The Option Investor Newsletter Wednesday 04-24-2002 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 04-24-2002 High Low Volume Advance/Decline DJIA 10030.40 – 58.80 10163.40 10027.70 1355 mln 1507/1645 NASDAQ 1713.30 - 17.00 1746.52 1711.11 1735 mln 1599/1945 S&P 100 541.86 - 3.94 549.98 541.47 totals 3106/3590 S&P 500 1093.14 - 7.82 1108.46 1092.51 RUS 2000 507.32 - 2.97 514.57 506.76 DJ TRANS 2674.74 – 23.31 2741.91 2674.59 VIX 22.67 + 0.54 23.08 21.39 VXN 40.20 + 0.27 41.08 39.36 Put/Call Ratio 0.78 ******************************************************************* Beige, green and red were the colors of the day It was seesaw action today with market participants not knowing what to do as the market averages whipsawed from green, then to red, back to green and then red again into the close. The "culprit of uncertainty" looked to be the Fed's Beige Book survey of Federal Reserve Districts. I won't go into great detail as the Beige Book survey is simply a report of various observations (not a finite number) of economic activity taking place in different financial districts in the U.S. In brief, the survey showed that signs of economic improvement or increases in economic activity were present among the various districts since late February, with the sole exception being Boston, which described economic activity as mixed. While the overall tone was positive, a few districts expressed "qualifications" about the pace of the recovery or strength of their regional economies. A link to the Beige Book summary can be found at the Federal Reserve website at http://www.federalreserve.gov/FOMC/BeigeBook/2002/20020424/default.htm Both the Dow Industrials (INDU) 10,030 -0.58% and the S&P 500 (SPX.X) 1,093 -0.71 were holding gains 30-minutes after the release of the Beige Book report, while the NASDAQ-Composite (COMPX) 1,713 -0.97 has edged lower just ahead of the report. NASDAQ losses were lead by semiconductors, which had been showing some technology leadership in recent weeks, but soon after the report was released, the Semiconductor Index (SOX.X) broke sharply from the 550 level and lost ground into the close, finishing down 3.76% at 534. For technology bulls, seeing weakness in one of the stronger segments of technology became disheartening and other groups turned more bearish. Semiconductor Index Chart - Daily Interval Yesterday's break of upward trend and inability to rally with other sectors in the market earlier in the day, sure has the look of determination that semiconductor bulls were and perhaps broader technology bulls were going to need a blow out type of Beige Book report to bring them to the table. We had a bullish play set up with a trigger in shares of Applied Materials (NASDAQ:AMAT) $24.96 -3.62% just in case there were some upside surprises from today's Beige Book report. For weeks we've been looking for an entry point on the stock for a pullback and it looks like we're going to get it. Applied Materials Chart - Daily Interval Technology bulls have learned that waiting for a pullback and then taking some heat into levels of support has been the best way to attack a trade. With the Semiconductor Index (SOX.X) breaking firmly below trend, expect some risk management in inventories to be underway. The greater the pullback in AMAT to the December-March consolidation range the better the chance to find committed longer-term bulls and institutional sponsorship. With the Beige Book report depicting a still growing economy, but perhaps not at the rapid pace of some momentum investors, expect technology stocks to get very volatile. The MARKET hates uncertainty and investors are beginning to question just how "robust" the economic turnaround is. Other technical damage taking place While a stronger group of technology like the Semiconductor Index (SOX.X) has fallen below an upward trend and experienced a 3.7% decline, one of our "key" economic sectors in the deep cyclicals and the Morgan Stanley Cyclical Index (CYC.X) 559 -1% also has broken below our upward trend and gives hint of a market's willingness to sell. Morgan Stanley Cyclical Index Chart - Daily Interval Today's "firmer" break of bullish trend is an alert to weakness in the scenario of more robust economic growth. While it is "tempting" to look for bearish opportunities in the group, there are undoubtedly some eager bears from lower levels looking for a pullback to get back to break even in their trade. It's my view that if the Cyclical Index (CYC.X) is going back to the lows, then yes this group would be a good short. However, if that were to happen (I don't think it will, but won't rule it out), then look out for many technology stocks that have lacked sponsorship. Another piece of mentionable "technical damage" came in the Dow Industrials (INDU) 10,030 -0.58% with a trade at the 10,050 level. On the 50-point box chart of the point and figure chart, this was a triple-bottom sell signal and this sell signal came below trend. In essence, on three previous declines, there had been enough buyers to prevent a trade at the 10,050 level, but today we saw more willing sellers than buyers at that level and this too is considered a technical breakdown in the Dow Industrials. I now have resistance firming at 10,300. There may be some "psychological" support at the 10,000 level, but bulls most likely should begin assessing downside risk to the 9,800 level near-term. Seeing rotation into Treasuries While the Treasury market closed at 03:00 PM EST today (it normally closes at that time every day) there was still an hour left in trading after the Beige Book numbers were released. Bonds saw buying across the maturities and here too we see a break of trend (from our regression) in the 10-year YIELD ($TNX.X). 10-year YIELD Chart ($TNX.X) - Daily Interval Today's action in the bond market was quite "defensive" looking. Note the rather "sharp" decline in YIELD. This hints to me that Treasury bulls are getting more aggressive with their buying in the bonds, despite a lower YIELD than found near our "YIELD top" of March 21st of 5.452%. While the difference between 5.45% and current YIELD of 5.095% may not seem like that much, imagine you're moving several million dollars a day among various investments (stocks or bonds). With the information currently at hand, I will go on record as saying I don't think the 10-year YIELD will break below the 4.854% level (50% retracement). I think there is enough underpinning economic strength to have an unfavorable risk/reward trade in bonds versus stocks (not all stocks) at that type of YIELD level. We will deal/monitor with this one day at a time. Just like we always have, but for now this bond action looks more defensive. I've "benchmarked" the March 21st date on the YIELD chart. Use it if you will to perhaps understand how this YIELD may have impacted securities you're trading, have bought, shorted, etc. It isn't all bad news! Bulls and bears that have been with us awhile know that there are opportunities to make money from both the bullish and bearish side of a trade. It's interesting to note that the Dow Jones US Home Construction Index (DJUSHB) 382.24, gave back just fractions of recent gains. All of a sudden, the "higher YIELDS driving mortgage rates higher" than may have priced buyers out of the housing market have started to come down a bit haven't they? (see 10-year YIELD chart above). A month ago, there was plenty of chatter that the higher YIELDS would have an adverse impact on mortgage rates and homebuilders would get crushed. So far this week, homebuilders have been reporting some stellar earnings and guiding estimates higher. True! A bear will now turn the table and talk about consumer confidence and how a "not so robust" economic picture will put a damper on consumer confidence and buyers for new homes will dry up. The bull will simply ask, "then explain what the heck happened to that scenario over the past two hears?" Look, arguing points of economic philosophy can be left for those that have a lot of time on their hands. What you and I need to do is stick with our disciplined methods of trading. Identify good action points where we can properly assess risk/reward and take it from there. Let's quickly review this morning's New Home Sales report that came in at 878,000, which was below the consensus number of 884,000. In an effort to perhaps "clear things up" we must understand that the consensus estimates were bumped higher to "account" for higher revisions to the February data. In February (prior report), the New Home Sales numbers were reported as 875,000. However, those numbers showed a higher revision (based on more complete data) to 906,000. Part of the reason the homebuilders saw some selling near the opening of trading was that the "3.1% decline" was taken from the 906,000 revised number, not the previously reported 875,000 data. Who knows. Next month, "today's" New Home Sales data can be revised (up or down). Again, if you and I are going to trade the homebuilders, we simply need to stay disciplined in our trading and let the stock tell us what to do. New Subscribers and those that have been with us! I get a lot of questions from subscribers regarding our play list and why we're doing the things we're doing with stops, targets, etc. Let it be the first priority that YOU do what is right for your account. If you feel a stop of ours (as outlined) is too tight and you want to give it more room, then you have the right and the priveledge to make the adjustments you feel are warranted. If you've got a nice gain going in the trade and want to exit the position, I STRONGLY advise you to do so! Hey, I will never tell an investor/trader that they shouldn't have taken a profit. That's what we're here for. By golly, that Amazon.com (NASDAQ:AMZN) $16.79 +19.4% is something else isn't it? If you would have told me at the beginning of the month that I had to pick one stock that might just end up representing the biggest gain from profiled entry, you'd have had to twist my arm to make the one bet on Amazon.com (AMZN). I can't say that I'm "surprised" that the stock has acted well, but 19% gains in a single day are very hard to find, especially from a bullish trade under current/recent market conditions. That gain should be protected and any subscriber taking partial positions or full positions off the table today should be proud that they sucked it up, traded their plan, and now have the opportunity to reap the benefit. Don't let it slip away! You can also bet there are some bears out there in other stocks on our play list that have also "sucked it up" and are playing the downside of things. I think we've got some stocks profiled on both the bullish and bearish side of things that have some good potential. A trader that will stay disciplined and true to the trading strategy will not only survive, but thrive! AOL earnings If you thought that earnings from Microsoft (MSFT) $53.02 -1.79% last week were "confusing" then you'll most likely find tonight's earnings report from AOL Time Warner (NYSE:AOL) $19.30 +0.99% an equal. After the close of trading, AOL reported Q1 earnings (excluding charges) of $118 million or $0.18 per share, which was 5-cents better than Multex consensus of $0.13. Q1 revenues came in at $9.76 billion versus consensus of $9.5 billion. AOL said it sees "light at the end of the tunnel" and sees Q2 revenue growth in mid to signle digits year-over-year, with full year revenue growth of 5-8%. While the numbers were reported concise and clear, many were shocked that INCLUDING CHARGES, AOL lost $54.2 billion in the first-quarter, the largest quarterly loss reported in U.S. history. AOL said the charges/losses stemmed from expenses in the aftermath of the January 2001 merger between America Online and Time Warner. My advice on AOL? Stay clear. There are too many other stocks to trade or invest in with less uncertainty surrounding the stock. Let things settle down and let the MARKET digest this earnings report. Gamblers only at this point, and PremierInvestor.com attempts to avoid "gambling" when risk/reward is so difficult to assess. Jeff Bailey ******************** INDEX TRADER SUMMARY ******************** BEARS ON A ROLL by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - Today, you could find some cautiously optimistic traders as the market rallied from the area of its prior lows, but by day's end the bears were BAACK! There were some cross currents early as Durable Goods were down, a first in 5 months. Feel good spill over from Amazon's earnings rebound or, we should say a narrowing of it's loss, keep the dip short and the morning climb continued, especially in the beaten up tech darlings -- the COMP (Nasdaq Composite) actually briefly got above pivotal daily resistance at 1740. Not for long and this was the only Index to get back above its down trendline. It was downhill after that as ALL indices made new closing lows. Hourly stochastic indicators turned up briefly and achieved an upside crossover, but this was short-lived. As Austin restated the old maxim, in his Trader's Corner article this week, the trend is your friend -- easier to trade on the same side of it, most of the time. This should not be surprising to the Tech bulls who bought every dip in Nasdaq on the way up to 5000 and who thought they had discovered a way to print money. Today's action suggests even more to me than yesterday, that the next downside targets have to be gauged by the Indexes that have NOT taken out their Feb. lows -- that sets up 1080 on SPX and the 9600 area in the Dow, as targets. If we get to these areas, past the current earnings season and given any reason to hope for improved earnings, there could then be a lift from those levels -- or, cause the market to simply drift sideways. We can see, in the case of Amazon today, what an improving earnings and profits picture will do. Repeating my thought of last night, a stock market break of the prior lows, could shock the economy and even imperil the recovery - how? Consumer spending is driving our GNP and positive consumer sentiment supports the public's tendency to keep spending. A dive in the value of stock holdings tends to make people grumpy. Grumpy is not the mood of spenders. IS THERE ANY PLACE TO HIDE - New closing lows all around relative to the current downswing. No more pointing to indexes holding ABOVE their prior lows, except the S&P 500 -- reflecting the recent months strength in the mid caps -- and the Dow Jones 30 stock average (INDU). ' Speaking of the mid caps, every fund manager talking head in creation, or at least interviewed of late, talks about how the small cap and mid cap(italization) stocks are doing well, going to new highs, etc. As if all you have to do is invest in these sectors -- well, they are not business sectors, but I suppose we could call them SIZE sectors. Well, as far as investing, you may have experienced a "different" stock market this year if you held the iShares small cap Index fund (symbol: IJR) or the iShares Russell 2000 ($RUT.X) Index fund and those stocks have done very well. But, lets take a look at these charts on a weekly basis. Both of these iShare stocks, the S&P 600 small caps and the Russell 2000 index of smaller companies, which reflect the most representative indexes comprised of the small and mid cap miracle stocks look pretty toppy to me. TRADING STRATEGY - I've been recommending trading the ranges, but trading BOTH sides has stopped working for most option players on this latest part of the current decline, as trying to play even a short-term bounce has been best left to day and floor traders. Rallies have been short-lived and you need be a day trader almost. Again today we saw the stochastic oscillators reversing from even mildly elevated levels in the oscillator type indicators like stochastics. When this has occurred from an area of chart resistance, the short side has been easier to trade. A put play today did occur but it was tricky to play. There was a minor run up in the stochastic model on a short-term basis (length at 5), COUPLED with a move up to a likely trendline resistance area was in the Nasdaq Composite (COMP). From this bearish set up, you would have some clue about a place for a bearish play on the NDX options or to shorting QQQ or buying the puts. THE CHART PARADE - Nasdaq Composite (COMP.X) - Hourly: The peak in the 1820 in the COMP reversed with high readings in both settings on the slow stochastic -- the "long" setting at 21 (below) and the "short" setting (upper) at 5. The 21 setting could have helped keep you on the short side through most of the down move. The quick moving "5" setting was a help when the COMP hit the resistance trendline and got up to about the area where this index topped the other day, but not from a fully overbought reading. Since many are enamored of the stochastic model, I keep them on these charts usually. Those who try trading off them do learn that hindsight is better than the foresight with them, as traders watch apparent crossovers evaporate in real time, due to the shifts in price action -- especially on the short trigger ones set to 5 or even 10. S&P 500 (SPX) - Hourly: The S&P 500 Index has been the key chart to follow for the big cap and NYSE stocks in terms of seeing resistance. The short setting is "5" on the stochastic (upper) and the long setting of "21" is below. A downside reversal at the trendline was, coupled with the stochastic reversal at their own trendlines -- trendlines being a definite help sometimes on the indicators too. The place to exit any bullish plays was at the deflection at the upper trendline once again on the hourly chart ABOVE. And, as suggested last night, playing the long side has taken ability to watch the market closely! Meanwhile, longer-term option plays continue to work well and holders of puts that are taking the longer view has little to do but watch their profits accumulate. I doubt that we will see much occurring to shake the content felt by the longer range bears until we re-test the area of the Feb. lows, which looks like it will happen. It's like the man that climbed the mountain because it was THERE. Potential buyers are just not going to get too interested until stocks find buying interest again in a prior area of perceived "value". The blue bands on the daily chart BELOW, "float" 4 percent above or below the 21-day moving average. They tend to be areas where the trend will slow down or reverse. The 21-day moving average is the single best average on the indexes to determine a kind of pivot point -- index trade above this line/value and the average is tends to define a support area for bullish price action and below this area the 21-day average tends to define a deflection point or a resistance area. S&P 500 Daily chart: OEX support now looks like it comes in around 534, a guesstimate based on the low end of the downtrend price channel on the hourly chart. Key or pivotal resistance is in 550 area. DJX has next support in the 99 area, in my estimation. Key resistance is at 101.7-102. I don't see it on the chart as a key area on this current decline, but 10,000-10,050 in the Dow Industrials (INDU) is where all the media talking heads will get excited, if this area is penetrated or broken. No doubt it is an important psychological area. 9938 is the level of the current 200-day moving average and is an important level, especially followed by institutional and fund managers, who don't follow a lot of technical indicators -- this one they do. QQQ looks like its next key support area is around 31. Key (pivot point) resistance is at 34.0. MAJOR INDICATORS - My sentiment, Advance-Decline oscillator and Upside volume indicator are not into bullish territory by being at oversold readings, also suggesting that the market has lower to go. I'll show one of the charts each night for this and my next two Index Trader wraps. For example, bearish sentiment as measured by option put/call ratios, or the way I use mine, CBOE equities call to put daily volume readings, are not suggesting a high level of bearishness on this latest decline. On my indicator BELOW, there have been some bullish readings marking a lot of put buying relative to call volume (approaching 1 to 1), but not on this latest shot down. AND, as been written about lately on Option Investor by Eric Utley, the CBOE market volatility index (VIX.X) shows volatility at an unusually low level -- unusual for a market that may be nearing a low. VIX levels are tending to suggest that we need to break 10,000 in the Dow perhaps to break the complacency that is implied by VIX or as Eric put it to "scare" them. As good "contrarians" know, market bottoms are most often associated with a high degree of bearish conviction and we are not there yet! Long/Call Positions: Long QQQ at 34.30 Stop: 32.50. 4/24 - EXITED ON STOP Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck" * Free Streaming Quotes with 5 or more trades per month * 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=oinvestor015 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** *********** OPTIONS 101 *********** Is Anybody Still Interested in Volatility? By Mark Phillips mphillips@OptionInvestor.com If it seems to you like we've been beating on the topic of volatility for forever, I apologize. If it is any consolation, we are nearing the end of this educational path -- at least to the degree that I can guide you. Since we've been covering other issues for the past few weeks, I needed to scan back through my old articles and see where we left off. I was amazed to see that we began this educational process on the option Greeks more than 3 months ago! When I started down this path, I had no idea that I had so much to say on the topic. For those of you just joining us, you can go to the Option Investor site and look in the Options 101 archives beginning with the January 16th, 2002 article. For your convenience though, I've pasted the links to each of the articles in the series below. Aren't I a nice guy? (BIG GRIN!) Paying Attention to Option Pricing The Greeks, Part 1 - Delta and Gamma Application of Gamma and Delta to Strike Selection Back to the Olympians of Old Oh, That Vexing Volatility Volatility - Part Deux The Greeks - Putting It All Together A Greek Encore Varying Views on Volatility A Primer on Online Volatility Tools - Part I A Primer on Online Volatility Tools - Part II That's a lot of writing (for me) and a lot of reading for you. Now that you're up to speed with the old stuff, it's time to dive into the complex use of Volatility that I've been promising for more than a few weeks, that of Volatility Skew. But before I get started, I must doff my hat to a fellow trader and former writer in these pages, Lee Lowell. Lee resides in the sunny Aloha state (makes you envious, just thinking about it, eh?) and as I've gotten deeper into the details of how to apply volatility studies to more complex trading strategies, I've had to rely on Lee to keep me headed in the right direction. He has likely forgotten more about Volatility than I'll ever know, so Lee, if you're listening, thanks for your time and patience! Alright, on with the show! We've spent a fair amount of time looking at volatility using online sources, so I'm not going to reiterate how to find the information we're going to focus on here. Rather, I'll point you to the articles listed above, as all the "How To" information is located within. What Is Volatility Skew? In an ideal world, all of the various strikes for a given option series (either puts or calls) will have the same volatility. But as you and I both know, we don't live in an ideal world. Volatility levels end up being different both for different strike prices and for different expiration months. If we were so lucky as to get an ideal example with what we would call a flat skew, here's what it would look like for a $50 stock with a nominal implied volatility (IV) of 55%. Calls: Strike 40 45 50 55 60 65 IV(%) 55% 55% 55% 55% 55% 55% Puts: Strike 30 35 40 45 50 55 IV(%) 55% 55% 55% 55% 55% 55% That's pretty boring, but we have to start somewhere. No matter what strike we select, the IV will be 55%. Where things get a bit more interesting is when we have different IVs for different strike prices, creating a simple "sloping skew". This effect normally occurs in more volatile stocks and here's what the IV picture would look like for the same $50 stock with a sloping skew. Calls: Strike 50 55 60 65 IV(%) 51% 54% 58% 63% Puts: Strike 35 40 45 50 IV(%) 61% 58% 54% 51% You can see that as the call strikes increase from the ATM strike, so does the IV of the options. Likewise, as the put strike decreases from ATM, the IV rises. And if we listed more strikes for both the puts and calls we would very likely see that the "sloping skew" becomes a "smiling skew" as shown below. Calls: Strike 35 40 45 50 55 60 65 IV(%) 61% 57% 53% 51% 54% 58% 63% Puts: Strike 35 40 45 50 55 60 65 IV(%) 61% 58% 54% 51% 54% 57% 62% If you use your imagination, you can see that a graph of volatility (using either the puts or the calls) relative to the strike price will produce a "smiling" shape, from which the skew pattern gets its name. For those of you (like me) that have a rather poor imagination, here is what the graph would look like for the calls. It doesn't take much imagination to see where the Smiling Skew gets its name, now does it. Unless I miss my guess though, you're all champing at the bit asking the following question: "So what the heck am I supposed to do with this information?". I'm glad you asked, because utilizing this information on volatility skew can dramatically skew (sorry, I couldn't pass that one up) the odds of success more sharply in our favor. This topic will be of particular interest to those traders that prefer to trade using various spread strategies. I wrote several articles late last year detailing how and when to use various spread strategies, but now that we are armed with this information on the skew effect, we can utilize it to improve our trading results yet again. I think we've gotten far enough into this discussion that you understand the basic premise behind the skew. Besides, most traders find this sort of information rather dry and uninteresting (Big Mistake!) and as we get deeper into the topic, I want to keep our weekly visits brief and easy to process. There's no need to try and go through everything in one sitting. Next week, we're going to abandon the sterile hypothetical example and tackle a real live stock with a smiling skew. Then we'll look at how utilizing the volatility skew can enable us to place a spread trade with reduced risk and enhanced opportunity for profit. With a teaser like that, I know I'll see you next week! Mark ************************Advertisement************************* DOES YOUR BROKER OFFER TRAILING STOPS ON OPTIONS? Trade online with trailing stops at OptionsXpress Trailing stops based on the option price or the stock price. Also: Contingent, Stop Loss, and "One Cancels Other" ordering Go to http://www.optionsxpress.com/marketing.asp?source=oinvest016 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 4/24 by Leigh Stevens Given the continued weakness of the market and the breakdown or continued weakness of some of the sectors that were being recommended for a trading rebound, I revaluated today any sector trading ideas where I was suggesting a call play in representative stocks within particular sector that seems to be bottoming. Healthcare Sector ($HMO.X) stocks continue to hold up -- this index appears to consolidating the recent strong run up, but time will tell if this sector can resist a deeper correction. Many funds are throwing money at them. Would like to play this sector, but have been reluctant to chase a runaway train. POSSIBLE SECTOR PLAYS BEING TRACKED: >> Oil Services ($OSX.X) - Daily highs since 3/20 keep hitting the same levels at 104-105 and this sector may be forming a top. An upside penetration of this level is needed to achieve a bullish breakout and suggest a new up leg. Looks to me like there is another down leg coming in crude oil prices. Sector play on oil service stocks by shorting or buying puts on those that appear they might be topping or at top end of a range, looks interesting: e.g., Haliburton (HAL), Nabors Industries (NBR), Schlumberger (SLB), Smith International (SII), and Global Industries (GLBL). This trading pattern probably has something to do with the chart picture for crude oil now trading at 26.29, as nearby crude futures have not been able to climb back to the prior highs in the $28 area. >> NYSE financial index ($NF.X), is still holding up pretty well, at least going sideways in a weak market. Some of these stocks should outperform when we do reach a tradable bottom. Per the charts shown in yesterday's Index Sector wrap, I'll be looking at some of the property causality stocks, like Chubb (CB), St. Paul Cos. (SPC), for possible call plays. NO SPECIFIC TRADE SUGGESTION YET. >> DRG, the Pharmaceutical sector index ($DRG.X), (4/22). Rebounding from low end of a probable trading range and oversold. This sector is playable by the purchase of the May 60 Merck (MRK EL) calls, a prominent stock in this sector, especially on a pullback in the stock to the 54 area -- 4/24 close: 54.84. The May 55 calls (MRK EK) closed at 1.20 (4/24). LONG/CALL TRADES, PREVIOUSLY RECOMMENDED: >> Internet Sector index ($INX.X) - 4/17 Sector Trader suggestion: OPTION play: $INX sector stock, JNPR (Juniper Networks) Buying the May 15 Call (JUX EC) at 4/18 opening was suggested. 4/18 open: .35; JNPR objective: to $18 UPDATE: Yesterday, INX closed under the lower channel line, but today's bounce back has it back in its channel, but just barely. Juniper May 15 (JUX EC)calls, today trading as low as .05, recently as high as .80. The May 12.5's (JUX EV) are .25. Stock has held, barely, an emerging up trendline dating from its early- March low. >> Telecom ($XTC.X) index - 4/15 suggestion: OPTION play: Sector stock, Level 3 Communications (LVLT)- 1)June 5 Call (HGY FA) suggested: 4/16 open: .60 2)LVLT outright purchase, with stock under $5, also suggested: 4/6 open: 4.16; Objective on LVLT stock: to 5.5/6. >> Semiconductor Index ($SOX.X) - 4/15 Sector Trader suggestion: May 650 calls suggested -- at 2.35 on 4/23 close, these calls have come down to a more attractive level, assuming SOX holds it prior recent low in 545-548 area -- still think the SOX sector is a play for a rebound in next 3-4 weeks, if index can hold these prior lows. Otherwise, I will exit. UPDATE: SOX slipped BELOW the early-April lows at 548-548,suggesting beginning of a new down leg. There is a "line" of support, formed by numerous lows over Nov.-Jan.-Feb. at 497-498 - this area looks like it'll be re-tested. THIS SUGGESTS NO NEW CALL PLAYS. Better to play the PUTS, but the SOX premiums are too rich for my blood. Instead, play the downside in SOX-member stocks like Micron (MU), KLA Tencor (KLAC), Teradyne (TER), Applied Materials (AMAT) or Intel (INTC). Among the biggies, only Texas Instruments (TXN) is holding up some here. >> Cyclical sector ($CYC.X) - 4/15 suggestion: 1.) iShares Cyclical Trust (IYC) - 4/16 open: 56.95 Objective: new high above 63.00 2.) OPTION play: CYC Sector stock, - Alcoa (AA) May 40 calls (AA EH) - 4/16 open: .60 4/23 Note: Holding any existing calls only, as stock has broken technical support. UPDATE: Cyclical group outlook is not as rosy as reflected by recent price levels of the stocks in this sector as sector got hit today. Looks like CYC will test support beginning around 559, extending down to 552. 552 is key support, the area where CYC topped in early-Jan.- what was resistance "becomes" support on the way back down. I had suggested buying Alcoa (AA) May 40 calls, now at 35, as a way to play this sector. I'll stay with the calls as they aren't worth selling, but the stock pattern is bearish -- key test of support would be in $33 area. >> Airline sector ($XAL.X) - 4/15 Sector Trader suggestion: OPTION PLAY: XAL sector stock Southwest Airlines (LUV) Sept. 20 (LUV ID) call suggested - 4/16 open: 1.25 OBJECTIVE: $22 near-term in the stock; $24, longer-term. LUV is hold technical support, but just. Retreat in the stock to BELOW 17.25, on a closing basis, would cause me to exit calls. UPDATE: Rebounding today (close: 97.24) on a Merrill Lynch upgrade of some key airline stocks (they believe in a cylical earnings recovery), appears to be too little too late, judging by the technical picture for XAL -- now looking bearish -- not unlike the Cyclical Index ($CYC.X). The other day, XAL broke below its Nov-Feb-Apr up trendline, which also took it under its 50 and 200-day MA's. Doubt that XAL will regain its uptrend line and a return to it could be the kiss of death - to regain its uptrend XAL needs to get north of 101. A rally to this area looks like a sell via playing some airline puts. Southwest Airlines (LUV), which has been bouncing around the low end of a broad uptrend channel, looks in danger of falling below this $18 support - if so, support at 17-17.25 is critical. Re Sep 20 LUV Calls suggested at a buck or under (at.95) Tough to make a buck on the long side these days! >> Utilities Index - Holders trust shares (AMEX: UTH) Long at 95.25 Stop: 91.00; Longer-term objective: 105 OPEN SHORTS/PUT PLAYS: >> RTH (AMEX: Retail sector trust stock) SHORT at 99.00 Objective: 90; Stop: 102 LIQUIDATIONS: >> XAU (PHLX Gold & Silver Index) Reiterated purchase of the May 65 puts; 4/19 STOP: Exit puts if XAU moves to new closing high above 72.33 BASED ON SUGGESTED STOP, PUTS WERE CLOSED OUT ON THE 4/23 OPEN UPDATE: At 75.09 today, XAU achieved technical break out and is no longer showing a double top. Threw in the towel on XAU puts, on yesterday's opening -- after Mon. close that exceeded prior closing high at 72.33. While the per ounce price of gold, based on the nearby futures contract, has not exceeded ITS possible double top in the $307-309 area, the mining stocks, etc. are still holding up or rising, suggesting that this sector may be still going on based on possible production cutbacks or other supply-related fundamentals. THERE IS STILL SOME TECHNICAL INDICATIONS THAT XAU IS BUILDING A TOP AND MAY BE IN FINAL MOVE BEFORE A RALLY FAILURE - AM STILL MONITORING THIS ONE. NOTE: RISK to REWARD guidelines - Determining an objective is important, even if it is a moving target, as this is the reward potential. Determining reward potential is critical to establishing whether a stop that makes “sense” (e.g., a sell stop that was placed under a key support level) would, if triggered, result in a dollar loss that is in proportion to profit potential; e.g., 1/3 of it. (On occasion, when the purchase price of call or put is equal to 1/3 or less of the estimated reward potential, there may not be a specific exit suggestion, as the cost of the option is equal to the amount that is being risked.) Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES AT OPTIONSXPRESS * EASY screens for spreads, collars, covered calls or butterflies! * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Go to http://www.optionsxpress.com/marketing.asp?source=oinvest012 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Wednesday 04-24-2002 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES AT OPTIONSXPRESS * EASY screens for spreads, collars, covered calls or butterflies! * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Go to http://www.optionsxpress.com/marketing.asp?source=oinvest012 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ***************** STOP-LOSS UPDATES ***************** AET - call Adjust from $40.75 up to $42 ADI - put Adjust from $42.50 down to $41.50 EBAY - put Adjust from $55.10 down to $54.25 MU - put Adjust from $52 down to $31 MXIM - put Adjust from $55.25 down to $53.25 NVDA - put Adjust from $40.50 down to $36.25 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ JDEC $11.99 +0.09 (-0.27) Despite being given plenty of time and a bearish market, shares of JDEC just refuse to break down. In fact they've been creeping higher so far this week despite the weakness seen in the Software sector (GSO.X). Rather than hope for the eventual breakdown, we're pulling the plug tonight to protect against a broad market rebound. Use any weakness in the morning to exit existing plays and then focus on better candidates. VRSN $18.00 -3.58 (-6.53) A beautiful end to a winning play, VRSN delivered in spades over the past 3 days and capped its decline off with a nice 20% intraday decline on Wednesday, pressured by sellers that piled on following a downgrade from SoundView Technology ahead of its earnings report tomorrow night after the closing bell. There should be no question about closing this play out ahead of the report as it has given us a very nice gain. Sure the earnings report could be negative, leading to more selling, but with 6 down days in a row (for a 34% loss), it is entirely possible that the bad news has already been reflected in the price. Aggressive traders can still try and scalp another gain on a failed rally tomorrow, but make sure all positions are closed before the close. ************************Advertisement************************* OptionsXpress: "FOUR STARS"; 1 of the "BEST ONLINE BROKERS"--Barron's * 8 different FREE options pricing, strategy, and charting tools * Outstanding customer service--access to options specialists * 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=oinvest013 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* MXIM – Maxim Integrated Products $50.03 -2.58 (-4.89 this week) MXIM designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. The company also provides a range of high-frequency design processes and capabilities that can be used in custom design. MXIM's objective is to develop and market both proprietary and industry-standard analog integrated circuits that meet the increasingly stringent quality standards demanded by customers. Most Recent Write-Up Weakness in the Semiconductor sector (SOX.X) has been hammering shares of MXIM lower again this week. The sharp drop in the stock on Monday found buyers waiting near the $53 level and it was able to recover in the afternoon. But the story wasn't quite as rosy on Tuesday, as selling drove the stock as low as $52.35 towards the end of the day before recovering to close above the critical $52.50 support level. With the heavy selling volume in the stock and the technical breakdown in the SOX today, it looks like MXIM will finally violate this support level ahead of its earnings release next Tuesday. An oversold bounce tomorrow is definitely possible in the wake of a series of positive earnings reports tonight. Use that bounce to initiate new positions on a rollover from the $54.00-54.50 resistance area. Should that bounce fail to materialize, consider new positions on a collapse below the $52 level. Lower stops to $55.25. Comments Tuesday's breakdown in the SOX below its long-term ascending trendline promised to deliver great things for the bears and that promise was fulfilled on Wednesday, with the SOX breaking the $550 support level, as well as the 200-dma. MXIM took its time chewing through the $52 support level, but in the end couldn't withstand the sector weakness and broke down in a big way. Closing just above the $50 level (at the low of the day) MXIM looks like it could indeed have further to fall ahead of earnings next Tuesday, especially if the SOX remains weak. Use a failed oversold bounce near the $52 level to initiate new positions or else wait for a drop below the 200-dma (currently $49.89) on continued heavy volume. We are lowering our stop to $53.25 tonight. BUY PUT MAY-50 XIQ-QJ OI=8606 at $3.00 SL=1.50 BUY PUT MAY-45*XIQ-QI OI=7578 at $1.40 SL=0.75 Average Daily Volume = 5.62 mln ************************Advertisement************************* OptionsXpress: "BEST OF THE WEB""FAVORITE OPTIONS SITE"--Forbes * 8 different FREE options pricing, strategy, and charting tools * No Hidden Fees for balances, limit orders, or service charges * 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=oinvest014 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************************************************ BIG-CAP COVERED CALLS, NAKED PUTS & COMBINATIONS ************************************************ Strategy Selection: Index Credit Spreads By Ray Cummins One of our readers submitted some great questions about a very popular technique among conservative spread traders. *************** MAILBAG - Reader's Comments & Questions *************** ATTN: OIN Spreads/Combos Editor Dear Mr. Cummins, I have been a subscriber to your site for a couple of years now, as well as a reader of many financial publications. Through much trial and error, I am trying to settle on and become proficient in a single type of trading. Recently, I have been involved in nothing but credit spreads on the OEX. I try to follow all the rules, yet without question, one bad spread which has to be closed out will more than wipe out the total of all of the other spreads combined, usually for an overall loss. I just have some general questions concerning this. Since there seems to be so much volatility, do you recommend both call and put spreads at the same time, or trade only one type? I know that one must constantly be aware of support and resistance lines in order to place trades, and then possibly bail out when they are broken. First, what is the easiest manner in which to determine these lines on the OEX? What seems to occur is that I will set a stop loss, it will be broken which closes out a spread for a loss, and then reverses course whereas I didn't need to close it out at all. This happens all the time and it is so frustrating. I have to believe that I am not looking at the correct lines to place my stops, or maybe I'm setting them too loose or tight. Lastly, your articles seem to highlight very few OEX credit spreads, but when you do, they are very welcome and seem to always work out. Is there a possibility that an ongoing selection of these types of spreads will be included in your article in the future? I realize I have asked a lot of questions, but I would appreciate any help you could offer in placing these types of trades. Again, thank you for your time. KT Regarding OEX spreads and Position Management: In reading your questions and comments, it sounds as if you have thoroughly considered these issues in your own mind, and it's obvious you are willing to acquire the knowledge and skills necessary to succeed in this unique game we play. The truth is, losses cannot be avoided in any type of trading, but they can almost always be minimized to the extent that they do not cause catastrophic damage to your portfolio balance. As you know, it is considered very beneficial for the credit spread investor to use index options rather than equity options. An extreme movement in one component of an index will not unduly affect that index, while a stock that gaps sharply in the wrong direction (such as often occurs after an earnings report) gives you much less ability to manage risk in equity-option positions. To be successful in this strategy, you must master a number of skills: First, you must correctly assess the direction of movement (and the magnitude of that movement) in the underlying stock or index. For credit spreads, the only objective is for the sold option to stay "out-of-the-money." This means you can be far less precise in your forecast for the underlying, but it does not relieve you of the requirement for sound judgment about the overall character of the market and the potential for future volatility. Considering the current outlook, it is fortunate that credit spreads are profitable in a range-bound environment. It is very important, however, to make sure there is technical support above the sold put in a bullish spread (such as a moving average, the bottom of a established trading pattern or a commonly recognized trend-line) to increase the probability that both options finish out-of-the-money. Of course, the opposite would be the case for a bearish spread using calls: overhead resistance or supply or a technical "top" formation below the strike price of the sold option. Second, it is important to establish spreads that are sufficiently distant from the price of the underlying, so the position can withstand a substantial (unexpected) market movement without undue risk. If excess volatility is a concern, you should consider establishing a larger cushion than normal (a greater margin for error) to avoid getting "whip-sawed" out of the position. Successful credit-spread traders learn to identify periods of extreme volatility and avoid those periods unless they can be used to one's advantage in a position's set-up (based on a longer-term timeframe and confirming technical indications). The basic questions related to position (strike) selection are: How much downside are you willing to risk in return for the (relatively small) profit achieved, and are you the type that manages his plays more aggressively, with a focus on limiting losses before they become substantial? In addition to defining the fundamental style of your trading, the first question also relates directly to option pricing theory because we know that prices are determined from historical and statistical data, and that in all but the most unique cases, the market trades inside the 2nd standard deviation of a normal distribution. Strangely, that area is roughly equivalent to the 3%-5% monthly (annualized) return in strategies such as deep-OTM credit spreads. So, if you want to have a very high probability of making a low profit (just one way, but not necessarily the best method of option trading), target plays that are in that range. The second part of the question is probably more important since it relates to the fact that success with a low profit-high probability approach to the market is based on limiting losses to a minimum. As I have said before, there are never any big winners to offset the big losers, so there simply can't be any big losers. Strategies such as OTM credit spreads (as well as many common option-trading techniques) need to have some type of exit point in case the market, stock, or sector turns in the opposite direction from that which is expected. Obviously, a gapping issue will occasionally wipe out a portion of previous gains and there is nothing you can do about it. At the same time, you must manage the remaining positions effectively or there will be no profits to offset the (rare) catastrophic losers. My point is, the key to success with a strategy such as OTM credit spreads is the position management that follows the initial trade and in all cases, you should remember the popular adage: Traders become successful when they learn to take small profits regularly and they don't let losing plays significantly erode capital. As far as the OEX credit-spreads strategy and my sections of the OIN: I try to offer a variety of plays in the most popular categories of option trading (as determined by the readers) so I won't always a position of that type in the current portfolio. However, that does not prevent you from trading the strategy on a regular basis and if you want to be successful in the long run, that is likely the best approach to take. As you mentioned, one way to hedge your positions is through the use of simultaneous bearish and bullish spreads (that is a tactic of many professional traders) and in some cases, you can benefit from the reduced collateral requirements of a neutral-outlook position. I suggest you read some of the material written by traders who use this technique frequently (Don Fishback and Jay Kaeppel come to mind) and try to focus more on the probability aspect of this approach, rather than the technical indications (which don't seem to be working for you anyway). I am not saying charting and technical analysis isn't important, rather I am simply pointing out that there are other ways to make price forecasts and volatility projections. I hope these comments will provide you some direction to help improve your trading skills and I wish you much success in the future. Ray *************** Summary of Current Positions *************** (As of 04-23-02) Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield ACF MAY 35 34.45 46.13 0.55 5.9% MXIM MAY 45 44.30 52.61 0.70 5.9% Naked Calls Stock Strike Strike Break Current Gain Potential Symbol Month Price Even Price (Loss) Mo. Yield MRVL MAY 47.5 48.00 39.00 0.50 5.1% TER MAY 40 40.75 34.68 0.75 6.7% ICOS MAY 55 55.50 42.70 0.50 5.7% CCMP MAY 75 75.90 56.53 0.90 6.9% MXIM MAY 65 65.90 52.61 0.90 5.8% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status ACDO 60.79 61.97 MAY 50 55 0.65 54.35 0.65 Open ASD 74.24 73.40 MAY 65 70 0.60 69.40 0.60 Open BSC 65.65 64.32 MAY 55 60 0.55 59.45 0.55 Open FAST 81.99 81.84 MAY 70 75 0.55 74.45 0.55 Open KSS 75.00 74.15 MAY 65 70 0.65 69.35 0.65 Open PCAR 77.34 72.16 MAY 65 70 0.50 69.50 0.50 Open WLP 67.79 70.70 MAY 60 65 0.80 64.20 0.80 Open IGEN 41.10 40.15 MAY 30 35 0.50 34.50 0.50 Open PGR 59.27 57.14 MAY 53 55 0.20 54.80 0.20 Open Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status RE 66.00 69.20 MAY 80 75 0.00 75.00 0.00 Open CSC 44.82 46.22 MAY 55 50 0.65 50.65 0.65 Open SMH 44.38 44.00 MAY 55 50 0.55 50.55 0.55 Open PFE 37.85 36.70 MAY 42 40 0.35 40.35 0.35 Open Debit Straddles/Strangles: Stock Position Debit Target M/V G/L Status DST MAY50C/50P 3.90 5.50 4.10 0.20 Open SPC MAY50C/50P 3.90 5.50 3.75 (0.15) Open The neutral position in St. Paul Companies (NYSE:SPC) did not offer our target entry price debit on a simultaneous order basis, however we will track the position through the company's quarterly earnings (on 4/25/02) for traders who participated in the position. Synthetic Positions: Stock Pick Last Position Credit C/B G/L Status APOL 65.80 61.92 MAY65C/45P (0.20) 44.80 0.70 Closed GM 64.95 66.00 MAY70C/60P 0.45 59.55 0.55 Open BA 45.37 42.46 MAY40P/50C (0.40) 49.60 0.10 No Play Apollo Group (NASDAQ:APOL) continued to rally this week, easily exceeding our maximum profit target as the company's share price moved to a new all-time high. The speculative synthetic play in General Motors (NYSE:GM) has also performed well and with the higher-than-expected initial credit, the position offered a small "early-exit" profit after only two days. The bearish-outlook synthetic position in Boeing (NYSE:BA) was correctly forecast but due to the sharp downward movement, the target credit was not available on a simultaneous order basis. New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations *************** ADRX - Andrx Corporation $44.50 *** Recovery Underway? *** Andrx Corporation (NASDAQ:ADRX) commercializes controlled-release oral pharmaceuticals using proprietary drug delivery technologies. The company has nine proprietary controlled-release drug delivery technologies that are patented for certain applications or for which it has filed for patent protection for certain applications. Andrx uses its proprietary delivery technologies and formulation skills to develop bio-equivalent versions of selected controlled release brand name pharmaceuticals, and other controlled release formulations of existing immediate-release or controlled-release drugs. The company is also developing bio-equivalent versions of specialty, niche and immediate-release pharmaceutical products. Shares of Andrx began a long-awaited recovery last week as news of AstraZeneca's (NYSE:AZN) setbacks in their battle to fend off copycat versions of the best-selling ulcer pill Prilosec spread among traders. Some analysts suggested the activity reflects a shift in favor of generic drug companies in the fight over the $6-billion-a-year market for the popular product. Andrx has been battling AstraZeneca in court since last December over the right to sell a generic form of the medicine and experts believe that a possible launch of the generic version may occur as soon as the third quarter of this year. Apparently investors agree with that optimistic outlook as they have been steadily moving back into ADRX over the past two weeks. Traders who believe the rebound will continue in the near-term can profit from that outcome with these positions. ADRX - Andrx Corporation $44.50 PLAY (sell naked put): Action Month & Option Open Opt Bid Cost Target Req'd Strike Symbol Int. Premium Basis Mo. Yield SELL PUT MAY 35 QAX QG 1,744 0.50 34.50 7.0% *** SELL PUT MAY 40 QAX QH 949 1.55 38.45 13.8% *************** PHTN - Photon Dynamics $49.15 *** Optimistic Outlook! *** Photon Dynamics (NASDAQ:PHTN) is a provider of yield management solutions to the flat panel display (FPD) industry. The company also offers yield management solutions for the printed circuit board assembly and advanced semiconductor packaging industries and the cathode ray tube display and CRT glass and auto glass industries. The company's test, repair and inspection systems are used by manufacturers to collect data, help analyze product quality and identify and repair product defects at critical steps in the manufacturing process. On Tuesday, computer display test equipment maker Photon Dynamics posted quarterly results that were in line with the consensus forecasts and said their flat-panel display business was doing well, considering the slow recovery in the industry. Revenues were $17 million, down from $23 million a year earlier but up from the $14 million earned in the first quarter. Bookings rose for the fourth consecutive quarter and orders exceeded sales, driven mostly by the flat panel display business. The company also forecast revenue for the fiscal third quarter rising 10 to 20% from the second, with earnings between break-even and $0.08 per share. Investors who agree with a bullish outlook for PHTN can establish a low risk cost basis in the issue with our target position. PHTN - Photon Dynamics $49.15 PLAY (sell naked put): Action Month & Option Open Opt Bid Cost Target Req'd Strike Symbol Int. Premium Basis Mo. Yield SELL PUT MAY 42.5 PDU QV 56 0.75 41.75 7.2% *** SELL PUT MAY 45 PDU QI 454 1.40 43.60 10.9% SELL PUT MAY 47.5 PDU QW 496 2.15 45.35 14.1% *************** Credit Spreads *************** EXPE - Expedia $80.56 *** A Big Day! *** Expedia (NASDAQ:EXPE) is a provider of branded online travel services for leisure and small business travelers. The company operates full service travel agency Websites targeted at a wide range of customers in a number of geographies. Expedia operates Expedia.com in the United States; Expedia.co.uk in the United Kingdom; Expedia.de in Germany; and Expedia.ca in Canada. The company also operates the Travelscape.com, VacationSpot.com, LVRS.com, and Rent-a-Holiday.com Websites. In addition, the company operates a private label travel Internet site under the Worldwide Technology Enterprises brand. Shares of online travel firm Expedia jumped $10 today after the company reported a quarterly profit of $0.46 per share, nearly double that of analysts' expectations. The company's sales of $116 million were almost twice those reported in the same period a year ago, due to strong sales of vacation packages and hotel bookings. EXPE has also been popular among "short-selling" traders and the rush to cover sold shares helped boost today's upside activity. Those who believe the rally will continue in the near-term can speculate on that outcome in a conservative manner with this position. EXPE - Expedia $80.56 PLAY (conservative - bullish/credit spread): BUY PUT MAY-65 UED-QM OI=84 A=$0.60 SELL PUT MAY-70 UED-QN OI=1366 B=$1.25 INITIAL NET CREDIT TARGET=$0.70-$0.80 PROFIT(max)=17% *************** TRMS - Trimeris $49.15 *** New HIV Drug! *** Trimeris (NAASDAQ:TRMS) is engaged in discovery and development of a unique class of antiviral therapeutics called viral fusion inhibitors (FIs). Trimeris' most advanced product candidates, T-20 and T-1249, are for the treatment of human immunodeficiency virus, type I-HIV. T-20 is a first-generation FI that prevents HIV from entering and infecting cells. T-1249 is a rationally designed second-generation FI in an earlier stage of development. Through its study and knowledge of the HIV fusion process, the company has developed a proprietary technology platform aimed at discovering compounds that identify potential fusion targets in certain viruses that rely on fusion to penetrate host cells. Using its proprietary viral fusion platform technology, the company has identified and filed patent applications disclosing numerous discrete peptide sequences that appear to inhibit fusion for several viruses. The share value of Trimeris soared last week on stellar results from pivotal tests on an experimental AIDS drug which could help patients who are resistant to currently available treatments. Trimeris is co-developing the drug, dubbed T-20, along with the U.S. subsidiary of the Swiss healthcare giant Roche Holding AG. In the phase III test, patients who got a combination of T-20 and other drugs already approved by the FDA enjoyed a greater reduction of HIV in their blood than patients who were taking only the approved drugs. Using the results of that test and another currently underway, Trimeris and Roche plan to apply for FDA approval later this year and hope to have T-20 on the market next year. Traders who have a positive outlook for TRMS in the near-term can profit from upside activity in its share value with this position. TRMS - Trimeris $49.15 PLAY (conservative - bullish/credit spread): BUY PUT MAY-40 RQM-QH OI=536 A=$0.60 SELL PUT MAY-45 RQM-QI OI=570 B=$1.20 INITIAL NET CREDIT TARGET=$0.65-$0.70 PROFIT(max)=15% *************** XAU - PHLX Gold & Silver Sector $74.07 *** Gold Hedge! *** The PHLX Gold & Silver Sector is a capitalization-weighted index composed of the common stocks of 9 companies involved in the gold and silver mining industry. XAUSM was set to an initial value of 100 in January 1979 and options on the index commenced trading on December 19, 1983. More information on the index and its options can be found at: http://www.phlx.com/products/xau.html The technical indications of the XAU are favorable and traders who agree with a bullish outlook for gold and silver prices can profit from that activity with this conservative position. XAU - PHLX Gold & Silver Sector $74.07 PLAY (conservative - bullish/credit spread): BUY PUT MAY-65 XAU-QM OI=2401 A=$0.50 SELL PUT MAY-70 XAU-QN OI=2157 B=$1.15 INITIAL NET CREDIT TARGET=$0.70-$0.80 PROFIT(max)=17% *************** BULLISH PLAYS - Synthetic Positions *************** KBH - KB Home $49.76 *** Hot Sector! *** KB Home (NASDDAQ:KBH) is a homebuilder with domestic operations in Arizona, California, Colorado, Florida, Nevada, New Mexico and Texas, and through a majority owned subsidiary, KB Home has international operations in France. KB Home builds homes that cater primarily to first-time and first move-up homebuyers, generally in medium-sized developments close to metropolitan areas. Kaufman & Broad S.A., KB Home's majority-owned French subsidiary, builds single-family homes, high-density residential properties such as condominium complexes and commercial projects in France. KB Home also provides mortgage-banking services to domestic homebuyers through its wholly owned subsidiary, KB Home Mortgage Company. Despite the recent decline in equity values, the Residential Construction sector has performed very well over the past few sessions and KB Home has been one of the more popular issues in the group. Much of the activity is related to the recent new-home sales data, which fell slightly in March but was also revised upward for February and January. KB Home's total net order for March rose 5.3% to 2,245 and the company's orders in France during March rose 75% to 358, well above the industry average. The fundamental outlook for KBH is excellent and its stock is in a long-term bullish trend, suggesting additional upside potential in the near-term. Traders who agree with that outlook can attempt to profit from future upside activity with this speculative position. KBH - KB Home $49.76 PLAY (conservative - bullish/synthetic position): BUY CALL JUN-55 KBH-FK OI=30 A=$1.15 SELL PUT JUN-45 KBH-RI OI=10 B=$1.20 INITIAL NET CREDIT TARGET=$0.15-$0.25 TARGET PROFIT=$0.75-$1.25 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,650 per contract. *************** Neutral Plays - Straddles & Strangles *************** GS - Goldman Sachs $79.49 *** Big Mover! *** The Goldman Sachs Group (NYSE:GS) is a global investment banking and securities firm that provides a range of services worldwide to a substantial and diversified client base. The company has operational offices in over 20 countries and its activities are divided into two segments: Global Capital Markets, and Asset Management and Securities Services. The Global Capital Markets segment, which represented 64% of the Goldman's 2001 net revenues, consists of Investment Banking, Trading and Principal Investments. Goldman Sachs' Asset Management segment offers various investment strategies and advice across all major asset classes: global equity; fixed income, including money markets; currency, and alternative investment products. Goldman's Securities Services activities include prime brokerage, financing services and securities lending. Goldman Sachs has been very active in recent sessions and based on analysis of historical option premiums and the issue's share price movement, the stock is a favorable candidate for a debit straddle. In addition, the issue has a history of multiple cycles through a sufficient range in the required amount of time to justify the overall risk of the position. As always, review the play individually and make your own decision about its future outcome. GS - Goldman Sachs $79.49 PLAY (speculative - neutral/debit straddle): BUY CALL MAY-80 GS-EP OI=1259 A=$2.60 BUY PUT MAY-80 GS-QP OI=2248 A=$3.20 INITIAL NET DEBIT TARGET=$5.50-5.60$ TARGET PROFIT=15-25% *************** BEARISH PLAYS - Naked Calls & Combinations *************** CCMP - Cabot Microelectronics $53.75 *** Earnings Play! *** Cabot Microelectronics Corporation (NASDAQ:CCMP) is a supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization (CMP). CMP is a unique polishing process used by IC device manufacturers to planarize (or flatten) many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. Planarization is a polishing process that levels and smoothes, and removes the excess material from the surfaces of these layers. CMP slurries are liquid formulations that facilitate and enhance this polishing process and generally contain engineered abrasives and proprietary chemicals. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. Cabot Micro is set to announce quarterly earnings results in the morning and based on today's selling pressure in the issue, investors are not expecting a positive surprise. The report is due before the market open, but there may be an opportunity to initiate the spread after the start of trading, due to volatility from the announcement. Traders who agree with a neutral-to-bearish outlook for the company's stock in the near-term can speculate on that outcome with this conservative position. CCMP - Cabot Microelectronics $53.75 PLAY (conservative - bearish/credit spread): BUY CALL MAY-70 UKR-EN OI=800 A=$0.35 SELL CALL MAY-65 UKR-EM OI=613 B=$0.80 INITIAL NET CREDIT TARGET=$0.55-$0.65 PROFIT(max)=12% *************** KLAC - KLA-Tencor $60.31 *** Look-Out Below! *** KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's large portfolio of products, software, analysis, services and expertise is designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to the company for in-line wafer defect monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer overlay; film and surface measurement; and overall yield and fab-wide data analysis. KLA-Tencor, one of the leading makers of equipment used in the production of microchips, recently disappointed investors with a weaker-than-expected forecast for orders, as it reported sharply lower quarterly revenues and profits. Now the company's stock is in a steep downward trend and the heavy-volume selling pressure suggests further bearish activity in the near-term. Traders who agree with that outlook can attempt to profit from future downside movement with this position. KLAC - KLA-Tencor $60.31 PLAY (very speculative - bearish/synthetic position): BUY PUT MAY-50 KCQ-QJ OI=1158 A=$0.65 SELL CALL MAY-70 CKV-EN OI=3660 B=$0.40 INITIAL NET CREDIT TARGET=$0.10-$0.20 TARGET PROFIT=$0.55-$0.75 Note: Using options, the position is similar to being short the stock. The collateral requirement for the sold (short) call is approximately $1,500 per contract. *************** SUPPLEMENTAL CREDIT-SPREAD CANDIDATES *************** BULLISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain DFXI 42.00 MAY 40P 1.15 MAY 35P 0.40 0.80 19% OHP 45.63 MAY 42P 0.55 MAY 40P 0.30 0.30 14% NBR 44.00 MAY 40P 0.60 MAY 37P 0.35 0.30 14% PLMD 40.26 MAY 35P 0.90 MAY 30P 0.40 0.55 12% RYL 108.31 MAY 100P 1.25 MAY 95P 0.75 0.55 12% PHM 54.25 MAY 50P 0.65 MAY 45P 0.15 0.55 12% BEARISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain ADBE 36.77 MAY 40C 0.75 MAY 45C 0.20 0.60 14% BOL 37.24 MAY 40C 0.75 MAY 45C 0.20 0.60 14% SYMC 34.65 MAY 40C 0.80 MAY 45C 0.25 0.60 14% SII 68.26 MAY 75C 0.75 MAY 80C 0.25 0.55 12% BRCM 34.01 MAY 40C 0.60 MAY 45C 0.15 0.50 11% *************** SEE DISCLAIMER ***************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. 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