The Option Investor Newsletter Sunday 05-05-2002 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 5-03 WE 4-26 WE 4-19 WE 4-12 DOW 10006.60 + 95.88 9910.72 -346.39 10257.11 + 66.29 - 80.82 Nasdaq 1613.00 – 50.89 1663.89 -132.94 1796.83 + 40.64 - 80.82 S&P-100 530.52 - 1.85 532.37 - 27.42 559.79 + 6.05 - 10.28 S&P-500 1073.43 - 2.89 1076.32 - 48.85 1125.17 + 14.16 - 11.72 W5000 10202.04 - 5.42 10208.26 -426.79 10635.05 +129.08 - 45.46 RUT 512.32 + 10.82 501.50 - 15.90 517.40 + 1.94 + 17.70 TRAN 2743.56 + 20.93 2722.63 - 74.24 2796.87 - 78.16 + 17.70 VIX 23.23 - 1.41 24.64 + 4.34 20.30 - 1.79 + .96 VXN 46.26 + 4.02 42.24 + 2.89 39.35 - 3.46 + 1.96 TRIN 1.71 1.82 1.18 1.03 TICK +910 +367 -492 +460 Put/Call .91 .87 .79 .99 ****************************************************************** Are we there yet? Technology stocks took it on the chin for the second straight week as the "more than tech-heavy" NASDAQ-100 (NDX.X) fell 2.82% on Friday and -4.8% on the week. With the NASDAQ-100 showing losses 7 out of the last 8 weeks, traders and investors are wondering a near-term bottom is in site? I think the answer is that big technology is a lot closer to finding a near-term bottom now than in December and March. "How can you possibly think that?" says the tech bear with a belly full of gains since the beginning of the year! It's never easy, but "risk" is what will eventually have the NASDAQ-100 and many technology stocks rebounding. Once again, I'll try and illustrate with my favorite indicator, the NASDAQ- 100 Bullish % ($BPNDX) from Stockcharts.com. NASDAQ-100 Bullish % Chart - 2% box In December, it was unthinkable for bulls that the NASDAQ-100 and the bulk of technology stocks were "overbought" as depicted by the NASDAQ-100 bullish % showing that 78% of the stocks in this market were showing a buy signal on their point and figure charts. Nonetheless, we issued a word of caution to be locking in gains on call options that had the bull holding some nice gains or at least snugging up some tight stops to help try and assure profitability. In mid-March (after red 3) we did the same after a rather "quick" and sharp move higher from a low reading in February (red 2) of 28% to a torrid 70% just 5-weeks later. Today, I'll take the opportunity to tell bears to snug down your stops and implement account management practices to start getting the account less bearish. Why? Because this is most likely what the NASDAQ market makers are doing in their stock inventories. Why would you or I give a darned what the market maker is doing with their inventories? Because these are the guys and gals that know what the order flows are looking like (I don't), but the history of the NASDAQ-100 as marked by the beginning of each months above tells us, when levels of lower bullish % like we're at right now take place, the risk for a market maker holding an overly short positions in their inventories has that market maker's account at risk. Imagine if you will, that you are the head of trading for Hewey, Dewey Suckfinger and Associates. You've got 10 market makers under your watch and each of those 10 market makers are assigned the task of managing the firms inventories and trading revenues for the firm. Each of those 10 traders are responsible for making a market in 10 different stocks for the NASDAQ-100. Now, for simplicity sake, lets imagine that back in December, mid-March, you came into work and noticed that the NASDAQ-100 Bullish % reached a level of 70% and alerted you (head of trading) that the risk levels for bullish inventory was high. What did you do? You strolled onto the trading floor and slapped each of your 10- traders on the back and said, "Slap those retracement to the highs and the lows and manage your risk. If you're not getting the order flow on the buy side, you'd better be short. The spouse has informed me we're 5-kids on a world tour this summer and it's going to cost me a fortune and I can't afford to lose my job!" You then sauntered back into your office, pulled up a chart of the NASDAQ-100 yourself, slapped on the retracement from the September lows to the December highs, perhaps added a regression channel to signify trend and have monitored it until now. Based on the NASDAQ-100 bullish %, what kind of conversation are you going to have with your 10-traders Monday morning? I'm thinking "Stick with those retracement brackets gang and manage your risk. If you're not getting the order flow from the SELL side, you'd better get back to neutral. The spouse has informed me that the neighbors kids are coming along on the summer vacation and it's costing me a fortune and I can't afford to lose my job!" NASDAQ-100 Index Chart - Daily Interval With retracement to define a range from the September lows to the December highs (correlates with the bullish % too) the NASDAQ-100 trader now has a way to define the NASDAQ-100, not only as it pertains to risk (from the bullish %) but in a numerical trading value for the NASDAQ-100. With a regression trend overlaid, we see some technical significance that ties in directly with historical trading dating back to February. Earlier I said "the NASDAQ-100 is at the same level of RISK as it was in early September (red 9) as defined by the bullish %. On the far left of the chart, I marked September 4th, which was just about the time the bullish percent reading of 18% (red 9) would have been charted. Notice how the NDX.X was sitting right on/near the 1,335 level several session later, September 10th? One could almost argue that the NASDAQ-100 had "sought out" that level as potential support. The collapse lower came the next trading session, September 17th, just after the terrorist attacks. That argument could be further supported as the NASDAQ-100 attempted to hold that 1,335 in October, February and April. Note the more "powerful" rally from February and check it against the bullish % reading of 28%. Do you see, or at least "get the observation" of how market action can reflect levels of bullish %? If a bear is looking or anticipating such a collapse as experienced in late September from current levels, I think he/she must then be looking for a similar type of catastrophe experienced on September 11th. While I'm a believer that the MARKET is all knowing, I do NOT believe the MARKET knows anything about events like those that took place on September 11th. So if a bear has the bulk of risk right now, is there a way a bull can perhaps look to capitalize on a market rally in the NASDAQ-100 and still not get crushed should the rally not take place? The answer is yes. A trader still holding some put/short positions is perhaps in the best situation as any offsetting bullish positions in the NASDAQ-100 Trust (AMEX:QQQ) $29.74 (depending on dollar amount weighting) creates a "synthetic hedge." Let's imagine you've got some puts on individual stocks in the QQQ that still have some room to their bearish vertical counts and their relative strength is weak and they trade below their bearish resistance trends. These are the stocks you and I perhaps feel should "outperform" to the downside if the QQQ is going to accomplish its bearish vertical count of $38. Say what! BEARISH vertical count of $25, what are you talking about going long or getting neutral for? Let's look at a risk/reward trade setup, but lets use the p/f chart where we can then "tie in" with the bullish percent chart better. NASDAQ-100 Trust (QQQ) - $1 box Market makers aren't concerned about market direction. They're only concerned with account/inventory risk management. If most trading desks at the major institutions listened to what their analysts said about the markets there wouldn't be any market makers or institutional trading desks around. They'd all be out of business or posting losses of biblical proportions if they didn't manage their inventory risk. Same can be said for most traders if they disregard risk and how the bullish % can help them manage and trade it. Let's once again look back and imagine you're a market maker and you wanted to make the "most" money from past trading in the QQQ. Let's benchmark back again to early September (red 9). It's as god as any since the bullish % readings are now at similar levels. We don't know what might have happened in the QQQ if the September 11th terrorist attacks didn't happen, but the QQQ did achieve its bearish vertical count, just 2 days prior to the attacks. With that said, did a market maker get crushed if he/she got their inventory to 20% long and 80% short in the QQQ at that point? Heavens no. They came out smelling like a rose. Heck, just two months later, that 20% they bought was actually profitable. Will a bull in the QQQ get crushed form current levels? He/she might if they don't implement some trade/account management practices. Right now, I'm still assessing longer-term downside to $25 from the bearish vertical count. Isn't it funny though (maybe not) how we were alerting bulls to be careful in the NASDAQ-100 or QQQ in December (red C) at the $40-$43 range? You can't believe the amount of e-mail I got from the bulls saying we were too bearish! Guess what the e-mail may be reading in the next day or so? Too bullish is my guess. Let's talk about getting 25% of a market maker's inventory back on the bullish side of things in the QQQ. This doesn't necessarily have to translate to an individual trader like you and I placing 25% of our $10K options trading account into a QQQ call. In September (red 9) at $35. Imagine that you put 25% of what you'd normally put in an options trade in a QQQ call. How long did you have to "wait" for that call to show a gain? By November (red B) the call was probably slightly positive or at least break-even (considering time erosion.) Here we'll talk about risk once again. I'll argue that current month options are inherently "more risky" that an option that is dated for expiration a couple of months out. We can perhaps use the past to help trade the future. Therefore, if I'm going to risk 1/4 or even 1/2 of my stated trade discipline amount on a QQQ call, I want to at least go out to July. I'd much prefer August as that would give me 3-months and tie in nicely with the "peak" in the QQQ of December (red 3). Even more preferable perhaps would be the September $30 (QAVID) $2.65. What does your stated trade discipline say with regards to how much you place in a trade? Don't talk to me about "number of contracts." 10 contracts of a $5 option is twice as "risky" as 10 contracts of a $2.50 option. I want to know what your trade discipline says about how much you are allowed to risk in any one trade on a full position. You'll blow yourself up as a trader (stock or option) if you're trades shares/contracts and not dollar amounts. I (Jeff Bailey) have said before, I don't use stops losses with my option trading. I assign myself to the potential loss before the trade takes place, as this assures myself I've properly assessed the risk/reward. On the previous chart, I "imagined" potential near-term trading in the QQQ. As we pull in some observations from the bar chart, we can see how the downward regression trend could serve as similar support as found in the Feb-March timeframe. A "simple" rally on the point/figure chart would have a level near $34 achieved. That would have a September $30 call most likely trading a minimum bid of $4.00. Should the QQQ decline to the September 2001 lows of $27 this week, I would then "round to full" in the exact same Sep. $30 call. I do NOT consider averaging down in a 1/4 or 1/2 position as a violation of what we teach about "never averaging down." Again, a trader using some trade/account management with a partial position has already started to reduce his/her risk in a bullish trade. Besides, with the NASDAQ-100 bullish percent down at 20%, it's the bears that currently carry the bulk of the risk. New market terminology comes of age The term "Blue Chip" is an age-old term used by investors to describe stocks that represent large, well-established companies that usually pay dividends. Subscribers are beginning to use the term "Red Chip" to describe the bulk of technology stock that continue to have a habit of dishing out disappointment to the bulls as the weekly statistics continue to show red numbers on a more regular basis. This also has some thinking/believing we're in a "bear market." Well, I guess that depends on where you've been that last several months. One might even say it depends where you were this week. For the week, the Russell 2000 Index (RUT.X) gave bulls a stellar gain of 2.2%. That's right! A gain. The "Blue Chip" Dow Industrials managed to shrug off some of the previous weeks losses and rebounded with a 1% gain of its own. Heck, even the NYSE Composite (NYA.X), what some old-timer considered the "real market" edged higher with a 0.5% gain. I'm getting a little tired of some media channels and anchors talking about the beating bulls took this week. The S&P 500 Index (SPX.X) didn't show a gain this week, it slipped lower by 0.3%, but it hardly suffered the shellacking the NASDAQ Composite (COMPX) and narrower NASDAQ-100 (NDX.X) took this week as they fell 3% and 4.8% respectively. Bear market? Yes, for most of technology. What we saw this week was a good old-fashioned "belch" from technology bulls. I get the feeling that the last little bit of last year's four-course meal of losses has now created the feeling of indigestion. If you've ever seen a sick dog, then you know what I'm talking about. A sick dog usually starts salivating, then its stomach starts retching, just before it lays a rather unpleasant surprise right on the new dining room carpet. No, it's not a pretty sight and just about enough to make one gag. Plop, plop, fizz, fizz.... We talked about the NASDAQ-100 Bullish % ($BPNDX), which showed a reading of 25%, but Friday's action found a net-loss of 5 stocks to sell signals on their point and figure charts as the gut retching picked up. It's rather interesting to me that we seeing such a nice round of selling in technology, when for the first time in over nine months, the economy actually added jobs! That's right, sell them technology stocks just when the economy actually adds some jobs. So why all this selling? Because the technology bulls can't take the pain anymore, that's the most probable reason. Yes, the 8- year high unemployment rate of 6% is enough to make a bull's stomach queasy, but once again, there's been areas of relief and even select stocks with a technology theme that have done well. Weekly market averages/sector performance Forest/Paper Products (FPP.X) were this weeks winners with a 4.3% gain. It's nice to see a deep cyclical group like the paper stocks bounce back strong and help boost the Morgan Stanley Cyclical Index (CYC.X) back after a four-week losing streak. It's interesting that just as the economy begins to add some jobs, some of the more economically sensitive sectors that should benefit most from an early recovery actually show yearly gains! This is something we've been talking about in the last 12 months and it continues to show up. Also worth noting is that the 10-year Treasury YIELD ($TNX.X) stayed rather steady this week and actually edged higher. Lots of subscriber's have been asking just where the money is going since it isn't going back into the bond market at an alarming rate. One area of bullishness that may be "hidden" a bit is the slight DIVERGENCE between the Airline Index (XAL.X) and the Dow Transportation Average (TRAN). The XAL.X got hit for a 7.2% loss this week, but look at the broader Transportation Average (TRAN) showing a marginal gain of 0.8%. As I flip through the charts of the Dow Transport components, one stock I'll monitor closely at the beginning of this week are shares of Fedex Corp. (NYSE:FDX) $51.49 -0.29%. I want a few observation days, but I like the way the stock found support right at the $50 level. PremierInvestor.com had profiled the stock as bullish in the past and if not for a tight stop and a brief 1-session decline, the stock performed quite well. Fedex Corp. Chart - Daily Interval Unfortunately our play list at PI didn't get the "full potential" from a previous bullish trade in FDX as a one-day decline triggered our stop just before the stock really got going. Here we are about 3-months later and FDX is right back where it started from in January. I'd like to see the stock hold above the $48 level as a trade there would have a sell signal on the point and figure chart canceling out the current bullish vertical count of $83, which has been in place since October of last year. Roadway Corporation (NASDAQ:ROAD) $34.01 +7.35% was today's transport winner. While I consider it a "trucking/ground" stock and Fedex (FDX) an "air/ground" transport, it's the similar patterns and today's bullish move from ROAD that has my attention. Roadway Corporation Chart - Daily Interval After a week of consolidation right at it's 50% retracement bracket, shares of Roadway (ROAD) made a nice move this week and today broke back above its 200-day moving average on strong volume. Roadway's earning's warning of March 21st that it would post a loss of $0.08-$0.12 a share for its 1st quarter had all the truckers seeing some losses that day (YELL, JBHT, KNGT, SWFT), but for some reason (we'll eventually find out) the stock continues to trade rather strong. Here's the Dow Transport components and how they traded today. Notice the commercial aircraft stocks like LUV, NWAC, AMR, UAL and DAL trading down today, but transport stocks that carry packages and cargo traded stronger. Dow Transport Components - Sorted by % gain When sorted by % gain on today's session, we see that the "truckers" were really the stocks that outperformed. I think one reason that CNF Inc. (NYSE:CNF) 31.98 -2.94% didn't participate today was that the stock had traded strong in the previous two trading sessions. CNF has also found good support in recent months at its 50% retracement level of $30.31, but stays range- bound with resistance at $34. The trade in the transports has been to buy weakness at support, then sell strength at resistance. I haven't see monstrous gains of more than 10%, but those have been very hard to come by in bullish trades in recent weeks. However. As the group continues to consolidate, it looks as if weaker hands are passing stock off to stronger and more longer- term committed hands. As this stock "turns over" it can then create a supply/demand setup where the bulk of the stock is owned at a rather tight level and should a bullish catalyst present itself and sellers become few, a strong move can take place. My goodness! There's a four-lettered technology stock in our play list at PI and it's in the "bullish" section. What's up with that! I had to go back to early March to find a 4-lettered technology stock in the PI bullish play list. That was a play in Research in Motion (NASDAQ:RIMM) $16.40 -5.36% from the $27.32 level. We actually held that silly bugger until March 20th, when the play was stopped at $26.49. With the stock now at $16.40, it's another lesson on how important a stop loss can be when investing/trading. I guess you could say the dog was salivating when we got stopped out, and now suffers from "motion sickness." I have to say, I am somewhat impressed with how Applied Materials (NASDAQ:AMAT) $22.17 -3.06% traded Friday. The Semiconductor Index (SOX.X) fell 4.72%, so there was a little bit of relative strength in AMAT. As mentioned in the intra day commentary on OI Friday, AMAT has pulled right into its bullish support trend. With the NASDAQ-100 Bullish % down at 20% a lot of "risk" has been reduced for the bulls and AMAT is still 1 of the 20 stocks in the NASDAQ-100 still showing a "buy signal" on its point/figure chart. From the institutional/point figure perspective, AMAT has had a nice little pullback. One thing we should note today is that AMAT and "like" semiconductor equipment stocks Novellus (NASDAQ:NVLS) $43.50 -4.66% and KLA Tencor (NASDAQ:KLAC) $52.78 -4.40 tested, or came very close to testing their 200-day moving averages today. There's been quite a bit of "risk" taken out of the stocks in the past two-weeks as AMAT has lost about 21%, KLAC has fallen approximately 24% and NVLS has dropped 19% from their recent highs. When enough is enough! Bears should have looked to book some gains today in some stocks on Friday. One of PI's bearish plays is perhaps indicative of how a market maker may also be reducing some bearish inventory risk. I think the action in SERENA Software (NASDAQ:SRNA) $13.10 +3.47%, while not indicative of the entire technology area right now, hints that there are definitely some bears locking in gains on broader tech weakness. As profiled in the SERENA (SRNA) trade, our bearish target of $12.51 was achieved. While the stock did trade as low as $12.45 and below our target, evidently we weren't the only ones watching current levels closely. SERENA Software Chart - Daily Interval It's always nice to lock in a gain ahead of the weekend and build a little cash in the account. The bearish side of the play list is off to a nice start this month, as it should be, considering tech weakness. Also closed out today on the bearish side was semiconductor stock DuPont Photomask (NASDAQ:DPMI) $32.32 -4.05% at the profiled target of $35.50. There may be some downside left in this one to the bearish vertical count of $29 (tie it in with the bearish count in the QQQ of $25 perhaps), but the stock has fallen for about 5-straight sessions. A trader that may have played AMAT long could have held the stock short, but a nice gain was at hand and that's what a trader is looking for. Gains. Dow Industrials just didn't have it As mentioned earlier, the Dow Industrials did manage to edge out a gain this week and didn't get hit to the downside too bad today, loosing just 85 points on the session. Last night we felt a break above the 10,120 level might spark a rally, but the MARKET was too fixated on this morning's 6% jobless rate. Dow Components Intel (NASDAQ:INTC) $26.60 -4.55%, SBC Communication (NYSE:SBC) $31.14 -3.97% and Microsoft (NASDAQ:MSFT) weighed on the index, while gains in Eastman Kodak (NYSE:EK) $33.65 +4.5%, McDonalds (NYSE:MCD) $29.29 +2.77% and Hewlett Packard (NYSE:HWP) $17.44 +2.04 helped keep the Dow above the 10,000 level on a closing basis. Dow Industrials Chart - Daily Interval Chart If any of the major market averages shows any technical strength or ability to stage a rally, then it's the Dow Industrials. General Motors (NYSE:GM), 3M (NYSE:MMM), Procter & Gamble (NYSE:PG) and Wal-Mart (NYSE:WMT) are now showing the biggest gains since the terrorist attacks, while SBC Communications (NYSE:SBC), Eastman Kodak (NYSE:EK), AT&T (NYSE:T) and General Electric (NYSE:GE) are now at the bottom. Hypothetical Dow Portfolio - $1000 in each on Sept. 10th The good old Dow "hypothetical portfolio" we started on September 10th, the day before the terrorist attacks, is holding up rather well on a total basis with a 2.92% gain. There's a large disparity between the upper 15 and lower 15. Quick generalizations continue to have telecom in SBC $31.14 - 3.97% and T $13.86 +1.38% at the bottom. Eastman Kodak (EK) $33.65 +4.50 rallied right back to its 200-day moving average today and may be a stock to watch for a move off the bottom. Conglomerate General Electric (GE) $31.70 +0.31% managed a small gain today and I'd like to think the weaker U.S. $ would help, but the MARKET just doesn't seem interested in the stock. General Motors (GM) $65.68 -0.84% "shocked" the market earlier in the week reporting strong car sales and saying it would ramp up production. Look for a bullish play in "like stock" Daimler Chrysler (DCX) $47.33 +0.55% next week in our bullish play list. For a "prep," traders and investors may want to go back and review Wednesday's market wrap and comparisons between the big 3 automakers and their point and figure charts. All eyes on Cisco You can bet that technology bulls will have their eyes and ears open next week when networking giant Cisco Systems (NASDAQ:CSCO) $13.14 -3.66% is scheduled to report earnings on Tuesday, after the close of trading. Analysts polled by Multex are looking for CSCO to report earnings of $0.09 a share. I'm not expecting an earnings "surprise" from CSCO, but what most likely influence technology trading is what CSCO says about visibility. Suffice it to say, if CSCO gives negative or "lack of visibility" type guidance Tuesday evening, then expect a now salivating dog to finally cough up what's been stuck in its throat since the December highs. Conversely, any bullish outlook on the future will most likely see a large short-covering rally as gains have been plentiful. Have a great weekend! Jeff Bailey ******************** INDEX TRADER SUMMARY ******************** ANOTHER ROLLER COASTER WEEK by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - This week was pretty much of a roller coaster ride, similar to last week, but the difference was that we had a narrower weekly price range and there were a couple of good upswings, so that all the tradable swings were not just on the downside. This is a function of the market being oversold, not any appreciable change in fundamentals or investor sentiment, which has grown more bearish. On the other hand, the volatility measures of VIX and VXN are not showing the kind of high option volatility that we normally have seen at significant market bottoms. This suggests some degree of complacency in market outlook. Yes, we all think that the market will eventually recover along with the rebounding economy. Investors have been willing to hang on. The only problem is that the market doesn't usually turn up in a substantial and sustained way until more investors throw in the towel -- yes, it (the market) is really perverse that way. But hey, it (the market) is a reflection of humans joined large in the ownership marketplace. Strange indeed. Well, this week, more patient tech long-term "buy and hold" investors had enough and decided to give them up (their big-loss stocks) for whatever dollars they were bringing that day. Declining volume swamped upside volume -- what had to give was price, as some of the tech-stock biggies went sort of into free fall. In the meantime, the market has gotten oversold, but not yet on a longer-term basis, as can be seen from the MACD Indicator applied to the weekly charts shown. S&P 500 (SPX) Weekly/Hourly Charts: Another down week, but there was a rebound from the Monday lows, which consisted of two back to back up days in the S&P stocks. Hadn't seen that in awhile. The rally fell apart in mid channel, but the hourly chart is showing, so far, a pattern of higher downswing lows; isn't that the definition of an uptrend? Time will tell. I know I want to be a seller/put buyer in the 1096-1100 area. Conversely, I would buy into another early week sell off, especially a dip into the low 1050's. This type of decline is the drip method of bear markets. Your stocks just erode a small amount every week or two. 1032, which represents a 62% retracement of the September - January advance, looks like a next lower target if 1050 is exceeded on any daily close. S&P 100 (OEX) Weekly/Hourly Charts: THE WEEK BEFORE I WROTE: "Hourly work with the channel lines suggests a short-term buying opportunity may be close at hand as OEX approaches the lower boundary of the downtrend channel, which comes in around 528-530 currently. Resistance comes in at 545, then 552." Hmm, buying in the 528 area worked pretty well, a couple of times even, but to grab some profits on those trades would require a more nimble trader than Jack be Quick! For those content to just wait to scope up some puts, 540 is my suggested area. In the short-term I think there is another downswing ahead, possibly to new lows. I would see a buying opportunity on a break to the 520 area, with 517 as the current target for new lows. The major downside potential for OEX looks like to be to 500, with 480 an outside possibility. Those even 100 levels attract more buying interest, or selling, depending on which way we are talking about. Dow Industrials ($INDU & $DJX.X) Weekly/Hourly Charts: The Dow Industrials (INDU) held above its 40-week moving average, although there was a slight penetration below it, before the weekly close. Dow stocks that have been well bid this week include key consumer stocks like MCD, PG, DIS, MO, and KO. The Dow looks to be vulnerable to another downswing early in the week. I continue to suggest playing the extremes of the hourly down trend channel, with an emphasis toward selling, the direction of the dominant trend. DJX - Sell in the 100.50 area; exit if there starts to be hourly closes above 101. 103 is my preferred area for adding to put positions. 97, if seen, would be worthwhile for buying for a short-term rebound. The Big Picture - The Dow Weekly technicals continues point to the average being vulnerable to another break below 10,000. A move that would take the average to a new relative closing low below 10,000, such as 200-300 points under. Nasdaq Composite ($COMPX) Weekly/Hourly Charts: We're there, as far as being at the bottom of the downtrend channel on the hourly chart. While there is potential for a further decline of another 100 points, to the 1500 area, the short-term should offer the prospect of an oversold rally from 1600 or at least the decline becomes more gradual. On any rebound, 1640-1642 is immediate overhead resistance. A series of hourly, or daily, closes above 1642 would suggest stronger rally potential, such as potential up to a retest of resistance around 1685. Nasdaq 100 ($NDX.X) Weekly/Hourly Charts: The weekly chart presents a very weak trend rolling over with just an approach to the major down trendline. 1090, at the prior weekly low, becomes a possible objective now, as NDX continues to sink like a stone. Meanwhile, near-term, there is perhaps a buying opportunity for a short-term trade buying in the 1180 area. Minor resistance comes in at 1230. A move well over 1230, suggests potential back to tougher resistance in the 1280 area. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly Charts: Near-term, buys in the QQQ 29.50 area offer some potential for a rebound. The Q's are now oversold on all but a weekly basis. Every dog has its day, but not much upside can be estimated beyond 30.6 in the immediate term. If 30.6 was well penetrated, potential is back up to the upper hourly channel line, where selling is suggested in the 32.5 area. 27 become a longer range downside objective, which would offer a possible retest of the prior QQQ weekly low (not shown). Index Trade Recommendations - Informal trade guidance offered this week only Long/Call Positions: Date: Bought; Stop or risk parameters; Trade Objective: Comments: Short/Put Positions: Date: Bought; Stop or risk parameters; Trade Objective: Comments: MAJOR MARKET INDICATORS - Given the "extremes" in this decline, I think it likely that we will see a spike well into bullish territory before the market bottoms more conclusively such as in the late-Feb low reading (on left in chart, yellow circle). Such an extreme, is at least one day in equities options when the put and call volume are equal or close to it; e.g., 1:1. In a bear market there have been extremes in bearish sentiment, before a market turn, when put volume was greater than calls. The other two indicators that I usually see line up at significant trend reversals are measures of "overbought" or "oversold" relating to advance/decline figures and the trend of daily advancing volume. We still see downward momentum in the 10- day moving average overlays that I use for these two studies. Both indicators are now dipping into oversold territory and when these 10-day averages turn up from oversold readings, assuming a collaborative signal on my option "sentiment" indicator, a market trend reversal is usually starting or about to. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************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 ************************************************************** ************** Editor's Plays ************** Due to Jim being out of town this weekend, there are no editor’s plays! **************** MARKET SENTIMENT **************** Retest or Recovery? By Eric Utley Last week's economic releases had investors questioning the direction of the U.S. economy. Friday's jobs data added to the confusion. The unemployment rate reached an eight year high despite non-farm payrolls rising to 43,000 during April. The number fell short of expectations. Rising unemployment may sneak over into consumer confidence for the worse, which is probably what the market was thinking late last week. There weren't any major company specific developments in the technology sector last Friday to spur continued weakness there, expect for maybe the chatter about Worldcom (NASDAQ:WCOM) possibly seeking bankruptcy. Other than that, it appeared that investors deferred to the crumby macro data, and began to lose belief in the new economy way of thinking. (Yes, there is an element of that line of thought still alive.) The sector scorecard saw another day of bifurcation between the old economy names, such as papers, and the tech sectors. Again, big losses were sustained in the technology sector. Another trend that we've seen build through the year is the upside in gold. Both the metal and equities traded to a new yearly high in last Friday's session. There may have been a defensive bid there. Treasuries continued trading with a bid; the benchmark 10-year Yield (TNX.X) finished lower to 5.062%. The weak run of economic data has helped to ease fears of inflation, and thus a rise in short term rates. The Fed is now expected to stay off the brake longer than previously thought, but we'll now more about the Fed's action or inaction next week. Each down day in the market makes stocks increasingly oversold. Indeed, most oscillator type measures are at or near oversold readings, including bullish percent, the ARMS Index, and weekly and daily Stochastics readings. But that doesn't mean the market can't grow more oversold, which has happened before. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 10007 Moving Averages: (Simple) 10-dma: 10013 50-dma: 10285 200-dma: 9925 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1073 Moving Averages: (Simple) 10-dma: 1086 50-dma: 1126 200-dma: 1127 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1191 Moving Averages: (Simple) 10-dma: 1274 50-dma: 1403 200-dma: 1484 Gold and Silver ($XAU) The falling dollar continued lending a bid to bullion. Spot gold traced a yearly high at $312.50 per ounce. The move in the metal boosted the equities to a fresh yearly high. The XAU was the day's best performing sector; it finished 2.61 percent higher. Leading to the upside included shares of Harmony Gold (NASDAQ:HGMCY), Gold Fields (NASDAQ:GOLD), Meridian Gold (NYSE:MDG), Anglogold (NYSE:AU), and American Eagle Mines (NYSE:AEM). 52-week High: 79 52-week Low : 49 Current : 78 Moving Averages: (Simple) 10-dma: 75 50-dma: 69 200-dma: 59 Semiconductor ($SOX) The rout in the technology sector continued last Friday, led lower by the SOX. The sector lost 4.72 percent for the day, arguably breaking down below the psychological 500 level. Leading to the downside included shares of LSI Logic (NYSE:LSI), Altera (NASDAQ:ALTR), Broadcom (NASDAQ:BRCM), National Semi (NYSE:NSM), and Teradyne (NYSE:TER). 52-week High: 711 52-week Low : 344 Current : 480 Moving Averages: (Simple) 10-dma: 527 50-dma: 570 200-dma: 536 ----------------------------------------------------------------- Market Volatility The VIX ticked higher during Friday's weakness in stocks. The fear gauge added 3.79 percent to finish the week at 23.23. The VXN'x relative strength versus the VIX was reinforced Friday when the former broke to a new relative high, which only made sense because the NDX broke to a new relative low. At this point, the VXN is confirming the weakness in the NDX, but it's not to an extreme level yet... CBOE Market Volatility Index (VIX) - 23.23 +0.85 Nasdaq-100 Volatility Index (VXN) - 46.26 +1.74 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.91 571,200 522,569 Equity Only 0.82 487,584 401,677 OEX 0.99 15,036 14,861 QQQ 1.11 80,143 88,833 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 63 + 0 Bull Confirmed NASDAQ-100 20 - 5 Bear Confirmed DOW 47 - 3 Bear Confirmed S&P 500 60 - 1 Bear Alert S&P 100 53 - 1 Bear Alert 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 1.44 10-Day Arms Index 1.48 21-Day Arms Index 1.39 55-Day Arms Index 1.26 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 1643 1475 NASDAQ 1578 1886 New Highs New Lows NYSE 257 58 NASDAQ 193 137 Volume (in millions) NYSE 1,297 NASDAQ 1,777 ----------------------------------------------------------------- Commitments Of Traders Report: 04/30/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials grew less bearish again during the most recent reporting period by adding more longs than shorts. It was the third week of decreased bearishness for the S&P commercials. Meanwhile, small traders grew less bearish by adding more short positions. Commercials Long Short Net % Of OI 04/09/02 320,101 411,075 (90,974) (12.4%) 04/16/02 322,578 411,245 (88,667) (12.1%) 04/30/02 340,936 421,673 (80,737) (10.6%) 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 04/09/02 151,237 47,678 103,559 52.1% 04/16/02 150,529 50,424 100,105 49.8% 04/30/02 153,158 56,372 96,786 46.2% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 107,702 - 3/26/02 NASDAQ-100 Nasdaq commercials grew less bearish by adding a number of long positions last week. The group is still net bearish, but growing less so with each week. On the other side, small traders slipped from a net bullish to a net bearish position. Commercials Long Short Net % of OI 04/09/02 28,985 35,221 (6,236) (9.7%) 04/16/02 32,024 35,723 (3,699) (5.5%) 04/30/02 34,591 35,933 (1,342) (9.7%) 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 04/09/02 11,640 8,353 3,287 16.4% 04/16/02 12,458 10,572 1,878 8.2% 04/30/02 12,271 12,703 (432) 1.7% 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 Commercial traders reduced their net bullish position again during the most recent reporting period. The group grew less bullish by dropping more longs than shorts. Meanwhile, small traders went in the opposite direction by reducing their net bearish position. Commercials Long Short Net % of OI 04/09/02 19,393 13,445 5,948 16.7% 04/16/02 19,080 14,267 4,813 14.4% 04/30/02 17,275 13,341 3,934 12.8% 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 04/09/02 5,459 9,340 (3,881) (26.2%) 04/16/02 5,644 9,448 (3,804) (25.2%) 04/30/02 5,813 8,869 (3,056) (20.8%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************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 ************************************************************** *************** ASK THE ANALYST *************** NDX Issues By Eric Utley I keep thinking that we're closer to a bottom in the Nasdaq types because of the removal of so much downside risk during the last few weeks. But that thinking has been wrong! Very wrong! In the short run, psychology trumps technicals. Psychology is influenced by myriad factors, and can shift quickly. That's why heeding risk levels is so important, no matter the prevailing sentiment. I think that a lot of downside risk has been removed from the Nasdaq names judging by the NDX bullish percent, which fell below 30 -- an oversold benchmark -- last week for the first time since February. Oversold markets, however, can always become more so, which is what's happening now. Part of the increasing oversold nature of the Nasdaq is attributable, in my view, to two sectors: Semiconductor and Biotech. Let's take a closer look... 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 ---------------------------- Biotechnolgy There are 18 biotech names in the Nasdaq-100. The index hasn't always been so biotech heavy. Last fall, the people who decide what goes into the Nasdaq picked a load of biotech shares to replace the dozen beaten down Internet and telco names. As it turns out, betting on biotech was a bad call. I've written about the AMEX Biotechnology Index (BTK.X) extensively in this column, as well as through Intraday Updates and the Market Monitor. Through those previous observations, I established that the 450 level was quite important as support from an institutional perspective. That level was broken about a week ago, and the BTK.X has fallen apart since then. With 450 now acting as resistance in a very big way, the remaining level of support in the BTK.X is 400, around which the index flirted late last week. The 400 level won't be broken until a print at 375.00. But if that happens, lookout below, because I don't see support until 250 -- that's where the downside risk lies. BTK.X - 25 Point Box I don't think we'll see if next week, but if the BTK.X does fall below 375.00, then the NDX could grow a lot more oversold as psychology will be stretched to the bearish camp. A move below 375.00, if it comes, will be very tradable to the downside, using some of the weaker components of the BTK.X as the trading vehicle, or an ETF such as the Biotech HOLDRs (AMEX:BBH). ---------------------------- Semiconductor Chips have long been a part of the Nasdaq-100. Obviously the bigger names such as Intel (NASDAQ:INTC) and Applied Materials (NASDAQ:AMAT) are among the bellwethers of the tech heavy index. Some smaller, niche names are among the chips included in the NDX, such as PMC-Sierra (NASDAQ:PMCS). Back in early February, I wrote about the January Effect as it related to sectors. The SOX.X was one of the few tech sectors to finish in the top ten performers during January, perhaps foreshadowing a better year for the index at the time. I think the SOX.X's performance during January helped to lend the bid that stuck with the group through most of March, and into late April. But the belief, or maybe the hope, that the chips would carry the tech sector through this downturn is eroding. We've seen a significant shift in relative strength over the last month, notably the sentiment has shifted away from the chips. The 400 level to the BTK.X is the 500 level to the SOX. Depending on which perspective you use, the SOX may or may not have broke down below 500 last week. The smaller views will reveal that the SOX did in fact breakdown. But using the same bigger view that we did in the BTK, the SOX is still trading above the 500 level. A breakdown would only come after a print at 475.00. But from there, and as the chart below reveals, there's the potential for support to form at the 450.00 level -- at the bullish support line. If the bullish support is broken, then risk shifts down to the September low at 350.00. SOX.X - 25 Point Box Trading around the SOX.X from here will most likely depend on your unique style and risk tolerance. For instance, a short/put can be tried on a breakdown below 475.00, while a long/call trade might be trade near the 450.00 level. Either way, the SOX.X will tell us a lot about the future direction of the NDX. And like the BTK, traders can use the Semi HOLDR (AMEX:SMH) as a trading vehicle, or one of the components that track it closely such as Intel. ---------------------------- 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 BMC BMC Software Mon, May 06 Before the Bell 0.11 CEPH Cephalon Mon, May 06 After the Bell 0.15 CHD Church & Dwight Mon, May 06 Before the Bell 0.32 ABV Companhia Bebidas Am Mon, May 06 Before the Bell 0.19 MAS Masco Mon, May 06 -----N/A----- 0.29 PRE PartnerRe Mon, May 06 After the Bell 1.30 PPS Post Properties Mon, May 06 After the Bell 0.72 PVN Providian Financial Mon, May 06 After the Bell 0.02 QGENF QIAGEN Mon, May 06 After the Bell 0.07 SKM SK Telecom Mon, May 06 Before the Bell N/A SKE Spinnaker Exploration Mon, May 06 -----N/A----- 0.20 WRC Westport Resources Mon, May 06 -----N/A----- -0.25 ATVI Activision Tue, May 07 After the Bell 0.11 AEG AEGON N.V. Tue, May 07 Before the Bell 0.41 ALS Alstom SA Tue, May 07 Before the Bell N/A AMH AmerUs Group Tue, May 07 After the Bell 0.86 RMK ARAMARK Corporation Tue, May 07 -----N/A----- 0.17 ASN Archstone-Smith Trust Tue, May 07 Before the Bell 0.52 CSCO Cisco Systems Tue, May 07 After the Bell 0.09 CCU Clear Channel Comm Tue, May 07 Before the Bell 0.08 CPWR Compuware Tue, May 07 After the Bell 0.07 CCRN Cross Country, Inc. Tue, May 07 -----N/A----- 0.20 CRWN Crown Media Holdings Tue, May 07 Before the Bell -0.56 DEG Delhaize Group Tue, May 07 -----N/A----- N/A HAL Halliburton Tue, May 07 Before the Bell 0.19 HSIC Henry Schein Tue, May 07 Before the Bell 0.42 HSP Hispanic Brdcstng Cmp Tue, May 07 Before the Bell 0.05 LAMR Lamar Advertising Tue, May 07 After the Bell -0.21 LM Legg Mason Tue, May 07 Before the Bell 0.66 CLI Mack Cali Realty Tue, May 07 Before the Bell 0.92 MBI MBIA Tue, May 07 Before the Bell 1.04 MDG Meridian Gold Tue, May 07 After the Bell 0.16 MET Metropolitan Life Ins Tue, May 07 Before the Bell 0.58 MNY MONY Group Tue, May 07 -----N/A----- 0.24 NJ Nidec Tue, May 07 -----N/A----- N/A PC Perez Companc Tue, May 07 -----N/A----- -0.73 PAA Plains All Am Pipline Tue, May 07 Before the Bell 0.32 PRU Prudential Financial Tue, May 07 After the Bell 0.47 QLGC QLogic Tue, May 07 After the Bell 0.20 SPP Sappi Ltd ADS Tue, May 07 Before the Bell 0.22 STO Statoil ASA Tue, May 07 Before the Bell N/A TI Telecom Italia Tue, May 07 Before the Bell N/A TSP Telecomunicações São Tue, May 07 -----N/A----- 0.31 TMPW TMP Worldwide Tue, May 07 After the Bell 0.14 TZH Trizec Hahn Tue, May 07 Before the Bell 0.57 UNM UnumProvident Tue, May 07 After the Bell 0.63 WMI Waste Management Tue, May 07 -----N/A----- 0.26 HLTH WebMD Tue, May 07 After the Bell 0.01 WON Westwood One Tue, May 07 Before the Bell 0.14 ARG Airgas Wed, May 08 After the Bell 0.20 ARI Arden Realty Wed, May 08 After the Bell 0.73 ANZ Aust&New Zelnd Bank Wed, May 08 After the Bell N/A BBV Bnco Blbao Vizcaya Arg Wed, May 08 Before the Bell N/A BRL Barr Laboratories Wed, May 08 Before the Bell 0.83 VNT C. A. Nac Tele Ven Wed, May 08 -----N/A----- 0.32 CAMT Camtek Wed, May 08 -----N/A----- -0.18 CED Canadian Natural Res Wed, May 08 Before the Bell 0.44 CM Coles Myer Wed, May 08 After the Bell N/A CCI Crown Castle Inter Wed, May 08 After the Bell -0.46 CVS CVS Wed, May 08 Before the Bell 0.43 DF Dean Foods Company Wed, May 08 Before the Bell 0.54 DYS Distribucion y Servic Wed, May 08 -----N/A----- 0.15 E ENI SpA ADR Wed, May 08 -----N/A----- N/A ENZN Enzon Wed, May 08 -----N/A----- 0.26 EXPD Expeditors Int WA Wed, May 08 After the Bell 0.39 FST Forest Oil Wed, May 08 After the Bell -0.05 GALN Galen Holdings PLC Wed, May 08 Before the Bell 0.22 JBX Jack in the Box Wed, May 08 Before the Bell 0.44 LQI LA QUINTA PPTYS Wed, May 08 Before the Bell -0.02 MME Mid Atlantic Med Serv Wed, May 08 -----N/A----- 0.42 MYL Mylan Laboratories Wed, May 08 Before the Bell 0.50 PSC Philadelphia Suburban Wed, May 08 Before the Bell 0.17 PIXR Pixar Wed, May 08 After the Bell 0.23 PFG Principal Fin Grp Wed, May 08 Before the Bell 0.51 REG Regency Centers Corp Wed, May 08 After the Bell 0.66 SRV Service Corp Int Wed, May 08 After the Bell 0.12 SPG Simon Property Group Wed, May 08 After the Bell 0.79 TDK TDK Wed, May 08 -----N/A----- N/A TRLY Terra Lycos, S.A. Wed, May 08 During the Market-0.05 TMBR Tom Brown Wed, May 08 After the Bell -0.12 TGH Trigon Healthcare Wed, May 08 Before the Bell N/A WPI Watson Pharmaceutical Wed, May 08 Before the Bell 0.34 WTM White Mount Ins Grp Wed, May 08 -----N/A----- N/A WFMI Whole Foods Market Wed, May 08 -----N/A----- 0.33 ATK Alliant Techsystems Thu, May 09 Before the Bell 1.02 BRG BG Group Thu, May 09 Before the Bell N/A CNA CNA Financial Corp Thu, May 09 Before the Bell 0.50 CEI Crescent Rl Es Eq Co Thu, May 09 Before the Bell 0.45 ERTS Electronic Arts Thu, May 09 After the Bell 0.28 EVC Entravisions Comm Corp Thu, May 09 After the Bell -0.04 HCC HCC Insurance Holdings Thu, May 09 After the Bell 0.39 HB Hillenbrand Industries Thu, May 09 Before the Bell 0.85 JS Jefferson Smurfit Thu, May 09 -----N/A----- 0.30 LTR Loews Thu, May 09 Before the Bell 1.24 NAB National Australia Bk Thu, May 09 -----N/A----- N/A NXL New Pln Excel Rlty Tst Thu, May 09 -----N/A----- 0.44 OCA Orthodontic Cent of Am Thu, May 09 Before the Bell 0.36 PCO Premcor U.S.A. Thu, May 09 Before the Bell N/A PDLI Protein Design Thu, May 09 After the Bell 0.01 PRS Pure Resources, Inc. Thu, May 09 Before the Bell -0.14 RSA Royal&Sun All Ins Grp Thu, May 09 Before the Bell N/A SHU Shurgard Storage Thu, May 09 Before the Bell 0.67 NZT Telecom New Zealand Thu, May 09 After the Bell N/A UBB Unibanco Thu, May 09 Before the Bell 0.71 UVN Univision Comm Thu, May 09 After the Bell 0.01 WGR Western Gas Resources Thu, May 09 Before the Bell 0.21 ZL Zarlink Thu, May 09 Before the Bell -0.09 BSY BritishSky Brdcstng Fri, May 10 Before the Bell N/A FS Four Seasons Hotels Fri, May 10 Before the Bell 0.13 ICCI Insight Communications Fri, May 10 -----N/A----- -0.41 MGA Magna International Fri, May 10 -----N/A----- 1.67 MITSY Mitsui & Co Ltd Fri, May 10 -----N/A----- N/A ORH Odyssey Re Holdings Fri, May 10 -----N/A----- 0.27 ================================================================= Upcoming Stock Splits This Week & Next... Symbol Company Name Ratio Payable Executable ABM ABM Industries 2:1 05/03 05/06 TJX TJX Companies 2:1 05/08 05/09 MCHP Microchip Technology 3:2 05/08 05/09 PNG Penn-America Group 3:2 05/08 05/09 WSM Williams Sonoma 2:1 05/08 05/09 CATY Cathay Bancorp 2:1 05/09 05/10 WTSLA The Wet Seal Inc 3:2 05/09 05/10 LH Laboratory Corp 2:1 05/09 05/10 FAST Fastenal 2:1 05/10 05/13 IFNY INFINITY Inc 2:1 05/10 05/13 BBY Best Buy 3:2 05/10 05/13 STZ Constellation Brands 2:1 05/13 05/14 CNTL Cantel Ind 3:2 05/14 05/15 EPD Enterprise Products 2:1 05/15 05/16 FULT Fulton Financial 5:4 05/17 05/20 VLY Valley National Bancorp 5:4 05/17 05/20 ANN Ann Taylor 3:2 05/17 05/20 OCFC OceanFirst Financial 3:2 05/17 05/20 MAXS Maxwell Shoe Co 3:2 05/17 05/20 YORW York Water Co 2:1 05/17 05/20 LLL L-3 Communications 2:1 05/17 05/20 ================================================================= Economic Reports Wow, we've got one heck of a week in front of us. While Wall Street is still wrapping up earnings, Tuesday could be a day for volatility with the Wholesale Inventories report and the FOMC meeting. Plus, after the close on Tuesday, CSCO is expected to announce earnings which could set the tone of the tech sectors for the rest of the week. On Friday, analysts will be watching for the PPI report. ================================================================= Monday, 05/06/02 None Tuesday, 05/07/02 Productivity-Prel (BB) Q1 Forecast: 7.0% Previous: 5.2% Wholesale Invntries (DM) Mar Forecast: -0.4% Previous: -0.7% FOMC Meeting (DM) Consumer Credit (DM) Mar Forecast: $7.0B Previous: $7.1B Wednesday, 05/08/02 None Thursday, 05/09/02 Initial Claims (BB) 05/04 Forecast: 407K Previous: 418K Export Prices ex-ag.(BB) Apr Forecast: N/A Previous: 0.2% Import Prices ex-oil(BB) Apr Forecast: N/A Previous: 0.0% FOMC Minutes (DM) 03/19 Friday, 05/10/02 PPI (BB) Apr Forecast: 0.4% Previous: 1.0% Core PPI (BB) Apr Forecast: 0.1% Previous: 0.1% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************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 ************************************************************** 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 $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Sunday 05-05-2002 Sunday 2 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** INDEX TRADER GAMEPLANS ********************** THE SECTOR BEAT - 5/5 by Leigh Stevens SECTOR ACTIVITY/OUTLOOK: There were no new "themes" this week in terms of sectors doing well or not doing well. The same areas: consumer stocks like MAC, KO, PG, MO, DIS and EK continue to have good momentum and buying interest. One of the reasons that the Dow 30 (INDU) -- "Industrials" seems outmoded! - continues to hold up better than it "ought" to, is the number of these type stocks in that average. Plus, GM (Autos), plus IP, (in the strong Forest & Paper Products sector), etc. Lately, even HWP has rebounded Fri.5/3-Sector or Market -----close-amt-percent So what investment "themes" do we have in the top five on Friday. We don't have the Health Care Index ($HMO.X), but it just happened to succumb to a bout of profit taking this week and was down slightly on the week. More on HMO shortly. The continued strong sectors up the most at week's end were Papers, Precious Metals, Oil and small caps (as reflected in the Amex Composite). SECTOR TRENDS AND TRADING IDEAS - Healthcare Payors Index ($HMO.X): Suggest purchase of Oxford Health Plans (OHP) on pullbacks, stock or deferred OTM calls, to the 40-41.00 area; OR, after a correction of the HMO Index back to the lower end of its daily uptrend channel around 570. HOW LOW CAN THEY GO? Look like 456 area, with slippage to 450, intraday, is the best case for the bulls. 456 is a 62% retracement -- last hope for a bullish retracement only expectation. Instead, given a confirming close under 450, SOX could be headed to a 100% retracement BACK to the rally starting point in the 365 area. TIME TO PLAY WITH THE GLITTER? I've been looking at the XAU again and again to see what there is technically that could explain the strength in the metals. I don't know the fundamentals well enough to make an intelligent analysis of the prospects of this sector to continue to move strongly higher. Mining companies like Newmont Mining (NEM) would be my preferred vehicle of choice to play this sector strength. Looking at the Weekly XAU chart, a very bullish rounding bottom over 2 years duration suggest to me now that the "base" for this rally is quite large and can "support" a double, by XAU going from 50 to 100, or over time up toward the wide upper channel boundary. Near-term resistance in XAU may be at hand, based on its arrival at the more narrowly drawn uptrend channel. I would buy NEW at 28.50 or better, stock or Sept. calls, with a stop out point, a close under 25.00 >> DRG, the Pharmaceutical sector index ($DRG.X), (4/22 comment). Rebounding from low end of a probable trading range and oversold. Moreover, investor attention may focus on DRB due to strength in other healthcare areas. DRG sector may be 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. UPDATE: Suggested purchase of the 6o calls on 5/2 - May was original suggestion, better now would to go out to June. LONG/CALL TRADES, PREVIOUSLY RECOMMENDED: >> Internet Sector index ($INX.X) - 4/17 Sector Trader suggestion: OPTION play: JNPR (Juniper Networks) May 15 Calls (JUX EC).JNPR objective is to $18, based on the stock having potential to retrace half of the Dec - Feb. downswing. The May 12.5's (JUX EV) Calls were also recommended. UPDATE: Stock is not performing as expected - STOP or EXIT below 9.00, especially on a closing basis >> Cyclical sector ($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 UPDATE: AA is rebounding some - SELL at 35.00 CYC broke technical support recently and AA fell to low end of its trading range at $33.30, but is off these lows. HOLD only. >> Airline sector ($XAL.X) - 4/15 Sector Trader suggestion: OPTION PLAY: XAL sector stock Southwest Airlines (LUV) Sept. 20 (LUV ID) call suggested at 1.25 or less. OBJECTIVE: $22 based on a rebound back toward the high end of the current uptrend channel. Both the Airline Index and the sector player chosen, LUV, are nearing key support. If the sector and the stock hold these levels we can stay with a long play in Southwest and see what develops. A break of these levels, would cause my EXIT with options with remaining value. >> Utilities Index - Holders trust shares (AMEX: UTH) Long at 95.25 Stop: 91.00 OPEN SHORTS/PUT PLAYS: >> RTH (AMEX: Retail sector trust stock) SHORT at 99.00 Stop: 100 LIQUIDATIONS: 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 *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week DGX 94.91 -1.05 1.89 2.86 0.05 3.86 Super strong SII 74.34 -0.64 -0.61 1.41 1.84 3.05 Working higher THC 73.60 -2.78 1.67 0.29 -0.31 -0.88 Consolidating SRCL 72.10 0.09 0.98 1.46 2.51 5.90 Super star!!! FISV 43.56 -0.44 1.62 0.32 -0.62 0.18 Dropped WM 39.35 -0.29 1.00 0.43 1.29 2.33 Watching rates RTN 43.75 0.52 2.24 0.10 1.35 3.74 Bumping at $44 EXPE 84.03 -4.68 3.08 0.92 1.40 1.59 New, running PUTS MU 22.61 0.45 -2.75 1.00 -1.34 -3.39 Going to $20 ADI 34.43 -0.49 1.21 -0.16 -0.64 -1.81 Big breakdown PLCM 20.38 -0.08 1.69 0.00 0.29 1.37 Stalling $21 LRCX 23.85 -0.19 0.63 -0.08 -1.00 -1.32 Watch 200-dma SEBL 21.16 1.09 0.51 -1.03 -1.51 -1.43 Another low VRTS 25.90 2.03 0.09 -0.44 -1.88 -0.32 Breaking too! FLIR 39.65 -1.18 -2.41 -0.62 -1.26 -3.92 Short covering GS 78.55 -0.40 0.25 0.46 1.50 -0.60 Rolled over!! QLGC 41.56 -0.64 2.49 -1.23 -2.02 -2.30 New, breaking IDPH 50.87 -2.13 2.43 -0.80 -1.72 -3.78 New, bio gone ************************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: ********************* EXPE - Expedia $84.03 (+1.59 last week) See details in play list Put Play of the Day: ******************** QLGC - QLogic $41.56 (-2.30 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 ^^^^^ FISV $43.56 (+0.18) The pressure from the broader markets finally caught up with FISV in the last two days of last week's weak trading for stocks. The stock rolled over in Thursday's and Friday's sessions, giving up much of the relative strength that we were initially attracted to. Instead of waiting around for a breakdown in this one, we're jumping ship early in favor of better bullish plays. Look for a bid next Monday to cut losses short. PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* 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 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 05-05-2002 Sunday 3 of 5 ************************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 ************************************************************** ************** NEW CALL PLAYS ************** EXPE - Expedia $84.03 (+1.59 last week) Expedia, Inc. is a provider of branded online travel services for leisure and small business travelers. The Company operates full service travel agency Websites targeted at customers in a number of geographies. The Company 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, LVRS.com, VacationSpot.com and Rent-a-Holiday.com websites. The online travel business is booming. And this company is in the sweet spot of the business. Expedia is hitting on all cylinders, and then some. The company recently posted a first quarter profit that surpassed even the most bullish of expectations. The company's results were boosted by strong sales of vacation and hotel packages sold online. Not only did the company handily surpass consensus estimates, but it raised guidance for the remainder of this year. The company is expected to grow by about 30 percent this year, and that much is attractive to fund managers have a difficult time finding growth in this market and economic environment. The simple fact that Expedia is growing at such a healthy clip in such a poor environment makes its shares very attractive to the money management crowd, who have been pouring in and will continue to do so through the summer travel season. Traders looking to jump into this momentum favorite next week can look for an advance above the $85 level. Such a move would reveal a breakout and inspire the bulls to carry shares higher. Those who would rather wait for a pullback can look for a retreat down into the $80 support area, where the buyers have been walking this stock up for about five days now. Our stop is initially in place at $77. ***May contracts expire in two weeks*** BUY CALL MAY-80 UED-EP OI=1318 at $6.40 SL=4.50 BUY CALL MAY-85*UED-EQ OI=1351 at $3.30 SL=1.50 BUY CALL JUN-85 UED-FQ OI= 257 at $6.50 SL=4.50 BUY CALL JUN-90 UED-FR OI= 281 at $4.40 SL=2.75 Average Daily Volume = 1.51 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 ****************** SII - Smith International $74.34 (+3.05 last week) Smith International, Inc. is a worldwide supplier of premium products and services to the oil and gas exploration and production industry, the petrochemical industry and other industrial markets. The Company provides a comprehensive line of technologically-advanced products and engineering services, including drilling and completion fluid systems, solids-control equipment, waste-management services, three-cone and diamond drill bits, fishing services, drilling tools, underreamers, casing exit and multilateral systems, packers and liner hangers. The Oil Service Sector Index (OSX.X) capped off a stellar late week rally last Friday by tracing another new relative high in its upward trend. The OSX.X traded as high as 112.74 before pulling back on an intraday basis. The index is currently trading near a 10 month high, hovering near levels not seen since last June. The strength of the broader energy group is impressive indeed, and being helped by the higher crude prices, which edged up in last Friday's trading. The black stuff goes for about $26.62 per barrel, and further strength from here in oil will only add to the momentum we've witnessed in the OSX. As for SII, it's one of the strongest components of the OSX, but it will still track its index and the broader energy sector was we move into next week's trading. If the trend continues in the energy sector, we should see SII move towards the $80 level over the next month or two. That means we'll be looking for pullbacks to support for entry points into the stock's strong upward trend. At this point in the trend, we'd look to get long calls near the ascending 10-dma, which sits below market at the $70.70 mark. A few days of consolidation near that level would remove some of the downside risk, and allow for new entries into the play. Until then, make sure to tighten stops on open positions to protect those profits! ***May contracts expire in two weeks*** BUY CALL MAY-70*SII-EN OI= 378 at $5.50 SL=3.50 BUY CALL MAY-75 SII-EO OI=1729 at $2.20 SL=1.00 BUY CALL JUN-70 SII-FN OI= 19 at $7.40 SL=4.75 BUY CALL JUN-75 SII-FO OI= 157 at $4.50 SL=2.25 Average Daily Volume = 1.22 mln SRCL - Stericycle $72.10 (+5.90 last week) Stericycle, Inc. is a regulated medical waste management company in North America, serving approximately 269,000 customers throughout the United States, Canada, Puerto Rico and Mexico. Stericycle's services and operations are comprised of collection, transportation, treatment, disposal and recycling, together with related training and education programs, consulting services and product sales. Last week, SRCL helped to build the growing bullish sentiment in the broader health care segment. Even though the company is near the bottom of the health care market, it's benefiting from the robust outlook and business conditions. After breaking out above its March highs near the $68 level, SRCL went on to take out the $70 mark, trading as high as $73.85 in Thursday's session. Friday's trading was one of pulling back, which helped to consolidate the big rally from earlier in the week. The stock traced a big inside day, which was easy due to the wide trading range put in during Thursday's volatile session. Volume was definitely on the light side, which was another encouraging sign of consolidation. Nevertheless, the stock spent the better part of Friday's session trading in positive territory, which was another positive that we were happy to observe. The buyers definitely remain in control of this one as evidenced by the positive trading in light of Friday's ugly market. Still, as traders, we need to be careful of a deeper pullback going into next week's trading. The stock is a bit extended to the upside on its longer term charts, such as the weekly view. It has had the tendency to trade to a new relative high, then pullback, in a rolling stock fashion. In order to protect against any consolidation based pullback next week, traders can set a relatively tight stop to protect profits. One level to focus on is the intraday low set during Thursday's session, which is at the bottom of the inside day previously mentioned. That level is at $69.40, which is still a distance away from Friday's close. Another possible approach is to take off partial positions on any further strength above last Friday's high. We'll start looking for new entries on a light volume multi day pullback down to the $69 to $70 support area. ***May contracts expire in two weeks*** BUY CALL MAY-65*URL-EM OI=521 at $8.00 SL=6.50 BUY CALL MAY-70 URL-EN OI=509 at $3.60 SL=1.75 BUY CALL JUN-65 URL-FM OI= 18 at $9.20 SL=6.75 BUY CALL JUN-70 URL-FN OI= 49 at $5.90 SL=4.00 Average Daily Volume = 286 K WM - Washington Mutual $39.35 (+2.33 last week) Washington Mutual Inc. is a financial services company committed to serving consumers and small to mid-sized businesses. Through its subsidiaries, Washington Mutual engages in the following lines of business: consumer banking, mortgage banking, commercial banking, financial services and consumer finance. The Company's principal banking subsidiaries are Washington Mutual Bank, FA, Washington Mutual Bank and Washington Mutual Bank fsb. As we detailed in the first write of the WM play, the stock is closely linked to the direction of interest rates. That includes both long and short term rates, which are linked to different sources. Short term rates are set by the Federal Reserve, while longer term rates are set by the market. The recent round of economic data seem to suggest that the Fed will remain on hold for longer than the market initially expected. Longer term rates are revealing a similar sentiment. The benchmark 10-year Note has been moving steadily higher over the last month, and appears poised for another breakout possibly next week. Readers can track the progress of the Note by monitoring the 10-year yield (TNX.X), keeping in mind that yield moves inverse to price. The TNX is looking like it's ready to breakdown below the 50.00 to 50.50 level as last week's highs were set sequentially lower. A declining yield would work in the favor of our WM play, which is why it's very important to monitor the Treasury market when tracking the WM play. Specific to WM, the stock has some historical congestion just below the $40 level. Without a big breakout in the Note, WM may spend some time consolidating its recent rally below the $40 level. On the other hand, a breakout in the Note should allow WM to clear the $40 level, and go on to trend towards the $45 mark. Watch the bond market closely, and trade the WM's levels accordingly. ***May contracts expire in two weeks*** BUY CALL MAY-37 WM-EU OI= 1 at $2.15 SL=1.00 BUY CALL MAY-40*WM-EH OI=2290 at $0.60 SL=0.25 BUY CALL JUN-37 WM-FU OI= 105 at $2.65 SL=1.25 BUY CALL JUN-40 WM-FH OI= 835 at $1.15 SL=0.50 Average Daily Volume = 3.92 mln DGX – Quest Diagnostics $94.91 (+3.86 last week) Quest Diagnostics was the result of a 1996 Corning spinoff, and currently holds the title of the world's #1 clinical laboratory. DGX performs more than 100 million routine tests annually, including cholesterol, HIV, pregnancy, alcohol, and pap smear tests. Operating laboratories throughout the US and in Brazil, Mexico, and the UK, DGX also performs esoteric testing (complex, low-volume tests) and clinical trials. The company serves doctors, hospitals, HMOs, and other labs as well as corporations, government agencies, and prisons. It turned out to be another tough week on the Technology bulls, but those that have been turning their attention to strong sectors like Health Care have been doing quite well indeed. After trading to a new high in the middle of the week, the HMO index succumbed to some much needed profit taking. While not a component of the HMO index, DGX has been benefiting from the sector strength and managed to trace another all-time high on Thursday before giving into the desire to consolidate a bit. The weakness managed to drag our play down to the $92.50 level (the top of Wednesday's gap), but there were eager buyers waiting in the wings. They drove DGX sharply higher in the final 2 hours on Friday, closing out the day with a slight gain. Now that's not bad considering all the red on the screen and the fact that the HMO index gave up nearly 2%. DGX continues to see strong buying interest in the wake of the company's solid earnings report earlier in the month. With Health Care still looking strong, DGX likely has more than one more new high in its bag of tricks. Intraday dips near support ($92.00-92.50) look good for initiating new positions, as does a breakout over the $95.60 level. Raise stops to $91.50. *** May contracts expire in 2 weeks *** BUY CALL MAY- 90 DGX-ER OI=2740 at $5.50 SL=3.50 BUY CALL MAY- 95*DGX-ES OI=1069 at $2.55 SL=1.25 BUY CALL JUN- 95 DGX-FS OI=1546 at $4.60 SL=2.75 BUY CALL JUN-100 DGX-FT OI= 330 at $2.50 SL=1.25 Average Daily Volume = 701 K RTN – Raytheon Company $43.75 (+3.74 last week) Raytheon is a provider of defense electronics, including missiles, radar, sensors and electro-optics, surveillance and reconnaissance, and command, control, communication and information systems. Additionally, the company provides naval systems, air traffic control systems and aircraft integration systems. RTN's commercial electronics businesses leverage defense technologies in commercial markets. Raytheon Aircraft is a provider of business and special mission aircraft and delivers a broad line of jet, turboprop and piston-powered airplanes. News of the Northrup Grumman contract win on the Navy's DD(X) program launched the Defense Industry index (DFI.X) vertical again last Tuesday and despite a weak market for the latter half of the week, the DFI index continued to push higher. Even the sharp selloff on Friday morning was reversed by the closing bell, with the index closing at another all-time high. Although Northrup Grumman got the headlines, we can't overlook RTN, which, as systems integrator for the project, will get 45% of the nearly $3 billion contract. That fact wasn't lost on investors, as they bought the stock with both hands last week, propelling it to fresh all time highs on Thursday with the breakout over the $43 resistance level. A bit of profit taking on Friday was all it took to convince new bulls to enter the play and RTN recovered nicely from the intraday lows to end the day unchanged. The PnF chart shows a very nice bullish trend in place, with the stock's last sell signal (an it was a short-lived one) occurring back in November of last year. The rebound off that dip (near the $30 level) came right at the ascending support line and the resulting column of X's gives us our current bullish price target of $58. Play the trend for all it's worth, targeting new positions on intraday pullbacks to support (first at $42.50-43.00 and then at major support near $41.50). Trading the price breakouts can work too, but entails greater risk. If you can handle that risk, look to initiate new positions on a push through the $44 level, so long as volume remains on the heavy side and the DFI index keeps pushing higher. *** May contracts expire in 2 weeks *** BUY CALL MAY-42*RTN-EV OI=1427 at $1.95 SL=1.00 BUY CALL MAY-45 RTN-EI OI= 520 at $0.70 SL=0.25 BUY CALL JUN-42 RTN-FV OI= 518 at $2.90 SL=1.50 BUY CALL JUN-45 RTN-FI OI= 140 at $1.50 SL=0.75 BUY CALL JUN-47 RTN-FW OI= 31 at $0.80 SL=0.25 Average Daily Volume = 2.52 mln THC– Tenet Healthcare Corp. $73.60 (-0.88 last week) THC is the second largest investor-owned healthcare services company in the United States. As of the end of May, 2001, the company's subsidiaries and affiliates owned or operated 111 general hospitals with more than 27,000 licensed beds and related healthcare facilities serving urban and rural communities in 17 states. The related healthcare facilities included a small number of rehabilitation hospitals, specialty hospitals, long-term care facilities, and numerous medical office buildings located nearby its general hospitals and physician practices. Momentum traders had some serious fun with the Health Care stocks over the past 2 months, with the HMO index running almost vertically up the charts for a 38% gain. Given that sort of run, it should come as no surprise to see a bit of profit taking over the past 2 days, with the index giving back a paltry 3.4%. Shares of THC participated nicely with the rest of the sector since the beginning of March, but the past 2 weeks have the look of some necessary consolidation. After the sharp selloff early in the week, the stock has been building a new ascending trend with a series of higher lows as the bulls continue to chip away at the $74 resistance level. Each move to that level has met with selling in the past several days, but each round of selling is meeting with buying interest at a higher levels. This is notable because the stock has essentially remained flat over the past 3 days (gathering its strength), while the HMO index has been dropping. That indicates an increase in Relative Strength. And despite the weakness over the past 2 days, the HMO index is strong relative to the broader market and looks like it still has significant upside left. Use the near-term weakness to enter new positions near support (first at $72.75-73.00 and then down at $71.50-72.00). Traders looking to play the next breakout will want to wait for THC to crest the $74.75 with the support of bullish action in the HMO index before playing. Keep stops set at $71. *** May contracts expire in 2 weeks *** BUY CALL MAY-70 THC-EN OI=5310 at $4.40 SL=2.75 BUY CALL MAY-75*THC-EO OI=1315 at $0.90 SL=0.50 BUY CALL JUN-75 THC-FO OI= 626 at $2.05 SL=1.00 BUY CALL JUN-80 THC-FP OI= 379 at $0.60 SL=0.25 Average Daily Volume = 2.01 mln ************* NEW PUT PLAYS ************* QLGC - QLogic $41.56 (-2.30 last week) QLogic Corporation is a designer and supplier of Storage Area Networking (SAN) infrastructure building blocks. Its SAN infrastructure building blocks, comprised of semiconductor chips, host board adapters and switches, are integrated into storage networking solutions of the world's leading system and storage manufacturers. Have you pulled up a chart of Sun Microsystems (NASDAQ:SUNW) recently? It's not looking so hot. How about a daily of good ole' International Business Machines (NYSE:IBM)? That one was on the Option Investor put list when it broke down in a big way following its high profile warning. The thing is, both of these companies, whose stocks are trading near multi year lows, are big customers of QLogic. Yet, QLogic hasn't even taken out its February lows yet. So something has got to give, and we think it's going to be to the downside. The stock slid lower along its 200-dma during last week's trading when it finally broke down below that important moving average in Friday's session. There exists very little in the way of support between Friday's close and February's lows down near the $36 level. We don't expect QLGC to trade straight down to that level, although anything is possible in this market environment. Instead, we expect a chop and drop pattern to emerge with as oversold that this stock has become. That means looking for intraday rollovers near short term resistance levels for entry points. The stock could potentially rally all the way back up to its rolling 10-dma, but that seems unlikely. If we get that lucky, a rollover from there would be an excellent entry point. Stops are at $45 initially. ***May contracts expire in two weeks*** BUY PUT MAY-22*MU-QQ OI=1409 at $1.40 SL=0.75 BUY PUT JUN-22 MU-RQ OI=2939 at $2.30 SL=1.25 Average Daily Volume = 9.00 mln IDPH – IDEC Pharmaceuticals $50.87 (-3.78 last week) IDEC Pharmaceuticals is a biopharmaceutical company engaged primarily in the research, development and commercialization of targeted therapies for the treatment of cancer, autoimmune and inflammatory diseases. IDPH's first commercial product, Rituxan, and its most advanced product candidate, Zevalin (formerly Y2B8), are for use in the treatment of certain B-cell non-Hodgkin's lymphomas. The company is also developing products for the treatment of various autoimmune diseases such as psoriasis, rheumatoid arthritis and lupus. Biotechnology investors are wishing one of their beloved companies would engineer a cure for what ails the price of their stocks, as this group is once again being pushed to fresh yearly lows. The Biotechnology index (BTK.X) traded as low as $401 on Friday and it hasn't been in that neighborhood since March of last year. With all of the broken support levels the BTK has left behind in the past month, it is a wonder there was any interest in trying to bounce from the $400 level on Friday. And to be sure, the rebound certainly lacked conviction, as the BTK once again sold off into the close. Shares of IDPH had been holding up better than the rest of the sector, at least until last week's plunge through the year-long ascending trendline. But that failed decisively on Thursday and the stock weakened further on Friday, closing below the $51 level for the first time since October. Making matters worse was the heavy selling volume, running 75% above the ADV. There is now formidable resistance at the $55 level, but we don't expect to see that any time soon. First the bulls will have to deal with $52.50 resistance and the broken trendline (now at $54), both of which are likely to provide significant resistance. Use any sort of failed rally at either of these levels to initiate new positions with an eye towards a decline towards the PnF price target of $39. Intraday support was found on Friday near the $49.40 level, so momentum traders can look to enter new positions as that support gives way. Watch the BTK index, as a violation of the $400 level will likely usher in a fresh wave of sellers. Initial stops are set at $55. *** May contracts expire in 2 weeks *** BUY PUT MAY-50*IDK-QJ OI=1613 at $2.10 SL=1.00 BUY PUT JUN-50 IDK-RJ OI= 194 at $4.40 SL=2.75 BUY PUT JUN-45 IDK-RI OI= 172 at $2.55 SL=1.25 Average Daily Volume = 3.90 mln ************************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 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 05-05-2002 Sunday 4 of 5 ************************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 ************************************************************** ***************** CURRENT PUT PLAYS ***************** ADI - Analog Devices $34.43 (-1.81 last week) Analog Devices, Inc. is engaged in the design, manufacture and marketing of high-performance analog, mixed-signal and digital signal processing integrated circuits (ICs) used in signal processing applications. The Company produces a wide range of products that meet the technology needs of a broad base of customers and markets. ADI spent the better part of last week's trading consolidating its most recent leg lower which saw the stock slide down from above $40 down to the $36 level. In Monday's session, the stock continued lower below the $36 level, but rebounded back above the $36 level in Tuesday's session which began a pattern of rollovers from the $38 mark. Wednesday, the stock traded in a wide range day in what was a volatile day, but the stock didn't make much progress as it closed right near where it opened for that day, resulting in a draw between the bulls and bears. Then in Thursday's session, the bulls tried to carry ADI out of its slump with a rally back up to the $38 level, but the breakout fell short when the downward sloping 10-dma came into play just below the $38 level. The pressure from the 10-dma forced ADI back down to the $36 short term support level, which led to a massive breakdown in Friday's session from the consolidation. It remains to be seen what happens next week, but judging by ADI's technical set up, the stock should slip into a new declining trend. There's mild historical support at the $34 level, which is the mark to key off of going into next week's trading. A breakdown below $34 would confirm that the stock is in fact in a new downward trend and would most likely lead to lower prices. Those who didn't get in put plays on a rollover from the 10-dma last Thursday can look for a breakdown below $34 as a new entry point. From there, we'll target the $30 level to the downside. ***May contracts expire in two weeks*** BUY PUT MAY-35*ADI-QG OI=6006 at $2.20 SL=1.00 BUY PUT JUN-35 ADI-RG OI=3222 at $3.60 SL=1.75 Average Daily Volume = 2.91 mln LRCX - Lam Research $23.85 (-1.32 last week) Lam Research Corporation designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. The Company's products are currently used in the front-end of the wafer processing manufacturing cycle: etch, CMP, and post-CMP clean. The Company's family of etch systems incorporates plasma technologies designed to meet both current and future needs. The big seller that we detected up around the $26 level early last week continued unloading in Thursday's and Friday's sessions. We witnessed LRCX trade up to the $26 level four out of the five days last week, each time the rally attempt resulted in a rollover as the seller overwhelmed any buying that was coming from short covering. Without the aid of short covering in Friday's session, the big seller overwhelmed the stock and finally pressured it below the stock's 200-dma. The 200-dma now sits just above the $24 level, and we expect that the bulls and bears will duke it out around the important moving average in next week's trading. Indeed, the stock rebounded late Friday to trade back up near the now overhead moving average. Nevertheless, the stock most likely lost some of its bid now having pierced below its 200-dma. The stock hasn't traded below its 200-dma since early March, so we expect some of the bulls that are still in the stock are even more nervous going over the weekend. For new entry points, we don't especially favor taking new plays around the 200-dma due to the increased level of emotions and heightened volatility. Instead, we'd like to wait for an extended short covering rally to carry LRCX back up to its downward sloping 10-dma, which is now around the $25.75 level. That would help to work off some of the stock's short term oversold condition, removing some of the upside risk currently associated with it. To the downside, we still think that the stock has the opportunity to trade down to the $22 level. In the meantime, lower stops on open plays to protect profits. ***May contracts expire in two weeks*** BUY PUT MAY-25*LMQ-QE OI=3097 at $1.90 SL=1.00 BUY PUT JUN-25 LMQ-RE OI=1322 at $3.20 SL=1.75 Average Daily Volume = 2.63 mln MU - Micron Technology $22.61 (-3.39 last week) Micron Technology, Inc. and its subsidiaries are principally engaged in the design, development, manufacturing and marketing of semiconductor memory products. The Company offers products that include dynamic random access memory, synchronous dynamic random access memory, double data rate dynamic access memory, legacy dynamic random access memory products, static random access memory products and Flash products. After about five months of negotiations, Micron formally announced last Thursday that it had ended talks to acquire assets of South Korea's Hynix Semiconductor. The deal called for a $3 billion swap of Micron stock, and was expected to push the Idaho based company into the world's top spot of memory makers for computer systems. Following Micron's formal announcement, investors were mulling over the developments in Friday's session, questioning whether Micron's announcement to end talks was merely a negotiating ploy, or if the deal was truly dead signaled by Micron's announcement. The stock seemed to continue discounting that the deal had fallen through, tracking the weakness in the broader semiconductor sector closely throughout the session. The question now is whether the shorts cover and pop the SOX.X next week, or if they keep selling. Traders with big gains in this play should protect against any short covering rally with tight stops. As for new entries, we'd welcome a short covering rally that takes MU back up to the $25 level, from where we'd look for a rollover based entry point. ***May contracts expire in two weeks*** BUY PUT MAY-22*MU-QQ OI=1409 at $1.40 SL=0.75 BUY PUT JUN-22 MU-RQ OI=2939 at $2.30 SL=1.25 Average Daily Volume = 9.00 mln FLIR – FLIR Systems $39.65 (-3.92 last week) FLIR is engaged in the design, manufacture and marketing of thermal imaging and stabilized camera systems for a wide variety of commercial, industrial and government applications. The company's products are divided into two categories, which include the thermography products and imaging products. In the Thermography division, FLIR manufactures products that are sold to commercial, industrial, research and machine vision customers. For industrial customers, FLIR has developed thermography systems that feature accurate temperature measurement, storage and analysis. The Imaging division caters to military, law enforcement, surveillance and security customers. If you like the idea of trading divergence, then you've got to love our FLIR play. Despite the fact that the Defense Industry index (DFI.X) is marching to new highs on the back of increasing government spending, shares of FLIR are definitely not participating. Things were already looking weak early last week and then the stock broke down on huge volume. There was no news to prompt the move, but our thinking is that where there's smoke there's probably some fire too. Even with BofA coming to the stock's defense, there is really very little bullish action to be found as FLIR continues to threaten to break below the $38 level for good. It was looking like Friday's bearish action was going to do the trick, but then along came the short covering at the end of the day to prop up the price going into the weekend. There's no question that supply is in control here and the late rally is likely just an attractive opportunity to get short again. Look to enter new positions on a rollover from the $40-41 area, as the 200-dma ($41.38) is likely to turn back any half-hearted bullish attempts. Did you notice how the short covering commenced right at the $35 level? That was no coincidence, as it is a critical level of support. Breakdowns below $37 can still work for momentum types, but make sure to keep a sharp lookout for those short-covering rallies until the $35 level fails as support. Keep stops in place at $41.50. *** May contracts expire in 2 weeks *** BUY PUT MAY-40*FFQ-QH OI=184 at $2.70 SL=1.25 BUY PUT MAY-35 FFQ-QG OI=199 at $0.90 SL=0.50 BUY PUT JUN-35 FFQ-RG OI= 0 at $1.90 SL=1.00 Average Daily Volume = 722 K GS – Goldman Sachs Group $78.55 (-0.60 last week) The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net-worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Brokerage stocks are still feeling the sting of the probe by the NY Attorney General into the apparent unethical practices with respect to analyst reports provided to the public. And that situation took a turn for the worse on Friday when it was reported that the discussions between the NY AG and Merrill Lynch had run into a snag. Last week's attempted rally in the Brokerage sector (XBD.X) fell apart on Friday, falling back from the $466 level and plunging back below that important 38% retracement level. The action wasn't much different in our GS play, as the stock ran out of buying support right at the $81 level and headed lower into the close of trading on Friday. Daily Stochastics appear to be rolling over without even entering overbought territory this time, underscoring the inherent weakness in the stock. Use any sort of failed rally in the $80-81 area to enter new positions in anticipation of a drop to (or below) last week's lows. The critical level of support to watch is near $75, as a drop below there will give a strong indication that GS is headed towards its PnF price objective of $70. If looking to trade on further weakness, look for a drop back under the $78 level on strong volume before playing. *** May contracts expire in 2 weeks *** BUY PUT MAY-80*GS-QP OI=3397 at $2.85 SL=1.50 BUY PUT MAY-75 GS-QO OI=2338 at $0.95 SL=0.50 BUY PUT JUN-75 GS-RO OI= 921 at $2.85 SL=1.50 Average Daily Volume = 3.24 mln PLCM - Polycom, Inc. $20.38 (+1.37 last week) Polycom manufactures and markets a full range of high quality, media-rich communications tools and network solutions, which enable business users to immediately realize the benefits of video, voice and data over rapidly growing converged networks. Although the company is primarily a video conferencing and voice conferencing product provider, it has recently entered the DSL access market, particularly in the area of integrated voice appliances and broadband access devices. Don't you love it when a plan comes together? PLCM spent most of last week rebounding from the lows and handed us a gem of an entry point as it rolled over right at the $21 level. Although volume was rather lackluster on Friday, the fact that price rolled over with daily Stochastics beginning to roll from overbought territory bodes well for the bears. We want to see the stock drop back below the $20 level to give us the confirmation that PLCM is headed back towards its recent lows, but that ought to occur early next week. Use either another failure at the $21 level or a breakdown under $20 to initiate new positions and then hold on for the ride. Keep in mind that the PnF chart still has a price target of $17 and that will be our first target for harvesting gains. *** May contracts expire in 2 weeks *** BUY PUT MAY-20*QHD-QD OI=1174 at $1.20 SL=0.50 BUY PUT JUN-20 QHD-RD OI= 67 at $2.15 SL=1.00 BUY PUT JUN-17 QHD-RW OI= 199 at $1.15 SL=0.50 Average Daily Volume = 3.40 mln SEBL – Siebel Systems $21.16 (-1.43 last week) Siebel Systems is a provider of eBusiness applications. The company's products enable organizations to sell to, market to, and service their customers across multiple channels, including the Web, call centers, resellers, retail, and dealer networks. SEBL's eBusiness applications are available in industry-specific versions designed for the pharmaceutical, healthcare, telecommunications, insurance, energy, apparel, automotive, and finance markets. Through SEBL's applications, companies can create a single source of customer information that sales, service, and marketing professionals can use to tailor product and service offerings to meet each of their customer's unique needs. Darwin said it best in his theory of "The Survival of the Fittest", that the weak get weaker and the strong survive. A quick look at the chart of the Software index (GSO.X) tells you that this sector of the market definitely falls into the 'weaker' category. The GSO had a dismal weak, breaking below support and closing out on Friday at its lowest level since the beginning of October. If you're making a case for the NASDAQ to take out its September lows, the GSO is likely to get there first. Shares of SEBL have been unable to find anything approaching support for weeks now, posting one lower high (and lower low) after another, as the descending trendline pressures the stock. So weak is SEBL that it hasn’t even challenged the steeply descending trendline at any point in the past month. Support was looking like it might hold in the $22 area (also the site of the 62% retracement of the fall rally), but that has been solidly broken over the past 2 days. Look for the $20 level to provide the next level of meaningful support, but if the GSO takes out its September lows, then the bulls will likely lose that battle as well. Intraday rallies continue to provide the best entry points when they fail near resistance. Look to initiate new positions on a rollover near $22.00-22.50, or possibly as high as $23.50. With the recent weakness, it looks like a drop below the $20.75 level (near Friday's intraday lows) is another solid way to play. Lower stops this weekend to $24. *** May contracts expire in 2 weeks *** BUY PUT MAY-22*SGQ-QX OI= 6324 at $2.30 SL=1.25 BUY PUT MAY-20 SGQ-QD OI=16872 at $1.00 SL=0.50 BUY PUT JUN-20 SGQ-RD OI= 603 at $1.90 SL=1.00 Average Daily Volume = 17.1 mln VRTS – Veritas Software $25.90 (-0.32 last week) As an independent supplier of storage management software, VRTS develops and sells products that protect against data loss and file corruption, allowing rapid recovery after disk or computer system failure. The company's products provide continuous data availability in clustered computer systems with shared resources. This enables IT managers to work efficiently with large file systems, making it possible to manage data distributed on large computer network systems without harming productivity or interrupting users. VRTS provides products for most popular operating systems, including UNIX and Windows NT, as well as a full range of services to assist its customers in planning and implementing their storage management solutions. Following the trend is the secret to investing success, and right now that trend is down. At least if you are looking at the Technology market. Virtually every stock related to IT or Enterprise Storage is coming under renewed selling pressure and that should come as no surprise with stock's like IBM and SUNW breaking to new multi-year lows. Afterall, who do you think the likes of VRTS sell their products and services to? VRTS hasn't been able to put together a decent rally for the past month and the descending trendline (now at $26) continues to keep all the half-hearted rallies in check. Last week's short-covering rally only served to hand us another attractive entry point as VRTS rolled right at the trendline (then at $29.50), heading sharply lower into the weekend. Things were looking better with Friday's attempt at a rally off the $25 level, but there wasn't any conviction and the bears pounced again, taking control in the final hour. Despite the fact that the bearish price target has been met, it looks like the $25 level will fail as support early next week. Use a breakdown below that level to initiate new positions or else wait for another failed rally near the trendline to jump into new positions. *** May contracts expire in 2 weeks *** BUY PUT MAY-25 VIV-QE OI=10643 at $1.50 SL=0.75 BUY PUT JUN-25*VIV-RE OI= 422 at $2.55 SL=1.25 BUY PUT JUN-22 VIV-RX OI= 322 at $1.60 SL=0.75 Average Daily Volume = 12.7 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 ***** Still Falling! By Mark Phillips mphillips@OptionInvestor.com Let's skip my Rant 'O The Week and instead just focus on the market action. No matter how you slice it, this was a clear victory for the bears and it now seems a foregone conclusion (although I've been saying it for awhile now) that the markets want to, need to, must challenge their September lows and in the very near future too. Without a doubt the NASDAQ will be the first one to arrive, but that is because I fully expect to see it break those lows. The DOW and S&Ps may be able to hold above their respective lows, but the bounce off the next meaningful low will come from levels far lower than where we are tonight. How's that for sticking my neck out? Actually, I don't think I'm going very far out on that proverbial limb. Look at that amazing VIX, which even after the volatile week we just endured is hovering just above the 23 level. Where's the fear, baby?? The severity of the carnage from last week is disguised in the numbers as the DOW managed to actually tack on just shy of 100 points for the week, the S&P500 only lost about 3 points and even the weakling NASDAQ-100 only shed about 60. If you want to really see the pain, look at the sectors that are leading the retreat, Biotechs, Software and of course Semiconductors. The Software index (GSO.X) is ticking along just above the September lows and does not look healthy. And why should they with MSFT breaking serious support at $50 and ORCL dropping to levels not seen since the middle of 1999? Biotechs, those kinkiest of the kinky stocks can't stop the bleeding. Now below the 200-week moving average, the BTK index was mercifully saved from breaking the $400 support level on Friday, but with the $414 level now violated, I've got my eye on the $380 level. That is the last vestige of support for this group, as it held in March of both 2000 and 2001. With the FDA's recent reluctance to approve new drugs the prospects in this largely unprofitable area of the market don't look promising. Finally we have the Semiconductors, which led us out of the September lows and were supposed to be leading us into economic recovery. What happened? Reality! The Semiconductor index (SOX.X) is in full breakdown mode now and last week's little bounce did little to alleviate that condition. The February lows are a road-kill and when the $475 level gives way as support, look for $460 and $425 to be tested in fairly short order. Enough with Technology, how about the rest of the market. Drugs stocks, that safe haven of Defensive investors has already broken down as measured by the DRG index, which is sitting at a fresh 1-year low. The Brokerage sector (XBD.X) is in serious trouble with the probe by the NY Attorney General only being the opening salvo in what is likely to be an unpleasant year for the likes of MER, LEH, GS, MWD and JPM. The Retail index (RLX.X) violated the $920 support level on Friday and I think we have to look to the $890-900 level for the next meaningful support. If you want to find strength in this market, you've got to look in some of Jeff Bailey's favorites, Cyclicals (CYC.X), Forest and Paper Products (FPP.X), Oil Service (OSX.X) and of course Health Care (HMO.X). Everything else is the domain of the bears, as investors come to grips with the fact that no matter what our government says, we DID have a recession. And it is my firm belief that it ain't over yet. Did you notice that unemployment hit 6% during the last reporting period? That GDP blip from inventory rebuilding is in the past and we now have to focus on new demand if this economy is going to grow. I sure don't see it. And that pretty much sums up my views of the market. I think new longs in this market are fraught with peril unless you are playing in those few areas of relative strength. And some of those are making me a bit nervous as well. Aside from a quick review of our current plays, I am not the bit motivated to add new plays to the Watch List this weekend. I am hoping I am wrong and the markets will turn around and rally on Monday, but I am not putting my money to work on that hope. I hope you aren't either. All right, here's the play-specific comments: Portfolio: JNJ - Health Care, need I say more? JNJ is holding up nicely, although I would have liked to see the stock participate more in the recent Health Care rally. But holding above recent support is a yeoman's feat in this market and I'll take what I can get. Dips near the $62 level still look buyable, but keep in mind that a breach of $61 will signal that this one is weakening. Conviction will come with a breakout over $62. LUV - What a lousy way to end the week. Just when it looked like LUV was going to claw its way higher, the sellers slammed the stock hard on Friday for a nearly 5% loss on heavy volume. The stock came to rest right on its ascending trendline and is less than 50-cents above our stop. Fasten your seatbelts, its likely to be a bumpy ride with the XAL index also breaking down last week. If the $84-86 area fails as support, it is a foregone conclusion that LUV will be stopped out in the not-so-distant future. EK - What happened here? Just when EK was getting ready to really break down, a 4.5% rally comes out of nowhere and in the midst of a broad market decline. I couldn't find any news on Friday's rebound that I think is meaningful, but this one says caution to the bears. There was an item in the company's quarterly report that stated EK entered a $400 million securitization program in March. Hmmm, that sounds like a good-old fashioned debt swap and it works both ways and I remember that GE investors didn't respond very favorably to the same sort of move in the recent past. Time will tell. It was encouraging to see the rally stop at the 200-dma, but we're going to need to close below $32 before I'm going to feel really comfortable with the play. Watch List: PG - Maybe next time. Just when it looked like a breakdown below the midline of the ascending channel was assured, PG goes and rallies strongly off of their earnings report. But it looks like the daily is rolling over and we'll get another shot at it. Continue to target the lower channel line in the $85-86 area -- it's a long shot, but if we get it, it should be a very solid entry. MDT - Should we or shouldn't we? I battled my internal demons on this one all week long and I still haven't made up my mind. MDT is still hammering on support in the $43.50-44.00 range and it is hard to figure out if it is an entry or a prelude to a fall. With the weekly Stochastics fully rolled over once again, I think waiting is the best course of action. My gut says that the current support level will eventually give way and we'll get a shot at $42. Hopefully that coincides with oversold readings on both the weekly and daily charts. WMT - The 200-dma is toast. Sounds like a familiar refrain lately, doesn't it? Needless to say, that ascending channel is no longer relevant to our discussion either. We've still got some time to wait on WMT, as I think the likely entry zone will be closer to the $50 level at just about the same time as the price falls to meet the 200-week moving average. The weekly Stochastics are still falling, so patience is the key here. WMT isn't going anyplace without us until support begins to show itself. BRCM - Talk about hitting the target! BRCM ended the week right on the $30 level, but there sure isn't any indication that it is going to hold here. A rebound from the $30 level could still make for a solid entry, but ONLY if the SOX turns around and re-enters rally mode. I don't think it's going to happen next week. I would be looking lower now, possibly in the $25-26 area, but not until the SOX finds support. MSFT - Ouch! Now that has got to hurt! No more $50 support and I'm really starting to question if the $48 level will survive. MSFT (along with ORCL) is responsible for a lot of the weakness in the Software sector and we don't want to be entering new positions until we begin to see things firm up quite a bit. The GSO index needs to hold the September lows and MSFT needs to rebound from the $48 level and get back over $50 before I'll be a buyer. Until next week, observe the most important rule of investing -- Preservation of Capital! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: JNJ 03/05/02 '03 $ 60 VJN-AL $ 5.90 $ 6.90 +16.95% $61 '04 $ 60 LJN-AL $ 9.20 $10.30 +11.96% $61 LUV 04/12/02 '03 $ 20 VUV-AD $ 2.10 $ 1.30 -38.01% $17.25 '04 $ 20 LOV-AD $ 3.90 $ 2.90 -25.64% $17.25 Puts: EK 04/12/02 '03 $ 30 VEK-MF $ 2.70 $ 2.40 -11.11% $36 '04 $ 30 LEK-MF $ 3.90 $ 4.20 + 7.69% $36 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BRCM 10/28/01 $29-30 JAN-2003 $ 35 OGJ-AG CC JAN-2003 $ 30 OGJ-AF JAN-2004 $ 35 LGJ-AG CC JAN-2004 $ 30 LGJ-AF MDT 03/10/02 $42, $43-44 JAN-2003 $ 45 VKD-AI CC JAN-2003 $ 40 VKD-AH JAN-2004 $ 45 LKD-AI CC JAN-2004 $ 40 LKD-AH 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 HOLD JAN-2003 $ 65 VWT-AM CC JAN-2003 $ 60 VWT-AL JAN-2004 $ 65 LWT-AM CC JAN-2004 $ 60 LWT-AL MSFT 04/21/02 $48-50 JAN-2003 $ 55 VMF-AK CC JAN-2003 $ 50 VMF-AJ JAN-2004 $ 55 LMF-AK CC JAN-2004 $ 50 LMF-AJ PUTS: None New Portfolio Plays None New Watchlist Plays None Drops None ************************Advertisement************************* Tired of waiting on trades to execute? 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The Option Investor Newsletter Sunday 05-05-2002 Sunday 5 of 5 ************************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 ************************************************************** ************* COVERED CALLS ************* Option Trading 101: Q&A On Covered-Call Strategies By Mark Wnetrzak This week's question concerns a repair strategy commonly used to recover losses in a long-term portfolio stock. Attn: Covered-Calls Editor Hello, First, thank you for providing a great selection of stocks each week. Sometimes I use them for covered-call candidates but many work just as well trading only the stock. My question is about a losing covered-call position that has troubled my portfolio for some time. I own 1000 shares of Hewlett Packard at a cost basis near $22 and I do have a positive outlook for HWP/Compaq, but the option premiums for HWP are very low so I really can't sell OTM calls (unless I use LEAPS) to reduce my basis in the stock. Also, I don't want to sell ATM because I would be guaranteeing a loss if the stock moved higher in the next few months. I have heard about a repair strategy using options that can recover the losses over the long-term. Can you explain this strategy to me? Any other suggestions would be much appreciated as well! TMV Regarding the "ratio-call" method used to repair a stock's value: This technique is best suited to long-term portfolio issues that have declined during a bearish market. When the share value of a portfolio issue falls, the investor can react in a number of ways. The easiest approach is to simply take no action and hope the stock eventually recovers. Another common method is to "average down," which involves adding new shares to your current position at a lower price. While this a great way to lower the overall cost basis in the issue, it also significantly increases the amount of money at risk in the position. Possibly a better method, and one that option traders favor in this situation, involves using a bull-call spread to lower the break-even basis of the overall position while increasing its profit potential. In the book "Options For The Stock Investor", the author refers to this strategy as a "covered-call plus a call-debit spread," where the premium from the sold options are used to offset the cost of the long calls. The term "ratio-call spread" is a slightly different definition than most position traders would use, but regardless of how the strategy is labeled, it is a favorable technique. Here is an example similar to your position: At some date in the distant past, an investor buys 1000 shares of HWP stock at $23 and writes (10) APR-$25 calls for a premium of $1. The cost basis is $22. At the end of the strike period, the stock has fallen to $17, a realized loss of $5. Now the trader still likes the long-term outlook for the issue but is concerned about further downside risk and needs to recover lost profit potential. The investor could attempt to improve his overall position by purchasing (10) NOV-$17.50 calls and selling (20) NOV-$20 calls. The new position would be a combination of the covered-call and the bull-call spread. The components are; LONG 1000 shares HWP and LONG (10) NOV-$17.50 calls but also SHORT (20) NOV-$20 calls. Notice there are no "naked" or uncovered calls and with simple analysis of each individual component, you will find that the technique offers an excellent remedy for restoring lost profit potential at a reasonable level of risk. An explanation of the strategy: Since the cost of ten (10) NOV-17.50 calls (Ask = 1.85) and the credit from twenty (20) NOV-20.00 calls [Bid = 0.90] are roughly equal, no extra expenses (other than commissions) are required for the play. However, if there was additional money invested towards the new position, it would simply raise the "break-even" (current cost basis) point by that amount. Now, if HWP finishes the November expiration period below $17.50, all of the calls will expire. The investor will be no worse off because his cost basis is increased only by any additional money spent for the bull-call spread. In most cases, the amount should be a small percentage of the stock price (2-5%) or, as in this example, almost nothing. If HWP finishes above $20 at expiration, the strategy will yield maximum profit, easily 2-3 times more than a simple covered call, but it must be structured so as to produce "break-even or better" results when compared to the original position. The "Math" using the above information: Original cost basis: $22,000 (for 1000 shares) Current stock price is $17.00 Spread Position: Buy 10 calls Nov-17.50: -$1,850.00 Sell 20 calls Nov-20: $1,800.00 Net Difference: -$50.00 Stock finishes at $20.00: New cost basis: -$22,050.00 Sold stock at $20: $20,000.00 Sold 10 calls Nov-17.50: $2,500.00 Expired 20 calls Nov-20: $0.00 Net Difference: $450.00 This example of a ratio-call spread repair strategy would net $450.00 (minus commissions) provided the stock "recovered" to $20 or higher at the November expiration. The primary advantage to this technique becomes apparent as you compare the outcomes when the stock price finishes within the strike prices. The profit threshold for the new position occurs at a much lower (stock) price and increases exponentially as the value of the underlying issue rises. In addition, the downside break-even is reduced by roughly the same amount that is invested for the bull-call spread, thus providing favorable risk/reward for any capital spent in the recovery effort. Of course, all of the possible results for any particular position can be analyzed by simply comparing both plays at the various prices, so it is very important to do the math (and make sure your calculations are correct!) before you initiate the strategy. Obviously, no one likes to be in a losing position, but the key to success is how we react to this type of situation and in many cases, the ratio-call repair technique offers an excellent method to recover lost share value. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield AVGN 10.56 10.50 MAY 10.00 1.15 *$ 0.59 9.1% BSML 5.37 5.00 MAY 5.00 0.90 $ 0.53 7.4% WGRD 5.89 5.90 MAY 5.00 1.20 *$ 0.31 7.2% NFLD 8.19 8.00 MAY 7.50 1.30 *$ 0.61 6.4% ZIXI 6.08 5.08 MAY 5.00 1.35 *$ 0.27 6.2% QUIK 5.03 5.00 MAY 5.00 0.30 $ 0.27 6.2% GRP 15.30 16.24 MAY 15.00 0.85 *$ 0.55 5.5% MOVI 18.78 19.49 MAY 17.50 1.90 *$ 0.62 5.3% TDY 17.82 19.17 MAY 17.50 0.90 *$ 0.58 5.0% PLUG 10.26 10.54 MAY 10.00 0.80 *$ 0.54 5.0% MOT 15.00 14.89 MAY 15.00 0.60 $ 0.49 4.9% CCK 8.85 11.47 MAY 7.50 1.80 *$ 0.45 4.6% EMKR 9.10 8.58 MAY 7.50 2.05 *$ 0.45 4.6% ACRT 19.90 18.30 MAY 17.50 3.10 *$ 0.70 4.5% PDG 12.79 12.50 MAY 12.50 0.65 $ 0.36 4.3% IDCC 10.99 11.00 MAY 10.00 1.45 *$ 0.46 4.2% AMLN 10.71 9.25 MAY 10.00 1.15 $ -0.31 0.0% ADPT 15.13 13.70 MAY 15.00 0.90 $ -0.53 0.0% PWAV 14.24 11.20 MAY 12.50 2.40 $ -0.64 0.0% PDLI 17.37 13.38 MAY 15.00 3.20 $ -0.79 0.0% SAPE 5.40 2.81 MAY 5.00 0.65 $ -1.94 0.0% *$ = Stock price is above the sold striking price. Comments: Trying times indeed for those investors implementing neutral to bullish strategies. It is usually difficult to paddle upstream. Yet, even in this bearish environment, Movie Gallery (NASDAQ: MOVI) gapped a little too quickly to the upside this week to offer a reasonable entry point. It will be removed from the summary list. Many experts use corrections to measure the strength of their positions. Stocks that act weaker than ex- pected are culled from the portfolio to lower the probability of a catastrophic loss. Amylin Pharmaceuticals (NASDAQ:AMLN) and Adaptec (NASDAQ:ADPT) are at a key moment - testing their 150-dmas and should be monitored closely. The horrid action in Protein Design Labs (NASDAQ:PDLI) and Sapient (NASDAQ:SAPE) is worrisome and offers little hope of a near-term recovery. We will show those positions closed. Powerwave Technologies (NASDAQ:PWAV) continues to move lower (market induced?) and will also be closed in our portfolio. Both IMPCO Technologies (NASDAQ:IMCO) and Napro Biotherapeutics (NASDAQ:NPRO) continued last week's decline, though IMPCO did rally mid-week for a less painful exit. Remember, a missed opportunity is easier made up than lost capital. Positions Closed: Cygnus (NASDAQ:CYGN), Praecis Pharma (NASDAQ: PRCS), Microtune (NASDAQ:TUNE), Napro Biotherapeutics (NASDAQ: NPRO), and IMPCO Technologies (NASDAQ:IMCO). 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 ASGN 20.42 MAY 20.00 UHV ED 0.90 4 19.52 14 5.3% ENMD 7.60 MAY 7.50 QMA EU 0.50 448 7.10 14 12.2% ENR 25.01 MAY 25.00 ENR EE 0.60 200 24.41 14 5.3% FHRX 26.75 MAY 25.00 FUF EE 2.30 625 24.45 14 4.9% NFLD 8.00 JUN 7.50 DHQ FU 1.05 80 6.95 49 4.9% NOVT 8.34 MAY 7.50 QOH EU 1.25 218 7.09 14 12.6% NTBK 17.86 MAY 17.50 NAA EW 1.00 1203 16.86 14 8.2% 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 NOVT 8.34 MAY 7.50 QOH EU 1.25 218 7.09 14 12.6% ENMD 7.60 MAY 7.50 QMA EU 0.50 448 7.10 14 12.2% NTBK 17.86 MAY 17.50 NAA EW 1.00 1203 16.86 14 8.2% ASGN 20.42 MAY 20.00 UHV ED 0.90 4 19.52 14 5.3% ENR 25.01 MAY 25.00 ENR EE 0.60 200 24.41 14 5.3% FHRX 26.75 MAY 25.00 FUF EE 2.30 625 24.45 14 4.9% NFLD 8.00 JUN 7.50 DHQ FU 1.05 80 6.95 49 4.9% 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). ***** ASGN - On Assignment $20.42 *** Assignment...Growth! *** On Assignment (NASDAQ:ASGN) provides assignments of temporary professionals in targeted industries. As of December 31, 2000, the company served 82 operational markets through a network of 176 branch offices. On Assignment has two operating segments: Lab Support and Healthcare Staffing. The Lab Support segment's clients primarily include biotechnology, pharmaceutical, food and beverage, chemical and environmental companies. The Health- care Staffing segment's clients include companies engaged in the healthcare industry. For the quarter ended March 31, 2002, the company's net income was $2.9 million, or $0.12 per share, on revenues of $42.1 million. On Assignment retains a strong balance sheet and with no debt, and plans to grow through acquisitions. The company recently completed the acquisition of Health Personnel Options Corporation, a leading U.S. provider of traveling nurses, allied health professionals and other temporary healthcare-related personnel. We simply favor the technical support area at the sold strike and the recent cross-over of the 30-dma up through the 150- dma. Reasonable short-term speculation on a Stage I stock. MAY 20.00 UHV ED LB=0.90 OI=4 CB=19.52 DE=14 TY=5.3% ***** ENMD - EntreMed $7.60 *** "Basing Pattern" Entry Point *** EntreMed (NASDAQ:ENMD) is a clinical-stage biopharmaceutical company developing angiogenic therapeutics that inhibit abnormal blood vessel growth associated with a broad range of diseases, such as cancer, blindness and psoriasis. The company has three product candidates: Endostatin, Panzem and Angiostatin, which are all in clinical trials. In addition, EntreMed has a pipeline of new proteins, small molecules, vaccines and genes-based medicines in development. The company's product candidates, targeted to inhibit the abnormal growth of blood vessels, may prove effective in treating certain cancers and a broad range of other diseases. Over the last month or so, several reports on current clinical trials are showing promise. The company recently announced that preclinical findings showed that a new derivative of thalidomide induces sustained tumor regression in preclinical models of multiple myeloma, a blood cancer that causes bone loss. The stock is forging a Stage I base and a break below the February low would signal a logical stop-loss exit. Reasonable short-term speculation for those investors who have a long-term bullish outlook on EntreMed's drug pipeline. MAY 7.50 QMA EU LB=0.50 OI=448 CB=7.10 DE=14 TY=12.2% ***** ENR - Energizer $25.01 *** It Keeps Going, And Going... *** Energizer Holdings (NYSE:ENR) is one of the world's largest manufacturers of primary batteries and flashlights and a global leader in the dynamic business of providing portable power. The company's products, under the brand names "Eveready" and "Energizer," have worldwide recognition, and are marketed and sold in more than 140 countries. Energizer's subsidiaries manu- facture and market a complete line of primary alkaline and carbon zinc batteries, miniature batteries and flashlights and other lighting products. Energizer rallied sharply two weeks ago after the company reported that profits rose in its fiscal 2nd- quarter, as cost-cutting offset slower sales. Energizer reported income of $20 million compared to $5.6 million a year ago. The stock continues to power towards a new all-time high and this short-term position offers a method to profit from the current bullish momentum, while offering a cost basis near the April high. MAY 25.00 ENR EE LB=0.60 OI=200 CB=24.41 DE=14 TY=5.3% ***** FHRX - First Horizon $26.75 *** New Product Launch *** First Horizon Pharmaceutical (NASDAQ:FHRX) is a specialty pharma- ceutical company that markets and sells brand name prescription drugs. The company focuses on the treatment of chronic conditions, including cardiovascular diseases, and respiratory, gastroentero- logical and gynecological disorders. First Horizon's strategy is to acquire pharmaceutical products, which other companies do not actively market, that may have high sales growth potential, are promotion-sensitive and complement their existing products. Key First Horizon products include Nitrolingual Pumpspray, Robinul and Robinul Forte, Tanafed and Ponstel. In addition, First Horizon intends to develop new patentable formulations, use new delivery methods and seek regulatory approval for new indications of exist- ing drugs. First Horizon recently completed a follow-on public offering (the underwriters exercised in full their over-allotment option) raising an estimated net proceeds of $152.6 million. The company is gearing up its sales force as it anticipates launching Sular®, for the treatment of hypertension, expected within the next month. The stock rallied through the end of April and the share price is now firmly above the 150-dma. A favorable entry point from which to speculate on the company's drug line. The company's earnings are due 5/06/02, after the close. MAY 25.00 FUF EE LB=2.30 OI=625 CB=24.45 DE=14 TY=4.9% ***** NFLD - Northfield Labs $8.00 *** Who Will Be First? *** Northfield (NASDAQ:NFLD) is engaged in the development of a safe and effective alternative to transfused blood for use in the treatment of acute blood loss. The company's PolyHeme blood sub- stitute product is a solution of chemically modified hemoglobin derived from human blood. Clinical studies to date indicate that PolyHeme carries as much oxygen, and loads and unloads oxygen in the same manner, as transfused blood. Infusion of PolyHeme also restores blood volume. Therefore, PolyHeme should be effective as an oxygen-carrying resuscitative fluid in the treatment of hemorrhagic shock resulting from extensive blood loss. North- field and Biopure (NASDAQ:BPUR) both are trying to win FDA approval for their blood substitutes. In April, Northfield's CEO stated that based on continuing conferences with the FDA, he remains optimistic that Northfield will "adequately address" the FDA's questions and achieve consensus on the approval of PolyHeme. A favorable entry point in a basing stock as investors speculate on who will be first to market their blood substitute. JUN 7.50 DHQ FU LB=1.05 OI=80 CB=6.95 DE=49 TY=4.9% ***** NOVT - Novoste $8.34 *** Bullish "Engulfing" Pattern *** Novoste (NASDAQ:NOVT) has developed the Beta-Cath System, a hand- held device to deliver beta, or low penetration, radiation to the site of a treated blockage in a coronary artery to decrease the likelihood of restenosis (the renarrowing of a previously treated artery). The Beta-Cath System has been shown to reduce the incidence of restenosis in-patients who are being treated for blocked stents, or in-stent restenosis. The Beta-Cath System is designed to fit well with techniques currently used by intervent- ional cardiologists in the cath lab. Novoste tanked in April after the company lowered its earnings forecast for the next quarter due to increased competition. However, the company did report a higher than expected 1st-quarter profit on sharply higher revenues. What's interesting, is this week's rally on higher volume that moved the stock back above Novoste's pre-earnings share price. On a weekly chart, a bullish engulfing pattern is now evident, which suggests higher prices in the future. This position offers favorable short-term speculation on an issue with bullish technicals. MAY 7.50 QOH EU LB=1.25 OI=218 CB=7.09 DE=14 TY=12.6% ***** NTBK - NetBank $17.86 *** Stage II Rally Continues *** NetBank (NASDAQ:NTBK) is a bank holding company. The company owns NetBank, FSB (the Bank), a federal savings bank; Market Street Mortgage Corporation (Market Street), a mortgage company and the Bank's wholly owned subsidiary; NetBank Partners, LLP (NetBank Partners), a partnership involved in strategic partnering opportun- ities, and NB Partners, Inc. (NB Partners) a corporation involved in strategic partnering opportunities. NetBank provides deposit products and services, non-banking financial services and lending and investment services. Investors rallied NetBank higher this week after the company reported earnings, which included large non-recurring and transaction-related expenses related to the acquisition of Resource Bancshares Mortgage Group, which closed on March 31, 2002. Exclusive of these transaction-related costs, the company reported net income for the 1st-quarter of $3.3 million compared with $0.8 million for the same period a year ago. We simply favor the bullish Stage II rally that is showing no signs of ending. Reasonable short-term reward potential with a favorable cost basis. MAY 17.50 NAA EW LB=1.00 OI=1203 CB=16.86 DE=14 TY=8.2% ***** ***************** 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 ONXX 7.75 MAY 7.50 OIQ EU 0.60 106 7.15 14 10.6% QSFT 13.25 MAY 12.50 QUD EV 1.30 372 11.95 14 10.0% WBSN 26.39 MAY 25.00 DQH EE 2.35 49 24.04 14 8.7% ISLE 22.78 MAY 22.50 QEP EX 0.90 320 21.88 14 6.2% EMKR 8.58 JUN 7.50 EUH FU 1.75 5 6.83 49 6.1% SUPG 5.51 JUN 5.00 UQG FA 0.90 10 4.61 49 5.3% REV 5.11 JUN 5.00 REV FA 0.50 0 4.61 49 5.3% ***************** NAKED PUT SECTION ***************** Option Trading 101: Q&A With The Naked-Puts Editor By Ray Cummins One of our readers asked about the reasons we focus more on an issue's technical history rather than the underlying company's fundamentals when selecting naked-put candidates. Hello Ray, I have been reading the naked-puts section for some time and I have noticed that you rarely comment on a company's fundamental outlook. Why do you base your selections on chart technicals rather than the future earnings and revenues or other similar valuations -- things that analysts have always said are "key" to a company's long-term success? DM Concerning the use of technical analysis in position selection: There are many advantages to the "technicals-based" approach but most importantly, it removes the need to understand the infinite components of fundamental valuation that market analysts find so intriguing. In addition, trading strategies based on historical price analysis can provide very precise entry and exit signals, a benefit to traders who participate in short-term strategies. Technical analysis makes three basic assumptions. First, simple market data such as price and volume indicate the true value of a specific stock or financial issue. Second, prices historically exhibit trends or patterns and third, history eventually repeats itself. These assumptions can be combined with the study of price and volume to provide traders the basic information they need to initiate profitable trading strategies. The technical indicators that identify buy or sell signals are contained in various chart formations and patterns and in many cases, no additional data is needed. Since the goal of any investor is to profit from their predictions, most experts suggest that the best place to begin is with proven practices such as evaluating an issue's price history and primary trend. For most investors, the easiest way to consistently make money in the market is to form the correct outlook for its future movement and position themselves to profit from that activity. In fact, that is the premise of the technician; that past price behavior can be used to forecast future trends, thus providing a means to profit from a successful forecast. Numerous systems have been developed to help traders form an opinion based on chart patterns and predict future turning points and direction in the underlying issue. Analysis begins by determining the strength and direction of a trend. The basis for future predictions is supported by the fact that once a primary trend is in motion, it will continue in that direction until a change in character occurs. Successful technical analysts will look at many indicators from different perspectives and identify signals that forecast upcoming changes or trend reversals. When you can do this accurately on a regular basis, your portfolio value will grow consistently, regardless of the overall market character. As far as choosing a viable premium-selling candidate, there are a number of steps you can take, not directly related to technical analysis, that will help ensure a high probability of a profitable trade. The first step is to identify expensive premiums using the composite implied volatility of all equity options. You should also identify those situations when options are priced at levels above where they have historically been known to trade in the past. Then you can use probability analysis to establish the potential for the underlying market to move the required distance to make the position unprofitable. Since that potential almost always exists, it is also necessary to determine if the stock has displayed a level of historical volatility that suggests it is likely to move the required distance (to make the position unprofitable) in the target timeframe. The final step is to review the fundamentals of the underlying issue to find out if there are any obvious reasons for the option premiums to be inflated. Since a large part of an option's extrinsic value is based on a projection of the future volatility of the underlying stock, there are very few instances where excess premium exists without a fundamental basis. The key for derivatives traders is to find those few instances where the actual movement of the issue may differ substantially from that which is forecast and then construct a strategy to profit from the incorrect pricing of the options. 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 EAGL 16.97 17.41 MAY 15.00 0.50 *$ 0.50 13.6% VIRL 17.81 18.23 MAY 15.00 0.50 *$ 0.50 11.3% MACR 22.01 20.23 MAY 20.00 0.50 *$ 0.50 9.9% WFR 8.60 7.95 MAY 7.50 0.30 *$ 0.30 9.9% OATS 10.63 10.80 MAY 10.00 0.45 *$ 0.45 9.6% AMZN 16.91 16.05 MAY 15.00 0.30 *$ 0.30 8.4% TTWO 26.53 25.31 MAY 22.50 0.55 *$ 0.55 8.4% ADPT 14.57 13.70 MAY 12.50 0.40 *$ 0.40 8.4% IMCO 14.22 12.55 MAY 12.50 0.50 *$ 0.50 8.1% PLNR 24.73 24.55 MAY 22.50 0.45 *$ 0.45 8.0% PHSY 26.01 27.14 MAY 20.00 0.40 *$ 0.40 7.8% ENER 24.24 23.36 MAY 22.50 0.75 *$ 0.75 7.5% EAGL 17.00 17.41 MAY 15.00 0.45 *$ 0.45 7.4% PHSY 28.30 27.14 MAY 20.00 0.30 *$ 0.30 7.3% IDTI 32.00 25.14 MAY 25.00 0.40 *$ 0.40 6.4% RMCI 25.45 26.77 MAY 20.00 0.40 *$ 0.40 6.3% TOL 27.58 30.85 MAY 25.00 0.65 *$ 0.65 6.2% ISLE 20.50 22.78 MAY 17.50 0.30 *$ 0.30 5.9% MARY 21.50 24.95 MAY 17.50 0.40 *$ 0.40 5.8% LNCR 31.28 31.02 MAY 30.00 0.80 *$ 0.80 5.8% DO 32.10 34.00 MAY 30.00 0.40 *$ 0.40 5.2% AEIS 36.71 31.37 MAY 30.00 0.40 *$ 0.40 5.2% GSF 35.33 36.15 MAY 32.50 0.40 *$ 0.40 5.0% OVER 33.77 22.20 MAY 25.00 0.45 $ -2.35 0.0% CTLM 13.86 9.36 MAY 12.50 0.45 $ -2.69 0.0% *$ = Stock price is above the sold striking price. Comments: This week's bearish activity produced two unexpected events in our portfolio. The first surprise occurred when Overture Services (NASDAQ:OVER) plunged almost 40% after losing a deal with America Online, which instead contracted with Google.com for search services. Analysts quickly lowered their ratings on the company and traders exited the issue in droves, taking OVER's share value with them. Fortunately, the issue will likely experience a technical rebound, allowing readers who are still in the position to exit with a reasonable debit. Another revelation came in advance of the quarterly earnings report for Centillium (NASDAQ:CTLM) as investors unloaded the company's stock amid concerns of an unfavorable announcement. Luckily, the bearish technical indications preceded the slump allowing a much better closing trade than our (Friday) summary indicates. As far as the current issues on the watch-list, we are monitoring Macromedia (NASDAQ:MACR), Impco (NASDAQ:IMCO), Take-Two (NASDAQ:TTWO), Memc Electronic (NYSE:WFR), Advanced Energy (NASDAQ:AEIS), Adaptec (NASDAQ:ADPT), and Integrated Device Technologies (NASDAQ:IDTI) for potential closing trades on further downside activity. Positions Closed: Veeco Instruments (NASDAQ:VECO), JDA Software (NASDAQ:JDAS), and Sandisk (NASDAQ:SNDK). 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 ABF 21.23 MAY 20.00 ABF QD 0.30 164 19.70 14 8.6% BSTE 32.25 MAY 30.00 BQS QF 0.30 166 29.70 14 6.0% ENDO 20.70 JUN 17.50 PFU RW 0.65 20 16.85 49 7.0% ENDP 11.56 JUN 10.00 IUK RB 0.55 0 9.45 49 9.4% GME 20.80 MAY 20.00 GME QD 0.45 20 19.55 14 12.3% NSIT 27.15 MAY 25.00 QNT QE 0.25 12 24.75 14 6.1% SIE 19.88 JUN 17.50 SIE RW 0.65 0 16.85 49 6.5% TDY 19.17 JUN 17.50 TDY RW 0.60 0 16.90 49 5.6% 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 GME 20.80 MAY 20.00 GME QD 0.45 20 19.55 14 12.3% ENDP 11.56 JUN 10.00 IUK RB 0.55 0 9.45 49 9.4% ABF 21.23 MAY 20.00 ABF QD 0.30 164 19.70 14 8.6% ENDO 20.70 JUN 17.50 PFU RW 0.65 20 16.85 49 7.0% SIE 19.88 JUN 17.50 SIE RW 0.65 0 16.85 49 6.5% NSIT 27.15 MAY 25.00 QNT QE 0.25 12 24.75 14 6.1% BSTE 32.25 MAY 30.00 BQS QF 0.30 166 29.70 14 6.0% TDY 19.17 JUN 17.50 TDY RW 0.60 0 16.90 49 5.6% 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). ***** ABF - Airborne Freight $21.23 *** Transport Sector *** Airborne Freight Corporation (NYSE:ABF) is an air express company and air freight forwarder that expedites shipments of all sizes to destinations throughout the United States and foreign countries. ABX Air, the company's principal wholly owned subsidiary, provides domestic express cargo service and cargo service to Canada. The company is the sole customer of ABX for this service. ABX also offers charter service. Airborne Express provides door-to-door express delivery of small packages and documents throughout the United States and to and from most foreign countries. The company also acts as an international and domestic freight forwarder for shipments of any size. Airborne posted excellent first quarter profits, despite a small decline in revenues and traders responded favorably to the news. Investors who are interested in owning a transport stock with a solid fundamental outlook should consider this position. MAY 20.00 ABF QD LB=0.30 OI=164 CB=19.70 DE=14 TY=8.6% ***** BSTE - Biosite $32.25 *** Multiple Upgrades = Rally! *** Biosite Incorporated (NASDAQ:BSTE) is a research-based diagnostics company dedicated to the discovery and development of protein-based tests that improve a physician's ability to diagnose disease. The company combines separate but integrated discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new approaches to diagnosis. In March, the company entered into a multi-year collaborative pact under which it will utilize Omniclonal phage display technology, and potentially Trans-Phage Technology to generate high-affinity antibodies to targets provided by Amgen (NASDAQ:AMGN). Shares of Biosite rallied in late March after the company exceeded analysts' earnings expectations and raised its revenue projections for the coming year. The issue was upgraded by Adams Harkness, Banc of America Securities, and Deutsche Securities and now it appears to be heading for previous valuations near $40-$50. Traders can speculate on that outcome with this position. MAY 30.00 BQS QF LB=0.30 OI=166 CB=29.70 DE=14 TY=6.0% ***** ENDO - Endocare $20.70 *** Record Growth! *** 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. The company is also developing cryosurgical technologies for treating tumors in other organs, including 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 that allows the urologist to treat prostate cancer in a minimally invasive manner. The company has also developed a new urological stent that has been designed to provide immediate relief for BPH patients who undergo thermotherapy, called the Horizon Prostatic Stent. Endocare recently reported record growth and its first profitable quarter, with revenues up 182% from year-ago period. Investors who like the outlook for the company can speculate on its future share value in a conservative manner with this position. JUN 17.50 PFU RW LB=0.65 OI=20 CB=16.85 DE=49 TY=7.0% ***** ENDP - Endo Pharmaceuticals $11.56 *** Optimistic Outlook! *** Endo Pharmaceuticals Holdings (NASDAQ:ENDP), through its wholly owned subsidiaries, Endo Pharmaceuticals and Endo Inc., is engaged in the research, development, sales and marketing of branded and generic prescription pharmaceuticals used mainly for the treatment and management of pain. Endo sells branded pharmaceutical to doctors, drug wholesalers and other healthcare professionals and markets its generics through sales and marketing activities as well as customer service activities directly with wholesale drug distributors and chain and independent retail pharmacists. Endo's portfolio of branded products includes recognized brand names such as Percocet, Percodan, Zydone and Lidoderm. Endo's portfolio of generic products includes products for various indications, most of which are focused on pain management. Endo reported solid quarterly numbers in late April as well as an optimistic outlook for the future. Investors responded favorably to the news and the issue has excellent upside potential in the near-term with buying support above our cost basis. JUN 10.00 IUK RB LB=0.55 OI=0 CB=9.45 DE=49 TY=9.4% ***** GME - GameStop $20.80 *** New Specialty-Retail Issue! *** GameStop (NYSE:GME) is a video game and personal computer gaming software specialty retailer. The company carries an assortment of new and used video game hardware, video game software and accessories, PC entertainment software and related products, including action figures, trading cards and strategy guides. GameStop operates 1,040 stores in the United States, the District of Columbia and Puerto Rico under the GameStop, Babbage's, Software Etc. and FuncoLand names, but is in the process of re-branding most of its stores under the GameStop name. GME carries a constantly changing selection of more than 2,800 stock-keeping units of electronic game merchandise in most stores. In addition, GameStop operates a Website, gamestop.com, and publishes Game Informer, a circulation multi-platform video game magazine with over 415,000 subscribers. Gamestop is a relatively new issue with excellent potential in the Specialty Retail sector and investors who want to own the stock can establish a low risk cost basis with this position. MAY 20.00 GME QD LB=0.45 OI=20 CB=19.55 DE=14 TY=12.3% ***** NSIT - Insight Enterprises $27.15 *** Buying The Competition! *** Insight Enterprises (NASDAQ:NSIT) is a holding company with two operating units, Insight Direct Worldwide (Insight) and Direct Alliance Corporation. Insight is a global direct marketer of brand name computers, hardware and software, and also offers an extensive assortment of more than 180,000 stock-keeping units. Its brands include Compaq, Hewlett-Packard, IBM, Microsoft, Palm, Toshiba and 3COM. Direct Alliance is a primarily a business process outsourcing organization providing marketplace solutions in the areas of direct marketing, direct sales, logistics, and finances using proprietary technology, infrastructure and other processes. Direct Alliance's services enable manufacturers of brand name products to sell directly to customers and support existing indirect sales channels in a cost-effective and timely manner. Shares of Insight Enterprises have rallied in recent sessions after the computer reseller posted favorable quarterly results and said it had bought a rival in a bid to reach U.S. government customers, a growing market segment. Investors who wouldn't mind owning the issue at a discounted cost basis can speculate on the outcome of the company's new acquisition with this position. MAY 25.00 QNT QE LB=0.25 OI=12 CB=24.75 DE=14 TY=6.1% ***** SIE - Sierra Health Services $19.88 *** Hot Sector! *** Sierra Health Services (NYSE:SIE) is a health care organization that provides and administers the delivery of comprehensive health care and workers' compensation programs with an emphasis on quality care and cost management. The company's primary types of health care coverage are HMO plans, HMO Point of Service (POS) plans, and indemnity plans, which include a preferred provider organization option. The POS products allow members to choose one of the many coverage options when medical services are required instead of one plan for the entire year. Shares of Sierra Health Services soared last week after the company posted first-quarter results that were well ahead of Wall Street's expectations. The health care services provider reported income of $0.25 a share, almost double last year's numbers and they raised guidance for the rest of 2002. Traders can speculate on a popular stock in a "hot" sector with this position. JUN 17.50 SIE RW LB=0.65 OI=0 CB=16.85 DE=49 TY=6.5% ***** TDY - Teledyne $19.17 *** Defense Industry Rally! *** Teledyne Technologies (NYSE:TDY) is a provider of sophisticated electronic components, instruments and communications products, including data acquisition and communications equipment for airlines and business aircraft, monitoring and control instruments for industrial and environmental applications and components, and subsystems for wireless and satellite communications. Teledyne also provides systems engineering solutions and other information technology services for space, defense and industrial applications, and manufactures general aviation and missile engines and components, as well as onsite gas and power generation systems. Teledyne has four business segments: Electronics and Communications, Systems Engineering Solutions, Aerospace Engines and Components and Energy Systems. Teledyne Technologies was recently awarded a multi-million dollar contract from the U.S. Army Space and Missile Defense Command. Teledyne Solutions will provide a broad array of technical services in support of the Command contract including expertise relating to missiles, optical and radar sensors, targets, command communications, test and evaluation, lethality, systems integration, information technology, simulation, and other areas. The share value of TDY rallied on the news and the bullish "break-out" suggests further upside activity in the near future. JUN 17.50 TDY RW LB=0.60 OI=0 CB=16.90 DE=49 TY=5.6% ***** ***************** 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 WBSN 26.39 MAY 22.50 DQH QX 0.40 60 22.10 14 12.3% ORB 6.10 JUN 5.00 ORB RA 0.30 113 4.70 49 11.4% PCSA 14.98 JUN 12.50 CQO RV 0.75 0 11.75 49 10.9% PHSY 27.14 MAY 22.50 HYQ QX 0.25 361 22.25 14 8.4% EDO 31.49 MAY 30.00 EDO QF 0.40 117 29.60 14 7.6% SHPGY 27.89 JUN 25.00 UGH RE 0.80 97 24.20 49 5.5% ************************ SPREADS/STRADDLES/COMBOS ************************ The Sell-Off Continues! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, May 3 Stocks fell again today amid concerns about the nation's jobless rate and the sluggish pace of the economic recovery. The Dow Jones Industrial Average closed down 85 points at 10,006 after discouraging news on the labor market put investors in a bearish mood. Adding to the stock market's malaise was a report showing that business activity in the non-manufacturing sector expanded in April, but not as strongly as it did in March. The news did little to help the outlook for blue-chips and shares of Intel (NASDAQ:INTC), Microsoft (NASDAQ:INTC), SBC Communications (NYSE:SBC), International Business Machines (NYSE:IBM), Proctor & Gamble (NYSE:PG) and Wal-Mart (NYSE:WMT) moved lower. The NASDAQ Composite Index fared no better, declining 31 points to finish at 1,613 on weakness in chip, networking, and software issues. The broader-market S&P 500 Index slipped 11 points to 1,073 as retail, airline, brokerage, and biotechnology stocks tumbled while paper, oil, utility and gold issues saw select buying. Trading volume ended at 1.30 billion on the Big Board and at 1.98 billion on the technology exchange. Market breadth was mixed as winning issues edged past losers 16 to 15 on the NYSE while losing stocks paced decliners 19 to 16 on the NASDAQ. In the bond market, the 10-year treasury rose more than 1/4 point while its yield fell to 5.06%. The 30-year bond added nearly 3/4 point to yield 5.54%. On the fund flow front, Trim Tabs estimated that equity funds had inflows of $2.8 billion in the week ended May 1 compared with outflows of $6.1 billion during the prior week. Last week's new plays (positions/opening prices/strategy): Global S.F. (NYSE:GSF) JUN40C/JUN30P $0.10 credit synthetic BJ Services (NYSE:BJS) MAY32P/MAY35P $0.30 credit bull-put Cigna (NYSE:CI) MAY95P/MA100P $0.60 credit bull-put Qlogic (NSDQ:QLGC) MAY55C/MAY50C $0.60 credit bear-call Conexant (NSDQ:CNXT) MAY10C/MAY10P $1.30 debit straddle Research Mot. (NSDQ:RIMM) MAY17C/MAY17P $2.55 debit straddle NASDAQ 100 (AMEX:QQQ) MAY31C/MAY31P $2.25 debit straddle The recent volatile market activity provided some excellent entry opportunities in our new combination positions. Spreads in BJ Services, Cigna, and Qlogic were initiated at the target prices and the synthetic position in GlobalSantaFe offered an acceptable opening credit before the issue moved higher later in the week. The extreme movement in the technology group also produced a big winner in the Conexant (NASDAQ:CNXY) straddle and the activity in the NASDAQ 100 Index (QQQ) was more volatile than we expected. The only position that has yet to prove its worth is the debit straddle in Research In Motion. But, with the issue trading at a recent low, there is certainly potential for further downside. Portfolio Activity: There was relatively little activity this week in the Combos portfolio, so I decided to share a recent E-mail from one of our readers. Subject: Bullish Synthetic Positions You keep offering plays that use synthetic positions. I have tried to figure them out from the option positions but I don't seem to get it. Can you please show a table and or a graph of how the position looks - a great example would be ADVP (published in the Big-Caps section on 5/1/02). Thanks, PM Hello PM, The ADVP play is a popular variation of a "synthetic position" that uses "out-of-the-money" options to construct a speculative- outlook play with lower probability of profit and reduced risk. The premium from the sold put is used to pay for the long call. It is a low risk position, based on the OTM put. If the stock goes up, the value of the call rises while the price of the put declines. When a sufficient upward move (in a timely manner) occurs, the call can be sold and the put repurchased (or allowed to expire worthless) to produce a net gain. Occasionally, these plays achieve profits in a few days. At other times, they are held closer to expiration for a small return and sometimes, they achieve no profit. The key is the put must expire (worthless) or the position may endure a loss. Of course, you may also choose to let a (ITM) put be assigned and take possession of the issue for a long-term portfolio holding or future combination plays such as writing covered-calls. The great feature of options is they can be used in a number of ingenious ways to create the most appropriate position for the current market outlook and your personal risk-reward attitude. The right combination of puts and calls can produce an effective position with results that are similar to being long on the stock, with less expense, and portfolio collateral can be used to finance the entire transaction. This approach also has the potential for unlimited gain, thus providing an opportunity (one you don't have with naked-puts alone) to overcome a number of losing plays. For most investors, the ability to profit from a stock's movement at a fraction of the cost of owning the issue is the primary reason for utilizing options. The bullish, limited-risk approach falls into two primary categories: option buying and (covered) option selling, and the most common method of option trading among retail participants has always been the purchase of calls. That technique can be very profitable but it requires an initial capital outlay and in the case of in- or at-the-money options, leaves the trader exposed to a large amount of downside risk. In addition, traders who purchase options during a strong directional movement in the underlying will be forced to pay higher premiums, greatly reducing the probability of profit. Those who realize the unique difficulty associated with this type of approach are forced to remain on the sidelines until they discover an alternative method. Fortunately, there are numerous combination strategies that can help limit the overall cost of the trade while simultaneously benefiting from inflated option premiums and the synthetic position fulfills that objective very well. Here is the article on Synthetic Positions in its complete form: http://members.OptionInvestor.com/nakedputs/011302_1.asp Hope that helps! Ray OIN Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** RDC - Rowan Companies $26.60 *** Hot Sector! *** Rowan Companies (NYSE:RDC) is a provider of international and domestic contract drilling and aviation services. Rowan also operates a steel mill, a manufacturing facility that produces heavy equipment for the mining, timber and transportation industries, and a marine construction division that designs and builds mobile offshore jack-up drilling rigs. Rowan provides contract drilling services utilizing a fleet of self-elevating mobile offshore drilling platforms (jack-up rigs), one mobile offshore floating platform (semi-submersible rig) and 14 land drilling rigs. Rowan's drilling operations are conducted mainly in the Gulf of Mexico, the North Sea, offshore eastern Canada and in Texas and Louisiana. Today's E-mail reply referred to a "bullish" synthetic position and here is a good example of that strategy. The underlying issue is in a favorable sector with good relative strength and the near-term technical indications suggest there is potential for further upside activity. Traders who wouldn't mind owning RDC can speculate on its future share value in a conservative manner using this technique. Target a small credit initially, to allow for a brief consolidation in current trend. PLAY (conservative - bullish/synthetic position): BUY CALL JUN-30.00 RDC-FF OI=403 A=$0.50 SELL PUT JUN-22.50 RDC-RX OI=70 B=$0.35 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.50-$0.75 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $700 per contract. ****************************************************************** SHPGY - Shire Pharmaceuticals $27.89 *** Bottom-Fishing! *** Shire Pharmaceuticals Group (NASDAQ:SHPGY) is an international specialty pharmaceutical company with a strategic focus on three therapeutic areas: central nervous system disorders, oncology and anti-infectives. The company's strategy is also supported by two technology platforms, drug delivery and biologics. The company has sales and marketing subsidiaries with a portfolio of products targeting the United States, Canada, the United Kingdom, the Republic of Ireland, France, Germany, Italy and Spain. Shire Pharmaceuticals is an old favorite in the Spreads/Combos portfolio and after months of unrelenting selling pressure, it appears that the issue is finally making a comeback. The reason for the bullish activity is the company recently beat analysts' first-quarter estimates on the success of its attention deficit hyperactivity disorder drug Adderall XR. The company said its first-quarter operating income was $72.9 million, or $0.33 per share, up from $52 million, or $0.25 per share, in the year-ago period. Analysts were very impressed by the company's revenues, which were up 30% to $243.2 million, and the fact that Shire now expects full-year revenue growth to be in the low to mid-teens. From a technical standpoint, the issue has a well established base to build on and traders who agree with a bullish outlook for Shire's share value can attempt to profit from any upside movement with this position. Target a small credit initially, to allow for a brief pullback from the recent rally. PLAY (speculative - bullish/synthetic position): BUY CALL JUN-30 UGH-FF OI=39 A=$1.05 SELL PUT JUN-25 UGH-RE OI=97 B=$0.80 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.70-$0.90 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $915 per contract. ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions may also be higher than other plays in the same strategy due to disparities in option pricing. Current news and market sentiment will have an effect on these issues so review each play individually and make your own decision about the future outcome of the position. ****************************************************************** NBR - Nabors Industries $48.70 *** Oil Drillers Rally! *** Nabors Industries (NYSE:NBR) is a land drilling contractor, with over 550 land drilling rigs. The company conducts oil, gas and geothermal land drilling operations in the lower 48 states, Alaska and Canada, and internationally, primarily in South and Central America, the Middle East and Africa. Nabors also is a land well-servicing and workover contractor in the United States. The company owns 745 land workover and well-servicing rigs, in the southwestern and western United States, and 40 well-servicing and workover rigs in certain international markets. Nabors also provides offshore platform workover and drilling rigs. Nabors markets 42 platform, 16 jackup and three barge rigs in the Gulf of Mexico and international markets. These rigs provide well servicing, workover and drilling services. The company also owns and operates a net of nine rigs through an international joint venture in Saudi Arabia. PLAY (conservative - bullish/credit spread): BUY PUT JUN-40.00 NBR-RH OI=244 A=$0.50 SELL PUT JUN-42.50 NBR-RV OI=1578 B=$0.75 INITIAL NET CREDIT TARGET=$0.30-$0.35 PROFIT(max)=14% B/E=$42.20 ****************************************************************** RTN - Raytheon Company $43.75 *** New Contracts! *** Raytheon Company (NYSE:RTN) is a provider of defense electronics, including missiles; radar; sensors and electro-optics; wartime intelligence, surveillance and reconnaissance; command, control, communication and information systems; naval systems; air traffic control systems; aircraft integration systems; and technical services. Raytheon's commercial electronics businesses leverage defense technologies in commercial markets. Raytheon Aircraft is a provider of business and special mission aircraft and delivers a broad line of jet, turboprop and piston-powered airplanes. PLAY (conservative - bullish/credit spread): BUY PUT JUN-37.50 RTN-RU OI=60 A=$0.40 SELL PUT JUN-40.00 RTN-RH OI=1521 B=$0.65 INITIAL NET CREDIT TARGET=$0.30-$0.35 PROFIT(max)=14% B/E=$39.70 ****************************************************************** SLB - Schlumberger $56.96 *** Oil Service Sector *** Schlumberger Ltd. (NYSE:SLB) operates two businesses: Oilfield Services and SchlumbergerSema. Oilfield Services is a provider of exploration and production services, solutions and technology to the international petroleum industry. ShlumbergerSema is an Internet technology services company that provides information technology solutions to the telecommunications, utility, finance, transport and public sectors, and is also a supplier of smart card technology. PLAY (conservative - bullish/credit spread): BUY PUT JUN-45 SLB-RI OI=415 A=$0.25 SELL PUT JUN-50 SLB-RJ OI=1080 B=$0.70 INITIAL NET CREDIT TARGET=$0.50-$0.60 PROFIT(max)=11% B/E=$49.50 ****************************************************************** CCU - Clear Channel $46.49 *** Earnings Play! *** Clear Channel Communications (NYSE:CCU) is a diversified media company with three major business segments: radio broadcasting, outdoor advertising and live entertainment. The company owns and programs, or sells airtime for over 1,000 domestic radio stations and a national radio network. In addition, the company has equity interests in various domestic and international radio broadcasting companies. The company also is engaged in outdoor advertising and is a promoter, producer and venue operator for live entertainment events with over 100 venues domestically and 31 venues internationally. The company also owns or programs 19 television stations, owns a media representation firm and also represents professional athletes. The company's earnings report is due on 5/7/02. PLAY (moderately aggressive - bearish/credit spread): BUY CALL MAY-55 CCU-EK OI=3123 A=$0.20 SELL CALL MAY-50 CCU-EJ OI=2759 B=$0.70 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% B/E=$50.55 ****************************************************************** - SPECULATIVE STRADDLES - These issues meet our criteria for favorable (speculative) debit straddles; cheap option premiums, a history of adequate price movement and the potential for volatility in the stock or its industry. This selection process provides the best combination of low capital risk and potentially high reward but, as with any positions, they must be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** MVSN - Macrovision $20.25 *** Recent Volatility! *** Macrovision (NASDAQ:MVSN) develops and licenses rights management and copy protection technologies. The company's many customers include studios, independent video producers, enterprise and consumer software vendors, digital set-top box manufacturers and digital pay-per-view network operators. Macrovision provides content owners with the means to market, distribute, manage and protect video, software and audio content. The company also is in the business of consumer software copy protection. MVSN has as CD-ROM copy protection and rights management technologies to a variety of software publishers in the personal computer (PC) games, home education, information publishing and also desktop applications software markets. PLAY (very speculative - neutral/debit straddle): BUY CALL MAY-20 MVU-ED OI=120 A=$1.50 BUY PUT MAY-20 MVU-QD OI=860 A=$1.00 INITIAL NET DEBIT TARGET=$2.30-$2.35 TARGET PROFIT=15-25% ****************************************************************** SFA - Scientific-Atlanta $20.55 *** Active Issue! *** Scientific-Atlanta (NYSE:SFA) provides its customers with broadband transmission networks, digital interactive subscriber systems, content distribution networks and worldwide customer service and support. SFA has evolved from a manufacturer of electronic test equipment for antennas and electronics to a producer of a wide variety of products for the cable television industry, including digital video, voice and data communications products. The company is changing the way consumers interact with their televisions, and is a supplier of transmission networks for broadband access to the home, digital interactive subscriber systems for video, high speed Internet, voice over IP (VoIP) networks, and worldwide customer service and support. Scientific-Atlanta is applying its expertise to the current convergence of the personal computer and the television, and helping to extend multimedia broadband applications to new platforms via the set-top. PLAY (very speculative - neutral/debit straddle): BUY CALL MAY-20 SFA-ED OI=1557 A=$1.40 BUY PUT MAY-20 SFA-QD OI=1525 A=$0.75 INITIAL NET DEBIT TARGET=$2.00-$2.05 TARGET PROFIT=15-25% Note: The Delta or "hedge ratio" in the position suggests that we should buy 1 call for every 2 puts (1:2 ratio) to maintain a neutral outlook. However, any downward movement in the issue should allow both sides of the position to be purchased at similar prices. ****************************************************************** YHOO - Yahoo! $14.77 *** Ready To Move? *** Yahoo! (NASDAQ:YHOO) is a global Internet business and consumer services company that offers a comprehensive branded network of properties and services to more than 219 million individuals worldwide. The company offers an online navigational guide to the Internet via its www.yahoo.com Website, which is a guide in terms of traffic, advertising and household and business user reach. Through Yahoo! Enterprise Solutions, the company also provides business services designed to enhance the productivity and Web presence of its clients. Yahoo! has offices in the U.S., Europe, Asia, Latin America, Australia and Canada. PLAY (very speculative - neutral/debit straddle): BUY CALL MAY-15 YHC-EC OI=16835 A=$0.65 BUY PUT MAY-15 YHC-QC OI=3205 A=$0.85 INITIAL NET DEBIT TARGET=$1.30-$1.40 TARGET PROFIT=15-25% ****************************************************************** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ The shorts are still working with two more triggered Friday. We’re trying it again with this Nasdaq favorite. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/050502.asp ************** MARKET POSTURE ************** More movement to report from Friday’s session. Unfortunately, most of it was to the downside. To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/050502_1.asp ********** 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
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