The Option Investor Newsletter Wednesday 03-13-2002 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) ******************************************************************* 03-13-2002 High Low Volume Advance/Decline DJIA 10501.85 -130.50 10620.17 10474.17 1.35 bln 1398/1767 NASDAQ 1862.03 - 35.09 1886.27 1858.45 1.65 bln 1503/2013 S&P 100 589.84 - 1.25 591.09 582.75 Totals 2901/3780 S&P 500 1164.31 - 1.27 1165.58 1151.01 RUS 2000 495.45 - 3.45 498.90 494.40 DJ TRANS 2949.84 - 44.97 2995.93 2948.67 VIX 21.97 + 0.66 22.58 21.55 VXN 43.26 + 0.25 44.17 42.55 TRIN 1.55 Put/Call 0.67 ******************************************************************* Backing Off First & foremost let me extend a warm welcome to Leigh Stevens, our newest market technician at OI. Hope you find this role as much fun as I have these past two years this month! Plenty of good people on both sides of this screen make it all worthwhile. This week I find myself surrounded with average people who exist at arm's length of the markets. It's always a refreshing change to renew my vision thru their eyes instead of market addicts like myself who are intertwined with each daily gasp & exhalation of the tape. Joe & Jane upper-middle class and upper class do not seem nearly as enamored with stocks this year as one might expect. Matter of fact, right when the experts on TV tell us a market bottom is in with nothing but green pastures ahead it is met with indifference to outright disbelief. I've seen stacks of unopened envelops with mutual fund statements inside and more than a few redemption checks as well. This is as unscientific a casual study as one could ever conduct, but interesting to me nonetheless. Turning back to my fellow tape addicts in the trenches, we endured another gap-down open this session on the latest knee jerk reaction to realistic economic news. Never ceases to amaze me how today's "investor" or trader is more emotional and short- sighted than ever, but I suppose the speed of fiber has much to do with this. Our task is to anticipate the illogical and try to understand emotional reaction before it occurs. I've learned a few new tricks the past couple months that are almost free money before the cash market opening bell ever rings, but that's another story. Suffice it to say we remain entrenched in a volatile market right now where creeping rallies and trends are merely distant memories. (Weekly/Daily Charts: Dow) Pea porridge hot, pea porridge cold... Dow looks coldest of the indexes right now as it met stiff rejection at resistance and both oscillators are poised for bearish reversals. Where doth thou support lie below? Just keep an eye on these various Fib retracement levels; especially 10,130 level below. The 20 DMA is rising to meet it and should offer magnetism next. (Weekly/Daily Charts: OEX) S&P 100 also sits on significant support right now and a break lower could easily revisit 560 areas noted above. (Weekly/Daily Charts: QQQ) Nazz 100 has recently climbed (clumb?) from 33 to 39 areas. I'd not be at all surprised if it doesn't at least retrace half that measure to 36, and quite probably in the next two sessions! (Weekly/Daily Charts: SOX) SOX rocks lately, but hot money flies in & out of there on every has-been upgrade and downgrade that crosses news wires several times each week. Great place for wild speculation, but "Semi- Conductor Investing" is a HUGE oxymoron since early spring 2000. Tough To Squeeze Last week witnessed a significant shift in the COT report for the first time in months. Much like other sentiment indicators this is not a short-term trade filter: it is designed to give us a feel for what big and small money are doing. I'm interested to see just what if any changes are made this week in the flailing action as well. Small speculators are easiest to squeeze and for that reason usually wrong. These are traders who merely go long or short index futures contracts and bite the bullet from there. This would be people like you & I who hold futures contracts just like options over time and take their chances from there. Commercial traders are very difficult to shake out of their positions on a squeeze. That's because they use index futures to hedge portfolios of stocks, naked options or both. They also use cash index options to hedge their futures with in somewhat complex delta-neutral deals only big money paying zilch for commissions can do. They do not simply sell a few thousand naked calls or puts and walk away without having intricate hedging systems in place to reduce or totally eliminate adverse risk. Nope... the big boys (and girls) play stocks, index futures and especially short options in an entirely different manner than speculators. This is why monitoring the COT reports each week is important. Commercial traders are seldom wrong and when they are, it's just a matter of quietly unwinding their positions that doesn't really move the markets much. On the other hand, small speculators are easily squeezed and when they reach a recent extreme high and start to sell at any "ask" the long-squeeze shoots broad market price action down in a hurry. As of last week we had commercials getting net short in a significant way with small specs getting net long with equal aplomb. Guess which group is hedged while the other twists in the breeze of market whims? Guess what might happen if the weak group is pressured a bit in the near future? Toss in a VIX stubbornly clinging to 22 range or lower and we've got the fixin's for a good ol' fashioned long-squeeze sell off ahead! Summation Expiration week, particularly a Triple-Witch even can be tumultuous and rife with noisy moves pushed by index futures contract rollouts and jostling. We'll have a much clearer picture of reality next Monday and the next two sessions are likely to be rocky, choppy and suitable for veteran scalpers only. My own money is still playing the downside more than not based upon the chart signals depicted above. There may not be signs nor catalyst of any major market plunge but I sure can't see budding evidence for any sustained rally to new recent highs right from here, either. The downside rules slightly for now, but believe anything you see for the next two days resembling weather patterns: each 15 minutes could bring rain or shine! Best Trading Wishes, Austin P ************************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 *********** A Greek Encore By Mark Phillips mphillips@OptionInvestor.com It took us 6 weeks to go through our discussion of the Greeks, explaining each of them in turn and then tying it all together last week, showing how to use all of them together in formulating a well thought out trade. While I thought we had just about exhausted the subject, I had several readers request a treatment of "the other side of the coin". Recall that our hypothetical trade setup last week focused on IBM, where we came to the conclusion that buying calls was the right decision based on Vega, and then we used the other Greeks to determine the appropriate strike price and expiration month. My faithful readers asked what we would look for in terms of the Greeks if we were looking to sell some premium (i.e. sell options, rather than buy them). My mother taught me at a young age that if a job is worth doing, it is worth doing right. So at the risk of boring some of you that are tired of my endless prattling on about Delta, Vega, and Gamma, I'm going to show "the other side of the coin" and describe how the Greeks should influence your decision process if you prefer to sell options. And for any of you that missed any part of the discussion that preceded our discussion here today, all the articles are stored for posterity in the Options 101 Archives, and I've provided the links here as well. 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 Volatility - Part Deux The Greeks - Putting It All Together Reviewing what we did in last week's example, first we looked at the price chart to determine whether a bullish or bearish stance is warranted in the underlying stock. Once we determined that the upside was the likely direction for the stock over the near term, we moved over to the volatility chart at www.ivolatility.com and determined that with relatively low volatility, we would want to be a buyer of options (buy when volatility is low and sell when it is high). Then we pulled out our other Greek tools, using Delta and Gamma to pick the right strike price, and our understanding of Theta to choose an appropriate expiration month. The process really isn't that much different if we are looking to sell options, rather than buy them. But there are some important distinctions that we need to be aware of. Since we already have a predisposition to sell options, we need to focus on Vega (volatility) first. The reason is that we want to pick options that have relatively higher implied volatility if we're going to sell them. It wouldn't do us any good to sell a low-volatility option and then have volatility increase, now would it? In fact, selling a low volatility option is playing with the deck stacked against us. We could be right about the direction and timeframe for the trade to materialize, but expanding volatility could actually inflate the value of the sold option such that we lose money on the trade. Remember, we want to get all the Greeks working in our favor -- that is the basis of an intelligent trading decision. So our first mission is to find a stock (and option) with high volatility first. Back to www.ivolatility.com for that information. Those industrious folks over there have put together a wealth of information for those of us that are serious about our volatility. Looking for stocks that are near the upper bound of their historical volatility range? Just click on the link for their Volatility Ranker and specify the information as you wish. I selected the S&P500 as the pool of stocks to consider and selected the radio button "Implied Volatility as a scaled % of IV Hi/Low range", then "Mean", "20" for the number of stocks to view and "Top Ranked only" to provide those stocks with the highest relative volatility ranking. Click "Show" and you're off to the races! Observant students that followed that process will notice the same thing that the VIX is currently telling us. Namely, Volatility is LOW! There are not a lot of stocks that are trading near the upper end of their historical volatility ranges. By far, the highest relative volatility I found was on Conseco (NYSE:CNC), but with a current price less than $5, I quickly lose interest. There just aren't a lot of 'options' available when a stock's price is that low. Another one that looks rather interesting is Maytag (NYSE:MYG), which has just had a nice bullish run from the low $30s to $45. The HV range is from 21.46-52.97, and IV is currently sitting at 44. Not at a peak to be sure, but definitely near the upper end of the range. So investors that like to sell naked options would definitely want to take a more careful look. Unfortunately, due to the large increase in price recently (MYG hasn't traded this high for over 2 years) the highest strike available on MYG is $45, which severely limits our choices if our preference is to utilize a spread. But let's go ahead and use MYG for our example today, with the intent of selling naked options on the stock. Now let me be perfectly clear. THIS IS ONLY AN EDUCATIONAL EXAMPLE. I do not consider this to be a good or even passable trade. It just happens to show the process that we need to go through if we are going to apply our newfound knowledge on the Greeks to implementing a trade where we sell time (and volatility). Ok, now that we've decided to sell a naked option on MYG, we need to then turn to the price chart and our news sources to determine whether to play puts or calls. Yesterday, the stock surged higher when the company announced that they would handily beat analyst estimates for the first quarter due to fatter profit margins. That was followed today by Prudential raising estimates for both 2002 and 2003. That news capped off a nice solid rally over the past month that has pushed the stock to fresh 2-year highs. I'm not a fan of shorting that kind of strength, so I'm not wild about selling naked calls. On the other hand, MYG has had one heck of a run lately and could be due for a bit of a pullback over the near term. If forced to pick a direction for an option sale, I think I'd have to go with selling the naked put, but I would want to see a bit of a pullback before initiating the trade. And that brings us to the issue of time. How long do we want to have the trade open? That comes down to the issue of time decay. Remember that time value in an option decays faster and faster as we approach expiration, so ideally we want to sell our option at such a time that the time value will erode rapidly. That means as close to expiration as possible. I would have to rule out the March contracts as there are only 2 days remaining until expiration (with very little premium to sell), which makes April contracts the best choice. When selling options, our desire is for the options to expire worthless, or at least decline in value so that we can buy them back to close at a significantly reduced price. Time value always decays and with volatility relatively high right now, both Vega and Theta will be working in our favor. Which brings us back to where our exercise started with the IBM example, Delta and Gamma. If we are correct in our assessment that MYG should continue higher following the vastly improved fundamental news, then we want to sell an option that already has high Delta and Gamma, which should also erode as the trade works in our favor. Since we know that Delta and Gamma will be fairly high for an ITM option, we would want to select the $45 strike. So our actual trade would consist of selling the $45 April put, ideally on a dip and bounce in the vicinity of $42.50 (the top of yesterday's gap). Then as the stock continues its ascent heading into earnings, we will have all the Greeks working in our favor. Time decay always works in the favor of the option seller and volatility decay should also work in our favor as the excitement of this week's news fades from investor's minds. Then as our sold option moves from ITM to ATM to (hopefully) OTM, the premium of the option will decrease due to the decrease in Delta, as dictated by the current value of Gamma (our acceleration). As a side note, this is a big reason why Jim is a big fan of selling Deep ITM puts. As the trade works in his favor, he is capturing nearly 100% Delta, so that his trade profits almost dollar-for-dollar with the move in the underlying stock. So let's assume that we sell our April $45 Put next week on a rebound from the $42.50 level. What do we do for our exit strategy? Well, if everything goes our way, MYG will continue to work higher into its earnings announcement on April 25th and as long as MYG is trading over $45 on April 19th, our sold option will expire worthless, allowing us to keep the entire premium in our account. But what if things don't go as planned? Stop losses, my amigos! Depending on your risk tolerance, you would want to place a (Buy to Close) stop just below your defined support at $42, or for those able to tolerate a bit more risk, $40 (where the stock built up a base before the latest surge higher). The point is that we always have to lay out our exit plan before entering the trade or we have no business entering the trade in the first place. This obviously isn't an ideal trade, but hopefully the process I have gone through here allows you to see the process one would go through in trying to select a trade (based on the Greeks) where the preference is to sell options rather than buy them. Of course, there are numerous other option selling strategies that could be employed here, such as initiating a spread, buying the underlying stock and selling a covered call, or putting on a straddle or strangle. But I didn't want to confuse the issue by trying to handle the Greeks and a complex option strategy at the same time. If there is sufficient interest, we can delve into some of those complex strategies in the future. Next week, I want to focus on using the strike-specific Greek information found on www.ivolatility.com to determine how best to implement some of these more complex trades. And that will lead us into the topic of Volatility Skew, which can be particularly useful when looking to initiate spread trades. Questions are always welcome! 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 *********************** Index Trader Swing-Trade Game Plan: Wednesday 3/13/2002 Sold Off News & Notes: ------------ From today's MM window at 9:24am EST (actual time): "My plans for short-term option trades today are very simple: follow the triangle patterns depicted in last night's Swing Trade Gameplan section, puts below and calls above the respective consolidation patterns. That equates to roughly DJX 105.90 for puts and 106.50 for calls, which were not charted in there. Together with price channels tracked for many days in those same charts, we have easy points of reference to follow!" Indexes did not confirm their bullish triangles from last night, and failed chart patterns are powerful to trade the opposite way of prediction. Shorts off the bell or into the feeble bounce attempt near 10:30am failure in 10/5 min charts was an easy play today. Featured Markets: ---------------- [60/30-Min Chart: OEX] OEX broke to the downside, short entry was in the 587 - 588 range and session low was several index points lower than that. [60/30-Min Chart: SPX] SPX initial entry was near 1159 or so, fell another 8 index points lower and still resides well below after the bell. [60-Min Chart: QQQ] QQQ was a short near 37.40 at the open to 37.50 on a failed pop and rolled down to close near 37.00 from there. Summation: ---------- Day trader's market still with volatile action and gap-open moves the norm instead of exception. Far easier to lose money than make it trading options right now, so extreme caution with entries and capital allotment is key! 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: 38 (QQQ-CL) Mar Calls: 106 (DJV-CB) Long: BREAK ABOVE none Long: BREAK ABOVE none Stop: Break Below Stop: Break Below Mar Puts: 37 (QQQ-OK) Mar Puts: 105 (DJV-OA) Long: BREAK BELOW none Long: BREAK BELOW none Stop: Break Above Stop: Break above ---------- OEX SPX Mar Calls: 600 (OEY-CT) Mar Calls: 1175 (SPT-CO) Long: BREAK ABOVE none Long: BREAK ABOVE none Stop: Break Below Stop: Break Below Mar Puts: 590 (OEB-OR) Mar Puts: 1150 (SPT-OJ) Long: BREAK BELOW none Long: BREAK BELOW none Stop: Break Above Stop: Break Above Open Plays: ----------- None Index Trader Sector-Trade Game Plan: Wednesday 03/13/2002 -------------------------------------------- Taking Turns. News & Notes: ------------ The bears had their way today taking advantage of soft retail numbers and a barrage of bearish analysts’ comments. We’ll remain on hold until after the “triple witching” has come and gone. We continue to track our open plays. Featured Plays: -------------- None Summation: ---------- No new entries listed for 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 symbol has listed options as well New Play Targets (Short): ------------------------ None Open Long Plays: --------------- XLE Long: 26.75 Stop: 28.50 [hit] BDH Long: 12.75 Stop: 14.50 [hit] Open Short Plays ---------------- XLB ** XLP ** Short: 23.75 Short: 26.00 Stop: 25.00 Stop: 28.00 XLV ** XLY ** Short: 29.00 Short: 29.90 Stop: 31.00 Stop: 32.00 IYD IYK Short: 45.25 Short: 45.90 Stop: 48.00 Stop: 48.00 IYR UTH ** Short: 84.75 Short: 93.25 Stop: 88.00 Stop: 98.00 RTH ** PPH ** Short: 98.00 Short: 98.75 Stop: 102.00 Stop: 102.25 DIA **[DJX] IYM Short: 105.90 Short: 42.00 Stop: 110.00 Stop: 44.50 IYE Short: 49.70 Stop: 52.00 IJJ Short: 97.00 Stop: 101.00 ************************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 03-13-2002 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 ***************** IDPH - call Adjust from $62 up to $65 TDW - call Adjust from $39.25 up to $40 HON - call Adjust from $27 up to $38 SYMC - call Adjust from $38 up to $40 DCN - call Adjust from $19 up to $19.50 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ ABT $55.50 +0.31 (+1.41) Fulcrum initiated coverage on ABT this morning with a buy rating. That move added to the momentum that was already in place in the broader drug group, based on positive developments. Plus the weakness in the broader markets is causing capital to flow into the defensive sectors of the market. Health care stocks finished higher across the board in today's session. With the recent downward trend coming to an end, ABT looks like it could have some more upside over the next several days. We're looking to cut losses ahead of additional upside. Look to close positions on any weakness early tomorrow morning. ************************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 - CALL ********************** SYMC - Symantec $42.24 +0.51 (+0.29 this week) Symantec Corp. provides a broad range of content and network security solutions to individuals and enterprises. The Company is a provider of virus protection, firewall, virtual private network (VPN), vulnerability management, intrusion detection, remote management technologies and security services to consumers and enterprises around the world. The Company currently views its business in five operating segments: Consumer Products, Enterprise Security, Enterprise Administration, Services and Other. Most Recent Update SYMC is holding up very well relative to its sector and the broader market, as measured by the Nasdaq Composite (COMPX). The COMPX lost 1.67% in today's session, while SYMC finished only fractionally lower. Moreover, the Software Sector Index (GSO.X) finished 2.12% lower in today's session. SYMC definitely gained some relative strength in today's session. The company is slated to present at the Lehman Brothers Global Software Conference tomorrow at 2:15 p.m. EST. The presentation could produce market moving guidance so traders need to be on alert tomorrow afternoon going into the conference. If the company's presentation produces positive news, then traders can look for a breakout on heavy volume above the $43 level. Ideally we'd like to see the GSO.X confirm any breakout attempt. But good news may trump sector weakness if it persists. In the event of a pullback, look for SYMC to retreat to the $40 level, reinforced by the 10-dma below at $39.76. Comments SYMC held up very well in today's session relative to the broader tech market and the Software Sector (GSO.X). The Nasdaq finished 1.84% lower and the GSO.X finished 2.59% lower. SYMC finished 1.22% lower. The stock is extended and a component of a weaker sector, but nevertheless could trade higher if the tech sector rebounds tomorrow. We'd be looking for a quick trade in SYMC if it advances above $43. Such a move should cause another round of quick short covering, good for maybe a move up to $45. Look for a quick entry and sell too soon. BUY CALL APR-40 SYQ-DH OI=10832 at $4.60 SL=2.75 BUY CALL APR-42*SYQ-DV OI= 1448 at $3.20 SL=1.50 BUY CALL APR-45 SYQ-DI OI= 1072 at $2.05 SL=1.00 BUY CALL JUL-45 SYQ-GI OI= 590 at $4.30 SL=2.25 Average Daily Volume = 1.90 mln ************************************************ BIG-CAP COVERED CALLS, NAKED PUTS & COMBINATIONS ************************************************ Is This A Correction or Consolidation? By Ray Cummins Stocks retreated again today amid disappointing retail sales data and concerns the economic recovery might take longer than expected. The blue-chip Dow average backpedaled 130 points to 10,501 on weakness in Intel (NASDAQ:INTC), Eastman Kodak (NYSE:EK), AT&T (NYSE:T), Citigroup (NYSE:C), General Electric (NYSE:GE), and International Paper (NYSE:IP). The slump in technology shares also weighed on the NASDAQ Composite, which fell 35 points to 1,862 after bearish analysts' comments on the chip sector sent buyers to the sidelines. Morgan Stanley lowered its rating on a slew of chip-equipment companies, citing too-high valuations, while Lehman Brothers said it remains cautious on the overall semiconductor equipment industry due to the group's relatively high valuations and expectations for only a modest recovery in the second half of the year. Networking issues were also among the losers and stocks in the telecom group continued to struggle after Tuesday's bruising losses. In the broader market sectors, airline, financial and cyclical groups moved lower while defense, drug, and biotechnology issues saw limited buying pressure. The oil service segment received a boost from Merrill Lynch, which reiterated its positive stance on the industry. Supporting data came the American Petroleum Institute, which said late Tuesday that U.S. petroleum product supplies declined in the previous week and Merrill also noted that overall oil fundamentals appear to be improving in conjunction with the downtrend in inventories. The brokerage said it now sees oil service earnings bottoming at much higher levels than in preceding down-cycles and continues to believe that oilfield equipment and service stocks have the best risk/reward potential in the near-term. *************** MAILBAG - Reader's Comments & Questions *************** Hi Ray, Hello and hope you're well. A quick question: What is the difference between your credit spread plays and your naked put plays? If you purchase the next lower put for protection on the naked put play, it becomes a bull put spread. Do you use a different screen or different criteria for coming up with those selections? Thanks. MP Regarding your question about NPs and Credit Spreads: To generate the majority of plays, I search through lists of candidates from various option-premium and chart-based sources and then evaluate the positions and their potential returns based on the technical outlook of the underlying issue (as well as its sector and the overall market). If I feel the chart fits the strategy and there is an acceptable risk/reward ratio, the position is placed on a list of final candidates. After I have assembled the group of potential plays for a specific day, I simply choose those which, in my opinion, appear most favorable. As far as the source of these positions, the majority of naked puts candidates emerge in a scan for "overpriced options on bullish issues" while the credit spread issues generally come from a sort for "premium disparities." Also, I try to offer a range of plays in the most popular strategies so there may be some positions that would fit in both categories but I have listed them in only one form to provide some balance to the published plays. For traders, the primary difference between a credit-spread candidate and a potential naked-put play is the risk/reward outlook and the overall return on investment in the position. Of course, naked puts have unlimited risk so if the next lower strike option can be purchased for a favorable price, it may be wise to initiate a bullish credit spread instead of a selling a cash-secured put. However, many of the (target) naked-puts are too "deep-in-the-money" to allow this approach, so the only alternative is to accept the unlimited risk and manage the play diligently. Regardless of the strategy you choose, always be sure to evaluate the position based on probability of profit and decide whether the risk/return ratio meets your personal criteria. Hope that helps... Good Luck! *************** Summary of Current Positions (as of 03-12-2002): *************** 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 44.85 2.36 6.4% * 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 48.29 0.80 7.2% MU MAR 30 29.20 35.69 0.80 7.5% NVDA MAR 47.5 46.45 54.59 1.05 6.4% KLAC MAR 50 48.55 66.11 1.45 7.4% AMAT MAR 40 39.40 50.66 0.60 5.1% KLAC MAR 50 48.95 66.11 1.05 7.5% RTEC MAR 35 34.25 44.85 0.75 6.9% TER MAR 27.5 27.00 37.48 0.50 6.3% IDPH MAR 55 54.00 66.38 1.00 7.1% ACS MAR 42.5 41.95 52.18 1.10 5.0% AMAT MAR 40 39.40 50.66 0.60 6.3% KLAC MAR 50 49.20 66.11 0.80 7.1% TER MAR 27.5 27.10 37.48 0.40 6.8% GILD MAR 30 29.72 35.74 0.27 5.5% COF MAR 50 49.65 61.04 0.35 7.4% CEPH MAR 55 54.30 64.61 0.70 13.4% KLAC MAR 60 59.45 66.11 0.55 8.9% PHTN MAR 47.5 46.85 51.85 0.65 12.1% COF APR 50 48.60 61.04 1.40 5.6% CEPH APR 50 48.35 64.61 1.65 7.9% KLAC APR 55 53.30 66.11 1.70 6.9% PHTN APR 45 43.30 51.85 1.70 7.0% GILD APR 27.5 26.75 35.74 0.75 6.4% There was no play in biotechnology company Sepracor (NASDAQ:SEPR) as its stock price plunged after the Food and Drug Administration announced it intends to issue a "not approvable" letter over safety data in tests of its allergy drug Soltara. Fortunately, the news came before Thursday's opening bell, preventing any losses in the position, but the activity clearly demonstrates why you should never sell puts on stocks you don't want to own! Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield VRTS MAR 45 45.80 43.33 0.80 8.2% EMLX MAR 47.5 47.95 31.65 0.45 7.4% MRVL MAR 42.5 42.90 40.32 0.40 10.5% PSFT APR 42.5 43.30 37.48 0.80 7.2% NVDA APR 70 71.00 54.59 1.00 5.6% QLGC APR 60 60.85 50.01 0.85 5.8% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status CYMI 41.37 44.64 MAR30P/35P 0.75 34.25 0.75 Open AZN 47.60 49.57 MAR40P/45P 0.40 44.60 0.40 Open NOC 109.32 109.47 MA95P/100P 0.80 99.20 0.80 Open PG 82.50 85.28 MAR75P/80P 1.00 79.00 1.00 Open BVF 42.05 47.99 MAR55C/50C 0.60 50.60 0.60 Open ROOM 54.72 63.50 MAR40P/45P 0.70 44.30 0.70 Open HIG 67.00 65.42 MAR60P/65P 0.90 64.10 0.90 Open PGR 152.90 155.58 M140P/145P 0.90 144.10 0.90 Open XL 97.11 93.88 MAR85P/90P 0.60 89.40 0.60 Open AHC 64.48 75.76 MAR55P/60P 0.50 59.50 0.50 Open BGEN 54.45 50.49 MAR65C/60C 0.50 60.50 0.50 Open TEVA 59.99 54.36 MAR70C/65C 0.60 65.60 0.60 Open ACE 42.50 42.10 MAR35P/40P 0.50 39.50 0.50 Open ETN 78.45 83.33 MAR70P/75P 0.55 74.45 0.55 Open MRK 61.26 63.49 MAR55P/60P 0.80 59.20 0.80 Open FD 41.68 43.49 MAR37P/40P 0.40 39.60 0.40 Open UTX 72.95 75.00 MAR65P/70P 0.55 69.45 0.55 Open XL 95.70 93.88 MAR85P/90P 0.45 89.55 0.45 Open CCU 47.00 49.22 MAR55C/50C 0.50 50.50 0.50 Open LXK 50.48 57.37 APR65C/60C 0.60 60.60 0.60 Open * WHR 65.50 79.66 APR80C/75C 1.10 76.10 (1.40) Closed * BGEN 57.07 50.49 APR45P/50P 0.60 49.40 0.60 Closed? Previously closed: Trigon Health (NYSE:TGH) - which is positive. Comments: Lexmark (NYSE:LXK) continued to rally this week and as noted in the previous summary, we rolled up and out to a higher strike spread (APR65C/60C) to protect gains in the position. Shares of Whirlpool (NYSE:WHR) traded lower Friday, retreating as investors took profits from the recent rally. However, the buying pressure renewed as the stock price fell to short-term technical support and the bullish trend was quickly rejuvenated. It was tough to admit defeat but as we mentioned last week, the key would be how the stock reacted as it neared $75 and indeed, $74.65 was the low on Monday. Those of you following the play know the rest of the story as the issue "never looked back" and today was the absolute last straw when Maytag (NYSE:MYG), the third-biggest U.S. home appliance maker, said it expects first quarter earnings to rise 50% more than previously anticipated due to strong sales in the first two months of the year. Our exit on Monday afternoon wasn't pretty as the loss was almost double the initial premium in the position, but we felt much better after watching the rally continue Tuesday morning. As if that wasn't enough excitement, our new position in Biogen (NASDAQ:BGEN) was affected by some unfortunate news. The FDA overturned the orphan drug status of Biogen's Avonex, thus allowing one of the company's competitors, Serono (NYSE:SRA), to sell a competing multiple sclerosis drug. Biogen released a statement saying it's confident Avonex will continue to be the leading drug in the U.S. market, but the news was clearly devastating to investors. Our spread is currently profitable however it may be best to simply close the play on any strength and move on to a more favorable position. Index Credit Spreads: Stock Pick Last Position Credit C/B G/L Status OIH 56.65 67.78 MAR45P/50P 0.60 54.40 0.60 Open OEX 557.59 591.03 M595C/590C 0.50 590.50 (0.53) Closed? The recent broad-market rally has pushed the OEX to a test of near-term resistance (in the 590-595 range) and conservative traders should have closed the bearish spread to protect profits and/or limit losses. Debit Straddles: Stock Position Debit Target M/V Gain Status QCOM MAR40C/40P 2.90 3.65 4.60 1.70 Closed Qualcomm was the big winner this week as the speculative play offered up to a $4.60 credit on $2.90 invested in only 4 days! Synthetic Positions: Stock Pick Last Position Credit C/B G/L Status WMT 59.86 62.23 MAR65C/55P 0.25 54.75 0.40 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 - Covered Calls, Naked Puts, & Combinations *************** ACS - Affiliated Computer $52.57 *** Target Shooting! *** 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 various system integration services, to both commercial and U.S. government clients. In the commercial sector the company offers its clients with business process outsourcing, unique systems integration services and technology outsourcing. Within the federal government sector, Affiliated provides business process outsourcing and systems integration services. One of our subscribers asked about the abbreviation for "TS" (in the play listing area) last week and this position provides a perfect opportunity to explain the acronym. In this section, we occasionally use the abbreviation TS for "target shoot" on some of the lower ROI plays where the underlying issue is due for a pullback. It is generally on positions that are just below our monthly profit threshold (5%). We usually don't recommend plays that are below a 5% monthly return but often the initial premium or credit can be increased during the next day's trading activity (by target-shooting) to make it a favorable position. Indeed, that is the situation in this play and initially, we are going to target-shoot an entry in the APR-47.50 put at a premium of $0.90-$1.10. PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT APR 47.5 ACS PW 1,084 0.85 46.65 4.2% "TS" SELL PUT APR 50 ACS PJ 1,509 1.45 48.55 6.0% SELL PUT APR 53 ACS PT 28 2.40 50.10 8.4% *************** COF - Capital One $59.60 *** Same Play - Different Week! *** Capital One Financial (NYSE:COF) is a holding company whose subsidiaries provide a variety of products and services to consumers using its proprietary information-based strategy. The company's main subsidiary, Capital One Bank, a limited purpose credit card bank, offers various credit card products. Capital One, F.S.B., a federally chartered savings bank, has consumer lending and deposit products. Capital One Services Inc., another subsidiary of the company, provides operating, administrative and other services to the company and its many subsidiaries. Capital One's business consists of both lending and non-lending activities. Its lending activities consist primarily of credit card products, but also include other consumer lending activities, such as unsecured installment lending and automobile financing. Its non-lending business activities consist primarily of its retail deposit-taking business and various non-lending new business initiatives. Bank, brokerage and credit card stocks have rallied in recent sessions on an improving U.S. economic outlook and hopes that loan losses might abate and companies involved in businesses like investing and trading would recover in the coming months. In addition, investors have begun to express a new interest in the market over the past few weeks, due to upbeat economic data in manufacturing, construction and consumer spending. The new buying pressure has extended to the Credit Services group and Capital One Financial has benefited from the bullish momentum. Traders who believe the upside activity in the sector will continue (after a necessary consolidation) can speculate on that outcome with these positions. COF - Capital One Financial $59.60 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT APR 47.5 COF PT 365 0.60 46.90 3.9% "TS" SELL PUT APR 50 COF PJ 997 0.90 49.10 4.9% *** SELL PUT APR 55 COF PK 1,123 1.90 53.10 7.4% *************** SYMC - Symantec $42.24 *** New "All Time" High *** Symantec (NASDAQ:SYMC) provides a broad range of content and network security solutions to individuals and enterprises. The company is a provider of virus protection, firewall, virtual private network, vulnerability management, intrusion detection, remote management technologies and security services to consumers and enterprises around the world. Symantec currently views its business in five primary operating segments: Consumer Products, Enterprise Security, Enterprise Administration, Services & Other. Shares of SYMC traded at a new "all-time" high today and despite the bearish near-term outlook for technology stocks, analysts agree with a positive future for the company. Investors are also bullish on the issue, based on the recent technical indications, and traders who want to speculate on the near-term performance of Symantec's share value should consider these positions. SYMC - Symantec $42.24 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT APR 35 SYQ PG 1,502 0.65 34.35 5.2% *** SELL PUT APR 38 SYQ PU 1,246 1.10 36.40 6.8% SELL PUT APR 40 SYQ PH 487 1.90 38.10 9.4% *************** Credit Spreads - Reader's Request One of our readers asked if we would search for some conservative credit-spread candidates, since the March expiration period is coming to an end and many traders will be looking for new plays in which to invest their capital. With that idea in mind, we have listed a selection of "bullish" positions, based on recent technical indications and favorable option premiums. Investors with a positive 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. *************** BBY - Best Buy Company $75.27 *** Earnings Speculation! *** Best Buy Company (NYSE:BBY) is a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. The company operates retail stores and commercial Websites under the brand names Best Buy (BestBuy.com), Media Play (MediaPlay.com), On Cue (OnCue.com), Sam Goody (SamGoody.com), Suncoast (Suncoast.com) and Magnolia Hi-Fi (MagnoliaHiFi.com). Best Buy stores account for 68% of the company's total retail square footage. Best Buy stores offer customers a selection of name-brand models consisting of approximately 6,000 products. The company's quarterly earnings are due 4/2/02. BBY - Best Buy Company $75.27 PLAY (very conservative - bullish/credit spread): BUY PUT APR-60 BBY-PL OI=1865 A=$0.55 SELL PUT APR-65 BBY-PM OI=965 B=$1.00 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% *************** CI - Cigna $96.38 *** Trading Range? *** CIGNA Corporation (NYSE:CI) is one of the largest investor-owned employee benefits organization in the United States. CIGNA is a holding company and its subsidiaries are primary providers of employee benefits offered through the workplace; healthcare products and services, group life, accident and disability insurance, retirement products and services and also investment management. CIGNA's major insurance subsidiary is Connecticut General Life Insurance Company. The company's principal business segments are Employee Health Care, Life and Disability Benefits, Employee Retirement Benefits and Investment Services and also International Life, Health and Employee Benefits. CI - Cigna $96.38 PLAY (conservative - bullish/credit spread): BUY PUT APR-80 CI-PP OI=307 A=$0.70 SELL PUT APR-85 CI-PQ OI=165 B=$1.25 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% *************** FRX - Forest Laboratories $83.65 *** Rally Underway! *** Forest Laboratories (NYSE:FRX) develops, manufactures and sells both branded and generic forms of ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. The company's most important U.S. products consist of branded ethical drug specialties marketed directly, or "detailed," to physicians by its Forest Pharmaceuticals, Forest Therapeutics and Forest Specialty sales forces. The company's products include those developed by Forest and those acquired from other pharmaceutical companies and integrated into Forest's marketing and distribution systems. Principal products include Celexa, Forest's SSRI for the treatment of depression; the respiratory products Aerobid and Aerochamber; Tiazac, a once-daily diltiazem for the treatment of hypertension and angina; and Infasurf, a lung surfactant for the treatment and prevention of respiratory distress syndrome in premature infants. FRX - Forest Laboratories $83.65 PLAY (very conservative - bullish/credit spread): BUY PUT APR-70 FRX-PN OI=70 A=$0.70 SELL PUT APR-75 FRX-PO OI=105 B=$1.05 INITIAL NET CREDIT TARGET=$0.45-$0.50 PROFIT(max)=9% *************** TOL - Toll Brothers $53.00 *** Stock Spit Coming! *** Toll Brothers (NYSE:TOL) designs, builds, markets and arranges financing for single-family detached and attached homes in middle income and high-income residential communities catering to move-up, empty-nester and age-qualified homebuyers in 21 states in six main regions around the United States. The communities generally are located on land the company has either developed or acquired fully developed and, in some cases, improved. The company operates its own land development, architectural, engineering, mortgage, title, security monitoring, landscape, cable TV, Internet access, lumber distribution, house assembly and manufacturing operations. The company also owns and operates golf courses in conjunction with several of its master-planned communities. TOL - Toll Brothers $53.00 PLAY (conservative - bullish/credit spread): BUY PUT APR-40 TOL-PH OI=90 A=$0.20 SELL PUT APR-45 TOL-PI OI=482 B=$0.70 INITIAL NET CREDIT TARGET=$0.55-$0.65 PROFIT(max)=12% *************** VLO - Valero Energy $47.85 *** Oil Sector Speculation! *** Valero Energy Corporation (NYSE:VLO) is an independent petroleum refining and marketing company in the United States. Valero owns and operates six refineries in Texas, California, Louisiana and New Jersey with a combined throughput capacity of one million barrels per day. Valero produces premium, environmentally clean products such as reformulated gasoline, low-sulfur diesel and oxygenates, and is able to achieve the specifications of the California Air Resources Board (CARB) for gasoline. Valero also produces a substantial slate of middle distillates, jet fuel and petrochemicals. Valero markets its products in 34 states through an extensive wholesale bulk and rack-marketing network, and in California through approximately 350 retail locations. Earlier this year, the company acquired Ultramar Diamond Shamrock, an independent petroleum product and convenience store merchandise marketing company. VLO - Valero Energy $47.85 PLAY (moderately aggressive - bullish/credit spread): BUY PUT APR-42.50 VLO-PV OI=2375 A=$0.60 SELL PUT APR-45.00 VLO-PI OI=103 B=$0.95 INITIAL NET CREDIT TARGET=$0.40-$0.50 PROFIT(max)=19% *************** Neutral Plays - Straddles & Strangles *************** NTRS - Northern Trust $59.19 *** Probability Play! *** Northern Trust Corporation (NASDAQ:NTRS) is a multi-bank holding company that owns all of the outstanding capital stock of The Northern Trust Company. The company also owns national or state bank subsidiaries in Arizona, California, Colorado, Florida and Texas, a federal savings bank with offices in Michigan, Missouri, Nevada, Ohio, Washington and Wisconsin, a trust company in New York and other non-bank subsidiaries, including an investment management company, a securities brokerage firm, an international investment consulting firm and a retirement services company. The company organizes client services around two primary business units, Corporate and Institutional Services and Personal Financial Services. Two other business units provide services to the two main business units. They are Northern Trust Global Investments and Worldwide Operations and Technology. Based on the recent share value activity and historical option prices, this position offers traders a favorable "speculative" straddle opportunity. The issue's options are undervalued and the stock has the potential to move (high or low) enough to make the straddle profitable. In addition, the issue has a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk-reward outlook of the position. NTRS - Northern Trust $59.19 PLAY (speculative - neutral/debit straddle): BUY CALL APR-60 NRQ-DL OI=728 A=$1.80 BUY PUT APR-60 NRQ-PL OI=233 A=$2.50 INITIAL NET DEBIT TARGET=$4.00-4.20 TARGET PROFIT=20-25% *************** BEARISH PLAYS - Naked Calls & Combinations *************** BRCM - Broadcom $40.24 *** "Bearish" Technicals! *** Broadcom Corporation (NASDAQ:BRCM) is a provider of integrated silicon solutions that enable broadband communications and networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies system-on-a-chip solutions for applications in digital cable set-top boxes and cable modems, high-speed local, metropolitan and wide area and optical networks, home networking, Voice over Internet Protocol (VoIP), carrier access, residential broadband gateways, direct broadcast satellite and terrestrial digital broadcast, digital subscriber line (xDSL), wireless communications, server solutions, and network processing. This play is simply based on the current price or trading range of the underlying stock and its recent technical history. The near-term BRCM price trend is bearish and reflects a negative divergence from an intermediate-period moving average. Also, the failure at $45 on Monday reestablishes a previous resistance area at that price (May - Aug 2001) and increases the potential for a "head-n-shoulders" top formation in the coming weeks. With the additional overhead supply near $50, the share value has little chance of moving beyond our sold strike in the next month. BRCM - Broadcom $40.24 PLAY (conservative - bearish/credit spread): BUY CALL APR-55 RDZ-DK OI=3288 A=$0.40 SELL CALL APR-50 RCQ-DJ OI=6653 B=$0.85 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% *************** LEH - Lehman Brothers $63.49 *** Earnings Speculation! *** Lehman Brothers Holdings (NYSE:LEH) is the holding company of subsidiaries that constitute one of the leading global investment banks, serving institutional, corporate, government and individual clients and customers. The company is engaged mainly in providing financial services. The company's many business services include capital raising for clients through securities underwriting and direct placements, corporate finance as well as strategic advisory services, private equity investments, securities sales and trading, research, and the trading of foreign exchange, derivative products and certain commodities. Lehman Brothers provides a full array of capital market products and advisory services worldwide. Through its many banking, research, trading, structuring and distribution capabilities of equity and fixed income products, Lehman continues its focus of building its client/customer business model. Shares of brokerage and finance companies have rallied in recent sessions in expectation of a resurgence in trading activity and investing in the equity markets. Lehman's stock has benefited from the bullish momentum and the optimistic outlook has also boosted the trading volume in its call options. In addition, the company's earnings are due next week (3/20) and the event provides a great opportunity for speculation on the issue's future movement. Traders who believe the stock has little chance of reaching $70 in the near-term can profit from that outcome with this position. LEH - Lehman Brothers $63.49 PLAY (conservative - bearish/credit spread): BUY CALL APR-75 LEH-DO OI=1717 A=$0.20 SELL CALL APR-70 LEH-DN OI=2484 B=$0.75 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% *************** QLGC - Qlogic $48.96 *** Trading Range Continues? *** QLogic Corporation (NASDAQ:QLGC) is a designer and supplier of Storage Area Networking infrastructure building blocks. Its SAN infrastructure building blocks, comprised of semiconductor chips, host board adapters and switches, are integrated into storage networking solutions of the world's leading system and storage manufacturers. Companies such as Sun Microsystems, IBM, Dell Computer Corporation, Compaq Computer Corporation, Fujitsu Microelectronics, and Hitachi all use some of its components in the storage and systems solutions they also sell to the world's largest information technology environments. In addition to its original equipment manufacturer relationships with these and other companies, in January 2000 the company started delivering selected Fibre Channel building blocks to leading distributors, systems integrators and resellers, thereby expanding its reach and visibility to the information technology community. We offered this issue as a bearish candidate last Wednesday and despite the brief rally in technology shares, it appears the stock is again headed for lower prices. From a purely technical viewpoint, the issue has a significant resistance area between $55 and $60, and with today's "less than favorable" outlook for the semiconductor segment in the coming months, the probability of a significant upward move seems rather small. QLGC - Qlogic $48.96 PLAY (conservative - bearish/credit spread): BUY CALL APR-65 QLC-DM OI=720 A=$0.50 SELL CALL APR-60 QLC-DL OI=2649 B=$1.05 INITIAL NET CREDIT TARGET=$0.65-$0.75 PROFIT(max)=15% *************** SUPPLEMENTAL CREDIT-SPREAD CANDIDATES *************** BULLISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain AHC 75.51 APR 70P 0.85 APR 65P 0.30 0.60 14% FLIR 53.65 APR 45P 1.10 APR 40P 0.55 0.60 14% NOC 109.83 APR 100 1.25 APR 95P 0.70 0.60 14% CHIR 47.09 APR 42P 0.70 APR 40P 0.45 0.30 14% ABC 69.09 APR 65P 1.00 APR 60P 0.50 0.55 12% GENZ 47.70 APR 40P 1.00 APR 35P 0.50 0.55 12% BEARISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain ADI 43.50 APR 50C 0.85 APR 55C 0.30 0.60 14% ELBO 35.59 APR 40C 0.85 APR 45C 0.30 0.60 14% NVDA 53.61 APR 65C 1.00 APR 70C 0.45 0.60 14% WLP 124.00 APR 135C 1.45 APR 140C 0.90 0.60 14% ADRX 40.57 APR 50C 1.25 APR 55C 0.75 0.55 12% EBAY 56.85 APR 65C 0.80 APR 70C 0.30 0.55 12% *************** 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 ************** When "Rich Dudes" Talk, I Listen Buzz Lynn buzz@OptionInvestor.com I can't sit in Bill Gates or Warren Buffet's office every day to get investment ideas or hear their take on the future. So when I get an opportunity to hear one of them talk, I jump at it. In fact, anyone can jump at it at any time. I don't yet have a hotline to Bill. But would it be useful to know how to tune into the Oracle of Omaha's thoughts at any time? Fortunately you can and it won't cost you a dime. Here's how. Simply go to the Berkshire Hathaway website. It's a treasure trove of information. See, Warren Buffet pens a letter to his shareholders every year. It is the most honest production and summary that I've ever seen generated by ANY CEO. If you doubt that, check out the following from nearly the first paragraph penned on February 28th and delivered on March 9th. "Though our corporate performance last year was satisfactory, MY performance was anything but. I manage most of Berkshire’s equity portfolio, and my results were poor, just as they have been for several years. Of even more importance, I allowed General Re to take on business without a safeguard I knew was important, and on September 11th, this error caught up with us. I’ll tell you more about my mistake later and what we are doing to correct it." Furthermore, "Over the last few years, however, our cost [of float in our insurance businesses] has been too high, and in 2001 it was terrible." Finally when talking about losses at Dexter Shoes, one of the last remaining shoe manufacturers in the U.S., Buffet summarizes, "I've made three decisions relating to Dexter that have hurt you in a major way: (1) buying it in the first place; (2) paying for it with stock and (3) procrastinating when the need for changes in its operations was obvious. I would like to lay these mistakes on Charlie (or anyone else, for that matter) but they were mine. Dexter, prior to our purchase - and indeed for a few years after - prospered despite low-cost foreign competition that was brutal. I concluded that Dexter could continue to cope with that problem, and I was wrong." Can you imagine one of the world's most successful investors admitting he ate the green burrito - and more than once in the same year? That's about as honest as it gets and a far cry from what we might hear out of Ken Lay (ENE), Gary Winnick (GX), Joe Naccio (Q) or anybody else that has been called to testify before a Senate committee, including Alan Greenspan. These guys are living proof that prevarication is legal as long as FASB (Financial Accounting Standards Board) allows it. It's interesting to me that the House and Senate also fail to follow GAAP, and severely abuse it - a hypocritical case of the pot calling the kettle black, as I've noted before. Again, that's for another discussion. But he nails the truth with humor in talking about corporate insiders' abuse of shareholders: "One story I’ve heard illustrates the all-too-common attitude of managers toward owners: A gorgeous woman slinks up to a CEO at a party and through moist lips purrs, 'I’ll do anything - ANYTHING - you want. Just tell me what you would like.' With no hesitation, he replies, 'Re-price my options.'". . .kind of like the old joke, "paint my house". In similar vein while referring to his 2001 acquisition of MiTek, a roofing structural system manufacturer, he notes what a great business Berkshire bought. But I was more interested in the actions of management as he relayed it: "[MiTek's] managerial crew is exceptionally enthusiastic about the company and wanted to participate in the purchase. Therefore, we arranged for 55 members of the MiTek team to buy 10% of the company, with each putting up a minimum of $100,000 in cash. Many borrowed money so they could participate. [This is the good part] As they would NOT be if they had options, all of these managers are true OWNERS. They face the downside of decisions as well as the upside. They incur a cost of capital. And they can’t "re-price" their stakes: What they paid is what they live with." That says a lot about general corporate managements' participation as "House" in the "Casino" versus MiTek's management's vested interest in business ownership. I'd rather see a hard dollar investment myself, as vesting and exercise of qualified and non- qualified incentive options are a drain and real expense to any business that frequently is conveniently left off a P&L statement. One thing I found interesting is that 99% of Buffet's net worth is in Berkshire stock of which he has never sold a share. It also means he has $380 mln in other "stuff" - a princely sum to say the least, but just 1% of his estimated $38 bln net worth. Clearly the guy is not hyping his own stock and selling into duped- investor strength. He opines, "To their [publicly traded management heads] shame, these business leaders view shareholders as patsies, not partners." When the world's greatest steward of capital is telling me that many issuers of shares consider me a patsy, I have to stop to examine my own reasoning as to why I would want to buy shares. For those who care, I am again in all cash with no desire to be long shares in any portfolio, even my IRA - and I can't short that one! While I am not so interested in what Buffet reports about the various businesses Berkshire owns and manages, I am interested in the investment principles and wisdom falling off the pages like marbles from a school kid's desk. If you want clear demonstrations of homespun wisdom, just look at the cutting truths cloaked in humor with regard to EBITDA and pro- forma income. Buffet states: "Bad terminology is the enemy of good thinking. When companies or investment professionals use terms such as "EBITDA" and "pro forma," they want you to unthinkingly accept concepts that are dangerously flawed. (In golf, my score is frequently below par on a PRO-FORMA basis: I have firm plans to "restructure" my putting stroke and therefore only count the swings I take before reaching the green.)" I was laughing myself silly at that one - one, because it was funny; but two, because it simply exposes the absurdity of pro- forma accounting in terms that anyone can understand. Here's another pearl. Did you ever wonder what the principles are that make a good insurance businesses? This is a great metaphor for our trading businesses that we each operate too. Again, Warren teaches us in three easy principles how to trade - and this is free! "What counts in this business is underwriting discipline [like trading]. The winners are those that unfailingly stick to three key principles: 1. They accept only those risks that they are able to properly evaluate (staying within their circle of competence) and that, after they have evaluated all relevant factors including remote loss scenarios, carry the expectancy of profit [see Jeff, Eric, Austin, and Mark on risk and reward]. These insurers ignore market-share considerations and are sanguine about losing business to competitors that are offering foolish prices or policy conditions. 2. They limit the business they accept in a manner that guarantees they will suffer no aggregation of losses from a single event or from related events that will threaten their solvency. They ceaselessly search for possible correlation among seemingly- unrelated risks. [Don't put all your money in one trade or basket of technology - think Q, WCG, GX, ENE all in the same sentence] 3. They avoid business involving moral risk: No matter what the rate, trying to write good contracts with bad people doesn't work. While most policyholders and clients are honorable and ethical, doing business with the few exceptions is usually expensive, sometimes extraordinarily so. [Unless you count cards, it's tough to beat the house.] Interesting observations that if we think hard enough about them, we can apply them anywhere from the mundane to the exciting parts of our lives. But on other subject near and dear to our hearts - the market - he has some cautionary and sometimes ominous comments. From the average Joe on the street, I would have a hard believing it. But from a guy who builds arks instead of just predicting rain (he puts his money where his mouth is), Buffet gets a lot more credibility from me. For starters, he accompanies his comments with a cautionary statement for perennial BubbleVision watchers: "One more point about our investments: The media often report that 'Buffet is buying' this or that security, having picked up the "fact" from reports that Berkshire files. These accounts are sometimes correct, but at other times the transactions Berkshire reports are actually being made by Lou Simpson, who runs a $2 billion portfolio for GEICO that is quite independent of me. Normally, Lou does not tell me what he is buying or selling, and I learn of his activities only when I look at a GEICO portfolio summary that I receive a few days after the end of each month. Lou's thinking, of course, is quite similar to mine, but we usually end up in different securities. That's largely because he's working with less money and can therefore invest in smaller companies than I. Oh, yes, there's also another minor difference between us: In recent years, Lou's performance has been far better than mine. [Another admission of honesty. You have been forewarned.] But here is the meat - the part that, sadly, most every analyst dog on Wall Street is missing from his/her current diet of exchanged foot and partially-nibbled crow: "We made few changes in our portfolio during 2001. As a group, our larger holdings have performed poorly in the last few years, some because of disappointing operating results. Charlie and I still like the basic businesses of all the companies we own. But we do not believe Berkshire's equity holdings as a group are undervalued. [Major current holding include KO, G, AXP, WFC, Moody's, Washington Post, and H&R Block. Wink, Wink! These things aint cheap!] Our restrained enthusiasm for these securities is matched by decidedly LUKEWARM FEELING ABOUT THE PROSTPECTS FOR THE STOCKS IN GENERAL OVER THE NEXT DECADE OR SO. [ALL CAPS - mine] I expressed my views about equity returns in a speech I gave at an Allen and Company meeting in July (which was a follow-up to a similar presentation I had made two years earlier) and an edited version of my comments appeared in a December 10th Fortune article. Charlie and I believe that American business will do fine over time but think that TODAY'S EQUITY PRICES PRESAGE ONLY MODERATE RETURNS FOR INVESTORS. [ALL CAPS - mine] The market outperformed business for a very long period, and that phenomenon had to end. A market that no more than parallels business progress, however, is LIKELY TO LEAVE MANY INVESTORS DISAPPOINTED, PARTICULARLY THOSE RELATIVELY NEW TO THE GAME. [ALL CAPS - mine] Perhaps that would explain why he goes on to enumerate the Berkshire businesses that will be selling "stuff" at the shareholder's meeting in Omaha on May 4th, one of which is, ". . . underwear, of course. Assuming our Fruit of the Loom purchase has closed by May 4, we will be selling Fruit's latest styles, which will make you your neighborhood's fashion leader. Buy a lifetime supply."
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