The Option Investor Newsletter Friday 03-29-2002 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 3-29 WE 3-22 WE 3-15 WE 3-08 DOW 10403.94 - 23.73 10427.67 -179.56 10607.23 + 34.74 +203.63 Nasdaq 1845.35 - 6.04 1851.39 - 16.91 1868.30 - 61.37 +126.93 S&P-100 577.87 - 2.22 580.09 - 11.04 591.13 + 1.29 + 13.68 S&P-500 1147.39 - 1.31 1148.70 - 17.46 1166.16 + 1.85 + 32.53 W5000 10775.74 - 1.12 10776.86 -127.83 10904.69 + 14.02 +330.66 RUT 506.46 + 4.07 502.39 + 3.27 499.12 - .73 + 21.51 TRAN 2917.96 + 40.69 2877.27 - 74.27 2951.54 - 58.70 +113.11 VIX 19.32 - 0.30 19.62 - 1.15 20.77 - 0.84 - 0.52 VXN 36.28 - 1.28 37.56 - 2.70 40.26 - 1.36 - 0.32 TRIN 0.84 1.12 0.56 0.73 TICK +793 +647 +855 +927 Put/Call .79 .66 .64 .62 ****************************************************************** The Week Ends Where It Started! by Jim Brown Only two major indexes ended the week with gains. The Russell-2000 gained +4.07 and the Dow Transports added +40.69. However things were not as bad as that first sentence may have indicated. The Dow only lost -23 points and as you can see by the table above the other major averages finished with losses of only a handful of points. Considering the significant drop on Monday any recovery to break even for the week should be considered positive. Unfortunately the recovery may have been artificial. There was a lingering hint of end of quarter window dressing added to significant short covering in the chip stocks on Friday. The news that moved the chip sector came from Taiwan Semiconductor which said they were raising their capital expenditures for this year by $1 billion dollars to $2.6 billion. A Goldman Sachs analyst said the market was only expecting a $350 to $500 million increase. Chip equipment manufacturers jumped at the open with AMAT adding +2.30, KLAC +2.18 and NVLS +2.03. Solectron gave the contract manufacturers a boost after announcing that it had entered into a deal with Lucent to build as much as $2 billion in optical networking equipment. It was a three-year deal which could be the leading edge of a new wave of manufacturing. SLR gained +11%, it was only a $7 stock, TER +1.43, JBL, CLS and SANM also gained but stopped at resistance. Surprisingly the network sector finished in the green despite the warning by Juniper on Wednesday night. Juniper said that not only JNPR but their rival CSCO was continuing to see weak demand from Internet service providers and telecommunications carriers. The Juniper CEO said they were seeing projects pushed out even further but at least they were not going away. Wells Fargo Securities said conditions could change in the next nine months IF traffic on the Internet continued to rise. This helped power the networkers and fiber optic companies to minor gains. CIEN +.93, JNPR +.70, HLIT +.61, CSCO +.59 cents. I only list these because it was surprising to see them positive after the warning. Economic reports surprised investors again with the Q4 GDP revision beating estimates slightly. At +1.7% growth compared to estimates of +1.4% it was not an explosion to the upside but once again stronger than expected. An improving balance of trade was given as the reason for the increase. Consumer spending held up better than expected but business spending was still anemic. Remember, this is the 4Q numbers we are talking about. The 1Q numbers will likely show a weaker consumer number now that zero percent financing is over and the holiday spending is history. Still the inventory correction cycle could push the 1Q growth back into the 4%-5% area which would make the Fed rethink the speed of future rate hikes. The Chicago PMI also rose more than expected to 55.7 and was the second month of positive growth. This continues to suggest that a manufacturing expansion is underway. New orders continued to grow, backlogs remained positive and inventories are shrinking at a slower pace. However, jobless claims rose to 394,000 for the last week which was a gain of +18,000. Continuing claims, people still out of work and drawing unemployment, rose to 3,526,000 and the highest level since January-5th. The final consumer confidence reading for March was revised upward slightly to 95.7 which was almost exactly where it was this time last year before the recession occurred. The strong gains in confidence could suffer if gas prices and interest rates continue to rise. The dramatic drop in gas prices amounted to an undeclared pay increase for most consumers and the +$.30 cent hike over the past few weeks amounts to an additional $50 a month expense for two car families. SUV owners would suffer even more. Mortgage rates rose to an eight month high of 7.18% last week and will go higher as the prime home buying season approaches along with almost certain rate hikes by the Fed in June if not in May. This may make many buyers rethink their plans. What does all of this mean to us as traders? Several problems lay in our path. The April earnings cycle kicks off with the first Dow component to report, AA, on Friday April 5th. However the rush does not begin until the week of the 15th when the trickle turns into a flood of hundreds of announcements. Still, next week should provide several more earning warnings now that the quarter is officially over. Those events could color investor sentiment going forward. With Thursday being the end of the quarter we are now open to exposure from portfolio stripping. What I mean is that the portfolio window dressing over the last two weeks may turn into undressing as fund managers dump those same stocks to prepare for the summer doldrums. With the market setting up for a possible fall these managers will be looking at buying these stocks back cheaper in the future. According to TrimTabs.com there was another inflow of cash into stock funds in the week ended Wednesday of $2.8 billion. This makes three weeks of substantial positive cash flow and the markets have not been able to breakout of the current trading range. Beginning next week we will start seeing money leave the markets and head towards the IRS coffers. With tax day only 19 days away there could be a steady outflow of cash to pay the taxman. Many traders, optimists all, wait until the last minute to close positions in the hopes of profits to help defer the tax payments. Depressing to most traders was the -100 point drop on the Dow from the highs of the day to close negative. The Nasdaq closed near its highs of the day but that is not saying much since the range for the entire day was only 19 points. It was pretty much a chip led rally but many sectors participated. Advancers beat decliners on the Nasdaq 4:3 but considering the very weak volume on both the NYSE and Nasdaq you can draw no conclusions. The lack of a rally at the close could be a bad omen for Monday. Typically, traders buy the close on the Thursday before Easter and then sell those positions after any pop on Mon/Tue. Thursday showed zero interest in buying at the close other than some short covering on the Nasdaq. The talking heads on CNBC kept repeating the fact that 77% of the S&P-600 was over its 50 DMA and the majority were over their 200 DMA as well. This has only happened five times since 1996 and each time it ended with a dramatic slide. Couple all of this together with the VIX hitting a new 52-week low on Friday of 18.87 and I think you would agree there could be problems ahead. The break under 19 is a clear warning indicator. If you recall my research on Tuesday regarding the last four 52-week VIX lows I would be very hesitant about opening new long positions at this time. My entry points remain 10500/1875/1155 respectively. The Dow broke 10500 by a whopping two points and and for an eternity of two minutes on Friday before dropping -100 points to close back near 10400. The S&P came within .55 cents of hitting 1155 before falling back at the close. The Nasdaq did not even get close to the 1875 entry point. I think you can see by these numbers EXACTLY where resistance is and where any rally on Monday could fail. Don't get me wrong. If an upside explosion occurs we want to be on it at those levels since the shorts will be in shock. Until that happens I would remain flat or short below S&P-1140 and Nasdaq 1825. Have a great weekend! Enter Passively, Exit Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** Hot Potato Just another day of toss the stocks around. Just like clockwork we had the morning move quickly reversed as daily trend headed off in opposite direction. Fading the open this week was easy money on drops and pops alike! (Weekly/Daily Charts: SMH) Last time we looked at the SMH in here it was posting an inside day. Simple solution for that is play the break above or below previous day's bar, which in this case was a short near 46.80. Sure enough, traders able to watch market action could have skimmed a point or two there and a point or two back up as well. More volatile than the Qs, this is my preferred tech playground when on the move. And it could be moving soon from here. Daily chart is bullish and a push to the 50 area is likely for successful longs. If daily chart signals get bearish looking while price action stalls below 50 area, short it with both barrels! (Weekly/Daily Charts: BBH) BBH was also a nice short at 126.25 and promptly tanked to yield several points gain in "short" order. Now resting on trendline support but a scary long if you ask me. Weekly chart is topped and price action remains below 50% Fib retrace at 121+ area. Could easily hit 116.5 area from here and no signs of turning bullish in chart signals tonight. Pass. (Weekly/Daily Charts: OIH) Oil services have been smokin' this year and old economy promises to rule markets for coming months and possibly years ahead. But I'd be careful with longs right now. Its 69 area is formidable resistance the past four weeks and weekly signals are toppy. Look for another swing to 75 area that matches up weekly Fib 62% and upper expanding wedge resistance in daily chart. I'd be a cautious long right here but a firm seller near 75 zone if it goes that far. (Weekly/Daily Charts: RTH) Retail is channeling higher as well. Daily chart signals are just turning bullish as price action pops off support. An ideal long entry would be one more touch of the red line and bounce from there. Stops go just beneath the line for easy risk/reward ratio. (SPX/ES02M) Where's the bullish love? After that irrational pop higher this morning, indexes ground lower and slid into the close. Easiest intraday shorts we've seen all week and heaven knows we saw a few! But look what happened after the close... GLOBEX futures plunged nearly six points in less than 15 minutes!!! Why would that be? Here's a wild guess... clueless fund managers who cannot trade their way out of a kitty litter box marked up their dismal portfolios today in the endless quest to hoodwink Joe & Jane Innocent "investor". Makes it look like the fund is actually worth sending cash into when actuality knows it's a pig. Regardless, fundies playing "push the pile" bought a whole bunch of stocks today they have no intention of keeping. In order to protect from a gap-down open on Monday before they can dump the smelly mess, better get short the S&Ps to hedge. That action triggers stops as others get short anticipating the fleece window dressings will be ripped down on Monday as markets return to "normal". Normal? It is a relative term. Conclusion S&P futures are currently resting nearly -6 index points below cash value. Could be a fun one on Monday, but only if we hit the right entry in the right direction with the right amount of capital. All else is merely noise to that basic reality. Trade either way with prudence and enjoy the happiest of Easter Holidays (and/or Passover) before giving thought to the next opening bell! Before I forget, please take note that I will be on vacation next week. Feel free to direct trading questions to Jeff or Eric and index questions to Leigh. I'll be writing again the week of April 8th. Take Great Care, Austin P MARKET WRAP - ADDITIONAL COMMENTS 3/28/02 It's a mixed market, which is fairly typical of one in transition. The biggest negative is the historical tendency for the VIX or CBOE volatility index when it gets down to the 20 area or under, to indicate at least one more sizable downswing ahead. I would key off the S&P 500 Index (SPX), as this is the sector of the market that is really in "play" and has some upside momentum. As you can see from the chart below, Thursday's high, which no doubt reflects some fund manager portfolio buying that may not be present on Monday, runs right up against the top end of the downtrend channel. The following scenarios are relevant: Near-term BULLISH: SPX advances through 1152-1154 and achieves a definite upside breakout of the top end of the downtrend channel. 1150 must then hold as subsequent support on Mon.-Tues. If so, the next upside objective is 1159-1160 -- a target also suggested by the bullish flag on the hourly chart. Above this, the next obvious target is to 1170, the top of the current broad trading range. A bullish bias is also suggested by the rebound back above the 200-day moving average. Near-term BEARISH: SPX dips under 1145 and this forms a top. If so, the next target is down toward the 1120-1125 area, where a buying opportunity may set up, which I will update on later if this scenario develops. Near-term NEUTRAL: SPX drifts sideways in a range between 1145 on the downside and 1155 on the upside. If so, there is not even a good short-term trade in the indexes. Anything more than trading on a short-term basis, with limited price objectives, is not suggested by the still mixed fundamental and technical picture. Traders that are not nimble and quick, ought to stay on the sidelines. A better opportunity should present itself, especially if there is one more sizable downswing, where a larger position could be taken and for a longer time frame, going out to the May calls. Leigh Stevens Chief Investment Strategist ************************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 ************** Low Volatility Plays - Continued Last week I offered a couple combination plays on the QQQ/DJX because of the low volatility and good chance of a strong move soon. After looking at dozens of plays today I came right back to the DJX/QQQ again as the best chance of success. Only this time I am going directional. With the VIX breaking under 19 on Thursday it is looking more like a market drop every day. Still these could be considered lottery plays since market timing is harder than finding Osama Bin Laden. I am only going to quote the April strikes because I think the drop will come before expiration on April 19th for reasons stated in my wrap. QQQ Puts The Nasdaq continues to look weak despite the positive close on Thursday. A breakdown in the index could bring it back to $33.50. Don't be greedy with these short-term options. Shoot for a 50% profit and close the play. ************************* DJX May Puts I recommended the MAY $104 puts last week with a trigger point of 10600 to enter the trade. After this weeks performance we may not see Dow 10600 again before May. Should it happen I would gladly load up on that strike. Until then I would suggest taking a position in the May $102 puts for $2.00 on any bounce or market if the markets open down on Monday. The April $103 puts are only $1.50 but with three weeks remaining it is possible the Dow could linger in this trading range and the premium would simply decay only to see a crash the Monday after expiration. Go with the May $104 and don't be greedy. Shoot for a 50% profit and close the play or at least set a tight stop on the profits. *************** For justification on the above plays read the last several paragraphs of my Sunday market wrap. *************** As always, do your own research and be comfortable with the downside risk before entering any play. Good Luck Jim **************** MARKET SENTIMENT **************** Enter Second-Quarter By Eric Utley The first-quarter of '02 finished with a blah. The major averages finished last week's trading bifurcated, displaying little in the way of volatility. The sector scorecard finished mostly positive. Technology sectors of the market were strongest at quarter's end, possibly a product of end of the quarter mark-ups. For example, the beaten down Fiber Optic Index (FOP.X) was last Thursday's best performing sector; it was one of the worst performing during the quarter. Meanwhile, the defensive sectors of the market pulled back, possibly a product of end of the quarter profit taking. The super strong Gold and Silver Index (XAU.X) led the way to the downside last Thursday with its 1.78 percent decline. One trend that was consistent last quarter was the decline in implied volatility. The CBOE Market Volatility Index (VIX.X) hit a new yearly low during Thursday's trading. Appropriate enough! The complacency, in my opinion, is a problem for stocks ahead of the summer doldrums and first-quarter earnings season. By way of the options market, participants appear far too comfortable with the prevailing sentiment in the economy and market. I don't know what the catalyst(s) will be to increase fear. It could be major disappointments from the technology sector; it could be a revival of accounting worries; it could be heightened tensions in the Middle East; it could be an invasion into Iraq; it could be merely a function of seasonality. Whatever plays out, I think that the VIX below 20 is dangerous for stocks. The way I'm playing it is through legging into various May and June puts, including individual stocks and indexes. The defined risk of buying options on sale is a bet that I'm comfortable with. The Nasdaq-100 Bullish Percent ($BPNDX), big surprise, is another metric I'm monitoring closely. We've witnessed a pretty big decline in the $BPNDX in the last week, which has removed some of the downside risk associated with the tech laden index. In Thursday's session, the $BPNDX dropped by another 3 percent, or net 3 more stocks went on sell signals. The $BPNDX in its current set-up has a long way to go before giving a Bear Confirmed signal, which itself says that there's still some downside risk. Finally, the end of quarter mark-ups were in full effect Thursday. Just take a look at the lousy volume figures in conjunction with the new high/new low numbers. Such light volume allowed the shady characters in money management land to push positions around, thereby boosting performance in the final day of the quarter. The shenanigans played at quarter's end can often lead to artificial weakness in some of the mark-up targets, because the demand that pushed the stocks higher was artificial to begin with. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 10404 Moving Averages: (Simple) 10-dma: 10470 50-dma: 10111 200-dma: 9981 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1147 Moving Averages: (Simple) 10-dma: 1152 50-dma: 1127 200-dma: 1142 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1453 Moving Averages: (Simple) 10-dma: 1467 50-dma: 1479 200-dma: 1536 Fiber Optics ($FOP) The FOP was the best performing sector in Thursday's session, gaining 4.41 percent for the day. That move came in spite of a warning from Juniper Networks (NASDAQ:JNPR). Maybe a little short covering and window dressing at play? Sector leaders included Ciena (NASDAQ:CIEN), ONI Systems (NASDAQ:ONIS), who Ciena is acquiring, Lucent (NYSE:LU), Vitesse (NASDAQ:VTSS), and Nortel (NYSE:NT). 52-week High: 139 52-week Low : 81 Current : 91 Moving Averages: (Simple) 10-dma: 90 50-dma: 97 200-dma: N/A Gold and Silver ($XAU) The rally in tech stocks attracted capital away from the defensive Gold and Silver Index (XAU.X) in Thursday's session. The XAU earned the day's worst performing sector spot with its 1.78 percent decline. It's been a volatile sector recently, a marked change from six to nine months ago. Leading to the downside included shares of Harmony Gold (NASDAQ:HGMCY), Agnico Eagle Mines (NYSE:AEM), Gold Fields (NASDAQ:GOLD), Anglogold (NYSE:AU), and Placer Dome (NYSE:PDG). 52-week High: 72 52-week Low : 46 Current : 71 Moving Averages: (Simple) 10-dma: 67 50-dma: 64 200-dma: 57 ----------------------------------------------------------------- Market Volatility The VIX hit another new yearly low in last Thursday's session with its trade below 19. Meanwhile, the VXN traced a new all-time low with its trade down to 36.21 CBOE Market Volatility Index (VIX) - 19.32 +0.07 Nasdaq-100 Volatility Index (VXN) - 36.28 -0.88 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.79 365,706 289,346 Equity Only 0.70 325,461 227,508 OEX 1.07 7,778 8,291 QQQ 3.69 16,931 62,493 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 64 + 0 Bull Confirmed NASDAQ-100 55 - 3 Bull Correction DOW 77 + 0 Bull Confirmed S&P 500 75 + 0 Bull Confirmed S&P 100 76 - 1 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 1.13 10-Day Arms Index 1.04 21-Day Arms Index 1.04 55-Day Arms Index 1.21 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 1740 1414 NASDAQ 2037 1543 New Highs New Lows NYSE 196 33 NASDAQ 210 43 Volume (in millions) NYSE 1,127 NASDAQ 1,493 ----------------------------------------------------------------- Commitments Of Traders Report: 03/19/02 ***COT data will be updated next week*** 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 S&P Commercials maintained their relatively higher net bearish position in the prior week by dropping a significant number of longs and a small number of shorts. The group's % of OI, however, increased by a larger amount. Small traders maintained their yearly high net bullish position. Commercials Long Short Net % Of OI 03/05/02 361,254 445,989 (84,735) (10.5%) 03/12/02 396,050 483,606 (87,556) (9.9%) 03/19/02 322,938 410,494 (87,556) (11.9%) 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 03/05/02 161,711 60,941 100,770 45.3% 03/12/02 179,825 75,025 104,800 42.6% 03/19/02 145,262 43,066 102,196 54.3% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 104,800 - 3/05/02 NASDAQ-100 NDX commercials dropped a big chunk of their long position, resulting in a drastic climb in the group's net bearish stance. Small traders went the opposite direction by shedding a larger number of short contracts, establishing a firm net bullish position. Commercials Long Short Net % of OI 03/05/02 33,549 35,419 (1,870) (2.7%) 03/12/02 37,415 42,942 (5,527) (6.9%) 03/19/02 24,792 33,699 (8,907) (15.2%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: 7,774 - 12/21/01 Small Traders Long Short Net % of OI 03/05/02 11,961 11,214 747 3.2% 03/12/02 14,571 13,045 1,526 5.5% 03/19/02 11,637 5,527 6,110 35.6% 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 commercials shed a significant number of both long and short positions. The result of their actions was a drastic drop in the group's net bullish position. Small traders reduced their total position, too, resulting in a modest drop in the group's net bearish position. Commercials Long Short Net % of OI 03/05/02 37,036 25,554 11,482 18.3% 03/12/02 35,080 23,204 11,876 20.4% 03/19/02 20,858 13,283 7,575 22.2% 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 03/05/02 6,589 13,057 (6,468) (32.9%) 03/12/02 6,400 13,070 (6,670) (34.3%) 03/19/02 4,651 10,367 (5,716) (38.1%) 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 *************** April's End Brings Weak Trend By Eric Utley The end of April brings to an end the best six months of the year. The period from November to April has historically out performed the "other" six months by a wide margin. Some refer to the "other" six months as the summer doldrums. I find the timing of the lack of fear in the market most suspicious. I'm of course referring to the historically low levels of the CBOE Market Volatility Index (VIX.X). If we're about to enter the worst six months of the year, why then is the VIX below 20? 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 ---------------------------- Invision (NASDAQ:INVN) Would you evaluate INVN? It has made a nice run since 09/11 but is beginning to break down. I would appreciate your opinion. Thank you. - Michael Thanks for the question, Michael. INVN has indeed had a nice run since 09/11: the stock is about 400 percent higher since 09/17; more than 1,000 percent higher since 09/10. In addition to its absolute performance, INVN has been out performing the broader market (S&P 500) in a big way. The two go hand-in-hand, so mine is a rather obvious observation. But I bring it up because INVN appears to be losing some of its relative strength momentum; that is, its relative strength is getting toppy. Since December, INVN hasn't been able to make any more upside progress in its relative strength. Since early February, the stock has traded in a narrowing range versus the S&P 500. I don't know if this is an end to the stock's run, using relative strength as a guide, but it's something to monitor if you're leaning bullish on this stock. INVN versus The Market If you're bullish on a stock like INVN, which has had an incredible run, I think the better approach is to buy the stock at support. Last week, INVN stopped at its double bottom at $38. If the stock comes in to that level, you can manage risk pretty tightly with a stop at $37. A better bullish position might be added at the $36 level, where INVN would find a quadruple bottom. If the longs in this stock are still serious, I think you'll see them defend the $36 level, possibly resulting in a three or four point pop higher, maybe more. Again, risk is easy to manage at the $36 level with a stop at $35. I wouldn't be inclined to short INVN on a breakdown based on its technicals. It's still a very strong stock despite the topping of relative strength; quite simply, it's still above its bullish support line by a wide margin. INVN - Levels ---------------------------- Gold and Silver (XAU.X) I have been pounding the table all month on gold and the reasons why. Last Friday March 22nd 02 was a primary example of the money flow. We saw both the equities and bonds sell off, and I could not find out where the money flow was going for about 3 hours... then the price of gold jumped. It's my professional opinion that gold is being bought and PHYSICALLY taken possession of by the Japanese before their fiscal year ends. As of today, there is a REAL fear of a run on the banks in Japan ..considering the amount of money they save, and the differences between their banks reserves, it is an impossible gap. Again, as a technician, it does get down to supply and demand. April in Japan could just go by the wayside, or it could be VERY exciting. I also find it unnerving that Merrill Lynch retail issued a buy signal on Japan, at the same time Merrill Lynch Institutional ( Japanese based ) was shorting the Japanese markets. - Don Intelligent observations, Don. Thank you. There has definitely been a flight to the safety of gold, especially during market conditions such as those alluded to. I've read reports about the physical buying of the commodity by Japanese and other central banks. The information flow from Japan is, however, imperfect, at least my resources are. I cannot give an intelligent take on that notion, simply because I don't know enough about the dynamics involved. Nevertheless, the reports that I have read imply exactly what Don alluded to: there's fear building in the Japanese banking system. I do know this much: the Japanese fiscal year ends in April. If in fact the Japanese have been buying gold, I don't know if it's been a function of fiscal year end positioning. That said, there could be some movement in gold next week that fits into the bigger picture. (I plan to do more research over the holiday weekend and will relay my findings if they're significant.) The reason, in my opinion, that the notion of a run on Japanese banks is important is because of the potential adverse impact on the U.S. economy and market. A lot of U.S. stocks and bonds are owned by foreign investors, including big chunks held by Japanese investors. A meltdown in the Japanese financial system could result in large asset sales in order to raise cash. The mixed signals coming from Japan make this matter all the more difficult. Merrill's retail call boosted in a big way many of the Japanese-traded stocks here in the U.S. We were profiling Toyota Motor (NYSE:TM) and Sony (NYSE:SNE), for example, in late February and saw a decent upside move in those stocks. Unfortunately, I don't have insight into Merrill's institutional actions in Japan. From what I've gathered, the Japanese government banned short sales, which is contradictory to what Don asserted. Whatever the Japanese are doing, we'll be able to detect their actions in the market, along with other traders. There's no doubt that gold has been incredibly strong. Spot prices traded back above the $300 per ounce level last week and look to go higher. What I found interesting was the defending of the $290 per ounce level a few weeks ago. I think that the volume we saw go off in February was the initiation of a big long position, and not necessarily all short covering. Those longs appear to be defending positions with great fervor. The key technical level, in my opinion, is around $305 per ounce. If gold clears that next week, then I think a run up to the $315 per ounce level is not out of the question. Gold (GC02J)- Daily Of course if the price of the commodity continues higher, the gold equities should follow. The equities have had the tendency to lead the commodity in recent weeks, not by much, but a tradable amount. There may be some arbitrage opportunities for skilled trades with that dynamic going forward. Separately, there are two things I'd like to point out concerning the Gold and Silver Index (XAU.X). First, it was the star performer during the first-quarter, finishing more than 30 percent higher. Second, the options on the XAU.X are one of the few index options that I like to trade because of their liquidity. If you can't wait for single stock futures to launch, the XAU.X options are a viable leveraged trading vehicle for moves in gold. As for the technicals in the XAU.X, I think it could trace a new high up around the 73 to 74 mark. As my style is to not chase performance, I'll be looking to get long gold positions on a pullback to the 50 percent retracement level of the bracket that I've used in the chart below. XAU.X - Weekly ---------------------------- 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 BBY Best Buy Tue, Apr 2 -----N/A----- 1.61 CC Circuit City Stores Tue, Apr 2 -----N/A----- 0.73 IBC Interstate Bakeries Tue, Apr 2 Before the Bell 0.33 THC Tenet Healthcare Tue, Apr 2 Before the Bell 0.82 TKTX Transkaryotic Tue, Apr 2 After the Bell -0.55 BBBY Bed Bath&Beyond Wed, Apr 3 -----N/A----- 0.26 L Liberty Media Group Wed, Apr 3 After the Bell -0.03 IMCL Imclone Sys Wed, Apr 3 Before the Bell N/A GAP Great Atl & Pac Tea Thu, Apr 4 Before the Bell 0.18 GTK Gtech Holdings Thu, Apr 4 Before the Bell 0.86 ISCA Int Speedway Thu, Apr 4 -----N/A----- 0.48 OCENY Oce N.V. Thu, Apr 4 -----N/A----- N/A SVU Supervalu Thu, Apr 4 Before the Bell 0.51 MSM MSC Industrial Thu, Apr 4 Before the Bell N/A AA ALCOA Fri, Apr 5 -----N/A----- 0.23 ================================================================= Upcoming Stock Splits This Week & Next... Symbol Company Name Ratio Payable Executable YDNT Young Innovations 3:2 03/28 04/01 TOL Toll Brothers 2:1 03/28 04/01 JEC Jacobs Engineering Group 2:1 04/01 04/02 NDN 99 Cents Only Stores 4:3 04/03 04/04 MKC McCormick & Co 2:1 04/05 04/08 ALLY Alliance Gaming 2:1 04/08 04/09 THQI THQ Inc 3:2 04/09 04/10 DHI D.R. Horton 3:2 04/09 04/10 DKWD D&K Healthcare 2:1 04/11 04/12 AVD American Vanguard Corp 4:3 04/12 04/13 ================================================================= Economic Reports As the market continues to focus on signs for an expanding economy, reports like Monday's Construction Spending and Tuesday's Factory Orders will play a roll next week. The auto and truck sales will be interesting to note but investors will probably be listening for any pre-earnings announcements now that the quarter is over. Earnings start up again in two to three weeks. ================================================================= Monday, 04/01/02 Auto Sales (NA) Mar Forecast: 5.6M Previous: 5.6M Truck Sales (NA) Mar Forecast: 7.5M Previous: 7.6M ISM Index (DM) Mar Forecast: 54.3 Previous: 54.7 Construction Spending(DM)Feb Forecast: 0.8% Previous: 1.5% Tuesday, 04/02/02 Factory Orders (DM) Feb Forecast: 0.5% Previous: 1.2% Wednesday, 04/03/02 ISM Services (DM) Mar Forecast: 57.0 Previous: 58.7 Thursday, 04/04/02 Initial Claims (BB) 03/30 Forecast: N/A Previous: 394K Friday, 04/05/02 Nonfarm Payrolls (BB) Mar Forecast: 23K Previous: 66K Unemployment Rate (BB) Mar Forecast: 5.6% Previous: 5.5% Hourly Earnings (BB) Mar Forecast: 0.2% Previous: 0.1% Average Workweek (BB) Mar Forecast: 34.2 Previous: 34.1 Consumer Credit (AB) Feb Forecast: $8.5B Previous: $12.8B 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 Friday 03-29-2002 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: Thursday 03/28/2002 No Big Surprise! News & Notes: From last night's Summation: "Thursday is for intraday traders only. Monday should begat a return to “normal” market action, whatever that is these days!" No kidding on that one! Easy upside S&P long plays in the morning and even easier downside plays in the afternoon, but one had to be quick on the entry and faster on the exit for that quick rally burst which failed before long. Qs offered little to nothing once again as they continue to under-perform the other indexes from bell to bell. Featured Markets: [60/30-Min Chart: OEX] The OEX popped cleanly outside its neutral wedge from the open of trading and printed session highs within that hour. From there it was back down towards support where it came to rest on previous wedge while inside another. Stochastic values point straight down and indicate a lower open for Monday. This would be no revelation as S&P futures promptly dove several points after the closing bell. [60/30-Min Chart: SPX] Same story SPX. I'll play any downward break at the open that doesn't gap. Watch 1143 area as support but if it breaks, 1130 area will soon be tested again. [60/30-Min Chart: QQQ] QQQs were stuck in the mud all session and formed a slightly bullish coil here. But stochastic values suggest more weakness is ahead, so watch a quick pop to 36.30ish area and failure at resistance to get short again. Summation: --------- Unless futures rally on Sunday night, we will see a lower open in the cash market Monday. I will not play the direction of any gap- open moves right now as they tend to offer better fades than anything. Wait for ideal entry setups, be careful with capital amount risked and take profits if/when possible! Trade Management: Option traders may choose listed In-The-Money (ITM) or Out-The- Money (OTM) contracts by personal preference. They are selected based on volume, open interest and "Delta" values in that order. Our preference is usually OTM contracts except for the last few days of expiration when ATM or ITM contracts are preferred. Index Trader Sector-Trade Game Plan: Thursday 03/28/2002 Popped Out News & Notes: We tightened stops last night in anticipation of wild gyrations today. While we couldn't exactly call it wild, today's session certainly did gyrate! Featured Plays: None Summation: Most tracked plays stopped out for slight loss or gain. BBH short has several points gain locked in and would make the entire short effort here the past week slightly green save for a huge gap-up open on Monday. Markets went sideways and nowhere, as did our recent play & hold attempts. All performed very well several times intra-session but for those who cannot baby-sit open markets, this week was merely a push. Expect a new selection of plays tracked from early next week forward as market setups permit. Have an excellent holiday weekend! 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 New Play Targets: None Open Long Plays: None Open Short Plays: ---------------- XLB ** XLP ** Short: 23.75 Short: 26.00 Stop: 24.50 Stop: 26.75 XLV ** XLY ** Short: 29.00 Short: 29.90 Stop: 30.00 Stop: 30.50 IYD IJJ Short: 45.25 Short: 97.00 Stop: 47.00 Stop: 99.00 [hit] -2.00 IYR IYE Short: 84.75 Short: 49.70 Stop: 86.00 Stop: 52.00 DIA **[DJX] IYM Short: 105.90 Short: 42.00 Stop: 103.50 Stop: 41.00 [hit] +2.40 [hit] +1.00 03/25 Listings -------------- QQQ ** SMH ** BBH ** Short: 36.60 Short: 46.25 Short: 126.25 Stop: 36.00 Stop: 46.00 Stop: 120.00 [hit] +0.60 [hit] +0.25 OIH ** MKH ** RTH ** Short: 65.50 Short: 58.50 Short: 100.00 Stop: 68.00 Stop: 58.50 Stop: 100.00 [hit] -2.50 [hit] 0.00 [hit] 0.00 TTH ** FFF ** IWD Short: 38.50 Short: 82.25 Short: 57.50 Stop: 38.00 Stop: 82.25 Stop: 57.75 [hit] + .50 [hit] 0.00 [hit] 0.00 IWM IWS IYC Short: 99.75 Short: 82.75 Short: 57.00 Stop: 100.75 Stop: 83.50 Stop: 57.50 [hit] -1.00 [hit] -0.75 [hit] -0.50 IWW IYY IVE Short: 73.70 Short: 53.00 Short: 55.50 Stop: 74.70 Stop: 54.00 Stop: 56.00 [hit] -0.30 XLE IYM XNG (options only) Short: 28.40 Short: 41.50 Short: 193.25 Stop: 29.40 Stop: 42.50 Stop: 203.00 *********************************************************** DAILY RESULTS *********************************************************** CALLS Mon Tue Wed Thu Week BAC 69.12 -0.50 0.97 -0.32 -0.79 -0.63 Dropped, stall IDPH 64.30 -2.05 0.84 -0.26 -3.43 -4.90 Dropped, stop COF 63.85 -2.83 2.21 1.17 -0.07 0.48 Trouble at $65 EOG 40.56 -0.24 -0.58 1.37 -0.11 0.40 Consolidating KLAC 66.50 -0.88 0.75 -0.81 2.18 1.24 Ready to break CAH 70.89 -1.34 -0.68 1.36 0.29 0.84 Past resistance LH 95.86 -0.66 2.36 2.44 -0.19 3.95 Pure strength THC 67.02 0.51 0.33 0.88 0.61 1.33 $67 breakout UNH 76.42 -0.33 0.03 1.02 1.02 1.74 New, higher HLIT 11.60 -0.52 0.54 0.37 0.61 1.00 New, performer SLAB 35.33 -0.74 0.87 -1.07 2.33 1.39 New, bull flag VARI 37.94 -0.31 0.27 0.02 2.11 2.09 New, leader PUTS ISSX 22.85 -0.69 -2.13 0.29 -0.51 -3.04 Next leg down MIL 44.24 -0.97 0.62 -0.46 0.19 -0.62 Still waiting GDW 63.50 -0.75 0.80 1.08 -0.10 1.03 Dropped, rates TMPW 34.47 -0.01 0.80 0.06 0.63 1.48 Biding time FLIR 47.75 -3.44 3.39 0.94 2.17 3.06 Dropped, stop EMLX 32.93 -1.79 0.04 1.62 1.51 1.38 Dropped, stop GNSS 26.00 -1.12 -1.81 -0.29 1.29 -1.93 Short covering IBM 104.00 -2.04 -0.66 0.49 0.61 -1.60 Struggling CVG 29.57 -0.61 0.06 -0.12 -0.71 1.38 New, breakdown CTX 51.93 -1.51 1.54 -1.49 -1.05 -3.51 New, housing ************************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: ********************* HLIT - Harmonic $11.60 (+1.00 last week) See details in play list Put Play of the Day: ******************** CTX – Centex Corporation $51.93 (-3.51 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 ^^^^^ IDPH $64.30 (-4.90) The AMEX Biotechnology Sector Index (BTK.X) traded poorly for most of Thursday's session, resulting in IDPH breaking down from its recent consolidation near relative highs. The stock fell back down to the $65 area, taking out support at the $67 and $66 levels. The technical damage combined with reversing sentiment in the biotech space have resulted in dropped coverage this weekend. Look for any bounce early next week to cut losses. BAC $68.02 (-0.63) Have you ever overstayed your welcome at a party? It's not a pleasant feeling, and it appears we are in danger of doing just that with our BAC play. While it has treated us well during its tenure on the call list, it looks like this one is getting very tired. In the past 2 weeks, the stock has been turned back from the $69 level on 8 separate attempts. And now the daily range appears to be expanding without making any upward progress. That is a sure sign of instability, and we'll opt to take our gains and move on to other more attractive plays. PUTS ^^^^ GDW $63.50 (+1.03) GDW broke above its very short-term consolidation that we wrote about in the last update. The stock traded above the $63 level in Wednesday's session and proceeded to tick above the $64 level in Friday's session. For this play to work, we need to see long-term rates rise faster than they did in last week's trading. That just didn't happen, which has us concerned for more upside in GDW. Traders with open plays can look for weakness early next week to take quick losses and minimize damage. EMLX $32.93 (+1.38) The bulls and bears in EMLX spent the week duking it out just below the $32.50 resistance level on low volume, but in the end, the buyers won out, pushing through our stop early in the day and really never showing any weakness throughout the day, despite a lack of broad market strength. With the descending trendline and our stop broken, it's time to relegate this play to the drop list. Use any weakness on Monday as an opportunity to exit at a better price. FLIR $47.75 (+3.06) Remember that mirror image reversal we saw in shares of FLIR earlier in the week. Well, it looks like that 'Tweezer Bottom' pattern proved to be correct again in calling a near term bottom in the stock. Since then, the stock has been working higher and the bulls pushed FLIR through our $46 stop at the open on Thursday morning and they never looked back. Needless to say, the bearish trend has been broken and we're dropping the play this weekend. *********** 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 Friday 03-29-2002 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 ************** VARI - Varian $37.94 (+2.09 last week) Varian, Inc. is a technology company engaged in the design, development, manufacture, sale and service of scientific instruments and vacuum technologies, and in contract electronics manufacturing. The Company's operations are grouped into three segments: Scientific Instruments, Vacuum Technologies and Electronics Manufacturing. Niche technology firms survived the economic downturn through diversification and solid risk management. Those firms stand to benefit most from the recovery, positioned stronger that those companies dependent on one or two segments of the economy. Varian delivered stellar results in its most recent report and is on track to deliver again for the next quarter. The company reported in January that its increased sales to life sciences customers boosted the bottom line. Investors will be looking for that division of the company to deliver once again when it reports later in April. The stock has reflected the improved outlook for the company as VARI finished last week's trading just off of its 52-week high at the $38.31 level. A breakout above that level early next week could bring in the momentum traders who should carry the stock higher. Traders can look for that breakout in a strong broader market next week, just make sure to confirm strong volume before entering new bullish plays into strength above current levels. Those who'd prefer waiting for a pullback can look for market weakness to drag VARI back down to the $36 mark where the 10-dma currently sits. A rebound from there would offer favorable entries on weakness. Our stop is initially in place at $35.25. BUY CALL APR-35*IUA-DG OI=1516 at $3.60 SL=2.00 BUY CALL APR-40 IUA-DH OI= 77 at $0.70 SL=0.25 BUY CALL MAY-35 IUA-EG OI= 85 at $4.30 SL=2.00 BUY CALL MAY-40 IUA-EH OI= 87 at $1.50 SL=0.75 Average Daily Volume = 249 K HLIT - Harmonic $11.60 (+1.00 last week) Harmonic, Inc. designs, manufactures and markets digital and fiber optic systems for delivering video, voice and data services over cable, satellite, telco and wireless networks. Harmonic's products fall into two principal groups, Broadband Access Networks Products and Convergent Systems Products. In addition, the Company provides Professional Services and Systems Support to its customers worldwide. Despite the overwhelming weakness in the broader networking sector, some stocks within the group are displaying signs of strength. The Networking Index (NWX.X) finished the quarter lower by more than 20%. By comparison, shares of Harmonic finished the quarter lower by a small 3.5%. The stock's out performance relative to its sector is certainly impressive. Its relative strength could lead to a trade higher in the coming weeks if the NWX.X gets its legs. Since bottoming out last fall, HLIT has traded in a pattern a rising relative lows, while its relative highs have been marked by the $14 to $15 range. Last week's trade down to and subsequent rebound from the $10 level could lead to the next rally attempt in the coming weeks. By our measure, the stock has about $1.50 of downside risk, using a stop at the $10 level, while the upside from the closing level last week could be between the aforementioned resistance range at the $14 to $15 zone. The potential upside out weighs the downside, plus the stock's relative strength increases bullish conviction. Traders looking to initiate bullish positions can watch for a breakout above the 50-dma at $11.70, confirming such a rally attempt with an advance past the $12 level. From there, watch for a move up to the $13 range, where the stock could pullback on profit taking before eventually retesting the relative highs. Those who favor trading pullbacks can look for market related weakness to pressure HLIT back down to the $10.50 level for entries on a pullback. Our stop is set at $10. Because of its low price, using in-the-money contracts may be the more prudent way of trading options on HLIT. BUY CALL APR-10*LOQ-DB OI= 618 at $1.85 SL=1.00 BUY CALL APR-12 LOQ-DV OI=1384 at $0.55 SL=0.25 BUY CALL MAY-10 LOQ-EB OI= 86 at $2.30 SL=1.25 BUY CALL MAY-12 LOQ-EV OI= 420 at $1.05 SL=0.50 Average Daily Volume = 1.33 mln SLAB – Silicon Laboratories $35.33 (+1.39 last week) Silicon Laboratories designs, manufactures and markets proprietary high-performance mixed-signal integrated circuits (ICs) for the wireless, wireline and optical communications industries. The company initially focused its efforts on developing ICs for the personal computer modem market and is now applying its mixed-signal and communications expertise to the development of ICs for other high growth communications devices, such as wireless telephones and optical network applications. After the sharp rally in early March, the Semiconductor index (SOX.X) has been drifting lower in a descending wedge pattern for the past 3 weeks. But that broke to the upside on Thursday following news of a 50% increase in cap-ex spending guidance from Taiwan Semiconductor for 2002. Shares of SLAB have been following the SOX in their consolidation pattern over the past few weeks, but a nice boost on the positive news Thursday morning. By the closing bell, the stock had risen right to recent resistance near the $35.50 level. If this fledgling recovery in the SOX and SLAB is for real, look for a substantial upward move as we head into earnings season. Support has been building near the $33 level and any sort of dip and bounce near that level next week will make for an attractive entry point. Barring a pullback, we'll want to look to initiate new positions as the stock rallies through near-term resistance at $36.50. The movement in the SOX will be key to sustaining this move, so we will want to see it holding above last week's lows and pushing back through the $600 level to confirm bullish sentiment for the sector. With the solid support that has been building, risk is easy to manage on this one, with a stop placed at $32.50. BUY CALL APR-35*QFJ-DG OI=1421 at $2.40 SL=1.25 BUY CALL APR-40 QFJ-DH OI=1599 at $0.60 SL=0.25 BUY CALL MAY-35 QFJ-EG OI= 0 at $3.80 SL=2.25 BUY CALL MAY-40 QFJ-EH OI= 5 at $1.75 SL=1.00 BUY CALL JUL-40 QFJ-GH OI= 275 at $3.70 SL=2.25 Average Daily Volume = 626 K UNH – UnitedHealth Group $76.42 (+1.74 last week) Providing a broad range of resources to help people improve their health through all stages of life, UNH forms and operates markets for the exchange of health and well being services. The company's Health Care Services segment consists of the UnitedHealthcare and Ovations businesses. UnitedHealthcare coordinates network-based health services on behalf of local employers and consumers in six broad regional U.S. markets. Ovations is a business dedicated to advancing the health and well-being goals of Americans over the age of 50. Additionally, the company's Ingenix business operates in the field of health care data and information, analysis and application. The one undeniable and unquenchable area of strength in this rangebound market is the Health Care Sector (HMO.X), which is once again in breakout mode. Setting a new all-time closing high on Thursday near $512 shows the strength in the sector, which is up 38% since the September lows and 17% since the first of the year. Shares of UNH have traced a similarly attractive pattern on the daily chart, forming a nice series of higher highs and higher lows. The latest installment in that series came on Thursday, as UNH surged through the $76 resistance level to post a new all-time high. Perhaps helping this move along over the past 2 days was a Federal ruling in favor of the HMOs in their attempt to overturn an earlier decision that made them subject to class action Racketeering charges under the RICO law. Whatever the cause, shares of UNH are looking bullish again, as evidenced by the high-volume short-cycle Stochastics reversal over the past 2 days, that has UNH breaking out again. There appears to be strong support in the $74 area, with the converged 20-dma ($72.95) and 50-dma ($73.54) resting just below and heading upwards. Consider new entries on a rebound from intraday support near $75 or possibly down near $74. We're initially placing our stop at $73. For those that are willing to chase the stock higher, look for a trade through the $77 level before playing. BUY CALL APR-75*UHB-DO OI=1353 at $2.50 SL=1.25 BUY CALL APR-80 UHB-DP OI= 500 at $0.40 SL=0.00 BUY CALL MAY-75 UHB-EO OI= 200 at $3.40 SL=1.75 BUY CALL MAY-80 UHB-EP OI=1035 at $1.00 SL=0.50 BUY CALL JUN-80 UHB-FP OI=3041 at $1.95 SL=1.00 Average Daily Volume = 1.54 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 ****************** CAH - Cardinal Health $70.89 (+0.84 last week) Cardinal Health, Inc. 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 reporting segments: Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and Services, Pharmaceutical Technologies and Services, and Automation and Information Services. Cardinal reported last week that it had entered a research and development pact with Durect (NASDAQ:DRRX). The collaboration is intended to explore the possibilities of taking long acting soft gelatin products to market. As exciting as it was, that was the only major news out of Cardinal last week. But the stock continued higher despite the absence of news events. The buyers remained in control as evidenced by Wednesday's rally and Thursday's follow-through above most, if not all, of the short term resistance. CAH advanced past the $71 level and continued up to the $72 level on healthy trading. But the risks associated with entering on breakouts were once again revealed in last Thursday's session after CAH rolled over from the $72 level. We don't view the stock's rollover as a sign of weakness by any measure. Since bouncing above the $68 level in Tuesday's session, CAH made a substantial run higher over the following two days. Such a big move in such a short time period requires backing and filling, which is what we saw in Thursday's session. The lesson is to target entries on weakness ahead of a breakout, where risk is much easier to manage. Moving forward, we'd like to get a pullback down to the $70 level for a new entry point on weakness. That level is reinforced by the ascending 10-dma around $69.70. Watch the broader health care measures, such as the HMO Index (HMO.X) and the Drugs (DRG.X) for insights into the sentiment in the health care segment. Look to take profits on strength above the $72 level. BUY CALL APR-65 CAH-DM OI= 294 at $6.50 SL=4.50 BUY CALL APR-70*CAH-DN OI=1887 at $2.20 SL=1.00 BUY CALL MAY-70 CAH-EN OI= 185 at $3.40 SL=2.00 BUY CALL MAY-75 CAH-EO OI= 680 at $1.10 SL=0.75 Average Daily Volume = 3.03 mln THC - Tenet Healthcare $67.02 (+1.33 last week) Tenet Healthcare Corporation (Tenet) is the second largest investor-owned healthcare services company in the United States. As of May 31, 2001, Tenet's subsidiaries and affiliates owned or operated 111 general hospitals with 27,277 licensed beds and related healthcare facilities serving urban and rural communities in 17 states, and held investments in other healthcare companies. THC moved past its triple top resistance at the $66 level in last Thursday's session with its advance up to the $67 level. The stock's move came in spite of lackluster trading in the HMO Index (HMO.X). The HMO.X bounced around the unchanged line, and did not exhibit conviction in either direction. THC's addition of relative strength compared to its sector was encouraging going into next week's trading. The breakout above the triple top could've caused readers to take new bullish positions. Those who did enter on the advance past the $67 level might consider using a tighter stop to manage risk than our coverage stop at the $64 level, which was raised last Thursday and sits just below the 10-dma. Those entering on the breakout might use a stop closer to the $66 level depending on risk tolerance. In terms of new entry points, we favor looking for intraday pullbacks on sector related weakness to key support levels. First level to watch for a bounce from is the $66 mark. Below that level, readers might look for a trade down to and rebound from the $65 support level. The 10-dma may serve as a third potential entry level if THC pulls back significantly next week. BUY CALL APR-60 THC-DL OI=1366 at $7.30 SL=5.75 BUY CALL APR-65*THC-DM OI=3881 at $2.90 SL=1.75 BUY CALL MAY-65 THC-EM OI=3817 at $3.60 SL=2.00 BUY CALL MAY-70 THC-EN OI=1453 at $1.20 SL=0.50 Average Daily Volume = 2.06 mln COF - Capital One Financial $63.85 (+0.48 last 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. We saw COF continued higher in Thursday's session despite a reluctance to the do the same on the parts of the KBW Bank Sector Index (BKX.X) and the AMEX Securities Broker/Dealer Index (XBD.X). The two financial measures traded relatively poorly, but that didn't stop COF's ascent. The stock broke above its recent relative high at the $64.10 level and traded just under the $65 level. Point and figure chartists will note that COF faces a spread triple top at the $64 level, which probably explains why the stock didn't trade past the $65 level in last week's trading. Even with its relative strength, without the participation of the broader financial sectors of the market, COF may have a difficult time advancing past its triple top resistance on the point and figure chart. With that said, traders can look for the financial measures to pick up the pace in next week's trading and possibly support COF above the $65 level. Such a move may be tradable, but the upside may be limited unless the financials really breakout. If the stock does pullback on profit taking in the coming days, then some of the downside risk may be removed, offering the bulls a better entry point on weakness. Look for a retreat down into the $63 area on lighter volume. Our stop has been raised to $61 to reflect last week's rebound from the $60 area. BUY CALL APR-60*COF-DL OI=4201 at $5.00 SL=2.50 BUY CALL APR-65 COF-DN OI=3996 at $1.90 SL=1.00 BUY CALL JUN-65 COF-FM OI=1449 at $4.60 SL=2.00 BUY CALL JUN-70 COF-FN OI=1346 at $2.60 SL=1.75 Average Daily Volume = 3.03 mln EOG – EOG Resources, Inc. $40.56 (+0.40 last week) EOG Resources explores for, develops, produces and markets natural gas and crude oil primarily in producing basins in the United States, as well as in Canada and Trinidad. EOG's operations are all natural gas and crude oil exploration and production related. The company's North American operations are divided into eight autonomous divisions, organized by geographical region; Midland, Texas; Denver Colorado; Tyler Texas; Corpus Christi, Texas; Mid-Continent; Pittsburgh, Pennsylvania; Calgary Canada and the Houston, Texas/Offshore Division. Well it was certainly reassuring to see the Utility index (UTY.X) recover from its lows earlier in the week, rebounding from the 10-dma to close at its highest level since the September attacks. With all moving averages now firmly in the rear-view mirror, this sector is looking better every day. Add in the fact that the Natural Gas index (XNG.X) appears to have established new support at the $190 level and we have a clear bullish case to make for shares of EOG. The stock followed the XNG index higher a few weeks back to break above the $40 level and since then has been gradually working higher. The highs have been pushing higher, as have the lows. In fact the line connecting the lows over the past 3 weeks has now risen above the $39 level, as has the 20-dma, which is now $39.15. We still want to target new entries on bounces from support (anywhere above the $39 level) for initiating new positions, setting our stop at $39. Traders that want to wait for the breakout before playing will need to wait for the move through $41.35 on solid volume, accompanied by positive movement in the XNG index. BUY CALL APR-40*EOG-DH OI=1412 at $1.75 SL=0.75 BUY CALL APR-45 EOG-DI OI= 294 at $0.20 SL=0.00 BUY CALL MAY-40 EOG-EH OI= 105 at $2.45 SL=1.25 BUY CALL MAY-45 EOG-EI OI= 98 at $0.60 SL=0.25 BUY CALL JUL-45 EOG-GI OI= 872 at $1.40 SL=0.75 Average Daily Volume = 1.05 mln KLAC – KLA-Tencor Corporation $66.50 (+1.24 last week) KLA-Tencor is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's comprehensive portfolio of products, software, analysis, services and expertise id designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to KLAC for in-line wafer defect monitorin, reticle and photomask defect inspection, CD SEM metrology, wafer overlay, film and surface measurement and overall yield and fab-wide data analysis. It was a nip-and-tuck week for the Semiconductor sector (SOX.X), as investors couldn't decide whether to push the pile up or down. While the jockeying came on relatively light volume ahead of the holiday, it appears the bulls finally won out on Thursday. The descending wedge/pennant formation broke out to the upside, which should allow a continuation of the move prior to this 3-week consolidation pattern, and that would be up. If the SOX is going to make another run up the charts on hopes that chip stocks will lead the broader Technology sector higher, than the stocks of the chip equipment manufacturers should lead that advance. That was certainly the case on Thursday as shares of KLAC caught a bid right from the opening bell, gapping higher on news that Taiwan Semiconductor increased their 2002 capital spending plans from $1.65 billion to the $2.5-2.6 billion range. KLAC closed near the to of the day's range, and just below the $67 resistance level. Traders that took advantage of the rebound off the lows near $64 (right on the ascending trendline) on Wednesday are smiling going into the long weekend. Renewed bounces from that trendline (now at $64.50) look good for fresh entries, as does a breakout above the $67.25 level. We're raising our stop this weekend to $63.50. BUY CALL APR-65*CKV-DM OI=7352 at $3.80 SL=2.25 BUY CALL APR-70 CKV-DN OI=7940 at $1.30 SL=0.75 BUY CALL MAY-65 CKV-EM OI= 671 at $5.70 SL=3.75 BUY CALL MAY-70 CKV-EN OI= 295 at $3.20 SL=1.50 BUY CALL MAY-75 CKV-EO OI= 550 at $1.60 SL=0.75 Average Daily Volume = 9.92 mln LH – Laboratory Corp. of America $95.86 (+3.95 this week) Laboratory Corporation of America Holdings (LabCorp) is the #2 clinical laboratory service in the world, behind Quest Diagnostics. LH performs 2000 types of tests for more than 100,000 clients, including health care providers, pharmaceutical firms, physicians, government agencies and employers. With 25 major laboratories and some 1200 service sites nationwide, the company emphasizes specialty and niche testing such as allergy tests, HIV tests, blood analyses, and substance abuse screenings. Tradable breakouts have been few and far between lately with the preponderance of false breakouts in an indecisive market. The one pocket of strength that just doesn't seem to fade is the Health Care sector. After pulling back from its initial breakout in early March, the HMO index is running again, pushing through resistance near $507 and ending the week at a new all-time high. The focus of our attention is LH, which broke out above the $90 level a few weeks back. After some mild consolidation, the bulls are running again and the price action over the past few days has been downright exciting. LH actually charged as high as $98 Thursday morning before the inevitable profit taking appeared. Prompting this big move were the positive comments being made about competitor DGX, which also has been moving up steadily. Traders that took profits on the morning surge are sitting pretty tonight, looking for a fresh entry point next week. After such a strong surge, we need to now be careful in choosing a new entry, but it looks like intraday support is building near $94, with stronger support down at $92. Use a solid bounce from either of these levels to initiate new positions ahead of a run at the century mark. One note of caution is that volume has been on the rise lately and Thursday saw a wide ranging doji candlestick on volume that more than doubled the ADV. This is a potential warning sign of a near term top, so if we are going to play it again, we want to see the series of higher highs and higher lows hold firm. Move stops up to $91.50 this weekend. BUY CALL APR- 95*LH-DS OI=538 at $2.85 SL=1.50 BUY CALL APR-100 LH-DT OI= 25 at $0.75 SL=0.25 BUY CALL MAY- 95 LH-ES OI=136 at $4.20 SL=2.50 BUY CALL MAY-100 LH-ET OI=311 at $1.90 SL=1.00 BUY CALL MAY-105 LH-EA OI= 0 at $0.70 SL=0.25 Average Daily Volume = 609 K ************* NEW PUT PLAYS ************* CVG - Convergys $29.57 (+1.38 last week) Convergys Corporation is a provider of outsourced, integrated billing and customer care services. The Company focuses on developing long-term strategic relationships with clients in customer-intensive industries, including telecommunications, cable, broadband, satellite broadcasting, Internet services, technology and financial services. The telecom segment of the economy remains very weak. Juniper Networks (NASDAQ:JNPR) reinforced that much last week. The same could be said for the cable and broadband businesses, which was reinforced by Adelphia Communications (NASDAQ:ADLAC) last week. Fortunately for the bears, Convergys operates in those two sectors among others. The stock fell off of a cliff earlier this year when it tumbled from the $36 level before settling around the $30 mark. Since that time, CVG has traced a pattern of relatively lower highs, while the short-term bottom around the $30 level has continued to hold. In last Thursday's session, the stock closed below the $30 mark, on the way to shedding more than 2% for the day on about three times its average daily volume. That move late last week could've set up CVG for a big breakdown below the $29 level next week. Bears who favor entering put plays into weakness simply need to watch for a decline below the $29 level early next week. Look for a continuation of active trading volume on a breakdown below the $29 level. If the stock does rebound before eventually breaking down, look for intraday rollovers near the downward sloping 10-dma at the $30.50 level. Our stop is initially in place at the $31.50 mark, just above the descending 50-dma. Our downside target on a breakdown below $29 is at the $25 level. BUY PUT APR-35 CVG-PG OI= 55 at $5.70 SL=4.00 BUY PUT APR-30*CVG-PP OI=281 at $1.15 SL=0.50 Average Daily Volume = 809 K CTX – Centex Corporation $51.93 (-3.51 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 $190,000 for both first-time and move-up buyers. The company has subsidiaries that offer home security systems and pest-control services, as well as construction contracting for hospital, school, office building and hotel projects. Rounding out the picture, CTX has interests in land development, mortgage banking, commercial real estate, and construction supply manufacturing. Have you noticed the changing trend in the Housing sector of the market? Sure the regular housing reports continue to be strong, but the market is responding differently now. Instead of rallying on the good news when it is released, the market is selling into the good news, a strong sign that all of the good news has been factored in. And when interest rates start to rise, the glow of the housing sector that has led the DJ US Home Construction index ($DJUSHB) to new all-time highs earlier this month will likely dim substantially. The bearish Stochastic divergence on the weekly chart is a powerful signal that the good times are over and this area of the market is going to be under significant selling pressure for awhile. We started playing this trend earlier in the month with shares of CTX and it looks like we can do it again here. The brief recovery rally rolled over last week near the $56 resistance level and is continuing to be pressured by the declining 10-dma (currently at $54.46). Last week's action may have been a bit artificial due to light volume and EOQ window dressing, but there is no arguing with the bearish action in shares of CTX. After rolling over, the stock is once again resting right above significant support near $51.50. We'd like to take an entry on one more failed rally in the $54-55 area, but we'll be more than happy to take an entry on a print of $51. That would give us a fresh spread triple-bottom breakdown on the PnF chart. The current bearish target if $40, so we've definitely got some room to fall. Place stops at $56. BUY PUT APR-55*CTX-PK OI=1688 at $4.00 SL=2.50 BUY PUT APR-50 CTX-PJ OI=4514 at $1.55 SL=0.75 Average Daily Volume = 1.05 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 Friday 03-29-2002 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 ***************** MIL - Milipore $44.24 (-0.62 last week) Millipore Corporation and its subsidiaries are engaged primarily in the development, manufacture and sale of products that are based on separations technology and are used for the analysis, identification and purification of liquids and gases. Millipore also generates revenues from the manufacture and sale of products based on electromechanical and pressure differential technologies to monitor and control critical aspects of the manufacturing process for integrated circuits. In last week's trading, we saw the bears try to pressure MIL below the critical $43 level on two separate occasions. In Monday's session, the stock traded as low as $43.29 before the bulls battled back to prevent the breakdown. Then in Wednesday's session, the bears pressured MIL down to the $43.39 level before the bulls propped up the stock. Last week's pattern of higher relative lows has to be considered by the bears, but at the same time, the relative highs are getting lower and lower. It feels as if the stock is going to make a big break in one direction or another in the coming week or two, which should have traders on alert. The increased battle between the bulls and bears should give way and that could happen as early as next week. Readers with open positions need to take risk management measures to protect against upside. Tight stops just above the 10-dma at $44.88 could be used to protect against such upside risk. Those willing to take on slightly more risk can use the short-term high at $45.20 for a stop. Meanwhile, those who are still waiting for an entry point need only look for a breakdown below the $43 level. Such a move should come on increased volume as the bulls jump ship and the bears press their shorts. Confirm a breakdown below the $43 level with a decline below $42. BUY PUT APR-50 MIL-PJ OI=21 at $6.10 SL=4.25 BUY PUT APR-45*MIL-PI OI=10 at $2.15 SL=1.00 Average Daily Volume = 325 K IBM - IBM $104.00 (-1.60 last week) International Business Machines Corporation (IBM) uses advanced information technology to provide customer solutions. The Company operates using several segments that create value by offering a variety of solutions, including, either singularly or in some combination, technologies, systems, products, services, software and financing. The Wall Street Journal reported Thursday that the Securities and Exchange Commission (SEC) asked IBM to ammend its 1999 annual report. Reportedly, the SEC asked several questions about IBM's accounting and disclosure practices. The SEC specifically targeted a large asset sale and the way IBM had explained its gains from its pension fund. IBM talked down the SEC's concerns; Big Blue said that the SEC's questions were closed and that the comments were routine for large companies. The market didn't seem too concerned with the article as IBM rallied in Thursday's session. The strength in the stock most likely stemmed from the pop in the broader technology measures. The Hardware Sector Index (GHA.X) and the Nasdaq Composite (COMPX), for instance, were both solidly higher, possibly lending strength to IBM. The stock's rally did however bring IBM back to its short term resistance levels between the $105 and $106 levels. The 10-dma currently sits just above the $105 level and the 50-dma sits just slightly above the 10-dma. Those two moving averages combined with congestion and a retracement level at $106 could produce a big rollover in next week's trading if the technology sector of the market doesn't breakout in a big way. Entries taken on rollover from the $105 to $106 resistance range can be managed with tight stops just above the $106 level. Those who favor breakdowns can wait for a decline below the $102 level in conjunction with weakness in the broader markets. BUY PUT APR-105*IBM-PA OI=20565 at $3.40 SL=1.75 BUY PUT APR-100 IBM-PT OI=36599 at $1.45 SL=0.75 Average Daily Volume = 7.84 mln GNSS – Genesis Microchip $26.00 (-1.93 this week) Genesis Microchip designs, develops and markets integrated circuits that receive and process digital video and graphic images. Its integrated circuits are typically located inside a display device and process images for viewing on that display. The company also supplies reference boards and designs that incorporate its proprietary integrated circuits. GNSS is focused on developing and marketing image-processing solutions and targets the flat-panel computer monitor and other potential mass markets. What's it going to be? A breakdown or a double-bottom recovery? Inquiring minds want to know. GNSS rolled over at the descending trendline a week ago, and that rollover (along with weakness in the Semiconductor sector) drove the price down as low as $24.25. The rebound on Thursday has the look of a possible double-bottom formation, but with the stock resting right on the descending trendline right now, it is hard choosing which direction to favor. But it certainly will make risk easy to manage as we head into earnings season following the long weekend. Ideal entries will come from a rollover near the $26.50-27.00 level, but if the fledgling bounce continues through the $27 level, we'll be pulling the plug on the play in short order. Alternatively, wait for a drop under the $24.25 level before playing. Keep an eye on the action in the SOX for confirmation of sector weakness before playing. Our stop remains in place at $27. BUY PUT APR-25*QFE-PE OI=6922 at $1.65 SL=0.75 BUY PUT APR-22 QFE-PX OI=1055 at $0.80 SL=0.25 Average Daily Volume = 4.59 mln ISSX – Internet Security Systems $22.85 (-3.04 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. Keep selling those rallies. Our ISSX play is certainly treating us right and got smacked down hard on Tuesday amidst concerns about its current quarter. That was good for nearly 8.5% to the downside and the past 2 days have seen some feeble attempts to recover. But the deck is getting stacked more heavily in favor of the bears now that the $23.50 support level (low from early March) has been breached. And we can see from the intraday action this week, that buyers are unable to push and hold price above the $24 level. And then there is the Tuesday gap to contend with, the top of which is just above $25. The combination of these factors and the looming earnings season looks like it is going to pressure ISSX lower from here. Turning to the PnF chart, we can see that the Tuesday's drop below $22 level created a fresh double-bottom breakdown with a price target of a measly $11. It is probably no coincidence that this is just above the September lows. For now, our approach remains the same, initiating new positions on failed rallies below resistance. Target rollovers either At $24 or $25 and keep stops in place at $25.50. BUY PUT APR-25 ISU-PE OI=1968 at $3.50 SL=1.75 BUY PUT APR-22*ISU-PX OI= 717 at $2.05 SL=1.00 BUY PUT APR-20 ISU-PD OI= 556 at $1.15 SL=0.50 Average Daily Volume = 2.96 mln TMPW – TMP Worldwide $34.47 (+1.44 last week) TMP Worldwide is a recruitment advertising agency and executive search and selection firm. The company has built Monster.com into one of the Internet's leading career destination portals. In addition to offering these career solutions, TMPW is a yellow page advertising agency. The company has more than 60,000 clients, including over 90 of the Fortune 100 and over 480 of the Fortune 500. Despite its cool Superbowl commercials and a supposed bottoming in the job market, shares of TMPW can't seem to make any headway to the upside. Want proof? Even with DB Alex Brown initiating coverage on Wednesday with a new Buy rating, buying interest has been rather muted. Given that the stock entered the week deeply oversold, TMPW should have been able to stage more of a bounce this week. Instead, it looks like the oversold condition is being relieved just enough to allow the sellers to pile on again when the stock rolls over. There's some significant resistance in the $35-36 area and a failed rally near that level would make for a great entry before the next drop. Traders that would like to see a bit more bearish evidence before entering will want to wait for the stock to fall through the $32.50 support level. We are keeping our stop in place at $37. BUY PUT APR-35*BSQ-PG OI=1810 at $2.55 SL=1.25 BUY PUT APR-30 BSQ-PF OI= 449 at $0.75 SL=0.25 Average Daily Volume = 2.98 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 ************************************************************** ***** LEAPS ***** Much Ado About Window Dressing By Mark Phillips Contact Support Due to my expectations that this past week would be rather inconsequential due to the End-of-Quarter window dressing and light pre-holiday volume, I promised last weekend that this week we would focus on plays and eschew the normal market commentary. Normally this would be a difficult tradeoff, but I really don't think you'll miss out on my weekly commentary this time around. Here are the highlights, as I see them. The markets weakened throughout the week (despite several attempts to rally the DOW) in the midst of what I would call mixed economic reports. Proof of investor complacency is seen in the VIX, which continues to track to new 19-month lows. The last time the VIX was this low was in late August of 2000. Anyone remember what happened to the markets shortly thereafter? Check out the graphic below for a quick reminder. Note the number of times over the past couple years that a low VIX has corresponded to a near-term market top. Pretty consistent, huh? Now note the number of times that a low VIX has been followed by a meaningful rally (without the VIX first shooting up to at least the top of its historical range). That's a big fat goose egg (read:ZERO). Is the VIX going to change its behavior this time? Maybe, but that's not the way I'm going to trade my account. I think we're looking at another substantial drop in the not-too-distant future. Alright, that's enough about the market. Let's get to the plays. First up are the current residents of the Portfolio, and for 2 of the 3 (BBH and IBM), it was not a stellar week. The Biotech sector had to field more bad news this week, this time in the form of reduced profit forecasts from GENZ, which has gotten knocked back for more than an 18% haircut in the past four days. My description last week of two steps forward and one step back seems wholly appropriate this week, as the BBH has fallen back through moderate support near $122, with stronger support waiting at $120, the site of our stop. Well, scratch that! In an effort to get my writing done early, I guessed that support on the BBH would hold at $120, and I was proven wrong, as weakness prevailed throughout the day on Thursday. By the closing bell, our stop had been violated to the downside, although just by a fraction. With the weekly Stochastics turning bearish I wouldn't look at this as a good entry point, but I'm going to go against my normal rules and cut BBH a bit of slack this weekend. The reason is that I went back and looked at the daily chart where I had drawn an ascending trendline off the lows in early February. That trendline is currently at $119.75, so it looks like I got too ambitious in tightening the stop last week. It really should have been set at $119, rather than $120. So I'm going to back-pedal a bit and rather than drop the play, I'm going to reset the stop at $119. Don't use this as a fresh entry point, as the play is not looking as attractive to me in light of the bearish developments on the weekly chart. But I think we would be better served by giving the play a little room to bounce. And judging by the daily Stochastics that are buried deep in oversold, and I think we'll get that bounce early next week. If the $119 level is violated, then I'll just have to bite the bullet and close the play for a loss. My apologies for the inconsistency, but in this particular case, I think it is the best decision. And IBM continues to be the target of sellers due to the comments from other companies like HWP that are painting a weak picture for their services businesses. Of course the meltdown in shares of EDS didn't help the picture for poor IBM, given similar areas of business interest. Now that IBM has moved more and more into the services business, investors are wondering if Big Blue will be able to keep its head above water. But we're holding our breath, along with our stop at the $100 level. While it really hasn't made any significant progress to the upside, it has been encouraging to see our JNJ play buck the weakness trend of the rest of the market, still holding above the $64 level. The strength of this stock reinforces my opinion that it will likely continue working higher over the weeks and months ahead. If you're not onboard yet, use dips to support near the $63-64 area to enter the play. With the light volume this week, there just hasn't been much to get excited about on the Watch List. So far, it looks like we made the right call on the BRCM play, as the stock has continued to vacillate throughout the past week. It remains to be seen whether the stock will actually hold up above the $34 level and begin a fresh recovery or fall further. I considered taking a position on the afternoon strength on Friday, but given the fact that it came on rather light volume and faded into the closing bell, we'll hold off until next week. Even with the current weakness in both the Communications and Semiconductor sectors of the marketplace, I continue to like BRCM as a strong recovery candidate when the market reverts back to recovery mode. Although LUV has recently ventured down near our $18 entry target, the recent wild swings in price have been keeping me on the sidelines. Gap moves and large range days are not the stuff solid entry points are made of, so I'm more than willing to wait for a better setup. Especially with the weekly Stochastics not yet done with their latest leg down. Our MDT and DYN plays are similarly stuck in the mud, unable to advance much, but not really able to give us a nice solid entry point either. Another victim of a directionless, light-volume week. Hopefully next week will have investors showing more conviction, whether to the upside or downside. And EK is just gradually drifting lower here. The last cycle on the daily chart couldn't even get to overbought before rolling over, so I think we've got a winner here. All we need to do now is grab a decent entry point. Given the recent price trend, I'm going to change our entry strategy somewhat and the Portfolio will take a position the next time EK pushes through the $32 level. We should have just entered on that big spike near $34 early in March and been done with it, but that isn't the way we exercise our discipline. Note that I have modified the entry target accordingly. True to my word, I spent the better part of the week looking for solid new long-term plays that we could add to the Watchlist this week. I can't tell you how badly I'd love to play the downside in some of the home-builder stocks over the long-term. Alas, while there are a few of the stocks like CTX and RYL that are optionable, there aren't any home-builders with LEAPS available. April Fools!! Ok, so I'm a day early, but I figure it is close enough. There is one home construction stock that actually has LEAPS available, and it is being added to the Put Watch List this weekend. I'll be a stinker and send you down below to see what it is. (BIG GRIN) Using my usual scanning tools, I found a whopping total of zero other new plays that look attractive based on overbought/oversold status on the weekly charts. But I did find a couple (actually they've been in my tickler file for weeks and I finally decided to put them in print) plays that look interesting because of the price pattern that has been building in recent months. As many of you know, I've been expecting the Retail sector to roll over and die for several months now, but the almighty consumer keeps spending, driving the RLX index ever higher. As the dominant company in this arena, it should come as no surprise that Walmart (NYSE:WMT) is leading the charge higher. Both WMT and the RLX have been in ascending regression channels for months now, and that trend shows no signs of ending anytime soon. And then there is another Consumer stock building a nice solid channel. Anybody ever heard of Proctor & Gamble (NYSE:PG)? We all use their products every day, and proof of that is seen in the consistent rising price channel that has been in place for a full year now, in complete defiance of a weak economy. Playing an established trend always helps to stack the odds in your favor, so we're going to step into this one. So WMT and PG get added to the Watch List this weekend along with an as-yet-unnamed Home Construction stock. Hopefully this gives you enough possibilities to whet your appetite as we head into earnings season. In the meantime, take some time over this long weekend to reflect on what is really important to you. For me, it is family. And I'll be leaving this weekend for a long week of R&R with my family in Northern California. Make a great weekend for yourselves. 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 $15.00 - 9.64% $119 '04 $120 KBB-AD $26.20 $24.60 - 6.11% $119 IBM 03/03/02 '03 $110 VIB-AB $ 9.80 $ 9.30 - 5.10% $100 '04 $110 LIB-AB $17.00 $16.60 - 2.35% $100 JNJ 03/05/02 '03 $ 60 VJN-AL $ 5.90 $ 8.20 +38.98% $61 '04 $ 60 LJN-AL $ 9.20 $12.20 +32.61% $61 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BRCM 10/28/01 $36 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 $18 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, $29 JAN-2003 $ 30 ONO-AF CC JAN-2003 $ 25 ONO-AE JAN-2004 $ 30 KYK-AF CC JAN-2004 $ 25 KYK-AE PG 03/31/02 $85-86 JAN-2003 $ 90 VPG-AR CC JAN-2003 $ 85 VPG-AQ JAN-2004 $ 90 LPR-AR CC JAN-2004 $ 85 LPR-AQ WMT 03/31/02 $60-61 JAN-2003 $ 65 VWT-AM CC JAN-2003 $ 60 VWT-AL JAN-2004 $ 65 LWT-AM CC JAN-2004 $ 60 LWT-AL PUTS: EK 01/27/02 $32 JAN-2003 $ 30 VEK-MF JAN-2004 $ 30 LEK-MF KBH 03/31/02 $45-46 JAN-2003 $ 45 OHK-MI JAN-2004 $ 45 KXC-MI New Portfolio Plays None New Watchlist Plays PG - Proctor & Gamble $90.09 **Call Play** Consumer stocks have been consistent performers for the past several months, but if I had to pick just one, it would be PG. The primary reason for my bullishness in this stock is the way it has been working upwards in an ascending channel for the past year. That's right, a 1-year channel! Not only that, but despite the recent market pullback, PG is riding the upper edge of its channel right now near 2-year highs. I know the long-term charts (weekly and monthly) have their oscillators buried in overbought, but if you want a picture of relative strength then PG is it. In recent weeks, the stock has been acting even better, as it is trading between the upper channel line and the center line (currently at $85). The game plan is simple. Target new entries on a pullback near the center line and then place stops at $83. Another bullish factor that is hard to ignore is the fact that the stock hasn't given a sell signal on the PnF chart since April of last year. I know it isn't the normal fare here in the LEAPS column where we like to buy oversold oscillators, but the only stocks giving us that kind of setup, are those that look technically weak. I like the long-term prospects with this one, especially once the bulls succeed in pushing through the century mark. Let's face it -- we all use the company's products in good economic times and bad. And that is reflected in the fact that buyers continue to line up to acquire the stock, whether the market has been heading up or down over the past year. BUY LEAP JAN-2003 $90 VPG-AR BUY LEAP JAN-2003 $85 VPG-AQ For Covered Call BUY LEAP JAN-2004 $90 LPR-AR BUY LEAP JAN-2004 $85 LPR-AQ For Covered Call WMT - Walmart $61.30 **Call Play** Long-time readers will remember that I was leaning into the bearish camp for the Retail sector a few months back. Well, I can admit I was wrong, as easily as the next guy, and looking at the chart of the Retail sector (RLX.X), you can see that the evidence is hard to ignore. After pushing through the $930 resistance level, the RLX crawled its way higher and with the bullish surge a couple weeks ago, came within spitting distance of the $980 level. While it isn't yet in a position to challenge the all-time highs, the RLX is clearly in bullish mode. Even so, with the oscillators buried in overbought territory, I wouldn't even think of a play in this sector without something else to back it up. And that's where selection of the right stock comes into play. WMT is clearly the 800-lb. gorilla in the Retailing world, and with competitors like Kmart falling by the wayside, they're just getting stronger. The other piece of fundamental information is that the discounters seem to be the area of the marketplace that is seeing the most action from profligate consumers. The price action in WMT is what is really getting my attention though. The stock has been working higher in a steady regression channel since late September and each time it touches the lower channel line, it proves to be a fortuitous entry point. So this one is really simple. Look to enter new positions on a bounce near the lower channel line, which is currently at $60, also a level of solid support. The PnF chart is giving us a price target of $79 (calculated from the long column of X's following the bounce from the September lows) and that means there is plenty of room to run. After entry, we'll place our stop at $59 and let the channel do the rest of the work for us, trailing our stop just below the lower channel line. BUY LEAP JAN-2003 $65 VWT-AM BUY LEAP JAN-2003 $60 VWT-AL For Covered Call BUY LEAP JAN-2004 $65 LWT-AM BUY LEAP JAN-2004 $60 LWT-AL For Covered Call KBH - KB Home $43.40 **Put Play** There's no debating the fact that the Housing sector has been on fire for the past 6 months, driven by month-after-month record housing numbers. But that party appears to be nearing its end, as interest rates are on the verge (within the next couple months) of beginning to creep back up. And that will start to stem the tide of easy financing that has driven the recent housing boom. That trickle-down effect is bound to hit the stocks of companies involved in new home construction. In fact, it looks like that reality is already starting to be seen, as demonstrated by the recent action in the DJ US Home Construction index ($DJUSHB). After moving to a fresh all-time high just south of the $380 level, the DJUSHB has been backing off on heavy volume. And this is in the face of the continued strong housing numbers. Here's the key point. Investors in this sector are no longer using the strong economic reports to buy these stocks. They are using them as an opportunity to sell the news. It's like an earnings run with an entire sector. The prices ramp up into the news and then decline after the expectations become fact. I looked through all of the Home Construction stocks and the only one that has LEAPS available is KBH, so it becomes our de-facto whipping boy for the whole sector. It's rather convenient that the charts of the DJUSHB and KBH track one another very well. We've got three data points of bearish Stochastics divergence on the weekly chart (increasing price highs and decreasing Stochastics highs) on both charts and that tells me that both the sector and the stock are moving into a period of distribution. A perfect environment for LEAP puts, if ever there was one. As a bonus, I looked at the monthly chart of KBH as well, and I like what I see. Monthly Stochastics are just starting to roll over deep within overbought territory and look ready for a fall. We want to target the next failed rally on the daily chart for initiating new positions, and a rollover in the vicinity of $45-46 looks ideal. Since we are trying to game a rollover near the top in a sector that has been strong up to this point, we need to be able to clearly manage our risk, and with the recent highs serving as our stop, I like the risk/reward ratio on this one. Set stops at $47 and then look for a breakdown under the $39 level as our first milestone on the way back to more reasonable valuations for the stock. BUY LEAP JAN-2003 $45 OHK-MI BUY LEAP JAN-2004 $45 KXC-MI Drops None ************** TRADERS CORNER ************** Milking Q-Charts, Part XII, An Owner's Manual Buzz Lynn buzz@OptionInvestor.com Are we done yet? I can hear my dearly departed grandmother reminding me that, "Cakes are done; people are finished." Thanks for the reminder, Grandmother. So, are we finished yet - with this Q-Charts thing? I keep crossing fingers that one day, the answer will be yes. And today may is that day. But for those hooked on the series looking for more, let's ease out of it so nobody experiences information withdrawals. Instead of focusing on Q-Chart functions and how to's, I thought fellow readers might be interested in some new symbols, which would make trading decisions that much easier. Actually, these are indicator symbols that are chock full of information, rather than stock symbols. Lest you think I discovered these on my own and use them regularly, I did not. They came from another sharp-eyed reader who pointed them out me, proving once again that we have the smartest readers in the whole world! (At least we think so.) But before we get to that, I encourage those just joining us to get caught up in the following installments. http://www.OptionInvestor.com/traderscorner/011002_1.asp http://www.OptionInvestor.com/traderscorner/011702_1.asp http://www.OptionInvestor.com/traderscorner/012402_1.asp http://www.OptionInvestor.com/itrader/archive/traderscorner/031801_1.asp http://www.OptionInvestor.com/traderscorner/013102_1.asp http://www.OptionInvestor.com/traderscorner/020702_1.asp http://www.OptionInvestor.com/traderscorner/021402_1.asp http://www.OptionInvestor.com/traderscorner/022602_1.asp http://www.OptionInvestor.com/traderscorner/022802_1.asp http://www.OptionInvestor.com/traderscorner/030702_1.asp http://www.OptionInvestor.com/traderscorner/031402_1.asp http://www.OptionInvestor.com/traderscorner/032102_1.asp Back to our sharp-eyed reader who writes, Hi Buzz, Haven't read all the Qcharts setup articles you are doing. Too little time and not enough energy. However, I wanted to mention that the three best indicators in Qcharts in my opinion are KOD, GKOD, GIDX. Set them up on your quote sheet in the following order. KOD, GKOD, MoneyFlow, GIDX This will tell you whether the stock is being bought or sold. No if's, and's, or but's. Here is a matrix of signals for you. KOD GKOD MoneyFlow GIDX Green Green Positive Green - Being accumulated, buy Green White Positive Red - Being accumulated, watch Red White Pos/Neg Green - Distribution, consider selling Red Red Negative Red - Big distribution, SELL! The numeric within the keys determine the true strength of the signal, but the color is a quick visual check on the quote sheet, especially when you have a ton of stocks. Thank God I'm not colorblind. Regards, RK Thanks RK! That's so simple and so helpful! Well, sort of simple, but still helpful. It's not as intuitive to put it together as you might think. We can't just plug in the symbol and have it pop up on the screen. Instead we have to start with a quote sheet and add columns. Since creating quote sheets was done in an earlier fun-packed episode, we'll skip that part today. Here's how we do it. First, open the quote sheet. Then with your mouse at the header (top) of a blank column, right-click, which should drop down a menu. Select Indicators, which should drop down another menu with all of the above symbols. This for example is how we would select the first one, KOD: Once you have KOD selected, just add to columns to accommodate the others in the order listed above - GCOD second; Money Flow third, GIDX fourth. If you already have symbols, you should see the colors. If not, just add symbols of interest and the quote sheet does the rest. I've selected a few as a demonstration below (not recommendation or even on my watch list - they just flowed nicely from brain to finger tips). To make this tool even more useful, you can left click on the header that you want to act as the master, as I've done above. By doing so, it places the values in numerical order. I've selected KOD as the master here. If you want to reverse the order from negative to positive simply click on the header again. A word of caution: Do NOT use this as the be-all, end-all set of indicators for entering or exiting trades. Like all indicators, they need to be taken in context with many other signals. Don't rely on these new ones exclusively. Consider it another tool in the box to help get the job done. But like a hammer (and contrary to popular belief), it can't fix everything. There, wasn't that easy? I want to shift attention now to a couple of recurring themes responsible for a flood of e-mail questions. One - How do I get Q-Charts? Two - How does it compare to XYZ charting services. Let's start with "How do I get Q-Charts?" Two ways - first, type www.qcharts.com into your browser. It won't be found there exactly, but you will be redirected to the website. Or you can simply click on the link here: http://finance.lycos.com/home/qcharts/mktg.asp. From there, go to the bottom of the page and click on "Subscribe here". Numerous options will appear on the page. The distinction to make is between Livecharts and Qcharts. Livecharts is fine to get real-time quotes but offers little technical analysis functionality. For serious trading and the ability to perform detailed technical analysis, you will be much better suited with the Qcharts subscription. You can choose one of three levels. In fact, you might suspect that recommend the Advanced subscription. Nope! Not even the Intermediate. We use the Basic service. I'm not aware of anyone in the office that used any level above that either. It does everything we need it to do. In fact this whole Q-Charts series was created using the Basic version. Just make sure you pay the NYSE, AMEX, and NASDAQ exchange fees plus any others you may want. Otherwise, you will not be getting real-time quotes. They'll be delayed. This ads about another $4 +/- to the total cost, which should run $83-$84 monthly. Nothing wrong with the higher-level if you can digest all that information. We just find it un-necessary. After you've selected the desired level of service, the first page that pops up is marketing stuff. If you wish to avoid bombardment with silly peoples' annoying mail (SPAM), be careful how you fill this out. From there, complete the application process and download the program. Easy, easy, easy. The second thing I mentioned above is the comparison to other charting programs. Candidly, other than hand drawn graphs, I've never used anything else (though I tried Trade Station and was overwhelmed. It sat in a box for 28 days and I sent it back.) Consequently, I have no clue how it compares to Trade Station, TC2000, Metastock or any of the other services available. All of them have advantages and disadvantages from what I'm told, but I can't begin to make a comparison. Sorry, wish I could be more helpful on that score. But that I am using Q-charts (I'm a complete computer dummy) and doing so effectively ought to be good testimony. I couldn't get anything else to work so simply (see above)! Well, there you have it. That wraps it up for always and for good unless I continue to get questions on its use. On occasion then, we'll run a "readers write" column to bring the important stuff to light. Look for a few more episodes of Trader Status and accounting issues next week in our continuing series of mock interviews with Jim Crimmons, tax expert at TraderAccounting.com. Make a great, extended weekend for yourselves! ************************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 Friday 03-29-2002 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 ************* Covered-Call Basics: Selling The Right Option By Mark Wnetrzak One of our new readers asked how to determine which option to sell in a covered-call position. The #1 goal for most option traders is correctly predicting the future movement of the underlying stock or index. But, after the decision to initiate a position has been made, the average investor will have trouble choosing which option to buy or sell. To be successful in the derivatives market, you must be able to select the most favorable positions based on theoretical pricing and the time horizon of the play. A conservative covered-call writer who uses trend or sentiment analysis, would likely sell near-term, "deep-in-the-money" options on technically favorable stocks. In contrast, investors that use fundamental valuations to make decisions would generally write out-of-the-money options with 2-3 months remaining until expiration, to reduce the overall basis in the underlying issue. For long-term covered-call positions, the goal is to reduce the overall cost of the stock with the income from monthly sales of near-term options. Investors that participate in this strategy with bullish stocks utilize out-of-the-money calls to reduce the chance of having their short positions exercised (in which case, delivery of the underlying issue would be required). The problem with this technique is that when one sells an out-of-money option, the overall position tends to reflect more of the result of the stock price movement and less of the benefits of writing the call. This occurs because the premium of the out-of-the-money call is relatively small and the overall position is very susceptible to loss if the underlying stock declines. Even if you choose to use near-term options in your covered-call positions, you must still decide which option to sell. In most cases, short-term positions are much more successful if you sell in- or at-the-money options. In this conservative option writing strategy, you should strive for position that return a minimum of 3%-5% per month while retaining downside protection of at least 10% of the current stock price. The overall position that is constructed using these guidelines will be a relatively low risk play (regardless of the volatility of the underlying stock) since the levels of protection will be large and there is still the expectation of a reasonable return. There is another concept in option pricing that is very important when determining the most favorable option to buy or sell. That is the extrinsic value or "premium" in the option, which is based on its implied volatility. Most traders identify this component as premium, even though the term actually refers to the cost of the option relative to its strike price and the current value of the underlying security. What the trader is really referring to is the implied volatility. In short, when implied volatility is low (relative to historic or overall market levels), the options are under-priced and when implied volatility is high, the options are overpriced. So it is also important for an option trader to be able to assess a position's fair value, using the components of theoretical pricing and select the most favorable options to buy (or sell) when participating in common trading strategies. That is a subject we will discuss further in a future narrative. Enjoy the Holiday weekend! 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 PRCS 5.43 5.20 APR 5.00 0.85 *$ 0.42 8.0% MANU 19.42 21.48 APR 17.50 3.40 *$ 1.48 6.7% NXTP 6.05 6.02 APR 5.00 1.50 *$ 0.45 6.1% SIPX 11.15 11.10 APR 10.00 1.90 *$ 0.75 5.9% JDEC 18.21 18.04 APR 17.50 1.60 *$ 0.89 5.8% RSTO 12.69 12.50 APR 10.00 3.30 *$ 0.61 5.6% REV 5.70 6.49 APR 5.00 1.00 *$ 0.30 5.5% EMKR 9.15 9.61 APR 7.50 2.00 *$ 0.35 5.3% PVN 5.71 7.55 APR 5.00 1.05 *$ 0.34 5.3% ENTG 15.01 16.15 APR 15.00 0.70 *$ 0.69 5.2% CANI 8.61 8.72 APR 7.50 1.45 *$ 0.34 5.2% SYXI 11.26 11.69 APR 10.00 1.85 *$ 0.59 4.5% GSPN 14.09 14.92 APR 12.50 2.20 *$ 0.61 4.5% ENDO 18.40 19.71 APR 17.50 1.75 *$ 0.85 4.4% AEIS 32.59 35.96 APR 30.00 4.00 *$ 1.41 4.3% HOFF 11.38 11.73 APR 10.00 1.75 *$ 0.37 4.2% ATVI 32.30 29.83 APR 30.00 4.00 $ 1.53 3.9% CTLM 12.96 12.10 APR 12.50 1.20 $ 0.34 3.1% ZOMX 7.93 7.30 APR 7.50 0.85 $ 0.22 2.7% SCIO 31.36 28.93 APR 30.00 2.80 $ 0.37 1.4% ICST 23.78 20.40 APR 22.50 3.00 $ -0.38 0.0% *$ = Stock price is above the sold striking price. Comments: A rather lackluster week as investors concentrated on "spring break" and the holiday weekend ahead. Activision (NASDAQ:ATVI) and Integrated Circuit System (NASDAQ:ICST) continue to trade at key support and will remain on the watch list. Restoration Hardware (NASDAQ:RSTO) appears to be rallying out of danger but Zomax (NASDAQ:ZOMX) has remained weak and is still trading just below the sold strike. Centillium Communications (NASDAQ:CTLM) stalled this week and should be watched closely as it tests support around $11.50. Another stock that has stalled (after being featured as a candidate this week) is Scios (NASDAQ:SCIO). Monitor the position closely as it tests key support near $28. Positions Closed: Gemstar-TV Guide (NASDAQ:GMST) 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 ASMI 26.11 APR 25.00 IQB DE 1.95 438 24.16 21 5.0% BSML 5.37 MAY 5.00 BQX EA 0.90 28 4.47 49 7.4% ELON 18.00 APR 17.50 EUL DW 1.45 359 16.55 21 8.3% OVTI 11.03 APR 10.00 UCM DB 1.40 207 9.63 21 5.6% SMMX 20.65 APR 20.00 OFU DD 1.45 81 19.20 21 6.0% TERN 8.48 APR 7.50 TUN DU 1.35 7871 7.13 21 7.5% TMCS 29.58 APR 27.50 QMF DY 2.85 66 26.73 21 4.2% 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 ELON 18.00 APR 17.50 EUL DW 1.45 359 16.55 21 8.3% TERN 8.48 APR 7.50 TUN DU 1.35 7871 7.13 21 7.5% BSML 5.37 MAY 5.00 BQX EA 0.90 28 4.47 49 7.4% SMMX 20.65 APR 20.00 OFU DD 1.45 81 19.20 21 6.0% OVTI 11.03 APR 10.00 UCM DB 1.40 207 9.63 21 5.6% ASMI 26.11 APR 25.00 IQB DE 1.95 438 24.16 21 5.0% TMCS 29.58 APR 27.50 QMF DY 2.85 66 26.73 21 4.2% 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). ***** ASMI - ASM International $26.11 *** Next Leg Up? *** ASM International (NASDAQ:ASMI) designs, manufactures and sells equipment and solutions used to produce semiconductor devices, or integrated circuits. The company's production equipment and solutions are used by both the front-end and back-end segments of the semiconductor market. ASMI also manufactures leadframes, copper carriers on which dies are mounted as part of the back-end assembly process. The company sells its products predominantly to manufacturers of semiconductor devices and manufacturers of silicon wafers. In early March, UBS Warburg raised the price target on several chip equipment stocks, including ASM Inter- national (to $27 from $22). Analysts believe the overall market for semiconductors is showing a few small signs of recovery as a result of increase in sales of ICs, higher prices and lower inventory levels. The stock has rallied strongly off the Sept. low and has formed a long-term "double bottom" (two-year chart). We favor the bullish technical indications and our conservative position offers a method to participate in the future movement of the issue with relatively low risk. APR 25.00 IQB DE LB=1.95 OI=438 CB=24.16 DE=21 TY=5.0% ***** BSML - BriteSmile $5.37 *** Cheap Speculation! *** BriteSmile (NASDAQ:BSML) develops, produces, sells and leases teeth whitening products, services and technology. BriteSmile's operations include the development of technologically advanced teeth whitening processes that are distributed in professional salon-like settings known as BriteSmile Professional Teeth White- ning Centers, and in existing dental offices known as BriteSmile Professional Teeth Whitening Associated Centers. The company also sells BriteSmile brand post-whitening maintenance products, including toothpaste and electric toothbrushes. On Wednesday, BriteSmile released record results for the year ended December 29, 2001. Net revenue for the year was up 120% to $43.2 million compared with $19.7 million for the year ended 2000. The company believes its revenues bottomed out in January and February and has seen a significant rebound in March 2002 revenues, which bodes well for the future. With the improving outlook and the long-term support near the cost basis, this position offers a favorable entry point for speculators. MAY 5.00 BQX EA LB=0.90 OI=28 CB=4.47 DE=49 TY=7.4% ***** ELON - Echelon $18.00 *** Bracing For A Rally? *** Echelon (NASDAQ:ELON) develops, markets and supports products and services that allow everyday devices, such as light switches, washing machines, conveyor belts, thermostats, door locks, motion sensors, air conditioners, pumps and valves, to be made "smart" and to communicate with one another and across the Internet. The company's products and services are based on its LonWorks tech- nology. Echelon's products and services may be used across many industries to network together devices in homes, buildings, fact- ories and transportation systems. Echelon offers a comprehensive set of over 90 products and services marketed under the LonWorks brand name. Not much news since Echelon, which recently appointed KPMG LLP as the company's independent auditor, joined a long list of companies that have dropped Arthur Andersen. Investors will be focused on Echelon's next earnings report after a solid quarter reported in January. We simply favor the recent technical trends and this position offers a reasonable entry point from which to speculate on the company's future. APR 17.50 EUL DW LB=1.45 OI=359 CB=16.55 DE=21 TY=8.3% ***** OVTI - OmniVision $11.03 *** Back In Rally Mode! *** OmniVision Technologies (NASDAQ:OVTI) designs, develops and markets high performance, high quality and cost efficient semi- conductor imaging devices for computing, communications and consumer electronics applications. The company's main product, an image sensor, is used to capture an image in cameras and camera related products such as personal computer cameras, digital still cameras, personal digital assistant cameras and mobile phone cameras. In February, OmniVision reported that 3rd-quarter revenues were $10.0 million, a 23% increase from last year but down sequentially. Gross margin for the quarter was 42.5%, up from 38.1% in the prior quarter. Guidance for the 4th-quarter ending April 30, 2002 is for revenues to increase to $12-$13 million, and for earnings per share to be in a range of $0.01 to $0.03. We like the bullish move above the February high (now providing support), which suggests further upside potential. APR 10.00 UCM DB LB=1.40 OI=207 CB=9.63 DE=21 TY=5.6% ***** SMMX - Symyx $20.65 *** Bottom-Fishing *** Symyx Technologies (NASDAQ:SMMX) is a pioneer of high-speed technologies for the discovery of new materials. The company's proprietary technologies, including instruments, software and methods, represent complete processes designed to accelerate and change materials discovery. The company's discovery efforts include x-ray storage phosphors for mammography, polymers to speed DNA separation, thermoelectric materials for cooling computers and telecommunications equipment, polymers for personal care applications, lighting phosphors, battery materials, catalysts for the manufacture of pharmaceutical intermediates, commodity chemicals, plastics and rubbers. The stock has rallied after Symyx announced in early March that plaintiffs had dropped a lawsuit against it, that was connected to the recently settled federal probe into Credit Suisse First Boston's initial public offerings business. We simple favor the recent bullish signals and the move back above the long-term 150-dma as Symyx forges a Stage I base. APR 20.00 OFU DD LB=1.45 OI=81 CB=19.20 DE=21 TY=6.0% ***** TERN - Terayon $8.48 *** Bottom-Fishing: Part II *** Terayon Communication Systems (NASDAQ:TERN) develops, markets and sells broadband access systems that enable cable operators, telco carriers and other providers of broadband services to deploy reliable voice, video and data services over cable, DSL and satellite networks. The company sells its broadband access products through a direct sales force worldwide, and distributes its products via resellers and systems integrators. ON Wednesday, Adams Harkness initiated coverage on Terayon with a Market Perform. We simply favor the heavy volume move back above the 150-dma and the long-term support near the cost basis. Reasonable speculation for those who believe the Telecom sector is bottoming. APR 7.50 TUN DU LB=1.35 OI=7871 CB=7.13 DE=21 TY=7.5% ***** TMCS - Ticketmaster $29.58 *** And The Rally Continues! *** Ticketmaster (NASDAQ:TMCS) is engaged in two business segments: ticketing, which includes both online and offline ticketing and camping reservations operations, and city guides and classifieds, which includes all of Ticketmaster's other online properties. Within its ticketing segment, Ticketmaster provides automated ticketing services worldwide, with over 6,200 domestic and foreign clients, including many entertainment facilities, promoters and professional sports franchises. Ticketmaster Group and its major operating subsidiaries, Ticketmaster Corporation and Ticketmaster LLC were organized for the purpose of developing "stand-alone" automated ticketing systems for sale to individual facilities. Ticketmaster is also a local web portal and electronic commerce company that provides in-depth local content and services online. Shares of TMCS are trading at a 2-year high and the recent technical indications suggest the rally has additional upside potential. Investors who wouldn't mind owning the issue can speculate on future bullish activity with this conservative position. APR 27.50 QMF DY LB=2.85 OI=66 CB=26.73 DE=21 TY=4.2% ***** ***************** 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 ONXS 4.99 APR 5.00 ODQ DA 0.35 61 4.64 21 10.9% JNPR 12.62 APR 12.50 JUX DV 0.95 20574 11.67 21 10.3% VRTY 17.68 APR 17.50 YQV DW 1.25 671 16.43 21 9.4% NTPA 5.10 APR 5.00 NQD DA 0.35 185 4.75 21 7.6% AEIS 35.96 APR 35.00 OEQ DG 2.35 395 33.61 21 6.0% MESA 11.20 APR 10.00 EAQ DB 1.55 994 9.65 21 5.3% MGAM 35.35 APR 35.00 QMG DG 1.55 167 33.80 21 5.1% MYK 15.29 APR 15.00 MYK DC 0.80 5 14.49 21 5.1% MNS 23.00 APR 22.50 MNS DX 1.25 37 21.75 21 5.0% ULGX 18.17 APR 17.50 OZU DW 1.25 123 16.92 21 5.0% ***************** NAKED PUT SECTION ***************** Success Basics: Portfolio Diversification By Ray Cummins Portfolio diversification is a fundamental rule for new investors and the concept certainly has merit in today's volatile markets. First, it's important to define the term diversification with regard to stocks and investments. In this case, diversification is a risk management technique that combines a variety of trading positions within a portfolio, thus reducing the impact of any one investment on its overall performance. An astute investor knows that negative news concerning a well-known company in any sector will tend to affect all of the stocks in that particular group. That is one reason it is important to balance the holdings in your portfolio; so that they don't all decrease in value because of a single event. Diversification also lets you take advantage of the variety of financial instruments available in the market, and an assortment of issues from different categories will ensure that at least some of your investments are outperforming the major indices. There are many different stock categories for to choose from but blue-chip stocks are historically the best long-term investments. These companies are established, high quality issues like Dupont (DD), Boeing (BA), McDonalds (MCD, American Express (AXP), and International Business Machines (IBM). They generally pay good dividends and are considered the bellwethers of the stock market. Defensive or safety issues are stocks that remain stable even in declining markets. This group usually includes utilities, drug manufacturers, and consumer products or food companies. These stocks hold their value in recessions because their products are always in demand, regardless of the economic climate. Cyclical companies are those whose earnings fluctuate with changes in a particular business or industry cycle. When the conditions are favorable, the company's stock and earnings rise. As the cycle ends, the company's revenues and stock value falls back to its previous position. Growth stocks include any companies that have a high probability of capital appreciation. They retain most of their earnings and usually don't pay dividends. In most cases, all of their income is invested in the company for expansion and acquisition or research. These stocks are more speculative and are generally found in the technology segment. One other type of investment: Income stocks, which are very conservative issues that have yields comparable with corporate bonds. These companies can offer competitive returns because their products or services are superior to others in the industry and they also have the possibility of price appreciation. Another popular category of stocks is the Conglomerate. These companies have a diverse line of products and services that span a number of key industries. For example, Minnesota Mining and Manufacturing (MMM) is often referred to as maker of industrial adhesive products (3M markets Scotch brand tape), but they also provide manufacturing services for the transportation, graphics and safety, health care, consumer, office supply, electronics, communications and specialty materials industries. Each specific segment is affected by a combination of many different elements, including the overall economy, the health of the industry they do business in, and the unit's individual performance. All of these subsidiaries behave in different ways from one another, performing uniquely in separate cycles and with varying degrees of success. At any given time, one or more of these segments will outperform the broader market and by owning shares of a conglomerate, you can benefit from their ability to compensate for common economic fluctuations. It's obvious that businesses in different industries are affected in unique ways by the same economic variables; and this reasoning applies just as well to a large portfolio of positions. Fund managers are an excellent example of this concept; they invest in a variety of issues to protect their portfolio against unexpected changes in the market. The amount of risk you are willing to incur has a direct effect on the diversity in your portfolio. Because every financial instrument reacts differently to market conditions and other business and economic factors, experienced traders attempt to maintain a balanced group of positions that provide steady income and a reasonable potential for capital appreciation. Though you are less likely to become an overnight millionaire with this low risk approach, your investment capital will be protected from unexpected losses, and your portfolio will be able to increase in value on a consistent basis. 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 CBST 20.63 18.48 APR 17.50 0.55 *$ 0.55 10.5% GNTA 18.05 16.77 APR 15.00 0.40 *$ 0.40 9.5% MSO 19.97 17.90 APR 17.50 0.60 *$ 0.60 8.5% NOVN 22.39 20.74 APR 20.00 0.70 *$ 0.70 8.4% DCTM 25.50 25.45 APR 22.50 0.60 *$ 0.60 8.4% DCN 19.10 21.47 APR 15.00 0.55 *$ 0.55 7.8% ACN 29.89 26.70 APR 25.00 0.85 *$ 0.85 7.8% SYXI 12.05 11.69 APR 10.00 0.25 *$ 0.25 7.2% GMST 20.69 14.79 APR 15.00 0.60 $ 0.39 7.2% PLMD 22.83 25.45 APR 17.50 0.50 *$ 0.50 7.1% TER 39.20 39.43 APR 32.50 0.95 *$ 0.95 6.9% MU 38.16 32.90 APR 30.00 0.75 *$ 0.75 6.5% MLNM 25.12 22.31 APR 20.00 0.40 *$ 0.40 6.4% TXN 34.09 33.10 APR 30.00 0.75 *$ 0.75 6.3% IDTI 35.99 33.24 APR 27.50 0.65 *$ 0.65 6.0% LRCX 28.88 29.32 APR 25.00 0.65 *$ 0.65 5.7% AZPN 22.72 22.90 APR 20.00 0.35 *$ 0.35 5.7% MLNM 23.66 22.31 APR 17.50 0.40 *$ 0.40 5.6% MRVL 41.38 43.80 APR 30.00 0.70 *$ 0.70 5.6% PLMD 25.95 25.45 APR 20.00 0.35 *$ 0.35 5.5% SNDK 21.10 21.70 APR 17.50 0.25 *$ 0.25 5.3% MRVL 38.60 43.80 APR 27.50 0.50 *$ 0.50 5.3% FMKT 27.66 22.97 APR 22.50 0.30 *$ 0.30 5.3% SKX 19.20 18.91 APR 17.50 0.30 *$ 0.30 5.2% ALXN 25.80 23.51 APR 22.50 0.35 *$ 0.35 5.2% VARI 35.40 37.94 APR 30.00 0.55 *$ 0.55 5.1% *$ = Stock price is above the sold striking price. Comments: The recent optimism in the market has begun to subside now that investors understand the economic recovery will be slow and difficult. In fact, many of the issues in our portfolio are struggling under the weight of the renewed selling pressure and there are definitely some positions that need to be monitored for early-exit (or adjustment) opportunities. Stocks on the watch-list include: Alexion Pharmaceuticals (NASDAQ:ALXN), Cubist (NASDAQ:CBST), Martha Stewart Living (NYSE:MSO), Micron Technology (NYSE:MU), and Noven Pharmaceuticals (NASDAQ:NOVN). In addition, shares of software maker FreeMarkets (Nasdaq:FMKT) plummeted last week after Goldman Sachs said it was concerned about the company's ability to add new customers. The stock is now testing support near its current price and if you did not exit the position on the announcement, you should consider that alternative on any close below $22. Positions Closed: Gemstar (NASDAQ:GMST) 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 AVCT 26.79 APR 25.00 QVX PE 0.50 2 24.50 21 7.7% DCTM 25.45 APR 22.50 QDC PX 0.45 32 22.05 21 8.5% ENDO 19.71 APR 17.50 PFU PW 0.30 1390 17.20 21 7.3% FTI 19.93 APR 17.50 FTI PW 0.30 1900 17.20 21 7.4% IDTI 33.24 APR 30.00 ITQ PF 0.70 785 29.30 21 9.4% JDAS 31.88 APR 30.00 QAH PF 0.95 32 29.05 21 11.6% OSIS 25.20 APR 20.00 UOJ PD 0.25 186 19.75 21 6.8% PDE 15.90 APR 15.00 PDE PC 0.35 639 14.65 21 8.7% TER 39.43 APR 35.00 TER PG 0.65 1319 34.35 21 7.9% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield JDAS 31.88 APR 30.00 QAH PF 0.95 32 29.05 21 11.6% IDTI 33.24 APR 30.00 ITQ PF 0.70 785 29.30 21 9.4% PDE 15.90 APR 15.00 PDE PC 0.35 639 14.65 21 8.7% DCTM 25.45 APR 22.50 QDC PX 0.45 32 22.05 21 8.5% TER 39.43 APR 35.00 TER PG 0.65 1319 34.35 21 7.9% AVCT 26.79 APR 25.00 QVX PE 0.50 2 24.50 21 7.7% FTI 19.93 APR 17.50 FTI PW 0.30 1900 17.20 21 7.4% ENDO 19.71 APR 17.50 PFU PW 0.30 1390 17.20 21 7.3% OSIS 25.20 APR 20.00 UOJ PD 0.25 186 19.75 21 6.8% 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). ***** AVCT - Avocent $26.79 *** Break-Out? *** Avocent Corporation (NASDAQ:AVCT) designs, manufactures, and sells console switching systems, digital connectivity solutions, serial connectivity devices, extension and remote access products, and display products for the computer industry. The company's analog, digital, and serial switching solutions and its extension and remote access products help network administrators manage multiple servers from a single local or remote console consisting of a keyboard, video monitor, and mouse. The company's switching solutions provide multiple users, each with a separate keyboard, video monitor, and mouse, with the capability to control thousands of computers, thus eliminating the need for individual keyboards, video monitors, and mice for the controlled computers. Shares of AVCT traded at 3-month high Friday and investors are wondering if the stock will finally move above the year-long resistance at the current price. Traders can also speculate on that outcome with this conservative position. APR 25.00 QVX PE LB=0.50 OI=2 CB=24.50 DE=21 TY=7.7% ***** DCTM - Documentum $24.96 *** New Outlook! *** Documentum (NASDAQ:DCTM) develops, markets and supports an open, flexible, Internet-scalable content management platform that enables companies to create, deliver, publish and personalize content in various formats across e-business applications. The company shipped the 1st commercial version of its Documentum Server product in late 1992, and since then, substantially all of its revenue has been from licenses of its family of Internet- scale content management system products and related services, which include maintenance and support, training and consulting services. In January, Documentum beat expectations, posting a fourth-quarter loss and said it expects to return to operating profits by the 2nd-quarter of 2002. Then Merrill Lynch raised its long-term rating on the company to a "strong buy," saying changes in Documentum's sales organization are a significantly positive. Recently, Deutsche Banc Alex. Brown started coverage on DCTM with a "buy" rating and a 12-month price target of $28. Last week, the issue soared amid speculation it will gain sales from increased government spending. Our conservative position offers a way to profit from future bullish movement in the issue. APR 22.50 QDC PX LB=0.45 OI=32 CB=22.05 DE=21 TY=8.5% ***** ENDO - Endocare $19.71 *** 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 in early March after Endocare announced that it had secured a 3-year system-wide Bulk Purchase Agreement from the United States Department of Veterans Affairs (VA) for the Company's FDA-cleared ErecAidŽ 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. The heavy-volume rally through a recent resistance area at $18 suggests further upside potential for the issue. APR 17.50 PFU PW LB=0.30 OI=1390 CB=17.20 DE=21 TY=7.3% ***** FTI - Fmc Technologies $19.93 *** Oil Service Sector! *** FMC Technologies (NYSE:FTI) designs, manufactures and services technologically sophisticated systems and products for customers through its Energy Systems and Specialty Systems segments. Energy Systems is a supplier of systems and services used in the offshore, particularly deepwater, exploration and production of crude oil and natural gas. Specialty Systems provides a range of advanced handling and processing systems to industrial customers. Until December 2001, FMC Corporation was the primary shareholder of the company, but now the company is fully independent. In February, Merrill Lynch raised its mid-term rating on FMC to a "strong buy" with a price target of $24, saying that the company's focus on deepwater development should result in high future growth based on the sector's expected average annual growth of 10%-15% through 2005. This week, the company reported that its FMC Energy Systems business has signed a three-year strategic sourcing agreement with BP (NYSE:BP) to supply Lease Automatic Custody Transfer units for BP's deepwater developments in the Gulf of Mexico. FMC Measurement is supplying these units and anticipates metering system orders for additional BP projects in the Gulf of Mexico. Investors favor the outlook for the company and this position offers a great way to speculate on future bullish activity in the stock. APR 17.50 FTI PW LB=0.30 OI=1900 CB=17.20 DE=21 TY=7.4% ***** IDTI - Integrated Device Tech. $33.24 *** Second Chance! *** Integrated Device Technology (NASDAQ:IDTI) designs, develops, manufactures and markets a broad range of high-performance semiconductor products. Applications for the company's products include: data networking and telecommunications equipment, such as routers, hubs, switches, cellular base stations and other devices; storage area networks; other networked peripherals and servers; and personal computers. IDT fabricates substantially all of its semiconductor wafers using advanced (CMOS) process technology in the company's own fabrication facilities. The company assembles or packages the majority of its products in facilities that it owns in Malaysia and the Philippines, where it also conducts product test operations. Shares of Integrated Device Technology rallied in early March after the company said "it now believes the third quarter represented a low point in revenue." The communications technology company said it expects fourth quarter revenue to be "flat to slightly up" and analysts at CIBC World Markets agreed with the outlook, following the announcement with an upgrade on the issue. This position offers a favorable cost basis for investors who wouldn't mind owning a leading issue in the semiconductor group. APR 30.00 ITQ PF LB=0.70 OI=785 CB=29.30 DE=21 TY=9.4% ***** JDAS - JDA Software Group $31.88 *** Big Day! *** With more than 4,300 retail, manufacturing and wholesale clients in 60 countries, JDA Software Group (NASDAQ:JDAS) is the global leader in delivering integrated software and professional services for the retail demand chain. By capitalizing on its market position and financial strength, JDA commits significant its resources to advancing JDA Portfolio, its suite of merchandising, POS, analytic and collaborative solutions that improve revenues, efficiency and customer focus. JDA is headquartered in Scottsdale, Arizona and employs more than 1,400 associates operating from 36 offices in major cities throughout North America, South America, Europe, Asia and Australia. Shares of JDAS spiked this week on end-of-quarter buying pressure by some major institutions and the question now is, "Will the rally continue?" The technical pattern suggests there is support near our cost basis so this position offers favorable risk versus reward for traders who are bullish on the issue. APR 30.00 QAH PF LB=0.95 OI=32 CB=29.05 DE=21 TY=11.6% ***** OSIS - OSI Systems $25.20 *** Bomb Detection! *** OSI Systems (NASDAQ:OSIS) is a vertically integrated, worldwide provider of devices, subsystems and end products based on optoelectronic technology. The company designs and manufactures optoelectronic devices and value-added subsystems for original equipment manufacturers for use in a broad range of applications, including security, medical diagnostics, fiber optics, telecom, gaming, office automation, aerospace and defense electronics, computer peripherals and industrial automation. In addition, the company utilizes its optoelectronic technology and design capabilities to manufacture security and inspection products that are used to inspect people, baggage, cargo and other objects for weapons, explosives, drugs and other contraband. In the medical field, OSI manufactures and sells bone densitometers, which are used for bone loss measurements in the diagnosis of osteoporosis. Last week, OSI Systems announced it received a $10 million initial orders for X-ray pre-scanners from InVision Technologies (NASDAQ:INVN). The continued necessity for these types of products should result in additional future revenues for OSI and traders can speculate on that outcome with this position. APR 20.00 UOJ PD LB=0.25 OI=186 CB=19.75 DE=21 TY=6.8% ***** PDE - Pride International $15.90 *** Entry Point! *** Pride International (NYSE:PDE) is a drilling contractor, providing offshore and onshore drilling, work-over and related services in over 20 countries. The company operates a fleet of 337 rigs, including two ultra-deepwater drillships, 11 semisubmersible rigs, 35 jackup rigs, 29 tender-assist, barge and platform rigs, as well as 260 land rigs. Its land rigs range in capability from shallow work-over units to 30,000-foot drilling depths. San Antonio, a subsidiary, provides a variety of oilfield services to customers in Argentina, Venezuela, Bolivia and Peru. Pride's many services include integrated project management, coiled tubing drilling and completion, under-balanced drilling, directional and horizontal drilling, environmental drilling (for river crossings, fiber-optic cables and more) and cementing, stimulation and related services. Pride International recently received contracts for three of its Gulf of Mexico jackups with a total value worth $150 million. In addition, Pride was awarded a two-year contract by Pemex for a 1000 horsepower platform rig, which will generate revenues of $14 million. This position offers a low risk entry point for traders who want to own a popular stock in the oil service sector. APR 15.00 PDE PC LB=0.35 OI=639 CB=14.65 DE=21 TY=8.7% ***** TER - Teradyne $39.43 *** Chip Rally Resumes! *** Teradyne (NYSE:TER) is a maker of automatic test equipment and related software for the electronics and communications industries. Products include systems to test and inspect semiconductors; circuit boards; high-speed voice and data communication, and software. Teradyne is also a manufacturer of back-planes and associated connectors used in performance electronic systems. Semiconductor and chip-equipment stocks have been among the best performing technology groups during the recent market sell-off and based on Friday's rally, the group is going to lead any future recovery in the technology industry. TER appears to be one the stronger issues in the chip-equipment sector and investors who wouldn't mind owning the issue at a discounted basis can speculate on the future performance of the company's share value with this position. APR 35.00 TER PG LB=0.65 OI=1319 CB=34.35 DE=21 TY=7.9% ***** ***************** 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 MDR 15.55 APR 15.00 MDR PC 0.50 121 14.50 21 11.7% NTAP 20.38 APR 17.50 NUL PW 0.40 3109 17.10 21 10.2% SLMC 16.01 APR 15.00 SRQ PC 0.40 20 14.60 21 10.0% SLAB 35.33 APR 30.00 QFJ PF 0.65 261 29.35 21 10.0% RMCI 25.32 APR 22.50 UHU PX 0.45 48 22.05 21 8.4% TTI 29.05 APR 27.50 TTI PY 0.55 0 26.95 21 7.5% MACR 20.42 APR 17.50 MRQ PW 0.25 202 17.25 21 6.6% ENTG 16.15 APR 15.00 UFN PC 0.25 124 14.75 21 6.5% ************************ SPREADS/STRADDLES/COMBOS ************************ A Great Time For A Holiday! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, March 28 The major equity averages ended the holiday-shortened week on a mixed note with technology issues closing higher while blue-chip stocks retreated. The Dow Jones Industrial Average edged down 22 points to 10,403 on weakness in DuPont (NYSE:DD), Caterpillar (NYSE:CAT), Home Depot (NYSE:HD), Minnesota Mining (NYSE:MMM) and Philip Morris (NYSE:MO). The NASDAQ Composite rallied 18 points to 1,845 as buyers rotated into technology stocks. Semiconductor-equipment makers, software and storage issues were among the group's best performers. The broader market S&P 500 index ended relatively unchanged as defense, airline, cyclical and drug stocks enjoyed selective interest while biotechnology, retail and gold shares slumped. Finance stocks were also under pressure after Merrill Lynch issued a slew of downgrades in the regional bank industry. Trading volume came in at 1.12 billion on the NYSE and at 1.66 billion on the NASDAQ. Market breadth finished positive, with winners pacing losers 17 to 14 on the Big Board and 20 to 16 on the technology exchange. Government bonds plunged following the day's upbeat economic news. The 10-year Treasury slid 14/32 to yield 5.40% and the 30-year bond was 17/32 lower to yield 5.80%. Last week's new plays (positions/opening prices/strategy): CVS Corp. (NYSE:CVS) MAY35C/MAY35P $3.50 debit straddle JP Morgan (NYSE:JPM) MAY35C/MAY35P $3.30 debit straddle Viacom (NYSE:VIA) MAY50C/MAY50P $4.95 debit straddle NASDAQ 100 (AMEX:QQQ) APR36C/APR36P $2.50 debit straddle S&P 100 (CBOE:OEX) APR615C/A610C $0.40 credit bull-put UCI (NYSE:UCI) NOV17C/APR17C $1.80 debit calendar All of our new straddles offered favorable entry prices during the week and both the Viacom and NASDAQ 100 positions were very active. Viacom shares plummeted Tuesday after a Morgan Stanley analyst noted that the advertising recovery at Viacom's largest radio division wasn't occurring as quickly as expected. The sell-off continued Wednesday with the stock falling to $46.16 early in the session, pushing the bearish portion of the debit straddle to a near "break-even" exit for the entire position. The NASDAQ 100 Index moved in a similar manner with Wednesday's decline boosting the QQQ APR-36 put to $2.10 before the hi-tech group rebounded. The lone credit spread last week was on the S&P 100 index and with Monday's broad market slump, the target premium was not available. However, there were a few traders that opened the spread for a slightly lower credit, so we will track the position based on that price. The bullish calendar spread in UCI suffered the same fate but in the other direction as the issue opened higher Monday and never looked back. The lowest debit observed for the spread was $1.80, well above our target entry price. Portfolio Activity: The recent volatility in the stock market continued this week as investors rotated back and forth among various segments in their search for issues that will weather the upcoming earnings season. Friday's session ended with a strong bias for NASDAQ stocks and although the activity did not affect many issues in our portfolio, there was some unexpected news that helped one of our new positions achieve profitability. Shares of Veeco (NASDAQ:VECO) soared Friday after Merrill Lynch upgraded the issue to a "strong buy" based on the company's fundamentals and attractive valuation. The brokerage offered a 12-month target price of $45 and VECO's share value jumped on the heels of the announcement. Our new straddle in the stock traded as high as $6.10 (credit), offering up to a $1.80 profit on $4.30 invested in only two weeks. Another position in that section that continued its recent winning ways was Fomento Economico (NYSE:FMX). The APR40C/40P straddle offered a credit as high as $7.00 on $3.90 invested, a gain of up to 80% in less than a month. In the time-selling group, Pactiv (NYSE:PTV) provided its first viable "early-exit" profit with the bullish calendar spread yielding up to $1.20 credit on $0.85 initially invested. In addition, the issue is trading exactly at the sold option's strike price, so we will continue to hold the position as a spread until the current trend changes character. The biggest surprise in the Spreads/Combos portfolio is Providian Financial (NYSE:PVN) and this week the issue moved to a new 6-month high as investors speculated on a recovery in the credit services industry. Our bullish debit spread in the stock (JUN5C/7C) is trading at a 200% profit and traders should consider closing the long-term play to lock-in favorable gains. Questions & comments on spreads/combos to Contact Support ****************************************************************** - STRADDLES AND STRANGLES - The overall level of implied volatility in stock options remains at historic lows, thus traders should focus on buying "premium" in their strategies. The simplest form of this approach is the debit straddle and since our readers have been requesting more candidates for this technique, it is appropriate to offer a new selection of favorable issues. Based on analysis of historical option pricing and technical background, all of these positions meet the fundamental criteria for straddles. However, they must also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. The speculative plays will not be tracked in the monthly summary. ****************************************************************** BRCD - Brocade $27.00 *** Recent Volatility! *** Brocade Communications Systems (NASDAQ:BRCD) is a provider of infrastructure for storage area networks (SANs), offering a product family of Fibre Channel fabric switches that provide an intelligent networking foundation for SANs. The company delivers and enables hardware and software products, education and services that allow companies to implement highly available, scalable, manageable and very secure environments for critical storage applications. Companies can leverage the company's SAN infrastructure solutions to connect servers with storage devices and scale them independently, consolidate and share servers and storage resources, centralize data management, share valuable backup resources across the enterprise, and provision and manage more storage without increasing personnel resources. PLAY (speculative - neutral/debit straddle): BUY CALL APR-27.50 UBF-DY OI=5062 A=$1.60 BUY PUT APR-27.50 UBF-PY OI=1173 A=$2.10 INITIAL NET DEBIT TARGET=$3.50-$3.60 TARGET PROFIT=15-25% ****************************************************************** Check Point Software $30.40 *** Key Moment! *** Check Point Software Technologies (NASDAQ:CHKP), together with its many subsidiaries, develops, markets and supports Internet security solutions for enterprise networks and service providers (Telcos, ISPs, ASPs and MSPs) including virtual private networks (VPNs), firewalls, intranet and extranet security. The company delivers solutions that enable secure, reliable and manageable business-to-business communications over any Internet protocol (IP) network, including the Internet, intranets and extranets. Check Point product offerings include traffic control/quality of service and IP address management. Check Point products are completely integrated as a part of the company's secure virtual network (SVN) architecture and provide centralized management, distributed deployment and comprehensive policy administration. PLAY (speculative - neutral/debit straddle): BUY CALL APR-30 KEQ-DF OI=3027 A=$2.20 BUY PUT APR-30 KEQ-PF OI=14090 A=$1.75 INITIAL NET DEBIT TARGET=$3.75-$3.80 TARGET PROFIT=15-25% ****************************************************************** SEBL - Siebel Systems $32.61 *** Earnings Play! *** Siebel Systems (NASDAQ:SEBL) is a provider of unique eBusiness applications software. Siebel Business Applications comprise a family of Internet-based applications software designed to meet the sales, marketing and customer service information system requirements of even the largest multinational organizations. Siebel eBusiness Applications enable organizations to sell to, market to, and service their customers across multiple channels, including the Web, call centers, field, resellers, retail and dealer networks. By employing complex eBusiness applications to better manage their customer relationships, the company's customers achieve high levels of customer satisfaction and also continue to be competitive in their markets. The company's earnings are due April 17, 2002. PLAY (speculative - neutral/debit straddle): BUY CALL APR-32.50 SGQ-DZ OI=7605 A=$2.05 BUY PUT APR-32.50 SGQ-PZ OI=5335 A=$1.90 INITIAL NET DEBIT TARGET=$3.75-$3.80 TARGET PROFIT=15-25% ****************************************************************** TQNT - TriQuint Semiconductor $12.01 *** Earnings Play! *** TriQuint Semiconductor (NASDAQ:TQNT) develops, manufactures and markets high-performance integrated circuits for communications markets. The company's integrated circuits are incorporated into a wide variety of products, including cellular phones and pagers, fiber-optic telecom equipment, satellite communications systems, high-performance data networking products and various aerospace applications. The company uses its proprietary gallium arsenide technology to enable its products to overcome the performance barriers of silicon devices. Gallium arsenide has some inherent physical properties that allow its electrons to move up to five times faster than those of silicon, allowing the manufacture of gallium arsenide integrated circuits that operate at much higher speeds than silicon devices, or operate at the same speeds with reduced power consumption. In July 2001, the company acquired Sawtek, a designer, developer, manufacturer and marketer of electronic signal processing components. The company's earnings are due April 18, 2002. PLAY (speculative - neutral/debit straddle): BUY CALL APR-12.50 TQN-DV OI=2539 A=$0.50 BUY PUT APR-12.50 TQN-PV OI=353 A=$0.95 INITIAL NET DEBIT TARGET=$1.35-$1.40 TARGET PROFIT=15-25% Note: The Delta or "hedge ratio" in the position suggests that we should buy 2 calls for every 1 put (2:1 ratio) to establish a neutral outlook in the straddle. ****************************************************************** QCOM - Qualcomm $37.64 *** More Earnings Speculation! *** Qualcomm (NASDAQ:QCOM) is a worldwide developer and supplier of code division multiple access (CDMA) integrated circuits and system software for wireless voice and data communications and global positioning system products. The company offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides its customers with advanced wireless technology, enhanced component integration and complex interoperability, as well as reduced time to market. Qualcomm provides integrated circuits and system software to many wireless handset and infrastructure manufacturers. The company's earnings are due April 24, 2002. PLAY (very speculative - neutral/debit strangle): BUY CALL MAY-40 AAW-EH OI=1970 A=$2.10 BUY PUT MAY-35 AAW-QG OI=931 A=$1.95 INITIAL NET DEBIT TARGET=$3.75-$3.90 TARGET PROFIT=25-40% ****************************************************************** MIR - Mirant $14.45 *** Utility Sector Activity *** Mirant Corporation (NYSE:MIR) and its subsidiaries comprise a global competitive energy company with energy marketing and risk management experience. The company has extensive operations in North America, Europe and Asia. With an integrated business model, the company develops, constructs, owns and operates power plants, and sells wholesale electricity, gas and other energy-related commodity products. Mirant owns or controls more than 20,000 megawatts (MW) of electric generating capacity around the world, with approximately another 9,000 MW under development. In North America, Mirant also controls access to 3.7 billion cubic feet per day of natural gas production, 2.1 billion CFPD of natural gas transportation and approximately 41 billion CF of natural gas storage. The company's earnings are due April 25, 2002. PLAY (conservative - neutral/debit straddle): BUY CALL MAY-15 MIR-EC OI=4422 A=$0.95 BUY PUT MAY-15 MIR-QC OI=1021 A=$1.50 INITIAL NET DEBIT TARGET=$2.35-$2.40 TARGET PROFIT=25-50% ****************************************************************** RRI - Reliant Resources $16.91 *** Probability Play! *** Reliant Resources (NYSE:RRI) is a provider of electricity and energy services with a focus on the competitive segments of the electric power industry in the United States and Europe. RRI acquires, develops, and operates electric power generation facilities that are not subject to traditional cost-based regulation and therefore can sell power at prices determined by the market. The company has an aggregate net generation capacity of over 12,000 megawatts and also trades and markets natural gas and other energy-related commodities. The company also provides related risk management services and engages in other businesses; specifically eBusiness, communications and venture capital. PLAY (conservative - neutral/debit straddle): BUY CALL MAY-17.50 RRI-EW OI=458 A=$0.55 BUY PUT MAY-17.50 RRI-QW OI=343 A=$1.15 INITIAL NET DEBIT TARGET=$1.55-$1.60 TARGET PROFIT=25-40% Note: The Delta or "hedge ratio" in the position suggests that we should buy 2 calls for every 1 put (2:1 ratio) to establish a neutral outlook in the straddle. ****************************************************************** ************************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 ************ Some candidates have drifted away from action points, they've been dropped. Mull over two new candidates this weekend. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/032902.asp ************** MARKET POSTURE ************** Several sectors are poised for big moves next week. Check your support and resistance levels this weekend! 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