The Option Investor Newsletter Wednesday 02-20-2002 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 02-20-2002 High Low Volume Advance/Decline DJIA 9941.17 +196.03 9956.05 9734.21 1.42 bln 1893/1221 NASDAQ 1775.57 + 24.96 1777.18 1729.20 1.89 bln 1980/1532 S&P 100 557.49 + 8.37 557.87 544.82 Totals 3873/2753 S&P 500 1097.98 + 14.64 1098.32 1074.36 RUS 2000 467.25 + 7.27 467.29 457.21 DJ TRANS 2697.13 + 24.73 2697.13 2652.98 VIX 24.26 - 2.11 27.00 24.09 VXN 46.68 - 0.55 47.92 46.30 TRIN 0.85 PUT/CALL 0.66 ******************************************************************* Squeeeeeezed! Austin Passamonte We knew downside pressure was building up in the market, no surprise there. But it sure release with impressive fashion! Three down session behind us had the Dow off –300 points and SPX down –50 points at today's low. We even saw S&P and NASDAQ indexes press below recent lows that previously held two or three times this month. When selling didn't accelerate from there, shorts covered and buyers started snapping up selected Dow issues and that spilled over into techs. Whenever large-range market moves as witnessed the past several sessions occur, three distinct camps are formed. Shorts who want to sell everything down to zero, longs who can't wait to buy the first bounce when stocks are so "cheap" and the third group safely in cash and destined to stay there for a long time. Eventually the battle comes to a halt and the other side now prevails. Such is the case with today. No monstrous up-volume on the rally or broad measure of stocks making new highs. Just a decline petered out via shorts covering in domino effect. (Weekly/Daily Charts: OEX) Our first stop for tonight is the OEX, a good market proxy for all major indexes. We immediately see oscillators are still in full- bear decline, which tells us underlying price strength is weak. Various measures of overhead resistance can noted in both time frame charts via Fib Retracements, moving averages and trend lines. My guess? Goes slightly higher or stalls right here before moving back down. A clean break to the upside of that blue trend line in the daily chart (right) would have me looking for continued upside to the next measures of resistance above. (Weekly/Daily Charts: Dow) Surprisingly, the Dow's weekly stochastic values are rising in bullish fashion. Well waddya know! Should we read much into this? I'd look at the NDX and S&Ps to gauge what may happen next myself. Meanwhile, looks like plenty of congestion near the 10,100 level if price action tests the upside further from present. (Weekly/Daily Charts: QQQ) NDX/QQQ is still riding its long-term descending channel in well- behaved fashion. Weekly stochastic values are oversold but daily charts show zero sign of price strength in the current move. If this index can reach 40 area in the QQQ, it will be met with two measures of resistance and eager selling there. (60/30 Min Charts: SPX) When we look at all these various index charts I hope you realize our study doesn't just apply to them alone. Every sector or stock that appears the same way will lead the indexes and every leadership stock in turn within noted sectors lead those up or down. In this case the SPX 60 and 30-minute intraday charts are copied from my service just the way they appear for tomorrow's trading. I want to see how price action behaves near pivot points when stochastic values go extreme in unison, preferably in harmony with the trend. We already looked at OEX weekly/daily charts still bearish, right? If these intraday chart signals tip over tomorrow it's time to play the downside once again. Follow the trend! I Truly Sympathize... "Dear Austin, Jeff, and Eric: I have been a subscriber on and off for a couple of years. I have had my successes in the market in part thanks to recommendations received from OI. However, this has not been very easy and it has required a lot of work on my part. The reason for my email is that you are (collectively) causing great frustration with your changes in state of mind from one day to the next or from one hour to the next. At times you provide suggestions or recommendations that do not make any sense if one is to profit from the investment results. Last week you guys alluded to the "Perfect Storm". What was all that about? We know the market tanked. ...My point is your credibility and that of OI has been suspect and irregular. Please think about the effect that your recommendations may have a serious effect on your subscriber's account if we take you for it. You have begun to sound like the guys and gals on the financial networks. Please clean up your act and start issuing some great stock recommendations one can really get excited in the subsequent research so that we may agree with you. [MG]" MG's letter to me is not uncommon at all. I honestly sympathize and can only imagine how it sounds on the other side of this screen to you when I'm bullish one day and bearish the next. But then again, have you seen the markets lately? Today was nothing unusual over the past two years and we all better get used to it. Major indexes are going absolutely nowhere close to new highs this year but new recent lows are a distinct possibility. Along the way there will be plenty of sideways, volatile chop for us to navigate & endure. Any trader with longer-term outlook in their personal holding period who want to get excited about making money might simply look to short every rally that stalls using stocks or long LEAP puts. Picking stocks that will go down far more than up this year is easy: reminds me of that TV commercial on CNBC where guys play pin the tail on a stock pick to go long. We can probably wait for each bear-market rally to stall, do that for any "big cap" getting smaller and do just fine. But for shorter-term plays with more precise entries it gets tricky. Here's a prime example of how to play today: (10/5 Min Charts: S&P 500) Another template plucked right from my trading platform to your home tonight. This 10/5-minute chart setup also has a 1-minute tick and Time & Sales window open alongside too, but that's another story. We have two different channels drawn in these windows. Note where the 1075 and then 1080 levels appear on both. See where price action reacted to each of them? When initial lows were hit this morning, 60/30 min chart signals showed no signs of sustained life. But scalpers could test the bounce from there using these short-term charts and in this case it worked. Once price action broke above the next measure of support and held, upside plays could be tested with greater conviction from there. If we tried shorting those moves and got stopped out quickly, that's a clear sign we need to reassess the situation. What was clearly bearish in the morning became decidedly bullish in the afternoon. For how long? I have no idea and didn't hold long over the close to find out. Thursday may bring a return to sharp selling soon after the early noise settles out. So where exist all the juicy stock picks a reader can get excited about? Unless it's a short-term play I wouldn't dare say. My best guess on enter & hold plays would be that short shares or long distant-month put options will pay off much bigger than bullish plays between now and Halloween if not beyond. Summation I'm fairly sure there exist some decent enter & hold plays on stocks somewhere in both directions. But we'll leave that to the other teammates for now. I myself would not play long-term bets on the indexes in either direction, especially to the upside right now. We can be sure a number of bear-market rallies will emerge this year for quick upside plays and terrific trend plays back down, but I'm content to be small, nimble and brief in my trades right now. The customary nightly scan of all indexes and sectors that trade options or shares show long-term chart signals all over the map. That's usually a strong sign that neither direction has an upper hand right now. My personal advice is to trade a bit (or considerably) smaller than usual and for shorter duration than preferred. When profits accrue it is vital to harvest or defend them immediately, lest days like this whisk them from our accounts in the blink of a byte. Don't Fall In Love With Either Market Direction, austinp@OptionInvestor.com ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES AT OPTIONSXPRESS * EASY screens for spreads, collars, covered calls or butterflies! * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor010 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** *********** OPTIONS 101 *********** Oh, That Vexing Volatility By Mark Phillips mphillips@OptionInvestor.com Over the past month, we've been working our way through an educational minefield, discussing each of the Greeks that affect option pricing. Beginning with Delta and Gamma, we addressed the issue of what strike price to buy based on our assumptions about the near-term future for the underlying security. Then last week, we added the time factor to the equation, spending our time together discussing time decay, or Theta, with an eye towards selecting the appropriate expiration month. This week, we're going to delve into the concept of Volatility or Vega, and I think you'll quickly notice that the question we're trying to answer here is very different. But first some housekeeping for any latecomers that happened to miss the first three articles on their initial release dates. I've listed the links here for quick reference, in order of publication. The Greeks, Part I - Delta and Gamma Application of Gamma and Delta to Strike Selection Back to the Olympians of Old Alright, like I mentioned above, volatility helps us answer a slightly different question than the other Greeks we've looked at. Volatility tells us whether now is a favorable time to buy or sell. We've all, at one time or another, bought an option, had the stock move in our favor and been stymied by the fact that our option hasn't appreciated much, or even worse, has lost value. The reason, as you've probably already surmised is volatility. After purchasing the option, the appreciation we would have expected from the price movement of the underlying security was diminished (or even absorbed) by the effect of declining volatility. While volatility is not one of the DOMINANT determinants of an option's value, looking at this confusing Greek can tell us whether a particular option is likely to be overpriced at any given point in time. Here is the simple rule. High volatility results in expensive options and low volatility results in cheap options. We normally want to be buying options when they are cheap and selling them when they are expensive, but application of this rule takes many forms. My intent here today is simply to lay the groundwork so that in our next visit, we can delve into the details of how to pecifically apply volatility data to our day to day trading decisions. You've all heard the saying, "Those that fail to learn the lessons of history are doomed to repeat them". Well, the value of volatility comes from looking at historical volatility (HV) and determining how it relates to the current or implied volatility (IV). First off, let's remove an issue of confusion for many. HV is a historical measure of a stock's volatility, while IV is a volatility measure that applies to the underlying options. Please don't ask me how either of these are created, as I don't know. More importantly, we don't need to know that answer in order to profitably apply the knowledge that they provide. While much of what we're going to cover is also applicable to discussions of the VIX, I really don't want to delve into that topic here. We're covering actual volatility levels on specific stocks, whereas the VIX is a synthetic volatility measure created by the CBOE. What the CBOE has created is a hypothetical value for volatility of a fictional ATM OEX option with 30 days until expiration. For those of you that want further details on the VIX, both its construction and application, I'll refer you to a couple of articles I wrote last year. Measuring the Mood of the Markets VIX Details for the Masochist If the IV of a given option is near the upper range of the stock's HV chart, then it’s a pretty good bet that the option is overpriced. On the other hand, if the IV is poking around near the lower end of the HV chart, then we can at least say that the option is reasonably priced. In some instances, we might even stumble across a bargain. But I haven't seen too many of those lately. It takes a better bloodhound than I to sniff out those bargains, and that is a topic that would take us far afield of our intended subject today. So where do we find data on these mythical volatility measures? I thought you'd never ask. By far, the best resource on the Internet for researching volatility is found at http://www.ivolatility.com. The industrious folks behind that site have put together quite a collection of volatility information, option calculators, and numerous other little tools that can enable us to delve into issues like ranking volatility of one option against another and searching for volatility skew. Don't even ask about that one right now -- it'll have to wait for a future article, after we've finished covering the basics. Rather than duplicate any of their volatility charts here today, I want to encourage you to head on over to their site and pull up some volatility charts on your own. Next week I'm going to delve into some examples and I think it will be far more instructive if you can look at the charts on your own, rather than looking at whatever static charts I might choose to include this week. Once you bring up the main page, there is a symbol entry field all the way at the upper right hand corner. Put in your favorite symbol and click the 'Go' button. Voila! There you have a cornucopia of volatility information available, including historical volatility over various timeframes, along with implied volatility for several near-the-money strikes for the current and next expiration months. But the item I find the most useful is the tiny little Volatility Chart. Click on that little chart and you'll be presented with a larger chart showing a graph of HV vs. IV for the past year. On a whim, I pulled up the HV/IV chart for Tyco International (NYSE:TYC) and the result is rather interesting. While the HV (volatility of the stock) peaked in early February, the IV (that of the options) is still climbing and is currently at its high of the past 12 months, more than 2.5 times its prior peak last April. This chart speaks volumes to us in telling us that the options in TYC are still VERY expensive relative to their historical norm. Even after the volatility in the underlying stock has passed (at least for now), the uncertainty (due to the accounting issues) remains and is reflected in the option prices as a volatility premium. While there is definitely more ground to cover on the subject of volatility, I think this is a good point to end for the day. Take some time this week and look at some volatility charts, getting a feel for what they look like and how the HV relates to the IV. Take particular notice of the fact that there is normally an offset between the two. Next week we'll delve into the details of HOW to use this new-found knowledge to initiate trades with a better understanding of the field on which we are playing. Have a great week! Mark ************************Advertisement************************* BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck" * IRA Accounts Available * 8 different FREE options pricing, strategy, and charting tools * Real-Time Buying Power, Account Balances or Cancels * EASY screens for spreads, collars, covered calls or butterflies! Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor013 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** IS Swing Trade Model: Thursday 2/20/2002 Expected Pop Today News & Notes: ------------ Here it is... our relief rally delivered to us right on a silver platter. What do we do with it from here? Featured Markets: ---------------- [60/30-Min Chart: OEX] As noted in tonight's Market Wrap, the OEX has bearish weekly and daily charts with intraday signals nearing overbought. I expect price action to go higher before lower, probably reaching the 560 area first. We have put play entry triggers listed in case of an opening drop, but hopefully we can trail them higher in the early going first. [60/30-Min Chart: SPX] Same for the SPX. Tuesday's gap begs to be filled as we noted last night, but once it is the chances of rejection and downside follow thru are high. [60/30-Min Chart: QQQ] If the QQQs break below Wednesday's open I'd get short there, but would be nicer to try entering near the 36 area instead. Summation: --------- Here's our rally, right up to resistance as long-term charts look bearish. Couldn't ask for it to be scripted any better than this. From here we test the downside at first opportunity, and our fondest wish would be a strong upside move at the open that smacks resistance and rolls. Hey... a fella can dream, can't he? 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 none Long: BREAK ABOVE none Stop: Stop: Mar Puts: 34 (QQQ-OH) Mar Puts: 98 (DJV-OS) Long: BREAK BELOW 34.85 Long: BREAK BELOW 99.00 Stop: Break Above 35.75 Stop: Break above 100.00 ===== OEX SPX Mar Calls: 570 (OEB-CN) Mar Calls: 1125 (SPT-CE) Long: BREAK ABOVE none Long: BREAK ABOVE none Stop: Stop: Mar Puts: 550 (OEB-OJ) Mar Puts: 1075 (SPQ-OO) Long: BREAK BELOW 557.00 Long: BREAK BELOW 1096.00 Stop: Break Above 561.00 Stop: Break Above 1104.00 Open Plays: ---------- None IS Position Trade Model: Wednesday 2/20/2002 Selling The Rally? News & Notes: ------------ Short-term traders might do very well going short soon. But enter & hold players face a bigger dilemma: long-term charts for indexes and sectors are mixed across the board tonight. Featured Plays: -------------- None Summation: --------- Traders who feel compelled to enter something will probably fare best looking for overbought charts and shorting any initial signs of a failed rally ahead. Don't be surprised if upside plays are in the works soon as well. Nothing high-odds enough to list in this model 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: ---------- 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 [hit] Stop: 1.50 [hit] Sector Share Trade Model: Wednesday 2/20/2002 Relief Is At Hand News & Notes: ------------ A blow-off short squeeze may fail tomorrow or be the sustained rally numerous pundits are calling for. Which is it? Our nightly scan of the indexes and sectors find weekly/daily chart signals all over the map. Featured Plays: -------------- None Summation: --------- This environment is easy to pick a few plays and scalp a point or two out of them, and better for the intraday player. However, enter & hold attempts right now are futile at best and probably going to get worse with volatile chop. No new entries planned to track at this time. 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: --------------- XLB Basic Technology Long: BREAK ABOVE 22.00 Stop: Break below 21.50 ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES AT OPTIONSXPRESS * EASY screens for spreads, collars, covered calls or butterflies! * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor010 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Wednesday 02-20-2002 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ************************Advertisement************************* BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck" * IRA Accounts Available * 8 different FREE options pricing, strategy, and charting tools * Real-Time Buying Power, Account Balances or Cancels * EASY screens for spreads, collars, covered calls or butterflies! Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor013 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ***************** STOP-LOSS UPDATES ***************** SPW - call Adjust from $117 up to $117.50 KSS - put Adjust from $70.25 down to $69.75 TLAB - put Adjust from $13 down to $12.80 ************* DROPPED CALLS ************* UNH $73.88 +0.07 (-0.43) UNH staged a sharp intraday drop which took the stock down near its 50-dma. UNH rebounded to fill its morning gap lower, but failed to advance past its short-term congestion near the $74.50 area. Its 10-dma is in the same vicinity. With the potential for a rollover high at current levels, we're dropping coverage on UNH this evening. Traders with open positions can look to exit on any strength early tomorrow. ************ DROPPED PUTS ************ None ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES AT OPTIONSXPRESS * EASY screens for spreads, collars, covered calls or butterflies! * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor010 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* KSS - Kohls $67.33 -0.37 (-1.17 this week) Kohl's Corporation currently operates 354 family oriented, specialty department stores that feature quality, national brand merchandise priced to provide value to customers. The Company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than traditional, full-line department stores, but offer customers dominant assortments of merchandise displayed in complete selections of styles, colors and sizes. Most Recent Update The earnings report from Wal Mart (NYSE:WMT) didn't help to boost retail shares in today's trading. The S&P Retail Sector Index ($RLX) finished 1.33% lower for the day, mirroring the performance of the Dow Jones Industrial Average ($INDU). For its part, KSS tracked the performance of the $RLX. We'd like to see the stock lose some relative strength versus the market and its sector. Until that happens, KSS will most likely track that $RLX and broader market closely. The stock closed near its 10-dma in today's session. The 10-dma currently sits at $67.83. A continuation of the recent sell-off through that level into tomorrow's session could have KSS lower in the short term. Confirmation of weakness would be provided on a decline below the $67 level. From there, we'll look for the stock to trade down to the $65 level if the $RLX continues to weaken. Watch for volume to increase on further weakness. Comments KSS traded lower in today's session on increased volume. The stock's weakness came in spite of strength in its sector, the Retail Sector Index (RLX.X), and the broader market. Its decline below the $67 level confirmed the weakness from earlier in the week. We're looking for the stock to continue lower, especially on weakness in the RLX.X. Look for a rollover on intraday strength from the $68.25 resistance zone or for a breakdown below the $66 support level. BUY PUT MAR-70*KSS-ON OI= 677 at $3.80 SL=2.50 BUY PUT MAR-65 KSS-OM OI=1625 at $1.40 SL=0.75 Average Daily Volume = 1.78 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** BIG-CAP COVERED CALLS, NAKED PUTS & COMBINATIONS *************** Stocks Rebound After Post-Holiday Slump! By Ray Cummins U.S. equities rallied today with blue-chip issues leading the way amid an unexpected buying spree by "bargain-hunting" investors. The Dow Jones Industrial Average gained 196 points to 9,941 after falling 157 points on Tuesday. The recent "tech wreck" also ended with the NASDAQ Composite recovering 24 points to 1,775 in the wake of yesterday's slide to a new low for the year. The broader market S&P 500 stock-index ended 12 points higher at 1,096, even as accounting worries continued to affect market sentiment. The rally in industrial shares was underpinned by Honeywell (NYSE:HON), which jumped almost 6% after the company's board selected David M. Cote, the current chairman and CEO of TRW, to take over as chairman and chief executive. Strength in the blue-chip group was also seen in Walt Disney (NYSE:DIS), which vaulted over 5% after a U.S. Court of Appeals handed down two rulings that could positively affect the the broadcasting industry. The rebound in the technology segment was led by semiconductor, hardware, and telecommunications issues. Despite some hopeful news about the economy, today's session was plagued by additional accounting concerns as a new company became the focus of an investigation. According to Newsday and the New York Times, the Federal Bureau of Investigation is now trying to determine whether Computer Associates (NYSE:CA) overstated its earnings to inflate its stock price. The company, however, said it hasn't been contacted by authorities and doesn't know what, if anything, is being investigated. It staunchly defended its past accounting practices, saying it has been "in accordance with all applicable accounting principles." Another market catalyst in today's session was the activity among Wall Street analysts and the big loser in this category was media and entertainment giant AOL Time Warner (NYSE:AOL). The company saw its rating slashed by Lehman Brothers to a "market perform" on lowered growth estimates for the American Online unit. The announcement sent shares of AOL tumbling and the issue was the most heavily traded on the NYSE. In the broader market, biotechnology, major drug, cyclical, retail, consumer and financial issues edged higher, reflecting the appeal of discounted prices in both defensive and aggressive areas of the market, while losses were seen in oil and oil service, gold and natural gas stocks. *************** Summary of Current Positions (as of 02-19-2002): *************** Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield RTEC MAR 40 37.64 38.25 0.61 1.6% The sell-off in technology shares has affected a number of bullish issues in the semiconductor group and Rudolph Technologies (NASDAQ:RTEC) may be our first "early-exit" of the new expiration period. Any close below the cost basis of the position should be a suitable exit signal for short-term traders while longer-term investors may choose to focus on the 30-dma for further indications of a new bearish trend. Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield INVN MAR 25 24.20 37.50 0.80 7.2% MU MAR 30 29.20 36.59 0.80 7.5% NVDA MAR 47.5 46.45 53.55 1.05 6.4% KLAC MAR 50 48.55 58.47 1.45 7.4% AMAT MAR 40 39.40 45.80 0.60 5.1% KLAC MAR 50 48.95 58.47 1.05 7.5% RTEC MAR 35 34.25 38.25 0.75 6.9% TER MAR 27.5 27.00 31.59 0.50 6.3% Shares of Nvidia (NASDAQ:NVDA) came under fire last week after officials disclosed that the Securities and Exchange Commission has asked 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 the company's B+ corporate credit and other ratings on credit watch with negative implications to reflect uncertainties about its reserves and the future potential for additional disclosures. From a technical viewpoint, the near-term trend has certainly turned "bearish" and traders should monitor the issue closely for an early exit. Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield VRTS MAR 45 45.80 34.16 0.80 8.2% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status CYMI 41.37 37.94 MAR30P/35P 0.75 34.25 0.75 Open AZN 47.60 49.43 MAR40P/45P 0.40 44.60 0.40 Open NOC 109.32 114.90 MA95P/100P 0.80 99.20 0.80 Open PG 82.50 84.00 MAR75P/80P 1.00 79.00 1.00 Open TGH 77.00 74.96 MAR65P/70P 0.45 69.55 0.45 Open BVF 42.05 44.00 MAR55C/50C 0.60 50.60 0.60 Open WHR 65.50 65.49 MAR75C/70C 1.10 71.10 1.10 Open ROOM 54.72 47.95 MAR40P/45P 0.70 44.30 0.70 Open HIG 67.00 65.49 MAR60P/65P 0.90 64.10 0.90 Open PGR 152.90 150.36 M140P/145P 0.90 144.10 0.90 Open XL 97.11 92.50 MAR85P/90P 0.60 89.40 0.60 Open AHC 64.48 65.00 MAR55P/60P 0.50 59.50 0.50 Open BGEN 54.45 53.21 MAR65C/60C 0.50 60.50 0.50 Open TEVA 59.99 57.27 MAR70C/65C 0.60 65.60 0.60 Open Index Credit Spreads: Stock Pick Last Position Credit C/B G/L Status OIH 56.65 58.23 MAR45P/50P 0.60 54.40 0.60 Open Synthetic Positions: Stock Pick Last Position Credit C/B G/L Status WMT 59.86 59.29 MAR65C/55P 0.25 54.75 0.20 Open New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Naked Puts (Same Stocks - Different Week!) The list of favorable issues in this category has not changed much over the last week, despite the market's volatility, and some of today's candidates are already posted in our portfolio. However, investors with a bullish outlook on the underlying issues, who plan to use the recent share-value slump to initiate new positions, may find the risk-reward outlook in these plays attractive. All of these companies have reported earnings this quarter and have favorable fundamentals and relatively positive technical indications. At the same time, they should also be evaluated for portfolio suitability and reviewed with regard to your personal investing criteria. *************** ACS - Affiliated Computer Services $94.70 *** Split Coming! *** Affiliated Computer Services (NYSE:ACS) is a global Fortune 1000 company that delivers comprehensive business process outsourcing and information technology outsourcing solutions, as well as system integration services, to commercial and federal government clients. In the commercial sector, ACS provides its clients with business process outsourcing, systems integration services and technology outsourcing. Within the federal government sector, ACS provides business process outsourcing and systems integration services. The recent slump in the value of ACS appears to be coming to an end, despite the selling pressure in broader-market issues. Some analysts say the reason for the renewed interest in the company's stock is the forecasted 20% growth in revenues and earnings per share beyond 2002. Others believe the recovery in the issue is due to the upcoming 2-for-1 stock split, which will occur on 2/25. Regardless of the reason for the activity, the current technical indications suggest the stock is preparing for a bullish move and traders who agree with that outlook can speculate on the future movement of the issue with these positions. ACS - Affiliated Computer Services $94.70 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT MAR 85 ACS OQ 150 1.10 83.90 5.0% *** SELL PUT MAR 90 ACS OR 139 2.00 88.00 7.5% SELL PUT MAR 95 ACS OS 956 3.80 91.20 12.0% *************** AMAT - Applied Materials $46.57 *** 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. Applied has five single-wafer, multi-chamber platforms: the Precision 5000, the Centura, the Endura, the Endura SL and the Producer. These platforms currently support chemical vapor deposition, physical vapor deposition, etch and rapid thermal processing technologies. Customers for their products include semiconductor wafer manufacturers and integrated circuit (or chip) manufacturers. Shares of Applied Materials rallied last week after the company posted a fiscal first quarter net loss of $45 million, or 6 cents a share, on revenue of $1 billion. During the same quarter last year, net income was $156 million, or 19 cents a share, on revenue of $2.36 billion. The consensus expectation was for "break-even" results, excluding charges, on revenue of $1.01 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 semiconductor revenues have apparently reached a bottom because memory chip prices have risen and activity in chip factories has increased. The issue is performing well, despite the slump in technology stocks, and traders who agree with a bullish outlook for AMAT can speculate on the future movement of its stock price with these positions. AMAT - Applied Materials $46.57 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT MAR 37.5 ANQ OU 1,075 0.35 37.15 4.7% "TS" SELL PUT MAR 40 ANQ OH 5,390 0.60 39.40 6.3% *** SELL PUT MAR 42.5 ANQ OV 8,160 1.05 41.45 8.9% SELL PUT MAR 45 ANQ OI 9,303 1.80 43.20 12.6% *************** IDPH - Idec Pharmaceuticals $62.10 *** New Drug Approval! *** IDEC Pharmaceuticals (NASDAQ:IDPH) is a biopharmaceutical company engaged in the research, development and commercialization of targeted therapies for the treatment of cancer and autoimmune and inflammatory diseases. The company's first commercial product, Rituxan, and its most advanced candidate, ZEVALIN (ibritumomab tiuxetan), are for use or intended for use in the treatment of certain B-cell non-Hodgkin's lymphomas (B-cell NHLs). B-cell NHLs currently afflict over 300,000 patients in the United States. The Company is also developing products for the treatment of various autoimmune diseases, such as rheumatoid arthritis and psoriasis. Shares of IDEC Pharmaceuticals soared today in the wake of news that the FDA had issued an earlier-than-expected marketing approval for the company's cancer-killing radiation product Zevalin. The U.S. Food and Drug Administration approved its new drug for the treatment of non-Hodgkin's lymphoma, a form of lymph cancer that is treatable in its early stages but which typically resurfaces and becomes very difficult to control. Analysts were bullish on the announcement, saying it will substantially boost the company's revenues in the current year. Investors were also optimistic in light of the new developments and they drove the issue up over 10% to a recent high near $62. Traders who believe the rally will continue can profit from that outcome with these bullish positions. Target a higher premium in the options initially, to allow for a brief consolidation in the issue. IDPH - Idec Pharmaceuticals $62.10 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT MAR 50 IDK OJ 577 0.45 49.55 4.5% "TS" SELL PUT MAR 55 IDK OK 598 1.00 54.00 7.1% *** SELL PUT MAR 60 IHD OL 912 2.10 57.90 11.2% *************** KLAC - KLA Tencor $59.77 *** Still A Favorite! *** KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's large portfolio of products, software, analysis, services and expertise is designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to the company for in-line wafer defect monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer overlay; film and surface measurement; and overall yield and fab-wide data analysis. KLAC has consolidated after last week's rally but the issue is definitely a "favorite" in the semiconductor-equipment group and today's bullish activity suggests there is still optimism for a few companies in that sector. The long-term technical outlook remains favorable and the premiums in these options offer excellent reward potential for traders who are bullish on the issue. KLAC - KLA Tencor $59.77 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT MAR 50 KCQ OJ 4,484 0.80 49.20 7.1% *** SELL PUT MAR 55 KCQ OK 7,307 1.65 53.35 10.5% SELL PUT MAR 60 KCQ OL 10,070 3.40 56.60 16.3% *************** TER - Teradyne $33.59 *** Sector Leader! *** Teradyne (NYSE:TER) is a manufacturer 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 backplanes 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 slump and today's rally in Teradyne confirmed its position as a leader in the sector. Based on the current technical indications, Teradyne is one of the stronger stocks in the chip-equipment segment and traders who wouldn't mind owning the issue at discounted cost basis should consider these positions. TER - Teradyne $33.59 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT MAR 27.5 TER OY 200 0.40 27.10 6.8% *** SELL PUT MAR 30 TER OF 686 0.80 29.20 9.9% SELL PUT MAR 32.5 TER OZ 226 1.45 31.05 13.9% *************** Credit Spreads All of these plays are based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may also be higher than other plays in the same strategy based on disparities in option pricing. However, current news and market sentiment will have an effect on these issues so review each play individually and make your own decision about the future outcome of the position. *************** ACE - ACE limited $42.50 *** Bullish Industry Outlook! *** ACE Limited (NYSE:ACE), through its many subsidiaries, provides a broad range of insurance and reinsurance products to customers in the United States and almost 50 other countries. In addition, ACE, through ACE Global Markets, provides various funds at Lloyd's, mainly in the form of letters of credit, to support underwriting capacity for their syndicates managed by Lloyd's managing agencies that are wholly owned subsidiaries of ACE. The company derives its revenue principally from premiums, fees and investment income. ACE operates through six business segments: ACE Bermuda, ACE Global Markets, ACE Global Reinsurance, ACE USA, ACE International and ACE Financial Services. ACE - ACE limited $42.50 PLAY (conservative - bullish/credit spread): BUY PUT MAR-35 ACE-OG OI=855 A=$0.25 SELL PUT MAR-40 ACE-OH OI=344 B=$0.65 INITIAL NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11% *************** DIAN - Dianon Systems $62.25 *** Earnings Play? *** Dianon Systems (NASDAQ:DIAN) provides a full line of anatomic pathology testing services and a number of genetic and clinical chemistry testing services to patients, physicians and managed care organizations throughout the United States. The company's principal physician audience for these services includes 50,000 clinicians engaged in the fields of medical oncology, urology, dermatology, gynecology and gastroenterology. Dianon performs all testing at either its main facility in Stratford, Connecticut, or at its other facilities located in Tampa, Florida; New City, New York; Woodbury, New York, or Englewood, Colorado (acquired in October 2000). The company provides most test results to physicians within 48 hours. Note: Dianon Systems is expected to announce earnings tomorrow, possibly before the market opens, but since the company has already offered a complete preview of its quarterly performance, the report (without a significant surprise) is likely to have little effect on its share value. DIAN - Dianon Systems $62.25 PLAY (conservative - bullish/credit spread): BUY PUT MAR-50 UID-OJ OI=20 A=$0.45 SELL PUT MAR-55 UID-OK OI=36 B=$0.95 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% *************** ETN - Eaton $78.45 *** Merrill Upgrade! *** Eaton Corporation (NYSE:ETN), incorporated in 1916, is a global diversified industrial manufacturer. Eaton is in the business of fluid power systems, electrical power quality and controls, automotive air management and fuel economy, and intelligent truck components for fuel economy and safety. The company is also a global manufacturer of highly engineered products that serve industrial, vehicle, construction, commercial, aerospace and semiconductor markets. The company segments its business as Automotive, Fluid Power, Industrial and Commercial, Controls, and Truck. Note: Target a higher credit in the spread initially, to allow for a brief consolidation from today's rally. ETN - Eaton $78.45 PLAY (conservative - bullish/credit spread): BUY PUT MAR-70 ETN-ON OI=188 A=$0.25 SELL PUT MAR-75 ETN-OP OI=26 B=$0.70 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% *************** MRK - Merck $61.26 *** Bottom-Fishing! *** Merck (NYSE:MRK) is a worldwide, research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care, L.L.C. (Merck-Medco). The company's operations are principally managed on a products and services basis and are comprised of two reportable segments, Merck Pharmaceutical, which includes products marketed either directly or through joint ventures, and Merck-Medco. Merck Pharmaceutical products consist of therapeutic agents, sold by prescription, for the treatment of human disorders. Merck-Medco revenues are derived mainly from the filling and management of prescriptions and health management programs. MRK - Merck $61.26 PLAY (moderately aggressive - bullish/credit spread): BUY PUT MAR-55 MRK-OK OI=4597 A=$0.20 SELL PUT MAR-60 MRK-OL OI=11540 B=$0.95 INITIAL NET CREDIT TARGET=$0.80-$0.85 PROFIT(max)=19% *************** BEARISH PLAYS - Naked Calls & Combinations *************** EMLX - Emulex $38.03 *** Premium Selling! *** Emulex is a designer, developer and supplier of a broad line of Fibre Channel host adapters, hubs, application-specific computer chips (ASICs), and software products that provide connectivity solutions for Fibre Channel storage area networks (SANs), network attached storage (NAS), and redundant array of independent disks (RAID) storage. Its products are based on internally developed ASIC technology, and are deployable across a variety of SAN configurations, system buses and operating systems, enhancing data flow between computers and peripherals. Emulex's products offer customers a combination of critical reliability, scalability, and high performance, and can be also customized for mission-critical server and storage system applications. Emulex is an excellent candidate in the premium-selling category of options trading, especially for those investors with a neutral to bearish outlook on the issue. The popular technology stock has higher than average premiums in its options, a defined resistance area near the target strike price ($45), and has recently fallen below a major moving average (30-dma) on increasing volume. The stock's near-term technical history suggests that further downside activity is likely in all but the most bullish market environments and traders can speculate on that outcome with these positions. EMLX - Emulex $38.03 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL MAR 47.5 UMQ CW 464 0.45 47.95 7.4% *** SELL CALL MAR 45 UMQ CI 1,613 0.85 45.85 12.4% SELL CALL MAR 42.5 UMQ CV 6,738 1.50 44.00 16.2% *************** LXK - Lexmark International $50.48 *** Sell-Off In Progress! *** Lexmark International (NYSE:LXK) is a developer, manufacturer and supplier of printing solutions such as laser and inkjet printers, associated supplies and services for offices and homes. Lexmark develops and owns most of the technology for its laser and color inkjet printers and associated supplies, and that differentiates the company from a number of its major competitors, including Hewlett Packard, which purchases its laser engines and cartridges from a third party. Lexmark also markets dot matrix printers for printing single and multi-part forms by business users. Lexmark also develops, manufactures and markets a line of other office imaging products, which include supplies for select IBM branded printers, aftermarket supplies for original equipment manufacturer products, and typewriters and typewriter supplies that are sold under the IBM trademark. Lexmark has long been regarded as a solid portfolio holding among technology investors but recently, the issue has struggled under the weight of profit-taking and a new downtrend appears to be well established. The current activity suggests a future drop to the previous trading range near $45-$48 and with the current overhead supply at $54, this spread offers a favorable risk/reward outlook for traders who agree with a bearish outlook for the issue. LXK - Lexmark International $50.48 PLAY (conservative - bearish/credit spread): BUY CALL MAR-60 LXK-CL OI=282 A=$0.20 SELL CALL MAR-55 LXK-CK OI=392 B=$0.65 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% *************** SUPPLEMENTAL CREDIT-SPREAD CANDIDATES *************** BULLISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain MGA 66.15 MAR65P 1.40 MAR60P 0.40 1.10 28% DD 46.83 MAR45P 0.85 MAR40P 0.15 0.75 18% SRCL 62.41 MAR60P 1.25 MAR55P 0.55 0.75 18% HSY 71.16 MAR70P 0.80 MAR65P 0.20 0.65 15% GM 52.28 MAR50P 0.55 MAR45P 0.15 0.50 11% BEARISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain EBAY 54.26 MAR60C 1.05 MAR65C 0.40 0.70 16% ENZN 45.40 MAR50C 0.90 MAR55C 0.25 0.70 16% MERQ 34.89 MAR40C 0.85 MAR45C 0.25 0.65 14% CCMP 57.04 MAR65C 0.95 MAR70C 0.35 0.65 14% ERTS 54.61 MAR60C 0.85 MAR65C 0.35 0.55 12% CEPH 60.85 MAR70C 0.70 MAR75C 0.25 0.50 11% SEPR 38.97 MAR45C 0.75 MAR50C 0.30 0.50 11% *************** INDEX-OPTION SPREADS *************** As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific industry group or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options and professional traders also employ index spreads in hedge strategies. We favor debit spreads on the S&P 500 index (SPX) for momentum and hedging as well as out-of-the-money credit spreads on the S&P 100 index (OEX) when the risk-reward outlook is acceptable. Low risk disparity spreads will also be listed (when available) for the conservative index trader. *************** OEX - S&P 100 Index $557.59 *** OTM Credit-Spread *** The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. Traders who participate in index-based spreads often utilize S&P 100 (OEX) options because they generally contain more premium than options on individual stocks and also provide an underlying instrument less prone to gapping moves. In this case, today's broad recovery in share values has boosted the front-month call option premiums, providing a favorable spread credit for traders who agree with a bearish stance on stocks in the near-term. The position will profit if the OEX remains below the sold strike at 590, which corresponds to the index's 50-dma. From a technical viewpoint, the market seems likely to move in constrained price pattern as the long-term outlook is somewhat uncertain. Please review the OIN's Market Sentiment section for specific technical information on the current trends in equities. OEX - S&P 100 Index $557.59 PLAY (conservative - bearish/credit spread): BUY CALL MAR-595 OEB-CS OI=687 A=$1.00 SELL CALL MAR-590 OEB-CR OI=2750 B=$1.40 NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11% Traders should target a higher premium in the spread initially, to allow for a brief continuation in today's bullish activity and increase the overall return on investment in the position. *************** SEE DISCLAIMER ***************************** ************************Advertisement************************* BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck" * IRA Accounts Available * 8 different FREE options pricing, strategy, and charting tools * Real-Time Buying Power, Account Balances or Cancels * EASY screens for spreads, collars, covered calls or butterflies! Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor013 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************** TRADERS CORNER ************** We Have Some of the Sharpest Readers in the World Buzz Lynn buzz@OptionInvestor.com Literally. We got e-mails from guys who can smell big dividends a mile away. While I've got two big dividend-paying stocks here that serve as today's medium thanks to a loyal reader, the real message today is about how to ferret out information available at our fingertips. In short, we can find lists all day long that tell us the highest dividend payers. But finding those with sustainable dividends is a whole 'nother matter. That's where ferreting school pays off. Reader's write: I'm following your website very close these days. Being without my family in the middle East is boring so I'm spending most evenings cuddled up next to the computer trading options and making money in large part due to your website. I bought some NAT for my IRA last fall. Big Dividend and a long- term contract with BP. Keep up the good work. I enjoy your columns. R.D. Thanks R.D. for your kind words. We sure appreciate it, as letters like these keep us motivated daily to share our collective knowledge with readers on how to earn money from the markets. But it's even better when readers are willing to share their ideas with us. That said, I hope R.D. won't mind if we use NAT as a way to show others how we might go about researching any company for more information. Well, I'd never heard of NAT, but I was curious. Are you? The first thing I did was pop this company up on Q-Charts. Drat! All I got when I plugged the symbol NAT into Q-Charts was NASDAQ:NAT and a screen that refused to paint the candles. OK, how about NYSE:NAT? After all, only four-letter stocks show up on NASDAQ. Three letter symbols or less ought to show up on the NYSE. Still no luck. OK, last shot. I tried AMEX:NAT. Jackpot! (Hope I'm this lucky at the gambling table some day when I'm down to my last dollar.) I have to say, the chart looked unremarkable. The first thing I saw was support at roughly $13 (solid red line) and resistance (at least since late-November) of $15. Hmmm - kind of rangebound I thought. Maybe it could make a good range-trading stock. You know, buy at $13, and sell at $15. Short at $15, cover at $13. Repeat. Maybe, but what if they are optionable? Would I be better off trading the options. Oops, dead end. No options available. So who are these guys and what do they do? Before we find the answer, I want to point out that Fundamentals Guy did a very UN-fundamental thing and went straight to the charts first with only a secondary care for fundamentals, thus demonstrating that he considers technicals primarily in a trading environment rather than an investing environment, as many wish we had now. Whether we like it or not, this is not an investor's market. It is a trader's market and I will play it that way as a matter of survival unless and until I have reason to do otherwise. So on with the story. Who these guys are - Nordic American Tanker Shipping Ltd. A shipping company? Yup. What do they ship? For that answer, I like to go to Yahoo Finance because they are low on graphics and the pages tend to load fast - a real time saver when performing my "ferret research" duties. Type in the symbol (plain old NAT), click on "profile" and up comes the following business description: "Nordic American Tanker Shipping Limited was incorporated on June 12, 1995 under the laws of the Islands of Bermuda for the purpose of acquiring, disposing, owning, leasing, and chartering three double hull Suezmax oil tankers (the Vessels). Each of the Company's Vessels is a 1997-built, 151,459 dwt (dead-weight tons) double hull Suezmax oil tanker built at Samsung Heavy Industries Co. Ltd. in South Korea. Each Vessel is chartered to BP Shipping Ltd. pursuant to separate "hell and high water" bareboat charters." Oh, so that's what they do. New oil tankers on lease under contract to BP - just like R.D. said. How about the financial summary? "Nordic American Tanker Shipping Ltd. was formed for the purpose of acquiring, disposing, owning, leasing and chartering three double hull Suezmax oil tankers and engaging in activities necessary, suitable or in connection with the foregoing. For the fiscal year ended 12/31/01, revenues fell 22% to $28.4 million. Net income fell 30% to $19.4 million. Results reflect a down market for Suezmax tankers in the fourth quarter and lower financial income." Hmmm - that doesn't sound so great on the surface with revenues and income falling. Show me the numbers. Scrolling down the page a bit further, we see the following table: Very interesting, as my eyes focus straight on the red circle reflecting a dividend of 10.93%. It pays $1.44 annually. Seems awfully high percentage wise for what ought to be a stable business hauling oil over the long-term for BP. Must mean there's a big risk in there somewhere that I haven't figured on. I always want to balance risk with reward. What could it be? Well, for starters, how secure is that long-term contract with BP and how long does it run? Any early cancellation provision for BP that would leave the company scrambling to fill those ships with another company's oil. How does the boat payment get made if BP cancels? Enquiring trader's leaning toward investing want to know. If only there were information to fill in the gaps. Now for the good news. Information is usually just a few keystrokes and/or a phone call away. In the case of NAT on the Yahoo! Page, there is almost always a link to the company's home page in the left-hand margin and all we do is click on it. More to the point, almost every company's homepage will contain some sort of link for press releases and financial information and I wasn't disappointed by NAT. The answers were all there in black and white. "NAT owns 3 Suezmax tankers (150 000 dwt), “British Hawk”, “British Hunter” and “British Harrier”, all on charter to BP Shipping until September 2004. BP has an option to prolong the charter by 7 x 1 year. BP Amoco Plc. guarantees the charters. NAT is paying dividend to its shareholders on a quarterly basis. The minimum guaranteed annual dividend until 2004 is USD 1.35 per share. If the timecharter equivalent for Suezmax tankers is above an average of USD 22,000 per day during a quarter – the dividend will increase correspondingly. NAT receives a minimum of USD 22,000/day per vessel on a timecharter basis from BP. If the market for Suezmax tankers is above USD 22,000, based on an agreed formula and specific trades, NAT will receive additional charter hire from BP. The additional revenue is being calculated and paid in arrears. NAT will distribute all excess earnings to the company’s shareholders. If the market for Suezmax tankers is less than USD 22,000/day, NAT will still receive the minimum timecharter equivalent of USD 22,000. No off-hire risk. The vessels receive hire 365 days a year. No management risk or costly administration. Ugland Nordic Shipping ASA is the commercial manager of NAT. Fixed interest costs on loan. All of a sudden, that dividend looks a whole lot safer with a guaranteed minimum from BP Amoco even of the ship sails empty. Not bad. But there is one big gotcha. Also contained on the homepage in the narrative section was the following information. Read on: "The charter party with BP is valid until September 2004 with a further seven one-year options in BP's favor. The contract ensures that the ships receive a minimum rate of USD 22,000 per day per ship on a time charter basis, but in periods when the tanker market is stronger the company will receive the market rate. The market rate is calculated quarterly in arrears on the basis of a formula set out in the contract. If the market is below USD 22,000 per day, NAT will still receive the minimum rate of USD 22,000." Translation: Contract with BP expires in September 2004 and even if renewed is only done so on an annual basis. 2.5 years remaining at 11% annual dividend reduces the current $13 stock price to a basis of $9.50. And remember that in the IRA, the dividend is tax free. Yes, there is a risk that BP does not renew and we would be stuck with empty boats looking for a contract. What then? Let's see. . .9.71 mln shares outstanding times $9.50 per share values the company at $92.25 mln plus debt (currently about $35 mln), which amounts to $127.25 mln or about $42.42 mln per ship. That seems pretty reasonable for double-hulled tankers (the newest standard). They could possibly be liquidated (sold) for that amount in the worst case scenario. However, I note here just from experience that NAT is more likely to renew the lease with BP since the boats are now partially paid for. For BP to build new ships would likely cost them more - the same for anyone else. New costs more, thus they are likely not to walk away from a perfectly good deal on a perfectly good ship. But, it is only my gut talking and nobody should take this as investment advice. It's just me thinking out loud. One way this deal could go sideways for an investor is for the world economy to continue slowing, the price of oil to drop, the shipping of oil to slow, and for the US to develop yet more supply in the Gulf of Mexico and Alaskan fields in order to become less dependent on foreign energy. That could really kill shipping rates and thus dividends. While these boats will stand a better shot at hauling cargo thanks to their newness, everybody considering NAT as an addition to the portfolio will have to evaluate the risks for themselves. Personally the "what if" makes me nervous, but the dividend makes up for that. While the ships may still sail, the rate of return thanks to downward price pressure may not be as great in the future. Full disclosure: I don't own any NAT shares but I will keep an eye on industry developments with the idea that I may buy at a later date. It stays on the radar. One other feature of the Yahoo! site is the industry button that can also be accessed on the left hand Profile Page margin. So, if the shipping industry has a high payer like this (it's not like shipping will just come to a stop one day and all the money will vaporize), there must be others that pay well too. Lo and behold, I found Knightsbridge Tankers (VLCCF) Ltd. who pays a bigger dividend of 11.63%. So I start the same process all over again. I'll save you the details, but in a nutshell, I checked the chart, check the business description, which sounded and looked remarkably like the NAT descriptions above. However, no homepage link this time in the left margin. Undaunted, Fundamentals Guy got his favorite search engine to ferret out Knightsbridge' home page. Whadda ya know! It's managed and operated by the same group as NAT! "Knightsbridge Tankers Limited owns five Very Large Crude Carriers ("VLCCs") built in Korea in 1995 and 1996. The five VLCCs are bareboat chartered to a company in the Shell Group ("Shell") for an initial period of 7 years, starting in February 1997, with the option for Shell to extend the charters for an additional period of 7 years at the end of the initial period. The charterhire payable by Shell is the higher of a base rate and a market related rate which is determined by market assessments made for each quarter by the London Tanker Broker Panel." "Knightsbridge's policy is to distribute to shareholders all charterhire proceeds, less the Company's expenses, after the end of each quarter. The distribution for each quarter will thus depend on the tanker market in such quarter." "The Company is managed by ICB Shipping (Bermuda) Ltd., a subsidiary of Frontline Ltd. (Bermuda). Frontline Ltd. is the world's leading crude oil tanker owner." Same deal. Interesting concept, but VLCCF leases five boats to Shell oil and the option to renew is a flat seven years. A nice deal for shareholders if Shell exercises, but a risky proposition, which explains the hefty 11.63% dividend. But how to get that information. . .I'll say it again. Information is almost always just a few keystrokes or a phone call away. Corporate web sites are usually packed with information on the company's business and financial information. Use them. Search them. Ferret through them. They often contain links to real 10K information too. They are a treasure trove of knowledge for those with a fundamental bent (Huge grin) Anyway, just as we tried to figure the downside with NAT should the oil companies not renew, the VLCCF website provides the answer if we dig enough (Oh, so that's where he was going with that last statement.) Straight from VLCCF's Frequently Asked Questions (FAQ) page: "When is the end of first period of the charter to Shell and what happens if Shell fails to renew? The initial charter period is about 7 years, starting February 1997, and expires early [March] 2004. Shell has an option to extend the charters for another 7 years. Should Shell decide not to renew the charters after the initial period, the Board will be asked by shareholders to propose alternative such as: selling the VLCCs seeking other period employment for the VLCCs entering the VLCCs in the spot market etc. The shareholders will vote on the Board’s proposal(s) and decide on the future of the Company." Question answered. And since NAT is known to be of the same heritage, we were likely on the right track in figuring that the BP boats would be subbed out to another oil company or simply liquidated, as might be the VLCCF boats should things turn for the worst. One other thing I like about these two companies (Full disclosure: I don't own any VLCCF either, but will keep it on the watch list too.), there isn't much volume in the shares (average daily volume is 80K for VLCCF and 35K shares for NAT) and they don't appear to be closely watched by many analysts. Thank goodness. They are off the radar and have not thus been subject to wild speculation and are likely rationally priced by fundamental-type investors. That said, if a gazillion readers jump on these tomorrow like dogs on a bone, the price is going to spike. Remember, I am not recommending their purchase. I bring this information up merely as a place to start, not a place to end the research. There are big risks for big dividends and we should avoid the temptation to jump in headlong. That's it for tonight! Chalk up a good one for the loyal readers - Thanks R.D. - and keep the comments coming. More on Q-Charts tomorrow. ************ MARKET WATCH ************ Bulls return to the market. So do a few bullish possibles on the watchlist. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/022002.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "email@example.com"
Option Investor Inc