The Option Investor Newsletter Sunday 03-17-2002 Copyright 2001, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 3-15 WE 3-08 WE 3-01 WE 2-22 DOW 10607.23 + 34.74 10572.49 +203.63 10368.86 +400.71 + 65.11 Nasdaq 1868.30 - 61.37 1929.67 +126.93 1802.74 + 78.20 - 80.66 S&P-100 591.13 + 1.29 589.84 + 13.68 576.16 + 22.12 - 5.61 S&P-500 1166.16 + 1.85 1164.31 + 32.53 1131.78 + 41.94 - 14.34 W5000 10904.69 + 14.02 10890.67 +330.66 10560.01 +380.72 -136.19 RUT 499.12 - .73 499.85 + 21.51 478.34 + 13.27 - 4.18 TRAN 2951.54 - 58.70 3010.24 +113.11 2897.13 +171.48 + 41.42 VIX 20.77 - 0.84 21.61 - 0.52 22.13 - 2.76 + .80 VXN 40.26 - 1.36 41.62 - 0.32 41.94 - 6.63 + 3.58 TRIN 0.56 0.73 0.74 1.33 TICK +855 +927 +1029 +1044 Put/Call .64 .62 .94 .90 ****************************************************************** Slowly It Crept, Step By Step! by Jim Brown Like a scene out of an old Abbott & Costello movie with the monster creeping slowly up on the unsuspecting victim, usually Costello, the Dow and S&P edged ever so closer to recent resistance. The Dow might have soared above the 10635 level from last week had it not been for Merck. The drug maker killed the opening rally on positive economic news by announcing it was pulling its new arthritis drug request from the FDA. The stock closed down -$3.69 on the news, which equates to something in the area of -25 Dow points. This was the major drag since there were only five other Dow stocks in negative territory for a total loss of only $1.59. - chart - S&P 500 (daily) - chart - S&P 500 (60 minute) - chart - Nasdaq Composite(60 minute) - chart - DJIA (60 minute) The economic news just keeps pointing the way to better times and the markets are showing every tendency to want to believe it. The Industrial Production numbers soared in February to +0.4%, about twice the consensus estimates, and with the upward revision to the January number it has now been positive for two months in a row. It is clear that the economy is coming out of the depths reached in September. The chart below, courtesy of Economy.com, shows the progress of the new trend. - chart - Industrial Production Capacity utilization also rose but there is plenty of room for the manufacturing process to grow before bottlenecks or price pressures could impact inflation. The Fed has no worries here! The low interest rates have encouraged expansion and that expansion is growing. Fourteen of the twenty industries contributing to the report showed growth in production in February. Without a pickup in the business environment continued growth will be slow due to lack of demand but it is rising. The Producer Price Index (PPI) also showed a slight increase in the price of finished goods but the gain was negligible. The lack of strong demand is keeping prices flat. The only major gains were due to a rise in energy prices but those are likely to be cyclical and are not expected to increase. The Weekly Leading Index of the ECRI showed another slight gain which was fueled by a drop in jobless claims and a rise in financial stocks. The index is seen as a leading indicator of economic activity and it is now at its highest level since early-2000. It is suggesting the chances for an overall recovery in 2002 are very good. Consumers must feel good about the future because the Michigan Sentiment for March (preliminary) showed a gain of nearly five points to 95 from 90.7 in February. The expectations component showed the largest gain from 87.2 to 92.3 while the current conditions component gained only 3.1 for the period. This is also the highest reading for the survey since December 2000. Whether the recession is really over or not it appears the consumer has already forgotten it happened. Consumer spending remains high despite weaker then expected Retail Sales this week. Much of this spending has been fueled by the low interest rates and the flood of refinancings. What will happen as the interest rates begin to rise is a source of concern. Speaking of interest rates rising, the next FOMC meeting is Tuesday. Nobody expects a rate hike so soon but almost everyone expects a change in the bias to neutral. After nearly sending the economy into shock by raising rates to the choking point two years ago it is inconceivable that Greenspan will act rashly this time. He is approaching retirement and would like to go out with the economy on a high. Most analysts do not expect any actual rate hikes until fall although the Fed funds futures are factoring in a 50 point hike by July. According to anybody willing to go on record that is unrealistic based on the tenuous nature of the economic recovery. We are showing gains in almost every area but it takes a microscope to see many of them. Most feel this meeting will see a change to a neutral bias and a change to tightening will not happen until the June-25th meeting. Why the futures are factoring in a 50 point hike before then is unknown. Still, the uncertainty surrounding the FOMC meeting on Tuesday is likely to impact any rally hopes until after the closing statement is read. If consumers could vote with their cash for an economic recovery it would have looked like last week. For the week ended Wednesday there was a whopping inflow of cash to the tune of $7 billion into equity funds according to Trimtabs.com. Considering that there was also a record number of debt offerings, $11 billion from GE, $8 billion from AXP, to name a couple, it was amazing to see that much cash move into the stock market. The large number of debt offerings has undoubtedly impacted the stock and bond markets over the last two weeks. You can't take $30 billion, by some estimates, out of the markets without a ripple. Much of that ripple was absorbed by cash flowing out of the bond markets attracted to higher yields from these high grade corporate borrowers. Still, we can attribute some of the weakness in stocks to this as well. Despite the mixed results for the week, Dow +35, Nasdaq -61, S&P flat, it was a very good week. Not as good as the prior week which saw strong rallies across the board, but very good in my opinion. There was a very good chance for profit taking and a change in direction. Instead only minor consolidation occurred and the major averages are ready to test the high ground again. The Nasdaq bounced off 1850 support and while it continues to lag the blue chips it did behave well. Chalk up the weakness to multiple chip downgrades, computer maker downgrades, Oracle earnings weakness and continuing telecom problems. Still, if you look at AMAT, KLAC and NVLS, the leaders in the .09 micron manufacturing process to be used in the next generation of processors, they held support and were up strongly on Friday. Intelligent investors know where the leaders will be WHEN the recovery finally catches fire. The triple witching options expiration week ended with a whimper and most highly visible stocks ended pinned to critical strikes. There was simply not enough conviction to break free from overhead option resistance. Our turn will come, be patient. Impacting the oil markets was the OPEC meeting this week. Oil prices have risen to over $24 on fears they would cut production or we would attack Iraq. Neither has happened and the short squeeze from futures traders has now passed. OPEC said they would not cut production and that clears the air until the next meeting in June. The administration is getting no support for attacking Iraq so oil should continue to flow from there. I bring all this up because I think the stage is set for a drop in oil prices and a corresponding drop in oil stocks as money moves out of this hot sector. Most stocks like the ones we have been playing, SII, TDW, etc, have huge gains and traders will likely rotate out of oil now that the pressure is off and into something else. The hot sectors on Friday were biotech, health care and banking to name a few. The transports should firm again as oil cheapens and support the next leg up for the Dow. That leg could come as early as Monday. All of my indicators were bearish prior to the close on Thursday but turning up. After the economic reports on Friday they firmed even more. Had it not been for MRK losing -3.69 and being an huge morning drag on the Dow the close on Friday could have been significantly stronger. Make no mistake, we are not out of the woods yet. Close but not yet. The Dow did close over 10600 again and the S&P eased back to within nine points of resistance at 1175. These are critical levels. Once over 10635 and 1175 there should be another round of short covering. Also, we are entering the end of the quarter. Fund managers sitting on cash and seeing the Dow and S&P breaking out of resistance could start chasing stocks in order to dress up their portfolios for quarter end. They are paid to produce results not sit on cash. They will want their statements to be chock full of premium names to encourage investors that they are on the job. If it were not for the FOMC meeting on Tuesday I would be much more bullish on the coming week. Once over that hurdle the CPI and FOMC minutes will loom in our path on Thursday but neither are expected to be earth shaking. Greenspan has repeatedly said bullish things about the recovery so minutes of the Jan-30th meeting will not be relative. My exit levels for last week were 10450/1865/1145 respectively. The only one breeched was the Nasdaq, which traded down to 1850 on Thursday, and 1845 on Friday. It rallied to close back above 1865 but only barely. I still believe bullish investors should be in the markets until the current trend changes. When it does we should exit gracefully and wait patiently for a new entry point. I am revising my exit points for this week to Dow 10475, Nasdaq 1850 and S&P 1150. Should any of those levels be broken I would consider closing any long plays in danger. That last comment will bring a flood of email so let me explain. If you are invested in a Dow stock and the Dow fails then you should probably close the play. Same with a tech stock during a Nasdaq failure. However, in many circumstances you could be in a stock that is gaining $1 a day, regardless of market direction, like UNH last week. There is no reason to close those plays unless they show weakness. You must use your judgment. The exit levels I give you are general guidelines. We all know that 85% of a stocks movement is related to the market/sector movement. If the sector is hot due to rotation out of the general market then by all means enjoy it. Just be aware that a prolonged market dip will eventually impact all sectors and all long plays. In times of market weakness snug up those stops on the winners before they become losers. One last note. While I am leaning to the bullish side in the comments above, I am still expecting another sell off in the next several weeks. This may seem like a contradiction but we need to always be conscious of historical trends. I mentioned that my indicators were turning bullish on Friday but one is definitely going bearish. The VIX closed at a low on Friday of 20.77 and a level not seen since last July. The challenge here is a combination of events. The bullish sentiment is swelling for reasons stated above but that same sentiment can change in a heartbeat as we all know. I have written about this several times in the last month but we need to always remember that the period between April-15th and May-15th usually brings a drop in the markets. This is the start of the summer doldrums and is usually prompted by weak earnings in the coming cycle. As evidenced by the Oracle earnings this week the economy has yet to recover to the point where earnings will exceed expectations for the 1Q. We have not had many warnings this cycle but the season is still young. Expect positive events but be prepared for negative surprises. Eric is going to go more in-depth on the VIX correlation in the Market Sentiment this weekend. Be sure to check it out. Sell Too Soon! Jim Brown Editor@OptionInvestor.com We have had many rewarding plays in the "Watch List" section of the newsletter recently. For those not familiar with this section Eric chooses several stocks, which appear ready to make a move and suggests entering a play only when the action point is met. For those new to this section you can visit it here: http://www.OptionInvestor.com/indexes/watchlist.asp ******************** INDEX TRADER SUMMARY ******************** Bubblicious! Just like that luscious, sugar-laden bubble gum that used to rot our teeth when we were young, investors and traders are addicted to the sugar rush of "economic recovery" euphoria right now while ignoring what could be painful cavities ahead. But we are traders here and couldn't care less about fundamentals and far-future predictions. We live for the here & now, or at least until our distant-month options run out of time! (Weekly/Daily Charts: SOX) Hottest of the hot money cannot play in most tech arenas any longer because the majority have imploded and failed to inflate. Not so the SOX, and we look to cast our lots at the crapshoot with everyone else. "Semi-conductor Investment" is a huge oxymoron if you ask me, but I'll grab those calls here or in the SMH in a heartbeat when 60/30 minute chart signals turn bullish again. Don't be surprised if this sector leads a charge to test recent highs soon and rest assured I'll be on board with my money if it does! With W/D chart signals aligned for bullish upside reversals, let the intraday chart signal entry begin. (60 min Charts: SOX / SMH) With the SOX and SMH hourly charts respectively, we see bearish descending triangles and overbought stochastic values suggesting a pullback to support straight ahead. If these chart signals bottom in oversold extreme and reverse upward while price action rests on or above blue lines of support at recent lows... buy calls with both hands! (Weekly Chart: BIX) Breaking the banks... financial stocks are reveling in what seems to be the perfect environment right now with economic expansion and no inflation. The reverse wouldn't be nice to this ramp at all and some intelligent minds suggest that's our future, but again we play entries on the here & now. I would not be buying banks myself but certainly see no reason to sell them tonight, either. (Daily Chart: RTH) Retail hugs a four-month channel higher. I plan on shorting resistance on top or a breakdown below lower support, but going long on each successive bounce within this channel is high-odds until it breaks. Makes for real easy stoploss management on the other side of these lines we enter on when touched, too! Summation Next week should be an active one following the last few sessions of consolidation behind us. Indexes & sectors show charts that are mixed and non-committal, so we'll do our best on a frequent basis to catch those poised to move where risk/reward favors us best. Wait For Precise Entries, 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 ************************************************************** ************** Editor's Plays ************** Will They or Won't They? The final vote on Tuesday will end the speculation on the Compaq/HWP merger. A no vote will propel HWP stock upward as investors breath a sigh of relief that they will not take on an albatross. A yes vote will sink them as investors who did not like the deal flee the stock in droves. There is a mounting tide of resistance and a very good chance the deal will not occur. The chances of a strong move by HWP in some direction is good. Since we know the time frame but not the result we can best play this with a straddle. Since HWP was $24 as recently as January we can speculate that a "no" vote could send the stock back up to that range quickly. - chart - HWP (weekly) The April $20 call is only $.95 cents and with more votes lining up on the no side daily it has a very good chance of being a winner. Conversely, the April $17.50 put is only $.65 cents which makes good insurance against the possibility of a yes vote. HWP could easily trade under $17.50 if the deal is approved. The bottom line is uncertainty and time. If you feel the long term benefits of a Compaq/HWP merger outweigh the bad then use the Jan-04 $20 leap calls at $4.30. You could also offset the cost of the calls by selling the Jan-04 $20 leap puts on any post "yes" vote dip. A dip to $17.50 would add another $2 to the already high $4.50 premium giving the seller $6.50 in pocket change per share. That means your risk in Jan-04 is an merged HWP/CPQ at below $13.50 ($20 strike -$6.50 premium). If you feel the company will eventually rise then use a portion of that premium to buy the Jan-04 $20 leap calls on any post vote dip. It would raise your breakeven to something around $17.00 but baring a disaster the risk/reward is very favorable. - chart - HWP (weekly) ******************** As always, do your own research and be comfortable with the downside risk before entering any play. Good Luck Jim **************** MARKET SENTIMENT **************** VIX! VIX! VIX! By Eric Utley I often write about the importance of not relying too much on one metric. Fortunately that rule is subject to change. WHOA! The CBOE Market Volatility Index (VIX.X), also known as the fear gauge, is growing increasingly important. It's credence as a stand alone indicator increased last week with the breakdown in Friday's session. The closer the VIX trades to 20, the more important it becomes. My astute friend, Austin Passamonte, is fond of suggesting loading up on back month puts when the VIX trades below 20. He's made a ton of money doing just that. Need some history to back-up that claim? chart comparision image - VIX versus OEX The VIX is typically early in predicting a sell-off in stocks and can remain below the 20 level for an extended period of time before the lack of fear in stocks turns into just that: fear. Combine the low level of fear with the increasingly overbought way of bullish percent data and the growing bearishness in the S&P commercials and I think the writing is on the wall. The only question that remains is one of timing. The VIX can stay below 20 for quite a while as we saw in late 1999. Without fail, however, a VIX below 20 has led to a sell-off in stocks. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 10607 Moving Averages: (Simple) 10-dma: 10556 50-dma: 10043 200-dma: 10007 DJIA chart = S&P 500 ($SPX) 52-week High: 1383 52-week Low : 945 Current : 1166 Moving Averages: (Simple) 10-dma: 1159 50-dma: 1129 200-dma: 1147 S&P 500 chart = Nasdaq-100 ($NDX) 52-week High: 2771 52-week Low : 1089 Current : 1495 Moving Averages: (Simple) 10-dma: 1511 50-dma: 1512 200-dma: 1555 Nasdaq-100 chart = Oil Service ($OSX) The OSX.X was the best performing sector in last Friday's session. The group gained 3.32 percent for the day, far out pacing the fractional gains in other segments of the broader energy group. Sector leaders included Nabors (NYSE:NBR), Varco (NYSE:VRC), Rowan Companies (NYSE:RDC), BJ Services (NYSE:BJS), Haliburton (NYSE:HAL), and Noble (NYSE:NE). 52-week High: 100 52-week Low : 97 Current : 100 Moving Averages: (Simple) 10-dma: 98 50-dma: 87 200-dma: 87 Internet ($INX) For the second consecutive session, the INX.X was the worst performing sector in last Friday's session. The INX.X shed 1.23 percent during the day. Leading to the downside included shares of Overture Services (NASDAQ:OVER), Inktomi (NASDAQ:INKT), Check Point Software (NASDAQ:CHKP), Amazon (NASDAQ:AMZN), and Real Networks (NASDAQ:RNWK). 52-week High: 243 52-week Low : 76 Current : 120 Moving Averages: (Simple) 10-dma: 124 50-dma: 124 200-dma: 136 ----------------------------------------------------------------- Market Volatility WHOA! The VIX dropped below the 21 level in last Friday's session. Fear is now on its way to the 20 level. In other words, complacency is rallying along with stocks. WHOA! The VXN dropped to an all-time low in last Friday's session, closing near the 40 level. Similar story as the one in the VIX. CBOE Market Volatility Index (VIX) - 20.77 -1.25 Nasdaq-100 Volatility Index (VXN) - 40.26 -2.07 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.64 854,766 548,973 Equity Only 0.53 773,575 410,938 OEX 1.45 28,498 42,336 QQQ 0.98 44,567 43,472 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 63 + 1 Bull Confirmed NASDAQ-100 70 + 2 Bull Confirmed DOW 77 + 0 Bull Confirmed S&P 500 77 + 1 Bull Confirmed S&P 100 78 + 0 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.12 10-Day Arms Index 1.00 21-Day Arms Index 1.14 55-Day Arms Index 1.23 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1826 1277 NASDAQ 1933 1543 New Highs New Lows NYSE 195 24 NASDAQ 155 32 Volume (in millions) NYSE 1,481 NASDAQ 1,683 ----------------------------------------------------------------- Commitments Of Traders Report: 03/12/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Attention!! Commercial traders continued to build their net bearish position while small traders reached an extreme bullish position. Commercials Long Short Net % Of OI 02/26/02 366,258 432,258 (66,000) (8.3%) 03/05/02 361,254 445,989 (84,735) (10.5%) 03/12/02 396,050 483,606 (87,556) (9.9%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 02/26/02 139,183 62,087 77,096 38.3% 03/05/02 161,711 60,941 100,770 45.3% 03/12/02 179,825 75,025 104,800 42.6% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 104,800 - 3/05/02 NASDAQ-100 Nasdaq commercial traders added a number of short positions for a big increase in the group's net bearish position. Meanwhile, small traders grew slightly more bullish. Commercials Long Short Net % of OI 02/26/02 33,589 34,091 (502) (0.7%) 03/05/02 33,549 35,419 (1,870) (2.7%) 03/12/02 37,415 42,942 (5,527) (6.9%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: 7,774 - 12/21/01 Small Traders Long Short Net % of OI 02/26/02 9,517 11,416 (1,899) (9.1%) 03/05/02 11,961 11,214 747 3.2% 03/12/02 14,571 13,045 1,526 5.5% Most bearish reading of the year: (9,877) - 12/21/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Dow Jones commercial traders dropped both long and short positions, while maintaining their net bullish position. Small traders dropped a number of longs and added a small number of shorts of an increase in their net bearish position. Commercials Long Short Net % of OI 02/26/02 33,322 21,110 12,212 22.4% 03/05/02 37,036 25,554 11,482 18.3% 03/12/02 35,080 23,204 11,876 20.4% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 02/26/02 6,333 12,547 (6,214) (32.9%) 03/05/02 6,589 13,057 (6,468) (32.9%) 03/12/02 6,400 13,070 (6,670) (34.3%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck" * IRA Accounts Available * 8 different FREE options pricing, strategy, and charting tools * Real-Time Buying Power, Account Balances or Cancels * EASY screens for spreads, collars, covered calls or butterflies! Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor013 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** *************** ASK THE ANALYST *************** Real Estate Bubble or Boom? By Eric Utley The housing market is a battleground between the bulls and bears. Bulls argue that the economy will carry the housing market higher. While bears argue that there exists a bubble in that portion of the economy and that the housing stocks trade at peak valuations. I don't know which way the housing market is heading, but I did notice a divergence in the sector late last week. My buddy Rocketman, a.k.a. Mark Phillips, gave me the symbol for the Dow Jones U.S. Home Construction Index ($DJUSHB) last week. While I couldn't find the components of the index, I did compile a few of the leading home builders for my own little basket to monitor. I think it's worth watching the index as it relates to the health of the economy and the prospects of the recovery. These stocks might be worth a look too: Clayton Homes (NYSE:CMH) Centex (NYSE:CTX) Beazer Homes (NYSE:BZH) KB Home (NYSE:KBH) Pulte Homes (NYSE:PHM) MDC Holdings (NYSE:MDC) Lennar (NYSE:LEN) Meritage (NYSE:MTH) Ryland (NYSE:RYL) D.R. Horton (NYSE:DHI) Toll Brothers (NYSE:TOL) This group is tied to the bond market, which also brings into the picture Freddie Mac (NYSE:FRE). Just something to watch... The point and figure charts that appear in this column were created using www.StockCharts.com. Please send your questions and suggestions to: Contact Support ---------------------------- Providian Financial (NYSE:PVN) I became interested in P&F charting after seeing some examples in Option Investor since becoming a member some four months ago. I'm just a rookie so I decided to choose a stock that was previewed in one of OI's write ups. The stock is Providian Financial Corp (PVN). I've charted what looks like a bullish triangle breakout but I am not quite sure where to go from here. How can I get a good gauge on where the stock could go from here? Some words of wisdom from you would be helpful and any suggestions on some good reading material on the subject. - Thanks, Jeff Thanks for writing in, Jeff. Background Providian was the worst performing component of the S&P 500 during 2001. The stock lost 94 percent last year. It was once a high-flying favorite during the go-go years. The company pursued aggressive lending practices that carried its return on equity -- an important metric for financial firms -- as high as 40 percent. The company's trailing twelve month return on equity, in comparison, is a measly 5 percent. Compare that number to Citigroup (NYSE:C), for example, who sports about a 20 percent return. Although, Citigroup and Providian are diametrically opposed financial firms. Through its aggressive consumer lending, Providian accrued large amounts of debt; it over leveraged its balance sheet to the point of excess. Once the inflection was reached, the stock sold-off at an alarming rate. Last year's economic slowdown increased the number of defaults among the high-risk consumers that Providian lent to; high-ranking management departed; layoffs followed. So here we are today. Foreground The primary reason for the recent rebound in the stock is the improvement in economic conditions as revealed by the macro data. Of course the recent cheerleading has helped fuel the momentum in shares. Following its most recent quarterly report, Merrill Lynch upgraded shares based on the relatively better condition of the company's financial position and the prospects of profitability this year. Merrill was quick to note, however, that it will take several more quarters to definitively know if Providian will make it out of the current restructuring successfully. The company reported that it ended its fiscal year with about $2 billion in capital and about $2.4 billion in reserves. In other words, Providian is funded over the next six to nine months. The company has also completed recent asset sales and reneged its aggressive modis operandi. Part of the company's ongoing restructuring calls for an end to lending to high-risk consumers and instead focusing on what is known as the "middle-market segment" of the lending business. While efforts have been made to turnaround this ship, there's still much to prove. Turnaround When investigating Providian for a bullish position, either for investing or trading purposes, you're betting on a turnaround. No matter the time frame, you've got to believe that things will get better for this beaten down company. While some of the recent analyst reports suggest an improvement, it's interesting to note how much of a discount the stock still trades versus its peers. I ran some numbers on a few other consumer finance stocks to compare relative valuations. What I found is that Providian still trades at a discount to book value. Others in the group are trading at two, three, even four times book. Providian, in comparison, trades at about a 30 percent discount. But, does the recent completion of the bullish triangle indicate a turnaround? Technical Round From a pure risk level perspective, Providian has a lot of upside work and repair in store before one could conclude that the business has turned around. I've anchored a simple retracement bracket from last May's high up around the $61 mark to the low last fall around the $2 level. The next and first progression of upside risk isn't even present until the $13 area, or about $7 away from current levels. The way I see, there's about $6 of downside risk from current levels. Providian Daily Before we get to the bullish triangle pattern, I'd like to point out an ever more significant development in the last few months. Since January, Providian has gained a significant and very meaningful amount of relative strength versus the S&P 500 (SPX.X). Because it's such a low priced stock, a relatively small point move can translate into a larger percentage move relative to the S&P 500. Nevertheless, you can't rationalize away what the market's been saying recently about the stock and its gaining of relative strength. Providian versus The Market The bullish triangle that was written about by the reader was completed when the stock broke out above the $4.75 level. That was the best level to place bullish bets. (Use this move as an example in future operations.) Since the stock is well above its breakout point, we missed a lot of the move already. Yes, it's only $1.25, but in percentage terms, that was a big jump in the stock. From here, as long as relative strength stays positive, the bullish triangle pattern should hold and the stock could work higher. If you want to try a position here, I think you have to be willing to give up downside risk to the $3.50 level -- that's where the bullish triangle would be negated. I don't know what kind of probability this trade carries in light of the business prospects of the company. The best a trader can do is continue monitoring advancement in relative strength. If that metric flips, then it would beg caution on the part of bulls. Otherwise, trying a turnaround play here might make sense. The current vertical count is $9.50. Providian Bullish Triangle ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* ----------------------------------------------------------------- Major Earnings This Week... ----------------------------------------------------------------- Symbol Company Date Comment EPS Est CGA Corus Group plc Mon, Mar 18 -----N/A----- N/A DG Dollar General Mon, Mar 18 After the Bell 0.23 ESIO Electro Scientific Ind Mon, Mar 18 After the Bell -0.01 KPN Koninklijke KPN Mon, Mar 18 -----N/A----- N/A PETC Petco Animals Mon, Mar 18 After the Bell N/A PFP Premier Farnell Mon, Mar 18 -----N/A----- N/A FDO Family Dollar Stores Tue, Mar 19 Before the Bell 0.36 GPN Global Payments Tue, Mar 19 After the Bell 0.26 GS Goldman Sachs Tue, Mar 19 Before the Bell 0.89 IPR International Power Tue, Mar 19 -----N/A----- N/A JBL Jabil Circuit Tue, Mar 19 After the Bell 0.07 MKC McCormick & Co Tue, Mar 19 -----N/A----- 0.45 PAYX Paychex Tue, Mar 19 -----N/A----- 0.18 RHAT Red Hat Tue, Mar 19 After the Bell 0.01 PKS Six Flags, Inc. Tue, Mar 19 After the Bell -1.02 ATYT Technologies Wed, Mar 20 -----N/A----- 0.06 SID Companhia Siderur Nac Wed, Mar 20 -----N/A----- 0.71 FDX FedEx Corp Wed, Mar 20 Before the Bell 0.36 LEN Lennar Wed, Mar 20 Before the Bell 0.99 NDC NDCHealth Wed, Mar 20 After the Bell 0.34 WGO Winnebago Wed, Mar 20 Before the Bell 0.41 WOR Worthington Industries Wed, Mar 20 -----N/A----- 0.12 COMS 3Com Thu, Mar 21 After the Bell -0.16 BKS Barnes&Noble Thu, Mar 21 Before the Bell 1.33 CCL Carnival Thu, Mar 21 Before the Bell 0.14 DRI Darden Restaurants Thu, Mar 21 -----N/A----- 0.49 EON E.ON AG Thu, Mar 21 -----N/A----- N/A FTE France Telecom Thu, Mar 21 Before the Bell N/A GUC Gucci Group NV Thu, Mar 21 -----N/A----- 0.62 KBH KB Home Thu, Mar 21 -----N/A----- 0.79 LWSN Lawson Software, Inc. Thu, Mar 21 After the Bell 0.04 NKE Nike Thu, Mar 21 -----N/A----- 0.45 PALM Palm Thu, Mar 21 After the Bell -0.04 SLR Solectron Thu, Mar 21 After the Bell 0.03 TECD Tech Data Thu, Mar 21 Before the Bell 0.61 BMET Biomet Fri, Mar 22 Before the Bell 0.24 TKA TELEKOM AUSTRIA AG Fri, Mar 22 -----N/A----- N/A ================================================================= Upcoming Stock Splits This Week & Next... Symbol Company Name Ratio Payable Executable SMD Singing Machine 3:2 03/15 03/18 ICUI ICU Medical 3:2 03/15 03/18 ELMS Elmers Restaurants 21:20 03/21 03/22 FELE Franklin Electric CO 2:1 03/22 03/25 YDNT Young Innovations 3:2 03/28 04/01 ESCA Escalade 3:1 03/28 03/29 DWL DeWolfe 3:2 03/28 03/29 TOL Toll Brothers 2:1 03/28 04/01 ================================================================= Economic Reports As the markets march into the last two weeks of the month and the end of the first quarter a lot of eyeballs on Wall Street will be watching the CPI numbers on Friday. However, the beginning of the week will hold investor attention with the Tuesday FOMC meeting. ================================================================= Monday, 03/18/02 None Tuesday, 03/19/02 Trade Balance (BB) Jan Forecast:-$26.9B Previous: -$25.3B FOMC Meeting (DM) Wednesday, 03/20/02 Housing Starts (BB) Feb Forecast: 1.630M Previous: 1.678M Building Permits (DM) Feb Forecast: 1.650M Previous: 1.706M Treasury Budget (DM) Feb Forecast:-$61.0B Previous: -$48.2B Thursday, 03/21/02 Initial Claims (BB) 03/16 Forecast: N/A Previous: 377K CPI (BB) Feb Forecast: 0.2% Previous: 0.2% Core CPI (BB) Feb Forecast: 0.2% Previous: 0.2% Leading Indicators (DM) Feb Forecast: 0.3% Previous: 0.6% Philadelphia Fed (DM) Mar Forecast: 17.8 Previous: 16.0 FOMC Minutes (DM) 01/30 Friday, 03/22/02 None Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************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 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-17-2002 Sunday 2 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** INDEX TRADER GAMEPLANS ********************** Index Trader Swing-Trade Game Plan: Saturday 3/16/2002 Poised & Waiting For Action News & Notes: ------------ Indexes pushed higher off the open on Friday and drifted sideways from there. That didn't offer much in the way of breath-taking trades then, but we have points of reference to work with for Monday ahead: Featured Markets: ---------------- [60/30-Min Chart: OEX] S&P and Dow indexes are wedged up in little bullish triangles ready to pop from here. We saw bearish triangles fail to confirm and pop higher in bullish fashion Friday... can the reverse be what happens Monday? After several small-range sessions this week a big one should be next, so stay long above these patterns and short below to attempt catching the next big move. With April option contracts in their first days of front-month cycle, theta values are high right now but vega is low. This means solid gains can accrue on decent moves right from Monday's bell should that begin to occur. [60/30-Min Chart: SPX] Ditto the SPX (and DJX) with playing either side of the pattern. Chart signals favor the downside soon but markets keep grinding higher regardless. Play either way and watch for failure near resistance on the upside or a bounce near support on the downside. [60-Min Chart: QQQ] The Qs will move above 37.50 or below 37.00 with emphasis in the next few sessions. Staying on the proper side of each pivot should allow us to catch a significant move ahead. Summation: ---------- Friday's artificial action makes Monday tough to read. Be prepared to play either direction and drop one quickly for the other. I would not chase any large gap-open moves off the bell without reassessing the situation after 9:30am myself. These are the guidelines I intend to follow subject to change when Monday a.m. rolls around. Index Trader Sector-Trade Game Plan: Saturday 03/16/2002 -------------------------------------------- Expiration Cleared News & Notes: ------------ Friday was a relative non-event and Monday next will resume what we hope to be the next directional action. We'll wait for that session to clear and see what entries shape up from there. Charts remain mixed and somewhat non-descript tonight. 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: --------------- None 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 XLE Long: 26.75 Stop: 28.50 *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week HON 40.00 0.26 0.06 0.06 0.53 0.15 Dropped ETN 83.20 1.00 -1.14 -0.21 0.80 -0.27 Dropped ACS 53.04 0.46 -0.52 0.39 0.01 0.80 Trending BAC 69.18 -0.08 0.25 -0.45 -0.55 1.35 Breakout! CHIR 47.48 0.01 -0.64 0.15 -0.02 -0.01 Dropped DCN 21.75 0.51 0.47 -1.07 1.05 1.23 New high SYMC 41.46 -0.15 -0.07 0.51 -1.29 -0.49 Holding IDPH 69.93 -1.33 0.22 2.93 -1.09 2.34 Watch $70 CEPH 67.37 1.68 -1.01 0.29 1.41 3.43 Leading GENZ 50.01 0.00 0.35 0.91 1.22 3.65 New, bio-run COF 62.05 2.41 0.17 -1.44 0.17 3.59 New, break KSS 71.35 0.51 0.85 -0.25 1.03 3.42 New, highs PUTS CTX 57.89 0.86 0.99 -1.24 -1.68 -1.58 Rolling EMLX 27.88 -2.80 -0.36 -0.47 -1.83 -6.93 Breaking NVDA 52.77 -0.68 -3.02 -0.99 -2.97 -5.52 Bounced RYL 88.70 1.42 -0.37 -2.12 -1.82 -4.75 Breakdown CCMP 63.30 -0.25 -8.37 -0.77 -1.66 -9.72 Bounced ISSX 28.20 1.31 -0.65 -0.77 0.58 -0.51 New, failed XAU.X 61.92 1.65 1.46 -1.80 0.25 1.02 New, deflate ************************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 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* COF - Capital One Financial $62.05 (+3.59 this week) See details in play list Put Play of the Day: ******************** ISSX – Internet Security Systems $28.20 (-0.51 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ HON $40.00 (+0.15) Was it any coincidence that HON closed last Friday - expiration Friday - at $40? The level proved more of a magnet in last Friday's session, which is why we're dropping coverage this weekend. The stock traded around the $40 level all of last week and may now be in danger of pulling back in a post-expiration type trade. Traders with open positions should look to exit plays early next week on any signs of strength in the Dow Jones Industrial Average ($INDU). ETN $83.20 (-0.27) ETN pulled back on relatively lighter volume in last Friday's session despite the new slate of positive economic data and the rise in the Dow Jones Industrial Average ($INDU). The stock's inability to rise under those conditions last week may reveal that it's tired in the short term and may be due for a period of consolidation. Because of that potential risk, we're dropping coverage this weekend. Look to close positions early next week. CHIR $47.48 (-0.01) The AMEX Biotechnology Sector Index (BTK.X) broke out in last Friday's session, finishing 2.38% higher for the day. Despite the BTK.X's strength last Friday, CHIR was unable to get its act together and stage a breakout of its own. In fact the stock failed to trade up to the $49 level, falling just short at the $48.73, the intraday high. The subsequent pullback has us worried and instead of waiting around, we're electing to drop coverage on this play this weekend in favor of a stronger biotech. PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-17-2002 Sunday 3 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** NEW CALL PLAYS ************** COF - Capital One Financial $62.05 (+3.59 this week) Capital One Financial Corporation is a holding company whose subsidiaries provide a variety of products and services to consumers using its proprietary information-based strategy. The Company's principal subsidiary, Capital One Bank, a limited purpose credit card bank, offers credit card products. Capital One, F.S.B., a federally chartered savings bank, offers consumer lending and deposit products. The credit concerns that have plagued many financial concerns appear to be subsiding. The KBW Bank Sector Index (BKX.X) was higher by 2.42% in last Friday's session, reflecting the renewed optimism surrounding financial shares. The recent action in the bond market lends to the market's warming up to financial stocks. We've seen a dramatic sell-off in Treasuries over the last several weeks as money leaves the safety of the bond market as perceived risks associated with stocks have diminished. That action has helped several consumer financial stocks higher, which had previously been a favorite target of the bears. COF was a stock that was heavily shorted during the first part of this year on expectations of increasing defaults. Those expectations were wrong as a recent round of short covering has broken COF out above its resistance. The stock continued higher in last Friday's session and is poised to test its relative highs on further buying. Traders looking for momentum based entries can turn to the sentiment in the banks early next week. Further strength in the BKX.X would offer trend traders entry points into COF plays at current levels. Traders who prefer the pullback game can look for market related weakness down back to the $60 level. Further weakness should be met by buying demand at the rising 10-dma at $58.85. Our stop is initially set below that level at $58. BUY CALL APR-60*COF-DL OI=2395 at $4.70 SL=2.50 BUY CALL APR-65 COF-DN OI= 791 at $2.10 SL=1.00 BUY CALL JUN-65 COF-FM OI= 996 at $4.10 SL=2.00 BUY CALL JUN-70 COF-FN OI= 846 at $2.60 SL=1.75 Average Daily Volume = 3.03 mln KSS - Kohl's $71.35 (+3.42 last week) Kohl's Corporation currently operates 354 family oriented, specialty department stores that feature quality, national brand merchandise priced to provide value to customers. The Company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Friday's consumer data spurred another rally in consumer tied stocks. The S&P Retail Sector Index (RLX.X) broke to a new yearly high. It was a continuation of the trend in the RLX.X that has been in place for several months. The retail group of stocks remains one of the strongest in the broader market. Leading retailers are breaking out to new 52-week highs with ease. Kohl's represents one of the leading names in the group and also hit a new high in last Friday's session. Over the longer term, KSS has been in a consolidation since early 2001, during which time it has traded in a wide range marked by a top around the $70 to $71 levels. It appears that the top has been broken and the stock could enter into a new ascending trend over the near term. Volume spiked up in last week's advance as it looked like big buyers were stepping up to the plate. The stock needs only to advance past the $72 mark to reveal a full fledged breakout. Traders can look for that move early next week on continued strength in the RLX.X. A positive RLX.X and broader market as well as KSS above $72 would be the recipe for an entry point into strength. A pullback down into the $70 range would offer entries on weakness in the retail group. Our stop is initially in place at $68.50. BUY CALL APR-70*KSS-DN OI=2830 at $4.00 SL=2.25 BUY CALL APR-75 KSS-DO OI=3553 at $1.40 SL=0.75 BUY CALL JUL-75 KSS-GO OI= 906 at $4.20 SL=2.50 BUY CALL JUL-80 KSS-GP OI=1137 at $2.40 SL=1.25 Average Daily Volume = 1.69 mln GENZ – Genzyme General $50.01 (+3.63 last week) Genzyme General, a division of Genzyme Corporation, is focused on developing innovative products and services to solve major unmet medical needs. GENZ has nearly 600 products and services on the market and a strong pipeline of therapeutic products for the treatment of rare genetic diseases. The Diagnostics business unit develops, markets and distributes in vitro diagnostic products and genetic testing services. With a solid, profitable revenue base, this research is intended to maintain the company’s high rate of earnings growth. After culminating a major decline in early February, the Biotech index (BTK.X) has been in the process of repair for the past several weeks. From the looks of things, the bulls are going to win this one, at least if the action of the BTK is any indication. Friday's action was very encouraging with the index moving to close at its highest level in nearly 2 months. This bullish action was underpinned by the likes of GENZ, which moved out of the February consolidation zone to close just above the $50 level. The movement in the stock and the sector looks solid, especially when taken together with the new double-top breakout on the PnF chart that is now forecasting a rise to the $65 level over the long term. But that level is a ways off, and with the daily Stochastics topped out in overbought, we need to be careful in picking our entries. Ideally, we'll see a bit of profit taking early next week that will give us an entry on a rebound from the $47.50-48.00 area (the top of the recent consolidation). Barring that, we would settle for either a dip and bounce from intraday support at $49 or a volume-backed rally that pushes through the $50.25 level. We're likely to see some mild resistance near $51.25 and then heavier resistance at $52.50-53.00. Those resistance levels could provide the catalyst for some profit taking to allow us to enter on a dip for the next leg higher. We're initiating the play with our stop set at $47. BUY CALL APR-50*GZQ-DJ OI=2905 at $3.20 SL=1.50 BUY CALL APR-55 GZQ-DK OI=1889 at $1.35 SL=0.75 BUY CALL JUL-50 GZQ-GJ OI= 376 at $6.10 SL=4.00 BUY CALL JUL-55 GZQ-GK OI=1580 at $3.70 SL=2.25 Average Daily Volume = 4.80 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** IDPH - IDEC Pharmaceuticals $69.93 (+2.34 last week) IDEC Pharmaceuticals Corporation is a biopharmaceutical company engaged primarily in the research, development and commercialization of targeted therapies for the treatment of cancer and autoimmune and inflammatory diseases. The company's first commercial product, Rituxan, and its most advanced product candidate, ZEVALIN (ibritumomab tiuxetan), are for use or intended for use in the treatment of certain B-cell non-Hodgkin's lymphomas (B-cell NHLs). We finally saw the breakouts in the AMEX Biotechnology Sector Index (BTK.X) and IDPH last Friday that we've been waiting for. IDPH, after its brief pullback in last Thursday's session, traded higher in Friday's session up to the $70 level in the final hour of trading. The stock's price action tracked its sector very closely as the BTK.X rose into the close last Friday. The move up to $70 could have had traders entering new call plays in IDPH. For those who took the entries, you can use a very short term target up between the $72 and $73 levels early next week. With momentum building in the BTK.X, it's reasonable to expect IDPH to retest its relative highs in short order. Very short term traders can look to exit for quick profits on a pop higher early next week. Those who have a longer time horizon can watch for IDPH to stage a big breakout above its relative highs, which would come on an advance past the $74 level. Such a breakout should have the stock poised to retest its all time high up around the $77 mark. From there, it's blue skies beyond. In terms of new entry points, traders can use an advance past $70 early next week to enter new plays. Those still waiting for a pullback down in the $67 to $68 range can look for a trade down to and subsequent rebound from the 10-dma next week. The 10-dma currently sits at the $67.73 mark. BUY CALL APR-60 IHD-DL OI=1507 at $12.20 SL=9.50 BUY CALL APR-65*IHD-DM OI=3508 at $ 8.00 SL=6.00 BUY CALL APR-70 IHD-DN OI=5408 at $ 4.70 SL=3.00 BUY CALL JUL-65 IHD-GM OI=2654 at $12.00 SL=9.25 BUY CALL JUL-70 IHD-GN OI=3039 at $ 8.90 SL=6.00 Average Daily Volume = 3.65 mln DCN - Dana Corp. $21.90 (+1.11 last week) Dana Corporation is an independent supplier of components and systems to vehicular manufacturers and related aftermarkets. The Company's operations are comprised of its Automotive Systems Group, Automotive Aftermarket Group, Heavy Truck Group, Engine Systems Group, Fluid Systems Group, and Off-Highway Systems Group. The Company also is a provider of lease financing services in selected markets through its wholly owned subsidiary, Dana Credit Corporation. The news flow from Dana has been relatively quiet in the last week. The stock has instead continued to trade off of the strength in the broader automotive sector as well as the positive economic news. General Motors (NYSE:GM) and Daimlerchrysler (NYSE:DCX) continue to trade incredibly well relative to the broader market. Those two stocks can be used as sector gauges for the broader automotive sector, which DCN is linked to. DCX broke out of its trading range in a big way in last Friday's session and on big volume too. That move in DCX could portend further upside for our play in DCN. For its part, our play traded up to a new relative high in last Friday's session before pulling back on normal profit taking later in the day. The stock's advance up to a new relative high in last Friday's market revealed the relative strength that is working in its favor. But traders still need to be careful with finding new entry points into this play. As we saw last Friday when the stock broke out above its short term resistance, it then pulled back. With that lesson behind, waiting for a pullback to support may be the better entry approach currently. Traders can look for a pullback starting next week down to the 10-dma, which is currently pegged at the $20.90 level. Though DCN hasn't traded down to its 10-dma since early February, it could bounce on its first test of that support line next week. If the stock fails to rebound from its 10-dma on any market related weakness, then traders can look for a trade down to the $20 level where the buyers should emerge. BUY CALL APR-17 DCN-DW OI=1153 at $4.90 SL=3.75 BUY CALL APR-20*DCN-DD OI= 503 at $2.85 SL=1.50 BUY CALL APR-22 DCN-DX OI= 329 at $1.30 SL=0.50 BUY CALL JUL-20 DCN-GD OI= 465 at $3.70 SL=2.00 Average Daily Volume = 891 K SYMC - Symantec $41.46 (-0.49 last 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. A report issued by Sun Trust Robinson Humphrey last Friday suggested that demand for security software was improving, although there were still signs of isolated weakness in certain segments and that competition was increasing. The vast majority of replies to the survey implied that demand had stabilized. While the report didn't inspire a breakout in SYMC last Friday, it helped to reinforce the relative strength with which the stock continues to trade. The negative news from the broader software sector late last week may have contributed to SYMC's inability to breakout from its recent trading range. On the positive side, the buyers stepped up to the plate at the $40 level last Friday to prop up SYMC. We were certainly pleased to see the stock rebound from the $40 level and not breakdown below its support. Hopefully traders used that dip as an opportunity to enter new call plays on weakness. If you did buy the dip, make sure to use a tight stop to protect against downside. Our coverage stop remains in place at the $40 level, with a close below resulting in a drop of coverage. If the broader tech sector gets moving higher in next week's trading, then we should see the Software Sector Index (GSO.X) participate. That should trickle into SYMC, when we'll be looking again for the breakout above the $43 level. An advance above $43 should inspire another round of short covering and free SYMC to trade higher in the short term. Momentum and breakout traders can simply look for a positive Nasdaq and GSO.X and look for a high volume breakout in SYMC above the $43 level. BUY CALL APR-40 SYQ-DH OI=11031 at $3.80 SL=2.75 BUY CALL APR-42*SYQ-DV OI= 1478 at $2.50 SL=1.50 BUY CALL APR-45 SYQ-DI OI= 1693 at $1.50 SL=1.00 BUY CALL JUL-45 SYQ-GI OI= 610 at $3.80 SL=2.25 Average Daily Volume = 1.90 mln CEPH - Cephalon $67.37 (+3.43 last week) Cephalon, Inc. is an international biopharmaceutical company focused on the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In the United States, the Company markets three products, Provigil (modafinil) Tablets [C-IV] for treating excessive daytime sleepiness associated with narcolepsy, Actiq (oral transmucosal fentanyl citrate) [C-II] for the management of cancer pain in opioid tolerant patients, and Gabitril (tiagabine hydrochloride) for the treatment of partial seizures associated with epilepsy. Last Friday, Ricera announced that it would take on the production of one of Cephalon's drugs under development. The news didn't have much impact on Cephalon as the stock continued higher along with the AMEX Biotechnology Sector Index (BTK.X). The BTK.X broke out from its two month trading range in last Friday's session by advancing past the 525 level and through 530. The BTK.X could face resistance at its 200-dma, which currently rests overhead at the 538 level. A breakout above the 200-dma could have the BTK.X poised to trade up to the 550 level. Pay close attention to how the BTK.X trades early next week as CEPH usually tracks its sector very close. An advance in the BTK.X above current levels and through the 200-dma would allow momentum traders to take entries in CEPH at current levels. Traders wanting confirmation before entering into strength can look for a trade past the $68 level. Did you notice that last Friday's high was set at $67.99? An advance past $68 would confirm the stock's recent momentum. If CEPH can clear the $68 level and the BTK.X continues building momentum, then we should see the stock work its way up to the low $70s in the short term. We will target the $73 level specifically in the short term on a move past the current hurdle at $68. If however the BTK.X pulls back on profit taking early next week, we'd look to enter new CEPH positions on a pullback to support. A good spot to target an entry point on weakness would be at the $65 level. BUY CALL APR-65 CQE-DM OI=2993 at $6.60 SL=4.75 BUY CALL APR-70*CQE-DN OI=2589 at $3.80 SL=1.75 BUY CALL MAY-65 CQE-EM OI= 672 at $8.30 SL=6.50 BUY CALL MAY-70 CQE-EN OI=2225 at $5.40 SL=3.75 Average Daily Volume = 2.43 mln ACS – Affiliated Computer Services, Inc. $53.04 (+0.80 last week) ACS is a global Fortune 1000 company that delivers comprehensive business process outsourcing and information technology outsourcing solutions, as well as system integration services, to both commercial and federal government clients. After rocketing higher in late February, shares of ACS have been stubbornly wedging their way higher for the past 2 weeks and look tantalizingly close to breaking out again. Thursday's move to the $54.50 had bulls slobbering all over themselves, thinking that the breakout was already here. But the sharp drop back from that level is giving us another opportunity to get on board before the train leaves the station. That is, assuming that the broad markets cooperate and the bulls actually can manage the breakout. The PnF chart is ready to give us that bullish signal, but it isn't there yet. Sure we had the triple-top breakout at $49 in February, but what we're really focused on here is the double top at $54. If ACS prints $55, it will be a new all time high and a fresh PnF buy signal. While we wait, establishing new positions on renewed bounces near the $52 support level looks like the best entry strategy. We're keeping our stop at $51.50, as that level has been consistently providing support of late. BUY CALL APR-52 ACS-DT OI= 958 at $3.30 SL=1.75 BUY CALL APR-55 ACS-DK OI=1961 at $1.80 SL=1.00 BUY CALL JUL-55 ACS-GK OI= 317 at $4.10 SL=2.50 BUY CALL JUL-57 ACS-GA OI= 525 at $3.20 SL=1.50 Average Daily Volume = 911 K BAC – Bank of America Corp. $69.18 (+1.35 last week) Providing a diversified range of banking and certain non-banking financial products and services, BAC's operations consist of Consumer Banking, Commercial Banking, Global Corporate and Investment Banking, and Principal Investing and Asset Management. Consumer Banking targets individuals and small businesses, while Commercial Banking targets businesses with annual revenues up to $500 million. Global Corporate and Investment Banking provides investment banking, trade finance, treasury management, leasing and financial advisory services. Principal Investing includes direct equity investments in businesses and general partnership funds, while the Asset Management businesses are split into three branches; Private Bank, Banc of America Capital Management and Banc of America Investment Services. One of the best performing sectors on Friday, the S&P Banks index (BIX.X) managed to give new life to the current broad market rally with a 2.7% advance. This pushed the BIX through more than 2 years of resistance to its highest close since early July of 1999. As one of the better performing bank stocks over the past month, BAC took advantage of this sector strength and blasted through the $68 resistance level to set its own multi-year high, closing above the $69 level for the first time since July of 1999. That looks an awful lot like the Financial stocks are attempting to confirm that this rally in the broad market is for real. Critics that are asking how much longer this can continue need only look at BAC's PnF chart, which is currently in a long column of X's, that is forecasting that the stock could eventually test the $90 level. Well, that isn't likely to happen over the near term, but it certainly is a nice target to shoot for. Over the near term, there is some mild resistance at $70, and then solid resistance up at the $75-76 area from the early part of 1999. Should profit taking occur, use the dip to initiate new positions on a bounce from nearby support in the $67-68 area. We are moving our stop up to the $66.75 level. BUY CALL APR-65 BAC-DM OI= 9009 at $5.30 SL=3.25 BUY CALL APR-70*BAC-DN OI=13019 at $1.90 SL=1.00 BUY CALL MAY-70 BAC-EN OI=27226 at $2.70 SL=1.25 BUY CALL MAY-75 BAC-EO OI=11665 at $0.80 SL=0.25 Average Daily Volume = 5.69 mln ************* NEW PUT PLAYS ************* ISSX – Internet Security Systems $28.20 (-0.51 last week) Internet Security Systems is a global provider of security management solutions for protecting e-business. The company's Adaptive Security Management approach to information security protects distributed computing environments from attacks, misuse and security policy violations, while ensuring the confidentiality, privacy, integrity and availability of proprietary information. ISSX delivers an end-to-end security management solution through its SAFEsuite security management platform coupled with around-the-clock remote security monitoring through the company's managed security services offerings. Internet Security stocks are not the momentum stocks they once were, and all of the residents of this group are trading at mere shadows of their former selves, having posted a long series of lower highs and lower lows over the past 2 years. Despite the attempted rally in this group in early March, it looks like the bears are back to their old tricks, working to put the top in on another failed rally. Shares of ISSX actually managed to move up to the $32 resistance level last Monday afternoon before falling back for the remainder of the week, culminating with a sharp selloff on Friday. Volume ran well above average as the stock shed 6.5% of its value to end the week right on the $28 support level. Despite the existence of this support level, ISSX looks like an attractive short right here due to the heavy resistance in the $30-31 area and daily Stochastics that are now in full bearish decline. While we would love to get a bounce back up to the $30 level to allow for solid entries, we may have to settle for a rollover near $29. On the downside, a drop below $27 could make for a decent entry, but look out for support at $26 and then $25, both of which are areas where the bulls might try to take a stand. Look for bearish confirmation in the trading of other Internet Security stocks like VRSN and RSAS. Stops are currently in place at $32. BUY PUT APR-30 ISU-PF OI=778 at $4.80 SL=3.00 BUY PUT APR-25 ISU-PE OI=277 at $2.50 SL=1.25 Average Daily Volume = 2.62 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-17-2002 Sunday 4 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** CURRENT PUT PLAYS ***************** XAU.X - Gold and Silver Index 61.92 (+1.02 last week) The PHLX Gold & Silver Sector (XAU.X)(SM) is a capitalization weighted index composed of the common stocks of 9 companies involved in the gold and silver mining industry. XAU.X (SM) was set to an initial value of 100 in January 1979; options commenced trading on December 19, 1983. Gold stocks have been among the better performing equities in the market this year. But that trend may reverse over the short term. The recent pullback in the gold equities has tracked the move in the commodity. The price of gold (GC02M) closed last Friday at $291.20 per ounce, well off of its recent highs above the magical $300 per ounce level. The metal appears to have more downside ahead in the short term as do the equities. There are two reasons for the recent pullback in gold, which are just the opposite factors involved during the group's recent rally. First, inflation appears under wraps, especially after last Friday's wholesale data revealed. Second, the recovery underway in the economy is taking money away from some of the defensive sectors of the market such as metals. The growing momentum in stocks could continue to pressure gold shares over the next three to four weeks, making the short term downside potential in the gold sector attractive from a trading perspective. In trading the downside, we're choosing the XAU.X. For an index, the options on the XAU.X are very liquid. The spreads are manageable and the open interest in the at the money contracts is more than adequate to accommodate a short term trade. Traders looking to get short the XAU.X can look for rollovers from current levels early next week. Confirmation of weakness would come on a decline below the 60 level. We're targeting 57 to the downside, where we'd look to book gains. Our stop is in place at $65. BUY PUT APR-65*XAU-PM OI=1088 at $4.90 SL=3.00 BUY PUT APR-60 XAU-PL OI= 423 at $2.15 SL=1.00 Average Daily Volume = N/A CCMP - Cabot Microelectronics $64.63 (-9.72 last week) Cabot Microelectronics is a supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization (CMP). CMP is a polishing process used by IC device manufacturers to flatten many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. After retracing exactly 50% of their rally from the prior week, Semiconductor stocks (as measured by the SOX index) were due for a bounce and they got exactly that on Friday, with the SOX advancing to the tune of 2.65%. That, more than anything else was the likely culprit behind CCMP's ability to find support near the $63 level. But there certainly wasn't much conviction behind the move, as the $65 resistance level kept the rally in check and we saw a slight weakening going into the closing bell. The tight range in the stock over the past few days gives us some workable entry points going forward. A failed rally below the $67 level is one entry possibility, and the other is a volume backed drop below the $63 level. Hopes for a sharp rebound in the Semiconductor business are starting to wane, and that unwinding of enthusiasm should drive the stock back towards the $58 support level over the near term. Our stop remains at $67.50, just above recent resistance. BUY PUT APR-65 UKR-PM OI=580 at $5.40 SL=3.25 BUY PUT APR-60*UKR-PL OI=826 at $3.50 SL=1.75 BUY PUT APR-55 UKR-PK OI=662 at $2.05 SL=1.00 Average Daily Volume = 1.21 mln CTX - Centex Corporation $57.89 (-1.58 last week) The top home builder in the U.S., CTX operates in 20 states and Washington DC, as well as in Latin America and the UK. The company builds almost 19,000 homes a hear with an average price tag of $190,000 for both first-time and move-up buyers. The company has subsidiaries that offer home security systems and pest-control services, as well as construction contracting for hospital, school, office building and hotel projects. Rounding out the picture, CTX has interests in land development, mortgage banking, commercial real estate, and construction supply manufacturing. The incredible boom in housing stocks over the past several months seems to be waning, at least if the action of the DJ US Home Construction index (DJUSHB) is any indication. After topping out near the $380 level earlier this month, supply appears to be taking control. Since then the index has waffled sideways and in the past few days has moved significantly lower, breaking the $358 support level on Friday. Shares of CTX have followed a similar pattern, topping out near $63 earlier this month and then breaking support just above $58 on Friday. While bulls may point to the afternoon rebound off the lows, they were unable to overcome the gap down open and ended the session fractionally lower and below the 20-dma ($58.04) for the first time in almost a month. Look for failed rallies to provide the best entry points, ideally in the $59-60 area. Of course continued weakness can also be used for initiating new positions as the stock falls below the $56.50 level on its way to testing stronger support near $53. Our stop is currently set at $61.50. BUY PUT APR-60 CTX-PL OI= 171 at $4.50 SL=2.75 BUY PUT APR-55*CTX-PK OI=1514 at $2.15 SL=1.00 Average Daily Volume = 962 K EMLX - Emulex Corporation $27.88 (-6.93 last week) A leading networking company, EMLX designs, builds and distributes three types of connectivity products: network access servers, printer servers, and high-speed fibre channel products. It's fibre channel products, which are based on internally developed ASIC technology, are deployable across a variety of network configurations and operating systems to support increasing volumes of stored data. EMLX sells its products directly throughout the world to OEMs and end users, as well as through system integrators and industrial distributors. "Help! I've fallen and I can't get up!" So goes the cry of EMLX, which is badly underperforming just about any measure of the market that you can come up with. The stock's most recent rally attempt failed at the $38 level a couple weeks ago, and it has been a rather swift descent since then. We've been riding this sled lower this week and we're pretty happy with the results this far. The big question is how much more pain the bears are determined to inflict on the stock. Friday's action was predictably quiet after the opening plunge due to expiration Friday and the fact that EMLX had reached the 50% retracement of its fall rally near $28. This looks like a temporary resting point, and we could be due for a bit of an oversold bounce. But that will likely set us up for a solid entry on the next failed rally, likely in the vicinity of $30-31. If the stock doesn't bounce here, then we can initiate fresh positions as the decline continues, with entries triggered on a break of Friday's intraday lows near $27.50. Watch for support to materialize near $26 (an area of support back in November), but once that level is broken EMLX bears will be setting their sights on the $19-20 level. We have moved our stop down to $31.50. BUY PUT APR-30 UMQ-PF OI=1649 at $4.90 SL=3.00 BUY PUT APR-27*UMQ-PY OI= 448 at $3.70 SL=2.25 BUY PUT APR-25 UMQ-PE OI=1967 at $2.60 SL=1.25 Average Daily Volume = 9.49 mln NVDA - NVIDIA Corporation $52.77 (-5.52 last week) NVIDIA Corporation designs, develops and markets 3D graphics processors, graphics processing units and related software that set the standard for performance, quality and features for every type of desktop personal computer user. Used in a wide variety of application including games, the Internet and industrial design, the company's products were the first to incorporate a 128-bit multi-texturing graphics architecture. This design approach delivers to users a highly immersive, interactive 3D experience with compelling visual quality and stunning effects at real-time frame rates. NVDA sells its products to major PC manufacturers such as Compaq, Dell, Gateway, Hewlett-Packard and IBM. Who says there isn't any merit to technical analysis? Just like we expected, shares of NVDA rebounded on Friday right where we said they would, at the $50 support level (actually $50.02, but that's splitting hairs). We have been focusing on NVDA a lot recently, as the stock has fallen out of favor since being the darling Chip stock of 2001. Since the first of the year, the stock has posted a series of lower highs and lower lows, and judging by the PnF chart, the bears aren't done yet. The PnF price target is currently $42 and that could be achieved rather quickly once the $49 level is pierced. It has acted as support recently and momentum traders will want to wait for a drop below this level before initiating new positions. The fly in the ointment is the Semiconductor index (SOX.X) which began to rebound rather sharply on Friday. If that rebound continues, then we'll need to be looking for entries when NVDA rolls over. Ideally that would occur in the $53-54 area as the bulls run out of steam. We've tightened our stop to the $54.50 area, so a rally and close above that level will clearly be cause for closing down the play. BUY PUT APR-55*RVU-PK OI=5204 at $5.80 SL=3.75 BUY PUT APR-50 RVU-PJ OI=3773 at $3.50 SL=1.75 Average Daily Volume = 9.53 mln RYL - The Ryland Group $88.70 (-4.75 last week) The Ryland Group is a homebuilder and mortgage-finance company that has built more than 175,000 homes. Additionally, the Ryland Mortgage Company (RMC) has provided mortgage financing and related services for more than 155,000 homebuyers. Currently, Ryland homes are available in more than 260 communities in 21 markets across the United States. It has been quite the bullish run for housing stocks over the past several months, but now talk is resurfacing that this group might be the site of the last great bubble. Real estate prices have escalated significantly this past year even with the economy in recession and housing numbers have been setting records for months. Investors seem to be thinking that maybe this tree can not grow to the sky and you can see their trepidation in the chart of the DJ US Home Construction index (DJUSHB) which appears to be rolling over from its all-time highs. We're seeing the same sort of action in shares of RYL, as the stock is rolling over from its own all-time highs near $97. Since hitting that peak a bit more than a week ago, the stock has given up more than 9% and the selling volume is on the rise. Friday's action saw RYL fall to $88 before finding some mild support and hold just above the 20-dma ($88.94) at the closing bell. But that doesn't change the overall picture, and that picture is pointing to more downside action ahead. We've seen two double-bottom breakdowns on the PnF chart in the past week, and the current column of O's portends a visit to the $79 level. That corresponds very nicely with historical support in the $79-80 level. A drop to that level will obviously make for a great opportunity to lock in our gains. In the meantime, use intraday bounces to initiate new positions as the stock rolls over (now likely at $90 and then a bit higher at $91.50-92.00). Traders looking for a fresh breakdown to trade will want to wait for RYL to drop below the $88 level before opening new positions. Move stops down to $92.50. BUY PUT APR-90 RYL-PR OI=103 at $5.50 SL=3.50 BUY PUT APR-85*RYL-PQ OI=175 at $3.60 SL=1.75 Average Daily Volume = 454 K ************************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 ************************************************************** ***** LEAPS ***** Expiration Week Ends On A Positive Note By Mark Phillips Contact Support As expiration weeks go, this one was pretty sedate, with the major indices failing to move very far off of their starting point on Monday. Sure there was some chop up and down throughout the week, but by the time Friday's closing bell rang, neither the bulls nor the bears had much to show for their efforts. The DJIA has been leading the bullish charge in recent weeks, but even the "old economy" (can you believe I'm still using that moniker?) index only managed a paltry 35-point gain for the week. The NASDAQ Composite, which has been acting like the tail of the snake in responding to prospects that the economy actually is in recovery mode, actually went the other way, losing 61 points to keep the S&Ps pinned under resistance for another week. And what of the pesky VIX? It spent another week inching its way lower, as it is prone to do from time to time. Dipping to close at 20.77 on Friday, it marked the lowest level for the VIX since last July when it hit 20.26. Much has been said about the VIX and there are numerous opinions out there as to what constitutes a low reading and just what to make of such a low reading. Here's my interpretation, along with why I pay such close attention to it when in the pursuit of LEAPS trades. Historically, the VIX meanders between roughly 20-30. It can exceed the 30 level as we have seen several times in recent years. When it does spike it can very quickly run into the 40-60 range before the unbridled pessimism runs its course. On the other side, there is nothing magic about the 20 level. It is just that it is near the lower end of the historical range. It is not without precedent for the VIX to drift along in the 18-20 range for weeks or even months at a time. But like all things, the VIX eventually wants to return to the mean. There are 2 things that I have never seen as it relates to the VIX. I have never seen a low VIX be followed by a powerful and sustained rally. The market seems to need that "wall of worry" or uncertainty to climb in order to put in a powerful rally. The other thing that I have yet to see is the VIX top out in the 55-60 area and then not see the markets rally from that point. Both of these observations are based on the historical patterns on the VIX and S&P price charts. Just because those two observations have always held true up to this point doesn't mean they always will -- but for now, I'll continue to play the historical odds. That means that when the VIX is low, we want to be buying long-term puts and when the VIX is high, we want to be buying long-term calls. Simple as that. If only we could remove emotion from the equation, then this whole process would be far easier, right? For now, I would be very careful about initiating new long-term bullish positions. Make sure everything else (technicals and fundamentals) are lined up in your favor before taking the plunge. One last comment on the VIX. It is NOT a primary indicator for initiating trades. It is a filter to help keep us from doing something exceedingly unwise. Alright, enough said on that topic. Unfortunately, it is a tough venture to find attractive long-term put candidates in this market, as many of the weaker stocks have already been taken out behind the wood shed and beaten severely; and repeatedly. That's why EK is the lone candidate on our Put list, and I'm starting to like it more and more by the day. My expectation is that we'll get a great entry into the play after one more cycle up to overbought on the daily chart. Combine that with historical resistance near $34-35 and a weekly Stochastic that is just now starting to tip over and I think we could have an enjoyable ride to the downside here. Overall, it was a very quiet week for both our Watch List and Portfolio, with little actual movement taking place this week. Can you say "rangebound"? The one notable exception was our BBH play on the Biotechs. It finally got moving again on Friday, blasting through the 200-dma and to a fresh 2-month high. This series of higher lows and higher highs is looking very good indeed. I commented in the Market Monitor on Thursday on the tendency of stocks to gravitate towards strikes with heavy open interest in quiet expiration weeks, and that was certainly the case this week with several of the plays on our radar screen. I don't think it is any coincidence that GE was pinned to the $40 level, LUV to $20, and JNJ near $65 as the closing bell rang on Friday. Clearly we'll need to wait for next week's action to unfold before we can see whether these pesky rangebound markets want to rally or fall. Last week I mentioned that I was looking at energy-producer Dynegy (NYSE:DYN) as an addition to our Watch List. And true to my word, DYN appears as a new Watch List play this weekend, following the CBOE issuance of LEAPS on the stock this past week. But don't get in a hurry on this one, as we've got a bit of time to wait for it to come back to us at our entry point. In summation, we are faced with markets that have rallied to heavy resistance on positive economic news. That had driven the VIX to fresh 9-month lows and we have directly in front of us earnings warnings and then earnings. This is where the rubber meets the road, and companies will have to put up or investors are likely to get that all-too-familiar queasy feeling and pull the plug. Take advantage of the entry points that do come your way, but don't try to force it. Patience is a virtue that pays dividends over the long term. Have a great week! Mark Phillips mphillips@OptionInvestor.com LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: BBH 03/03/02 '03 $120 OEE-AD $16.60 $20.00 +20.48% $115 '04 $120 KBB-AD $26.20 $29.90 +14.12% $115 IBM 03/03/02 '03 $110 VIB-AB $ 9.80 $11.40 +16.33% $95 '04 $110 LIB-AB $17.00 $19.00 +11.76% $95 JNJ 03/05/02 '03 $ 60 VJN-AL $ 5.90 $ 8.30 +40.68% $61 '04 $ 60 LJN-AL $ 9.20 $12.10 +31.52% $61 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: GE 08/12/01 $36 JAN-2003 $ 40 VGE-AH CC JAN-2003 $ 30 VGE-AF JAN-2004 $ 40 LGR-AH CC JAN-2004 $ 30 LGR-AF BRCM 10/28/01 $36-37 JAN-2003 $ 40 OGJ-AH CC JAN-2003 $ 35 OGJ-AG JAN-2004 $ 40 LGJ-AH CC JAN-2004 $ 35 LGJ-AG LUV 12/09/01 $19-20 JAN-2003 $ 20 VUV-AD CC JAN-2003 $ 15 VUV-AC JAN-2004 $ 20 LOV-AD CC JAN-2004 $ 15 LOV-AC MDT 03/10/02 $40-42 JAN-2003 $ 45 VKD-AI CC JAN-2003 $ 40 VKD-AH JAN-2004 $ 45 LKD-AI CC JAN-2004 $ 40 LKD-AH DYN 03/17/02 $27 JAN-2003 $ 30 ONO-AF CC JAN-2003 $ 25 ONO-AE JAN-2004 $ 30 KYK-AF CC JAN-2004 $ 25 KYK-AE PUTS: EK 01/27/02 $34-35, $32 JAN-2003 $ 30 VEK-MF JAN-2004 $ 30 LEK-MF New Portfolio Plays None New Watchlist Plays DYN - Dynegy, Inc. $28.98 **Call Play** As I mentioned last week, I've had my eye on the Utility sector (UTY.X) since the Enron news has started to die down. This has allowed solid stocks to start moving again, even those that were thrown out with the bath water as all of Enron's dirty laundry was brought forward. The solid ramp that we saw in late February and early March in the Utility sector was downright encouraging, but I think this is just the first wave of the recovery. DYN is one of my favorite names in the sector, as they have a strong set of energy producing and transportation assets. They even operate in the touchy energy and bandwidth trading industries that were part of Enron's downfall. But unlike Enron, what we have here is a solid business model without the poor business ethics. With that as a backdrop, we need to focus on DYN's price chart and along with the UTY sector, it has recently seen quite a rally, right up to the $31 resistance level. Some air is being let out of the balloon and rightly so, as both the daily and weekly Stochastics had gotten into overbought territory rather quickly. I am encouraged by the fact that the profit taking has been rather mild so far, but I'm not quite ready to plunge in with both hands. Rather, I'd like to see a pullback to the $26-27 area before venturing into new positions. Even though the weekly Stochastics is in overbought right now, I'm willing to consider new positions based primarily on the daily chart if we can get a brief dip back to support. Pushing me into this thinking is the picture I see on the really long-term chart, with the monthly Stochastics just now starting to turn up our of oversold territory. Add to that the solid double bottom near $20 and I think we've got a solid rebound candidate on our hands. Anxious traders might consider half positions on a rebound from the $28.50 area as the daily Stochastics turns up, but here in the Portfolio, we'll wait for a move back down to firmer support before taking a position. Because I think this is a longer-term recovery story, I'm willing to play with a rather wide stop, set at $22.50. BUY LEAP JAN-2003 $30 ONO-AF BUY LEAP JAN-2003 $25 ONO-AE For Covered Call BUY LEAP JAN-2004 $30 KYK-AF BUY LEAP JAN-2004 $25 KYK-AE For Covered Call Drops None ************** TRADERS CORNER ************** SENTIMENTAL JOURNEY -- ONE WAY TO MEASURE MARKET "SENTIMENT" By Leigh Stevens Saturday, March 16, 2002 Now I am a sentimental guy, known to shed some tears at sad movies and during other emotional moments. Besides my prediction for hearts and flowers, I was always a student of psychology, especially as it relates to the madness of crowds and all extraordinary popular delusions. Yes, you have perhaps seen a book with a similar title, by Charles Mackay, put out by Wiley. Soon (April), you will even be able to buy my book from Wiley, but that's another story for another time. SENTIMENT INDICATORS One of the important factors to pay attention to in the market, especially at what you think may be a bottom or a possible top, is to measure how bullish or bearish traders are. A conventional and standard way to do this in terms of what traders (those with a short-term penchant for madness) is to look at the daily CBOE volume numbers of total puts traded to calls. Total daily put volume is simply divided by total daily call volume. You can see this ratio daily on the CBOE web site (www.cboe.com) or, if you have a charting program like QCharts, their symbol to graph this daily number is "QC:PUTCALL". Now why would you want to study this fluctuating number? Principally as a key to how bullish or bearish option traders are getting in terms of where they are actually putting their money. Whether they are leaning to the call (bullish) or put (bearish) side. Option traders are the best and brightest of traders, also likely the most mad. So, as the option traders go, so goes the traders and as the traders go so go the investors. This raises the question then as to why you would want to want to know the degree of bullishness or bearishness at all? There is nothing much new under the (market) sun, since crusty old Charles H. Dow described how the market tends to go from extremes of bullishness to bearishness. Dow observed, and he was not one to lose his head by getting emotional about the market, that at significant market tops most everyone is bullish and caught up in a sort of mania that the manna will flow from the market forever. Conversely, at bottoms, he noticed that the mass of people, those who knew what a stock was, were quite pessimistic and didn't want to even HEAR about the prospects for stocks. Like the bear in the woods, they had gone to sleep as far as an interest in the market. Dow therefore began to expect that the contrary was about to happen whenever popular opinion or "sentiment" was heavily leaning one way or the other. Hence the concept of "contrary opinion" was born. Too much bullishness was bearish and too much bearishness was bullish -- well, try to get your head around this concept. This concept of contrary opinion is not that different from the concept of "overbought" or "oversold". When most or all, potential buyers have bought already, there are few NEW buyers who will come in to support the market upon any appreciable amount of concerted selling. The same is true when everyone is bearish. Most market participants are already short or on the sidelines (not interested) and a small amount of concerted buying will take the market back up, sometimes sharply. PUT/CALL RATIO - the conventional way When put/call ratios have gotten down to the .40 to .45 area, this is seen to mark a bullish extreme and caution is indicated as to the FURTHER prospects for much more of a rise. When put/call ratios have gone to or above about .88, this is considered to be a sign that there is too much put buying and bearishness and there may be potential for an upside reversal. Now this sounds very simple and easy, right? WRONG! The trickiest thing is that this indicator tends to be early in pegging an actual reversal. In fact, buy or sell "signal" are regularly 1 to 5-6 trading days ahead of an actual market reversal. This suggests, at a minimum, that you need to be carefully watching other things in the market that also weigh in the side of suggesting a significant top or bottom. The other thing that can make the put/call standard way of measuring market extremes less than useful, is the effect of index calls and index puts in the total option volume figures. There is a lot of hedging of portfolios that goes on and related more to portfolio "insurance" that simply how hot, or not, the buyer or seller is for the market. Bullish sentiment extremes have tended to occur when CBOE daily equities call volume equals or approaches at least 2.4 times that of total daily equities put volume. Readings at this level or above suggests that traders are overly optimistic but may be unrealistic concerning the likelihood of a continued strong advance, as most market participants that are interested in buying in the near to intermediate-term, have already done so. I myself, over the years, have found it useful to EXCLUDE the Index option volume numbers, to take out some of the influence of hedging activities and to get a more “pure” reading on how enthusiastic, or not, traders are for stocks. And by dividing only equities call volume by puts, I get a whole number and more importantly, a LOW number is bullish and a HIGH number is bearish this then is the same kind of scaling as an overbought/oversold indicator, like RSI or stochastics. Just as I have a hard time standing on my head, I have a hard time translating a high ratio (PUT/CALL) as bullish and a low ratio as bearish. So, watch what word is FIRST. If put/call, this is the standard way you see this indicator. If call/put, this is Leigh Stevens of OptionsInvestor.com talking and you can see my way of looking at this figure frequently by tuning in to my writings. You heard it here first folks. By the way, bearish sentiment extremes have been reached when my call/put indicator gets down toward a 1 to 1 ratio, and bullish sentiment extremes have been reached when my call/put ratio gets to around 2.4 or above -- in major bull markets this figure can get up to around 3. Now that all these words and this concept has perhaps gotten you crazy, pictures will make sense of it all. Study these charts and then I will have a closing word at the bottom. CALL/PUT chart -- "standard" way to look at option volumes CALL/PUT ratio -- EXCLUDES Index call & put volumes -- Calls are divided by puts. I keep this a custom indicator; e.g., as done in Excel, or in this case in TradeStation SUMMARY - A buy or sell "signal" was defined by eyeballing the extremes and assuming that move into these areas was a "signal". Somewhat subjective, but such is the nature of technical analysis. A signal was considered to be "good" or valid, when a market turning point occurred within 1-5 trading days AFTER the extreme reading. The put/call standard was premature in its buy "signals" on several occasions on the decline into the Sept. low, probably due to the "distortion" of Index activity related to hedging. Sell signals were pretty good on the way down. "Sells" in BOLD, were ones where my CALL/put ratio was confirming. Buy signals in both charts for the two differing calculations at the Sept. bottom. Secondary buys were good in both methods. Neither method was good at identifying the peak in early- January. But both were good in identifying a secondary sell point later that month. Both methods were good in identifying the upside reversal in late-Feb. (2/21). The put/call standard has generated what may be an early sell signal of 3/11/02, not "confirmed" by the Stevens CALL/put indicator. Time will tell on when a next top comes. The usefulness of following option volume activity is greatest when it is looked at in CONJUNCTION with other indicators. What those indicators are will be the subject of future columns in this corner and further madness on how to look at the market in some unconventional ways. Hey, we need all the help we can get. ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-17-2002 Sunday 5 of 5 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Trading Basics: Q&A With The Covered-Calls Editor By Mark Wnetrzak This week's questions concern the effects of Open Interest on option prices, calculating profit potential and management of "in-the-money" positions. Mark, I make extensive use of covered calls, including many OIN picks, in my IRA account as a means of generating cash. I try to shoot for and be content with a 5% per month return on my covered-call plays. My question concerns what to do with the stock that rises dramatically above the strike price I've sold. If I do nothing and wait a month or two for the stock to be called away, I feel like a chump for sitting on "dead money". If I buy-to-close the position and roll out to a higher strike further out, I feel like a chump for giving back option income and raising my cost basis. Are there some common-sense, non-emotional guidelines to help me get past this (I can't win) feeling of "chumpness?" Thanks! BR Regarding adjustment strategies with "in-the-money" positions: Many times I feel like a chump too and as Patton once said to a Russian general, "All right, I'll drink to that, one chump to another!" (Well, it was something like that...) Bob, you are describing what every trader/investor battles day in and day out -- themselves. That is why it is so important to identify your risk-reward targets before entering a trade so as to avoid emotional trading. You must decide what your goal is and it is something only you can do. Are you more interested in higher potential returns or positions that make acceptable returns while still receiving an above-average amount of downside protection? Some investors split the difference, writing a combination of strikes both ITM and OTM as well as different time frames, where the overall position offers a higher potential yield but retains reasonable downside protection. However, it all comes down to the same thing: if a position provides the "expected" profit, then it was a success...end of story! Time for the clichés? "Nobody ever went broke by taking a profit"; "Bulls and bears make money, hogs get slaughtered"; and Jim's favorite, "Sell too soon!" Bob, almost every time I deviate from my plan under fire, I end up really feeling like a chump, a poorer chump... Best of luck, Mark W. OIN Hello Mark, I have found that on more than a few occasions I will find an attractive setup at night (I.E. NXTP stock @ $8.18/Apr 7.50 call @ $1.60) then the next day the call is trading extremely lower (.75) Is this because of the low open interest? When open interest is listed is this the true number of open positions or is it X1000 (like a volume number)? I have been using the calculator you sent me to figure profit potential. I have noticed that other sources use different methods to figure profit. What is your reasoning behind yours? Should you use the price of the position minus the option premium received from the sold calls divided by the option premium? You do receive that money in your account that could be used for other trades? Another thing I have noticed is the covered-call position will sometimes reach a point of strike price plus option price equals current stock price, would you close out the position depending on time left to expiration or just ride it out? Thank you in advance for your answers and I love my renewal special! Keep up the good work... RZ Regarding Open Interest and position management techniques: Open interest represents the number of outstanding option contracts in the exchange market or in a particular class or series (both short and long positions) and does not use a multiplier. Thinly traded issues can be difficult to enter as the spread can be fairly large and price discrepancies may vanish quickly when buying (or selling) pressure eases. A useful method to establish the overall profit/loss position in a thinly traded covered-write is with a "Buy-Write" order: buy the stock and sell the call at a specified "net debit." A buy-write order specifies a target cost basis that a broker may achieve throughout the trading day as the stock and option prices fluctuate. In this manner, you will only enter the position at your desired cost basis and if you don't get a fill, "Oh well, there will be other trading days and plenty of fish in the ocean." As far as profit/loss calculations, I am simply using the formulas that Larry McMillan details in his book, "Options: As a Strategic Investment." Essentially, for a cash position, you take the net premium received and divide it by the cost basis. The cost basis would be the price paid for the stock minus the premium received, as this is the maximum amount of equity required for the duration of the play. Using margin effectively doubles the potential yield as the equity requirement is much lower. Remember, our candidates are all "in-the-money" (ITM), and the maximum return possible is achieved when the stock is called away, even if the stock price remains unchanged. If you aren't worried about keeping the stock, having it called away early is not a problem and will actually increase your target yield by providing the maximum return in a shorter time frame. As long as there is time premium left in the call, there is little risk of early assignment (and you are earning time premium by staying with the original position). Once the option trades at parity or a discount (or nears expiration), there is a significant probability of exercise by arbitrageurs (floor traders who don't pay commissions). An option writer has several choices at this point: do nothing, get called out and accept the original profit established; if appropriate, close the position early (evaluate extra commissions vs. an increased annualized return); or roll the call up/down and/or forward. Regards, Mark W. OIN SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield CRGN 17.44 18.00 MAR 17.50 1.15 *$ 1.21 10.8% BSML 5.22 5.00 MAR 5.00 0.65 $ 0.43 10.6% IMCL 27.28 26.14 MAR 25.00 3.30 *$ 1.02 9.2% MACR 15.61 19.55 MAR 15.00 1.50 *$ 0.89 9.1% AVII 10.50 11.00 MAR 10.00 1.45 *$ 0.95 9.1% LTXX 23.72 25.47 MAR 22.50 1.90 *$ 0.68 6.8% CANI 5.93 8.19 MAR 5.00 1.20 *$ 0.27 6.4% MACR 18.85 19.55 MAR 17.50 1.85 *$ 0.50 6.4% IMCL 18.44 26.14 MAR 12.50 6.60 *$ 0.66 6.3% ATVI 26.71 29.29 MAR 25.00 2.70 *$ 0.99 6.0% UTHR 11.20 12.09 MAR 10.00 1.70 *$ 0.50 5.9% OSIS 22.82 25.09 MAR 20.00 3.80 *$ 0.98 5.8% XMSR 13.98 15.04 MAR 12.50 2.25 *$ 0.77 5.7% AVII 11.22 11.00 MAR 10.00 1.70 *$ 0.48 5.7% DCTM 20.39 21.67 MAR 17.50 3.90 *$ 1.01 5.3% WNC 10.86 10.49 MAR 10.00 1.20 *$ 0.34 5.1% GT 25.14 27.51 MAR 25.00 0.95 *$ 0.81 4.8% FFIV 22.66 25.30 MAR 20.00 3.30 *$ 0.64 4.8% FDP 17.61 18.14 MAR 17.50 0.65 *$ 0.54 4.6% HAL 16.27 16.67 MAR 15.00 1.85 *$ 0.58 4.5% OI 15.10 14.90 MAR 15.00 0.50 $ 0.30 4.5% IBI 20.17 19.69 MAR 20.00 0.75 $ 0.27 3.0% MANU 19.42 18.75 APR 17.50 3.40 *$ 1.48 6.7% NXTP 6.05 7.33 APR 5.00 1.50 *$ 0.45 6.1% GMST 22.59 20.69 APR 20.00 4.10 *$ 1.51 5.9% SIPX 11.15 11.78 APR 10.00 1.90 *$ 0.75 5.9% PVN 5.71 6.00 APR 5.00 1.05 *$ 0.34 5.3% SYXI 11.26 12.05 APR 10.00 1.85 *$ 0.59 4.5% ICST 23.78 21.78 APR 22.50 3.00 $ 1.00 3.5% ATVI 32.30 29.29 APR 30.00 4.00 $ 0.99 2.5% *$ = Stock price is above the sold striking price. Comments: The last few weeks have actually been fairly generous to our covered-call portfolio. Time to re-evaluate your short- and long-term outlook on any issues you may own after the March expiration. As for the April positions, the technicals on Manugistics (NASDAQ:MANU) are looking a tad worrisome as the stock failed to rally above the DEC high. With the current wave of weakness washing through the Tech sector, we will keep a close watch on the issue as it tests support. We will also be watching Gemstar-TV Guide (NASDAQ:GMST), Integrated Circuit System (NASDAQ:ICST), and Activision (NASDAQ:ATVI) as they test near-term support areas. Do you still retain a near-term neutral to bullish outlook on the overall market? Let your answer be your guide! Positions Closed: Packeteer (NASDAQ:PKTR), Inrange Technologies (NASDAQ:INRG), ViroPharma (NASDAQ:VPHM), Pec Solutions (NASDAQ: PECS) - which finished positive! NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield AEIS 32.59 APR 30.00 OEQ DF 4.00 178 28.59 35 4.3% ENDO 18.40 APR 17.50 PFU DW 1.75 176 16.65 35 4.4% GSPN 14.09 APR 12.50 GLQ DV 2.20 735 11.89 35 4.5% PRCS 5.43 APR 5.00 FGU DA 0.85 225 4.58 35 8.0% REV 5.70 APR 5.00 REV DA 1.00 10 4.70 35 5.5% RSTO 12.69 APR 10.00 URF DB 3.30 305 9.39 35 5.6% ZOMX 7.93 APR 7.50 ZMQ DR 0.85 614 7.08 35 5.2% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield PRCS 5.43 APR 5.00 FGU DA 0.85 225 4.58 35 8.0% RSTO 12.69 APR 10.00 URF DB 3.30 305 9.39 35 5.6% REV 5.70 APR 5.00 REV DA 1.00 10 4.70 35 5.5% ZOMX 7.93 APR 7.50 ZMQ DR 0.85 614 7.08 35 5.2% GSPN 14.09 APR 12.50 GLQ DV 2.20 735 11.89 35 4.5% ENDO 18.40 APR 17.50 PFU DW 1.75 176 16.65 35 4.4% AEIS 32.59 APR 30.00 OEQ DF 4.00 178 28.59 35 4.3% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** AEIS - Advanced Energy $32.59 *** Looking For An Entry Point *** Advanced Energy Industries (NASDAQ:AEIS) designs, manufactures and supports products and systems critical to plasma-based manu- facturing processes. These systems are important components in industrial manufacturing equipment that modifies surfaces or deposits or etches thin film layers on computer chips, CDs, flat panel displays such as computer screens, DVDs, windows, eye- glasses, solar panels and other products. The company's systems define, modify and control the raw electrical power from a utility and convert it into power that is uniform and predictable. This allows manufacturing equipment to produce and deposit very thin films at an even thickness on a mass scale. The company's product line includes direct current products, high power products, low and mid-frequency products, radio frequency products, ion beam sources and other products. Morgan Stanley Dean Witter analyst Steven Pelayo recently cut his investment rating on a handful of chip equipment stocks because of their "lofty" valuations." The related pullback in AEIS could offer a favorable entry point as analysts believe that as business for the chip equipment industry improves, subsystem suppliers like AEIS could see sharp rise in revenue, one quarter earlier than the major OEMs. We simply favor the relative strength in the issue and the support area near our cost basis. APR 30.00 OEQ DF LB=4.00 OI=178 CB=28.59 DE=35 TY=4.3% ***** ENDO - Endocare $18.40 *** VA Contract! *** Endocare (NASDAQ:ENDO) is a vertically integrated medical device company that develops, manufactures and markets cryosurgical and stent technologies for applications in oncology and urology. The company has concentrated on developing devices for the treatment of two common diseases of the prostate: prostate cancer and benign prostate hyperplasia (BPH). Endocare is also developing cryo- surgical technologies for treating tumors in other organs, such as the kidney, breast and liver. Endocare has developed products that include the Cryocare-4 Probe system, Cryocare-8 Probe System, FastTrac, CryoGuide and Horizon Prostatic Stent. The company has developed the Cryocare System, a next-generation cryosurgery system, to allow the urologist to treat prostate cancer in a minimally invasive manner. The stock rallied strongly on Thursday after Endocare announced that it has secured a 3-year system-wide Bulk Purchase Agreement from the United States Department of Veterans Affairs (VA) for the Company's FDA-cleared ErecAid® therapy system, which is used to treat the large population of men suffering from erectile dysfunction (ED) who do not respond adequately to drug therapy. The multi-million dollar contract is expected to nearly double the current annual volume of units sold to the VA. We like the heavy volume rally above resistance at $18, which suggests further upside potential. APR 17.50 PFU DW LB=1.75 OI=176 CB=16.65 DE=35 TY=4.4% ***** GSPN - GlobespanVirata $14.09 *** Bottom Fishing For Chips *** GlobespanVirata (NASDAQ:GSPN) is a provider of advanced integr- ated circuits that enable broadband digital communications to homes and business enterprises. The company offers chip-set solutions for DSL, voice and video processing, as well as net- work protocol processing. The company's product offerings include various combinations of digital signal processor and an analog front-end chip sets, a reference design guide and software. Globespan products target the rapidly growing market for high- speed data transmission applications, such as Internet access, telecommuting and networking among branch offices. Globespan sells integrated circuits to equipment manufacturers for products that are sold to telecommunications service providers and end users worldwide. In February, the recently merged Globespan and Virata Corp. reported a 4th-quarter pro forma loss of $0.01 a share, down from its year-ago equivalent profit but 4 cents narrower than expected. The stock has been forming a Stage I base for almost a year and this position offers a way to profit from the current lateral trend. APR 12.50 GLQ DV LB=2.20 OI=735 CB=11.89 DE=35 TY=4.5% ***** PRCS - Praecis Pharmaceuticals $5.43 *** New Drug Speculation *** Praecis Pharmaceuticals (NASDAQ:PRCS) is a drug discovery and development company with a lead product, abarelix depot, for the treatment of prostate cancer. In December 2000, Praecis submitted to the FDA a new drug application for abarelix depot. The Company is also developing abarelix depot for the treatment of women with diseases that respond to a reduction of the female hormone estrogen, such as endometriosis. Praecis is developing Apan, a new drug for the treatment of Alzheimer's disease. The company licensed Latranal, a proprietary topical composition that it is developing for the relief of localized muscle, tendon or neuropathic related pain and, in particular, chronic back pain. In January, the company said that its initial Phase I study of Apan will be completed during the second half of 2002. They also plan to file an Investigational New Drug application for their Rheumatoid Arthritis drug candidate during the summer of 2002 and initiate a Phase I study prior to year-end. A reasonable cost basis from which to speculate on the company's drug pipeline. APR 5.00 FGU DA LB=0.85 OI=225 CB=4.58 DE=35 TY=8.0% ***** REV - Revlon $5.70 *** Will A New CEO Rejuvenate Revlon? *** Revlon (NYSE:REV) manufactures, markets and sells an extensive array of cosmetics and skin care, fragrances and personal care products exclusively through its direct subsidiary, Revlon Consumer Products Corporation and its subsidiaries. Revlon's products are marketed under brand names such as Revlon, Color- stay, Revlon Age Defying, Almay and Ultima in cosmetics; Moon Drops, Eterna 27, Ultima and Jeanne Gatineau in skin care; Charlie and Fire & Ice in fragrances, and Flex, Outrageous, Mitchum, Colorstay, Colorsilk, Jean Nate, Bozzano and Colorama in personal care products. The company markets each core brand with a distinct and uniform global image, including packaging and advertising, while retaining the flexibility to tailor products to local and regional preferences. In July 2001, the company sold its Colorama brand to the L'Oreal Group. In Feb., Revlon posted a narrower 4th-quarter loss as it cut costs, but was disappointed in the demand for its products. But the recent rally started a few days earlier when Revlon said it had named former Coca-Cola Co. President and COO Jack Stahl, to become the company's third chief executive in five years. A conservative entry point from which to speculate on Revlon's future. Try target-shooting a lower cost basis to improve the potential profit in the position. APR 5.00 REV DA LB=1.00 OI=10 CB=4.70 DE=35 TY=5.5% ***** RSTO - Restoration Hardware $12.69 *** The Trend Is Your Friend *** Restoration Hardware (NASDAQ:RSTO) together with its subsidiaries, is a specialty retailer of home furnishings, functional and decor- ative hardware and related merchandise that reflects its classic and authentic American point of view. The company markets its merchandise through retail locations, mail order catalogs and on the Web at www.restorationhardware.com. The company operated 106 stores in 31 states, the District of Columbia and in Canada as of February 3, 2001. The company displays its broad assortment of merchandise in an architecturally inviting setting, which it believes appeals to both men and women. The company recently announced that it has paid off the $5 million balance of a Sept- ember 2000 33-month term loan from Back Bay Capital, and has ended the fiscal year with no debt and approximately $22 million of cash and equivalents. The stock has gained strength as it rallied off the September low and hasn't violated its 30-dma since November. This position offers a conservative entry point in a Stage II stock. Earnings are due this week. APR 10.00 URF DB LB=3.30 OI=305 CB=9.39 DE=35 TY=5.6% ***** ZOMX - Zomax $7.93 *** Bracing For A Rally *** Zomax (NASDAQ:ZOMX) is an international outsource provider of process management services. The company's fully integrated services include front-end e-commerce support, call center and customer support solutions, DVD authoring services, CD and DVD mastering, CD and DVD replication, supply chain and inventory management, graphic design, print management, assembly, packaging, warehousing, distribution and fulfillment, and RMA processing. Zomax services a broad customer base, including Microsoft (NASDAQ: MSFT), Novell (NASDAQ:NOVL), Hewlett Packard (NYSE:HWP) and Gateway (NYSE:GTW). Zomax has rallied off its February low after announcing that it agreed to buy the business, and substantially all the assets of bankrupt Software Logistics Corp., dba iLogistix. Zomax estimated the acquired businesses would produce $225 million in revenue in 2002, more than doubling Zomax's sales and adding to Zomax' profits in the second half of the year. The technicals remain bullish as the stock has repeatedly tested resistance of a year-long base. A reasonable entry point for those wishing to speculate on the recent acquisition. APR 7.50 ZMQ DR LB=0.85 OI=614 CB=7.08 DE=35 TY=5.2% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield XMSR 15.04 APR 15.00 QSY DC 1.30 1902 13.74 35 8.0% UCOMA 5.19 APR 5.00 QUW DA 0.55 462 4.64 35 6.7% PSUN 25.89 APR 25.00 PVQ DE 2.30 199 23.59 35 5.2% RIMM 27.08 APR 25.00 RUL DE 3.40 2051 23.68 35 4.8% MACR 19.55 APR 17.50 MRQ DW 2.95 47 16.60 35 4.7% CBST 20.10 APR 17.50 UTU DW 3.50 2 16.60 35 4.7% IDTI 30.89 APR 27.50 ITQ DY 4.80 83 26.09 35 4.7% ***************** NAKED PUT SECTION ***************** Options 101: Margin And ROI Calculations Revisited By Ray Cummins With the recent influx of new readers, we have received a number of questions about how the collateral requirement and "Target Yield" and are calculated for a cash-secured put. Hello, A simple question to understand your format on naked-puts: I don't understand how you get the "cost basis" and "target yield." All other columns are easily understood. Here's an example: Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ACN 29.89 APR 25.00 ACN PE 0.85 2347 24.15 42 7.8% Where's the 24.15 come from? Also, target yield of 7.8%...that's 7.8% of what? Thanks, SP Regarding your question about cost basis and target yield: Cost basis is the price at which you will own the stock if the sold (short) put is assigned. Target yield is just a fancy (SEC approved) way of saying "expected profit" or "potential gain"...it is the amount of money we expect to earn in the position, but adjusted to a monthly basis for comparison to other plays. Here is an explanation of the margin and collateral requirements for common equity-option strategies including "naked" puts. MARGIN REQUIREMENTS - UNCOVERED OPTIONS The margin requirement for writing options is vastly different than that which is used with stocks. The margin requirement is simply a deposit that an investor must provide to guarantee that he or she will cover any written options in the event they are exercised. This collateral is a legal requirement and it is a very important component in your strategy selection because it determines the overall "return on investment" or ROI. There are two different categories of margin requirements with options: Initial Margin and Maintenance Margin. INITIAL MARGIN The Initial Margin is the amount of collateral you must have in your account to initiate the position. Recall that with options, margin means the cash or securities required to be deposited by an option writer with his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest, or in the case of cash-settled options, to pay the cash settlement amount, if assigned an exercise. The minimum margin requirements are imposed by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations, and increased margin requirements may be imposed either generally or in individual cases by various brokerage firms. The most widely used margin requirements are based on the regulations at the Chicago Board Options Exchange: Writers of uncovered puts or calls must deposit and maintain 100% of the option proceeds* plus 20% of the aggregate contract value (current equity price x $100) minus the amount by which the option is out-of-the-money, if any, subject to a minimum for calls of option proceeds* plus 10% of the aggregate contract value and a minimum for puts of option proceeds* plus 10% of the aggregate exercise price amount. (*For calculating maintenance margin, use the option's market value instead of the option's proceeds.) MAINTENANCE MARGIN The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option (and the underlying stock) changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price falls and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the exchange formula) and traders should always consider not only the initial margin requirement, but also the maximum margin needed through the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Consider these facts carefully before you initiate any "naked" option positions. MONTHLY YIELD As far as the calculations we use to determine collateral and net return for our Naked-Put positions, the following example will explain the Margin/ROI formula and demonstrate the mathematical advantage of this technique when compared to covered-call writing. Return On Investment (ROI) = Profit / Collateral Requirement. In this strategy, profit is the initial premium received for the sold option. The collateral requirement is simply the amount of cash or equity that must be in your account to open the position. Most discount/online brokers use the following formula to determine the collateral requirement for "naked" puts. The margin maintenance per contract is the greater of: The premium received plus 40% of the underlying issue price, minus the out-of-the-money amount; (0.40 * Stock Price + Premium - (Price Picked - Strike)) - or - The premium received plus 20% of the underlying issue price; (0.20 * Stock Price + Premium) The second formula generally applies when the strike price sold is significantly below the underlying stock price. An example: Stock Price = $29.25 Strike Price Sold = $25 Premium Received = $0.50 Cost Basis = $24.50 The 20% formula requirement = $6.35 The 40% formula requirement = $7.95 Using the greater value of the two formulas, the collateral for this play is $7.95 per contract. The Return On Investment (ROI) = $0.50 / $7.95 = 6.29% To correlate the ROI to a monthly basis, annualize the ROI and divide by 12. Using the above example of a 6.29% ROI with an expiration of 3 weeks (21 days), calculate the Target Yield as follows: 6.29 / 21 * 365 / 12 = 9.11%. The original collateral requirement is always utilized in the monthly summary, regardless of the eventual change in stock price. The final price of the stock determines the actual profit when that price is below the sold strike but above the cost-basis. In any case, the total profit can never be greater than the initial premium for the sold option. As you can see, there is a slight mathematical edge with this strategy when compared to covered-calls because of the lower margin maintenance or collateral requirement. However, the risk is the same in both techniques; the underlying stock can always fall to $0. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield INVN 40.10 45.50 MAR 35.00 0.85 *$ 0.85 15.7% AMZN 12.52 14.03 MAR 10.00 0.50 *$ 0.50 14.5% HAL 16.49 16.67 MAR 15.00 0.50 *$ 0.50 12.9% HAL 13.95 16.67 MAR 12.50 0.70 *$ 0.70 12.6% ASW 10.81 8.35 MAR 5.00 0.35 *$ 0.35 12.1% OSIS 22.06 25.09 MAR 17.50 0.70 *$ 0.70 11.9% PPD 26.30 29.65 MAR 20.00 0.45 *$ 0.45 11.4% PLMD 20.76 25.95 MAR 17.50 0.40 *$ 0.40 10.7% DDS 18.70 24.38 MAR 15.00 0.30 *$ 0.30 10.7% MU 36.29 33.39 MAR 32.50 0.55 *$ 0.55 10.6% FFIV 23.15 25.30 MAR 17.50 0.45 *$ 0.45 10.0% SLAB 30.90 35.00 MAR 25.00 0.30 *$ 0.30 9.6% PPD 26.11 29.65 MAR 17.50 0.45 *$ 0.45 8.9% OCLR 27.25 27.50 MAR 25.00 0.55 *$ 0.55 8.7% ACN 27.45 28.99 MAR 22.50 0.50 *$ 0.50 8.6% MANH 29.80 35.00 MAR 22.50 0.65 *$ 0.65 8.5% PSUN 25.21 25.89 MAR 22.50 0.30 *$ 0.30 8.5% MDR 14.14 14.51 MAR 12.50 0.25 *$ 0.25 8.5% TER 32.70 37.00 MAR 27.50 0.60 *$ 0.60 8.0% TXN 30.29 34.09 MAR 27.50 0.85 *$ 0.85 7.3% FTI 17.64 19.48 MAR 15.00 0.30 *$ 0.30 7.2% OII 23.79 27.39 MAR 22.50 0.55 *$ 0.55 7.1% DDS 17.40 24.38 MAR 15.00 0.30 *$ 0.30 7.0% MU 34.90 33.39 MAR 27.50 0.60 *$ 0.60 6.9% PLMD 20.75 25.95 MAR 15.00 0.25 *$ 0.25 6.4% LUX 18.13 19.82 MAR 17.50 0.30 *$ 0.30 6.3% SANG 19.75 23.50 MAR 17.50 0.25 *$ 0.25 6.1% FST 26.24 27.95 MAR 25.00 0.25 *$ 0.25 5.7% AMAT 47.98 50.72 MAR 40.00 0.30 *$ 0.30 5.7% AMAT 47.20 50.72 MAR 40.00 0.60 *$ 0.60 5.5% TER 37.55 37.00 MAR 32.50 0.25 *$ 0.25 5.3% DCN 19.10 21.90 APR 15.00 0.55 *$ 0.55 7.8% ACN 29.89 28.99 APR 25.00 0.85 *$ 0.85 7.8% PLMD 22.83 25.95 APR 17.50 0.50 *$ 0.50 7.1% TER 39.20 37.00 APR 32.50 0.95 *$ 0.95 6.9% MU 38.16 33.39 APR 30.00 0.75 *$ 0.75 6.5% IDTI 35.99 30.89 APR 27.50 0.65 *$ 0.65 6.0% LRCX 28.88 27.43 APR 25.00 0.65 *$ 0.65 5.7% MLNM 23.66 25.12 APR 17.50 0.40 *$ 0.40 5.6% MRVL 41.38 38.60 APR 30.00 0.70 *$ 0.70 5.6% *$ = Stock price is above the sold striking price. Comments: The past month has provided some great opportunities for option traders and our list of candidates was certainly enhanced by the recent volatile activity. Despite the sell-off earlier in the week, all of the positions in the portfolio expired profitably. However, a number of April plays are under scrutiny due to the mediocre performance of the technology group. Issues which should be monitored for early exit or adjustment include: Micron Technology (NYSE:MU), Lam Research (NASDAQ:LRCX), and Integrated Device Technology (NASDAQ:IDTI). Positions Closed: PMC Sierra (NASDAQ:PMCS) - positive (Murphy's Law again!) NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield GMST 20.69 APR 15.00 QLF PC 0.60 1441 14.40 35 11.0% MLNM 25.12 APR 20.00 QMN PD 0.40 642 19.60 35 6.4% MRVL 38.60 APR 27.50 UVM PY 0.50 10 27.00 35 5.3% MSO 19.97 APR 17.50 MSO PW 0.60 24 16.90 35 8.5% NOVN 22.39 APR 20.00 NPQ PD 0.70 60 19.30 35 8.4% PLMD 25.95 APR 20.00 PM PD 0.35 54 19.65 35 5.5% SYXI 12.05 APR 10.00 USX PB 0.25 7 9.75 35 7.2% TXN 34.09 APR 30.00 TXN PF 0.75 21121 29.25 35 6.3% VARI 35.40 APR 30.00 IUA PF 0.55 170 29.45 35 5.1% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield GMST 20.69 APR 15.00 QLF PC 0.60 1441 14.40 35 11.0% MSO 19.97 APR 17.50 MSO PW 0.60 24 16.90 35 8.5% NOVN 22.39 APR 20.00 NPQ PD 0.70 60 19.30 35 8.4% SYXI 12.05 APR 10.00 USX PB 0.25 7 9.75 35 7.2% MLNM 25.12 APR 20.00 QMN PD 0.40 642 19.60 35 6.4% TXN 34.09 APR 30.00 TXN PF 0.75 21121 29.25 35 6.3% PLMD 25.95 APR 20.00 PM PD 0.35 54 19.65 35 5.5% MRVL 38.60 APR 27.50 UVM PY 0.50 10 27.00 35 5.3% VARI 35.40 APR 30.00 IUA PF 0.55 170 29.45 35 5.1% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** GMST - Gemstar $20.69 *** Patent Lawsuit Speculation! *** Gemstar-TV Guide (NASDAQ:GMST) is a global media and technology company focused on developing, licensing and providing products and services that simplify and enhance consumer entertainment. The company was formed on July 12, 2000 through the merger of Gemstar International, a technology company focused on consumer entertainment, and TV Guide, a provider of television information and guidance in the United States. Many of the company's products have a special emphasis on television-oriented technologies and services, in particular, program guidance products including those marketed under the TV Guide name. Gemstar rallied in February after an administrative judge decided to drop closing arguments in a key patent battle over the company's interactive TV guides (a decision is expected by March 21). The stock was further boosted by a report from Goldman Sachs, which said the stock was oversold. Even in a worst-case scenario, Goldman doesn't believe a setback in the case would undermine Gemstar's overall patent position, nor would it likely materially affect its existing licensing agreements. Traders can speculate on the outcome of the patent litigation with this conservative position. APR 15.00 QLF PC LB=0.60 OI=1441 CB=14.40 DE=35 TY=11.0% ***** MLNM - Millineum Pharma $25.12 *** Recovery Underway! *** Millennium Pharmaceuticals (NASDAQ:MLNM) incorporates large-scale genetics, genomics, high-throughput screening and informatics in an integrated science and technology platform. Millennium applies this technology platform primarily in discovering and developing proprietary therapeutic and diagnostic human healthcare products and services. Since inception, substantially all of the company's revenues have been derived from its strategic alliances. Their business is built around three primary areas of focus: technology, therapeutics and predictive medicine. Millennium is one of the ancient giants in the "Genomics" business but the fading craze for gene-mappers has left many stocks in the group struggling to stay above single-digit share values. The selling pressure in a few of these issues appears to be coming to an end and MLNM is among that group. The buying support near the cost basis of this position makes it a relatively low risk speculation play. APR 20.00 QMN PD LB=0.40 OI=642 CB=19.60 DE=35 TY=6.4% ***** MRVL - Marvel Technology $38.60 *** Entry Point! *** Marvell Technology Group (NASDAQ:MRVL) designs, develops and markets integrated circuits using proprietary communications mixed-signal and digital signal processing technology for 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 also develops a range of high performance communications internetworking and switching products for the broadband communications market. Marvel has recently been inundated with upgrades, based on its "marvelous" outlook, which includes a new growth cycle. Investors who are bullish on the company's future can establish a low risk basis in the issue with this position. APR 27.50 UVM PY LB=0.50 OI=10 CB=27.00 DE=35 TY=5.3% ***** MSO - Martha Stewart Living $19.97 *** K-Mart Recovery! *** Martha Stewart Living Omnimedia (NYSE:MSO) is an integrated content and commerce company that creates how-to content and related merchandise for homemakers and other consumers. The company's products bear the well-known Martha Stewart brand name, which the company leverages across a range of media and retail outlets. The company primarily focuses on the domestic arts, providing consumers with the how-to ideas, information, merchandise and other resources they need to raise the quality of living in and around their homes. The company has four primary business segments, including Publishing, Television, Merchandising and Internet/Direct Commerce, through which content and merchandise relating to its eight core content areas are created and distributed to consumers. K-Mart has decided not close as many stores as originally expected (in the wake of their bankruptcy announcement) and the news has boosted share values of the retail chain's suppliers. MSO has an exclusive contract with K-Mart to market its Martha Stewart Everyday linens, cookware and household products, so any future recovery in KM will benefit MSO's stock price. Traders can speculate on that outcome with this position. APR 17.50 MSO PW LB=0.60 OI=24 CB=16.90 DE=35 TY=8.5% ***** NOVN - Noven Pharmaceuticals $22.39 *** Rally Mode! *** Noven Pharmaceuticals (NASDAQ:NOVN) is engaged primarily in the development and manufacture of advanced transdermal and transmucosal drug delivery products and technologies. Their primary commercialized products are transdermal drug delivery systems for use in hormone replacement therapy. Noven's first product was an estrogen patch for the treatment of menopausal symptoms marketed under the brand name Vivelle in the United States and Canada. Noven's second-generation estrogen patch is marketed under the brand name Vivelle-Dot and Noven also developed a combination estrogen/progestin transdermal patch for the treatment of menopausal symptoms, which is marketed under the brand name CombiPatch. Noven has some new products in the pipeline and based on the recent activity in its stock, investors are bullish on the company's outlook. Traders who agree with that assessment can profit from continued upside movement with this position. (Due Diligence Required!) APR 20.00 NPQ PD LB=0.70 OI=60 CB=19.30 DE=35 TY=8.4% ***** PLMD - PolyMedica $25.95 *** "Short-Covering" In Progress! *** PolyMedica (NASDAQ:PLMD) is a provider of direct-to-consumer specialty medical products and services, conducting business in the Chronic Care, Professional Products and Consumer Healthcare markets. PolyMedica sells diabetes supplies and related products through its Chronic Care segment and provides direct-to-consumer prescription respiratory supplies to Medicare-eligible seniors suffering from chronic obstructive pulmonary disease (COPD) and also markets, manufactures and distributes a line of prescription urological and suppository products with its Professional Products segment. PolyMedica's products for urinary health are distributed mainly to food and drug retailers as well as mass merchandisers nationwide through its Consumer Healthcare segment. Shares of PLMD were hammered late last year after the company announced it was under investigation by the Securities and Exchange Commission in connection with accounting matters, financial reports, other public disclosures and sales of the company's securities. Now it appears the company's stock is recovering and traders who shorted the issue are scrambling to cover their shares. With near-term buying support at $20, this play offers favorable speculation for investors who wouldn't mind owning the issue. APR 20.00 PM PD LB=0.35 OI=54 CB=19.65 DE=35 TY=5.5% ***** SYXI - IXYS Corp. $12.05 *** Cheap Speculation! *** IXYS Corp. (NASDAQ:SYXI) is engaged in the design, development, manufacture and marketing of high power, high performance power semiconductors. The company's power semiconductor products have historically been divided into two primary categories, power metal oxide semiconductor (MOS) transistors and bipolar products. IXYS sells gallium arsenide products, which has become a primary product category. IXYS also sells ICs that have applications associated with power management, and high speed, high density SRAM products. There's little news to explain the recent bullish activity in SYXI but the stock continued to rally this week in the wake of speculative buying among technology investors. From a technical viewpoint, SYXI has broken its year-long downtrend and those who favor the recent strength in the semiconductor sector can use this position to speculate conservatively on the upside momentum in the group. Target a higher premium initially to allow for a pullback in the issue and increase the ROI in the position. APR 10.00 USX PB LB=0.25 OI=7 CB=9.75 DE=35 TY=7.2% ***** TXN - Texas Instruments $34.09 *** Portfolio Position! *** Texas Instruments (NYSE:TXN) is a global semiconductor company and a designer and supplier of digital signal processors and analog integrated circuits, the engines driving the digitization of electronics. These two types of semiconductor products work together in digital electronic devices such as digital cellular phones. TI also designs and manufactures other semiconductor products. These products include various standard logic devices, application-specific integrated circuits, reduced instruction-set computing microprocessors, micro-controllers and digital imaging devices. In addition to semiconductors, TI has two other primary segments. Sensors & Controls sells electrical and electronic controls, sensors and radio-frequency identification systems to commercial and industrial markets. Educational & Productivity Solutions is a supplier of graphing and educational calculators. TXN is one of our favorites among blue-chip technology issues and investors who want to establish a long-term portfolio position in the issue should consider this play. APR 30.00 TXN PF LB=0.75 OI=21121 CB=29.25 DE=35 TY=6.3% ***** VARI - Varian $35.40 *** Trading Range? *** Varian (NASDAQ:VARI) is a technology company engaged in the design, development, manufacture, and marketing of scientific instruments and vacuum technologies, and in contract electronics manufacturing. Varian's operations are grouped into three segments: Scientific Instruments, Vacuum Technologies and Electronics Manufacturing. Scientific Instruments designs, develops, manufactures, sells and services chromatography, optical spectroscopy, mass spectroscopy, dissolution testing, and nuclear magnetic resonance equipment and consumable laboratory supplies. Vacuum Technologies supplies high vacuum pumps, leak detection equipment, and related products and services, all of which are used to create, control, measure, and/or test a vacuum environment in industrial and scientific applications requiring ultra-clean or high-vacuum environments. Electronics Manufacturing is a contract manufacturer of advanced electronic assemblies and subsystems for original equipment manufacturers. Varian has established a trading range near $34 and the technical indications suggest the rectangular pattern will continue in the near-term. Traders can profit from that outcome with this position. APR 30.00 IUA PF LB=0.55 OI=170 CB=29.45 DE=35 TY=5.1% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ACF 37.10 APR 30.00 ACF PF 1.30 1243 28.70 35 12.5% XMSR 15.04 APR 12.50 QSY PV 0.45 884 12.05 35 10.0% INVN 45.50 APR 35.00 FQQ PG 1.10 510 33.90 35 9.4% SNDK 20.69 APR 17.50 SWQ PW 0.55 305 16.95 35 8.5% KEI 22.60 APR 20.00 KEI PD 0.65 20 19.35 35 8.0% AMKR 20.20 APR 17.50 QEL PW 0.45 30 17.05 35 6.7% ADBE 39.18 APR 35.00 AEQ PG 0.95 3094 34.05 35 6.6% PSUN 25.89 APR 22.50 PVQ PX 0.55 50 21.95 35 6.4% TIF 37.71 APR 35.00 TIF PG 0.90 831 34.10 35 5.9% ************************ SPREADS/STRADDLES/COMBOS ************************ Bullish Reports Spur Investor Optimism! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, March 15 The major equity averages moved higher today as positive economic data boosted hopes that a recovery is underway. The Dow Jones Industrial Average finished the session 90 points higher at 10,607 on strength in Procter & Gamble (NYSE:PG), Walt Disney (NYSE:DIS), J.P. Morgan Chase (NYSE:JPM), American Express (NYSE:AXP), Wal-Mart (NYSE:WMT), and McDonald's (NYSE:MCD). The NASDAQ Composite index rose 14 points to 1,868 amid a rebound in semiconductor shares but a mediocre profit outlook from software giant Oracle (NASDAQ:ORCLE) stifled hopes of a technology rally. The broader-market S&P 500 index climbed 13 points to 1,166 due to a resurgence of buying pressure in bank, oil services, retail, biotechnology and consumer stocks. Market breadth was favorable with 1,864 winners versus 1,276 losers on the Big Board, where 1.48 billion shares were traded. On the NASDAQ exchange, 1.66 billion shares changed hands, with winners pacing losers 19 to 15. U.S. Treasury prices, which typically fall amid signs of economic strength, managed to push their way higher in what some analysts said was a counter-reaction to the sell-off in recent sessions. The 10-year note added more than 1/2 point, or $5 for each $1,000 invested while its yield, which moves inversely to price, fell to 5.33%. The 30-year bond was up 1 1/16 point to yield 5.75%. On the fund flow front, Trim Tabs reported that all equity funds had inflows of $7.6 billion in the week ending March 13 compared with inflows of $3.2 billion in the prior week. And equity funds that invest primarily in stocks had inflows of $7.1 billion, compared with inflows of $3.7 billion during the prior week. Last week's new plays (positions/opening prices/strategy): Although we did not track the issues individually, speculative straddles in American Express (NYSE:AXP), Veritas (NASDAQ:VRTS), WMS Industries (NYSE:WMS), Interwoven (NASDAQ:IWOV) and the CBOE Mini NDX Index (CBOE:MNX) offered profitable opportunities. In addition, credit spreads were initiated in Advent Software and Medicis Pharmaceutical. Advent (NSDQ:ADVS) APR50P/APR55P $0.70 credit bull-put Medicis (NYSE:MRX) APR65C/APR60C $0.60 credit bear-call Portfolio Activity: Friday's upside activity was a welcome event for most investors and the bullish bias was simply "icing on the cake" for many of the positions in the Spreads-Combos portfolio. The majority of plays in the Straddles group were already profitable but today's rally helped the position in Agilent (NYSE:A) extend its gains and boosted the Storage Technology (NYSE:STK) straddle into the plus column. Overall, there were 14 successful plays offered in the delta-neutral category for the March expiration. Among the conservative credit-spreads, positions in Cephalon (NASDAQ:CEPH), Express Scripts (NASDAQ:ESRX), Flir Systems (NASDAQ:FLIR), Gilead Sciences (NASDAQ:GILD), and L3 Communications (NYSE:LLL) ended at maximum profit and there were no adjustments. In the calendar spreads category, ImClone (NASDAQ:IMCL) was the big winner with a potential gain of over 100% in less than two weeks. The LEAPS and Covered-Calls play in United Airlines (NYSE:UAL) was also a surprise as the issue recovered from a major sell-off to provide a great short-term profit for conservative investors. Synthetic positions in Tidewater (NYSE:TDW) and Goodyear (NYSE:GT) offered profitable early-exit opportunities and the bullish stock-option "collar" in Sandisk (NASDAQ:SNDK) also rebounded, finishing the month above the sold call at $20. Looking forward, time-selling plays in Dupont (NYSE:DD) and Pactiv (NYSE:PTV) are performing well with both stocks trading very near the sold strike prices and the speculative debit spread in Providian (NYSE:PVN) is back in the black with the issue at $6. Today's activity in St. Jude Medical (NYSE:STJ) is also worth noting as the stock tested its all-time highs near $81 and appears poised for further upside movement. Our bullish synthetic position (APR85C/APR75P) in the issue may yet achieve a profit. Questions & comments on spreads/combos to Contact Support ****************************************************************** - CREDIT SPREADS - One of our readers asked if we would search for some conservative credit-spread candidates, since the March expiration period has come to an end and many traders are looking for new positions in which to invest their capital. With that idea in mind, we have decided to supplement Wednesday's list with these plays, which are based primarily on recent trends and technical indications. ****************************************************************** CAH - Cardinal Health $69.06 *** Prudential Upgrade! *** Cardinal Health (NSE:CAH) is a provider of products and services to healthcare providers and manufacturers, helping them improve the efficiency and quality of their healthcare services and products. Cardinal Health has four primary reporting segments: Pharmaceutical Distribution/Provider Services, Medical-Surgical Products and Services, Pharmaceutical Technologies and Services, and Automation and Information Services. Shares of Cardinal Health rallied Friday after analysts at Prudential Securities started coverage of the company with a "buy" rating, based on a positive outlook for stocks in the drug-distribution sector. Prudential put a price target of $83 on Cardinal Health, which is the largest U.S. drug wholesaler, saying the company has an "untarnished record of delivering 20% annual earnings per share growth for over 16 years." The news drove the stock price up and out of a recent trading and the renewed buying interest should help the issue test last year's highs near $74. Our conservative position allows traders to speculate on that outcome with relatively low risk. PLAY (conservative - bullish/credit spread): BUY PUT APR-60 CAH-PL OI=1136 A=$0.45 SELL PUT APR-65 CAH-PM OI=2197 B=$1.05 INITIAL NET CREDIT TARGET=$0.65-$0.75 PROFIT(max)=15% ****************************************************************** BBY - Best Buy Company $78.91 *** 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. Best Buy shares climbed to an 18-month high Friday as investors flocked to the retail giant amid hopes that an economic recovery will boost the company's earnings and stock price. Indeed, the recent bullish data suggests the recession may be over and many consumer stocks are starting to benefit from a more optimistic outlook among analysts. One industry expert who favors BBY is US Bancorp Piper Jaffray analyst Brent Rystrom and he is urging clients to pick up shares of the electronics retailer. Last week, Rystrom issued a "strong buy" rating on Best Buy Company due to its dominant position in the consumer electronics-retailing area. He noted that the company should be able to deliver "significant sales and earnings growth over the next several years" and that "recent results have been highly encouraging." Based on the positive technical indications, investors agree with that outlook and traders can profit from future upside activity in the issue with this position. PLAY (conservative - bullish/credit spread): BUY PUT APR-65 BBY-PM OI=1131 A=$0.55 SELL PUT APR-70 BBY-PN OI=1554 B=$1.10 INITIAL NET CREDIT TARGET=$0.65-$0.70 PROFIT(max)=15% ****************************************************************** IDPH - Idec Pharmaceuticals $69.96 *** Premium Selling! *** IDEC Pharmaceuticals (NASDAQ:IPH) is a biopharmaceutical company engaged in the research, development and commercialization of targeted therapies for the treatment of cancer and autoimmune and inflammatory diseases. The company's primary commercial product, Rituxan, and its most advanced product candidate, ZEVALIN (ibritumomab tiuxetan), are for use or intended for use in the treatment of certain B-cell non-Hodgkin's lymphomas (B-cell NHLs). B-cell NHLs currently afflict over 300,000 patients in the United States. The company is also developing products for the treatment of various autoimmune diseases, such as rheumatoid arthritis and psoriasis. Idec is one of our favorite issues in the biotechnology segment and the stock moved higher this week after U.S. regulators told competitor Corixa (NASDAQ:CRXA) that it must provide additional information regarding the safety and efficacy of its experimental non-Hodgkin's lymphoma treatment Bexxar. Idec Pharmaceuticals has a competing drug, Zevalin and any setback for Corixa is seen as a boost to the potential revenues for Idec. However, the long-term chart pattern for IDPH suggests there is heavy overhead supply just above the current price and that presents a favorable "premium-selling" opportunity for conservative traders. Plan to exit or adjust the position if IDPH closes above the current resistance area near $75. PLAY (conservative - bearish/credit spread): BUY CALL APR-85 IHD-DQ OI=166 A=$0.40 SELL CALL APR-80 IHD-DP OI=556 B=$0.90 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% ****************************************************************** - Speculation Plays - ****************************************************************** XMSR - XM Satellite Radio $15.04 *** The Future Of Radio? *** XM Satellite Radio Holdings (NASDAQ:XMSR) is a development stage company that seeks to become a premier nationwide provider of audio entertainment and information programming. XMSR owns one of two FCC licenses to provide a satellite digital radio service in the United States and it transmits its XM Radio service by satellites to vehicle, home and portable radios . The company offers a wide variety of music, news, talk, sports and other specialty programming on up to 100 distinct channels. XM Satellite Radio says they are transforming radio, an industry that has seen little technological change since the origination of FM almost 40 years ago. XM's programming lineup features 100 coast-to-coast digital channels in all genres and categories and the diverse selection is available for both new and existing car radios. General Motors is one of the biggest proponents of the technology, having rolled out factory-installed Delphi-Delco XM radios in its new Cadillac DeVilles and Sevilles, and they plan to offer the product in 21 new GM models this year. The system is certainly unique, having recently been named "Product of the Year" by Fortune, and "Invention of the Year" by Time and it was also Popular Science's "Best of What's New" Grand Award winner in the electronics category for 2001. In addition, XM received several awards at the 2001 CES, including "Best of CES" in the automotive category, and its popularity among auto-audiophiles is increasing by leaps and bounds. Traders who think the company's stock price has the ability to match their product's growth potential can speculate on that outcome in a conservative manner with this position. Target a credit in the position initially, to allow for a consolidation in the underlying issue. PLAY (speculative - bullish/synthetic position): BUY CALL APR-17.50 QSY-DW OI=1146 A=$0.70 SELL PUT APR-12.50 QSY-PV OI=884 B=$0.45 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.30-$0.50 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $400 per contract. ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** ANF - Abercrombie & Fitch $29.77 *** Probability Play! *** Abercrombie & Fitch (NYSE:ANF), through its many subsidiaries, is primarily engaged in the purchase, distribution and sale of men's, women's and kids' casual apparel. The company's retail activities are conducted under the Abercrombie & Fitch and Abercrombie trade names through retail stores, a catalogue, a magazine/catalogue and a web-site, all bearing some form of the Abercrombie name. Retail activities are also conducted under the Hollister Co. trade name through retail stores and a lifestyle web-site. Merchandise is targeted to appeal to customers in specialty markets who have distinctive consumer characteristics. The company is a specialty retailer of casual, classic American sportswear, targeted to men and women approximately 15 to 50 years of age and kids up to 14 years of age. The company's quarterly earnings are due May 14. This issue meets our criteria for a favorable straddle; cheap option premiums, a history of adequate price movement and the potential for volatility in the stock or its industry. This selection process provides the foremost combination of low risk and potentially high reward, but current news and market sentiment will have an effect on the issue, so review the play thoroughly and make your own decision about its outcome. PLAY (conservative - neutral/debit straddle): BUY CALL MAY-30 ANF-EF OI=1093 A=$2.30 BUY PUT MAY-30 ANF-QF OI=86 A=$2.35 INITIAL NET DEBIT TARGET=$4.40-$4.50 TARGET PROFIT=25-50% ****************************************************************** VECO - Veeco Instruments $29.85 *** Reader's Request! *** Veeco Instruments (NASDAQ:VECO) designs, manufactures, sells and services a broad line of equipment used by manufacturers in the optical telecommunications, data storage, semiconductor and research industries. These various industries produce computer integrated circuits, personal computers, hard drives, network servers, fiber optic networks, digital cameras, TV set-top boxes and personal digital assistants. The company's Process Equipment products precisely deposit or remove (etch) various materials in the manufacturing of advanced thin film magnetic heads for the data storage industry and optical telecommunications components. Veeco's Metrology equipment is used to provide critical surface measurements on semiconductor devices, thin film magnetic heads and disks used in hard drives and in optical telecommunications and research applications. One of our new readers submitted this issue for a speculative straddle and indeed, the position is viable based on analysis of historical price activity and the stock's recent technical pattern. Also, the probability of profit from this position is higher than other plays in the same strategy based on the discounted option premiums. As with any recommendation, the position should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (speculative - neutral/debit straddle): BUY CALL APR-30 QVC-DF OI=238 A=$2.15 BUY PUT APR-30 QVC-PF OI=152 A=$2.45 INITIAL NET DEBIT TARGET=$4.35-$4.45 TARGET PROFIT=15-25% ****************************************************************** MNX - CBOE Mini NDX Index $149.71 *** Instant Replay! *** The CBOE Mini-NDX Index (CBOE:MNX) is based on 1/10th the value of the Nasdaq-100 Index (NDX). The Nasdaq-100 Index is a modified, capitalization-weighted index composed of 100 of the largest non financial securities listed on the NASDAQ Stock Market. The index was created in 1985 with a base value set to 250 on February 1 of that year. After reaching a level of nearly 800 on December 31, 1993, the index level was halved on January 3, 1994. For more information on the MNX, visit the CBOE online at www.cboe.com. We received some favorable comments from one of our readers for introducing them to this popular index and as mentioned in last Sunday's section, the MNX is a common issue among professional traders. The (ATM) option prices and liquidity are perfect for traders who speculate on the movement of the technology segment and fortunately, the premiums for MNX options are theoretically favorable with regard to historic levels. Although the straddle is a bit too aggressive for our portfolio, experienced traders can attempt to profit from the activity on the NASDAQ with this position. PLAY (speculative - neutral/debit straddle): BUY CALL APR-150 MQX-DJ OI=3715 A=$6.60 BUY PUT APR-150 MQX-PJ OI=12128 A=$6.50 INITIAL NET DEBIT TARGET=$12.50-$12.75 TARGET PROFIT=15-25% ************************Advertisement************************* ”If you haven’t traded options online - you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success - Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ We're sticking with what's been working. 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