The Option Investor Newsletter Sunday 05-19-2002 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 5-17 WE 5-10 WE 5-3 WE 4-26 DOW 10353.08 +413.16 9939.92 - 66.68 10006.60 + 95.88 -346.39 Nasdaq 1741.39 +140.54 1600.85 - 12.15 1613.00 - 50.89 -132.94 S&P-100 553.30 + 30.06 523.24 - 7.28 530.52 - 1.85 - 27.42 S&P-500 1106.59 + 51.60 1054.99 - 18.44 1073.43 - 2.89 - 48.85 W5000 10474.18 +456.71 10017.47 -184.57 10202.04 - 5.42 -426.79 RUT 508.94 + 16.21 492.73 - 19.59 512.32 + 10.82 - 15.90 TRAN 2798.36 +155.26 2643.10 -100.46 2743.56 + 20.93 - 74.24 VIX 20.28 - 4.75 25.03 + 1.80 23.23 - 1.41 + 4.34 VXN 42.94 - 7.79 50.73 + 4.47 46.26 + 4.02 + 2.89 TRIN 0.78 2.56 1.71 1.82 TICK +651 +364 +910 +367 Put/Call .72 .83 .91 .87 ****************************************************************** Resistance Broken? by Jim Brown Who would have thought after the Dow closed under 10,000 on last Friday that we would have been celebrating a +413 gain this week? The +4.1% gain in the Dow was dwarfed by the +140 point, +8.8% gain in the Nasdaq. It is amazing how a few well-placed upgrades, earnings and economic reports can change the landscape. Intel upgraded, AMAT upgraded, AMAT earnings, Dell earnings, Book-to-Bill numbers, consumer sentiment, etc. Suddenly we have a real rally on our hands and the bears are still in denial. The biggest news came for the week came from the chip sector, which had been beaten bloody for weeks. Chips had not seen a positive week since hitting 608 on the SOX on April-17th. Suddenly Cisco's comments spiked them +75 points in one day only to see it all disappear before the week was out. It was as though the chip analysts saw the spark potential and decided to create a real rally with back to back upgrades of INTC and AMAT. Of course the stunning book-to-bill numbers did not hurt. What a rally they created! The Dow posted the best weekly gain since March-1st and closed at a four week high. The Nasdaq posted the best week in a year and stretched its streak to five days. Resistance levels were failing left and right at the close. Don't forget this was an option expiration week. The market makers and hedge funds tried really hard on Friday to hold the markets down to levels that would make the maximum number of options expire worthless. Those levels were 10200 on the Dow, 1100 for the S&P, 1725 on the Nasdaq and $32 on the QQQ. They attempted to hold GE at $32.50 until noon before finally giving up. The Monday after option expiration is normally bullish as positions are squared after receiving exercise notices in trading accounts. Those writing naked calls must buy stock if they failed to close the positions on Friday. Many writing covered calls will buy new stock to satisfy the calls rather than tender the stock they own at a lower basis. (This does not work for a tax audit but nobody volunteers the information) The jump in Consumer Sentiment to 96 when analysts expected a decline and the biggest jump in semiconductor orders in over a year has investors thinking the bottom is behind us. The explosive jumps in the market over the last couple weeks has awakened many investors to the fact that the markets are alive and well. There is an estimated $2.5 trillion in cash sitting idle in brokerage accounts and money market accounts. Many mutual funds are sitting with more than 20% of their assets in cash waiting for the summer slump to buy. All of these factors add up to a powder keg of volatility and explosive potential. This should be scaring the hell out of anybody still short. Monday should be the day of reckoning for many. The market overcame more news that Enron may have helped engineer the energy crisis in California for a profit. It ignored Carter in Cuba, assassination rumors, attacks in Israel, rumors of troops in Iraq and news that Bush may have been warned about Al-Queda and airline hijacking possibilities before 9/11. Finally it started listening to positive news instead of negative news. The proof of an economic recovery, while not robust, is strong and growing. The reawakening of the retail investor may be in progress. Those that decided to venture back into the market could feast on toasted bear next week. I think it is possible we are setting up for the perfect storm. Only this storm is going to rain on the bear's parade. This is just a possible scenario but follow along. Think back to the bursting tech bubble in 2000. For two years dip buyers had been prospering wildly and new highs were a weekly occurrence. When the crash began those dip buyers continued to buy the dip for quite some time. It was denial that the trend had changed and they had made a wrong decision. They bought and rode stocks down until their pain threshold was reached and finally surpassed before they sold. The next bounce brought them back in thinking they had just sold too soon and then it happened to them again and again. Those who stuck their head in the sand simply let the stocks slide and consoled themselves that they would come back. As their wealth slipped away their incentive to sell the losers fell also. They watched those losers shrink and slipped even more into denial. Am I reaching anybody? Let's turn the tables. Bears have been shorting every rally for a year or more. Every bounce, every good news event, every earnings surprise. Profits soared and the system became ingrained into their consciousness. Suddenly two weeks ago the system changed. The Dow hit the 9800 level several times and skidded but did not break. The first hit was in the last week of April, the second in early May. A surprise rally on Cisco earnings was written off as a one day wonder and bears still bloody from covering their shorts in a panic jumped on board again for the ride back down. Convinced that the panic covering was a mistake and had they only waited another day they would have won. Then came the surprise Intel upgrade. No problem it will pass. Then the AMAT upgrade and earnings produced some covering but the majority thought it would pass. Surely the IBM analyst meeting will tank the techs! Let's short the bounce! What? No bad news? That's ok Dell reports on Thursday and they will guide analysts lower. That will knock the stuffing out of these bulls. Besides, the book-to-bill will show the inventory replenishment cycle is over and we will be hitting new lows by the week end. Suddenly all the pivot points the bears were counting on have passed. That is ok, there is huge resistance at 10300 and 1100 on the S&P. They bulls will never break that. Their party is over. Suddenly it is 4:05 Friday afternoon and the bears are in stunned disbelief. How did they do that? It should have cratered. Where is the profit taking that always appears? I can't believe they closed over resistance. I can't believe I did not cover! The shorts will think about the shoulda, woulda, coulda things they did not do as each decision point was passed and hopes were pinned on the next one. (Remember, the bulls did this on the way down. They (XXX stock) will beat earnings and it will recover. They will announce a stock split and we will be singing again. Surely the Fed will not raise rates again. All the while the bulls held in denial.) Now the bears are faced with the same thing in reverse. When bulls finally bite the bullet and bail out of stocks in desperation it is called capitulation. There is a huge dip and everybody long loses money. Don't look now but the same thing happens in a bear capitulation only it is a spike, not a dip. Now, I am not claiming that this scenario has any basis in fact. We do know that many of these points have been felt, painfully probably, by most of us at some time in the past. We may or may not see another massive short covering rally on Monday. What are the odds? Maybe I am smoking too many of those funny cigarettes you roll yourself. Maybe I overdosed on sugar donuts during the intraday boredom in the markets on Friday. Those of you that know me realize that neither of those possibilities exist. What we do know is that the markets defied gravity, bears and market makers last week and it culminated in a surprisingly strong close on Friday. Will that carry over into Monday? I hope so. Will the remaining bears become road kill? I hope so. Not just for you guys, I am long the DJX/OEX/SPX in the Pivot Trade section of the market monitor. After being stopped out of shorts at the open twice this week I would love for the gap to go in our direction for once! No, that is not why I am waxing bullish in the commentary this weekend. I really believe that this scenario is possible for Monday. If it does it may only be another one day wonder. While the markets closed above all recent resistance the monster of all resistance levels still lays ahead. For the S&P it is the 1120-1126 level. The 200 DMA is at 1121. The 150 DMA is 121. The 120 DMA is 1125. The 90 DMA is 118. Who uses ALL those averages? Nobody I know but when ALL the averages converge you can bet that there are several thousand computer programs out there that notice. Now, would your next door neighbor impact the markets if he noticed it? I doubt it. Let the 6000 active hedge fund manager/traders, managing over $600 billion in assets, see it coming and it is a high odds bet that a short or two gets triggered. The Dow has resistance at 10400-10430 and then a free ride to 10600 where all the skeletons come out of the closet. All those traders who have been kicking themselves for months for not selling at 10600 in March will get another chance. The Nasdaq has resistance at 1765, 1790 and finally 1820. The Nasdaq stopped right on the down trend line from March at 1741. A break above 1741 would be a strong bullish signal. Don't get me wrong. There are still valuation problems in the market. We will still see some dips before fall and the summer doldrums are still ahead of us. However, I think there is a good chance of a bounce on Monday that will push the VIX below 20 again. That will set us up for several days of profit taking and start the cycle all over again. Hey, if investing was easy it would not be so much fun! Enter Very Passively, Exit Aggressively! Jim Brown Editor Editors Note: We are having a spring-cleaning sale at OIN. We have rounded up the last remaining video sets of the last seminar consisting of 10 four hour VHS cassettes and workbooks. There are only several left. These are the next best thing to being there. This seminar had over a dozen speakers including Austin, Jeff, Eric, Jim, Tom DeMark, Jon Najarian (Dr J on the CBOE), Tim Taylor, Dick Arms, Lindsay Glass, Buzz Lynn, Jeff Wright, Jim Crimins, Rance Mashek, Harry Browne, Mark Skousen. Over 40 hours of option teaching. https://secure.sungrp.com/video/video.asp Also we have a couple dozen of the year end special CD/Workbooks available. This is the five special reports with several hundred pages of indepth teaching. Jim, Austin, Jeff, Steve and Eric. We have delivered several thousand of these to rave reviews and only have a couple dozen left. Don't miss out! https://secure.sungrp.com/cd_clearence/02renewal.asp Act fast because there are no more. When they are gone they are GONE! ***************** Day Trader? The Market Monitor continues to provide profitable trades and premium education every day. It comes with your Option Investor subscription. If you have not checked it out you are missing a vital part of Option Investor. Click here for a sample. http://members.OptionInvestor.com/itrader/marketbuzz/# http://members.OptionInvestor.com/itrader/archive/marketmonitor.asp ******************** INDEX TRADER SUMMARY ******************** MONSTER WEEK by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - It was truly a big week, with the oversold Nasdaq up over 8%. Most of the beaten down sectors of the market were either participating or stirring some. Not only were all the indices up strongly, but all had weekly closes at or near their highs. This bodes well for a further move higher. All the previously identified index breakout points were pierced. These bullish breakout moves set up possible upside objectives to the upper envelope bands that I use to measure the point where a given index has the highest probability to reverse or slow its trend momentum: SPX above 1100-1103 - objective becomes: 1128 OEX above 547 - potential upside to 563 DJX above 103 - objective to 105.3 COMP above 1736 stop - potential to 1785 NDX above 1325 - objective to 1376 QQQ above 33.5 - potential to 35 The same key near-term support levels bear watching: SPX - 1090 - if broken, possible downside to 1080 OEX - 541 - if pierced, downside potential to 535 DJX - 102 - if broken, possible downside to 101 COMP - 1700 - if pierced, downside potential to 1670 NDX - 1288 - if penetrated, downside to 1250 QQQ - 32 - if exceeded, downside to 31 All my downside targets would fill all or much of the gap areas from early last week. They are all also areas where I favor new index call purchases. S&P 500 (SPX) Weekly/Daily charts: There has not yet been a confirming bullish upside breakout on the weekly chart. This would occurs with a weekly close above 1125. Any daily close over 1116 would get the S&P 500 above its 40-week moving average, which is another level that I am watching. On the daily chart, there was a bullish flag consolidation that formed last week, followed by a breakout above the top of the "flag". This pattern also supports the ideas of a move up to the 1125-1127 area, a likely resistance. S&P 500 (SPX) Hourly chart: Key near support is at 1190, then at 1180-1175, where I favor buying again if reached. 1117 is the top end of the hourly uptrend channel, which might also be an area where SPX would correct from. S&P 100 (OEX) Weekly/Daily charts: Breakout in OEX comes with a weekly close above 558.5 at the down trendline. 566, is another level to watch at the 40-weeka average. 561-562 is about the best upside potential I see, before some corrective action sets in, which looks like a good area to book some call profits. Buy at 535-537 if reached. S&P 100 (OEX) Hourly charts: Hourly chart resistance: 557 area Support in 535-534 area Rallies to the upper boundary, might offer a shorting opportunity, but should be assessed intraday Dow Industrials ($INDU & $DJX.X) Weekly/Daily charts: Clear cut breakout in the weekly down chart. New major resistance comes in at 10,675 at the prior high. 105 area looks like a place to book some DJX call profits, if reached. Dow Industrials 1/100 Index ($DJX.X) Hourly chart: Near term move above 103.5 is needed to suggest that DJX could reach the upper trendline boundary on the hourly chart. I favor selling in the 104.5-105 area, buying on pullbacks to 101. Nasdaq 100 Trust Stock (QQQ) Weekly/Daily charts: Bullish weekly chart breakout is illustrated on the left chart above - the upside reversal came from an oversold level. Next weekly chart resistance comes in at 35. This level will not likely be overcome soon, at least without some corrective action setting in first in my estimation. Nasdaq 100 Trust Stock (QQQ) Hourly chart: Hourly chart resistance appears to come in just over the 34 level. The lower trend channel boundary comes in at 31.2-31.5. A break of near support at 32 probably will get us down to support in a hurry. Index Trade Recommendations Exited SPX puts on move above 1101 MAJOR MARKET INDICATORS - Sentiment - how bullish or bearish are traders. Best thing about this rally from a bull's perspective, is how the LACK of call side speculative activity in equities options, relative to put volume, per my daily CBOE equities call to put volume measure. There was one day that this indicator ran up toward an "overbought" or bearish reading, but otherwise this indicator is staying well away from bearish levels. 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 ************** That Was Painful The markets closed at their low on Friday May-10th and the three put plays I profiled for expiration week all failed miserably after the Intel upgrade on Monday provided the first of many excuses for the market to rally for the week. That is why you need to put your brain in gear before making any trade. Conditions on Friday night can change drastically by Monday morning as we can all attest. The market gapped up at the open on Monday not down. I had one reader email me with this comment after the market closed on Tuesday afternoon. "I bought the QQQ puts on Monday morning. What do I do now?" The Nasdaq had gapped open for two days in a row and never looked back. The puts, which had been profiled at Friday's close of $29.54 were now $32.60. The reader had not used any stop loss and was totally confused by the bounce. It is readily apparent in hindsight what the reader should have done. It is always less apparent during the heat of battle. The first thing you should examine before placing any order for any option recommendation is the market conditions. Are they the same as when the recommendation was made? No, abort the play. Yes, is the stock moving in the expected direction? No, abort the play. Yes, is it after 10:AM ET yet? No, wait until after 10 then go back to the first question. If all conditions are still valid then what does YOUR gut tell you? Do you still like the play in the cold hard light of day? If the answer is yes then go for it. No trade is a sure thing and once committed you need to act swiftly. Once in the trade you need to determine what your stop loss will be. You will find that picking a stop loss before you open the position will normally get you out with less of a loss than a stop picked after you have entered the play. Once money is committed it is human nature to fade our original stop because "we don't want to get jerked out of the trade prematurely." Set the stop and forget it. Your first choice is usually the right one and once you start second guessing yourself failure usually follows. You will always make bad trades. The trick is to minimize the losses on the bad ones so they do not eat up the profits on the good ones. Above all, take responsibility for your actions. Nobody is sitting beside you when you click that mouse button. You may get a recommendation from OIN, your brother in law or somebody in your investment club. Once you click that mouse it becomes YOUR play, not theirs. You are responsible win or lose. It is your money not theirs. Preserve it! Don't put your head in the sand if the trade goes against you. This will not help the person who made the QQQ trade on nothing but faith last week. I hope it helps everyone else that is reading this from suffering the same fate in the future. ************************** Plays Only one play this week but I think it is a good one. The Biotech index (BTK.X0 has been rebounding from the lows in early May. Most analysts feel this sector is overdone and a good place to put long term money. I will leave that up to the individual stock pickers. The index appears ready to retest the 440 resistance level and a breakout above that could setup a run to 500. The best way to play this is with the biotech holders (BBH). The 440 level on the BTK corresponds with the 101 level on the holders. If the BTK breaks out the BBH could run to 110. Buy the June 105 Call GBZ-FA at market on any trade above 101.25. That means if the BBH trades at 101.26 or above, initiate the trade. It could be Monday or a week from Monday before it hits that level, if at all. We only want to initiate the trade if the stock is going in our direction and has passed the 100-101 resistance. Once in the trade put your stop loss at 97.50. For every dollar the BBH rises above 103, raise your stop by $1.00 until the stop reaches 102. If the trade goes our way and hits $110 the option should be worth around $6.00 or more depending on the time remaining. *********************** Remember, these are all high risk plays and should only be made with 100% risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Timeframes By Eric Utley The volatility that had become a near constant dried up late last week ahead of May expiry. The ranges for the major averages in the last two days of last week grew increasingly tight. Does that mean another round of volatility lies ahead? If so, in which direction will that volatility drive stocks? In the near term, the path of least resistance is skewed to the upside. That's because of the development in bullish percent data last week. The Nasdaq-100 Bullish Percent ($BPNDX) went bull confirmed, and finished the week at 50 percent, or the mid-point of upside risk versus downside risk. The S&P 500 Bullish Percent ($BPSPX) reversed back into bull confirmed territory. It is, however, at a higher reading at 65 percent. Nevertheless, with these two indicators signaling bullishness, stocks may be headed higher over the short term. Looking past the near-term, though, there were some bearish developments in the bigger picture. For one, the oversold readings of the Arms Index (INDEX:TRIN) have been worked off, meaning that the build up demand has been worked off. More importantly, the spread between S&P commercials and small specs widened for the first time in about three weeks. The big guys grew more bearish during the most recent reporting period, while the small guys moved back towards their yearly high of bullishness. Moreover, there's no fear in this market. None. Unfortunately it is fear that bottoms are built on, not massive short covering rallies that are met with open arms by options market participants. The wall of worry that had been building since early April was crashed down last week on the strength in stocks. The upward trend that we had been observing in the CBOE Market Volatility Index (VIX.X) was broken by its move below the 23 level Tuesday. Since then the VIX.X drifted lower, back down to the magical 20 level; it closed Friday at 20.22. The good news for options trades is that premiums are once again on sale. The bad news for longer term bulls is that the low level of the VIX.X portends another multi-month slide in stocks. The timing is the only variable. In summary, the short term looks favorable for bulls with more short covering ahead. But once the bullish percent grows overbought and reverses lower, the bears may have their way once again. What traders need to do is define their timeframes and adjust position risk accordingly. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 10353 Moving Averages: (Simple) 10-dma: 10106 50-dma: 10248 200-dma: 9906 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1107 Moving Averages: (Simple) 10-dma: 1079 50-dma: 1116 200-dma: 1121 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1306 Moving Averages: (Simple) 10-dma: 1253 50-dma: 1366 200-dma: 1463 Gold and Silver ($XAU) It was a volatile week for the $XAU. One day it was in the worst performing sector slot, the next it was in the best performing sector spot. There's certainly a battle being played out in this index with the metal ticking higher. The index was in fact the best performing sector last Friday with its 4.38 percent pop during the day. Top performing components included Anglogold (NYSE:AU), Meridian Gold (NYSE:MDG), Harmony Gold (NASDAQ:HGMCY), Barrick Gold (NYSE:ABX), and Newmont Mining (NYSE:NEM). 52-week High: 81 52-week Low : 49 Current : 81 Moving Averages: (Simple) 10-dma: 78 50-dma: 71 200-dma: 61 Oil Service ($OSX) Familiar to the daily top spot, the OSX earned the day's worst performing sector spot last Friday. It gave back 2.29 percent during the day. Worst performing individual names included Tidewater (NYSE:TDW), Baker Hughes (NYSE:BHI), Weatherford (NYSE:WFT), and Nabors Industries (NYSE:NBR). 52-week High: 136 52-week Low : 58 Current : 105 Moving Averages: (Simple) 10-dma: 107 50-dma: 103 200-dma: 86 ----------------------------------------------------------------- Market Volatility True to form, the VIX plowed lower last Friday on the strength in stocks. But I don't know how reliable the index is surrounding expiration. There may have been some artificial weakness in the VIX due to May expiry. We'll know more into next week. But the low level is disconcerting for longer term bulls. Same goes for the $VXN. I'll be watching the 50-dma around the 42 mark next week. CBOE Market Volatility Index (VIX) - 20.22 -1.23 Nasdaq-100 Volatility Index (VXN) - 43.21 -1.31 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.72 833,624 596,669 Equity Only 0.64 721,163 462,520 OEX 0.83 45,625 37,715 QQQ 0.63 46,979 29,646 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 63 + 0 Bull Confirmed NASDAQ-100 50 + 0 Bull Confirmed DOW 67 + 3 Bear Correction S&P 500 65 + 1 Bull Confirmed S&P 100 64 + 3 Bear Correction 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 0.84 10-Day Arms Index 1.23 21-Day Arms Index 1.34 55-Day Arms Index 1.24 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 1748 1424 NASDAQ 1880 1592 New Highs New Lows NYSE 118 38 NASDAQ 149 45 Volume (in millions) NYSE 1,248 NASDAQ 1,649 ----------------------------------------------------------------- Commitments Of Traders Report: 05/14/02 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 S&P commercials reverted to their bearish commitments by reducing their longs and adding to shorts. Small traders grew more bullish by adding a large amount of longs; small traders are 3,000 contracts away from their most bullish reading of the year. Commercials Long Short Net % Of OI 04/30/02 340,936 421,673 (80,737) (10.6%) 05/07/02 348,019 422,801 (74,782) (9.7%) 05/14/02 343,941 424,893 (80,952) (12.1%) 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 04/30/02 153,158 56,372 96,786 46.2% 05/07/02 154,664 59,583 95,081 44.4% 05/14/02 163,035 58,587 104,448 49.8% 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 shifted to a decidedly bullish position last week by adding longs and dropping shorts. Commercials are net long more than 5,000 contracts. Small traders meanwhile went in the opposite direction by establishing a position that was net short more than 5,000 contracts. Commercials Long Short Net % of OI 04/30/02 34,591 35,933 (1,342) (9.7%) 05/07/02 38,338 39,152 (814) (1.1%) 05/14/02 40,858 35,761 5,097 (5.5%) 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 04/30/02 12,271 12,703 (432) 1.7% 05/07/02 13,229 13,161 68 0.3% 05/14/02 11,920 17,479 (5,559) 8.2% Most bearish reading of the year: (9,877) - 12/21/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Dow commercials added a few more longs than shorts for an increase in the group's net bullish position. Small traders went in the opposite direction by reducing their longs and adding to their shorts. Commercials Long Short Net % of OI 04/30/02 17,275 13,341 3,934 12.8% 05/07/02 19,967 14,045 5,922 17.4% 05/14/02 21,080 14,725 6,355 14.4% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 04/30/02 5,813 8,869 (3,056) (20.8%) 05/07/02 5,124 9,831 (4,707) (31.5%) 05/14/02 4,930 10,899 (5,969) (25.2%) 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 *************** Darn Doldrums By Eric Utley I really hope that the market's lack of movement late last week wasn't a sign that the summer doldrums are already here. Instead, I hope that expiration had something to do with it. Or at the very least, I hope that Thursday's and Friday's inaction was a consolidation of the Cisco (NASDAQ:CSCO) rally. I mean, come on, a 10 point swing in the S&P 500 (SPX.X)? How do you trade around that? 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 ---------------------------- NVIDIA (NASDAQ:NVDA) I played NVDA for good gains lower on the put list...thanks. What do you think about the upside from here? The stock might be topping out? - Thanks, Jill Thanks for the question, Jill, and congratulations on the good trade lower in NVDA! NVDA was heavily shorted from early March through the end of April based on slower sales and the accounting issues that sprung up. During that time, the stock fell from $60 to about $30. Obviously a 50 percent hair cut is a big. But it's those types of downward moves that cause the bears to become greedy near the bottom. (According to Yahoo Finance, there were about 15 million shares sold short in NVDA through April 8). The result of that greed was a big short covering rally last week to the tune of more than 20 percent! Only fear of the upside will inspire such a big move in such a short time period. The fear that inspired such a big move was brought about through several developments during the last two weeks. Cisco's (NASDAQ:CSCO) earnings report for one, plus the strength in the broader technology sector. So that brings us up to date through last Friday. Where NVDA trades from here is dependent on another short covering catalyst. In what form that may come I don't know. Fortunately we have a few good tools to measure and monitor risk. This is where using retracement brackets really comes into play. What I've done is taken a retracement from the relative high up around the $60 level where the stock's slide really began picking up speed. From there, I anchored the lower end of the retracement bracket near the relative low down around the $30 mark. The retracement bracket will help us define the progress of the stock's retracement of its downward move, and help to pinpoint risk levels. NVDA closed last Friday right in the middle of its near term risk range. That is, it closed above the 19.1 percent retracment level, but below the 38.2 percent retracement level. There, the stock is in sort of a 50/50 risk position. If the semis continue to catch a bid, then the short term risk in the stock is defined by the $41.50 level, which is the site of the 38.2 percent retracement level. If the stock pulls back, it has downside risk to the $35.50ish area. If anything, I'd like to use a straddle/strangle in current positioning of NVDA. But because the options are expensive on this stock due to its high level of volatility, and because we're just coming off of May expiration, I wouldn't implement such a strategy. And because the stock is in the middle of its risk range, I can't find much of an edge for either side. If I were long the stock, I'd be using a stop just beneath the $35.50 level to define my downside risk. Conversely, if I were short, then I'd define risk up to $41.50. Now you see if we get a catalyst to carry tech stocks higher, then the shorts still in NVDA will probably cover up to $41.50. From there, a breakout would most likely lead to the stock up to its next retracement level at $45. But the overriding theme here is that the stock is in the middle of its range. If it were to pullback to the lower end, then I'd look to get bullish and enter positions with a tight stop just beneath $35.50. In the middle, however, I think the stock begs inaction when thinking about new positions. NVDA - Daily ---------------------------- PolyMedica (NASDAQ:PLMD) Polymedica (PLMD) has been in the news but it looks like its topping out and rolling. Any thoughts on this one? Keep up the great work. - Ken Thanks for the question and compliment, Ken! PolyMedica had been under investigation by the Securities and Exchange Commission (SEC). The investigation was closed in early April with no action being taken by the SEC. The stock exploded on that news for about $15. But since that time, the stock has slipped into what I consider a short term descending wedge pattern with a bottom in place near the $35 level. If PLMD were trading closer to its lows than its highs, I'd be jumping all over this bearish pattern. But the stock is trading closer to its highs. Nevertheless, I think there are two ways to play this set-up. The first would be to look to get short/buy puts on a rally near very short term highs, around the descending resistance line. By entering on strength, a bear would have the ability to control risk with a tight stop just above overhead resistance, while at the same time positioning for a potential breakdown below the $35 level. If in fact the stock were to breakdown below the $35 level after having shorted it around $37 or $38, then a bear could do a whole bunch of things with an open short/put such as adding to the winning trade, taking partial gains and letting the other half of the position ride, or just letting the initial full position ride, then lowering the stock to breakeven or slightly into profitable territory. The bullish set up in this stock is betting on another rebound from the $35 level since the stock has rebounded three times from that level already. Buying on a trade down to $35 with a stop at $34 would be a low risk proposition, but I don't know who good the probabilities are in such a set up. Of course the very short term descending trend diminishes the probabilities of a bullish trade, but the fact that the stock is closer to its highs might negate that. And the rising 50-dma around $33.50 might draw some attention from the bulls. Either way you see it, there are two good set-ups in this stock with easy risk management. PLMD - Daily ---------------------------- 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 ************* ===================================== Market Watch for the week of May 13th ===================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- BAB British Airways Mon, May 20 -----N/A----- N/A GME Gamestop Corp. Mon, May 20 After the Bell 0.05 LTD Limited Mon, May 20 -----N/A----- 0.10 LDG Longs Drug Stores Mon, May 20 -----N/A----- 0.28 LOW Lowe`s Companies Mon, May 20 -----N/A----- 0.36 NSANY Nissan Mon, May 20 -----N/A----- N/A TOY Toys R Us Mon, May 20 Before the Bell -0.05 ------------------------- TUESDAY ------------------------------ SKS Saks Tue, May 21 After the Bell 0.13 SMTC Semtech Tue, May 21 After the Bell 0.12 SPLS Staples Tue, May 21 Before the Bell 0.11 SCMR Sycamore Networks Tue, May 21 After the Bell -0.11 TGT Target Corporation Tue, May 21 Before the Bell 0.36 KPN Koninklijke KPN Tue, May 21 Before the Bell N/A IPR International Power Tue, May 21 -----N/A----- N/A HD Home Depot Tue, May 21 Before the Bell 0.33 CPRT Copart Tue, May 21 After the Bell 0.17 CSKKY CSK Tue, May 21 -----N/A----- N/A BGP Borders Group Tue, May 21 After the Bell 0.04 BCM Canadian Imp Bank Comm Tue, May 21 -----N/A----- N/A AZO AutoZone Tue, May 21 After the Bell 0.78 BLI Big Lots, Inc. Tue, May 21 Before the Bell 0.07 BJ BJ`s Wholesale Club Tue, May 21 Before the Bell 0.31 ----------------------- WEDNESDAY ----------------------------- CMOS Credence Systems Wed, May 22 After the Bell -0.33 DT Deutsche Telekom Wed, May 22 Before the Bell N/A EV Eaton Vance Wed, May 22 Before the Bell 0.46 JDEC J.D. Edwards Wed, May 22 -----N/A----- 0.04 KUB Kubota Wed, May 22 -----N/A----- N/A MDT Medtronic Wed, May 22 -----N/A----- 0.34 NVDA NVIDIA Wed, May 22 After the Bell 0.46 RL Polo Ralph Lauren Wed, May 22 Before the Bell 0.44 ROST Ross Stores Wed, May 22 Before the Bell 0.59 RY Royal Bank of Canada Wed, May 22 -----N/A----- N/A TLB Talbots Wed, May 22 -----N/A----- 0.56 TECD Tech Data Wed, May 22 -----N/A----- 0.57 TKP Technip-Coflexip Wed, May 22 After the Bell 0.32 TOT Total Fina S.A. Wed, May 22 -----N/A----- 0.85 ------------------------- THURSDAY ----------------------------- AAP Advance Auto Parts Thu, May 23 Before the Bell 0.53 BKS Barnes&Noble Thu, May 23 Before the Bell -0.06 CBRL CBRL Group Thu, May 23 -----N/A----- 0.34 CIEN CIENA Thu, May 23 Before the Bell -0.21 CLE Claire`s Stores Thu, May 23 -----N/A----- 0.15 Z Foot Locker, Inc. Thu, May 23 Before the Bell 0.26 ING ING Groupe NV Thu, May 23 -----N/A----- N/A KKD Krispy Kreme Doughnut Thu, May 23 -----N/A----- 0.14 MBG Mandalay Resort Group Thu, May 23 After the Bell 0.71 MRVL Marvell Tech Grp LTD Thu, May 23 After the Bell 0.07 MW Men`s Wearhouse Thu, May 23 Before the Bell 0.16 NDSN Nordson Thu, May 23 Before the Bell 0.25 PDCO Patterson Dental Thu, May 23 Before the Bell 0.38 PETC Petco Animals Thu, May 23 After the Bell 0.13 ROP Roper Industries Thu, May 23 After the Bell 0.56 SXC Six Cont Hotels & Res Thu, May 23 -----N/A----- N/A TOM Tommy Hilfiger Thu, May 23 -----N/A----- 0.40 UU United Utilities Thu, May 23 -----N/A----- N/A WSM Williams-Sonoma Thu, May 23 Before the Bell 0.09 ------------------------- FRIDAY ------------------------------- SCO Scor ADS Fri, May 24 Before the Bell N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable 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 ZRAN Zoran Corp 3:2 05/21 05/22 ANE Alliance Bancorp 11:10 05/21 05/22 DCM NTT DoCoMo 5:1 05/22 05/22 GTK GTECH Holdings Corp. 2:1 05/23 05/24 BKNW Bank of the Northwest 5:4 05/24 05/28 SU Suncor Energy 2:1 05/25 05/28 GG Goldcorp 2:1 05/28 05/29 CPG Chelsea Property 2:1 05/28 05/29 UCBI United Community Banks 2:1 05/28 05/29 COCO Corinthian Colleges 2:1 05/28 05/29 RYL Ryland Group 2:1 05/29 05/30 RYAN Ryans Family Steak 3:2 05/29 05/30 DBRN Dress Barn 2:1 05/30 05/31 APWR AstroPower, Inc 3:2 05/30 05/31 RNR RenaissanceRe 3:1 05/30 05/31 HHS Harte-Hanks Inc 3:2 05/30 05/31 CACB Cascade Bancorp 3:2 05/30 05/31 SRCL Stericycle Inc. 2:1 05/31 06/03 FBC Flagstar Bancorp 3:2 05/31 06/03 ALC Alltrista 2:1 05/31 06/03 PRSP Prosperity Bancshares 2:1 05/31 06/03 -------------------------- Economic Reports This Week -------------------------- Do we have a real economic recovery yet? We'll know if the consumer is doing his (and her) part next week when we see piles of earnings reports from the like of The Limited, Saks, Target, Home Depot, Toys R Us and Autozone. Not enough recovery rubble to rummage through? Don't worry! You'll be able to get your fill with Monday's Leading Indicators report, Thursday's Durable Goods Orders numbers and Friday's all-important preliminary GDP figures. Who knows--maybe they'll all point in the same direction for a change! ============================================================== -For- Monday, 05/20/02 ---------------- Leading Indicators (DM) Apr Forecast: -0.1% Previous: 0.1% Treasury Budget (DM) Apr Forecast: $72.5B Previous: $189.8B Tuesday, 05/21/02 ----------------- None Wednesday, 05/22/02 ------------------- None Thursday, 05/23/02 ------------------ Initial Claims (BB) 05/18 Forecast: N/A Previous: 418K Durable Orders (BB) Apr Forecast: 0.4% Previous: -0.5% Friday, 05/24/02 ---------------- GDP-Prel. (BB) Q1 Forecast: 5.8% Previous: 5.8% Chain Deflator-Prel. (BB) Q1 Forecast: 0.8% Previous: 0.8% New Home Sales (DM) Apr Forecast: 883K Previous: 878K 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. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 05-19-2002 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 - 5/19 by Leigh Stevens HIGHER ON THE DAY ON FRIDAY - A mix of some of the former favorites like Gold & Silver (XAU) and Healthcare, and some of the more oversold sectors like the Brokers and tech groups like software and networking. DOWN ON THE DAY AT WEEK'S END - We saw an end of the week oil price correction. I believe that this will bring the oil services stocks down to an area where some buying could be done again. SECTOR TRADING IDEAS - Healthcare Payors Index ($HMO.X): Looks like this group has broken out to the upside again: HMO sector stocks (3) that were suggested in Sector Trader, where entry was possible in my suggested buy area and where the stocks have listed options also: PacifiCare Health Systems (PHSY) dropped twice into my suggested buying 23.5-24.7 zone at. The August 30 calls were a possible option play. (5/17 PHSY close: 30.06) Wellpoint Health Networks (WLP) - Two price entry points were suggested with subsequent declines to and under these levels - at 72.00, then again at 70 or less. (5/17 close: 71.3). HUMANA (HUM) - Purchase suggestion was at 15.60, and again in the 15.00-15.15 area. HUM reached a recent low of 14.75. (5/17 close: 15.44) Oil Services ($OSX.X)- As with the Healthcare stocks, sectors that were up strongly, while the overall market was falling, may continue to be market leaders even in an overall market advance. Within OSX, Smith International (SII), BJ Services (BJS) and Cooper Cameron (CAM) look like representative stock plays in this sector, including option possibilities. The 3 stocks were leading this group. Smith International (SII) - SII looks vulnerable to a pullback to the 68 area, perhaps a bit lower. The recent high was accompanied by a diverging RSI, as it failed to also register a new high - this is suggestive of an interim top. BJ Services (BJS) - BJS made an apparent double top and could pull back to 34-35, which may be an area to buy the stock/buy calls. Cooper Cameron (CAM) - CAM is still in a strong uptrend, but the last higher high was not "confirmed" by a similar new high in the 14-day stochastic. Now, sure enough, Friday's action pierced its up trendline at 56.5 The next lower support area looks like 54; below 54, a possible downside objective is to 50-51, where purchases are suggested. 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 SII 73.18 1.87 0.08 -2.91 1.39 -1.01 Dropped, weak SRCL 72.70 1.91 0.80 0.46 -2.41 2.19 Dropped, stable RTN 42.57 1.01 0.22 -0.57 -1.44 -1.20 Dropped, pause SGR 34.65 0.10 0.94 0.86 -1.02 1.40 Dropped, gains LLL 127.30 1.02 0.36 -2.70 0.46 -3.17 Dropped, PT MMM 130.07 1.60 1.49 -0.49 -0.09 3.17 Running higher HET 49.56 2.83 0.81 0.17 1.16 4.53 Consumer bid NVDA 39.17 1.93 3.36 0.73 0.07 7.29 Nervous bears SYMC 39.17 1.30 2.86 0.24 -0.71 5.42 Strong play TEVA 62.60 0.60 0.10 1.85 0.60 3.30 Stepping up BAC 76.90 1.15 0.88 0.92 0.29 3.05 New, lead bank ERTS 63.71 2.03 -0.79 1.07 3.05 4.61 New, price wars QLGC 51.82 2.38 4.14 -2.51 0.79 5.64 New, no doubt AOL 19.98 0.37 1.20 0.05 1.08 3.00 New, rebound MTB 89.94 1.20 2.25 0.15 0.71 3.69 New, sector PUTS IDPH 47.93 -1.39 1.35 1.67 -2.01 1.94 Dropped, highs RE 63.70 0.11 0.18 -0.12 -1.62 -3.65 Lower bound GENZ 35.58 0.05 0.79 -0.50 -1.43 0.17 Dropped, shorts FLR 35.94 0.04 0.67 -0.19 -1.58 -1.17 Working down MGG 39.00 1.36 0.78 -0.52 0.07 1.90 Dropped, relief CVC 19.35 -2.15 0.10 -0.35 -1.80 -3.05 New, poor biz MU 22.47 1.13 2.70 -0.81 0.52 2.54 New, DRAM down TTI 25.95 -1.00 -0.99 0.30 -0.32 -2.80 New, rotate HB 61.14 0.35 1.23 -0.52 0.21 0.30 New, pullback ************************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: ********************* ERTS – Electronic Arts $63.71 (+4.61 last week) See details in play list Put Play of the Day: ******************** MU – Micron Technology $25.01 (+2.54 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 ^^^^^ SII $73.18 (-1.01) Something feels like it has changed in SII's trend after observing its trading last week. The stock failed to respond in Friday's session after we saw the lift during Thursday's trade. Instead of exposing ourselves to the risk of a breakdown, we're choosing to drop coverage this week. Use an intraday bounce next week to exit plays. SGR $34.65 (+1.40) SGR wrapped up a solid week last Friday with a bounce back after the one day sell off Thursday. Although the stock remains technically strong, it just isn't moving enough for options traders. We're dropping the play and instead moving into stocks with faster upside potential. Use a breakout in next week's trading above relative highs to exit positions. SRCL $72.70 (+2.19) The sideways go nowhere price action of SRCL is testing our patience. The stock rebounded again from the $70 level, but failed to make much more upside progress. We're going to use the stock's late week rally as an exit opportunity next week. Look for a trade up to the $74 level to book profits. LLL $127.30 (-3.17) The profit taking in the Defense sector took a turn for the worse on Friday, with the DFI index falling to the $660 level by early afternoon. That bout of selling was enough to drive LLL well below our $127.50 stop, and even a solid rebound in the final 2 hours of trade wasn't enough to get the stock back above that level. We'll stick with our stop and exit the play this weekend. Should the rebound continue on Monday, use that strength to obtain a more favorable exit from any open positions. RTN $42.57 (-1.20) RTN managed to hold up rather well during the selling in the Defense sector on Friday, ending the week just above the $42.50 level. But the upward momentum that first attracted us to the play has been seriously damaged over the past few days. Rather than wait for our stop to be triggered, we're dropping the play this weekend to make room for stronger bullish candidates. PUTS ^^^^ MGG $39.00 (+1.90) The super strong consumer numbers last Friday helped MGG above its downward sloping 10-dma. Although very subtle, the piercing of the moving average could portend a reversal of short term trend. We're choosing to step out of this play early to avoid any big short covering rally next week. GENZ $35.58 (+0.17) Still locked in a downtrend, GENZ has been going our way ever since we started coverage last week. But with the Biotech sector gaining strength and looking like it wants to take a run up the charts, we think the smart move is to exit the play before it reverses direction. See how GENZ has been finding support near the $34.50 level and refuses to break down? That is an early indication that it is time to move on. Exit any open positions on Monday, using weakness in the stock to gain a more favorable exit from the play. IDPH $47.93 (+1.94) Our IDPH play has been good to us lately as the bears have repeatedly sold into the rallies at resistance. But we're starting to get a bit nervous, with the strong action in the broad markets on Friday and the nearly 3% rebound in the Biotech sector. Note how the stock has been posting higher lows over the past several days, demonstrating that the bulls are gaining strength. Rather than wait for our stop to be triggered, we're dropping the play this weekend in anticipation of a stronger upward move in the sector in the coming week. Use any weakness on Monday to exit open positions. *********** 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 05-19-2002 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 ************** AOL - AOL Time Warner $19.98 (+3.00 last week) AOL Time Warner Inc. is a fully integrated, Internet-powered media and communications company. The Company was formed in connection with the merger of America Online, Inc. (America Online) and Time Warner Inc. (Time Warner), which was consummated on January 11, 2001. America Online and Time Warner are wholly owned subsidiaries of AOL Time Warner. Former high flyers have been beaten down to once thought inconceivable levels this year. But traders and investors are starting to look for bargains in the most beaten down stocks in technology and telecom. At least that was the talk surrounding the rally in the media giant AOL last week. Following its most recent slide lower, investors began to move back into shares of AOL on the growing belief that the stock had finally hit bottom and in the process had become a good value in the technology and telecom sectors. There is a growing consensus that the recent lows in AOL are going to hold and end up being the bottom in the stock since the merger of AOL and Time Warner was completed. The major mutual fund sellers that have punished this stock all year long appear to have finally wrapped up their selling, which has been putting pressure on the stock this year to the tune of about 40 percent. Aggressive investors are now eyeing the stock as a bargain and looking to scoop up some value with the stock. The move last week which saw AOL pop above the $20 level on an intraday basis could very well have foreshadowed that a major recovery rally is just getting underway for the stock. In a positive broader market condition next week, look for the stock to rally firmly above the $20 level. Use such a move to enter new bullish positions. Broad market weakness should pressure the stock back down into its now ascending 10-dma near the $18 level. Look for bounces from there as entry points on intraday weakness. Our stop is in place first at the $17.50 level. BUY CALL JUN-17 AOL-FW OI=15252 at $2.95 SL=1.75 BUY CALL JUN-20*AOL-FD OI=44258 at $1.15 SL=0.75 BUY CALL JUL-20 AOL-GD OI=11950 at $1.65 SL=0.75 BUY CALL JUL-22 AOL-GX OI=22431 at $0.65 SL=0.25 Average Daily Volume = 24.1 mln MTB - M&T Bank $89.94 (+3.69 last week) M&T Bank Corporation is a bank holding company that conducts its business through two wholly owned bank subsidiaries, Manufacturers and Traders Trust Company and M&T Bank, National Association. The banks collectively offer a wide range of commercial banking, trust and investment services to their customers. The Company's segments are Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking. Short term interest rates remain near a 40 year low thanks to the efforts of the Federal Reserve to influence an economic recovery through its monetary policy tools. The yield curve, at the same time, remains relatively steep, in which longer term rates are much higher than shorter term rates. These two conditions are what the bank holding companies live for. It's also the reason why these stocks have been one of the strongest performing groups in the equity markets this year. Just take a look at a daily chart of MTB. The stock is up by about 23 percent so far this year and has plenty of upside potential left in it despite the already big run. That's because of the favorable interest rate environment that remains. As long as inflation remains low this year and short term interest rates stay down, these stocks will continue to rise as they leverage off of the favorable monetary conditions. Look for the momentum to the upside to continue into next week's trading with further upside in MTB. Use a breakout on heavy volume above the $90 level as a potential entry point into new call positions on further strength in the banking indices. If the stock pulls back, look for a light volume trade down to the rising 10-dma near the $87.50 level. Wait for a bounce, then look to enter call positions on a resumption of the stock's upward trend. Our coverage stop is in place at the $86 mark. BUY CALL JUN-85 MTB-FQ OI=20 at $5.50 SL=3.75 BUY CALL JUN-90*MTB-FR OI=40 at $1.70 SL=0.75 BUY CALL JUL-85 MTB-GQ OI=83 at $6.00 SL=4.75 BUY CALL JUL-90 MTB-GR OI=23 at $2.45 SL=1.25 Average Daily Volume = 238 K BAC – Bank of America Corp. $76.90 (+3.05 last week) Providing a diversified range of banking and certain non-banking financial products and services, BAC's operations consist of Consumer Banking, Commercial Banking, Global Corporate and Investment Banking, and Principal Investing and Asset Management. Consumer Banking targets individuals and small businesses, while Commercial Banking targets businesses with annual revenues up to $500 million. Global Corporate and Investment Banking provides investment banking, trade finance, treasury management, leasing and financial advisory services. Principal Investing includes direct equity investments in businesses and general partnership funds, while the Asset Management businesses are split into three branches; Private Bank, Banc of America Capital Management and Banc of America Investment Services. There are many areas of uncertainty in the current market, pertaining both to the strength of the economic recovery and how that will translate into gains in the equity market. But one thing that seems clear is that interest rates aren't going up anytime soon. Due to recent comments from Alan Greenspan, it looks like a raise in the Fed's target interest rate could be on hold for the rest of the year, as economic growth still appears to be tepid, at best. This is good news for the banks, as they don't need to be worried about rising rates cutting into their profit margins over the near term. Apparently investors have already figured that out, as Banking stocks have moved back into rally mode. The interesting thing is that BAC never left that mode, as it has been in a steady uptrend since bouncing off the $67 support level in early April. If you want to see just how strong the stock is, look at the PnF chart, where the past 3 months of trading are represented by a single column of X's 18 boxes high. That means that the stock has a bullish price target of $118! It is a pretty sure thing that we won't see anything close to that level during this play, but you can see what the long-term upside is. BAC just broke out above its 1999 highs and it looks like the $81-82 level will be the next place for bulls to cool their heels. For now we have a solid upward trend to play, where buying dips to support should provide solid entry points. Up until early last week, BAC had been riding its month-long ascending trendline (currently $74.75), but the bulls propelled the stock upwards at an even greater rate last week and it appears to need a bit of time to consolidate before continuing higher. A mild pullback to the $75 level would be just what the doctor ordered, as it would give the bulls a solid point from which to launch their next assault up the charts. Of course, with the steeper ascent the stock has been on recently, we may have to settle for a bounce near the $76 intraday support level to trigger new entries. We are initiating coverage with a fairly tight stop at $74.50. BUY CALL JUN-75*BAC-FO OI= 6575 at $2.95 SL=1.50 BUY CALL JUN-80 BAC-FP OI= 1108 at $0.65 SL=0.25 BUY CALL AUG-75 BAC-HO OI=20188 at $4.30 SL=2.50 BUY CALL AUG-80 BAC-HP OI= 6017 at $1.80 SL=2.50 Average Daily Volume = 5.79 mln ERTS – Electronic Arts $63.71 (+4.61 last week) ERTS creates, markets and distributes interactive entertainment software for a variety of hardware platforms, including Sony's PlayStation 2, the PC, Nintendo GameCube and the recently launched Xbox. The company's EA.com business segment is engaged in the creation, marketing and distribution of entertainment software which can be played or sold online, as well as the ongoing management of subscriptions of online games and Website advertising. News of soft sales of MSFT's new game unit, the Xbox, didn't sit well with investors in the world's largest Software company, but there is a silver lining to this cloud. MSFT's announcement of reductions in the price for its game unit was followed by Sony making a similar announcement related to its PlayStation 2. While that will reduce profit margins for the makers of the gaming systems, it will likely boost the number of units sold. And that is good news for the companies that make the actual gaming software that runs on those platforms. ERTS is a leader in the entertainment software industry and makes games for both platforms. The reduction in cost of the game stations will likely have no effect on the prices that ERTS can charge for its games, so the hefty profit margins should remain intact. The stock has been in a broad consolidation pattern over the past 2 months, but is looking more and more likely that it will break out to the upside, and soon. The $64 level has served as overhead resistance during that time, marking the top of the recent trading range. Shares of ERTS are chipping away at this level though, hitting it 3 times in just the past week. Note that ERTS will give a fresh double-top PnF buy signal with a print of $65, and the bullish price target of $79 tells us this one has plenty of gas in the tank. While we're looking for a breakout, that doesn't mean we can't take a position in anticipation of a breakout. Support should be solid in the $60-61 area and a dip and rebound from above that level would make for an attractive entry point. Given the stock's rise over the past week though, a rebound from the $61.50 level is more likely. For those looking to play the breakout, a rally through the $64 level will be the trigger to initiate new positions. After that, the only level of overhead resistance is at the $66-67 area, with the stock's all-time high at $66.92. Place stops initially at $59.50. BUY CALL JUN-60 EZQ-FL OI=2123 at $5.80 SL=3.75 BUY CALL JUN-65*EZQ-FM OI=1922 at $2.90 SL=1.50 BUY CALL SEP-65 EZQ-IM OI= 135 at $6.30 SL=4.25 BUY CALL SEP-70 EZQ-IN OI= 181 at $4.20 SL=2.50 Average Daily Volume = 2.80 mln QLGC – QLogic Corporation $51.82 (+5.64 last week) Somebody has to make the equipment that lets your computer talk to all its peripheral equipment, and QLGC does it well. A leading designer and supplier of semiconductor and board-level input/output (I/O) management products, QLGC has been providing SCSI-based connectivity solutions to this market sector for over 12 years. QLGC's I/O products provide a high performance interface between computer systems and their attached data storage peripherals, such as hard disk and tape drives, removable disk drives and RAID (redundant array of independent disks) subsystems. The company is also the market share leader in Fibre Channel host bus adapters, a market segment that is receiving tremendous attention from investors. It seems everyone has an opinion on the Storage sector lately, and that raise the question of who to believe. When in doubt, we should always go to the authority, the Market. And the Market is currently voting with the bulls. While BRCD beat estimates in its earnings report it is still mired in its downtrend, but shares of EMLX and QLGC are making strides into bullish territory. A quick glance at the daily charts of each of these companies will show that QLGC is clearly the strongest of the three, as it is currently trading near 4-month highs and is right on the cusp of a breakout. A big part of the stock's strength is coming from the very strong earnings report from a couple weeks ago, where the company guided earnings estimates higher for the next quarter. With the NASDAQ-100 Bullish Percent going Bull Confirmed late last week and QLGC giving a fresh double-top PnF buy signal with its recent trade at $52, we like the bullish prospects. The current bullish price target for QLGC is $70, so there is plenty of room to run if the bulls can push back through the recent highs. There is more resistance in the $56-57 area, but once clear of that obstacle, QLGC looks like it could quickly run towards the $65 level, the site of the highs from last summer. Aggressive traders can look to initiate new positions on a dip ahead of the breakout, looking for a bounce from $50 or even $48.50, the bottom of the gap from last week. Traders that would prefer to wait for the breakout before playing will want to see QLGC push through the $53 level on strong volume first. We are initiating coverage with our stop set at $48. BUY CALL JUN-50 QLC-FJ OI=5724 at $5.20 SL=3.25 BUY CALL JUN-55*QLC-FK OI=3702 at $2.80 SL=1.50 BUY CALL JUL-50 QLC-GJ OI=1995 at $7.10 SL=5.00 BUY CALL JUL-55 QLC-GK OI=2547 at $4.50 SL=2.75 BUY CALL JUL-60 QLC-GL OI=2197 at $2.70 SL=1.25 Average Daily Volume = 10.3 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 ****************** TEVA - Teva Pharmaceuticals $62.60 (+3.30 last week) Teva Pharmaceutical Industries Ltd. is a fully integrated global pharmaceutical company producing drugs in all major therapeutic categories. In the area of proprietary drugs, Teva has focused on products for central nervous system disorders, primarily the development of Teva's first globally marketed branded drug, Copaxone, a treatment for relapsing-remitting multiple sclerosis. Teva also possesses significant manufacturing operations for active pharmaceutical ingredients (API). Teva Pharmaceuticals USA, Inc., Teva's principal United States subsidiary, is a generic drug company in the United States. Teva announced last Friday morning that through one of its subsidiaries in Latin America would market and distribute two of Immunomedics (NASDAQ:IMMU) products. The deal calls for the selling and distribution of diagnostic products throughout Latin America. That news, along with the strength in the AMEX Biotechnology Sector Index (BTK.X), helped TEVA to yet another new relative high in the stock's recently established ascending trend. The stock traded as high as the $63.25 level before profit takers decided to take some gains off the table ahead of the weekend. For the week, the stock finished more than $3 higher, reinforcing the relative strength that has been at play since earlier this month. The big run in the stock recently may necessitate a pullback and consolidation in the week ahead, but not if the broader biotechnology group continues moving higher like it did during last Friday's session. The BTK.X powered higher by more than 2 percent during the day, and the move higher in this group could just be getting underway. Bulls on biotechs should look to the BTK to further lift TEVA over the short term. Use intraday pullbacks to support followed by bounces to enter new call positions, then look for sector upward momentum to push TEVA to new relative highs in its trend. Use a strong rally to take profits from entries on weakness. BUY CALL JUN-60 TVQ-FL OI=1266 at $3.90 SL=2.25 BUY CALL JUN-65*TVQ-FM OI= 937 at $1.30 SL=0.75 BUY CALL SEP-60 TVQ-IL OI= 913 at $5.80 SL=4.00 BUY CALL SEP-65 TVQ-IM OI= 892 at $3.30 SL=1.75 Average Daily Volume = 910 K HET - Harrah's Entertainment $49.56 (+4.53 last week) Harrah's Entertainment, Inc. operates casinos through a wholly owned subsidiary, Harrah's Operating Company, Inc. (HOC), and through HOC's subsidiaries. As of December 31, 2001, the Company owned and/or operated a total of approximately 1,458,021 square feet of casino space, 41,719 slot machines, 1,114 table games, 13,477 hotel rooms or suites, approximately 371,405 square feet of convention space, and 101 restaurants. Las Vegas hotel workers could put a kink in our play on HET during next week's trading. The broader casino sector was anxiously awaiting the results of a vote during last Friday's session, resulting in most stocks in the group trading in a very tight range for the day. Hotel workers in Las Vegas voted for a strike, which could adversely impact earnings for the group if the tensions are not resolved rather quickly. However, the strength of the U.S. consumer which was reported last Friday with the consumer sentiment numbers may trump any risk from the strike over the short term. Most investors think that a strike is unlikely because of the damage it would cause to both parties; the market is expecting that the strike will be adverted through negotiations over the weekend and into next week. We want to watch the developments very closely over the weekend and use tight risk management on any open plays going into next week's trading. If the strike is adverted over the weekend or early next week, then HET should continue trending higher based on the positive consumer sentiment and rebounding economic conditions. What we'll be watching for is another break above the $50 level which should lead to a revisit of the relative highs above the $51 congestion area. BUY CALL JUN-45*HET-FI OI=40 at $5.20 SL=2.75 BUY CALL JUN-50 HET-FJ OI=58 at $1.65 SL=0.75 BUY CALL AUG-47 HET-HW OI=77 at $4.30 SL=2.00 BUY CALL AUG-50 HET-HJ OI=96 at $2.75 SL=1.25 Average Daily Volume = 988 K NVDA - NVIDIA $39.17 (+7.29 last week) NVIDIA Corporation designs, develops and markets graphics processors and related software for personal computers and digital entertainment platforms. NVIDIA provides a "top-to bottom" family of performance 3D graphics processors and graphics processing units that, in the Company's opinion, has set the standard for performance, quality and features for a broad range of desktop PCs, from professional workstations to low-cost PCs, and mobile PCs, from performance laptops to thin-and-light notebooks. Dow Jones was reporting Friday that NVDA was asking shareholders to approve the doubling of the company's common shares outstanding up to 1 billion shares. The company commented that it had no intentions of issuing additional stock but would like access to additional shares for capital raising measures such as stock options to employees, dividends and using the additional stock for possible partnerships down the road. The news didn't seem to rattle traders during Friday's session as shares of the high flying chip company worked higher still on what appeared to be further short covering ahead of Friday's equity options expiration. The stock gained another 3 percent on the day, working closer towards the $40 level. Traders who got in early on this play can start thinking about booking partial gains on a rally up to the $40 mark, which is a potential double top for the stock. However, a breakout above the $40 level early next week would most likely lead to a move up into the mid $40's, possibly as high as the $45 level. The stock will need the support of the Semiconductor Sector Index (SOX.X), so make sure to confirm sector strength before taking on new call plays in this stock. As for new entry points, we'd like to see an intraday pullback down to support for new entries, but would consider a breakout above $40 as a good momentum entry, provided that the market and the stock's sector are both confirming such an entry point. BUY CALL JUN-35 RVU-FG OI=3281 at $6.20 SL=3.75 BUY CALL JUN-40*RVU-FH OI=6444 at $3.20 SL=1.75 BUY CALL SEP-40 RVU-IH OI=1350 at $6.40 SL=3.75 BUY CALL SEP-45 RVU-II OI=3042 at $3.90 SL=2.25 Average Daily Volume = 11.5 mln MMM – Minnesota Mining and Manufacturing $130.07 (+3.17 last week) Commonly known as the maker of the ubiquitous, adhesive-backed Post-It Notes, MMM is also a leading manufacturer of a variety of industrial, consumer, and medical products. Reflective sheeting on highway signs, respirators, spill-control sorbents, and Thinsulate brand insulations are just some of the company's industrial products. MMM also makes microbiology products, making it easier for food processors to test for the microbiological quality of food. Option expiration served to pin many stocks near strikes with the highest open interest, and MMM certainly fits that description. Closing out a positive week with another fractional gain on Friday, the stock came to rest just 7-cents above the $130 strike, which just happened to have the highest open interest of both puts and calls for May. With last week's breakout over the $127 resistance level and the removal of the expiration-related funny business next week, MMM looks poised to stage another advance. And with the DOW closing right at its high at resistance, we could be looking at another round of short-covering next week if the bulls can push through the 10,350 level. The PnF chart is still giving us a full-bull-ahead signal with MMM's recent triple top breakout and a price target of $140. Intraday support has been building near the $128.50 level and bounces from this level continue to provide attractive entry points into the play. Traders that want to see a fresh breakout before playing will want to enter new positions as MMM clears the $130.50 level, along with the DOW powering through resistance. Raise stops to $127. BUY CALL JUN-130*MMM-FF OI=1838 at $3.30 SL=1.75 BUY CALL JUN-135 MMM-FG OI=1189 at $1.30 SL=0.75 BUY CALL JUL-130 MMM-GF OI=1461 at $4.90 SL=3.00 BUY CALL JUL-135 MMM-GG OI=1461 at $2.65 SL=1.25 Average Daily Volume = 1.88 mln SYMC – Symantec Corp. $39.17 (+5.42 last week) A world leader in Internet security technology, SYMC provides a broad range of content and network security solutions to individuals and enterprises. The company is a leading provider of virus protection, risk management, Internet content and e-mail filtering, remote management and mobile code detection technologies. The desktop battleground is where SYMC derives nearly 60% of its sales. Duking it out with Network Associates in this arena, the company is best known for its security software (Norton AntiVirus), desktop efficiency (Norton CleanSweep), and PC utility (Norton Ghost) products. When we initiated coverage of SYMC, we were looking for the stock to decisively breakout over the $38 level and charge through resistance near the $39.40 level. Well, we got half of that request fulfilled last week as the stock did indeed break through the $38 resistance level that had been holding it back for the past 6 weeks. But the follow through was lacking and SYMC spent the remainder of the week vacillating between $38 support (old resistance) and new resistance at the top of the April gap, near $39.40. Aside from a brief spike through the top of this gap at the open on Friday, SYMC was still confined to a rather narrow range. But a narrow range helps us to better define our entry points into the play. Dip buyers will want to continue looking for entries on intraday pullbacks near $37.50-38.00, while momentum traders will want to enter on a rally through the $40 level. Once the breakout occurs, look for mild resistance near $41, and stronger resistance between $42-43, the site of the stock's all-time highs, set during the month of March. Further supporting our bullish thesis for the stock is the fact that the NASDAQ-100 Bullish Percent has now gone Bull Confirmed and the Software sector (GSO.X) has managed to clear near-term resistance. We will need to see the GSO index continue to advance if SYMC is going to push towards those all-time highs. Move stops up to $36. BUY CALL JUN-35 SYQ-FG OI=1198 at $5.60 SL=3.50 BUY CALL JUN-40*SYQ-FH OI=1568 at $2.15 SL=1.00 BUY CALL JUL-37 SYQ-GU OI=1576 at $4.80 SL=3.00 BUY CALL JUL-40 SYQ-GH OI=1633 at $3.40 SL=2.75 BUY CALL JUL-42 SYQ-GV OI=3992 at $2.25 SL=1.00 Average Daily Volume = 3.84 mln ************* NEW PUT PLAYS ************* TTI - Tetra Technologies $25.95 (-2.80 last week) TETRA Technologies, Inc. is an oil and gas services company with an integrated calcium chloride and brominated products manufacturing operation that supplies feedstocks to energy markets, as well as other markets. The Company is comprised of three divisions. The Fluids Division manufactures and markets clear brine fluids dry calcium chloride. The Testing & Services Division provides production testing services and technology and services required for the separation and recycling of oily residuals generated from petroleum refining and exploration and production operations. The broader energy sector is looking toppy. There are several developments and events that could lead to a move lower in the broader group. For one, the price of oil is extended and due for a pullback. That alone would increase the downward pressure on the broader group. The move lower in oil could be precipitated by an increase in production from Russia, who has been saying that it may start to ramp production with prices as high as they are. There's also the seasonal trend at work in the natural gas business, which may result in further weakness in the overall group. TTI is a pick and shovel provider to the energy markets, and could be in for more downside after its recent retreat from relative highs. The stock took out short term support during the last two weeks and is now pointing towards its 200-dma which is well below last Friday's close just below the $26 level. The 200-dma sits below at the $22 mark, and will make for a good downside target over the next month or two. Watch for weakness to enter the oil and gas markets next week, and look for TTI to take out its most recent relative low in its downward trend at the $25.70 level. A breakdown below there can be used as an entry point into weakness. Our coverage stop is in place above at the $28 level, just above the downward sloping 10-dma which can be used as an entry point on rollovers following any brief relief rally. BUY PUT JUN-25*TTI-RE OI=32 at $1.50 SL=0.75 BUY PUT SEP-25 TTI-UE OI=10 at $2.70 SL=1.75 Average Daily Volume = 151 K HB - Hillenbrand $61.14 (+0.30 last week) Hillenbrand Industries, Inc. is a diversified holding company that owns 100% of the capital stock of its three major operating companies serving the funeral services and healthcare industries. The Company's Health Care Group consists of Hill-Rom Company, a manufacturer of equipment for the health care market and provider of wound care and pulmonary/trauma management services. The broader health care group is looking ripe for an extended pullback into the summer doldrums. Some of the weaker stocks in the group present a good downside opportunity over the coming weeks. HB is a diversified concern with operations in the broader health care industry, as well as funeral services. The stock slipped below its 10-dma about two weeks ago, which was an indication of the short term downward trend that followed the breakdown. Since that time, the stock has fallen lower on increased trading volume, indicating that the bulls are ready to bail at a moment's notice. The trade down to the $58.30 level early in last week's trading will most likely be revisited in the coming week or two as the bulls fish for a bottom in the stock. Such a move would present some good downside from last Friday's close just above the $61 level. From there, a breakdown should be followed up with downside to the rising 200-dma which sits below at the $57 area. Look for intraday rally attempts to be met with selling at the 10-dma, which has served as a formidable resistance level since it was broken below two weeks ago. The 10-dma finished the week near $62.20, which is where the bears can watch for rollovers next week. Our stop is initially in place at $62.68. BUY PUT JUN-60*HB-RL OI= 10 at $1.50 SL=0.75 BUY PUT SEP-60 HB-UL OI=220 at $3.10 SL=1.75 Average Daily Volume = 146 K CVC – Cablevision Systems Corp. $19.35 (-3.05 last week) Cablevision Systems Corporation owns and operates cable television systems and has ownership interest in companies that produce and distribute national and regional entertainment and sports programming services. Its Rainbow Media subsidiary operates cable networks including American Movie Classics (AMC) and Bravo. Rainbow's majority-owned Madison Square Garden properties include the famous sports arena, the New York Nicks (NBA), the New York Rangers (NHL), and Radio City Entertainment (the Music Hall and the Rockettes). Other CVC units are involved in electronics retailing (The Wiz), movie theaters, and competitive telephone service. Remember what happened to Adelphia Communications over the past several weeks? While that saga may be just about played out, that doesn't mean that there aren't other companies that will be touched by the fallout. Shares of CVC have been in the loser column almost every day for the past month, and the stock got hit hard again last Monday on rumors of the company doing a convertible deal to address the 2003 funding gap. While that rumor never turned out to be anything but rumor, it was enough to hand investors a nearly 10% loss on the day. Worse yet, it produced another breakdown to all-time lows and a fresh double-bottom breakdown on the PnF chart. Speaking of the PnF chart, the current vertical count has CVC slated to visit the $15 level before the pain abates. But now that it is under the magical $20 level, there are likely more sellers waiting to get out on the slightest hint of a recovery in price in the hopes of getting back to even. The first level of resistance is now resting at $20-21, also the site of the 2-month descending trendline at $21. Even if the bulls manage to lift CVC through that level there is heavy resistance at $22.50-23.50 that should stop any frisky bulls in their tracks. So what does any of this have to do with Adelphia? In 2001, CVC received $1.4 billion in cash and stock from the sale of its Ohio system to Adelphia, with the stock portion totaling $422 million. In response to investor concerns about CVC's exposure to Adelphia's decline, the company stated that the stock risk has been hedged through derivative contracts. Additionally, the company stated that is has no plans to undertake a primary issuance or euity securities or convertible equity securities, putting Monday's rumor to rest. This is the source of the 6% bounce in the stock on Friday, but the technical damage has already been done, and reassuring statements from the company are unlikely to turn the tide in just one day. We want to target new positions on rally failures near resistance as detailed above. Initially, we are placing our stop at $23.50. BUY PUT JUN-20*CVC-RD OI= 706 at $2.70 SL=1.25 BUY PUT JUN-17 CVC-RW OI=1376 at $1.60 SL=0.75 Average Daily Volume = 1.97 mln MU – Micron Technology $25.01 (+2.54 last week) Micron is one of the world's leading makers of semiconductor memory components. Two-thirds of the companies revenues come from dynamic random-access memory (DRAM), flash memory, and other chips. MU has added the newer Rambus DRAM and Synchronous DRAM products to its line, and it is developing embedded memory for the digital video and other markets. The other third of the company's sales come from Micron Electronics (61% owned by MU), which makes PCs and laptop computers and offers Internet related business services. The impressive Semiconductor Book-to-Bill report had Semiconductor bulls clicking their heels together in glee as the closing bell rang on Friday. While the Semiconductor index (SOX.X) ended essentially unchanged for the day, the bulls had done an excellent job of battling back from support near the $535 level early in the day. With the NASDAQ-100 Bullish Percent reading now solidly in Bull Confirmed, we could be looking at a powerful Chip rally again next week. But that doesn't mean that all is rosy in Chip-land. DRAM prices are falling and there is likely to be a price war over the summer. That translates into shrinking profits for MU, the king of DRAM manufacturers. Investors are clearly worried about these factors and you can see it in the daily chart. After the short-covering gap on Tuesday, the stock has been drifting lower again, and closed right on support at $25 and back below the declining 20-dma ($25.21) on Friday. Add in the fact that daily Stochastics are just starting to roll over from overbought territory, and you can see that MU is ripe for a fall. The first stage of that tumble has taken place over the past 10-weeks, with the PnF chart giving us a big double-bottom sell signal and a bearish price target all the way down at $6. Ouch!! It's seems unlikely MU will fall that far, but we can dream, can't we? Intraday resistance has been building in the $26.00-26.50 area, and should we get so lucky as to see that level again before the slide resumes, it will make for a solid entry point. Otherwise, we will want to wait for the $22 support level to give way before initiating new positions. Our stop is initially set at $27.75. BUY PUT JUN-27 MU-RR OI=7431 at $3.70 SL=2.00 BUY PUT JUN-25*MU-RE OI=1838 at $2.20 SL=1.00 BUY PUT JUN-22 MU-RQ OI=4134 at $1.15 SL=0.50 Average Daily Volume = 9.16 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. 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The Option Investor Newsletter Sunday 05-19-2002 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 ***************** RE - Everest RE Group $63.70 (-3.65 last week) Everest Re Group, Ltd.'s principal business, conducted through its operating subsidiaries, is the underwriting of reinsurance and insurance in the United States, Bermuda and international markets. The Company underwrites reinsurance both through brokers and directly with ceding companies, giving it the flexibility to pursue business regardless of the ceding company's preferred reinsurance purchasing method. The stair step pattern that has been in place since mid April has seen shares of insurance giant RE move lower from their long term consolidation. The weekly chart gives a good view of the stock's long term consolidation, which appears to have been broken out of to the downside during the last two weeks of price action. The break came when the stock moved below the $65 level two weeks ago, and it now has the stock looking dangerously suspect to further measurable downside from last Friday's close. The first potential level of support lie below near the $60 level. But that potential support level is more psychological than anything. From there, a longer term downward move is setting up for a retest of the September lows down around the $50 mark. With momentum indicators now all pointing south, the stock appears like it will continue to step lower during the summer months. Look for further weakness to develop during next week's trading with a break below the $62 level, from which the stock rebounded in two of last week's sessions. A breakdown from there would reveal that the sellers have returned. A one or two day rally to remove some of the oversold condition would be welcome. Look for any buying to top out near the $64 level, and use a rollover from there as an entry point into new plays. BUY PUT JUN-65*RE-RM OI=1266 at $3.50 SL=1.75 BUY PUT JUL-65 RE-SM OI= 294 at $4.20 SL=2.75 Average Daily Volume = 528 K FLR – Fluor Corporation $35.94 (-1.17 last week) Fluor Corporation is a diversified industrial company conducting business through five operating segments; Energy and Chemicals, Power, Global Services, Industrial and Infrastructure and Government Services. The Energy and Chemicals segment provides design, engineering, and construction services on a global basis to an extensive range of oil, gas, refining, chemical, polymer and petrochemical clients. The Industrial and Infrastructure segment provides the same services to a broad base of businesses, including general industrial, commercial, institutional, manufacturing and telecommunications customers. The Power segment designs, engineers and constructs power facilities around the globe. Darwin's theory of evolution says that the strong survive at the expense of the weak. That certainly appears to be the case in the markets right now, as money rotates out of weaker stocks to be put to work where it has the potential to grow. Laggard stocks like FLR are feeling the pain of being unloved as cash continues to rotate out of them. The pivotal development for the stock was the breakdown under the 200-dma, as that unleashed a fresh wave of selling. And from the picture being painted by the heavy selling volume, that wave has yet to crest. Friday's session saw the heaviest volume since the sharp selloff in January, with more the 800K shares trading hands. The recent double-bottom breakdown on the PnF chart put the stock back in its sell mode after moving up between February and April, and the bearish price target is now $27, below the February lows. The bears have been merciless over the past 3 weeks, selling everything that even looks like a rally and that gives us our entry strategy. Use any rebound near the $37 level to initiate new positions as the stock rolls over. Either that, or wait for a breakdown below the $35 support level. Once that support gives way, FLR will likely move down to the $32 support level in short order. Lower stops to $38.50 this weekend. BUY PUT JUN-40 FLR-RH OI=31 at $4.80 SL=2.75 BUY PUT JUN-35*FLR-RG OI=22 at $1.70 SL=0.75 Average Daily Volume = 308 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** No Lack of Excitement By Mark Phillips mphillips@OptionInvestor.com It was another wild and wooly week in the markets, with the impressive ramp job on Monday and Tuesday, quiet consolidation on Wednesday and Thursday, with a push back to/through resistance (depending on how you measure it) by the closing bell on Friday. There was a plethora of good news to drive the markets higher, with positive earnings from the likes of DELL, WMT and AMAT. With the Dow above 10,300, S&P500 above 1100 and the NASDAQ Composite apparently clear of the 1725 resistance level, it certainly seems as though we have begun the next bear-market rally. I know many of you are still in denial that this is a bear market, so let me put a few issues to rest. First off, we did have a recession. Secondly, while the economy may be (let me stress, "may be") bottoming, the recovery out of this slump is not going to be fast or strong. And I question whether it IS on the rebound, at least for broad Technology. If Technology spending was about to rebound, you know IBM wouldn't be contemplating a layoff of 8-9% of their workforce. The market is still pricing in a strong recovery and at some point in the future, it is going to be disappointed and disillusioned again and selling will be all the rage once again. The so-called experts have been telling us for two years that better times are just ahead and the markets are putting in THE bottom right now. Are they going to be right this time? It reminds me of the children's story about the little boy who cried "Wolf". Eventually they will tell us that it is the bottom and they'll be right. But we won't know it until well after the fact. So how will we know that we have truly entered a new bull market? At a minimum, it will require the broad market averages (DOW and S&P) to take out their 2001 highs (11,3250 and 1300 respectively). And for the NASDAQ Composite, we'll need to at least see a move through the 2400 level. Those measures are all a long way off at this point, the furthest away for the NASDAQ. Until those measures are met, it remains a rangebound market, at best. But that doesn't mean that we won't have solid trading rallies that we can profit from. I just don't see them as being investable over the long term (measured over a period of years). Fortunately for us, we're traders, albeit with a longer timeframe in mind in the LEAPS column. And I think the next tradable rally is here. Trade it while it lasts, but don't hold any illusions that THE bottom has arrived yet. I've been saying for many months that I think the September lows will be broken and I remain convinced that is the case. It just isn't going to be right now. Having said that, I think we actually got some solid entry points on some of our LEAPS candidates over the last week, and we could very well see some more develop in the weeks ahead. MSFT and MDT migrated to the Portfolio last week, and with BRCM and WMT finding an apparent near-term bottom, they are moving back to active status this week. Bullish Percent measures have moved back into Bull Confirmed and most weekly charts I looked at this week show the Stochastics just beginning to emerge from oversold territory. This is the kind of confirmation that we look for to indicate that bullish trading opportunities are at hand. Despite my optimism for this rebound to have some legs over the near-term, I remain very concerned about the action of the market volatility measures. After a fairly mild rebound in the broad markets from the lows of a couple short weeks ago, the VIX is right back at the 20 level, and the VXN has fallen sharply, now at 43 and appearing to be headed lower. This lack of concern by the investing public does not portend a lasting rally, as the markets need a wall of worry to climb if they are going to make serious upward progress. So like I said above, trade the rally as long as it lasts, but be constantly vigilant for the good times to come to a premature end. So let's look at the plays, and see where things are headed, ok? Portfolio: JNJ - The jury is still out on whether our out and then back in activity of last week was the right move. JNJ didn't trade very well last week, drifting back below the $60 level on Friday morning before staging a strong rebound with the rest of the broad markets. The poor action in Drug stocks is exerting heavy pressure on the stock, but if the sector (DRG.X) can mend its ways and start heading northward, then JNJ should be able to push through its all-time highs in the weeks ahead. For the record, that rebound from the $60 level on Friday looked like a solid entry point to me. MDT - Moved from the Watch List to the Portfolio as the stock rallied through the $44 level last week. Particularly impressive was its ability to crest the $45 level and move into the late April gap on Friday. If this move is for real, then the $48 level will present the first serious resistance for the bulls. MSFT - Isn't it amazing how the picture can change in one short week? MSFT gave us a nearly picture perfect entry on Monday as it launched higher from the $50 support level on respectable volume. There is some serious overhead resistance to deal with, but it was encouraging to see the stock move through the $56 level on Friday, creating a double-top breakout on the PnF chart. The bearish trendline is waiting to squash this rally at the $57-58 area, and we need to see the stock push through this level to convince us that the rally has legs. EK - Well, we finally pulled the plug on this one. See the writeup below for details. Watch List: PG - Just one mild dip, is that too much to ask for? Apparently so, in the case of PG, as the stock just keeps on riding its middle channel line higher. I'm changing the entry strategy on this one, as we want to participate in this uptrend. Use the next trip of the daily Stochastics back to oversold to initiate new positions, so long as the lower line of the ascending channel isn't violated on a closing basis. I expect we will have to settle for an entry in the vicinity of $91-92, but I'd be willing to enter on a dip as low as $89-90. After entry, stops will be placed just below the lower channel line, currently $86.50. WMT - Positive earnings and a better than expected Retail Sales report finally put a floor under shares of WMT right at the 50% retracement of the September-March advance. With the weekly Stochastics just poking above oversold, it looks like this move may have some room to run. With daily Stochastics nearing overbought, we'll want to catch new entries on the next oversold reading. If there is some strength behind the current rebound (and volume would seem to indicate that there is), look for a rebound from the vicinity of last week's lows ($56.50) to provide entry. I tend to favor the gap being filled, and that means looking for new entries on a bounce near $55. BRCM - Isn't it amazing how the technical picture can change in just a week. With the bullish action in the Semiconductor sector and a bullish Book-to-Bill report, the chip sector is looking bright again for technology investors. BRCM's action relative to the SOX left something to be desired last week, but this could just be part of the bottoming process. Let's move the stock back to active status this week, with an entry target of $25-26. While the trend is still bearish, and BRCM couldn't really get anything going to the upside last week, if the sector starts rocking, BRCM is likely to be a major player. Greater reward means greater risk, and this is definitely intended for those traders that can handle the risk. A rebound from anywhere above last week's lows looks good for new entries, but if the stock falls below $24, leave it alone. AMAT - Earnings were solid, but the forward guidance was really what lit a fire under the Chip sector last week. Then with the bullish Book-to-Bill numbers rounding out the week's events, it is no surprise that AMAT refused to give us what was admittedly an aggressive entry point. We'll have to take what the market gives us here and it looks like the next high odds entry will come on a dip into the $25-26 area, filling last week's gap. XOM - New. I've been looking for a way to play the expected strength in the Oil patch for awhile now, and XOM appears to have the best chart of those stocks with LEAPS available. See the writeup below for details. One other point that I think is worth noting is that last Friday was the May expiration event. For most option traders, this is just another expiration event, but for LEAPS traders it is important because it marks the beginning of the process whereby the 2005 LEAPS get issued. That's right, the 2003 LEAPS will start to become regular options over the next 3 months, as the 2004s become front-year LEAPS and the 2005s become available. Every year I get a number of questions on how this process works, so I'll address it in detail in Wednesday's column. Note that the process has already begun, with the root option symbols for the MSFT, PG and JNJ 2003 LEAPS changing this weekend. It looks like the next trading rally is here and we'll do our level best to capture the gains on the way up. We'll remain cautious in our approach though, due to the concerns that I highlighted above. Trade them, but don't fall in love with them. Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: JNJ 03/05/02 '03 $ 65 JNJ-AM $ 3.30 $ 3.10 - 6.06% $58.50 '04 $ 65 LJN-AM $ 6.40 $ 6.90 + 7.81% $58.50 MDT 05/15/02 '03 $ 45 VKD-AI $ 4.00 $ 4.70 +17.50% $42 '04 $ 45 LKD-AI $ 7.30 $ 7.90 + 8.22% $42 MSFT 05/13/02 '03 $ 55 MSQ-AK $ 5.90 $ 7.70 +30.51% $48 '04 $ 55 LMF-AK $10.20 $12.80 +25.49% $48 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BRCM 10/28/01 $25-26 JAN-2003 $ 30 OGJ-AF CC JAN-2003 $ 25 OGJ-AE JAN-2004 $ 30 LGJ-AF CC JAN-2004 $ 25 LGJ-AE PG 03/31/02 $91-92 JAN-2003 $ 95 PG -AS CC JAN-2003 $ 90 PG -AR JAN-2004 $ 95 LPR-AS CC JAN-2004 $ 90 LPR-AR WMT 03/31/02 $55, $56.50 JAN-2003 $ 60 VWT-AL CC JAN-2003 $ 55 VWT-AK JAN-2004 $ 60 LWT-AL CC JAN-2004 $ 55 LWT-AK AMAT 05/12/02 $25-26 JAN-2003 $ 27 ANQ-AY CC JAN-2003 $ 25 ANQ-AE JAN-2004 $ 30 LPJ-AF CC JAN-2004 $ 25 LPJ-AE XOM 05/19/02 $39-40 JAN-2003 $ 40 XOM-AH CC JAN-2003 $ 37 XOM-AU JAN-2004 $ 40 LXO-AH CC JAN-2004 $ 35 LXO-AG PUTS: None New Portfolio Plays MDT - Medtronic Inc. $44.18 ** Call Play ** It took a lot of patience, but it is looking like MDT is finally ready to show us some upside action. Over the past couple weeks, the weakness in the stock has been rather disconcerting and more than once I considered simply pulling the plug on the play altogether. But then we got this week's action and I started feeling much better. Perhaps investors were reminded that MDT is a leader in the medical devices market and well positioned for growth throughout the remainder of this year and beyond. Early in the week, the stock confirmed the $42.50 support level and actually got a decent bounce off that level. But since it didn't trade down to our $42 target, we needed to wait for a rally through the secondary entry target, $43-44. That finally came to pass on Wednesday, as MDT finally pushed back above the $44 level and held it at the close. That triggered us to take a position in the Portfolio, but it is a classic good news-bad news story. While both weekly and daily Stochastics are on the rise in bullish fashion, MDT really has some work to do to dislodge the bears grip on the stock. The long-term descending trendline hasn't been broken sine early 2001 and that trendline currently rests at $46.50. And if the emergent recovery is going to ever get moving, it is going to have to clear resistance at $47.50 and then again at $48.50-49.00. Then we'll have a serious rally on our hands. With my clearly cautious stance, you might wonder why I decided to add it to the Watch List and now the Portfolio. The simple answer is that I really like the picture on the PnF chart, even with the recent double-bottom breakdown. The thing that grabs my attention is the ascending bullish trendline (currently at $42), which has been in place since the September lows. I expect this level to hold, and we'll really know for sure when MDT breaks out and prints $48. That will paint a fresh double-top breakout and have the bulls setting their sights on a longer-term price target of $58. Use repeated dips near the $44 level to get into the play and set stops at $41. BUY LEAP JAN-2003 $45 VKD-AI $4.00 BUY LEAP JAN-2004 $45 LKD-AI $7.30 MSFT - Microsoft Corp. $52.69 ** Call Play ** Mr. Softee got the week off to a solid start, at least for us here in LEAPS-land. Recall that we were looking to take a position on a rebound from the $48-50 level and MSFT delivered that up on a silver platter on Monday. After spending a couple days below the critical $50 level, MSFT gapped higher and then dropped back with the remainder of the Technology market to fill that gap. Hitting the $50 level on both last Friday and this Monday, MSFT rebounded strongly on Monday, closing at $52.69 after trading as low as $49.75 in the morning. This is the way our entry strategy is supposed to work. The gap up on Tuesday leaves MSFT vulnerable to a mild pullback as that gap needs to be filled. So if you missed your entry into the play, a dip and bounce in the $52.50-53.00 area would make for a solid second chance. It looks like the bearish sentiment that followed the company's earnings report has now been played out and with a positive earnings report from DELL on Thursday night, it looks like Mr. Softee could have the necessary catalyst to start pushing through some important resistance levels. Adding fuel to this argument is the fact that the NASDAQ-100 Bullish % has now reached the 50 level and has gone Bull Confirmed. Look out bears, the bulls are back in town! But it isn't likely to be a straight moonshot, with MSFT staring some formidable resistance in the face. First up is the $57-58 level where the stock topped out following its most recent earnings report. $57 is also the site of the bearish resistance line on the PnF chart, as well as the site of the 4-month descending trendline on the candle chart. But that Bullish % reading ought to give the stock the fuel to power higher. Oh, and did I mention that the PnF chart just gave a double-top buy signal, with the upside price objective now set at $69. Our stop is starting out at $48, just below the lows of earlier this month. BUY LEAP JAN-2003 $55 MSQ-AK $ 5.90 BUY LEAP JAN-2004 $55 LMF-AK $10.20 New Watchlist Plays XOM - Exxon Mobil $40.20 **Call Play** I've been looking for a solid way to play the current bullish trend in the Oil patch and I think I finally found it. I favor trades on the oil producers rather than the Oil Service companies due to the fact that many of the Oil Service stocks do not have LEAPS available and they tend to be more volatile. A quick look at a weekly chart of the Oil index (XOI.X) shows that it has already started its bullish reversal. Add to that the further complication that many of the components of this index don't lend themselves to predictable trends and the selection was more limited. The likes of CVX, P and BP just don't look that attractive on a risk-reward basis. But then I stumbled across a weekly chart of XOM and it is a thing of beauty. The series of higher lows since September builds a perfect ascending trendline and the weekly Stochastics is just starting to emerge from oversold territory. The fundamental picture is looking good too, with the summer driving season and continued Mid-East turmoil likely to keep Crude Oil prices on the rise for the next several months. Ideally we'd like to get one more pullback near the ascending trendline near $39 to give us a better entry and with the daily Stochastics starting to weaken near overbought, we just might get that chance. After entry, we'll set a fairly tight stop at $37.50. We aren't targeting a runaway move here, just a slow, gradual climb that takes the stock back into the $44-45 area, which would make a good point to take our gains off the table. With the relatively cheap LEAPS, a $5-6 move could make for a nice little payday between now and the end of summer. BUY LEAP JAN-2003 $40 XOM-AH BUY LEAP JAN-2003 $37 XOM-AU For Covered Call BUY LEAP JAN-2004 $40 LXO-AH BUY LEAP JAN-2004 $35 LXO-AG For Covered Call Drops EK $33.57 As I mentioned last week, it is time to put our EK play out of its misery. In the past month, as the broad market has been falling, EK has been rising. And with the recent trade at $35, the stock is now on a PnF buy signal. To say I am puzzled would be an understatement. The company's fundamentals are horrible, as it loses ground to foreign competition on film sales and has a lackluster approach to entering the digital market. In the face of all that, the company entered into a $400 million securitization of debt program in March and had a less than inspiring earnings report. What did the stock do? It went up! The first thing a man needs to do when he is wrong is to cease being wrong, so I'm giving up on EK. Not because I think the stock is going higher, but because it is not going lower. Remember that we need the stock to move in order to make money with LEAPS, and when it just sits there or moves slightly against us, time decay takes its toll on our LEAPS. For me, this is a case of exiting a trade because of what I don't know. What I know (or think I know) isn't sufficient to cause to stock to behave in the manner in which I think it should. The obvious conclusion is that there is something important that I DON'T know. That is a screaming signal to get out, and I'm going to heed it. For the record, I took the exit on Monday at the close, following the stock's sharp rebound from its intraday lows. ************************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 05-19-2002 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 Basics: More Recovery Strategies By Mark Wnetrzak One of our readers noted this week that, "The decline in equity values has affected almost every stock investor's portfolio in a negative way." Indeed, the market has been very unforgiving to the "buy-n-hold" crowd and with the recent downturn in stocks, we have received a number E-mails about selling LEAPS in covered-call positions to recover lost value in long-term portfolio issues. The strategy of writing LEAPS against portfolio stock can be a great way to offset potential losses in downtrodden equities because the time value premium in LEAPS is less affected by market downturns and sharp declines in the underlying issue can increase the implied volatility (providing additional premium) of the sold options. For those who are new to options, LEAPS, or Long-term Equity AnticiPation Securities have expiration dates far in the future and currently, LEAPS are available for the year 2004. As with standard equity and index derivatives, these unique instruments allow investors to establish long or short positions using the most popular trading techniques and combinations. In most cases, positions involving LEAPS do not differ much from those utilizing shorter-term options and LEAPS can be sold against the underlying stock in the same manner as near-term call options. The covered write position with LEAPS will have limited profit potential when compared to outright stock ownership, but will outperform that strategy if the stock declines in value or remains relatively unchanged. At the same time, a trader who sells LEAPS will earn a substantial credit when compared to a near-term covered write and since he is selling a more expensive option, the initial cash investment in new positions will be smaller. The LEAPS writer also has a higher net return if assigned early, because the cost basis in the underlying issue was reduced through the sale of additional premium. For long-term investors, writing covered LEAPS can provide additional insurance against bearish market activity while retaining the potential for stock splits and spin-offs, dividends and other benefits of stock ownership. The most significant difference in LEAPS is their slow rate of time-value decay. While this effect is initially beneficial to option writers, it can be a major obstacle in future position adjustments. The premiums (due to future potential) inherent in LEAPS prices can be very large even when they are substantially in- or out-of-the-money. This characteristic will significantly affect a trader's ability to roll-out of a position because the sold (short) call option is relatively expensive to repurchase. However, a short-term covered-call writer who is faced with the task of rolling down - buying back a current short position and selling another with a lower strike price - may transition to LEAPS as a simple means of reducing the overall basis in the underlying issue, even though he may be moving to a potentially less profitable position. The large absolute premiums available in LEAPS make them an attractive tool in hedging against future downside activity, but selling long-term options to salvage lost share value is not always the most efficient technique. The key to a correct assessment of this popular strategy, whether used for new positions or in an attempt to recover from falling stock prices, lies in comparing the difference in annualized returns from the sale of LEAPS versus those that can be achieved from repeatedly writing shorter-term options. 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 ENMD 7.60 7.80 MAY 7.50 0.50 *$ 0.40 12.2% NOVT 8.34 7.48 MAY 7.50 1.25 $ 0.39 12.0% WGRD 5.89 5.49 MAY 5.00 1.20 *$ 0.31 7.2% ZIXI 6.08 5.02 MAY 5.00 1.35 *$ 0.27 6.2% MOT 15.00 16.78 MAY 15.00 0.60 *$ 0.60 6.0% QUIK 5.03 4.99 MAY 5.00 0.30 $ 0.26 6.0% ASGN 20.42 22.44 MAY 20.00 0.90 *$ 0.48 5.3% ENR 25.01 25.05 MAY 25.00 0.60 *$ 0.59 5.3% TDY 17.82 20.05 MAY 17.50 0.90 *$ 0.58 5.0% PLUG 10.26 10.55 MAY 10.00 0.80 *$ 0.54 5.0% CCK 8.85 9.75 MAY 7.50 1.80 *$ 0.45 4.6% EMKR 9.10 8.21 MAY 7.50 2.05 *$ 0.45 4.6% ACRT 19.90 19.14 MAY 17.50 3.10 *$ 0.70 4.5% PDG 12.79 12.94 MAY 12.50 0.65 *$ 0.36 4.3% IDCC 10.99 13.64 MAY 10.00 1.45 *$ 0.46 4.2% GRP 15.30 14.60 MAY 15.00 0.85 $ 0.15 1.5% AVGN 10.56 9.43 MAY 10.00 1.15 $ 0.02 0.3% NTBK 17.86 16.00 MAY 17.50 1.00 $ -0.86 0.0% FHRX 26.75 23.32 MAY 25.00 2.30 $ -1.13 0.0% MACR 20.32 23.89 JUN 20.00 2.25 *$ 1.93 7.7% INFA 8.16 9.31 JUN 7.50 1.30 *$ 0.64 6.8% UNTD 11.00 12.35 JUN 10.00 1.75 *$ 0.75 5.9% NTIQ 22.10 24.49 JUN 20.00 3.50 *$ 1.40 5.5% GIVN 13.99 15.22 JUN 12.50 2.25 *$ 0.76 4.7% SIE 18.50 17.80 JUN 17.50 2.00 *$ 1.00 4.4% ENDO 19.11 17.06 JUN 17.50 2.65 $ 0.60 2.6% *$ = Stock price is above the sold striking price. Comments: Wow! The major averages rallied without an immediate reversal. Several of our closed positions managed to move into positive territory, offering a second-chance exit. However, both North- field Labs (NASDAQ:NFLD) and BriteSmile (NASDAQ:BSML) were closed as they continued to break-down. (Sigh) Murphy's Law is alive and well. The June position in Endocare (NASDAQ:ENDO) is a bit worrisome as the stock dropped drastically on heavy volume. No news on the move for this early-exit candidate. As for the May expiration: time to re-evaluate the risk-reward potential on any issues you retain. Most of the above stocks are established in basing patterns and could be reasonable candidates to continue to write calls on. Of course, taking an immediate profit works too. Decisions, decisions... Positions Closed: Cygnus (NASDAQ:CYGN), Praecis Pharma (NASDAQ: PRCS), Microtune (NASDAQ:TUNE), Napro Biotherapeutics (NASDAQ: NPRO), IMPCO Technologies (NASDAQ:IMCO), Powerwave Technologies (NASDAQ:PWAV), Protein Design Labs (NASDAQ:PDLI), Amylin Pharma- ceuticals (NASDAQ:AMLN), Adaptec (NASDAQ:ADPT), Sapient (NASDAQ: SAPE), Northfield Labs (NASDAQ:NFLD), and BriteSmile (NASDAQ:BSML). 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 INET 7.95 JUN 7.50 UAU FU 0.90 5461 7.05 35 5.5% PCLE 10.59 JUN 10.00 PUC FB 1.15 53 9.44 35 5.2% PCSA 14.12 JUN 12.50 CQO FV 2.30 2 11.82 35 5.0% QSFT 15.06 JUN 15.00 QUD FC 1.70 263 13.36 35 10.7% RETK 27.45 JUN 25.00 QRD FE 3.90 241 23.55 35 5.4% USU 9.34 JUN 7.50 USU FU 2.30 1998 7.04 35 5.7% VVTV 21.99 JUN 20.00 UVR FD 3.10 754 18.89 35 5.1% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield QSFT 15.06 JUN 15.00 QUD FC 1.70 263 13.36 35 10.7% USU 9.34 JUN 7.50 USU FU 2.30 1998 7.04 35 5.7% INET 7.95 JUN 7.50 UAU FU 0.90 5461 7.05 35 5.5% RETK 27.45 JUN 25.00 QRD FE 3.90 241 23.55 35 5.4% PCLE 10.59 JUN 10.00 PUC FB 1.15 53 9.44 35 5.2% VVTV 21.99 JUN 20.00 UVR FD 3.10 754 18.89 35 5.1% PCSA 14.12 JUN 12.50 CQO FV 2.30 2 11.82 35 5.0% 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). ***** INET - Instinet $7.95 *** Island Merger A NASDAQ Threat? *** Instinet Group (NASDAQ:INET) is an electronic agency securities broker that has been providing investors with electronic trading solutions for more than 30 years. INET operates an e-financial marketplace where buyers and sellers worldwide can trade securities directly and anonymously with each other, gain price improvement for their trades and lower their overall trading costs. Through the company's electronic platforms, its customers also can access 40 securities markets throughout the world, including Nasdaq, the NYSE and stock exchanges in Frankfurt, Hong Kong, London, Paris, Sydney, Tokyo, Toronto and Zurich. Instinet also provides its customers with access to research generated by the company and by third parties, as well as various informational and decision-making tools. Instinet's customers consist of institutional investors, such as mutual funds, pension funds, insurance companies and hedge funds, as well as broker-dealers. Instinet rallied sharply this week after it was reported on Thursday to be in talks to buy rival share-dealer Island ECN. Completion of the deal, which would end a vicious price war and create a company to challenge the NASDAQ, could come as early as this month and be worth $500 million, according to the Wall Street Journal. This position offers a favorable entry point near technical support from which to speculate on the potential merger. JUN 7.50 UAU FU LB=0.90 OI=5461 CB=7.05 DE=35 TY=5.5% ***** PCLE - Pinnacle Systems $10.59 *** Next Leg Up? *** Pinnacle Systems (NASDAQ:PCLE) is a supplier of video authoring, storage, distribution and Internet streaming solutions for broad- casters, professionals and consumers. The company's products are used to create, store and distribute video content for television programs, television commercials, pay-per-view, sports videos, corporate communications and personal home movies. In addition, Pinnacle's products are increasingly being used to stream video over the Internet. Pinnacle Systems beat estimates in April as net sales, gross margins, net income and the company's cash balance all increased sequentially over both the first and second quarters of this fiscal year. The company's CEO stated that the financial performance for both the Broadcast & Professional and Personal Web Video divisions had improved significantly since the beginning of this fiscal year. We simple favor the "break-out" above $10 on heavy volume, which suggest further upside potential. JUN 10.00 PUC FB LB=1.15 OI=53 CB=9.44 DE=35 TY=5.2% ***** PCSA - AirGate $14.12 *** Bottom-Fishing! *** AirGate PCS (NASDAQ:PCSA) markets and provides digital personal communication services (PCS). The company is a network partner of Sprint PCS , the personal communications services group of Sprint Corporation (NYSE:PCS). Through AirGate's management agreement with Sprint PCS, it has the exclusive right to provide Sprint products and services under the Sprint and Sprint PCS brand names in a territory that covers almost the entire state of South Carolina, parts of North Carolina and the eastern Georgia cities of Augusta and Savannah. The company's Sprint PCS territory encompasses 21 contiguous markets and approximately 7.1 million residents. Morgan Stanley recently raised its investment rating on AirGate to "equal-weight" from "underweight," as they believe there is less risk in the stock after good second-quarter revenue growth and conservative 3rd-quarter guidance. AirGate appears to be past the integration issues stemming from its merger with the privately held iPCS in November, after including a one-time goodwill impairment of $261.2 million last quarter. We like the basing pattern with signs of accumulation as AirGate PCS forges a Stage I base. JUN 12.50 CQO FV LB=2.30 OI=2 CB=11.82 DE=35 TY=5.0% ***** QSFT - Quest Software $15.06 *** On The Mend *** Quest Software (NASDAQ:QSFT) is a developer and vendor of appli- cation and database management software products. The company also provides support and maintenance services for its products, as well as post-sale consulting services. Quest's products improve the quality of service provided by its customers' key software applications. The company's application management products support the packaged applications from many of vendors, including SAP (NYSE:SAP), Siebel (NASDAQ:SEBL), PeopleSoft (NASDAQ: PSFT) and Oracle (NASDAQ:ORCL). Quest beat estimates when it reported earnings April 30, with revenues down slightly to $59.3 million from $63.4 million. The company is still cautious about the future and expects the current 2nd-quarter's and the full year's earnings to be below analyst’s average expectations. Quest's expense control, cash flow and balance sheet are all excellent as the company builds for the future, according to the CEO. Lower the bar to make the jump easier? The stock appears to have made a successful test of the September low and this position offers a reasonable entry point for those investors who retain a bullish outlook on the company. JUN 15.00 QUD FC LB=1.70 OI=263 CB=13.36 DE=35 TY=10.7% ***** RETK - Retek $27.45 *** Trading Range *** Retek (NASDAQ:RETK) provides advanced application software to help retailers create, manage and fulfill consumer demand. Retek's soft- ware solutions enable retailers to use the Internet to communicate and collaborate efficiently with their suppliers, distributors, wholesalers, logistics providers, brokers, transportation companies, consolidators and manufacturers. The company is primarily focused on retailers with sales of $500 million and above. A week after SunTrust Rbsn Humphrey upgraded Retek to a "buy," the company announced that Ross Stores (NASDAQ:ROST) has selected Retek's Merchandising Operations Management and Supply Chain Management solutions. Ross operates 470 Ross `Dress For Less' stores in 22 states. At their recent Analysts Day conference, Retek management noted the strong fundamentals driving retail industry adoption of packaged software solutions and discussed the company's strategies for capitalizing on this trend. This position offers favorable speculation on a long-term trading range centered around $25. JUN 25.00 QRD FE LB=3.90 OI=241 CB=23.55 DE=35 TY=5.4% ***** USU - USEC $9.34 *** Break-Out = Opportunity! *** USEC (NYSE:USU), global energy company, is in the production and sale of uranium fuel enrichment services for commercial nuclear power plants. For the nine months ended 3/31/02, revenues were up 30% to $1.11 billion while net income fell 87% to $9.1 million. Revenues reflect an increase in the volume of standard units of uranium enrichment and earnings were offset by higher cost of sales as a percentage of revenue due to lower production level. No recent news to explain the surge in USEC's price though the message boards are alive with rumors. The technical indications suggest the issue has successfully completed its recent consolid- ation and is poised for future gains. Conservative speculation with a cost basis at a solid technical support area. JUN 7.50 USU FU LB=2.30 OI=1998 CB=7.04 DE=35 TY=5.7% ***** VVTV - ValueVision $21.99 *** Strong Retail Sales *** ValueVision (NASDAQ:VVTV) is an integrated direct marketing company that markets its products directly to consumers through various forms of electronic media. VVTV also conducts business under the corporate name ValueVision Media. The Company's operating strategy incorporates television home shopping, Internet e-commerce, vendor programming sales and fulfillment services. The company's principal electronic media activity is its television home shopping business, which uses recognized on-air television home shopping personalities to market brand name and proprietary/private label consumer products at competitive prices. On Friday, ValueVision announced that it had replaced Arthur Andersen with Deloitte & Touche as their independent auditors. Was ValueVision's strong rally this week a delayed re- action to the 1.2% surge in retail sales report on Tuesday, which was double the 0.6% rise economists were looking for? Time will tell. We simply favor the break-out above the MAR - APR resistance area (which is now support) on heavy volume, which suggest higher prices in the near future. This position offers a conservative method to profit on the future movement of the company's share value. JUN 20.00 UVR FD LB=3.10 OI=754 CB=18.89 DE=35 TY=5.1% ***** ***************** 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 CLHB 14.64 JUN 12.50 QPB FV 3.20 50 11.44 35 8.1% ONXX 8.40 JUN 7.50 OIQ FU 1.40 180 7.00 35 6.2% ASYT 20.41 JUN 20.00 QQY FD 1.70 544 18.71 35 6.0% RMCI 31.23 JUN 30.00 UHU FF 3.00 512 28.23 35 5.4% NTIQ 24.49 JUN 22.50 CQT FX 3.30 237 21.19 35 5.4% GSPT 15.47 JUN 15.00 UGF FC 1.30 247 14.17 35 5.1% TDY 20.05 JUN 20.00 TDY FD 1.15 78 18.90 35 5.1% SNDK 17.01 JUN 15.00 SWQ FC 2.80 81 14.21 35 4.8% GNSS 27.90 JUN 25.00 QFE FE 4.20 1769 23.70 35 4.8% IDTI 30.15 JUN 27.50 ITQ FY 4.00 265 26.15 35 4.5% EXTR 11.51 JUN 10.00 EXJ FB 2.00 2261 9.51 35 4.5% ***************** NAKED PUT SECTION ***************** Technical Analysis Basics: Understanding Market Trends By Ray Cummins One of our readers made some interesting comments about a recent article on "contrarian" investing while another trader wants to know about different types of option orders. Hello Ray, I read your recent article on contrarian investing and I must say that is a unique way to approach the market. At first glance, trading against the crowd looks like a good way to lose money but now I understand why it is very important to avoid the "herd" mentality. Until a week ago, there did not seem to be much concern about the bearish activity in the market but the fear emerged on May 6 and 7 in the form of "panic" selling. Do you think that based on the increased selling pressure, we are approaching a bottom in the market? Your insight is always appreciated! TH Regarding market sentiment and contrarian investing: One of the most important parts of being a successful trader is understanding the cycles that occur as a natural part of market growth. The recent sell-off in technology stocks is just one of the many examples of a historically repetitive rhythm in price action and the necessary process of a "correction" is healthy for stocks in the long-term. To avoid large losses, you must be able to discern the broader rhythms of the market and approach trading in a counterintuitive manner. In simple terms, you should be a "contrarian" investor. One who "goes long" in the closing stages of a prolonged decline, when everyone else is pessimistic on the market's prospects, and takes profits after a strong rally, when the public is confident that the trend will continue forever. Strangely enough, the final stages of bearish activity are often the most difficult to identify. The general panic propagated by doomsayers and the media's sensationalistic coverage of negative events spreads fear among investors and creates skepticism about any signs of a potential recovery. The challenge, of course, is to buy during this hysteria, when it appears the market is at its worst. Many experts believe that is the current situation with equities and if so, it is the primary reason you should be buying while everyone else is selling. The act of buying into weakness, in opposition of the crowd, will always feel uncomfortable but the basis for this unique style of investing is the fundamental element of a contrarian viewpoint; one that counters the views of the collective majority. By approaching the stock market in this manner, you can avoid the tendency to react emotionally, in the heat of the moment, and rely instead on tried and tested methods, based on proven trading strategies and effective analysis. Attn: Naked Puts Editor A few weeks ago, you talked about using different types of orders in closing your positions. Would you please review (for a novice trader) the various orders that one might use to enter and exit an option play (like a covered-call or naked-put). Thank You, BN Regarding Option Orders: When you place an option order, you must specify; whether the order is a "buy" or a "sell", the option to be bought or sold, whether the trade is an opening or closing position and the desired price. There are also specific types of orders to help you trade, based on certain conditions or requirements: "Market" orders are simple orders to buy or sell the option at the best possible price as soon as the order is received at the exchange. "Limit" orders are used to buy or sell at a specific price. It may be executed at a better price than the limit but if the limit is never reached, the order will not be executed. A "stop" order becomes a market order when the security trades at or through the price specified on the order. "Buy-stop" orders are placed above the current price, and "sell-stop" orders are used below the current price. Such orders are used to either limit losses or protect a profit. This order is not always valid on all option exchanges and is usually ineffective on fast moving issues. A "stop-limit" order becomes a "limit" order when the specified price is reached. Whereas the stop order has to be executed as soon as the "stop price" is reached, the stop-limit may or may not be filled, depending on the market. This type of order is generally used to open a position rather than to close it. A "good-until-cancelled" order is a limit, stop, or stop-limit order that can be valid for up to 6 months without renewal if the conditions for the order execution do not occur. There many other types of orders that can be used when trading with a full service broker such as "market not held" or "market on close". Those are some of the benefits of having a floor agent working on your behalf in the execution of trades. Hope that helps! Ray *** 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 18.87 MAY 15.00 0.50 *$ 0.50 13.6% GME 20.80 21.23 MAY 20.00 0.45 *$ 0.45 12.3% VIRL 17.81 16.54 MAY 15.00 0.50 *$ 0.50 11.3% MACR 22.01 23.89 MAY 20.00 0.50 *$ 0.50 9.9% WFR 8.60 8.85 MAY 7.50 0.30 *$ 0.30 9.9% OATS 10.63 15.65 MAY 10.00 0.45 *$ 0.45 9.6% ABF 21.23 23.05 MAY 20.00 0.30 *$ 0.30 8.6% AMZN 16.91 19.16 MAY 15.00 0.30 *$ 0.30 8.4% TTWO 26.53 25.60 MAY 22.50 0.55 *$ 0.55 8.4% ADPT 14.57 14.18 MAY 12.50 0.40 *$ 0.40 8.4% PLNR 24.73 24.36 MAY 22.50 0.45 *$ 0.45 8.0% PHSY 26.01 30.06 MAY 20.00 0.40 *$ 0.40 7.8% ENER 24.24 22.53 MAY 22.50 0.75 *$ 0.75 7.5% EAGL 17.00 18.87 MAY 15.00 0.45 *$ 0.45 7.4% PHSY 28.30 30.06 MAY 20.00 0.30 *$ 0.30 7.3% IMCO 14.22 12.44 MAY 12.50 0.50 $ 0.44 7.1% IDTI 32.00 30.15 MAY 25.00 0.40 *$ 0.40 6.4% RMCI 25.45 31.23 MAY 20.00 0.40 *$ 0.40 6.3% TOL 27.58 30.02 MAY 25.00 0.65 *$ 0.65 6.2% NSIT 27.15 28.23 MAY 25.00 0.25 *$ 0.25 6.1% BSTE 32.25 31.87 MAY 30.00 0.30 *$ 0.30 6.0% ISLE 20.50 22.18 MAY 17.50 0.30 *$ 0.30 5.9% MARY 21.50 24.63 MAY 17.50 0.40 *$ 0.40 5.8% LNCR 31.28 30.86 MAY 30.00 0.80 *$ 0.80 5.8% DO 32.10 32.85 MAY 30.00 0.40 *$ 0.40 5.2% AEIS 36.71 37.15 MAY 30.00 0.40 *$ 0.40 5.2% GSF 35.33 34.38 MAY 32.50 0.40 *$ 0.40 5.0% WFR 8.30 8.85 JUN 7.50 0.60 *$ 0.60 13.9% ENDP 11.56 12.83 JUN 10.00 0.55 *$ 0.55 9.5% RMCI 27.46 31.23 JUN 22.50 0.70 *$ 0.70 7.5% CKFR 23.89 24.32 JUN 20.00 0.65 *$ 0.65 7.4% GG 18.71 19.00 JUN 17.50 0.70 *$ 0.70 7.3% FLM 25.35 24.44 JUN 22.50 0.80 *$ 0.80 7.2% HDWR 18.42 17.81 JUN 17.50 0.70 *$ 0.70 7.1% SIE 19.88 17.80 JUN 17.50 0.65 *$ 0.65 6.5% PHSY 25.87 30.06 JUN 20.00 0.50 *$ 0.50 6.4% AMZN 16.94 19.16 JUN 12.50 0.30 *$ 0.30 5.9% TDY 19.17 20.05 JUN 17.50 0.60 *$ 0.60 5.6% RDC 26.12 25.02 JUN 22.50 0.50 *$ 0.50 4.9% ENDO 20.70 17.06 JUN 17.50 0.65 $ 0.21 2.3% *$ = Stock price is above the sold striking price. Comments: The late session rally helped two of our negative plays, Veeco Instruments (NASDAQ:VECO) and Sandisk (NASDAQ:SNDK) finish the expiration period positive and the speculative position in JDA Software (NASDAQ:JDAS) ended the month with a very small loss. Looking forward, positions in Endocare (NASDAQ:ENDO) and Sierra Health Services (NYSE:SIE) are in jeopardy and should be closed on further downside movement. Positions Closed: Centillium (NASDAQ:CTLM), Veeco Instruments (NASDAQ:VECO), JDA Software (NASDAQ:JDAS), Overture Services (NASDAQ:OVER), 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 AMZN 19.16 JUN 15.00 ZQN RC 0.40 4877 14.60 35 8.2% DCN 22.67 JUN 20.00 DCN RD 0.45 261 19.55 35 5.7% MACR 23.89 JUN 20.00 MRQ RY 0.60 1038 19.40 35 8.3% PHSY 30.06 JUN 25.00 HYQ RE 0.60 719 24.40 35 6.9% PLXS 28.00 JUN 25.00 QUA RE 0.75 172 24.25 35 7.3% RMCI 31.23 JUN 25.00 UHU RE 0.55 27 24.45 35 7.0% TTWO 25.60 JUN 20.00 TUO RD 0.40 252 19.60 35 6.3% 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 MACR 23.89 JUN 20.00 MRQ RY 0.60 1038 19.40 35 8.3% AMZN 19.16 JUN 15.00 ZQN RC 0.40 4877 14.60 35 8.2% PLXS 28.00 JUN 25.00 QUA RE 0.75 172 24.25 35 7.3% RMCI 31.23 JUN 25.00 UHU RE 0.55 27 24.45 35 7.0% PHSY 30.06 JUN 25.00 HYQ RE 0.60 719 24.40 35 6.9% TTWO 25.60 JUN 20.00 TUO RD 0.40 252 19.60 35 6.3% DCN 22.67 JUN 20.00 DCN RD 0.45 261 19.55 35 5.7% 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). ***** AMZN - Amazon.com $19.16 *** Earnings Rally? *** Amazon.com (NASDAQ:AMZN) is a Website where customers can find and discover anything they may want to buy online. The company lists millions of unique items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera/photo items, software, computer and video games, tools and hardware, lawn & patio items, kitchen products, and wireless products. Through its Marketplace, Auctions and zShops services, any business or individual can sell virtually anything to the company's 30 million customers, and with Amazon.com Payments, sellers can accept credit card transactions. In addition to its U.S.-based Website, the company operates four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. The company also operates the Internet Movie Database (www.imdb.com), a source of information on movies and entertainment titles, and cast and crewmembers. Shares of Amazon.com surged again last week as investors anticipated the online retailer's upcoming quarterly earnings report. A number of analysts believe the company will easily meet consensus estimates and may even achieve an upside surprise. Investors who want to speculate on that outcome in a conservative manner should consider this position. The company's earnings are expected on 5/22/02. JUN 15.00 ZQN RC LB=0.40 OI=4877 CB=14.60 DE=35 TY=8.2% ***** DCN - Dana Corporation $22.67 *** On The Move! *** Dana (NYSE:DCN) is an independent supplier of components, modules and other systems to global vehicle manufacturers and related aftermarkets. The company's products are sold to the automotive, commercial vehicle and off-highway markets, and are used in the manufacturing of passenger cars and vans, light trucks, sport utility vehicles (SUVs) and medium- and heavy-duty vehicles, as well as in a range of off-highway applications. Each of the markets Dana serves consists of original equipment production, service and aftermarket segments. Each of these businesses has a strong market position and brand equity and provides the company's customers with value-added manufacturing. Stocks in the Automotive Parts sector are often an excellent hedge against broad-market declines and Dana is one of the better performing issues in the group. Traders who agree with a bullish outlook for the stock can profit from future upside activity with this position. JUN 20.00 DCN RD LB=0.45 OI=261 CB=19.55 DE=35 TY=5.7% ***** MACR - Macromedia $23.89 *** Entry Point! *** Macromedia (NASDAQ:MACR) develops, markets, and supports software products, technologies, and services that enable people to define what the Web can be. The company's customers, from developers to enterprises, use Macromedia solutions to help build compelling and effective Websites and eBusiness applications. As a result of the deconsolidation of shockwave.com, the company operates in one major business segment, the Software segment. Shares of web-publishing software company Macromedia soared in April after the company said it expects to return to profitability, on a pro-forma basis, in the June quarter, and remain "in the black" for the rest of the year. Also, revenue showed sequential growth for the first time in a year, and the top line should grow another 10% sequentially in the June quarter, due to a slew of new products that have been released or are scheduled for release in the next few of months. In addition, MACR recently announced the release of several upgrades to its Web software products and on May 10, the company received a favorable verdict in its counterclaims lawsuit against Adobe (NASDAQ:ADBE). Investors can establish a conservative cost basis in the stock with this position. JUN 20.00 MRQ RY LB=0.60 OI=1038 CB=19.40 DE=35 TY=8.3% ***** PHSY - PacifiCare Health Systems $30.06 *** Entry Point! *** PacifiCare Health Systems (NASDAQ:PHSY) is a healthcare services company with operations in managed care products for employer groups and Medicare beneficiaries in the U.S. and Guam, serving approximately four million members. The company operates health maintenance organizations (HMOs) and offers HMO-related products and services. The company's commercial and Medicare programs are designed to deliver quality healthcare and customer service to members, cost effectively. The company also offers a variety of specialty HMO managed care, and HMO-related products and services that employers can purchase to supplement their basic commercial plans or as stand-alone products. The company's other specialty products include pharmacy benefit management, behavioral health services, life/health insurance, and dental and vision services. Shares of PHSY soared in April amid increased insider buying in the Health Services sector but the "fast and furious" rally came to an end earlier this month. Now the issue is once again in a strong up-trend and investors can establish a favorable basis in the company's stock with this position. JUN 25.00 HYQ RE LB=0.60 OI=719 CB=24.40 DE=35 TY=6.9% ***** PLXS - Plexus $28.00 *** New Trading Range? *** Plexus (NASDAQ:PLXS) and its many subsidiaries provide product realization services to original equipment manufacturers in the networking/data communications, medical, industrial, computer and transportation industries. The company offers its customers the ability to outsource all stages of product realization, including: development and design, materials procurement and management, prototyping and new product introduction, testing, manufacturing and after-market support. Engineering services include digital and analog design, mechanical and industrial design, embedded software design, printed circuit board design, test equipment and software development, product verification and new product introduction services. Manufacturing services include printed circuit board assembly, product configuration, testing, final product and system box build and after-market support. Plexus assembles complex electronic products that use multiple printed circuit boards and subassemblies. The share value of PLXS moved up and out of a recent trading range with the recovery rally in technology stocks and the issue has a good chance of continuing higher in the coming week. Investors who wouldn't mind owning the issue can speculate on that outcome with this position. JUN 25.00 QUA RE LB=0.75 OI=172 CB=24.25 DE=35 TY=7.3% ***** RMCI - Right Management Consultants $31.23 *** New High! *** Right Management Consultants (NASDAQ:RMCI) is an international career management and organizational consulting company. The company's operations are structured into five geographic groups that provide management oversight to over 200 service locations worldwide. Operations are divided into two lines of business, career transition services and organizational consulting. Their career transition services are divided into two main categories, individual outplacement services and group outplacement services. The company also provides organizational consulting services that assist organizations and employees in the areas of leadership development, organizational performance and talent management. Right Management's quarterly earnings were favorable and after a brief consolidation, the issue has moved to a new, all-time high. Investors who believe the company will continue to enjoy strong demand for its career transition services can establish a low risk cost basis in the issue with this position. JUN 25.00 UHU RE LB=0.55 OI=27 CB=24.45 DE=35 TY=7.0% ***** TTWO - Take-Two Int. Software $25.60 *** Earnings Play! *** Take-Two Interactive Software (NASDAQ:TTWO) is an integrated developer, marketer, distributor and publisher of interactive entertainment software games and accessories for the personal computer, PlayStation, PlayStation2, Nintendo Game Boy Color, Nintendo GameCube, Nintendo Game Boy Advance and the Xbox. The company publishes and develops products through various wholly owned subsidiaries including Rockstar Games, Rockstar Studios, Gathering of Developers, TalonSoft, Joytech, PopTop, Global Star and under the Take-Two brand name. The company maintains sales and marketing offices in Cincinnati, New York, Toronto, London, Paris, Munich, Vienna, Copenhagen, Milan, Sydney and Auckland. Take Two's game sales jumped 79% in the first quarter while net income quadrupled to $34 million, but an investigation by the SEC overshadowed the company's success. Apparently, investors have decided the probe involving revenue recognition in prior periods will not affect the future because the issue has moved higher since early April. However, the stock has stalled near all-time highs on concerns over Take-Two's upcoming earnings report (due 6/6/02) which will certainly have an effect on its near-term share value. Traders who think the announcement will be favorable can profit from that outcome with this position. JUN 20.00 TUO RD LB=0.40 OI=252 CB=19.60 DE=35 TY=6.3% ***** ***************** 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 QSFT 15.06 JUN 12.50 QUD RV 0.60 12 11.90 35 12.8% IDCC 13.64 JUN 12.50 DAQ RV 0.65 1727 11.85 35 11.4% SHLM 22.73 JUN 22.50 UFZ RX 1.00 10 21.50 35 8.8% RETK 27.45 JUN 22.50 QRD RX 0.65 47 21.85 35 8.5% JBL 24.98 JUN 22.50 JBL RX 0.80 1156 21.70 35 8.4% GNSS 27.90 JUN 22.50 QFE RX 0.55 1742 21.95 35 7.6% EMLX 31.80 JUN 22.50 UML RX 0.55 555 21.95 35 6.9% WIN 18.30 JUN 17.50 WIN RW 0.55 75 16.95 35 6.8% EXAR 24.50 JUN 22.50 EQC RX 0.65 65 21.85 35 6.7% EAGL 18.87 JUN 17.50 UQV RW 0.50 0 17.00 35 6.5% GSPT 15.47 JUN 12.50 UGF RV 0.25 0 12.25 35 6.3% FOX 26.06 JUN 25.00 FOX RE 0.60 20 24.40 35 5.2% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ A Comforting (But Short-Lived?) Bear-Market Rally By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, May 17 Stocks moved higher today in a late-session rally as investors ignored concerns of a weak dollar and focused instead on Dell's rosy earnings outlook. The technology giant was the catalyst for upside activity on the NASDAQ after posting better than expected first-quarter profits that topped consensus estimates. The optimism spread to other hi-tech segments with networking, Internet and software shares boosting the composite index 10 points higher to 1,741. Despite a wild ride in the currency markets, other major equity averages achieved solid gains with the Dow Jones Industrial Average rising 63 points to 10,353 while the broader S&P 500-stock index closed up 8 points at 1,106. The blue-chip rally was led by Home Depot (NYSE:HD), Eastman Kodak (NYSE:EK), General Electric (NYSE:GE), Merck (NYSE:MRK), and Disney (NYSE:DIS) while the broader market saw the most interest in the drug, biotechnology, brokerage and airline groups. Utility stocks and oil services issue were among the few losing sectors as 1,723 stocks rose and 1,440 stocks fell amid 1.26 billion shares traded on the NYSE. On the technology exchange, 1.63 billion shares changed hands with similar breadth. In the bond market, the 10-year Treasury lost more than 5/8 point while its yield, which moves inversely to price, rose to 5.26%. The 30-year bond was down nearly 1 point to yield 5.75%. Last week's new plays (positions/opening prices/strategy): Gold Index (PHLX:XAU) JUN65P/JUN70P $0.55 credit bull-put Adobe (NSDQ:ADBE) JUN45C/JUN30P $1.25 credit strangle FMC Corp. (NYSE:FTI) JUN25C/JUN22P $0.10 debit synthetic Pride (NYSE:PDE) JUL20C/JUL17P $0.10 debit synthetic Patterson (NSDQ:PTEN) AUG40C/AUG30P $0.50 credit synthetic Shaw Grp. (NYSE:SGR) JUL40C/JUL30P $0.50 credit synthetic The broad-market volatility provided favorable entry opportunities for our new plays in ADBE and the XAU, and the "Reader's Request" synthetic positions in the Oil Service group were also available at acceptable opening prices. However, the bullish trend in oil stocks may be coming to an end in the near-term as crude futures are pricing-in the potential for lower oil prices due to Russia's announcement that it plans to abandon current oil-export limits. One issue we are concerned about is Patterson Energy (NASDAQ:PTEN) and if the stock declines further in the coming sessions, it may be best to exit the position to limit future losses. Among the speculative straddle candidates, positions in Power Integration Services (NASDAQ:POWI), Verisign (NASDAQ:VRSN), Pri Automation (NASDAQ:PRIA) and Broadcom (NASDAQ:BRCM) were profitable. Portfolio Activity: The month of May offered some great prospects for option traders as the market volatility continued despite the fact that premiums remained at historic lows. While these conditions made "selling" strategies such as credit spreads and strangles very difficult, traders who used techniques involving option "buying" were very successful. Our straddle portfolio provided a large number of profitable candidates with some of the positions enjoying gains in excess of 100%. Among the time-selling plays, calendar spreads in American Express (NYSE:AXP) and Applied Materials (NASDAQ:AMAT) have performed very well and both issues appear to have excellent upside potential (for selling new calls) in the coming week. The portfolio of synthetic positions had only one play expiring in May and it was a winning selection in Andrx (NASDAQ:ADRX). Our group of credit spreads included a variety of active issues, but the recent sharp recovery in share values adversely affected two of the bearish positions. The most volatile stock in the section was Qlogic (NASDAQ:QLGC) and we received some interesting E-mails on the potential adjustments in the spread. One reader asked if there was a way to deal with a pre-market move through the sold strike price. Unfortunately, the only practical alternative is to buy the stock in pre-session trading and use it to cover the sold call -- if assigned. There is little else you can do to recover from that type of activity, however the issue will almost always "fill the gap," thus allowing a more favorable exit or adjustment opportunity. Looking back, Qlogic closed last Friday's session at $46, after two days of small declines. From a technical viewpoint, there was little indication the character of the stock had been altered substantially and with the resistance at $50-$51, the primary exit/adjustment point had yet to be tested. But, Monday's market activity changed everything and if you were a trader with bearish stock or option plays, you would definitely have reviewed your portfolio that evening in order to initiate any necessary position modifications, based on the near-term bullish outlook for technology stocks. Fortunately, the technical outlook for QLGC still suggests a potential for lateral movement and our solution was simply to roll up and forward to the $65/$60 spread in June for a small debit ($0.25). There are two additional areas of overhead supply below our sold strike and a move through $60 on heavy trading volume will now be the logical exit-adjustment point for the new position. A similar adjustment opportunity was available in Clear Channel (NYSE:CCU) and with the overhead supply near the sold strike (at $55), the new position has a favorable risk/reward outlook. In the bullish portion of the portfolio, all of the May positions were profitable but one of the June spreads is struggling in conjunction with the sell-off in the Oil Service sector. The share value of Nabors Industries (NYSE:NBR) has retreated to the top of a previous trading range near $42 and any further downside activity should be considered a potential early-exit signal. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - Each time we begin a new expiration period, traders comment that they want a variety of spreads in order to commit some of their portfolio collateral to low risk positions. Here is a group of credit-spread candidates, both bullish and bearish, that should provide a reasonable selection of potentially profitable plays. The positions are based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy based on 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. ****************************************************************** ACS - Affiliated Computer $55.02 *** New Acquisition! *** Affiliated Computer Services (NYSE:ACS) is a global Fortune 1000 company that delivers comprehensive business process outsourcing and information technology outsourcing solutions, as well as system integration services, to both commercial and government clients. In the commercial sector, the company provides its clients with business process outsourcing, systems integration services and technology outsourcing. Within the government sector, ACS provides business process outsourcing and systems integration services. PLAY (conservative - bullish/credit spread): BUY PUT JUN-45 ACS-RI OI=170 A=$0.35 SELL PUT JUN-50 ACS-RJ OI=440 B=$0.85 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% ****************************************************************** SNE - Sony Corporation $58.81 *** 10-month High! *** Sony Corporation (NYSE:SNE) is the ultimate parent company of the Sony group. In the Electronics business, Sony is engaged in the development, design, manufacture and sale of various kinds of electronic equipment, instruments and devices. In the Game business, Sony develops, produces, manufactures, markets and distributes home-use entertainment hardware and related software. In the Music business, Sony is engaged in the development, production, manufacture, marketing and distribution of recorded music. In the Pictures business, Sony is engaged in designing, production, marketing, distribution and broadcasting of image software, including film, video, television and new entertainment technologies. In the Insurance business, Sony conducts insurance operations primarily through Sony Life and Sony Assurance. In addition, Sony is engaged in other businesses, such as banking, leasing and credit financing, satellite broadcasting and other location-based entertainment. PLAY (conservative - bullish/credit spread): BUY PUT JUN-50 SNE-RJ OI=28 A=$0.35 SELL PUT JUN-55 SNE-RK OI=26 B=$0.90 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% ****************************************************************** MERQ - Mercury Interactive $38.25 *** Trading Range? *** Mercury Interactive Corporation (NASDAQ:MERQ) is a provider of enterprise testing, production tuning and performance management solutions that help companies keep digital business processes operating at peak performance and closely aligned with their business goals. The company's products and services assist customers to identify and assess performance problems, maximize overall performance with minimum investment and manage ongoing application availability, performance and service levels. The company offers its testing and application performance management solutions as both software and managed services. The managed services versions of the Company's offerings provide access to its global infrastructure and monitoring capabilities. PLAY (conservative - bearish/credit spread): BUY CALL JUN-50 RQB-FJ OI=286 A=$0.30 SELL CALL JUN-45 RQB-FI OI=1834 B=$0.85 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% ****************************************************************** WFT - Weatherford Intl. $49.20 *** Oil Sector Slump! *** Weatherford International (NYSE:WFT) is a provider of equipment and services used for the drilling, completion and production of oil and natural gas wells. The company conducts operations in approximately 100 countries and has approximately 485 service and sales locations, which are located in nearly all of the oil and natural gas producing regions in the world. The company's business is divided into three principal operating divisions. The Drilling and Intervention Services Division provides drilling systems, well installation services, cementing products and underbalanced drilling. The completion Systems Division provides a full range of completion products and services. The Artificial Lift Systems Division is the only organization in the world that is able to provide all forms of artificial lift used primarily for the production of oil. It also provides for the production optimization services and automation and monitoring of well head production. PLAY (conservative - bearish/credit spread): BUY CALL JUN-60 WFT-FL OI=54 A=$0.35 SELL CALL JUN-55 WFT-FK OI=784 B=$0.85 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% ****************************************************************** XL - XL Capital $90.02 *** Trending Down! *** XL Capital Limited (NYSE:XL), formerly EXEL Merger Company, is a provider of insurance and reinsurance coverages and financial products and services to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. The company provides property and casualty insurance on a global basis and writes specialty coverages for commercial customers. Specific lines of business written include third-party general liability insurance, environmental liability insurance, directors/officers liability insurance, professional liability insurance, aviation and satellite insurance, employment practices liability insurance, surety, marine insurance, property insurance and other insurance covers, including program business and political risk insurance. The company's premiums vary by jurisdiction principally due to local market conditions and legal requirements. PLAY (conservative - bearish/credit spread): BUY CALL JUN-100 XL-FT OI=54 A=$0.30 SELL CALL JUN-95 XL-FS OI=784 B=$0.85 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** NVDA - Nvidia $67.30 *** Reader's Request! *** Nvidia (NASDAQ:NVDA) designs, develops and markets unique graphics processors and related software for personal computers and digital entertainment platforms. Nvidia provides a "top-to-bottom" family of performance graphics processors and graphics processing units that has set the standard for performance, quality and features for a broad range of desktop PCs, from professional workstations to low-cost PCs, and mobile PCs, to performance laptops. One of our readers asked if NVDA would be a good candidate for a "speculative" straddle and indeed, the issue meets our criteria for a profitable volatility play; cheap option premiums, a history of adequate price movement and the potential for volatility in the stock or its industry. Using this selection process produces the best combination of low risk and potentially high reward but, as with any play, it must be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (speculative - neutral/debit straddle): BUY CALL JUN-40 RVU-FH OI=6444 A=$3.20 BUY PUT JUN-40 RVU-RH OI=3638 A=$4.00 INITIAL NET DEBIT TARGET=$7.00 TARGET PROFIT=25-50% ****************************************************************** - INDEX OPTION SPREADS - ****************************************************************** As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific industry group or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options and professional traders also employ index spreads in hedge strategies. ****************************************************************** OEX - S&P 100 Index $553.30 *** OTM Credit-Spreads *** Standard & Poor's 100-stock index is a capitalization-weighted index of 100 stocks from a range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. Traders who participate in OTM credit-spreads often utilize S&P 100 (OEX) options because they generally contain more premium than options on individual stocks and also provide an underlying instrument less prone to huge, gapping moves. The strategy will profit if the underlying remains in a relatively small range and from a technical viewpoint, the overall market seems likely to move back into a constrained price pattern as the longer-term outlook is somewhat uncertain. Review the Market Sentiment section of the OIN for more specific technical information on the current trends in equities. By combining two credit-spread positions, you can participate in a popular neutral strategy known as the "Long Iron Condor." It is often used with range-bound issues and it is a limited risk, limited profit position that gives you a wide range for success. The benefit to this technique is that some brokers require less collateral for the combined position, as only one spread can lose money at expiration. You should consult your brokerage to determine the maximum margin requirements before initiating the position. Traders should also target a higher premium in each position initially, to increase the overall return on investment. OEX - S&P 100 Index $553.30 PLAY (conservative - bearish/credit spread): BUY CALL JUN-585 OEB-FQ OI=513 A=$2.05 SELL CALL JUN-580 OEB-FP OI=2916 B=$2.50 NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11% - and - PLAY (conservative - bullish/credit spread): BUY PUT JUN-525 OEB-RE OI=706 A=$4.10 SELL PUT JUN-530 OEB-RF OI=4684 B=$4.50 NET CREDIT TARGET=$0.45-$0.50 PROFIT(max)=9% ****************************************************************** ************************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 ************ With the markets trading in a tight range, the action could heat up next week. Look for several triggers in these watch list candidates. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/051902.asp ************** MARKET POSTURE ************** Friday was a quiet day for Market Posture. That means we should expect some movement next week. To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/051902_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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