The Option Investor Newsletter Wednesday 02-27-2002 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) ******************************************************************* 02-27-2002 High Low Volume Advance/Decline DJIA 10127.58 + 12.32 10255.24 10058.66 1.39 bln 1913/1207 NASDAQ 1751.88 - 14.98 1793.73 1741.48 1.80 bln 1813/1721 S&P 100 563.09 + 0.42 570.45 558.95 Totals 3726/2928 S&P 500 1109.89 + 0.51 1123.06 1102.26 RUS 2000 472.61 + 1.32 474.86 471.13 DJ TRANS 2861.06 + 52.76 2861.35 2809.01 VIX 23.09 - 0.48 24.12 22.30 VXN 45.76 + 0.99 46.72 44.05 TRIN 1.04 Put/Call 0.64 ******************************************************************* The Bulls Are Not Convincing Us Austin Passamonte We'd be a lot more convinced that any bear-market rallies these days might actually last awhile if they just didn't collapse so quickly. Trying to trade the upside for any distance or duration seems to be an effort in futility. Fundamentalists point to a hundred different reasons why markets plunged this afternoon and a few of them may be right. It's important for some people to try and rationalize why the markets do whatever it is they do. I suppose this gives some level of emotional comfort inside, as if understanding what did happen can help make money with what's going to happen next. I've never been smart enough to figure all that stuff out nor do I possess an attention span broad enough to do so. Suffice it to say that indexes pushed toward resistance early in the session, met repeated rejection there and futures traders over at the CME began selling the market and cash indices followed suit. Those who think the retail trader puttering around in Nasdaq Comp has anything to do with broad market action are sadly mistaken. That ceased to exist about three trillion lost dollars ago. Equity markets are once again controlled by program buying or selling in the index futures pits and this afternoon's vertical slide was living proof of that. So all we need to know is where the points of reference are everyone else is watching, and trade reversals at those pivots or to a much lesser extent, breakouts when they appear to succeed. (Weekly/Daily Charts: SPX) This weekly chart of the pro's index shows firm support near 1087 and similar resistance near 1132. But don't let those numbers fool you: plenty of shorts in the pits will whack the 1125 area every time it's tested until bulls prove they mean business. That wasn't today. Speaking of which, this is the second day in a row we've seen markets post a rather large range doji session the Japanese refer to as spiders and various other fancy names. Regardless, it tells us that indecision still reigns. Stochastic values are trying to do something in the weekly chart while rapidly reaching overbought in the daily chart. Not a sign of sustained underlying price strength by any means. (Weekly/Daily Charts: NDX) The NDX is weaker looking by relative comparison. Still trapped in a defined channel and yet to break higher. Sitting near 25% off the low range of year 2001's price span, it just fell and hasn't gotten up. Personally I'd look for tech to under-perform the general market for years and would only consider buying CSCO in my Roth when it hits $5.00 a share, but that's just a personal opinion. (Weekly/Daily Charts: Dow) The Dow is currently fighting against a collision of two moving averages and major Fib retracement value in the weekly chart. It may very well break higher and test its 10,300 and 10,500 areas soon but that's not looking like a high-odds probability to stick & stay. Trust me when I tell you that shorts will step on the old index in a monstrous way if/when it fights up to those measures. Whether bulls or bears prevail from there will remain to be seen. (Weekly/Daily Charts: DTX) Plenty of excitement about Dow Transports breaking out. I see this all over the web at numerous sites, and the DTX was even charted on CNBC these past few days in between Enron scum and Greenspan testimony! Can you believe that? Nary once did we see this index on CNBC in 1999 or 2000 that I can recall. And it is on a nice, strong run. Successful breakout of its wedge pattern and stochastic values are pointing straight up. I sure as heck would not even dream of shorting this puppy right now, but it could be getting a bit toppy these days. Strongest sector I've seen in my nightly scan of numerous charts, but the prime entry points for longs is now below us at support. Conclusion I expected a rally these past two days and saw brief parts of one. Monday was impressive, but lonely without company of follow through. Thursday and Friday should see mutual funds playing the fan dance game of marking up big holdings to puff the performance and hope to attract fresh money to their lairs. Even with that said, I'm a very tentative trader right now in either direction. Too many whipsaw sessions smashing out stops on calls and puts for those who hold too long is not a fun world to play in. (One Minute Chart: S&P 500) Much as I can live without the adrenaline rush, scalping works best for me these days. This hyper-quick action is not for everyone and I'd safely say it's not for most traders. But those who find a directional move like we saw the last two hours of today can make a week's (or month's) wages in quick fashion. If they don't lose the same first! Today at 1:44pm in the Market Monitor we warned that indexes were breaking down. All intraday chart signals were in classic bearish reversal fashion and the SPX broke 1119, a near-term channel line of support depicted in last night's (and tonight's) Swing Trade Gameplan. Soon as traders saw that break, hit the "short" button on trade window parked open and waiting. Keep shorting every pop all the way down to session lows near 3:00pm for possible 18 index points of profit. At 3:00pm we saw sell programs driving price action down but immediately stop on 1102, a measure of support from Monday still drawn on our chart. What next? All intraday chart signals are buried in oversold extreme. Let's see if the next test of that low breaks or holds. If it breaks, we watch it fall to further lows. If it holds, let's test the upside for a real quickie. Higher low holds, we get in around 1104 and exit near 1108 or hold into the bell for double that distance by 4:15pm. This is fast action scalping at it's best... quick, small gains and few/no losing trades done right. Done wrong one can expect to take a string of losses and get carved to pieces. Looks real easy profiled here tonight, but when those flags are still forming and price action whirs by it's a whole 'nother story. I much, much prefer buy & hold trading and long for those days to return but they are not with us here right now. Summation Much of the trading world is waiting for the bottom to fall out of this market in utter collapse. We wouldn't know that by looking at the VIX low reading, would we? I for one have no strong opinions right now. I see indexes that desperately want to go higher but simply cannot manage to do so. I see markets poised to go up that continually go down faster on a different whim every day. I see a market that scares me either way, so I'll play fast & small for now. I don't really like what I see, but that does not change the picture in my view. Trade Carefully Either Way, austinp@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********** OPTIONS 101 *********** Volatility - Part Deux By Mark Phillips mphillips@OptionInvestor.com It has been quite a ride we've embarked on over the past month or so, handling each of the Greeks in turn, endeavoring to detail how each of them impact option pricing and how we can utilize this information to our advantage. Last week, we tackled the issue of Volatility, otherwise know as Vega in an attempt to determine whether a given option is relatively cheap or expensive, relative to its historical norm. After pointing you at the www.ivolatility.com website, I left you with a mission to explore some volatility charts and get a feel for what they look like. I assume (I know that's dangerous!) that by now all of you that have an interest have already done so and we can plunge into analyzing some volatility data and learning how to interpret it. For all you newcomers to this discussion, I would strongly recommend you go back to the beginning of our discussion and work your way forward before continuing with the remainder of this article. It will be here waiting when you return and the rest of this article will make a lot more sense after you're done. Here are the links (in order of publication to each of the articles I've done on the Greeks, beginning with Delta and Gamma and ending with last week's introduction to Vega. The Greeks, Part I - Delta and Gamma Application of Gamma and Delta to Strike Selection Back to the Olympians of Old Oh, That Vexing Volatility When we left off last week, we had introduced the concepts of both Historical Volatility (HV), which is the historical volatility measure of the underlying stock, and Implied Volatility (IV), which is the estimated volatility of the option that is used to determine its price. So let's start with a volatility chart of IBM, since we've talked about that one a fair amount over the course of this series of articles: We can see that over the course of the past year, the HV for IBM tends to bottom near 20%, while the IV tends to reach a base in the 26-28% level. This tells us nothing about whether to go long or short, as we have to rely on the price chart and our standard technical indicators for that sort of information. What it does tell us is that when IBM's volatility nears its historical lows, odds favor option buyers rather than sellers because the options will be relatively cheap on a volatility basis. So turning our attention to the price chart, we can make our determination of what action we might want to take. Looking at IBM on the combined weekly/daily chart above tells us that in late December/early January odds clearly favored downside plays, as both the daily and weekly Stochastics oscillators were rolling over from overbought territory, with price action rolling over from significant resistance near the $125 level. So now the question is whether to buy puts or sell calls. Well, based on the volatility chart we have up above, IBM at the time in question has both of its volatility measures clearly buried near historical lows. That tells us that if anything, volatility should either remain flat for a bit longer or should trend upwards. Since increasing volatility tends to inflate option premiums and decreasing volatility tends to deflate the premiums, we would want to be a buyer of options at this point. As volatility rises from current levels (early January, that is), the volatility component of the option's price (whichever one we happen to choose) should also rise. So my vote at this point would be to buy Put options on IBM. Since we are looking at these charts with the benefit of hindsight, we could arrogantly say that the high odds approach would have been to buy a fistful of March $100 Puts and be done with it. Closing that position for a tidy profit anytime in the past week would have made for a solid trade. That seems obvious now, but we're in the process of building a model that helps us determine IN ADVANCE what the best trade is based on the Greeks at the time we wish to initiate the trade. Volatility has done its job, telling us near the beginning of the year that IBM options would be relatively cheap on a volatility basis. The price chart tells us that puts are the best course of action. But we've still got some important questions that need to be answered. How long should the downward move take to run its course, or more directly, what expiration month should I select for the puts? And then there is the question of what strike price to buy. Should I buy the $120, the $115, the $110? Or should I really go for the gusto and take a long-shot with $100 puts? Those of you that have been following along with this discussion for the past several weeks recognize that these are all issues that we are attempting to address with our compartmentalized approach to handling each of the Greeks in turn. Remember that our end goal is to tie it all together, so that we can do our analysis and make a statement like this. "Based on the price chart, I believe that IBM should trade substantially lower over the near to medium term and I intend to profit from that situation by buying puts. I have decided to buy puts because volatility is near the lower end of its historical range, so the options should be relatively cheap on a volatility basis. I have looked at the Point and Figure chart and see that it is giving me a bearish chart pattern with a price target of $105. From statistical studies, I know that the current PnF chart pattern takes approximately 3 months to achieve its price objective, so I want to give myself plenty of time to be right. So I will use April contracts. Since I want to take maximum advantage of the movement of Delta and Gamma, I will choose the $110 strike, as that will give me a strong appreciation in the option as Delta and Gamma move into the area that cause my option price to appreciate rapidly, especially as IBM approaches my $105 price target." While most of that description is still lacking the factual basis to back it up (we're going to tie everything together next week), you can see that we have used all of the Greeks together to make a decision that gives us a very specific action plan. We specify direction and duration of the move that we expect and then fine tune our trade to select both the appropriate expiration month and strike price. Very clear and concise. But let's get back to volatility, as I've gotten a bit off track here for today's discussion. Looking back at the IBM volatility chart, we can see that volatility spiked higher (with that of the rest of the market) following the September attacks. Traders might have been looking to profit from a rebound in the stock as volatility reverted to the mean. But how to do that? Our first task is to go back to the price chart and see if there are any encouraging bullish signs that would have us looking to play the upside. Indeed there were! We've got both the weekly Stochastics attempting to put in a bottom, while price is successfully bouncing at support near $87, a successful retest of the March lows. And over on the daily chart, we had some encouraging signs as well, with bullish divergence between the price chart and the daily Stochastics. If we are looking for a trade here, the high odds favorite would be to trade the upside. But once again, the question of how specifically to do it. Volatility is high, which means that options are going to be on the expensive side. As volatility reverts back to the mean, we're going to see option premium decline due to collapsing volatility, so just purchasing calls may not be the best way to go. Remember that we want to buy low volatility and sell high volatility. One way to go would be to sell naked puts. But as many of you know, I'm not a big fan of going naked -- I'm just not comfortable with that sort of risk, especially not after the drubbing that the markets just suffered. So I would be looking at a way to profit from the upside, without exposing myself to all that potential volatility decay. Spreads, anyone? That's right, we can put on a bullish spread using either calls or puts depending on what gives us the best price for the spread. Then as volatility decays, it reduces the value of the long and short options by essentially the same amount. So our spread position is left to work for us as the anticipated bullish action unfolds. If we are right about the bullish potential for IBM, then price action should far outpace any volatility affects, but even if it doesn't, we have a reduced risk position due to the characteristics of the spread. But volatility is not a part of our risk equation in this sort of position. By utilizing a spread, we essentially remove the volatility risk in our bullish play. I don't want to get into the details of Spreads here right now, as it takes us away from the focus on the Greeks. Besides that, I've written a number of articles on various spread strategies and they are stored for all to peruse at their leisure in the Trader's Corner archives. As usual, I'm running long today and running out of time in order to get this published in tonight's newsletter. But hopefully, our little discussion has helped you to see that paying attention to volatility can help you to determine which strategies will work best at a given point in time. Next week we're going tie up our rambling discussion of the Greeks, by revisiting the IBM example at the top of this article, fleshing out the hypothetical description of the trade using all of the tools at our disposal. By the time we are done, you should have a clear picture of how to apply all the Greeks to define your own individual trading plan on a trade by trade basis. Have a great week! Mark ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** IS Swing Trade Model: Wednesday 2/27/2002 Active Session That Went Nowhere News & Notes: ------------ Indexes popped, dropped and rallied higher before the closing bell again this session. Day trader's only conditions exist right now. Featured Markets: ---------------- [60/30-Min Chart: OEX] Indexes gapped open higher, broke above resistance and promptly trapped the bulls yet again on another afternoon plunge. Now we have mixed chart signals and price action sitting in the middle of no man's land. [60/30-Min Chart: SPX] These indexes could go anywhere from the open tomorrow and reverse themselves after that. Big surprise, right? Trouble is right now we have zero points of reference to gauge direction with. Sitting in space, chart signals mixed, inconclusive evidence tonight. [60/30-Min Chart: QQQ] Same for the QQQ, which is relatively weaker than the old economy indexes. Summation: --------- I'd feel more bullish on Thursday if indexes fell at the open, bounced at or above Wednesday lows and chart signals turned up from oversold extreme in unison. That fantasy could easily be thwarted by markets that pop & drop instead. Or sideways, choppy action until another afternoon move. In any event we have nothing to measure entries with right here in front of us tonight, so we'll see what transpires tomorrow. 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: 102 (DJV-CX) Long: BREAK ABOVE none Long: BREAK ABOVE none Stop: Break Below Stop: Break Below Mar Puts: 34 (QQQ-OH) Mar Puts: 100 (DJV-OV) Long: BREAK BELOW none Long: BREAK BELOW none Stop: Break Above Stop: Break above ===== OEX SPX Mar Calls: 570 (OEB-CN) Mar Calls: 1125 (SPT-CE) Long: BREAK ABOVE none Long: BREAK ABOVE none Stop: Break Below Stop: Break Below Mar Puts: 550 (OEB-OJ) Mar Puts: 1075 (SPQ-OO) Long: BREAK BELOW none Long: BREAK BELOW none Stop: Break Above Stop: Break Above Open Plays: ---------- Call plays entered at the open, exited at par. IS Position Trade Model: Wednesday 2/27/2002 Nowhere Fast News & Notes: ------------ Intraday volatility remains alive & well. Buy & hold index option attempts are not well. Entry points come and go on pinpoint turns and missing those has found traders with stops taken out in both directions in sideways, whipsaw noise. Featured Plays: -------------- None Summation: --------- The trend is decidedly down while indexes appear poised to rally. We cannot in good faith suggest call option plays that will hold for several days or weeks for high-odds success against this trend. However, shorter-term call plays look like potential winners to us. Our suggestion is to follow Swing Trade entries as they emerge later this week or Sector Share listings of optionable symbols and use those parameters for buy & hold calls. Using 100% risk capital instead of stops and March or (at the furthest away) April call option contracts for any option play attempts. 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: ---------- None Sector Share Trade Model: Wednesday 2/27/2002 Up & Down Again News & Notes: ------------ Indexes and sectors can be expected to chop sideways to higher right now, but it is purely evident the bulls will have to fight for every inch of higher ground claimed. Buy & hold conditions are difficult right now. Featured Plays: -------------- None Summation: --------- Current open plays have stops trailed closer, and no new entries to track are listed 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: --------------- IIH BHH Long: 4.75 Long: 3.50 Stop: 4.25 Stop: 3.25 HHH XLE IYV Long: 28.00 Long: 26.75 Long: 11.40 Stop: 27.00 Stop: 26.50 Stop: 11.00 QQQ BDH SWH Long: 35.30 Long: 12.75 Long: 40.00 Stop: 34.00 Stop: 12.00 Stop: 38.50 WMH IAH MKH Long: 45.60 Long: 32.75 Long: 57.60 Stop: 45.00 Stop: 31.50 Stop: 57.00 OEF SPY FFF Long: 56.65 Long: 111.60 Long: 80.15 Stop: 56.00 Stop: 110.00 Stop: 78.00 IYZ IYW IYC Long: 26.60 Long: 48.10 Long: 55.60 Stop: 26.00 Stop: 46.00 Stop: 55.00 IYG IVE IVW Long: 87.00 Long: 53.10 Long: 58.10 Stop: 87.50 Stop: 52.50 Stop: 57.00 MDY XLF XLK Long: 92.70 Long: 25.25 Long: 21.40 Stop: 93.00 Stop: 25.00 Stop: 20.50 ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Wednesday 02-27-2002 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** STOP-LOSS UPDATES ***************** SII - call Adjust from $57 up to $59.75 TDW - call Adjust from $35.40 up to $36.40 UTX - call Adjust from $67.75 up to $69.50 HON - call Adjust from $33 up to $35 BA - call Adjust from $42.50 up to $43.30 MXIM - put Adjust from $52.50 down to $51 ************* DROPPED CALLS ************* ESRX $52.86 -1.65 (-0.92) ESRX was pressured lower today by the weakness in the broader health care sector (HMO.X). The HMO finished 1.35% lower on weakness in Humana, WellPoint, and Trigon. The sector weakness gave investors reason to take profits in ESRX after its recent solid run. After its break from consolidation and the weakness in its group, ESRX may be due for a period of consolidation. We're dropping coverage ahead of that potential development and in light of its close below our stop. We will, however, revisit this stock as a potential call play once it forms a short-term base as its fundamentals and technicals remain among the stronger in the market. ************ DROPPED PUTS ************ CCMP $57.68 +0.98 (+4.43) Cabot Micro bucked the weakness in the broader semiconductor sector (SOX.X) Wednesday, finishing nearly 2% higher. The stock traded strongly for most of the session and was only pressured lower during the late-day retreat in the Nasdaq. Its close above the 10-dma and our stop prompt us to drop coverage on CCMP this evening. If you're holding open positions and weren't stopped out in today's session, look to cut losses in tomorrow's session on any follow-through to the downside in the SOX.X. ADVS $49.40 +1.43 (+4.50) ADVS advanced sharply early Wednesday, far out pacing the gains in the broader market averages. The stock's early strength allowed it to buck the weakness into the close of the session. The stock did, however, finish well off of its session highs. Its rollover early Wednesday from the 50-dma is encouraging for potential downside into the coming sessions on further sector and market weakness. If you're still holding open positions, look for a breakdown below the 10-dma at $48.75 for potential confirmation of downside. For our part, we're dropping coverage in light of the close above our coverage stop. ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* GS - Goldman Sachs Group $80.89 -0.51 (+1.89 this 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. Most Recent Update Bearish resolve is being tested again, and this can be seen in the recent trading action of the Broker/Dealer index (XBD.X), which is trying mightily to put in a bottom at the $450 support level. While Monday's action was encouraging for the bulls, it was clear from Tuesday's trading that there isn't a lot of bullish conviction out there right now. The XBD failed to push through resistance and the resulting downward pressure could be clearly seen in our GS play as the stock pulled back from its opening highs (right at the descending 20-dma). Following a tepid rally attempt through most of the remainder of the day, GS pulled back right at the $82 level near the closing bell, setting us up another possible entry point. That being said, we may be on the cusp of a failed play, and the action in the XBD tomorrow will likely hold the deciding vote. Use a rollover in the XBD from current levels and more weakness in GS in the vicinity of $82 as a fresh entry point. More conservative traders will want to wait for GS to break below the $80 level on increasing volume again before attempting new positions. Keep in mind that the $78 level has provided support twice in the past week, and we'll want to tighten up stops on open plays as GS approaches that level again. Comments The brokers (XBD.X) finished lower Wednesday in spite of the positive finish in the banks (BKX.X). Additionally, the XBD failed at resistance again. The XBD's current resistance level is 472, where the index rolled Wednesday. That has us thinking that GS could be in for more downside in tomorrow's session if the XBD continues lower. Watch for the XBD to breakdown below 459 and cross-reference that action point with GS at $80. BUY PUT MAR-80*GS-OP OI=4681 at $2.60 SL=1.00 BUY PUT MAR-75 GS-OO OI=1535 at $1.15 SL=0.50 Average Daily Volume = 3.08 mln ************************************************ BIG-CAP COVERED CALLS, NAKED PUTS & COMBINATIONS ************************************************ Longing For A Bit Of "Irrational Exuberance" By Ray Cummins Stocks ended mixed today in spite of Fed Chair Alan Greenspan's cautiously upbeat outlook for the U.S. economy. The Dow industrial average climbed to its highest level since early January Wednesday in the wake of Greenspan's optimistic comments before the House Financial Services Committee. The Fed Chief said a "subdued recovery" is likely underway, though the risk that growth could falter remains. He also cautioned that the soft labor market could put a damper on consumer spending but he presented a positive stance on inflation. Greenspan's remarks pacified both bond and equity investors, however fresh economic data offered a mixed outlook for the future. A rise in durable goods suggested the economy was growing while declining new homes sales figures put a damper on the recovery viewpoint. Despite the apparently improving economic conditions, the recent volatility in stocks continued with the Dow up 140 points at its apex before slumping to a 12 point gain at the close. The most popular issues early in the session were Honeywell (NYSE:HON), Citigroup (NYSE:C), International Business Machines (NYSE:IBM), United Technologies (NYSE:UTX), American Express (NYSE:AXP), and Boeing (NYSE:BA). The technology segment was also active with the NASDAQ Composite rising 27 points before retreating 14 ticks into the red at day's end. Semiconductor and software companies were bullish in early trading but a sell-off in networking issues weighed heavily on the hi-tech index. Among the broader market groups, financial, airline, biotechnology, major drug and defense issues were moderately upbeat during the first half of the session while retail and gold stocks slid lower after recent gains. On a positive note, one brokerage firm turned bullish on stocks amid a belief a recovery is taking hold. Salomon Smith Barney boosted their target equity asset allocation to 75% based on "increasing evidence, both from our own work and that of our economists, that the predicted U.S. economic recovery is under way." (Apparently, no one was listening...) *************** Summary of Current Positions (as of 02-26-2002): *************** 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 38.52 0.88 2.4% *** Short-term traders should have closed the bullish position in Rudolph Technologies (NASDAQ:RTEC) when the issue moved below the cost basis of the play. Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield INVN MAR 25 24.20 39.03 0.80 7.2% MU MAR 30 29.20 33.70 0.80 7.5% NVDA MAR 47.5 46.45 55.00 1.05 6.4% KLAC MAR 50 48.55 59.97 1.45 7.4% AMAT MAR 40 39.40 44.57 0.60 5.1% KLAC MAR 50 48.95 59.97 1.05 7.5% RTEC MAR 35 34.25 38.52 0.75 6.9% *** TER MAR 27.5 27.00 34.22 0.50 6.3% IDPH MAR 55 54.00 64.12 1.00 7.1% ACS MAR 42.5 41.95 46.42 1.10 5.0% *** AMAT MAR 40 39.40 44.57 0.60 6.3% KLAC MAR 50 49.20 59.97 0.80 7.1% TER MAR 27.5 27.10 34.22 0.40 6.8% Conservative traders should consider an early exit in the Rudolph Technologies (NASDAQ:RTEC) position if the issue moves below the sold (short) strike in the play. Affiliated Computer (NYSE:ACS) has been adjusted for the recent 2:1 stock split. Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield VRTS MAR 45 45.80 37.76 0.80 8.2% EMLX MAR 47.5 47.95 37.00 0.45 7.4% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status CYMI 41.37 37.87 MAR30P/35P 0.75 34.25 0.75 Open AZN 47.60 50.80 MAR40P/45P 0.40 44.60 0.40 Open NOC 109.32 107.72 MA95P/100P 0.80 99.20 0.80 Open PG 82.50 86.50 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 48.15 MAR55C/50C 0.60 50.60 0.60 Open *** ROOM 54.72 50.59 MAR40P/45P 0.70 44.30 0.70 Open HIG 67.00 68.87 MAR60P/65P 0.90 64.10 0.90 Open PGR 152.90 155.52 M140P/145P 0.90 144.10 0.90 Open XL 97.11 94.55 MAR85P/90P 0.60 89.40 0.60 Open AHC 64.48 68.87 MAR55P/60P 0.50 59.50 0.50 Open BGEN 54.45 55.86 MAR65C/60C 0.50 60.50 0.50 Open TEVA 59.99 56.84 MAR70C/65C 0.60 65.60 0.60 Open ACE 42.50 43.36 MAR35P/40P 0.50 39.50 0.50 Open ETN 78.45 81.80 MAR70P/75P 0.55 74.45 0.55 Open MRK 61.26 60.65 MAR55P/60P 0.80 59.20 0.80 Open LXK 50.48 52.54 MAR60C/55C 0.55 55.55 0.55 Open WHR 65.50 73.40 APR80C/75C 1.10 71.10 1.10 Open *** Shares of Whirlpool (NYSE:WHR) soared today after the company predicted better-than-expected earnings in the first quarter, citing an improving outlook for the U.S. appliance market. Based on appliance industry conditions in January and February, Whirlpool said it now expects per-share profit in the quarter, excluding charges or any other items, to increase 15% to 20% from the $1.10 a share the company earned a year earlier. A company spokesman said that first-quarter results would exceed the consensus estimate of $1.23 a share and investors flocked to the issue on the news. We had previously decided to roll up and out to a higher strike (APR80C/75C) on any move through $70, but we did not expect the issue to enjoy such exuberant buying near its all-time high. Now we will have to monitor the issue closely for any break-out above the current resistance (at $75), which could lead to a significant rally. Biovail (NYSE:BVF) is another issue which has reversed direction and the new bullish trend suggests we should consider adjusting (or exiting) the current short position at $50. A transition to the MAR60C/55C spread would preserve the initial position credit and offer a high probability of a successful outcome, due to the technical resistance at $55. Index Credit Spreads: Stock Pick Last Position Credit C/B G/L Status OIH 56.65 62.63 MAR45P/50P 0.60 54.40 0.60 Open OEX 557.59 562.66 M595C/590C 0.50 590.50 0.50 Open Synthetic Positions: Stock Pick Last Position Credit C/B G/L Status WMT 59.86 59.29 MAR65C/55P 0.25 54.75 0.40 Open Discount retailer Wal-Mart (NYSE:WMT) broke to a new 52-week high today and our bullish position is comfortably profitable. Traders should consider using the current rally in the retail group to "lock-in" gains in the speculative play. 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 - Speculative Synthetic Positions One of our long-time readers asked for some low-risk speculative positions on bullish issues. All of these stocks have excellent technical indications and favorable option premiums, and based on the quarterly earnings reports, each underlying company has solid fundamentals. Investors with a bullish outlook on these stocks may find the risk-reward outlook in these positions attractive, however they should also be evaluated for portfolio suitability and reviewed with regard to your personal investing criteria. Current news and market sentiment will have an effect on these positions, so review them thoroughly and make your own decision about their outcome. These plays will not be included in the monthly summary. *************** BA - Boeing $45.90 *** New Contracts! *** The Boeing Company (NYSE:BA), an aerospace company, operates, together with its subsidiaries, in three principal segments: Commercial Airlines Operations, Military Aircraft and Missiles, and Space and Communications. Commercial Airplanes Operations is also involved in the development, production and marketing of commercial jet aircraft. The segment provides related support services, primarily to the commercial airline industry worldwide. The Military Aircraft and Missiles segment is involved in the research, development, production, modification and support of military aircraft, including fighter, transport and attack aircraft; helicopters; and missiles. The Space & Communications segment is involved in the research, development, production, modification and support of space-based systems, missile defense systems, satellites and satellite-launching vehicles, rocket engines and information and battle management systems. BA - Boeing $45.90 PLAY (speculative - bullish/synthetic position): BUY CALL APR-50.00 BA-DJ OI=1859 A=$0.70 SELL PUT APR-42.50 BA-PV OI=105 B=$0.75 INITIAL NET CREDIT TARGET=$0.15-$0.25 TARGET PROFIT=$0.60-$0.90 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,500 per contract. *************** CB - Chubb $75.32 *** Recovering Industry! *** Chubb Corporation (NYSE:CB) is a holding company with subsidiaries primarily engaged in the property and casualty insurance business. The property and casualty insurance subsidiaries provide insurance coverages mainly in the United States, Canada, Europe, Australia, and parts of Latin America and the Far East. The company also has many investments in high quality bonds, U.S. Treasury, government agency, mortgage-backed securities and corporate issues as well as equity securities. The company has a Real Estate Group that is composed of Bellemead Development Corporation and its subsidiaries. The group's activities involve commercial development primarily in New Jersey and residential development activities in Florida. CB - Chubb $75.32 PLAY (speculative - bullish/synthetic position): BUY CALL APR-80 CB-DP OI=318 A=$1.45 SELL PUT APR-70 CB-PN OI=122 B=$1.35 INITIAL NET CREDIT TARGET=$0.10-$0.25 TARGET PROFIT=$1.00-$1.25 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $2,500 per contract. *************** VAR - Varian $42.25 *** Hot Sector! *** Varian Medical Systems (NYSE:VAR) is engaged in the design and production of equipment for treating cancer with radiation, as well as high-quality, cost-effective X-ray tubes for original equipment manufacturers, replacement X-ray tubes and imaging subsystems. In serving the market for advanced medical systems (primarily for cancer care), the company continues to broaden its offerings to address the continuing demand to contain costs and enhance efficacy of healthcare. In addition to developing unique medical equipment, the company also develops software products and devices designed to enhance the productivity and quality of its equipment, devices manufactured by other companies and the general delivery of healthcare services. VAR - Varian $42.25 PLAY (speculative - bullish/synthetic position): BUY CALL APR-45 VAR-DI OI=8 A=$1.00 SELL PUT APR-40 VAR-PH OI=20 B=$0.90 INITIAL NET CREDIT TARGET=$0.10-$0.20 TARGET PROFIT=$0.75-$1.00 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,500 per contract. *************** WGO - Winnebago Industries $47.40 *** Outstanding Growth! *** Winnebago Industries (NYSE:WGO) is a United States manufacturer of motor homes, self-contained recreation vehicles used primarily in leisure travel and outdoor recreation activities. The company's motor home sales represent more than 86% of its revenues and its motor homes are sold through dealer organizations, primarily under the Winnebago, Itasca, Rialta and Ultimate brand names. Among the other products manufactured by the company are extruded aluminum, commercial vehicles, and a variety of component products for other manufacturers. Finance revenues consist of revenues from floor plan unit financing for a limited number of the company's dealers. WGO - Winnebago Industries $47.40 PLAY (very speculative - bullish/synthetic position): BUY CALL APR-55 WGO-DK OI=0 A=$0.65 SELL PUT APR-40 WGO-PH OI=3 B=$0.50 INITIAL NET CREDIT TARGET=$0.05-$0.15 TARGET PROFIT=$0.50-$0.75 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,200 per contract. *************** BULLISH PLAYS - Naked Puts & Combinations *************** GILD - Gilead Sciences $69.41 *** Stock-Split Coming! *** Gilead Sciences (NASDAQ:GILD) is a biopharmaceutical company that seeks to provide accelerated solutions for patients and their caregivers. The company discovers, develops, manufactures and commercializes therapeutics for challenging infectious diseases (viral, fungal and bacterial infections) and cancer. Gilead also has expertise in liposomal drug delivery technology. The company markets AmBisome ((amphotericin B) liposome for injection), an antifungal agent, DaunoXome (daunorubicin citrate liposome), a drug approved for the treatment of Kaposi's Sarcoma, and VISTIDE (cidofovir) for the treatment of cytomegalovirus retinitis. Hoffmann-La Roche markets Tamiflu (oseltamivir phosphate) for the treatment of influenza under a collaborative agreement with GILD. Gilead is also developing products to treat diseases caused by human immunodeficiency virus and hepatitis B virus, bacterial infections and cancer. Gilead Sciences' shares traded near recent highs today after the biotechnology company reported that two studies showed its Viread drug reduced the hepatitis B virus levels in patients who already were infected with HIV. The company said the studies, which ran for 12 and 24 weeks, respectively, showed Viread "significantly" reduced the serum hepatitis B virus DNA levels compared to the placebo drug. Viread, a one-tablet, once-daily antiretroviral agent, has already received marketing approval for HIV treatment in the U.S. and it also received European approval earlier this month. In addition to the news about Viread, investors are anticipating the upcoming 2-for-1 stock split on March 8. Stockholders of record as of the close of business on February 14 will receive a stock dividend of one additional share of common stock for every share of common stock they own. The CEO of the company says the stock split will increase market interest in Gilead and traders who agree with that outlook can speculate on the future value of GILD with these positions. GILD - Gilead Sciences $69.41 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT MAR 60 GDQ OL 1,042 0.55 59.45 5.5% *** SELL PUT MAR 65 GDQ OM 2,353 1.40 63.60 10.8% *************** BULLISH PLAYS - Credit Spreads *************** FD - Federated Department Stores $41.68 *** Bullish Outlook! *** Federated Department Stores (NYSE:FD), through its subsidiaries, is an operator of full-line department stores in the U.S., with over 400 department stores in 33 states and Puerto Rico. The company's subsidiaries operate department stores under the names Bloomingdale's, The Bon Marché, Burdines, Goldsmith's, Lazarus, Macy's, Rich's and Stern's, and related direct-to-customer mail catalog and electronic commerce businesses under the names of Bloomingdale's By Mail, bloomingdales.com and macys.com. These department stores and related businesses sell a wide range of merchandise, including men's, women's and children's apparel and accessories, cosmetics, home furnishings and other consumer goods. Retail stocks have performed well over the past few sessions and shares of Federated Department Stores rebounded Tuesday after the company issued optimistic comments about fall sales and raised its profit outlook for 2002. Federated said it now expects 2002 earnings from continuing operations of $3.30 to $3.55 a share, up from an earlier forecast of $3.25 to $3.50 as share. The CEO said sales are expected to rise overall in the near-term and sales of items like apparel and furniture should strengthen as the year progresses. Analysts at ABN AMRO agree with the outlook and they raised the issue to a "buy" rating today, based on the improving company fundamentals. Apparently, investors were also pleased with Tuesday's news as the issue has shown signs of a recovery and this position offers a way to speculate conservatively on the company's future share value. FD - Federated Department Stores $41.68 PLAY (moderately aggressive - bullish/credit spread): BUY PUT MAR-37.50 FD-OU OI=107 A=$0.25 SELL PUT MAR-40.00 FD-OH OI=106 B=$0.60 INITIAL NET CREDIT TARGET=$0.40-$0.45 PROFIT(max)=19% *************** UTX - United Technologies $72.95 *** Solid Technicals! *** United Technologies (NYSE:UTX), through its operating segments, manufactures, installs and services elevators and escalators; manufactures commercial and residential heating, ventilating and air conditioning systems; produces commercial, aviation and military aircraft engines, and military & commercial helicopters; and supplies transport helicopters. Otis manufactures, markets and installs elevators, escalators, automated people movers and service. Carrier manufactures heating, ventilating and air conditioning systems and equipment, and commercial and transport refrigeration equipment. Pratt & Whitney makes aircraft engines, parts, industrial gas turbines and space propulsion. The Flight Systems division manufactures helicopters, and sells aircraft power generation and management systems, engines, flight controls, auxiliary power units, environmental control systems and propeller systems, compressors, metering devices, fluid handling equipment and enclosed gear drives. Shares of United Technologies moved higher today after one of its major subsidiaries, engine maker Pratt & Whitney, said it had been awarded a contract to supply engines for nine Boeing 767-300ER jet airliners. The announcement was just one in a series of recent "major" events that has boosted the share value of UTX and other companies in the aerospace/defense sector and the stock appears poised to move higher in the coming sessions. Traders who think the issue is destined for a future rally can profit from continued upside movement in its share price with this combination position. UTX - United Technologies $72.95 PLAY (conservative - bullish/credit spread): BUY PUT MAR-65 UTX-OM OI=958 A=$0.25 SELL PUT MAR-70 UTX-ON OI=986 B=$0.75 INITIAL NET CREDIT TARGET=$0.55-$0.65 PROFIT(max)=12% *************** XL - XL Capital $95.70 *** Second Chance For Profit! *** XL Capital Limited (NYSE:XL) provides insurance and reinsurance coverages, and financial products and services to industrial, commercial, and professional service firms, insurance companies and other enterprises on a worldwide basis. XL Capital Limited is organized into three major underwriting segments: insurance, reinsurance, and financial products and services. The company also has a corporate segment, which includes the investment operations of the Company. The company's Lloyd's syndicates, which are operated by XL Brockbank and Denham, are included in the insurance segment. Stocks in the property and casualty insurance segment continue to perform well amid optimistic forecasts for the industry. Analysts at Deutsche Banc recently said that property casualty insurers are in the early stages of a rising pricing cycle and the pricing environment is likely to be favorable for the next few years. XL Capital appears to be one of the more bullish issues in the group and the favorable option prices will allow traders to speculate, in a very conservative manner, on the future movement of the company's share value. XL - XL Capital $95.70 PLAY (very conservative - bullish/credit spread): BUY PUT MAR-85 XL-OQ OI=601 A=$0.30 SELL PUT MAR-90 XL-OR OI=55 B=$0.65 INITIAL NET CREDIT TARGET=$0.40-$0.50 PROFIT(max)=9% *************** BEARISH PLAYS - Naked Calls & Combinations *************** MRVL - Marvell Technology $34.10 *** Earnings Speculation! *** Marvell Technology Group (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed-signal and digital signal processing technology for various communications-related markets. The company's products provide the critical interface between analog signals and the digital information used in computing and communications systems and enables its customers to store and transmit digital information reliably and at high speeds. The company designs, develops and markets integrated circuits using proprietary communications mixed signal processing and digital signal processing technologies for communications-related markets. The company also develops high performance communications internetworking and switching products for the broadband communications market. Marvel is due to report earnings tomorrow and based on the recent share price activity, there is little optimism among investors concerning the quarterly report. In addition, MRVL is a great candidate in the "premium-selling" category of options trading due to the higher than average premiums in its options and the well defined resistance area near the target strike price ($42.50). The issue is below a significant moving average (30-dma) and the recent sell-off has occurred on increasing volume, suggesting further downside activity is likely in the near-term. Traders can speculate on the outcome of the report with these positions. MRVL - Marvell Technology $34.10 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL MAR 42.5 UVM CR 291 0.40 42.90 10.5% SELL CALL MAR 40 UVM CH 566 0.95 40.95 20.8% SELL CALL MAR 37.5 UVM CT 485 1.50 39.00 24.3% *************** CCU - Clear Channel Comm. $47.00 *** Just A Bad Day! *** Clear Channel Communications (NYSE:CCU) is a diversified media company with three business segments, radio broadcasting, outdoor advertising and live entertainment. The company owns, programs or sells airtime for over 1,000 domestic radio stations and two international radio stations and owns a national radio network. In addition, the company has equity interests in various domestic and international radio broadcasting companies. The company is also an outdoor advertising company, with a total advertising display inventory of 149,171 domestic display faces and 549,094 international display faces. Clear Channel is also a diversified promoter, producer and venue operator for live entertainment events and owns or operates over 100 live entertainment venues. Shares of Clear Channel Communications slumped today after the company reported a greater than expected loss in its quarterly earnings and said it also expects to take a pre-tax, non-cash impairment charge of $15 to $25 billion to comply with a new accounting rule that prohibits the amortization of goodwill and indefinite-lived intangibles. Investors reacted appropriately to the news, driving the stock to recent lows and the outlook for the issue is not very favorable. Traders can profit from continued bearish activity in the stock with this position. CCU - Clear Channel Comm. $47.00 PLAY (conservative - bearish/credit spread): BUY CALL MAR-55 CCU-CK OI=874 A=$0.15 SELL CALL MAR-50 CCU-CJ OI=1484 B=$0.60 INITIAL NET CREDIT TARGET=$0.50-$0.60 PROFIT(max)=11% *************** SUPPLEMENTAL CREDIT-SPREAD CANDIDATES *************** BULLISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain PCAR 72.19 MAR 70P 0.85 MAR 65P 0.25 0.65 15% PGR 157.02 MAR 150P 1.05 MAR 145P 0.50 0.60 14% SWK 50.78 MAR 50P 0.90 MAR 45P 0.35 0.60 14% ATK 94.18 MAR 100P 1.00 MAR 95P 0.50 0.55 12% MMC 108.35 MAR 105P 0.75 MAR 100P 0.30 0.50 11% BEARISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain ENZN 46.06 MAR 50C 0.90 MAR 55C 0.25 0.70 16% CVTX 40.99 MAR 45C 0.85 MAR 47C 0.55 0.35 16% NVDA 53.20 MAR 60C 0.90 MAR 65C 0.35 0.60 14% FNM 77.97 MAR 80C 0.70 MAR 85C 0.15 0.60 14% KMI 46.08 MAR 50C 0.80 MAR 55C 0.25 0.60 14% *************** SEE DISCLAIMER ***************************** ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** "The List" of Arthur Anderson Clients, Plus a Lesson in Trader Psychology Buzz Lynn buzz@OptionInvestor.com Reader e-mail is the basis of today's Fundamentals Guy chat. Since my open letter to all CEO's and CFO's two weeks ago titled "Use Pro Forma, Go to Jail" (http://www.OptionInvestor.com/traderscorner/021202_1.asp), I have received quite a bit or e-mail. Two in particular struck me as important. The first for its informational content; the second for its lessons in trader psychology. Let's get to it. In the Open Letter I opined that publicly traded companies should dump Arthur Anderson (the brand) as their auditors since the name had become a liability to shareholder value. I never expected more than a handful of company symbols to trickle in from readers who might have the scoop on one or two that use AA. One reader took the research to a new level. Keith M. writes "Read your open letter, did some 5000 keystrokes on a friends Bloomberg and thought it may interest someone when not yourself. Carry on the great work." Thanks for your great work too Keith! Anybody interested in knowing which companies he found on Bloomberg that use AA? Me too! But in fairness, I have not verified the findings. Some of these companies may have already made the switch, or use AA in addition to other auditing functions. Just because the AA name pops up shouldn't automatically besmirch the listed company. Do you own research by calling the companies for definitive answers. Still, my guess is there is a high degree of accuracy to the list, as it is but two weeks old and utilizes Bloomberg information. Now, "The List": Following is a list of S&P500 companies who have Arthur Andersen as Auditor (source:- Bloomberg 14/02/2002) ABT Abbott Labs ADCT ADC Telecom. APD Air Products AW Allied Waste AT Alltel Corp. AHP Amer.Home Prod APA Apache Corp. ONE Bank One BCR Bard Inc. BBT BB&T Corp. BMC BMC Software BCC Boise Cascade BC Brunswick Corp. CPN Calpine Corp. CTX Centex Corp. CIN Cinergy Corp. CMS CMS Energy Corp. CL Colgate-Palmolive. COST Costco Wholesale CUM Cummins Inc DHR Danaher Corp. DAL Delta Airlines DNY RR Donnelley DYN Dynegy Inc. EIX Edison Intl. EC Engelhard Corp. EOG EOG Resources EFX Equifax Inc. FDX FedEx Corp. FE First Energy Corp. FRE Freddie Mac FCX Freeport-McMoran GD General Dynamics GP Georgia-Pacific HAL Halliburton HET Harrahs Entertainment HIG Hartford Financial HSY Hershey Foods HLT Hilton Hotels HI Household Int. ITW Illinois Tool IP International Paper ITT ITT Inds. KMG Kerr-McGee KSE KeySpan Corp. LIZ Liz Claiborne MAR Mattiot Int. MI Marshall & Ilsle MAY May Dept. Stores MRK Merck MIR Mirant Corp. NWL Newell Rubbermaid NEM Newmount Mining GAS Nicor Inc. NI NiSource Inc. NTRS Northern Trust OXY Occidental Petro. OMC Omnicom Group. ORCL Oracle Corp PTV Pactiv Corp. PGL Peoples Energy PFST Peoplesfot PKI PerkinElmer PCL Plum Creek Timber QTRN Quintiles Trans. Q Qwest Comm. RHI Robert Half SANM Sanmina-SCI SLE Sara Lee SFA Scientific-Atlanta SIAL Sigma-Aldrich SNA Snap-On Inc. SO Southern Co SOTR SouthTrust Corp HOT Starwood Hotels STI Suntrust Banks SYY Sysco Corp TMO Thermo Electr. UNH UnitedHealth Group UVN Univision Comm. SLM USA Education WAG Walgreen WMI Waste Management WY Weyhaeuser WCOM WorldCom XEL XCEL Energy Delta (DAL) and SunTrust Banks (STI) have already fired AA. There may be more. Thanks again for the research Keith! The next e-mail I got was a bit of a sadder tale, and an all too common demonstration of negative trader psychology that almost every trader is unable to avoid at least once in their hopefully long careers. I'm not intending to pick on our fellow trader, for the condition is as common as the day is long. Neither Austin nor I have mentioned it lately, but this goes straight to the heart of, "The market can remain irrational much longer than I can stay solvent". This has been edited for brevity and to protect the innocent. T. writes, "In '99 and 2000 I made $512,000 playing blackjack. I even made $530K in the market through Nov/00. I predicted then that the market would go down. I could not believe how overvalued it was, yet I went long over a year ago because I assumed baby boomers would continue their insanity thanks to all the baby boomer books at the time, which said insanity would continue 'til 2008-10. From Jan/01 to March/01, I got creamed holding various stocks long. I then sold out and had only $130,000 left. Again, I predicted a downturn, but refused to chase it down for an entry point. Bizarre. Then I finally shorted at (SPX) 1138. At (SPX) 945 I had $285,000. But I stayed short as it retraced all the way back to 1160. I covered my short at the worse possible time, almost the entire move up except for about 12 additional points. I can't understand how this happens to me. I now have $60,000 left, which is in June (SPX) 1050 big S&P500 puts. I have 84 trading days left to June 21st. All I know to say is this has been a nightmare experience for me. I can't believe I would be willing to short at 1060 but cover at 1160. Over-leverage was the culprit, but I was trying to get my $530,000 back. This market sure knows how to steal money from me or rather I sure know how to give it away. I have been reading a good 5 hours/day on any information I can get my hands on about the market. So basically now I am the end of my ropes - I need the S&P500 to be at least 1000 before June 21. If the S&P500 went to 900 I would have $300,000 CDN. If it went to 800 I would have $500,000. I wish I could have never invested and continued traveling the world playing blackjack. I am now really starting to get depressed. I am in shock." Signed, T. I might add that T.'s e-mail came with a ton of research and math that support the notion that the market MUST, HAS TO, CANNOT HELP BUT, go down in order to make T.'s position profitable. In my opinion, T.'s analysis was dead on and I too believe the market must fall for the same fundamental reasons T. states. But there's key distinction that needs to be made. Let's see if we can help T. out. There is rationality and there is market reality. The two are not related. Again, the market can remain irrational much longer than we can remain solvent. T.'s issue is not with reading the market correctly or incorrectly. In the long run, perhaps T. has read it correctly. The logic is certainly impeccable given the premises on which the trading decision was based, but June may not be long enough to be right. The issue is psychology, the first step of which is money management. That begins with never risking more than we can afford to lose. Trying to "win it back" is equally as deadly because we dupe ourselves into seeking rewards (greed) that far exceed our capacity to handle the downside risk (ruin). Never look at reward without first evaluating risk using equal aplomb. Double or nothing will eventually get us nothing. How else might T. benefit in the future? Once in the trade, a simple axiom applies - ride winners, cut losses early. We should never come to believe that we MUST be right and that that market is wrong. We should avoid demanding that the market cater to what we believe. The market does not care what we think or demand. It will do as it pleases, irrational or otherwise. The market just is, and it our job to play what is given. Right about the time we reach our threshold of pain ("puke point", as it's termed), the market reverses. Yes, it happens to everyone at some point or at many points in their careers if they don't lose their trading account first. Protecting capital if we are wrong is the name of the game. Fear of loss prevents us from doing that. Think of how irrational this is. If we are not willing to take a small loss out of never wanting to lose money, and our fear compounds with potentially greater loss, we have no business selling when the pain of loss is the greatest. I'm not saying to grit your teeth and take the pain. Far from it. I'm saying cut the loss before it becomes an increasingly painful issue. Personally, I'd rather need a Band- aid than stitches, major surgery, or worse, amputation of my limb or trading account. One other thing I want to address here. We can see that T. is a bunch of turmoil. The first step in overcoming it is to change our thinking. Notice the pre-supposed condition? "I can't understand how this happens to me". The supposition is that "I don't understand". That can only happen if we let it happen. We have the ability to control the "happening". A better outcome results from asking better questions of ourselves. Instead of "why does this happen to me", a better question would be "what has this taught me about the market and how can I apply it in the future". Your brain will answer any questions you pose to it, positive or negative. Since it can't distinguish positive from negative, your answer will only be as good as the question. Asking the better question (as in the one above) might then yield the answer, "I cannot control the markets no matter how much I rationally believe they must go up or down". And, "based on my risk profile, I am willing to lose only $X on this trade in order that I sleep well at night and to know that I controlled my risk to the best and smartest of my ability." We might conclude with, "I will never let my losses grow so large as to risk my entire account (let alone my nest egg) again." Unfortunately, as in T.'s case, there is only luck to rely on once a position has gotten away from us. We are in fear, we are scared and hoping to find anything or any reason to hang on. In short, we have a big case of analysis paralysis, or "deer in the headlight" syndrome. But we still have some choices that can render us from the depths of hopelessness and giving up. From this moment forward, we can decide to cut our losses and exit now with a few dollars intact and work on our psychology. Or we can accept the inherent risk of losing everything and be willing to bet it all with no regrets if we lose it all. If the latter is too horrible to contemplate, we are betting too big. Another solution might then be to take money off the table by closing part of the position and riding the rest. Again, our decision depends on our risk profile. No amount of study of economics or analysis of the market, which seeks to bolster or weaken our position once we are in a pickle, is going to make us money. It won't change the outcome of the markets and it won't change the outcome of our trade if we are already in state of heightened fear. Moneymaking is done between our ears before we enter the trade from a state of confidence derived from a plan. If the market proves us right, ride it until the market proves us wrong. If it proves us wrong, exit and wait for another opportunity for the market to prove us right. Again, this is about trading psychology, not about further study of the market. If any of the above resembles you, and my maker knows, it's resembled me at times, the best salvation can be found in APPLYING the contents of Alan Goldberg's book, "Sports Slump- Busting". It is not for wimps. It is hardcore a readjustment of your mental state. For softer, but equally practical mental state changes, I think any tape set or book by Anthony Robbins is good too. Even better, one of my personal all-time favorites is "Think and Grow Rich" by Napoleon Hill. Let me leave you with one more thought. "Failure" is only failure if and when we accept it as such. Adopt the mentality that has you viewing losses (or anything else for that matter) as only a temporary setback, and our world becomes a better place just by virtue of improved attitude. Questions always welcome. A great Q-Charts article lies in waiting for tomorrow! ************ MARKET WATCH ************ We're sticking with what's been working. Another deep cyclical and transport make their way onto the watch list. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/022702.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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