate computer networks. As has been its pattern of late, the Software index (GSO.X) rolled over at resistance and headed south again from a lower high. The GSO is in full roll right now, below all of its moving averages, all of which are pointing down. We're definitely in bear country! Enter CHKP, which has been performing poorly (even relative to the GSO) over the past few weeks. The retracement levels left over from the fall rally are working nicely as action points on the way down. After spending the better part of 3 weeks vacillating around the 50% retracement ($34.50), that support level gave way for good, allowing the stock to work down to its 62% level at $31. It didn't last very long as support, as the bears sliced through that level as well as the $30 level on Friday. While there is some historical support down below, first at $27-28 and then again near $26, CHKP appears destined to test its September lows. While trading the breakdown below current levels may be profitable, it is not as likely to be successful as waiting for an oversold rally to fail. If trading the breakdown, enter on a drop below $29.50, but make sure the GSO is continuing to weaken, preferably with a breakdown under the $163.50 level. If waiting for the bounce before entering, look for attractive entries to materialize as CHKP runs out of gas and rolls over near the $31.50 or $32.50 resistance levels. Ratchet stops down to $32.75 this weekend. BUY PUT MAR-30*KEQ-OF OI=2915 at $2.50 SL=1.25 BUY PUT MAR-25 KEQ-OE OI=2293 at $0.75 SL=0.25 Average Daily Volume = 8.57 mln GNSS – Genesis Microchip $44.76 -0.24 (-4.48 last week) Genesis Microchip designs, develops and markets integrated circuits that receive and process digital video and graphic images. Its integrated circuits are typically located inside a display device and process images for viewing on that display. The company also supplies reference boards and designs that incorporate its proprietary integrated circuits. GNSS is focused on developing and marketing image-processing solutions and targets the flat-panel computer monitor and other potential mass markets. The bullish glow has definitely dimmed for shares of GNSS since the rocket ride that propelled the stock higher throughout 2001. Since early January, it seems like this stock is one of the bears' favorites, as they have dutifully sold into every rally attempt. Perhaps it is related to comments out of the analyst community that the stock has just about reached the limits of its upward potential. Whatever the case, it is clear that supply is in control here, as the stock continues to be pressured by its descending trendline (which just happens to rest at $50). The fact that the Semiconductor index (SOX.X) is rolling over again is just adding conviction for our bearish thesis, as sector weakness will further pressure a weak stock. This isn't necessarily the kind of stock that is well suited to playing the breakdowns, but fading the rallies has been working very well for the past month. The bulls haven't given up on this one yet, and each time the stock reaches a meaningful level of support, the jump in to try and support it. They are eventually overrun by the bears, and we want to time our entries with the failure of the rallies. We couldn't have scripted Friday's action any better if we had tried. Sure enough, GNSS dropped sharply Friday morning only to rebound from its near-term oversold condition in the afternoon session to end the last day of expiration week only fractionally lower. This looks like the beginning of another oversold bounce (and possibly a rally attempt), so we'll be looking to initiate new positions on a rollover from resistance between $47.50-48.50. For those that decide to play a breakdown from current levels, be on the lookout for a bounce from the vicinity of $41-42. And make sure to keep an eye on the SOX. Renewed buying in that sector will make things tougher on GNSS bears. For now, we have a fairly wide stop at $50. BUY PUT MAR-45 QFE-OI OI= 710 at $4.60 SL=2.75 BUY PUT MAR-40 QFE-OH OI=1220 at $2.55 SL=1.25 Average Daily Volume = 3.10 mln ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ***** LEAPS ***** Let The Valuation Compression Begin By Mark Phillips Contact Support With all eyes on the continuing Enron hearings, it was rather refreshing to see the market moving to the upside for most of the week. Granted, it was recovering from a near-term oversold condition and was rather weak towards the end of this expiration week, but it was encouraging nonetheless. To me, the most telling development all week was the earnings report from Nvidia (NASDAQ:NVDA) Thursday night. As expected, the company handily beat estimates, but as has become the pattern of late, what was said in the conference call was what commanded investors' attention. Apparently the SEC is looking into the company's accounting practices, with a specific focus on the last quarter of 2000 and the first 3 quarters of 2001. NVDA got whacked to the tune of 7.7% in Friday's trading session. It was only a matter of time before an otherwise pristine Tech stock got hit with these issues and I don't expect them to be the last. This will be the lasting effect of the Enron/Anderson fiasco as companies will be forced to be more forthright with their investors. I would personally be suspect of any company that uses Arthur Anderson as their accountant. While there may be nothing hidden in any of these other companies, I subscribe to the cockroach theory. Where there is one (Enron), there are many. For the record, I don't think NVDA uses AA to do their books, but the near-term problems for that company are a direct result of the loosey-goosey accounting standards that have crept into so many companies SOPs (Standard Operating Procedures) in the name of always painting company performance in the best possible light. Away from accounting issues, it was another rangebound week. What? Who would have thought? (BIG GRIN) We had another rally off of major support and from an oversold condition, but at the week's high, there we were at resistance again; Dow - 10K, S&P500-1120 and NASDAQ COMP - 1875. All the daily charts are showing signs of weakness again, and while we may probe a bit higher first, I expect the next directional move to be down. Just about everything that is on my radar screen posted another lower high before the end-of-week weakness, so I'm clearly not enthusiastic about initiating a new batch of bullish plays. Look at the likes of International Business Machines (NYSE:IBM) dropping to test the $102 level again on Friday morning with daily Stochastics near overbought. Our first possible entry target is $100, but I don't want to nibble on new positions there without the daily oscillator reversing from near the oversold region. And then there's Broadcom (NASDAQ:BRCM). The stock has made for a very nice short-term play to the downside and I noticed on Friday that it is starting to drop below the $36 level. It looks like we could see our $31-32 target achieved in the near future, and hopefully a bounce there will coincide with the weekly Stochastics once again bottoming in oversold territory. In fact, I like the entry targets listed for all of our Call plays, but remember to wait for the oscillators to confirm a bounce at our respective targets. When trading in a rangebound market, we need to wait for everything to align in our favor before pursuing new entry points, and while we are getting close, bullish long-term entries will need to wait for another week. And my favorite long play on the Watch List has to be the Biotech HOLDR (AMEX:BBH) that we listed last week. After running up to near term resistance, it is obediently pulling back towards support. If the daily Stochastics goes oversold about the same time that the BBH is finding support near our entry target, I'll be all over that one. And that could materialize next week. But with the weekly charts starting to show signs of bullish strength, neither am I thrilled with new long-term Puts. Along those lines, look what has been happening with the Puts in our Portfolio. They just keep stubbornly working higher, in defiance of both my read of the fundamental situation and my technical observations. General Motors (NYSE:GM) is working its way through the $51-52 level and I'm really starting to get nervous on this one. The price action is looking rather healthy from a bullish perspective, with a series of higher lows. I'm tightening our stop to $51.50 this weekend, as a move above the last two daily highs will make me want to get out in a hurry. For now there is a neutral wedge in place, with the top just over $51 and the bottom near $48.50. When GM breaks out of that pattern, we'll know which way is the proper direction to play, but right now I'm getting nervous that I'm on the wrong side of the play. The same thing can be said about the position we took in Philip Morris (NYSE:MO) last week. In fact, I'm pulling the plug this weekend. Not only did the stock push through its recent highs near $50, it also punctured its long-term descending trendline. Once again, my readers were right in stating that I was premature on this play. Maybe I'm becoming the ultimate contrarian indicator? "Phillips says go short, I'm going long!" And I'm stunned by the action in some of the Retailers, chief among them our failed put play on Jones Apparel (NYSE:JNY). While the catalyst for the Retail sector (RLX.X) to continue to trade well appears to be coming from the strength in the likes of Walmart (NYSE:WMT), the specialty names have been trading well too. With our violated stop on JNY on Thursday, I've got no choice but to pull the plug and chalk it up as a failed play. I still like the downside play we have listed in Eastman Kodak (NYSE:EK), but given the strength the stock has seen this week, I'm in no hurry to take a position. I've shifted our entry target back to the $31-32 area where I originally had it, and given the sharp reversal in the weekly Stochastics, am content to wait for that long-term oscillator to top out in overbought before taking a position. Patience is a virtue and one I'm trying desperately to exercise in this rangebound market. I really don't see anything meaningful to read into the action in the VIX of late. While it is trading near the lower end of its historical range, at 23 and change, it is neither a warning for bulls or bears. Back to the 29-30 range and I'll start to drool over calls again, and south of 21-22 gets my bearish nature fired up for long-term puts. In the middle of its range, it is difficult to make any sort of informed decision about which way the herd is likely to jump next. Add to that the normal noise that surrounds the VIX near option expiration, and I'll wait until middle of next week (at least) to draw any conclusions from the VIX. Likewise, the new play generator is idle for this week. No new entries to take off of the Watch List and the new plays I am considering for the Watch List are not yet ready for publication. Besides, there are plenty of Watch List plays to focus our attention on for the time being. And that about does it for this week. On a side note, I'm sure you've noticed my absence in the Market Monitor last week. That isn't likely to change next week either, as I struggle with technical issues. Just adding the entry window onto my system makes it incredibly crash prone, and I've had to make the decision to keep it idle. A new DELL power machine is on its way to me, and it is my sincere hope that it will slay the instability dragons I've been dealing with over the past couple weeks. As long as delivery doesn't slip, I should be firing on all cylinders again by the end of the month. Have a great extended weekend and I'll see you in the Options 101 column on Wednesday where we'll be talking about one of my favorite topics - Volatility. Mark Phillips mphillips@OptionInvestor.com LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None Puts: GM 01/10/02 '03 $ 50 VGN-MJ $ 6.50 $ 5.70 -12.31% $51.50 '04 $ 50 LGM-MJ $ 8.40 $ 7.90 - 7.90% $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 $31-32 JAN-2003 $ 30 VEK-MF JAN-2004 $ 30 LEK-MF New Portfolio Plays None New Watchlist Plays None Drops JNY $34.97 So much for my expectations of a breakdown in the Retail sector (RLX.X). Each time the RLX has dropped it has bounce back from a higher low, and we've seen the same behavior from our bearish JNY play. This week the RLX managed to top the $950 level before pulling back on Friday, and that bullish sentiment carried into JNY, allowing the stock to push through our $35 stop on Tuesday and Wednesday, and I pulled the plug on Wednesday, even though JNY closed fractionally below our stop. While my fundamental bias tells me that this whole group (JNY included) should trade down over the intermediate term, it is clear that the market disagrees at this point in time. MO $51.48 Too early to get in and perhaps too early to get out, but I just don't like the price action in MO. As you could tell from my tepid writeup when we added the play last week, the bullish action in the stock had me nervous, and rightly so. MO spent the entire week working higher, even in the midst of weakness in the broad market on Friday. While our stop at $51.50 hasn't been tripped yet, in looking at the long term trendline, I saw that the stock moved above that level this week and shows no sign of reversing over the near term. I continue to think that the stock should trade back into the low $40s in the weeks ahead, but with the broken bearish trendline, I've lost too much of my conviction to keep the play alive. Those that have the play open might want to wait for the next cycle down on the daily chart to obtain a more favorable exit, but as for me, I'm pulling the plug this weekend. ************** TRADERS CORNER ************** Anatomy Of A Day Austin Passamonte "I hope you summarize your trading action for today in the weekend newsletter. I think it would be very educational. [LW]" I'm not so sure Friday's effort was anything to be proud of but it sure merits review by myself. Matter of fact, reviewing my choice of plays and why things went that way is a customary weekend exercise in personal growth. Care to join me for the film session? Pour yourself a drink and let's see what went right, wrong and things we need to do next time. (Daily Chart: SPX) "I am curious if someone there could find my nagging question if it is true any correlation, that is I do notice if we have an up month, option expiration seems to have up bias. Negative month and it seems to have a negative bias. I know that goes against what might be technical, but I swear it seems to always work that way, and then the week after tends to reverse for a few days... anyhow take care! [Mike P]" There are many assumptions we bring into every trading session from the past that may help (or sometimes hinder) performance for the day. One of those being the trend, of course. As Mike pointed out the monthly trend (20 candles) was decidedly down. It has formed a semblance of expanding wedge consolidation bearish by nature. Thursday's high tried to take out that upper measure but could not, and index rolled over in the afternoon. One pattern I've noticed for expiration week is that a bullish week tends to have a bullish trend on Friday and the opposite is also true. Considering Friday opened higher than Monday did, this upward trend was in place even after the dip on Thursday from session highs. So now what? Another pattern I've noticed in the past is for expiration Friday to close market direction opposite its open. In other words a strong pop higher usually results in a series of lower highs through the day that ends up selling into the close. A strong push lower often results in higher lows being posted until shorts squeeze into the close. One thing we know for sure: most expiration Fridays have a sudden move in the morning that soon counters in reversal, and another strong move from 3:00pm into the closing bell. The period in between can be quite flat under normal circumstance whatever the heck that is. So our prime opportunities to trade are in the first and last hours of this day. (60/30 Min Chart: OEX) Sticking with the S&P theme here, we noted on Thursday night via Index Wrap that the intraday charts for indexes showed signs of a possible early drop but chart signals were nearing oversold zones. Look for an early drop of small distance and quick bounce from there as a likely scenario. To sum up our market posture Friday morning into the open, we new the Feb expiration month was bearish but this week was bullish, based on raw values or relative highs and lows. We also knew the VIX was low and near bearish territory but nowhere near screaming reversal readings. We knew IBM would shock price action at the open, which could be the expected down move to send all intraday charts oversold. We also knew that Thursday was actually a bearish finish of that session when the rally failed in typical bear market fashion. Armed with this knowledge to filter trades, what should we do? (10-Min Chart: S&P 500) Let's begin with what should have been done. The opening ticks went up and immediately turned red, an expectation we had since IBM would drop the Dow and both S&Ps. Put option prices already reflected this drop as they are priced via S&P futures pricing and that market was trading 1116.00 at the open. Entry #1 (blue) shows where the futures market first broke. We watch this market because it leads the cash market price action and we need to be early in our entry/exit attempts on expiration days. Now, anyone who simply went short in whatever manner right from the open caught that first draft down from roughly 1116.00 to 1106.00 cash market values. Remember, OEX options are valued at where the S&P 500 futures market is trading at the time, not where we see OEX price levels noted on cash charts. The futures went down in a hurry along with cash markets as put option price values exploded. The challenge with option trading on expiration morning is speed in which the price action moves. Many times a play will swell +100% to +400% in value within five or ten minutes only to immediately reverse and wipe out all gains. This shocks the new trader and usually causes them to freeze. Heck, even we old timers in this fast game pull triggers too late ourselves! So play #1 was lucrative but fleeting. Those who missed the action as it fell straight down were indeed prepared to buy any dip that sends 60/30 min charts to oversold extreme, right? That was part of the plan. So we went long right at the morning bottom and rode the upside move higher. Call options bought then swelled in value a bit more than +100%, but they too died an early death. Entry #2 showed where price action pinned for some time on both sides of the pink line. When stochastic values rolled bearish from overbought extreme while price action was at a lower relative high for the session, this is very bearish. That on its face is enough to cover longs and/or get short. Confounding the problem though is our intraday trend charts. All 60/30 min chart signals were rising in bullish fashion up from oversold extreme and warning us to play the upside. We all see this 10-min chart right now in hindsight, but going short near 1108 could have easily hit a higher low or double bottom, turned tail and soared far into the green ahead. Who knew? Nobody. Not a single soul on earth knew but aggressive traders could get short, take their chances to the downside and exit in a flash if things turned on them. As it was, selling every rally attempt was the right approach and those who did so or merely got trapped holding puts from the early gyration fared well. I now wish I'd done exactly that instead of taking another route that was quite grueling, far less fun ended the day in black. (5-Min Chart: S&P 500) Instead of selling every top like I should have I played the green entries instead. I bought every dip expecting a reversal into the close from the open, a pattern that often occurs. The second long play entry was indeed at a higher low than first, which seemed to confirm early suspicions. I kept getting long on every oversold bounce and managed to scrape out modest gains or stopped out right near entry for par. This went on until the last long play attempt fizzled near 3:00pm and it was clearly evident that downside strength prevailed that day. I stopped out my long play for a tiny gain and immediately switched to the short side with a tad more capital than played the upside with. Inwardly I feared that selling this move would be the one time market action reversed and soared to the upside now that I finally switched sides. Has that counter-market move ever bit you both ways in a day? Those who have suffered the same know from whence that fear of mine came. But this time the markets rolled over in a hurry and I was short from 1108 to 1104 on the most capital in play for the day. That turned out quite well indeed. The first long-play entry and the final short play entry fared very well and the rest made a bit or lost less. How many other trades were there? I'm sorry to say it was thirteen round trips in all. Some plays were options and some weren't, but the crux of this example is I was out of synch with the intraday trend. Friday's session only needed two to four entries at the most to capture plenty of profit. I worked my butt off fighting the proper direction and made about half the gains I should have over three times the needed activity. Had those 60/30 min charts been bearish all day, I'd have sold every rally that failed and ended the day refreshed, energized and exhilarated. Instead I fought the market and its mixed charts, earned favorable returns but limped away from the chair sweaty, exhausted and ready to collapse on the couch. I hope this lesson helps prove several things. No one is on the right side of market action every time, especially me. When we find ourselves riding the proper waves it's easy to prosper. When we find ourselves bucking the waves it's easy to lose. A key to long-term success is surviving or profiting when we're wrong. It is never too late to get flat, reassess the market and play the other direction without a second thought. Short-term traders can indeed make money bucking the trend but it won't be easy, is terribly hard work and pays far less than catching the trend. Those who look at charts in hindsight while preparing themselves for action can be lulled into a false sense of security on how "easy" trading any time frame is. I drew these charts this morning after a good night's sleep and see all the entries that should have been taken. But under live fire with the trusted tools I had to work with my picture was quite cloudy indeed. Some days we make all the right reads, all the right moves. Trading is easy and money flows in. Some days we make the wrong reads and struggle to find the flow. What happens then? If we can manage to keep losses nil or even make money in the process I think that's one vital key to long-term success. Surviving the poor outings in between glory days keeps the equity curve pointed north. I'll review what I did on Friday versus what should have been done and keep that snapshot in mind's eye for next time. The best part about our profession is that the next opening bell is always right around the corner! Hope This Helps, austinp@OptionInvestor.com ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. 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The Option Investor Newsletter Sunday 02-17-2002 Sunday 5 of 5 ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************* COVERED CALLS ************* Trading 101: Option Pricing and Position Management By Mark Wnetrzak This week's discussion includes a question from one of our new readers about option premiums and some excellent suggestions for position management with covered-calls. Dear OIN, This is related to covered calls. (I am not looking for advice on a trade.) Using PHSY as an example in a covered-call scenario. Say you sold Feb. 20's on stock you owned. The option expires this Friday (let me know if I wrong here). The bid/ask is still .70/.90 for a stock that is trading approx. $1 below the strike price with now 4 days to expiration. Does this seem normal? I am trying to figure out if it because of a possible overreaction to the news out today? I have been paper-trading covered-calls...thinking of using the strategy if I can achieve approx 5% a month. I first need to have a better understanding of the downside; cutting losses. In general, I am looking for advice I setting the stops: closing out covered-calls to minimize losses. I am sure that every play will have its own scenario but in this case a stop at $20 on the stock looks like it would have got you out of the stock near $20. In theory, would you buy back the calls this close to expiration and move on to the next position or let it play out with some type of order to purchase the stock back if it recovers from the bad news? In any covered call play, is it recommended to buy back the calls if the stock hits the stop that's been set. Would you set a stop on the sold call (limit order) and what would determine its price? (A percentage change in call price?) I would like to learn more than the information on covered-calls and stops...could you recommend a good book on this topic? Thanks, RZ Concerning option pricing and position management: One aspect of option pricing is "volatility." PHSY recently made some rather radical (news-related) moves in each direction, causing a further rise in volatility, which would inflate the option price and counter, to some degree, "time" decay. Usually this effect is resolved quickly, once the "market's" reaction to the news is known. "Stop-loss" strategies protect investors from an excessive drain on their capital by making a quick exit from a losing position when a sell signal is triggered. This could be a percentage (5%, 10%, ??%) decline in position value or overall capital, a technical violation in the stock chart, or simply a move to the break-even point. This is not dependent on expiration but rather a mechanical (or mental) signal that one follows as soon as it is hit. Remember, stop-loss strategies are not a "perfect" solution and generally won't protect for a catastrophic drop in the stock price, especially after the close and before the open of trading. There are other alternatives too, such as adjusting a covered-write position by rolling forward and/or down, as described in McMillan's book (mentioned below). The following is a letter I received this week from a reader on the subject of position management with covered-calls. Remember, this method works for S7: You need to find a method that works for you and fits your personal risk-reward tolerance. ************ Mark, I notice many readers ask how much they should lose on a covered write play and the answer is usually in percentage and psychological terms. My method is easier. The cost basis for each play is listed in OIN. This is equivalent to "break even." I simply place a stop loss order at the cost basis and a "buy to close" (order) on the option contingent on that price. No muss no fuss. Since the cost basis is usually about 15%-20% below the original cost of the stock, it's a pretty good bet that if it sinks that low, it's time to go. This results in little or no loss and easy management. It's also important to figure your profit going in. Is it worth risking $250 to make $500? I think not. OIN's plays have a terrific average and I rarely lose overall. (I do this on OptionsXpress, which has the best covered-write screens I've seen.) S7 ************ The following books are well worth reading: Options: As A Strategic Investment, by Lawrence McMillan. The book gives a basic overview of options; chapter 2 is devoted to the Covered-Write strategy; and the rest of the book covers almost every conceivable option-trading strategy. Secrets for Profiting in Bull and Bear Markets, by Stan Weinstein. I like his simplistic approach to technical analysis as he defines the four stages of a stock's share price activity. Trading for a Living, by Dr. Alexander Elder. This book covers the psychology of trading and has some useful insights on why people stay in losing position. However, it is geared towards day-trading. It is very important to learn everything you can about a strategy before you try to use it, because knowledge is "financial power." Good Luck! A personal note to S7: Thanks for your E-mail. You outlined an excellent way to employ mechanical stops - the "no muss no fuss" exit strategy. Regardless of which method an investor uses, the key to financial success is to find a method that "successfully" limits their downside damage. Mechanical stops work well most of the time - a lesson you have learned! I also like the way you evaluate the reward potential verses the risk before entering a trade - sound money management. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield CYMI 37.22 38.45 FEB 35.00 3.50 *$ 1.28 8.2% UCOMA 5.50 4.83 FEB 5.00 1.00 $ 0.33 8.0% TSTN 5.19 4.89 FEB 5.00 0.55 $ 0.25 7.8% MONE 14.01 13.73 FEB 12.50 2.25 *$ 0.74 6.8% MONE 14.83 13.73 FEB 12.50 3.20 *$ 0.87 6.5% ELON 16.73 19.54 FEB 15.00 2.40 *$ 0.67 5.1% PLCE 32.00 32.28 FEB 30.00 2.90 *$ 0.90 4.5% ELON 19.50 19.54 FEB 17.50 2.50 *$ 0.50 4.3% PWAV 18.15 16.16 FEB 15.00 3.70 *$ 0.55 4.1% CECO 37.07 35.39 FEB 35.00 2.70 *$ 0.63 4.0% AMZN 14.44 13.41 FEB 12.50 2.25 *$ 0.31 3.7% RATL 23.92 21.32 FEB 22.50 2.35 $ -0.25 0.0% PLUG 10.58 8.88 FEB 10.00 1.40 $ -0.30 0.0% FCEL 18.08 16.31 FEB 17.50 1.25 $ -0.52 0.0% RBAK 6.20 4.05 FEB 5.00 1.55 $ -0.60 0.0% CLRS 5.60 3.96 FEB 5.00 0.95 $ -0.69 0.0% RNWK 8.13 5.32 FEB 7.50 1.30 $ -1.51 0.0% ADIC 18.32 12.85 FEB 17.50 1.70 $ -3.77 0.0% MDR 12.36 13.93 MAR 10.00 3.40 *$ 1.04 10.1% AVII 10.50 11.22 MAR 10.00 1.45 *$ 0.95 9.1% INRG 13.65 13.17 MAR 12.50 2.00 *$ 0.85 6.3% XMSR 13.98 12.75 MAR 12.50 2.25 *$ 0.77 5.7% PECS 28.55 25.85 MAR 25.00 5.00 *$ 1.45 5.4% DCTM 20.39 19.16 MAR 17.50 3.90 *$ 1.01 5.3% VPHM 19.50 19.05 MAR 17.50 3.00 *$ 1.00 5.3% PKTR 7.69 6.42 MAR 7.50 0.85 $ -0.42 0.0% *$ = Stock price is above the sold striking price. Comments: The near-term market outlook continues to be bearish as the "questionable accounting" virus appears to be spreading, while the long-term outlook seems neutral at best. Hey, after the Great Bull run of the '50s, the Dow Jones Industrials traded relatively flat for almost 20 years. The rally which started last Friday offered ample opportunity to exit positions that had reversed their previously bullish trends. For Advanced Digital (NASDAQ:ADIC), the final straw was Thursday's earnings report and the position offered a great example of how to use technical violations as an exit signal. The play was listed January 13: the stock violated its 30-dma on January 22; its 50-dma on February 4; and its 150-dma on February 5. Hoping for an earnings rally or a final move through the support area near $14.50 proved costly. As for the March positions, last week's oil sector candidate, McDermott International (NYSE:MDR) was unplayable due to Monday's gap-up open, and the play will be removed from the summary list. Keep a close watch on the above issues as they test near-term support. With the general market malaise, a move lower could be forthcoming. Positions Closed: Riverstone Networks (NASDAQ:RSTN), Bruker Daltonics (NASDAQ:BDAL), ADC Telecommunications (NASDAQ:ADCT), Sycamore Networks (NASDAQ:SCMR), Acacia Research (NASDAQ:ACRI), priceline.com Inc. (NASDAQ:PCLN), Network Associates (NYSE:NET), Webmethods (NASDAQ:WEBM), Storagenetworks (NASDAQ:STOR) and E.piphany (NASDAQ:EPNY). 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 11.22 MAR 10.00 QVI CB 1.70 169 9.52 27 5.7% BSML 5.22 MAR 5.00 BQX CA 0.65 30 4.57 27 10.6% CANI 5.93 MAR 5.00 CDU CA 1.20 31 4.73 27 6.4% HAL 16.27 MAR 15.00 HAL CC 1.85 8739 14.42 27 4.5% IMCL 18.44 MAR 12.50 QCI CV 6.60 15 11.84 27 6.3% OSIS 22.82 MAR 20.00 UOJ CD 3.80 122 19.02 27 5.8% UTHR 11.20 MAR 10.00 FUH CZ 1.70 539 9.50 27 5.9% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield BSML 5.22 MAR 5.00 BQX CA 0.65 30 4.57 27 10.6% CANI 5.93 MAR 5.00 CDU CA 1.20 31 4.73 27 6.4% IMCL 18.44 MAR 12.50 QCI CV 6.60 15 11.84 27 6.3% UTHR 11.20 MAR 10.00 FUH CZ 1.70 539 9.50 27 5.9% OSIS 22.82 MAR 20.00 UOJ CD 3.80 122 19.02 27 5.8% AVII 11.22 MAR 10.00 QVI CB 1.70 169 9.52 27 5.7% HAL 16.27 MAR 15.00 HAL CC 1.85 8739 14.42 27 4.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** AVII - AVI BioPharma $11.22 *** 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 NEUGENE® antisense drugs. This week, AVII announced the licensing of a patent regarding Calicivirus Infections. AVII previously published data indicating that their proprietary 3rd-generation NEUGENE® antisense agents targeting calicivirus had successfully reduced viral infection, viral replication and cell death in cells from two species. 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=1.70 OI=169 CB=9.52 DE=27 TY=5.7% ***** BSML - BriteSmile $5.22 *** Bracing For A Rally? *** BriteSmile (NASDAQ:BSML) develops, produces, sells and leases teeth whitening products, services and technology. BriteSmile's operations include the development of technologically advanced teeth whitening processes that are distributed in professional salon-like settings known as BriteSmile Professional Teeth White- ning Centers, and in existing dental offices known as BriteSmile Professional Teeth Whitening Associated Centers. The company also sells BriteSmile brand post-whitening maintenance products, including toothpaste and electric toothbrushes. The Forsyth study recently presented at the IADR conference found that the average BriteSmile patient received eight+ shades of whitening in one hour, 50% more effective when compared to the "curing light" procedure, which produced approximately five shades in the same amount of time. Not much news though there are plenty of commercials on TV. We simply favor the improving technicals and the long-term support near the cost basis. The company is due to report earnings on March 20. MAR 5.00 BQX CA LB=0.65 OI=30 CB=4.57 DE=27 TY=10.6% ***** CANI - Carreker $5.93 *** Cheap Speculation! *** Carreker (NASDAQ:CANI) is a provider of integrated consulting and software solutions that enable banks to identify and implement e-finance solutions, increase their revenues, reduce their costs and enhance their delivery of customer services. The company's offerings fall into four groups: Revenue Enhancement, which enable banks to improve workflows, internal operational processes and customer pricing structures; PaymentSolutions, which address the needs of a critical function of banks, the processing of payments made by one party to another; Enterprise Solutions, which provides conversion, consolidation and integration consulting services and products on a bank-wide basis; and CashSolutions, which optimizes the inventory management of a bank's cash on hand. CANI rallied sharply on Friday after the company lifted its 4th-quarter earnings guidance, citing revenues carried over from the previous quarter. The company also said that it saw better-than-expected revenue from its technology and revenue enhancement business units. Carreker has formed a 6-month Stage I base and this position offers a reasonable entry point for investors who have a bullish outlook on the company. Target shooting a lower "net-debit" (cost basis) will enhance the potential yield as the stock may pull back next week. MAR 5.00 CDU CA LB=1.20 OI=31 CB=4.73 DE=27 TY=6.4% ***** HAL - Halliburton $16.27 *** Asbestos Claims Limit! *** 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. On Friday, a judge delayed more than 200,000 pending asbestos claims against a subsidiary, Dresser Industries. UBS Warburg analyst James Stone said the judge's restraining order put Halliburton's most troublesome claims on hold. He expressed confidence that the temporary order would be made permanent. Investors can speculate on the company's future with this low risk position. MAR 15.00 HAL CC LB=1.85 OI=8739 CB=14.42 DE=27 TY=4.5% ***** IMCL - ImClone Systems $18.44 *** Speculators Only! *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company that is developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company focuses on three strategies for treating cancer, growth factor blockers, cancer vaccines and angiogenesis inhibitors. The company's lead product candidate, IMC-C225, is a therapeutic mono- clonal antibody that inhibits stimulation of a receptor for growth factors upon which certain solid tumors depend in order to grow. ImCLone's share price recently suffered over concerns regarding one of its cancer drugs. Now there is speculation that company may be a take-over target. IMCL said that it had adopted a shareholder rights plan or "poison pill," which would distribute new shares to current stakeholders if anyone tried to acquire a greater than 15% stake in ImClone. Was this in response to billionaire financier Carl Icahn, who is looking to buy $500 million worth of shares or is it a shield against a larger threat? We favor the inflated option premiums which offer a conservative entry point from which to speculate on the company's future. MAR 12.50 QCI CV LB=6.60 OI=15 CB=11.84 DE=27 TY=6.3% ***** OSIS - OSI Systems $22.82 *** 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, recently said 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 20.00 UOJ CD LB=3.80 OI=122 CB=19.02 DE=27 TY=5.8% ***** UTHR - United Therapeutics $11.20 *** A New Drug! *** United Therapeutics (NASDAQ:UTHR) is a biotechnology company focused on combating cardiovascular, inflammatory, and infectious diseases with unique therapeutic products, which include pharma- ceuticals, arginine products and telemedicine services. Some current products under development include Remodulin, for treating advanced pulmonary hypertension and late-stage peripheral vascular disease and Beraprost, which is for the treatment of peripheral vascular disease. United Therapeutics also intends to provide telemedicine services which allows patients and physicians to periodically monitor certain bodily measurements such as heart and lung function. UTHR's share price jumped this week after the company said it received an "approvable" letter from U.S. regulators for its Remodulin drug for pulmonary arterial hyper- tension. This is usually the final step before a drug receives clearance for marketing from the U.S. FDA. We simply favor the support area around $10 and the improving technicals. Investors who wish to speculate on United Therapeutics' future can use this position to gain a conservative entry point. MAR 10.00 FUH CZ LB=1.70 OI=539 CB=9.50 DE=27 TY=5.9% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield NPRO 10.10 MAR 10.00 NYQ CB 1.05 56 9.05 27 11.8% ONIS 5.54 MAR 5.00 EMU CA 0.95 1336 4.59 27 10.1% OSTE 8.70 MAR 7.50 OQQ CU 1.65 170 7.05 27 7.2% ASW 10.45 MAR 7.50 ASW CU 3.40 246 7.05 27 7.2% NOVT 8.38 MAR 7.50 QOH CU 1.30 25 7.08 27 6.7% FTUS 16.60 MAR 15.00 FEQ CC 2.25 20 14.35 27 5.1% ACF 21.57 MAR 17.50 ACF CW 4.80 32 16.77 27 4.9% PPD 26.11 MAR 22.50 PPD CX 4.50 712 21.61 27 4.6% ***************** NAKED PUT SECTION ***************** Success Basics: More Q&A on Position Management By Ray Cummins The proper use of trading stops is a common topic in discussions among new traders and this week, we received another excellent question on the subject. Hi Ray, I have been following with interest your naked put recommendations on both Sundays and Wednesdays for quite some time now and have had good success for the most part. However, as I expected, there have been several occasions when it seemed that an early exit was advisable, at which times I bought back the sold put to close the position. My method has been to simply watch the stock as closely as possible and if it reached a level near the strike price (maybe one dollar or less away), I would place a limit order to close the position. I also consider where the underlying stock is relative to various resistance lines on the chart and any news-related issues, but rely mostly on the relative price of the stock to the strike price. I would be interested to know if you consider this manual method of monitoring and exiting positions to be adequate to minimize losses on positions which require closing, or would it be more likely to minimize losses by placing a contingent order with my broker at the time the trade is initiated whereby the option would be bought back if the stock dropped to a predetermined price, or simply bought the option back at a predetermined price? Is there any generally accepted belief among option traders, or any statistical study available as to a preferred method of closing naked put positions - manually versus automatically? By the way, should it be preferable for me to have an account which would allow stops on options and contingency orders it would be necessary for me to open an account in the United States as there are not as yet any brokers in Canada (where I live) which offer these services. Thanks very much for any thoughts you may have in this regard and for your much-appreciated insightful articles. GS Regarding the use of trading stops in position management: Hello GS, First, thanks for the kind comments! It sounds as though you have a very good grasp of the strategy and the manner in which you must manage these types of positions (limited profit/unlimited loss = no big losers!) to be successful. Since you mentioned that you read the newsletter often, I won't go into the details of closing a position (although I think you should consider "shorting" the stock instead of repurchasing the put when the premium of the put option is inflated - often the case after a steep downward trend). As far as the use of manual versus mechanical exit orders, I think they both have merit in certain situations, but apparently you don't have the ability to use the latter technique, due to the limitations of your current broker. I believe it is very important to have all the necessary tools to manage your portfolio effectively and that should include the ability to place trading stops on options and also stops on stocks, which will trigger option-closing orders. With regard to a "generally accepted" method for closing positions, I would say the overwhelming number of traders use mechanical systems on a regular basis, however there are many short-term strategies that are better suited to manual order executions. Keep in mind these techniques require continuous monitoring of the position to make sure the entry/exit trades are executed in a timely manner. If you are going to open an account with a U.S. brokerage, I would suggest you start with a discount broker (if that is agreeable with your trading style) and consider one of the option specialists that have all of the features we discussed, but at a fair commission rate and with good history of order executions. If you have a relatively large portfolio balance, I highly recommend Preferred Trade (that's the company most of us use) and I am including a list of candidates to consider, based on the types of option trading they allow. Of course, many of the features of these brokers change regularly and it is up to you to find one that fits your personal criteria (not an easy job for sure...) Good Luck! Editors Note: Definitions of STOP Orders: STOP ORDER An option stop order is an order to buy or sell option contracts when the market for a particular contract reaches a specified price, called the stop price. A stop order to buy becomes a market order when the option contract trades or is bid at or above the stop price. A stop order to sell becomes a market order when the contract trades or is offered at or below the stop price. STOP-LIMIT ORDER An option stop-limit order is an order to buy or sell option contracts at a specified price or better, after a given stop price has been reached or exceeded. A stop-limit order to buy becomes a limit order when the option contract trades or is bid at or above the stop-limit price. A stop-limit order to sell becomes a limit order when the contract trades or is offered at or below the stop-limit price. An option stop-limit order is a combination of a stop order and a limit order. Stop-limit orders that have been triggered and converted into limit orders will execute if the option is thereafter offered at or below the ask price for buy orders or at or above the bid price for sell orders. In layman's terms: If you use a STOP order and the instrument trades at or below your stop loss, the order will become a market order. This is not the case with a stop-limit order. If you use a stop-limit order and the issue moves too quickly to trade at the limit price, the order will not be executed. *** 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 13.93 FEB 10.00 0.25 *$ 0.25 19.8% DGIN 24.77 25.78 FEB 22.50 0.50 *$ 0.50 13.3% PCX 28.30 28.10 FEB 25.00 0.75 *$ 0.75 12.4% ISLE 16.45 16.26 FEB 15.00 0.30 *$ 0.30 12.0% TMCS 21.50 23.08 FEB 20.00 0.60 *$ 0.60 11.3% FCN 29.10 28.05 FEB 25.00 0.40 *$ 0.40 10.9% ENER 23.27 20.03 FEB 20.00 0.30 *$ 0.30 10.3% CRUS 19.15 16.99 FEB 15.00 0.45 *$ 0.45 9.1% SPCT 15.10 13.63 FEB 12.50 0.30 *$ 0.30 8.7% ISSX 39.00 32.94 FEB 30.00 0.30 *$ 0.30 8.0% TMCS 19.78 23.08 FEB 17.50 0.40 *$ 0.40 7.2% FCN 26.85 28.05 FEB 23.38 0.35 *$ 0.35 6.7% TMCS 19.95 23.08 FEB 17.50 0.45 *$ 0.45 6.5% MERQ 37.51 36.64 FEB 30.00 0.35 *$ 0.35 6.5% JDAS 28.10 24.71 FEB 22.50 0.35 *$ 0.35 6.3% PPD 23.21 26.11 FEB 17.50 0.35 *$ 0.35 6.1% MEDC 23.34 18.08 FEB 17.50 0.35 *$ 0.35 6.1% IRF 39.19 39.64 FEB 35.00 0.50 *$ 0.50 6.0% MROI 29.20 25.91 FEB 25.00 0.40 *$ 0.40 5.5% LIN 27.64 27.19 FEB 25.00 0.45 *$ 0.45 5.5% SEBL 37.20 32.86 FEB 30.00 0.30 *$ 0.30 5.4% SFA 26.70 22.10 FEB 22.50 0.45 $ 0.05 0.8% ICST 25.69 19.08 FEB 20.00 0.45 $ -0.47 0.0% ESST 22.89 19.06 FEB 20.00 0.35 $ -0.59 0.0% AMZN 12.52 13.41 MAR 10.00 0.50 *$ 0.50 14.5% HAL 13.95 16.27 MAR 12.50 0.70 *$ 0.70 12.6% ASW 10.81 10.45 MAR 5.00 0.35 *$ 0.35 12.1% OSIS 22.06 22.82 MAR 17.50 0.70 *$ 0.70 11.9% MANH 29.80 29.17 MAR 22.50 0.65 *$ 0.65 8.5% TXN 30.29 31.50 MAR 27.50 0.85 *$ 0.85 7.3% MU 34.90 36.95 MAR 27.50 0.60 *$ 0.60 6.9% PMCS 22.50 20.71 MAR 15.00 0.30 *$ 0.30 5.4% *$ = Stock price is above the sold striking price. Comments: Friday's bearish activity did little to help the issues in our portfolio but fortunately, the damage was minimal. Integrated Circuit Systems (NASDAQ:ICST) and Ess Technology (NASDAQ:ESST) were the only positions that moved into the red as a result of today's broad-market sell-off. Of the plays closed earlier in in the month, only Iona Technologies (NASDAQ:IONA) managed to finish positive. Looking forward, all of the current portfolio positions are technically favorable, but we will be watching PMC Sierra (NASDAQ:PMCS) for any move below the recent support level near $18. 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 ACN 27.45 MAR 22.50 ACN OX 0.50 105 22.00 27 8.6% AMAT 47.20 MAR 40.00 ANQ OH 0.60 5219 39.40 27 5.5% DDS 17.40 MAR 15.00 DDS OC 0.30 995 14.70 27 7.0% FFIV 23.15 MAR 17.50 FLK OW 0.45 116 17.05 27 10.0% FTI 17.64 MAR 15.00 FTI OC 0.30 1000 14.70 27 7.2% OII 23.79 MAR 22.50 OII OX 0.55 0 21.95 27 7.1% PLMD 20.75 MAR 15.00 PM OC 0.25 612 14.75 27 6.4% PPD 26.11 MAR 17.50 PPD OW 0.45 891 17.05 27 8.9% TER 32.70 MAR 27.50 TER OY 0.60 180 26.90 27 8.0% 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 FFIV 23.15 MAR 17.50 FLK OW 0.45 116 17.05 27 10.0% PPD 26.11 MAR 17.50 PPD OW 0.45 891 17.05 27 8.9% ACN 27.45 MAR 22.50 ACN OX 0.50 105 22.00 27 8.6% TER 32.70 MAR 27.50 TER OY 0.60 180 26.90 27 8.0% FTI 17.64 MAR 15.00 FTI OC 0.30 1000 14.70 27 7.2% OII 23.79 MAR 22.50 OII OX 0.55 0 21.95 27 7.1% DDS 17.40 MAR 15.00 DDS OC 0.30 995 14.70 27 7.0% PLMD 20.75 MAR 15.00 PM OC 0.25 612 14.75 27 6.4% AMAT 47.20 MAR 40.00 ANQ OH 0.60 5219 39.40 27 5.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ACN - Accenture $27.45 *** Technology Solutions! *** Accenture (NYSE:ACN) is a management and technology consulting organization with more than 75,000 employees based in more than 110 offices in 47 countries delivering a wide range of consulting, technology and outsourcing services. The company provides a range of management and technology consulting services and solutions to the communications, high technology, and media and entertainment industries. The company offers services that help its clients stay ahead of major technology and industry trends, including the proliferation of new wireless devices, next-generation networks, digital content services, Web-enabled platforms and the industry restructuring brought about by the convergence of these growing technologies. Accenture works with clients of all sizes and has extensive relationships with the world's leading companies and governments. To be successful, you must stay ahead of the trends in technology and ACN provides the information and guidance to help companies do that in today's complex industrial environment. Investors who want to establish a conservative cost basis in this unique company should consider this position. MAR 22.50 ACN OX LB=0.50 OI=105 CB=22.00 DE=27 TY=8.6% ***** AMAT - Applied Materials $47.20 *** Optimistic Outlook! *** Applied Materials (NASDAQ:AMAT) develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry. Many of Applied's products are single-wafer systems designed with two or more process chambers attached to a base platform. The platform feeds wafers to each chamber, allowing the simultaneous processing of several wafers to enable high manufacturing productivity and precise control of the process. Their platforms support chemical and physical vapor deposition, etch and rapid thermal processing technologies. Customers for their products include semiconductor wafer manufacturers and integrated circuit (chip) manufacturers. Shares of Applied Materials rallied last week, even after the company posted a fiscal first quarter loss of $45 million, or 6 cents a share, on revenue of $1 billion. However, the company surprised investors by announcing that new orders rose for the first time in four quarters. AMAT's CEO also noted that chip revenues have apparently reached a bottom because memory prices have risen and activity in chip factories has increased. Traders can establish a low risk entry point in the issue with this play. MAR 40.00 ANQ OH LB=0.60 OI=5219 CB=39.40 DE=27 TY=5.5% ***** DDS - Dillard's $17.40 *** Buyout Speculation! *** Dillard's (NYSE:DDS) operates retail department stores located primarily in the Southeastern, Southwestern and Midwestern United States. Dillard's also operates a small-event ticket-sales chain in the Southwest United States. All of the company's stores are owned or leased from a wholly owned subsidiary or from third parties. Dillard's has over 330 stores in operation with gross square footage approximating 56.5 million feet. The company owns or leases from a wholly owned subsidiary a total of 250 stores with 41.6 million square feet. Dillard's sells name brand and private-label merchandise and their customers are mostly people with a middle to upper-middle income. Shares of Dillard's soared last week as investors continued to speculate that the founder's recent death would precipitate a sale of the chain. Most analysts say that is unlikely but Dillard's was also the only one of the top department-store chains to report positive same-store sales results in January, up 4% against rivals' double-digit declines. The encouraging performance was unexpected after nine months of negative comparable-store sales and traders who think the upside activity will continue can use this position to speculate on the near-term movement of the issue. MAR 15.00 DDS OC LB=0.30 OI=995 CB=14.70 DE=27 TY=7.0% ***** FFIV - F5 Networks $23.15 *** Internet Traffic Manager *** F5 Networks (NASDAQ:FFIV) is a provider of integrated Internet traffic and content management solutions designed to improve the availability and performance of mission-critical Internet-based servers and applications. F5's products monitor and manage local and geographically dispersed servers and intelligently direct traffic to the server best able to handle a user's request. Its content management products enable network managers to increase access to content by capturing and storing it at points between production servers and end users and ensure that newly published or updated files and applications are replicated uniformly across all target servers. When combined with its network management tools, these products help organizations optimize their network server availability and performance and cost-effectively manage their Internet infrastructure. FFIV has established a relatively stable trading range near $20 and investors who favor the outlook for this unique company can profit from future bullish activity in its share value with this position. MAR 17.50 FLK OW LB=0.45 OI=116 CB=17.05 DE=27 TY=10.0% ***** FTI - FMC Technologies $17.64 *** Oil Service Sector *** FMC Technologies (NYSE:FTI) designs, manufactures and services technologically sophisticated systems and products for customers through its Energy Systems and Specialty Systems segments. Energy Systems is a supplier of systems and services used in the offshore, particularly deepwater, exploration and production of crude oil and natural gas. Specialty Systems provides a range of advanced handling and processing systems to industrial customers. Until December 2001, FMC Corporation was the primary shareholder of the company, but now the company is fully independent. Merrill Lynch recently raised its mid-term rating on FMC to a "strong buy" with a price target of $24. Merrill said that the company's focus on deepwater development should result in high future growth, with the sector's expected average annual growth of 10% to 15% through 2005. Investors must agree with the outlook as they have pushed the issue to a new 6-month high and this position offers a great way to profit from future bullish activity. MAR 15.00 FTI OC LB=0.30 OI=1000 CB=14.70 DE=27 TY=7.2% ***** OII - Oceaneering International $23.79 *** Record Earnings! *** Oceaneering International (NYSE:OII) is an applied technology company that provides a range of integrated technical services and hardware to customers that operate in harsh environments such as underwater, space and other hazardous areas. The company provides most of its services and products to the oil and gas industry and these include drilling support, sub-sea construction, design, lease and operation of production systems, facilities maintenance and repair, specialty sub-sea hardware and specialized onshore and also offshore engineering and inspection. The company operates in five business segments and these are segments are contained within two businesses. Its business segments within the Offshore Oil and Gas business are Remotely Operated Vehicles, Subsea Products, Mobile Offshore Production Systems and Other Services. OII reports its Advanced Technologies business as one segment. Shares of OII have been "on the move" since the company announced quarterly earnings that more than doubled those reported for the comparable periods of 2000. The CEO said the company is poised to set consecutive earnings records in 2002/2003 and they have an excellent platform for future sustained growth. Investors who want to own the stock can profit from future bullish activity or buy it at a discounted price with this position. Target a higher premium initially, to allow for a brief consolidation in the issue. MAR 22.50 OII OX LB=0.55 OI=0 CB=21.95 DE=27 TY=7.1% ***** PLMD - PolyMedica $20.75 *** Recovery Mode! *** PolyMedica (NASDAQ:PLMD) is a provider of direct-to-consumer specialty medical products and services, conducting business in the Chronic Care, Professional Products and Consumer Healthcare markets. PolyMedica sells diabetes supplies and related products through its Chronic Care segment and provides direct-to-consumer prescription respiratory supplies to Medicare-eligible seniors suffering from chronic obstructive pulmonary disease (COPD) and also markets, manufactures and distributes a line of prescription urological and suppository products with its Professional Products segment. PolyMedica's products for urinary health are distributed mainly to food and drug retailers as well as mass merchandisers nationwide through its Consumer Healthcare segment. Shares of PLMD were hammered late last year after the company announced it was under investigation by the Securities and Exchange Commission in connection with accounting matters, financial reports, other public disclosures and sales of the company's securities. Now it appears the company's share value is "on the mend" and investors who want to speculate on the future of its stock should consider this position. Remember, "due diligence" is always recommended before initiating any new play. MAR 15.00 PM OC LB=0.25 OI=612 CB=14.75 DE=27 TY=6.4% ***** PPD - Pre-Paid Legal Services $26.11 *** Solid Results! *** Pre-Paid Legal Services (NYSE:PPD) was one of the first companies in the United States organized solely to design, underwrite and market legal expense plans. The company's legal expense plans (referred to as Memberships) currently provide for a variety of legal services in a manner similar to medical reimbursement plans. Plan benefits are provided through a network of independent law firms, typically one firm per state or province. Members have direct, toll-free access to their Provider law firm rather than having to call for a referral. Legal services include unlimited attorney consultation, traffic violation defense, auto-related criminal charges defense, letter writing/document preparation, will preparation and review and a general trial defense benefit. Prepaid's share value jumped last week after the company reported that 2001 annual membership revenue was up 24%, earnings were up 40% and cash flow was up 63%; an outstanding performance in the current economic environment. Investors who favor the outlook for the company can establish a discounted entry point in the issue with this conservative position. MAR 17.50 PPD OW LB=0.45 OI=891 CB=17.05 DE=27 TY=8.9% ***** TER - Teradyne $32.70 *** Chip Sector Speculation! *** Teradyne (NYSE:TER) is a maker of automatic test equipment and related software for the electronics and communications industries. Products include systems to test and inspect semiconductors; circuit boards; high-speed voice and data communication, and software. Teradyne is also a manufacturer of back-planes and associated connectors used in performance electronic systems. Semiconductor and chip-equipment stocks have been among the best performing technology groups during the recent market sell-off and based on the current technical indications, TER appears to be one the stronger issues in the group. Investors who wouldn't mind owning TER at a discounted cost basis can speculate on the future performance of the chip-equipment group with this position. MAR 27.50 TER OY LB=0.60 OI=180 CB=26.90 DE=27 TY=8.0% ***** ***************** 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 MSV 5.59 MAR 5.00 MSV OA 0.30 0 4.70 27 17.4% ELON 19.54 MAR 17.50 EUL OW 0.70 57 16.80 27 12.2% IMCL 18.44 MAR 10.00 QCI OB 0.40 496 9.60 27 11.0% TDW 36.15 MAR 35.00 TDW OG 1.10 15 33.90 27 8.6% MKSI 26.74 MAR 25.00 QQB OE 0.70 2 24.30 27 8.2% OSIS 22.82 MAR 17.50 UOJ OW 0.35 42 17.15 27 8.0% IGEN 40.05 MAR 35.00 GQ OG 0.75 1300 34.25 27 7.2% SANG 19.76 MAR 17.50 QDY OW 0.35 53 17.15 27 6.6% WSTC 27.35 MAR 25.00 HUD OE 0.50 0 24.50 27 6.2% ************************ SPREADS/STRADDLES/COMBOS ************************ The Market Needs A Holiday! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, February 15 The major equity averages slumped today after an unexpected drop in consumer sentiment added to recent worries about questionable accounting practices and future corporate earnings. The Dow Jones Industrial Average closed down 98 points at 9,903 on weakness in International Business Machines (NYSE:IBM), which was pummeled by investors after an article in the New York Times questioned the accounting of a recent sales transaction. One of the most popular companies in the technology group was also the target of an investigation, and that did little to support the value of shares on the NASDAQ. Nvidia (NASDAQ:NVDA), a maker of graphics semiconductors, fell over 7% after the company reported that the Securities and Exchange Commission is looking into its accounting practices. That was not good news for the technology average and when added to the recent barrage of profit warnings, there was little hope for a positive finish to the session. The NASDAQ Composite index tumbled 38 points to 1,805 with hardware and networking companies leading the retreat. The S&P 500-stock index slid 12 points to 1,104 amid widespread selling pressure. On the Big Board, where about 1.36 billion shares traded, 1,548 stocks rose and 1,537 fell. Market breadth was much the same on the technology exchange, where about 1.60 billion shares changed hands. The 10-year Treasury note moved up more than 5/8 point while its yield fell to 4.86%. The 30-year long bond was up 5/8 point to yield 5.37%. On the fund flow front, Trim Tabs noted that all equity funds had inflows of $3.9 billion in the week ended 2/13, compared with inflows of $1.5 billion in the prior week. Equity funds that invest primarily in stocks had inflows of $2.4 billion compared with inflows of $1.8. billion during the prior week. Last week's new plays (positions/opening prices/strategy): CV Thera. (NSDQ:CVTX) FEB40C/FEB40P $3.10 debit straddle LTX Corp. (NSDQ:LTXX) FEB20P/FEB20C $1.70 debit straddle Agile (NSDQ:AGIL) STOCK/MAR12P $1.25 debit straddle Express Sc. (NSDQ:ESRX) MAR40P/MAR45P $0.60 credit bull-put Fannie Mae (NYSE:FNM) MAR90C/MAR85C $0.50 credit bear-call USA Educ. (NYSE:SLM) MAR80P/MAR85P $0.50 credit bull-put Sealed Air (NYSE:SEE) JUL45C/MAR45C $2.45 debit calendar This week's big winner was the volatility play in CV Therapeutics (NASDAQ:CVTX) and the neutral-outlook position provided up to a 100% gain in less than three days. LTX Corporation (NASDAQ:LTXX) was also a profitable position with the call portion of the debit straddle trading as high as $2.30 on Thursday. With the initial investment of $1.70, the position yielded up to a 35% profit. Agile (NASDAQ:AGIL) was very "agile," moving through an extreme range during the period from Thursday's open to Friday's close, which was a new 3-month low. It appears the synthetic straddle in the issue has good potential, depending on how low the share value of AGIL falls in the coming weeks. The new credit-spread candidates performed well but the premium in the USA Education (NYSE:SLM) position was slightly less than expected, due to the upside activity in the issue. We had high expectations for the bullish calendar spread in Sealed Air (NYSE:SEE), but Monday's "gap-up" open left no opportunity to initiate the play near the suggested debit (on a simultaneous order basis). Of course, the issue eventually finished the week almost $4 higher, ending just $0.55 beyond our sold strike at $45. (Murphy's Law?!?) Portfolio Activity: Another month has come and gone and the strategy of choice in the recent market environment has definitely been the (debit) straddle. Neutral-outlook positions in Agilent (NYSE:A), BEA Software (NASDAQ:BEAS), C.R. Bard (NYSE:BCR), Intervoice-Brite (NASDAQ:INTV), Jabil (NYSE:JBL), Juniper Networks (NASDAQ:JNPR), J.P. Morgan Chase (NYSE:JPM), Mirant (NYSE:MIR), and Schering Plough (NYSE:SGP) offered a number of profitable opportunities with some plays yielding potential gains of 50% or more in less than 30 days. Indeed, the recent volatility in equity values has been very favorable to option buyers, especially when the purchases were timely and with the appropriate outlook. Since that ability is limited to a very small number of traders, it's often best to focus on strategies that profit from other option pricing characteristics such as volatility or time-value erosion, as well as certain techniques that provide a larger margin for error or reduced risk, such as spreads and combinations. As an investor, your goal is to maximize profits and preserve capital in every position you take and those objectives are generally much easier to achieve with methods that don't require perfect timing and faultless directional forecasts. Since the current market conditions are ideal for a delta-neutral approach with option-buying strategies, I have decided to review some of the fundamental components that affect position selection in debit straddles. Success with Straddles: Knowledge of Option Pricing Theory Option premium consists of two components: Intrinsic Value and Time Value. Assume that a current stock price is equal to the strike price. In this case, the option premiums (both the call and the put) do not have any intrinsic value, only time value. The main factors that influence Time Value include: 1) The number of days until expiration 2) Implied Volatility 3) How far the option is in- or out-of-the-money. At-the-money options have the highest time value. As the option starts moving in- or out-of-the-money, the time premium begins to lose value. The closer an option is to expiration, the more an option's premium will shrink (per day) due to time decay. This gives us a guideline in selecting a straddle. We should pick an expiration month so that the price of the straddle will not be too high (not too far from expiration). However, it should still provide enough time for the stock to perform as expected, before the trade must be closed to preserve capital. One important fact to remember; the highest increase in time decay for "at-the-money" options occurs in the last 30 days before expiration. That means we should rarely hold a straddle to expiration. When you know that time decay is working against you, you can begin to choose trades in which the other beneficial components such as intrinsic value and implied volatility, help your position profit, even as time passes. Now that we know time decay is working against us in a straddle, what other factors can help us to achieve our goal of selling at a higher price in the future? Two components: Implied Volatility and Intrinsic Value. Implied volatility is a characteristic of an option's time value. The higher the implied volatility, the higher the option's time value is. When you find a situation where implied volatility is statistically low (probability dictates that it should start to move higher), you can make a profit by selling your straddle at a higher price, even if the underlying stock price doesn't move. Obviously, any increase in implied volatility will boost the time value of your position and move your trade closer to a profitable outcome. Another basic component that can help us profit in a straddle is intrinsic value. Once again, assume that the underlying price is equal to the strike price; this means that our straddle does not have any intrinsic value. When the stock starts moving in either direction, one of our options will become "in-the-money." This will cause the intrinsic value to grow in that option. In contrast, the time value of both of our positions begins to decrease as the underlying moves away from the at-the-money strike. Remember, the further the option is in- or out-of-the-money, the less time value it contains. The rate of change for both of these values is very important. Intrinsic value has a rate of change equal to one; if the stock price moves one point into the money, intrinsic value increases by one point. Time value is much more complex. The rate of change depends on how far away the option is from the strike price: the further the option is in- or out-of-the-money, the smaller the rate of change on a one point move in the underlying issue. With that concept in mind, it is easy to see that when the stock price moves away from the strike price, we gain more in intrinsic value than we lose in time value and that's one way a straddle profits. The measurement of the underlying move is statistical volatility and we look for straddle positions on issues where we expect that component to increase. To construct profitable straddle positions, it is important to be aware of the effects of all these components. A theoretical edge in one or two of these factors can make a position favorable but it is better to have the majority of them on your side. The most common mistake among new traders is the purchase of short-term straddles. You can profit from these positions but usually that occurs only when the underlying starts moving immediately after the play is initiated. Of course, the straddle appears attractive because it doesn't have a large amount of time value and the small movement required for profit seems very probable. The problem is, if the underlying doesn't move right away, time decay will start to increase rapidly and the position will suffer regardless of the eventual stock price movement. Most professional traders say that 2 or 3 months should be the minimum time frame for "conservative" straddles and if you have a choice between different series of expirations and the implied volatility in the longer-term options is lower, you should probably purchase the additional time value because those positions are theoretically cheaper. Good Luck! Questions & comments on spreads/combos to Contact Support ****************************************************************** - SPECULATION PLAYS - This week we have a new selection of "earnings-related" volatility plays, where the underlying issues have discounted option prices and the potential to move significantly due to their quarterly reports. All of these issues are favorable straddle candidates, based on analysis of historical option pricing and their technical trends. Each stock has a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk of the straddle. As always, review each position individually and make your own decision about its future outcome. ****************************************************************** CMOS - Credence Systems $15.27 *** Chip Sector Volatility! *** Credence Systems Corporation (NASDAQ:CMOS) designs, manufactures, sells and services automatic test equipment (ATE) used for testing semiconductor integrated circuits (ICs). Credence also develops, licenses and distributes related software products. The company serves a broad spectrum of the semiconductor industry's testing needs through a wide range of products that test digital logic, mixed-signal, non-volatile memory and radio frequency chips and semiconductors. Credence utilizes its proprietary technologies to design products that are intended to provide a lower total cost of ownership than many competing products currently available while meeting the increasingly demanding performance requirements of the ATE market. Its products are designed to test semiconductors that are produced in high volume and its many customers include major semiconductor manufacturers as well as assembly and test services companies. The company is expected to report earnings on 2/20/02. PLAY (speculative - neutral/debit straddle): BUY CALL MAR-15 CQS-CC OI=201 A=$1.25 BUY PUT MAR-15 CQS-OC OI=55 A=$0.95 INITIAL NET DEBIT TARGET=$2.00 TARGET PROFIT=20%-35% ****************************************************************** FMX - Fomento Economico Mexicano $40.00 ** Probability Play ** Fomento Economico Mexicano, S.A. de C.V. (NYSE:FMX), or FEMSA, is Mexico's largest producer of beer and soft drinks, as well as a major producer of beer and soft drinks in Argentina. FEMSA's principal activities are grouped under the following sub-holding companies: FEMSA Cerveza, S.A. de C.V., which engages in the production, distribution and marketing of beer; Coca-Cola FEMSA, which engages in the production, distribution and marketing of soft drinks; FEMSA Empaques, which engages in the production and distribution of packaging materials; FEMSA Comercio, which is in the operation of convenience stores; Desarrollo Comercial FEMSA, S.A. de C.V., which owns 50.01% of the voting capital stock of Empresas Amoxxo, S.A. de C.V., which operates convenience stores adjacent to gasoline stations; Logística CCM, which provides logistics management services to FEMSA Cerveza; and Logística, which provides logistics management services to Coca-Cola FEMSA, FEMSA Empaques, and third party clients. The company is slated to report earnings on 2/19/02 at 12:00 P.M. EST. PLAY (conservative - neutral/debit straddle): BUY CALL APR-40 FMX-DH OI=291 A=$2.10 BUY PUT APR-40 FMX-PH OI=990 A=$2.00 INITIAL NET DEBIT TARGET=$3.80-$3.90 TARGET PROFIT=25%-50% ****************************************************************** SNPS - Synopsys $49.78 *** Software Sector *** Synopsys (NASDAQ:SNPS) is a supplier of unique electronic design automation software to the global electronics industry. Synopsys' products are used by designers of integrated circuits, including system-on-a-chip ICs, and the electronic products (such as PCs, cell phones, and internet routers) that use such ICs to automate significant portions of their chip design process. ICs are often distinguished by the speed at which they run, their volume/area, the amount of power they consume, and the cost of production. The company's products offer its customers the opportunity to design ICs that are optimized for speed, area, power consumption and production cost, while reducing overall design time. The company also provides consulting services to assist customers with their IC designs, as well as training and support services. Synopsys is scheduled to report earnings on 2/20/02. PLAY (speculative - neutral/debit straddle): BUY CALL MAR-50 YPQ-CJ OI=606 A=$2.90 BUY PUT MAR-50 YPQ-OJ OI=2931 A=$2.95 INITIAL NET DEBIT TARGET=$5.55-$5.70 TARGET PROFIT=20%-35% ****************************************************************** SRNA - Serena Software $22.38 *** Break-Out Coming? *** Serena Software (NASDAQ:SRNA) is a provider of unique e-business infrastructure software change management (SCM) solutions. The company's products and services are used to manage and control software change for organizations whose business operations are dependent on managing information technology. Serena develops, markets and supports a full suite of mainframe SCM products for managing and controlling change in the software application life cycle. Serena's product offerings support the industry standard IBM mainframe platforms. In addition, the company develops, markets and supports an SCM product suite for the distributed systems environment to support Microsoft Windows 95/98/NT, UNIX, LINUX and HP e 3000 platforms. The company's earnings are due on or about 2/21/02. PLAY (speculative - neutral/debit straddle): BUY CALL MAR-22.50 NHU-CX OI=20 A=$1.80 BUY PUT MAR-22.50 NHU-OX OI=36 A=$1.85 INITIAL NET DEBIT TARGET=$3.40-$3.50 TARGET PROFIT=20%-35% ****************************************************************** QLGC - Qlogic $45.80 *** Probability Play! *** QLogic Corporation (NASDAQ:QLGC) is a designer and supplier of Storage Area Networking infrastructure building blocks. Its SAN infrastructure building blocks, comprised of semiconductor chips, host board adapters and switches, are integrated into storage networking solutions of the world's leading system and storage manufacturers. Companies such as Sun Microsystems, IBM, Dell Computer Corporation, Compaq Computer Corporation, Fujitsu Microelectronics, and Hitachi Ltd. all use some or all of its components in the storage and systems solutions they sell to the world's largest information technology environments. In addition to its original equipment manufacturer relationships with these and other companies, in January the company started delivering selected Fibre Channel building blocks through other distributors, systems integrators and resellers, thereby expanding its reach and visibility to the information technology community. This is not an earnings-related position, but the play does meet our criteria for a favorable straddle: cheap option premiums, a history of adequate price movement and the potential for future volatility in the stock or its industry. This selection process provides the foremost combination of low risk and potentially high reward but, as with any position, it must be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (speculative - neutral/debit straddle): BUY CALL MAR-45 QLC-CI OI=693 A=$4.20 BUY PUT MAR-45 QLC-OI OI=1987 A=$3.30 INITIAL NET DEBIT TARGET=$7.25-$7.30 TARGET PROFIT=20%-35% ****************************************************************** - SPREADS & COMBINATIONS - ****************************************************************** NVDA - Nvidia $67.30 *** The Bad News Just Keeps Coming! *** Nvidia (NASDAQ:NVDA) designs, develops and markets unique graphics processors and related software for personal computers and digital entertainment platforms. Nvidia provides a "top-to-bottom" family of performance graphics processors and graphics processing units that has set the standard for performance, quality and features for a broad range of desktop PCs, from professional workstations to low-cost PCs, and mobile PCs, to performance laptops. Nvidia is one of the top companies in the Specialty Semiconductor group but this week the issue came under fire after officials disclosed that the U.S. Securities and Exchange Commission has inquired about the recording of certain reserves in the fourth quarter of fiscal 2000 and the first quarter of fiscal 2001. The stock also suffered in the wake of an announcement from Standard & Poor's, which said it was placing Nvidia's B+ corporate credit and other ratings on credit watch with negative implications to reflect uncertainties about certain of its reserves and the future potential for additional disclosures. From a technical viewpoint, the near-term trend has certainly turned "bearish" and traders who favor conservative combination plays should consider this position. PLAY (conservative - bearish/credit spread): BUY CALL MAR-75 RVU-CO OI=2146 A=$0.40 SELL CALL MAR-70 RVU-CN OI=8053 B=$0.80 INITIAL NET CREDIT TARGET=$0.50-0.60 PROFIT(max)=11% ****************************************************************** IMCL - ImClone Systems $18.44 *** Speculators Only *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company that is developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company focuses on three strategies for treating cancer, growth factor blockers, cancer vaccines and angiogenesis inhibitors. The company's lead product candidate, IMC-C225, is a therapeutic mono- clonal antibody that inhibits stimulation of a receptor for growth factors upon which certain solid tumors depend in order to grow. IMC-C225 has been shown in several Phase I/II trials to have an acceptable safety profile, to be well tolerated and, when it is administered with either radiation therapy or chemotherapy, to enhance tumor reduction. ImCLone's share value recently suffered over concerns regarding one of its cancer drugs. Now there is speculation the company may be a "take-over" target. IMCL said that it has adopted a shareholder rights plan or "poison pill," which would distribute new shares to current stakeholders if anyone tried to acquire a greater than 15% stake in ImClone. Is this in response to the recent activities of billionaire financier Carl Icahn, who is trying to buy $500 million of IMCL stock. Is it a shield against a larger threat? Regardless of the reason, the inflated front-month option premiums offer an excellent opportunity for traders that participate in "time-selling" strategies. PLAY (speculative - bullish/calendar spread): BUY CALL AUG-25 QCI-HE OI=559 A=$2.95 SELL CALL MAR-25 QCI-CE OI=2153 B=$1.00 INITIAL NET DEBIT TARGET=$1.80-$1.90 TARGET PROFIT=50% Note: This position is based on recent increased activity in the stock and/or its underlying options. Although the play offers a favorable risk/reward potential, it should also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** SEE DISCLAIMER IN SECTION ONE ***************************** ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. 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