The Option Investor Newsletter Sunday 06-02-2002 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 5-31 WE 5-24 WE 5-17 WE 5-10 DOW 9925.25 -179.01 10104.26 -248.82 10353.08 +413.16 - 66.68 Nasdaq 1615.73 - 45.76 1661.49 - 79.90 1741.39 +140.54 - 12.15 S&P-100 529.20 - 10.72 539.92 - 13.38 553.30 + 30.06 - 7.28 S&P-500 1067.14 - 16.68 1083.82 - 22.77 1106.59 + 51.60 - 18.44 W5000 10106.49 -144.15 10250.64 -223.54 10474.18 +456.71 -184.57 RUT 487.47 - 6.17 493.64 - 15.30 508.94 + 16.21 - 19.59 TRAN 2749.26 + 5.59 2743.67 - 54.69 2798.36 +155.26 -100.46 VIX 22.90 + 1.64 21.16 + .88 20.28 - 4.75 + 1.80 VXN 45.95 + 3.09 42.86 - .08 42.94 - 7.79 + 4.47 TRIN 1.11 1.59 0.78 2.56 Put/Call .73 .82 .72 .83 ****************************************************************** Economy Is Growing, Does Anybody Care? by Jim Brown The open on Friday was full of bullish cheerful traders calmly picking over the few bargains available but like Kmart shoppers on a budget there were no volume buyers. A nibble on semis, a biotech or two, even an oil stock here and there. There was a flood of economic reports coming out at 10:AM but nobody seemed to care. They will be positive because everybody knows the recovery is underway. Sure enough they were positive and with that ammunition the buyers became a little more excited as stocks ran up to resistance but once the easy pickings were gone so were the appetites. The Chicago PMI report soared to 60.8 in May and far surpassed expectations. The index gained +6 points from the April reading of 54.7. Any reading over 50 represents an expansion of manufacturing activity. New orders jumped to 65.8 from 59.0 and production jumped to 65.7 from 55.8. The production jump was the largest one month increase since December 1995. You can't get much more bullish than this. Factory Orders rose +1.2% last month and nearly doubled the estimates. Shipments increased by +2.4% and inventories declined. Sounds like an economic wonderland! Want more good news? The Productivity Report showed a +8.4% spike in productivity and unit labor costs fell by -5.2%. The largest quarterly drop since 1983. Productivity up, costs down, Dow 15,000 here we come, right? Not in this fairy tale. The holdup is not in the tech sector if you believe the Semiconductor Billings Report. Billings were up +3% in April for the third monthly increase in a row. Wireless communications chips led the gain. Considering the pounding the wireless sector has taken recently this should have been good news. Neither MOT, NOK nor QCOM could manage a gain of more the $.50 cents on the news. Probably the most watched release of them all was the University of Michigan Sentiment Survey. The index rose to 96.9 in may from 93 in April. This is the highest level since late 2000. The current conditions index was 103.5 and four points higher than in April. The expectations index rose to 92.7. The survey was impacted by the continued drop in home mortgage rates and the continued low inflation. This was also great economic news in that a happy consumer is a shopping consumer. So why did these great economic reports fail to spark a monster short covering rally that would make the Cisco event look like a lazy day in summer? Multiple reasons. First, it is summer and most investors are worried about other things than following the stock market on a tick by tick basis. They have followed the long standing Ray Hirsch advice to "go away in May." This can be proven by the volume on the Nasdaq which started out the week with a meager 1.2 billion shares and finished up on Friday with only 1.46 billion. Granted Fridays are slow in the summer but it was still the highest volume day of the week. Great economic news but nobody was listening. Secondly the current active(?) investor has taken a "show me the money" stance. They have been told that profits were coming for several quarters now and they never appeared and in most cases got worse. They are now waiting for "real earnings" from real companies. The earnings shell game that was brought vividly to the surface by Enron and now dozens of companies since has built up a defensive wall between the market and the investors accounts. They do not want to part with the cash until they see who is left standing when the smoke clears. Thirdly, the bearish sentiment has been so prevalent for so long that it has rubbed off on everyone. It is like having a smoker come to live in a non-smoking house for several months. Even though they don't smoke "in the house" the smoke is in their car, their clothes, their breath, etc. Even in the most cautious home this smoker smell eventually contaminates everything. You don't realize it until one day you open the front door and it hits you. By then it is too late. (I am not picking on smokers but I am relating a recent personal experience.) The bearish sentiment has so infiltrated the market that almost everyone is admitting that we will see lower lows and a retest of some past bottom. They have accepted that all the bear claims are true and many are even beginning to look for the second economic dip. Add to that the daily analyst surprise and you have a recipe for investor apathy. Did I mention that two nuclear powers are getting ever closer to war? The U.S. government warned that all non-essential personnel should leave India immediately. They were already ordered out of Pakistan two months ago. Both countries now have a million soldiers each facing each other over the disputed line of control. There were warnings of a possible 10-12 million deaths within the next two weeks if the countries escalated their war into a nuclear conflict. The problem is the uneven ratio of power with India the strongest power by far. Possible scenarios include a first strike by Pakistan to level the odds and a retaliatory strike by India to punish them for the attack. While this seems like science fiction or a Tom Clancy mystery novel it is real life and this is weighing heavily on the markets. (Clancy did write a novel about a possible nuclear conflict between these two countries called "Line of Control.") This is not just a distant war possibility but a real potential impact to major companies. Oracle and HPQ have several thousand employees in their manufacturing plants in India and these are only two of the hundreds of U.S. companies with exposure to the potential war. Those bulls that felt led to buck the trend and buy stocks on Friday were met with several critical downgrades. Lehman Bros drastically cut estimates on Micron to a loss of -.43 cents from a gain of a penny. A major haircut! Morgan Stanley also downgraded Micron on Friday. The problem is the continued slippage in corporate spending. The lack of buyers for computer equipment is causing a severe price war and one of the first items to be cut is excess memory. Prices for components are becoming so cheap that it is hard for the major manufacturers to make a profit because the smaller independents are cutting their throats just to stay open. I bought a Pentium-4 2.2GHZ processor and Gigabyte motherboard today for less than $350. I bought 1.5GB of DDR PC2700 333mhz memory for $297. I will throw this into my existing case and have to buckle my seatbelt when Isit down to trade. The problem? I upgraded to a state of the art system for next to nothing. I could have bought it as an entire computer for a couple hundred more. There is no profit in computers in this market. There is so much "extra" horsepower available today that there is not enough computing needs to max it out. Even with my four monitors and running Qcharts with nearly 100 charts and almost 1000 active quote sheet symbols, half a dozen browsers, email, Preferred Trade, Interquote, a couple of Word documents and an Excel spreadsheet there will be easily 75% of the power to spare. I can't imagine ever using all the capacity. (Famous last words) This system for normal people would replace 2-3 older computers with one. Many of our readers use multiple computers for trading platforms. One for quotes/charts, one for a browser and/or broker interface and maybe even one for email and "work" during the day. Instead of upgrading all these systems they can upgrade one and toss the others out. This goes the same for businesses. Tasks that took several computers two years ago may only take one now. We have half the servers we had two years ago and twice the amount of data and active pages. For more on this impact to the tech sector I recommend this: http://biz.yahoo.com/smart/020531/20020524aheaofthecurv_16.html A reader emailed me this link this afternoon and while I don't normally agree with Fleckenstein he is on the same track. http://money.msn.com/content/p24025.asp He is not the only one that thinks the computer upgrade cycle everyone has been waiting for may not be as robust as expected. Lehman Brothers analyst Dan Niles suggested lightening up on chip stocks because the summer was not going to be kind to them. He feels the upgrade patterns mentioned above will continue to pressure earnings and with the average chip stock at a PE of 45 and chip equipment makers over 70, there could be some price compression in the future. (In English, "stock prices are coming down") The semiconductor sector saw a brief bounce on short covering when the economic and semiconductor billing news was released but it was only temporary and it finished at the days lows. Intel barely broke even after trading up intraday after several analysts said they expected Intel to guide to the lower end of their range next Thursday when they have their mid-quarter update. Time and time again we have heard about how this quarter has been very slow and it will be extremely back end loaded. With their update on June 6th they will not know for sure how it is going to end and may be forced to be ultra conservative and guide lower hoping to surprise to the upside later. Other techs were targeted on Friday as well. IBM, which is continuing to cut workers, 2,000 this week, was the target of cautious comments from several sources. The stock lost -1.80 even though it announced an order for a $224 million computer from the government, announced its leadership role in disk storage and announced its worldwide leadership role in super- computer revenue. Some days it just doesn't pay to go to work! Merrill Lynch, concerned about the slow IT growth, cut sales and earnings estimates on the software sector, primarily ORCL, SEBL and SY. Microsoft lost -1.73. Merrill said that many companies will struggle to gain limited sales improvements for the rest of the year. Check out the MSFT chart intraday and look at the drop at the close. Somebody wanted out really bad before the weekend. I looked at time and sales and did not see any giant blocks of stock trade but there were a lot of multi-thousand share trades at the low of the day. The 2Q is shaping up like this so far. According to First Call there have been 285 negative and 247 positive pre-announcements. On the surface that appears bearish but analysts are actually glad it is not worse. Next week the 2Q-warning season will begin to heat up. The economic calendar is also huge with the ISM Survey (formerly known as NAPM) and Construction Spending on Monday. Tuesday we get the BTM and Redbook. Wednesday the non- manufacturing ISM and Friday the Non-farm Payrolls and Wholesale Inventories. The Intel analyst update on Thursday after the close will have tech investors shaking all week. Will they or won't they guide lower? The markets on Friday appeared to be pricing in many of the negative factors described above. The post economic report rally was likely inspired by some limited short covering since there was no volume and no follow through. I am sure some diehard bulls were buying in hopes of a breakout on the first leg of a new bull market. They were sorely disappointed when the +130 point Dow gain dwindled to only +13 points at the close. What was unthinkable last Friday, a retest of the 9800 lows, when the Dow closed at 10100, came to pass. While it should have been seen as the "bottom" and a successful retest of the May-7th lows, it was met with a yawn and not even a respectable bout of short covering. After Friday's roll over the chances of another retest of even lower numbers are very strong. The Nasdaq stopped dead on resistance intraday at 1650 and then dropped -34 points to close with a loss of -16 for the day. Nearest support is 1600-1607 but that could be only a pause if the tech downgrades and warnings continue. The next support is a distant 1560 with eventual support well below that in the low 1400 range. While that may only be a doomsday scenario the odds for another drop to something below 1600 are pretty good. The S&P, probably the best barometer for the general market, failed at 1080 on Friday and closed under support at 1070. The Thursday low of 1054 was only 4 points above real support at 1050. This should be our line in the sand. We can give the bears the next 17 points but the 1050 level is critical. That will determine the next phase of this market decline. If we can stop the bleeding there and trade sideways for a couple weeks then the July earnings expectations may kick in to provide a little positive momentum. That of course assumes enough positive pre-announcements to wake up the bulls from their summer nap. A well-known market prognosticator who has been laying low recently, made a public statement on Friday. "Until we witness a definitive upside breakout, we will view the sustainability of any rally (or rallies) from current levels as suspect," said Ralph Acampora, Prudential Securities' top technical analyst. In English he said, "if the markets don't go up they will probably go down." After being a lightning rod during the 1999-2000 bubble he has been very quiet and has avoided any market moving calls or predictions. In reality he is right. If, after the extremely positive economic reports this week, the markets cannot put together a solid gain on Monday/Tuesday then in reality we are toast. With no volume our path may already be carved in stone. Volume is a weapon for the bulls. Markets can go down on low volume simply due to lack of interest but it takes volume to make it go up. Volume is the measure of supply and demand. When there is no demand ANY supply will push prices down. Even a positive advance/decline ratio on both exchanges could not hold the markets up with light volume on Friday. When the good economic news from Friday fades behind nuclear war newsbytes on Monday, bulls may not see an urgent need to own stocks. Trading in these markets is tough at best. For the Nasdaq the only long positions I would consider would be a bounce off 1565 or a breakout over 1675. Trading the chop in the middle could be expensive. The Dow is even harder. It has resistance at every century mark beginning with 10000. Waiting for a breakout of any hundred mark gives you very little room before the next one is a problem. After the lackluster rebound performance from the 9800 dip on Thursday I would be hard pressed to buy a dip to that level again. I would only play the Dow (DJX) long on a rebound with strong volume or short it on any drop below 9800. I know this may sound very negative or defeatist but this is a tough market and pretending it isn't will cost you money. You need to be very quick about entry points and even quicker about exits. If you would like some guidance during the trading day about entry points and trade setups then click on the Market Monitor. Leigh, Jeff, Jonathan and myself will provide continuous updates and trade signals through the day. We will help you cut through the intraday noise and understand what is happening in the markets. We can't make the markets better but we can help you understand what is really happening. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** GOOD ECONOMY/BAD MARKET by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - Usually, the market "leads" the economy, but now the economy is way ahead of the market. The more good news we get, contained in such reports as on the latest Consumer Sentiment numbers, factory orders, etc., the more the market wails, but VARE are the EARNINGS! Then, it (the market) proceeds to have a temper tantrum and the refusnik bears stomp on rallies growling sell, sell, sell! It's time for some market discipline: You vill rally and you vill ENJOY it! In a sign that investors continue to exchange paper with pictures of dead presidents on it for stock shares, the total new money invested in stocks in April was nearly $12 Billion ($11.76). However, this was down substantially from nearly $30 Billion ($29.6) in March according to the Investment Company Institute. If April new money was down over 50% from March, May must be off from the prior month pace also. (NOTE: This year through April, investors have put $66.8 billion into stocks, more than triple the amount of the first four months of 2001.) In the S&P 500 (SPX), I highlighted last week the long term bullish chart pattern that I believe is forming - that of a bullish Head & Shoulders (H&S) bottom (see below, left), that peculiar 3 pronged bottom with the middle low under the other two lows on either side of it. This may well be the longer-term picture, but the unknown is when the buying will come in to lift stocks, as a sideways trend (just more "shoulder") could go on for weeks longer. S&P 500 (SPX) Weekly/Daily charts: Meanwhile, the daily chart showed how the 21-day moving average acts as a common "pivot" point, helping define the short-term rend as bullish or bearish - witness the rally failure as the 1080 high touched, then reversed, from 1080 on Friday; the close then was 13 points under this intraday high. I think we have more to go on the downside. Just as opposites attract, we can get a short-term top pattern within a longer term bottom formation of the same type, per the outline of the Head and Shoulders TOP pattern that has become clear on the HOURLY chart below. S&P 500 (SPX) Hourly chart: Judging by market action on Friday, as the SPX reversed right at resistance implied by prior lows and a down trendline drawn through the 1106-1097-1080 highs, SPX has more to go on the downside. Specifically, as implied by measuring a "minimum" downside objective for the H&S pattern, an objective is obtained to 1042-1045. This measurement also suggests that the recent pair of lows at 1054 and the early-May bottom (1049) will be exceeded. SPX in the low 1040 area, if seen, offers a next buying opportunity in my estimation. S&P 100 (OEX) Weekly/Daily charts: The S&P 100 (OEX) has a similar pattern on the weekly and daily charts in all respects except the H&S bottom is not as well defined on its weekly chart. S&P 100 (OEX) Hourly chart: The move to and reversal at the hourly charts down trendline at 537 was the "kiss of death" for the rally occurring at the end of last week. As with the SPX, I anticipate new lows for the current move, which should both put the hourly stochastic into an oversold area, and build up a good deal of bearishness - typical for bearish "sentiment" to be high to set up what should be a next tradable bottom - in the 520 area (or a bit lower). Nasdaq 100 Trust Stock (QQQ) Weekly/Daily charts: Not much to say regarding this chart pair, except to note that the Nasdaq is oversold, so a good-sized rally would not be surprising if the political and earnings worries lift for a while. Meanwhile, I think the Q's move lower before shorts need to think about covering. Nasdaq 100 Trust Stock (QQQ) Hourly chart: I suggested intraday on the Market Monitor, to sell QQQ as soon as it became apparent that the rally was failing in the 31 area, right at resistance implied by the down trendline. As with the S&P, a Head & Shoulders top is outlined. Wish I had noticed this pattern earlier, as it offered guidance to sell near the "top" of the Right Shoulder (RS) - the H&S top pattern tends to be so reliable as a probable top, that shorting can be done before the "confirming" break of the "Neckline" (dashed line), using a stop just over the peak of the 3rd. and final rally (RS). I anticipate further weakness early in the week - for those who are short/long puts: a move to new lows, such as at the implied downside H&S objective in the 27.5 area, is suggested as a place to take profits. Buying in this area appears warranted as well. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** Editor's Plays ************** Cheap Options Even in a directional market (down) there are cheap options to be found. Normally these are found on the really high volume stocks or stocks that are not normally the focus of attention Ball Aerospace (BLL) is really not an aerospace company. Sure, they have a division that works on satellites and defense items but their main business is aluminum cans. They are one of the largest, if not the largest can maker in the world. Look on any pop or beer can the next time you drink one for the Ball logo near the bottom. When the war started and every defense contractor looked like they would get more money than they could spend from uncle sam Ball soared and they even announced a split for March. Now that the defense contracts and reorders have been given out or toned down, Ball is left to go back to the satellite and can business. With aluminum costs climbing, profits could be shrinking. Either way the trend on Ball is down. The key here is the $41 level. There is limited support at $41 with nothing after $41 until it nears the $35 level. I would set a buy stop for $41 ($39.95 actually) and enter the trade automatically if that level is hit. *********************** Semiconductor Blues The semiconductors got two separate downgrades on Friday but most traders were looking the other way. They were thinking weekend or positive economic reports. When the next round of downgrades appears, and it could be with Intel's analyst update on Thursday, the sector could retest the old lows. Support is in the $33-$34 area and buying ITM options would allow you to capture most of the gains. Check out the two links to chip stories in the Sunday wrap and then decide what you think the future holds for the SMH. *********************** Remember, these are all high risk plays and should only be made with 100% risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Broken Trend By Eric Utley Well, the post Memorial Day rally never really got cooking last week. The Nasdaq capped off a less than stellar four day week with about a 1.5 percent drop Friday. Meanwhile, the blue chip averages finished virtually unchanged. I don't know what the market's failure to rally during one of the most bullish weeks of the year says about its prospects going forward. I would dare guess that the deviation from the seasonal trend implies a weaker than previously thougth market. But that seems too logical, so I really don't know what to make of it. I do know this. There's a widening of the spread between commercial and small traders in the S&P 500 futures market. Of the Committments of Traders (COT) numbers, I give the S&P's the most credence because of their liquidity. Commercial traders it seems grew more bearish last week after bringing in a few short positions ahead of the Memorial Day holiday. But more interesting, the small traders in the S&P futures grew even more bullish, reaching their highest level of bullishness in over a year. The spread between these two is usually telling of a market event, and more often than not the commercials are on the right side of the move. That being the case, the extreme bullishness on the part of small traders may very well lead to a nasty downturn in the S&P 500 this summer. So much for the summer rally theory. If we do get any sort of bounce in the blue chip names, it will probably be a good shorting opportunity as it's likely to hold without the support of the big commercial interest who are obviously betting in a bearish way on this market. The bearishness in the S&P pit may stem from the still relatively overbought ways of the index versus others such as the Nasdaq 100. Turning to bullish percent data, it was a quiet week for the indicator, and almost unheard Friday as the only markets to change were the NDX and the S&P 100 (OEX.X). Of them all, the NDX is the most overbought as it quietly lost a few more stocks last week to end at the 33 percent level. It's getting awful close to being below the oversold 30 percent level, which may mean that there's less downside risk in the NDX this summer. By contrast, the SPX is bullish percent is still above 60 percent. Granted, the market remains in a bull confirmed mode, but there's more downside risk in it than the others. Maybe that's why the commercials are betting so heavily bearish on the market. Elsewhere, the ARMS Index (INDEX:TRIN) short term indicator reached an extreme oversold reading during Friday's session with the 5-day moving average ending up above the magical 1.50 level. The other intermediate and long term indicators are still well below oversold extremes, but the short term number is indicating that a short covering rally of some size may be around the corner in the broader market. The market is certainly not washed out by any means, so another short covering pop, which the 5-day ARMS has been pretty good about predicting recently, may set up just another good entry point into short/put positions. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9925 Moving Averages: (Simple) 10-dma: 10090 50-dma: 10155 200-dma: 9888 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 1067 Moving Averages: (Simple) 10-dma: 1082 50-dma: 1101 200-dma: 1115 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1208 Moving Averages: (Simple) 10-dma: 1258 50-dma: 1320 200-dma: 1443 Oil Service ($OSX) The OSX traded higher ahead of the weekend while crude bounced back as well. The OSX was the day's best performing sector with its 1.13 percent rally, fueled by further geopolitical fears. Leading to the upside included Global Industries (NASDAQ:GLBL), Varco (NYSE:VRC), Nabors Industries (NYSE:NBR), Transocean (NYSE:RIG), and Noble (NYSE:NE). 52-week High: 131 52-week Low : 58 Current : 106 Moving Averages: (Simple) 10-dma: 105 50-dma: 104 200-dma: 87 Biotech ($BTK) The BTK was the worst performing sector last Friday. The index finished lower by 2.52 percent on the day. Leading to the downside included shares of Millennium Pharmaceuticals (NASDAQ:MLNM), Protein Design Labs (NASDAQ:PDLI), Sepracor (NASDAQ:SEPR), and Amgen (NASDAQ:AMGN). 52-week High: 676 52-week Low : 375 Current : 405 Moving Averages: (Simple) 10-dma: 414 50-dma: 447 200-dma: 507 ----------------------------------------------------------------- Market Volatility The VIX turned lower Friday on the heels of the 0.06 percent gain in the S&P 100 (OEX.X). It bounced above its converged 10- and 50-dmas. The VXN shed 1.56 percent despite the 1.59 percent drop in the Nasdaq-100 (NDX.X). Go figure. CBOE Market Volatility Index (VIX) - 22.81 -0.33 Nasdaq-100 Volatility Index (VXN) - 45.89 -0.73 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.73 365,435 266,163 Equity Only 0.55 306,482 169,056 OEX 1.01 15,482 15,750 QQQ 0.40 27,820 11,267 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 61 + 0 Bull Confirmed NASDAQ-100 33 - 1 Bull Correction DOW 63 + 0 Bear Correction S&P 500 60 + 0 Bull Confirmed S&P 100 60 - 1 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 1.54 10-Day Arms Index 1.24 21-Day Arms Index 1.29 55-Day Arms Index 1.30 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 1930 1228 NASDAQ 1782 1690 New Highs New Lows NYSE 117 40 NASDAQ 104 94 Volume (in millions) NYSE 1,226 NASDAQ 1,687 ----------------------------------------------------------------- Commitments Of Traders Report: 05/28/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials grew more bearish last week by adding about 5,000 contracts to their net bearish position. They did so by adding more shorts than longs. Listen up! Small traders reached their most bullish position in over a year by adding a big number of long positions to total more than 114,000 net long contracts. The spread here between commercials and small traders has widen considerably over the last two weeks! Commercials Long Short Net % Of OI 05/14/02 343,941 424,893 (80,952) (12.1%) 05/21/02 354,039 429,803 (75,764) (9.7%) 05/28/02 362,607 442,845 (80,238) (9.9%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 05/07/02 154,664 59,583 95,081 44.4% 05/14/02 163,035 58,587 104,448 49.8% 05/21/02 172,313 57,803 114,510 49.8% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Nasdaq commercials grew less bullish last week by reducing their longs more than their shorts. Small traders went in the opposite direction by growing less bearish, reducing their net position by about 3,000 contracts. Commercials Long Short Net % of OI 05/14/02 40,858 35,761 5,097 (5.5%) 05/21/02 51,448 45,375 6,073 (6.3%) 05/28/02 49,669 44,900 4,769 (5.0%) 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 05/14/02 11,920 17,479 (5,559) 8.2% 05/21/02 12,567 19,899 (7,332) 22.6% 05/28/02 12,562 16,969 (4,407) 14.9% 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 were flat on a week over week basis. Their net position lost less than 100 contracts. Small traders grew less bearish, though, by adding a number of long positions. Commercials Long Short Net % of OI 05/14/02 21,080 14,725 6,355 14.4% 05/21/02 20,173 15,317 4,856 13.7% 05/28/02 20,289 15,513 4,776 13.3% 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 05/14/02 4,930 10,899 (5,969) (25.2%) 05/21/02 3,661 9,585 (5,924) (44.7%) 05/28/02 5,709 9,180 (3,471) (23.3%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *************** ASK THE ANALYST *************** Contrarian or Kooky? By Eric Utley I normally don't comment on what I read in the financial press. But something caught my attention Saturday morning that I thought was worth passing along. Barron's ran a piece over the weekend that was bullish on the telecom sector? Stocks mentioned included AT&T (NYSE:T) -- one of the stocks I reviewed this weekend -- Verizon (NYSE:VZ), and Vodaphone (NYSE:VOD). Look, I appreciate the fact that the telecom sector is the most oversold sector in the entire market. So there's not a lot of downside risk. But I think the business is far from a bottom, meaning that the stocks are not good buys in here. Period. I remember the cover story on XO Communications in early '01, when the stock was trading north of $20. And yes, it was most bullish. But guess what, six months later, XO was at zero. There, enough said. Let's move on. 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 ---------------------------- AT&T (NYSE:T) What do you think about short on T? - Bernard Thanks for the question, Bernard. There's a lot going on with Ma Bell at the moment, so let's get a quick run down on some important events. First, the debt downgrade. The rating agencies have been on the prowl in the telecom sector, and T hasn't avoided the downgrades. The company's debt rating was downgraded by Moody's earlier in May. With about $25 billion of debt on the sheet, the downgrade certainly didn't help matters at Ma Bell in the form of increased borrowing costs. T is under contract to buy the 66 percent it doesn't already own of AT&T Canada (NASDAQ:ATTC) by next year. The company is expected to shell out about $3.4 billion for the buyback, of which some of that money is going to come from a stock offering that is estimated to be around $2.25 million. Or, in other words, more dilution. The company is in the process of selling its broadband unit, which will knocked some dollars off of the stock. In an attempt to make the stock more appealing to institutional investors, the company is going to effect a reverse stock split. Now this is interesting. I can think of only one reverse stock split that I've ever seen work, and that was in Iomega (NYSE:IOM), a component of the Disk Drive Index (DDX.X), back in October of last year. The 1 for 5 reverse split brought IOM up from below $1 to about $6. The stock has doubled since then, so I'd consider that reverse split a success for the time being. The other, oh, 100 or so reverse splits I've seen put in place have failed miserably. Granted, all of the companies I've seen issue reverse splits were micro cap stocks, no where near the size of T. But the reverse split generally isn't a boost of confidence. Technically, the stock is a mess. It hasn't traded this low for over a decade as depicted by this monthly chart. T - Monthly But do I think T is a good short? The fundamentals certainly suggest so. It's just that the stock is so very oversold, and the same goes for its sector, that I don't know if a short at current levels offers the best risk versus reward set up. I'd like to see a rebound in the stock back up to a level where you can manage risk a little bit easier, rather than running the risk of shorting the stock in a whole, a what might turn out to be a relative low for a few weeks or months. I do think that the stock will trade lower into the end of the year, but I think that there's a better entry point than current levels. I would like to get in it somewhere near the five month downward trend line that is drawn on the daily chart below. I think there that you can manage risk just a little bit better in case I'm wrong about the stock's direction into the end of the year. T - Daily ---------------------------- Home Depot (NYSE:HD) I've been watching Home Depot go lower without much signs of a bottom. Where do you see support for this one and what's your outlook for the stock. - Regards, Kathy Thanks for the question, Kathy. Home Depot had been holding up very well versus the broader market, as measured by the S&P 500, through most of April and into May, up until just a few weeks ago when the company reported its most recent quarter. The company hit its targets, but it was the guidance that sent fear into the minds of investors. Some analysts said that HD's failure to raise guidance for the next quarter caused worries. Many were expecting that the company would continue to raise the bar, and that had built into the stock price. But the failure to do so shifted investor's perceptions for growth in the huge retailer going forward. When rival Lowe's (NYSE:LOW) reported analysts suggested that its numbers were better, but even late last week investors began to get nervous about its growth prospects. The two taken together, I think, might be saying something about the strength of the U.S. consumer, and maybe to a smaller extent even the housing market. To digress, HD's recent spill caused quite a bit of technical damage to the stock. The breakdown below the $45 level from its consolidation essentially negated the consolidation. I would actually be bearish on this stock going forward, but would be willing to wait for a good entry point. I think a retest of the previous descending support line would offer a good entry point with tight risk management into short/put positions. HD - 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 June 3rd ================================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- None ------------------------- TUESDAY ------------------------------ BTH Blyth Inc. Tue, Jun 4 -----N/A----- 0.34 BOBE Bob Evans Farms Tue, Jun 4 -----N/A----- 0.45 RDY Dr. Reddy`s Labs Tue, Jun 4 -----N/A----- N/A PETM PETsMART Tue, Jun 4 Before the Bell 0.10 RYAAY Ryanair Holdings Tue, Jun 4 -----N/A----- 0.18 SNPS Synopsys Tue, Jun 4 After the Bell 0.37 ----------------------- WEDNESDAY ----------------------------- ABS Albertson`s Wed, Jun 5 Before the Bell 0.56 CMVT Comverse Technology Wed, Jun 5 After the Bell -0.06 MDZ MDS Wed, Jun 5 Before the Bell 0.15 SFD Smithfield Foods Wed, Jun 5 -----N/A----- 0.21 ------------------------- THURSDAY ----------------------------- IDT IDT Corporation Thu, Jun 6 -----N/A----- N/A NSM National Semiconductor Thu, Jun 6 -----N/A----- -0.08 AHO Royal Ahold N.V. Thu, Jun 6 -----N/A----- N/A ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable 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 CNBC Center Bancorp 21:20 06/01 06/03 FDC First Data 2:1 06/03 06/04 SLFI Sterling Financial 5:4 06/03 06/04 AAON AAON Inc 3:2 06/04 06/05 FIC Fair, Isaac and Co 3:2 06/04 06/05 ESI Fair, Isaac and Co 2:1 06/05 06/06 GBTS Gateway Financial Hldngs 11:10 06/05 06/06 UPC Union Planters Corp 3:2 06/06 06/07 CPS ChoicePoint 4:3 06/06 06/07 GGG ChoicePoint 3:2 06/06 06/07 AWR American States Water 2:1 06/07 06/10 FOSL Fossil, Inc. 3:2 06/07 06/10 ATK Alliant Tech 3:2 06/10 06/11 SABB Pacific Capital 4:3 06/10 06/11 APPB Applebees 3:2 06/11 06/12 IFIN Investors Fincl. Srvcs 2:1 06/13 06/14 WTRS Waters Instruments 3:2 06/14 06/17 OZRK Bank of the Ozarks, Inc. 2:1 06/14 06/17 MI Marshall & Ilsley 2:1 06/14 06/17 ALFA Alfa Corp 2:1 06/14 06/17 -------------------------- Economic Reports This Week -------------------------- Did you hear it? Wall Street is already looking towards the June earnings warning season. Feels like we just finished the Q1 numbers. We're looking at a somewhat quiet week. Auto and truck sales come out on Monday and a small pile of reports come out on Friday. ============================================================== -For- Monday, 06/03/02 ---------------- Auto Sales (NA) May Forecast: 6.3M Previous: 6.3M Truck Sales (NA) May Forecast: 7.5M Previous: 7.5M ISM Index (DM) May Forecast: 55.0 Previous: 53.9 Construction Spendng(DM) Apr Forecast: -0.1% Previous: -0.9% Tuesday, 06/04/02 ----------------- None Wednesday, 06/05/02 ------------------- ISM Services (DM) May Forecast: 56.0 Previous: 55.3 Thursday, 06/06/02 ------------------ Initial Claims (BB) 06/01 Forecast: N/A Previous: 410K Friday, 06/07/02 ---------------- Nonfarm Payrolls (BB) May Forecast: 70K Previous: 43K Unemployment Rate (BB) May Forecast: 6.1% Previous: 6.0% Hourly Earnings (BB) May Forecast: 0.3% Previous: 0.1% Average Workweek (BB) May Forecast: 34.2 Previous: 34.1 Wholesale Inventories(DM)Apr Forecast: 0.1% Previous: 0.0% Consumer Credit (AB) Apr Forecast: $6.0B Previous: $4.6B Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! 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The Option Investor Newsletter Sunday 06-02-2002 Sunday 2 of 5 ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************** INDEX TRADER GAMEPLANS ********************** THE SECTOR BEAT - 6/02 by Leigh Stevens Friday, retail stocks put in a good performance; also, the oil, oil service, cyclicals and gold sectors. Biotech, software, boxmakers and internet stocks were among groups that fared poorly at week's end. Losses in the software sector hit the Nasdaq as investors didn't find more to like after Thursday's gains. Oracle (ORCL) fell 5.9% following a bearish report from First Albany Corp. that suggested that the company's fiscal Q4 results were "not likely to be pretty". Microsoft (MSFT) gave back 3.3%, PeopleSoft 2.4% and Siebel Systems 6.2 percent. HIGHER ON THE DAY ON Friday - DOWN ON THE DAY on Friday - SECTOR HIGHLIGHT OF THE WEEK - Why the divergent results? For small-cap indexers, the devil has been in the details of which benchmarks the various funds seek to track. The biggest difference is that for more than two years, the Russell 2000 index used by several "small cap" funds, has lagged far behind a competing benchmark, Standard & Poor's S&P SmallCap 600 ($ )used by still other funds. The RUT however still has a number of tech stocks left over from the late-1990s Nasdaq/dot-com bubble. There are more of those weaker-performing tech issues in Russell 2000, dragging down its returns, compared with the S&P small-cap index. The RUT iShares (IWM) are correcting from a top and there is no apparent sign of a bottom yet. IWM may retrace a further portion of its last run up, perhaps as much as 75% of it - such as to the 94 area, which also corresponds to a prior high. A re-test of the February low could take it back to 90.80. For small cap participation, I favor the S&P 600 iShares. The recent performance gap certainly has been striking. From full year 2000 through April 2002, the Russell 2000 gained an average 1.9% a year, compared with 12.3% for the S&P SmallCap 600. There are significant differences in the methodology and composition of the two leading small-cap benchmarks, which investors in small- cap index funds should consider. The Russell 2000, first calculated in 1986, tracks the performance of the 2,000 U.S. stocks that rank after the largest 1,000 in market capitalization, or the total value of shares outstanding. The chart below is of the iShares of the Index (IJR) - The 600 stocks in the S&P small-cap benchmark, meanwhile, are selected by the same committee that selects the stocks in the widely followed Standard & Poor's 500-stock index of large stocks. S&P's process is more subjective, and stocks aren't added or removed on any set schedule. Further, the committee's guidelines for new additions call for companies to have been profitable in four recent quarters -- a test that kept out most of the hot Internet names of the late 1990s. S&P says it generally follows the industry breakdown of the total stock market in picking stocks for the small-cap index. The S&P benchmark tends to have a higher market capitalization than the Russell 2000. Recently, the figure was $440 million for the Russell 2000, and $586 million for the S&P SmallCap 600. Indexing hasn't been as popular in the small-cap realm as among large stocks, in part because stock-picking small-cap managers have often beaten the traditional Russell 2000 benchmark. Still, a total of about $24 billion in mutual funds and other accounts is indexed to the Russell 2000, and about $12 billion to the S&P 600 by an estimate I saw in the Wall Street Journal this morning. There are a couple of iShares choices in the S&P 600 - one being a "growth" segment (IJT) and the other a "value" segment (IJS). John Bollinger and some others I have heard from suggest the value trust, IJS - certainly, the "value" iShares have held up better on the recent decline. The growth stock, IJT, is showing an apparent double top and a deeper retracement. On the other hand, the index has gotten oversold and looks like it may find support in the 75-76 area. This one is more volatile, but may also be in an area where it is again worth buying. The value segment of the S&P 600 as represented by the iShares, symbol IJS, has broken below its up trendline, and today topped on a return to that line - (prior) support (once broken) "becomes" resistance. I believe that IJS would be a buy if it dropped to the 89-91 zone, where I suggest accumulation of the trust stock. SECTOR REVIEW - Airline Index ($XAL.X) STOCKS: ALK; AMR; AWA; CAL; DAL; FRNT; KLM; LUV; NWAC; U; UAL Still in a downtrend, well under its 50 and 200-day moving averages. Sector would not break out above its major down trendline before 89. Support has developed in the last month in the 77.00 - 79.00 area. Sector looks like it may be bottoming, but is not yet in a position to rally much - little buying interest in the group has shown up as evidenced by the pattern of lower relative lows after the early-May rebound. LAST UPDATE: 6/02 Amex Composite Index ($XAX.X) The small cap stocks so predominating in the Amex, as a group, has been in a sideways consolidation. Recent rally attempts have been finding resistance in the 964 area. 947-948 looks like a key near support, with a break under this level suggesting at least a temporary top. LAST UPDATE: 6/02 Bank Index ($BKX.X) STOCKS: BAC; BBT; BK; C; CMA; FBF; FITB; GDW; JPM; KEY; KRB; MEL; NCC; NTRS; ONE; PNC; SOTR; STI; STT; USB; WB; WFC; WM; ZION The bank index has made at least a temporary double top in the 916 area - closing penetration of this prior top, and subsequent support developing in this area, would suggest a new up leg. BKK fell under its up trendline this week and its 50-day moving average. It would need to close back above 889 to reverse this bearish near-term picture. Significant support lies in low 860 area - no major trend change is signaled without a move to under this area. LAST UPDATE: 6/02 Biotechnology Index ($BTK.X) STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; MYGN; PDLI; TARO; TEVA; VRTX; XOMA Biotech has been in pronounced downtrend, which may have reversed at the early-May lows in the 380 area. A continued rally from this point would suggests that index can work higher as long as BTK maintains a pattern of higher (up) swing highs and higher (down) swing lows. This pattern would be broken on a downside penetration of 393. A key technical resistance is 449-450, the area of several prior lows and the intersection of daily down trendline. A close above 449-450 would indicate that the trend has reversed higher. Further resistance then comes in at the top of its downtrend channel at 475. Suggested buy of Biotech Holdr's (BBH) at 101.50 on 5/24 open; recommended initial stop/exit point at 92.5; initial objective: 113; longer-term objective: 127, back to area of mid-March highs. LAST UPDATE: 6/02 Computer Technology Index ($XCI.X) STOCKS: to be listed Remains in a downtrend; May rally recently reversed at 50-day moving average and from an overbought reading on the daily oscillators; e.g., 4-day RSI. Resistance is at 658, then 682. Close over these levels would turn the trend up. Early-May lows in the 580 area now looks like major support. XCI has been continuing to trend lower, from its upswing high in the 680 area. LAST UPDATE: 6/02 Computer Boxmaker Index ($BMX.X) STOCKS: AAPL; CPQ; DELL; GTW; HWP; IBM; SNE; SUNW; UIS; VRTS The Boxmaker sector, an unglamorous term for PC manufacturers, had a mid-May rally right to its down trendline at it's 50-day moving average, where BMX reversed - this was also area of its 50-day moving average. Resistance is at 94, then 98. Major support looks like 83-85. LAST UPDATE: 6/02 Cyclical Index; Morgan Stanley; ($CYC.X) STOCKS: AA; C; CAT; CSX; DCN; DD; DE; DOW; ETN; F; FDX; GP; GT; HON; HWP; IP; IR; JCI; KRI; MAS; MMM; MOT; PBI; PD; PPG; PTV; R; S; UTX; WHR; X The cyclical index has been locked in a 552-595 trading range since early- March, with current levels closer to the high end of this range. A breakout above 595 on a closing basis, with subsequent ability to hold this level on pullbacks, would suggest that another up leg was developing in CYC. A close below 552 would reverse the trend down. LAST UPDATE: 6/02 Defense Index; Amex ($DFI.X) STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN; ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC The Defense sector, a very strong performer in the January to May timeframe, formed a May top after repeated failures to get through resistance in the 680 area - retreat from the top area was accompanied by the a downside break of the Jan-May up trendline. The last rally to this area occurred on less relative strength, forming a classic price/RSI divergence. Resistance at the previously broken up trendline is at 673 currently, not far under the major 680 resistance. Am watching to see if the 50-day moving average acts as support beyond today. Downside possibilities for a pullback in DFI may lie either in the 615 or 595 areas, representing the 38% and 50% retracements, respectively. LAST UPDATE: 5/23 Disk Drive Index ($DDX.X) STOCKS: ADIC; ADPT; DSS; FLSH; HTCH; IOM; MXO; RDRT; SNDK; STK The disk drive index remains in a downtrend. However, after a drop to the 82 area in early-May, which completed a 62% retracement of the September '01 - February '02 advance, DDX rebounded some. If the index can hold above its prior low at 82, the index could be a position to rally. The last rally reversed at its 200-day moving average. A close above 88, current resistance implied by its down trendline, would suggest some further rally potential at least back up to re-test its 200 and 50-day moving averages. LAST UPDATE: 5/26 Fiber Optics Index ($FOP.X) STOCKS: ADCT; ALA; AMCC; AVNX; CIEN; CORV; CSCO; FNSR; GLW; JDSU; JNPR; LU; MRVC; NEWP; NT; NUFO; ONIS; PMCS; Q; SCMR; TLAB; VTSS; WCG The Fiber Optic group has been in a downtrend since peaking in the 139 area in early-December. FOP's recent low was made at 65 in early-May and the index is again near that area. A break of this level would suggest another downswing, but I don't have enough price history to focus on what might be a possible further downside objective. On the upside, a close over 71.00 would put FOP above its down trendline, basis the daily chart. Sector is again approaching an oversold reading on the daily oscillators. LAST UPDATE: 5/26 Financial Index; NYSE ($NF.X) STOCKS: This index is composed of all the financial stocks on the NYSE; e.g., banks, insurance, etc. Forest & Paper Products Sector Index ($FPP.X) Gold & Silver Sector Index ($XAU.X) STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL XAU continues to accelerate to the upside, but may find near resistance at the top end of its steep uptrend channel at around 90. My longer-term objective is 100 however. Near support looks like 80, with major support at 70. If you want to buy into this sector it is high risk, although gold bullion has a possible per ounce target to $340-345, maybe 350. The question is how much of the potential further price rise in gold is priced into the XAU stocks already. LAST UPDATE: 5/23 Health Providers Index; Morgan Stanley ($RXH.X) Healthcare Index; Morgan Stanley ($HMO.X) STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; TGH; THC; UNH; WLP Healthcare ($HMO.X) rebounded strongly from where it needed to maintain its bullish technical chart picture, at its up trendline. However, the prior high in the 644 area now looms as significant resistance. LAST UPDATE: 6/02 ** Previously suggested basket of 3 HMO stocks/calls - PacifiCare Health Systems (PHSY) at 23.5-24.7. Stop/exit: 23.3 Wellpoint Health Networks (WLP) - Entry at 72.00, then at 70. Stop/exit point: 65 Additional buy suggested at 66. Humana (HUM) - Entry suggested at 15.60 & 15.00-15.15. Stop/exit point: 13.2 High Tech Index; Morgan Stanley ($MSH.X) Internet Index; CBOE ($INX.X) Natural Gas Index ($XNG) Networking Index ($NWX.X) Oil Index; CBOE ($OIX.X) Oil Service Sector Index ($OSX.X) Pharmaceutical Index ($DRG.X) Retail Index; S&P - CBOE ($RLX.X) Russell 2000 Index ($RUT.X) Securities Broker Dealer Index ($XBD.X) Semiconductor Sector Index ($SOX.X) STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX The Semiconductor sector, after making an approximate double bottom in the in the low 460 area, rebounded strongly. This was accompanied by an RSI reading that was well above its prior low, which is a bullish divergence and also suggested a bottom. One option play on this sector is to buy SOX index calls, although they have a tendency to get pricey as soon a rally develops so limit orders and picking an area to buy them on a pullback is important, Individual stocks that look favorable, and will likely trade in line or as well as the SOX on a rebound, include MU, NSM, and TXN. LAST UPDATE: 6/02 Software Index; Goldman Sachs ($GSO.X) Telecoms Index; No. American ($XTC.X) Transportation Average; Dow Jones ($TRAN) Utility Sector Index ($UTY.X) Wireless Telecom Sector Index ($YLS.X) 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 Tue Wed Thu Fri Week TEVA 67.03 -0.50 0.15 0.65 -0.70 0.23 Still strong ERTS 64.00 -0.89 -0.46 1.84 -0.30 0.19 Breakout??? NOVN 26.61 0.38 0.58 0.69 0.60 2.24 Good plan!! SNPS 50.44 -1.23 -0.87 0.39 -0.55 -2.23 Entry point ADBE 36.10 -1.00 -0.82 0.68 -0.43 -1.57 At support CI 106.05 0.19 0.05 0.88 0.12 1.24 Steadily up GILD 35.66 0.90 -2.60 1.46 -1.15 -1.39 Dropped PDLI 11.37 0.30 -0.49 0.20 -0.69 -0.68 Dropped THC 74.50 1.45 0.95 1.22 0.30 3.92 Breakout??? DGX 87.42 0.44 0.33 1.28 0.42 2.47 Rebound!! INTU 43.73 -0.74 1.44 1.56 -0.75 1.51 Entry point WFMI 51.17 -0.89 0.60 -0.14 1.61 1.18 New, runner PUTS HB 60.75 -0.54 -0.48 1.10 0.25 0.33 Dropped GS 75.45 -1.29 -0.75 -1.07 0.37 -2.74 Relief pop PLAB 22.87 -0.25 -0.75 -0.24 0.15 -1.12 Entry point COHU 24.50 0.30 -0.65 0.10 0.75 0.50 10-dma roll WHR 71.40 -1.26 -0.80 -0.75 0.30 -2.51 200-dma spot VRTS 22.67 -1.48 -1.14 2.06 -0.32 -0.88 Down trend WMB 14.20 -0.31 -1.64 -1.47 0.20 -3.22 $14 support DUK 32.01 -0.11 -1.08 -1.73 0.23 -2.69 Breakdown?? EXPE 71.50 -0.93 -1.75 -2.59 -4.16 -9.43 New, falling BLL 41.58 -0.21 -0.86 -0.59 -0.94 -2.60 New, trend ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* WFMI - Whole Foods Market $51.17 (+1.18 last week) See details in play list Put Play of the Day: ******************** EXPE – Expedia, Inc. $71.50 (-9.43 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 ^^^^^ PDLI $11.37 (-0.68) The bears have burst the bubble that Biogen built and the BTK index finally violated its 3-week ascending trendline on Friday, falling nearly 3%. PDLI fared even worse, sliding sharply to end the day down more than 5%. With daily Stochastics pointing south and the bearish sector technicals, the factors that had us looking bullish on PDLI have all but disappeared. Rather than hang onto a losing play, we're going to pull the plug this weekend to make room for better candidates. GILD $35.66 (-1.39) GILD appears to be weakening and looks like it will breakdown from its upward trend as early as next week. The stock is being pressured by the weakness in the biotech arena, and we don't want to hang around a sector that is displaying signs of weakness. Look to exit plays early next week on a relief rally in Monday's session. PUTS ^^^^ HB $60.75 (+0.33) HB broke above its downward sloping 10-dma in decisive fashion last week and closed above that level in Friday's session. The short covering that we detected in the last few sessions looks like it has some legs, and for that reason we're dropping coverage on HB this weekend. Look to get out of plays on a pullback to the 10-dma next week. *********** 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 06-02-2002 Sunday 3 of 5 ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** NEW CALL PLAYS ************** WFMI - Whole Foods Market $51.17 (+1.18 last week) Whole Foods Market, Inc. owns and operates a chain of natural and organic foods supermarkets. The categories of products that the Company offers include: produce, grocery, meat and poultry, seafood, bakery, prepared foods, specialty (beer/wine/cheese), nutritional supplements, body care, pet products, floral, household products and educational products such as books. On average, the Company's stores carry approximately 20,000 SKUs (stock-keeping units) of food and non-food products. Niche super market chains and food stocks have been star performers this year. And the small group appears to be gaining price momentum. That's because of the stellar earnings being reported by the major players in the group. WFMI in early May reported a 36 percent jump in earnings and a 10 percent rise in sales. In addition to beating its estimates, the company raised sales and earnings targets for the rest of this year, citing continued strong demand from consumers and growth in new stores. Wall Street is eating up the story at WFMI with its positive earning surprises and stock price momentum. And the news is only getting better for the stock as Standard & Poor's recently announced the entrance of WFMI into its small cap index to replace BJ Services. The stock broke out from its recent short term consolidation during last Friday's session on relatively heavy volume. About double the average daily volume exchanged last Friday on the way to a more than 3 percent gain for the day. The stock's three week consolidation followed by the breakout last Friday should lead to another upward trend into the summer months. And with earnings reported just three weeks ago, we have plenty of time to ride this stock higher over the next two months. Look to take entries at or around current levels on further strength above last Friday's close. Pullbacks down in the consolidation zone may offer good entry points as well. Look for a bounce from the $50 level on future weakness. We'll start the play with a stop at the $48 level. BUY CALL JUN-50*FMQ-FJ OI=716 at $2.00 SL=1.00 BUY CALL JUN-55 FMQ-FK OI= 0 at $0.30 SL=0.00 BUY CALL JUL-50 FMQ-GJ OI= 2 at $2.85 SL=1.75 BUY CALL JUL-50 FMQ-GK OI= 56 at $0.80 SL=0.25 Average Daily Volume = 571 K ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ****************** CURRENT CALL PLAYS ****************** ADBE – Adobe Systems $36.10 (-1.57 last week) A long-time leader in desktop publishing software, ADBE provides graphic design, publishing, and imaging software for Web and print production. Offering a line of application software products for creating, distributing, and managing information of all types, the company generates nearly 75% of sales through publishing software products such as Photoshop, Illustrator, and PageMaker. Its Acrobat Reader, which uses portable document format (PDF) is popping up all over the Internet, as businesses shift from print to digital communications. In addition, ADBE licenses its industry standard technologies to major hardware manufacturers, software developers, and service providers, as well as offering integrated software solutions to businesses of all sizes. Turbulent trading has been the watchword in the depressed Software sector (GSO.X) lately and the past week was no different. After once again dipping to the $120 support level, a bit of bullish action gave the sector a boost on Thursday, only to give most of it back on Friday. The GSO is looking like it is trying to put in a solid bottom, but is in a very precarious position here, a mere 7% above the intraday lows from late September. ADBE is one of the few stocks in the sector that has held up rather well over the past few months, trading well off its September lows, and consistently finding support in the $36 area. Its relative strength is a major reason why we are featuring ADBE on the call list right now, as a rebound in the sector should benefit the stronger stocks. Sure enough, even with this week's sector weakness, ADBE continued to hold above support, coming to rest Friday afternoon just above $36. Continue to use intraday dips near this level to enter new positions, but wait for the bounce before playing. Alternatively, look for bullish conviction to show itself with ADBE pushing through near-term resistance at $38.75 before initiating new momentum-based positions. Keep stops in place at $35, just below the early May lows. Don't forget that earnings are set to be announced on June 13th. BUY CALL JUN-35*AEQ-FG OI=1752 at $2.80 SL=1.50 BUY CALL JUN-40 AEQ-FH OI=4507 at $0.75 SL=0.25 BUY CALL JUL-35 AEQ-GG OI=1533 at $3.70 SL=2.25 BUY CALL JUL-40 AEQ-GH OI=4170 at $1.45 SL=0.75 Average Daily Volume = 3.72 mln DGX – Quest Diagnostics $87.42 (+2.47 last week) Quest Diagnostics was the result of a 1996 Corning spinoff, and currently holds the title of the world's #1 clinical laboratory. DGX performs more than 100 million routine tests annually, including cholesterol, HIV, pregnancy, alcohol, and pap smear tests. Operating laboratories throughout the US and in Brazil, Mexico, and the UK, DGX also performs esoteric testing (complex, low-volume tests) and clinical trials. The company serves doctors, hospitals, HMOs, and other labs as well as corporations, government agencies, and prisons. Looking across the major sectors of the market in the middle of the day on Friday it was a sea of green. That picture changed significantly by the closing bell, with several sectors, including Health Care (HMO.X) ending with losses for the day. In light of that environment, it was encouraging to see DGX hang on to post a fractional gain, albeit a small one. The stock has been trading well over the past week after finding support near the $85 level and began rebounding strongly on Thursday following Moody's upgrade of the company's debt. With bullish life returning to the Health Care sector, DGX should benefit from any meaningful move due to the continued strong earnings the company has been reporting. The ascending trendline that has been supporting the stock on major pullbacks has now risen to $84, the site of our stop, and we expect to see it support another extended bullish move as it rises to meet historical support at $85. Over the past week, DGX has been building a new ascending trend, which currently rests at $87. This is interesting given the fact that the stock has been finding intraday support at that level over the past 2 days. Another rebound from that level would make for a decent entry point, as would a dip and rebound near the $86 level. Keep stops set at $84, which is just below the recent lows. BUY CALL JUN-85*DGX-FQ OI=2544 at $4.30 SL=2.75 BUY CALL JUN-90 DGX-FR OI= 636 at $1.50 SL=0.75 BUY CALL JUL-85 DGX-GQ OI= 45 at $5.90 SL=4.00 BUY CALL JUL-90 DGX-GR OI= 149 at $3.10 SL=1.50 BUY CALL JUL-95 DGX-GS OI= 37 at $1.40 SL=0.75 Average Daily Volume = 873 K ERTS – Electronic Arts $64.00 (+0.19 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. While the overall Software sector (GSO.X) continues to languish just above its September lows, shares of companies involved in making the video game software for Microsoft's Xbox and Sony's Playstation 2, have been seeing renewed buying interest. This was confirmed on Thursday when Electronics Boutique (ELBO) reported solid earnings due to the fact that recent price cuts are stimulating increased sales of both game platforms. Additionally, the rate of software sales are picking up speed, and those comments are likely to keep buyers interested in shares of ERTS next week. After bottoming in early May, the stock has been steadily working higher and looks like it is coiled for a breakout over the $65 level. The intraday lows are moving higher, with the ascending trendline connecting the lows from the past 3 weeks now sitting near $63. Intraday dips near this level (or even down at $62 support) look attractive for new entries on the rebound, as does a volume-backed rally through the $65 resistance level. Note that a trade at $65 will generate a fresh double-top buy signal on the PnF chart, giving the bulls confidence that the stock has a decent shot at testing its all-time highs near $67. Once clear of that level, bulls will have to turn to the PnF vertical count for upward guidance. The current count is forecasting an eventual bullish price target of $79. Our stop remains at $61. BUY CALL JUN-60 EZQ-FL OI=2037 at $5.10 SL=3.00 BUY CALL JUN-65*EZQ-FM OI=4484 at $1.85 SL=1.00 BUY CALL JUL-65 EZQ-GM OI= 699 at $3.30 SL=1.75 BUY CALL JUL-70 EZQ-GN OI= 372 at $1.45 SL=0.75 Average Daily Volume = 2.85 mln SNPS - Synopsis, Inc. $50.44 (-2.26 last week) Synopsis is a supplier of electronic design automation software to the global electronics industry. The company's products are used by designers of integrated circuits (ICs), including system-on-a-chip ICs, and the electronic products (such as computers, cell phones, and internet routers) that use such ICs to automate significant portions of their chip design process. SNPS' products offer its customers the opportunity to design ICs that are optimized for speed, area, power consumption and production cost, while reducing overall design time. As the Semiconductor (SOX.X) and Software (GSO.X) sectors struggle to find a near-term bottom, we have been focusing on shares of SNPS, which although still being locked in a long-term descending trend, has been holding up fairly well. After bouncing strongly in early May after the company raised earnings and revenue guidance, the stock has risen to the 5-month descending trendline near $52. The past 2 weeks have seen numerous attempts to push through this trendline, but so far the bears have been able to keep the bulls at bay. In order to push higher, SNPS is likely going to need the participation of at least the SOX and ideally the GSO indices in order to stage a sustained move through this resistance level. At the same time, it has been encouraging to see that intraday dips are being met by solid buying interest near the $50 level, the site of the 20-dma ($50.18), 50-dma ($49.94) and 200-dma ($50.31). Bounces from this level, look good for fresh entries, so long as our $49.50 stop isn't violated on a closing basis. On the upside, new entries can be considered on a push through the trendline at $52, although the real bullish conviction will come into play as SNPS pushes through the $54 resistance level. Make no mistake though, that won't necessarily get SNPS out of the bearish woods though, as there is more resistance to contend with at $55 and $56. But we've got to start somewhere, and right now relative strength is starting to build in SNPS. Unfortunately, our fuse is growing short on this play as SNPS is set to announce earnings on Tuesday, June 4th after the close. So one way or the other, we'll be dropping the play Tuesday night. Make sure to close all positions before then. BUY CALL JUN-50*YPQ-FJ OI=1341 at $2.85 SL=1.50 BUY CALL JUN-55 YPQ-FK OI= 949 at $0.90 SL=0.25 BUY CALL JUL-50 YPQ-GJ OI= 20 at $3.80 SL=2.25 BUY CALL JUL-55 YPQ-GK OI= 26 at $1.70 SL=0.75 Average Daily Volume = 1.25 mln THC– Tenet Healthcare Corp. $74.50 (+3.92 last week) THC is the second largest investor-owned healthcare services company in the United States. As of the end of May, 2001, the company's subsidiaries and affiliates owned or operated 111 general hospitals with more than 27,000 licensed beds and related healthcare facilities serving urban and rural communities in 17 states. The related healthcare facilities included a small number of rehabilitation hospitals, specialty hospitals, long-term care facilities, and numerous medical office buildings located nearby its general hospitals and physician practices. Health Care stocks are back in favor with the bulls after taking most of the month of May off to consolidate the huge bullish gains accrued earlier in the year. The last two days of the week saw the Health Care Payor index (HMO.X) push through the $625 resistance level, putting the PnF chart back on a buy signal and that has had investors jockeying for new entries into what they expect will be another strong run. Shares of THC have been languishing just above the $70 level since early May, but that situation improved over the past few days, as the stock has pushed higher on strong volume and is within a dollar of its all-time highs. Even with the late-day broad market weakness, shares of THC managed to eke out a fractional gain on Friday and that is a good sign for our play. While we would like to see a dip and bounce near the $72 level to allow us an attractive entry point, with strength returning to this sector, we may have to settle for buying a bounce near the $73 intraday support level. Momentum traders will want to watch for a move through the $75.50 level on strong volume before initiating new positions. Given the recent strength, we are once again ratcheting our stop up, this time to $71. BUY CALL JUN-70 THC-FN OI=3614 at $5.10 SL=3.00 BUY CALL JUN-75*THC-FO OI=2036 at $1.50 SL=0.75 BUY CALL JUL-70 THC-GN OI= 30 at $5.80 SL=4.00 BUY CALL JUL-75 THC-GO OI= 191 at $2.55 SL=1.25 Average Daily Volume = 1.75 mln TEVA - Teva Pharmaceuticals $67.03 (+0.23 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 has been one of the few bright spots in the broader Biotechnology Sector (BTK.X) during the last two months. The stock has gained about 24 percent since the beginning of May on favorable news from the legal front. TEVA's performance has far out paced the continued weakness in the biotech group, which is the reason that we're still in this play for its relative strength. Last week's consolidation which saw TEVA finish the week fractionally higher could lead to the next rally in the stock next week if the market and the biotech sector at the very least stabilize. We saw late last week the 10-dma provide support during the early pullback Thursday, which helped the stock back up to just below the $68 level. That 10-dma finished Friday right at the $66 level, which has become our preferred level for an entry point during any pullbacks next week. The bulls should be there to try and carry TEVA higher again, so we like the odds of an entry and the tight risk management at the $66 level. To the upside, the stock is encountering resistance at the $68 level. A breakout entry point above $68 is possible, but just make sure that the BTK.X and broader market are bullish enough to support a breakout and follow through in TEVA. BUY CALL JUN-65*TVQ-FM OI=1417 at $3.10 SL=1.75 BUY CALL JUN-70 TVQ-FN OI=1037 at $0.60 SL=0.25 BUY CALL JUL-65 TVQ-GM OI= 122 at $4.00 SL=2.00 BUY CALL JUL-70 TVQ-GN OI= 824 at $1.60 SL=0.75 Average Daily Volume = 910 K NOVN - Noven Pharmaceuticals $26.61 (+2.24 last week) Noven Pharmaceuticals, Inc. is engaged in the development and manufacture of advanced transdermal drug delivery products and technologies and prescription transdermal products. Noven's principal commercialized products are transdermal drug delivery systems for use in hormone replacement therapy. The Company's first product was an estrogen patch for the treatment of menopausal symptoms marketed under the brand name Vivelle in the United States and Canada and under the brand name Menorest in Europe and other markets. What a week for NOVN! Since the company received Federal Drug Administration (FDA) approval for expanded use of its drug Vivelle, the stock has responded in the most bullish way. Just as scripted last week, the stock steadily worked higher throughout last week, one day after another finishing higher by 2 percent or thereabout. In Friday's session, the stock finally climbed back up to its relative high at the $26.80 level. NOVN's intraday high last Friday was $26.82! Those traders who took profits on that move up to the $26.80 level last week, well done! If you're still holding positions, consider taking some off of the table next week. Our plan was to take profits at the $26.80 level upon a retest, so make sure to stick with your plan and don't let greed take over. Also, the stock is increasingly overbought on the daily timeframe. Friday's 2.30 percent close higher marked the ninth consecutive day that NOVN closed higher. Clearly the stock is under institutional accumulation, but we nevertheless expect a pullback at any time. For that reason, traders with open plays should be using a very tight trailing stop to protect against a big downward blow off move. As for new entry points, we still like the trend in this stock very much, and don't want to drop it just because it's ready to pullback. Instead we'd view such a pullback as an entry point. We'll start looking for such an entry near the $24 to $25 range. BUY CALL JUN-22 NPQ-FX OI=103 at $4.10 SL=2.75 BUY CALL JUN-25*NPQ-FD OI= 65 at $2.00 SL=1.50 BUY CALL JUL-22 NPQ-GX OI= 74 at $4.50 SL=3.00 BUY CALL JUL-25 NPQ-GE OI=207 at $2.65 SL=1.75 Average Daily Volume = 206 K CI - CIGNA Corp. $106.05 (+1.24 last week) CIGNA Corporation and its subsidiaries are an investor-owned employee benefits organizations in the United States. Its subsidiaries are major providers of employee benefits offered through the workplace, including health care products and services, group life, accident and disability insurance, retirement products and services and investment management. CIGNA's operating divisions include Employee Health Care, Life and Disability Benefits, CIGNA Group Insurance, Employee Retirement Benefits and Investment Services, and International Life, Health and Employee Benefits. Slowly but surely, CI ticked higher last week above the $106 resistance level that we had been watching for when we first profiled this play. The stock's close above the $106 resistance level last Friday was very encouraging as it revealed that the bulls are more than ready to take this stock higher provided the market and the sector continues to support such a move. We also noticed a slight uptick in volume during last Friday's rally. Though still well below the stock's 30-day average volume of more than 800 K, the volume last Friday did pick up to the most active level we've seen in about a week and a half. From here we expect a slow and steady ascent up to the $110 level over the next week or two. Of course the right catalyst at the right time could have the shorts running for cover and have CI moving quickly back up to the $110 area. Traders looking to game such an event can look to enter positions on moves above the previous day's high. Using a breakout above last Friday's high at the $107.20 level on higher intraday volume could be used for such a strategy. Those who favor entering strong stocks on a pullback to support can use the recent series of relatively higher lows to pick a spot near intraday support. If the stock does pullback by a little more than last Friday's low of $105.70, the look for the 10-dma to come into play below around the $104.50 area. Look for declining hourly volume on the way back down, and wait for a rebound from the 10-dma before entering on weakness. BUY CALL JUN-100 CI-FT OI= 38 at $7.00 SL=4.00 BUY CALL JUN-105*CI-FA OI=208 at $3.30 SL=1.75 BUY CALL JUN-110 CI-FB OI=402 at $1.10 SL=0.75 BUY CALL JUL-105 CI-GA OI=431 at $4.80 SL=2.25 Average Daily Volume = 834 K INTU - Intuit $43.73 (+1.51 last week) Intuit, Inc. is a provider of small business, tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers, small businesses and accounting professionals. The Company's principal products and services include Quicken, QuickBooks, Quicken TurboTax, ProSeries, Lacerte and Quicken Loans. Intuit offers products and services in five principal business divisions, which include Small Business, Tax, Personal Finance, Quicken Loans and Global Business. There's no denying that the U.S. consumer remains extremely strong in light of the continued weakness in the business sector of the economy. Recent economic data from the consumer continues to show that he or she is spending and gaining confidence in the economy. The primary reason that INTU is trading so well is because the company's products and services cater to consumers. Though the company does provide a lot of products and services to small businesses, its primary line of business is with the consumer, which is why it continues to hit financial goals and grow sales and earnings. So as long as the market believes that the consumer is holding up well and gaining confidence, then INTU should continue working higher. The stock did just that early last Friday when it broke above the $45 level, taking out the short term overhead congestion that we had pointed out in the first play write up Thursday evening. The breakout above the $45 level didn't hold because of the rollover in the Nasdaq. But we liked very much the stock's powering through its overhead congestion which cleared the way for further upside upon a stabilization of the tech sector. Friday's pullback offered a very favorable entry set up on the pullback as traders can start looking for rebounds early next week from current levels or slightly lower down around the rising 10-dma at the $42.83 level. Monitor the price action of the Software Sector Index (GSO.X) closely to gauge the sentiment in the broader sector. If the bulls return to that group, then watch for INTU to lead to the upside. BUY CALL JUN-40 IQU-FH OI=1668 at $4.50 SL=3.75 BUY CALL JUN-45*IQU-FI OI=1691 at $1.20 SL=0.75 BUY CALL JUL-40 IQU-GH OI=3797 at $5.20 SL=4.00 BUY CALL JUL-45 IQU-GI OI=1880 at $2.20 SL=1.75 Average Daily Volume = 2.41 mln ************* NEW PUT PLAYS ************* EXPE – Expedia, Inc. $71.50 (-9.43 last week) Expedia is a provider of online travel services for leisure and small business travelers, offering one-stop shopping and reservation services with real-time access to schedules, pricing and availability. The company's global travel marketplace includes direct-to-consumer Websites offering travel-planning services at Expedia.com, Expedia.co.uk, Expedia.de, Expedia.nl and Expedia.it. In addition, the company provides travel-planning services through its telephone call centers and through private label travel Websites through its WWTE business. WWTE is a division of Travelscape, Inc., one of EXPE's wholly owned subsidiaries. It may sound crazy to initiate a put play on a stock that is up more than 250% since the September lows, but you know what they say, "The taller they are, the harder they fall". While EXPE has been a bullish favorite for the past 8 months as it shot nearly straight up the charts, there are some disturbing developments on the daily chart, at least if you're a bull. The stock has now tested the $84 level on 3 separate occasions in the past 6 weeks and after the sharp decline this past week, it appears that the bulls have lost possession of the ball. The handwriting was on the wall before this past week as the "consolidation" near the highs since late April has been taking place on very heavy volume. This is not a healthy consolidation pattern and in a previously bullish trend, is usually resolved to the downside. The weakness last week dropped EXPE right to major support at the $70-71 level and given the fact that volume continues to rise, it doesn't look like the bears are even close to being done. The recent double-bottom sell signal on the PnF chart is giving us a vertical count of $59. That correlates nicely with the long-term ascending trendline beginning at the September lows, which is currently at $60. This is simply a case of a stock that has run too far too fast, and we are looking to take a piece of the action as it pulls back to a more realistic valuation. Given the volatile nature of the stock, we need to start out with a fairly wide stop, set initially at $77. With EXPE sitting on major support, it could be due for an oversold bounce. Look to initiate new positions on a rally failure near the $75-76 area, or else target a breakdown below $70. There is more support at $68 and then $65. EXPE is still a favorite of the bulls, so expect continued volatile trade with bounces from support levels likely to continue. The best entries will clearly come as those rebounds run out of steam and the stock then heads back to earth. BUY PUT JUN-75 UED-RO OI=1960 at $5.40 SL=3.50 BUY PUT JUN-70*UED-RN OI=1674 at $2.75 SL=1.25 BUY PUT JUN-65 UED-RM OI= 672 at $1.30 SL=0.75 Average Daily Volume = 1.48 mln BLL - Ball Corp. $41.58 (-2.60 last week) Ball Corporation is a manufacturer of metal and plastic packaging, primarily for beverages and foods, and a supplier of aerospace and other technologies and services to commercial and governmental customers. Ball's principal business is the manufacture and sale of rigid packaging products, primarily for beverages and foods. Polyethylene terephthalate packaging is Ball's newest product line. The aerospace and technologies segment includes civil space systems, defense operations and commercial space operations. The defense operations business unit includes defense systems, systems engineering services and advanced antenna and video systems, as well as electro-optics and cryogenic systems and components. Despite all of the seemingly positive economic news coming out from the government, the economically sensitive stocks are starting to display signs of weakness. We've seen it happen in the cyclical stocks of the market, as well as basic materials issues. BLL is one such stock that is showing signs of weakening and is in a short term trend of lower highs and lows. The company is obviously one that would benefit from a pickup in the economy due to the nature of its businesses. But it seems that the market is revealing that the pickup in the economy may be pushed out even further judging by the way that BLL has been trading since mid April when the stock briefly traded above the $50 level following its 2 for 1 split. The normal post split pullback took place in late April before the stock tried to rebound through early May. But the rally attempt failed as the stock recently broke down from its consolidation and into a new descending trend which appears to be picking up steam to the downside. The stock broke from a short term pause six days ago pressured by the declining 10-dma now overhead at the $43.87 level. In Friday's session, the stock broke below the lower end of that consolidation and finished on its low for the day, revealing that the sellers may not be finished dumping this stock going into next week's trading. Watch for further weakness in the Dow Jones Industrial Average ($INDU) to pressure BLL below its low closing last Friday at the $41.58 level. With the 200-dma below at the $37 level, we'll turn to that level for a possible short term downside target if the trend in BLL continues over the next two weeks. Our stop is initially in place at the $45 level. BUY PUT JUN-40*BLL-RH OI= 73 at $0.90 SL=0.25 BUY PUT JUL-40 BLL-SH OI=118 at $1.55 SL=0.75 Average Daily Volume = 414 K ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. 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The Option Investor Newsletter Sunday 06-02-2002 Sunday 4 of 5 ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** CURRENT PUT PLAYS ***************** GS – Goldman Sachs Group $75.45 (-2.74 last week) The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net-worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. With Brokerage stocks still reeling from the recent blow dealt to Merrill Lynch by the NY Attorney General's probe into purported unethical behavior by its analysts, the Broker/Dealer index (XBD.X) spent most of last week in the red, falling back to important support near $453. That was enough to push shares of GS back to its early May lows near the $74 level on Thursday. The group got a bit of a boost on Friday morning with the attempted broad market rebound, but Prudential knocked the legs out from under the hopeful bulls, reducing estimates for several firms in the sector, including GS. Citing expectations for "flattish" 2Q revenue, the earnings expectations for GS were reduced from $1.08 to $1.04. That stopped the fledgling rally in its tracks and when the broad market rolled over in the afternoon, so did GS, falling back to close near the lows of the day. The stock is sitting near major support ($74) and is deeply oversold, so we could be near an important near-term bottom. So we want to keep those stops tight (ours is currently set at $78) to protect our current gains in the play. We're keeping the play open though due to the possibility that the bears could manage to push GS under the $74 level, which would unleash another round of selling. Use failed intraday rallies near the $77 level (like we saw on Friday) to initiate new positions or else wait for a drop under $74 on strong volume to add new positions. Recall that the current vertical count on the PnF chart is forecasting a decline to the $70 level. BUY PUT JUN-75*GS-RO OI=3865 at $2.35 SL=1.25 BUY PUT JUN-70 GS-RN OI=1488 at $0.85 SL=0.25 Average Daily Volume = 3.12 mln VRTS – Veritas Software $22.67 (-0.88 last week) As an independent supplier of storage management software, VRTS develops and sells products that protect against data loss and file corruption, allowing rapid recovery after disk or computer system failure. The company's products provide continuous data availability in clustered computer systems with shared resources. This enables IT managers to work efficiently with large file systems, making it possible to manage data distributed on large computer network systems without harming productivity or interrupting users. VRTS provides products for most popular operating systems, including UNIX and Windows NT, as well as a full range of services to assist its customers in planning and implementing their storage management solutions. With all the major indices testing important support levels last week, eager bulls are hoping that they have seen a near-term bottom so they can play the upside again. But the failure of any of the intraday rallies to gain any traction is certainly casting a pall over any bullish enthusiasm. One of the weakest areas of the technology sector is Software, with the GSO index trading just slightly above the September lows and showing very little inclination to head higher. Showing that Thursday's gain was little more than short-covering, the GSO gave back nearly all of those gains on Friday, closing the week just above the $120 support level. VRTS mirrored that action, getting a nice short-covering rebound on Thursday. The bulls stopped their advance just over $23, showing the tenuous nature of the rebound in their inability to even test the first level of tangible resistance at $23.50. The rollover that commenced near the $23 level provided another attractive entry point, but don't worry if you missed it because from the looks of the bounce at the close, we're going to get another chance on Monday. We'll continue to look for fresh entries to present themselves on failed rallies below the descending trendline (currently $24.25), which also happens to be the site of our stop. BUY PUT JUN-22*VIV-RX OI=8895 at $1.95 SL=1.00 BUY PUT JUN-20 VIV-RD OI=2025 at $1.00 SL=0.50 Average Daily Volume = 12.6 mln WMB – Williams Companies $14.20 (-3.22 last week) Williams is engaged in the transportation and sale of natural gas and petroleum products and other energy related activities. Through its subsidiaries, the company is engaged in price risk management services; the purchase, sale and transportation and transmission of energy and energy-related commodities; transportation and storage of natural gas; exploration, production and marketing of oil and gas. Along with being involved in seemingly every aspect of the energy production and marketing business, WMB also is engaged in energy commodity trading and marketing, and even participates in the communications business. The issue of "round trip" energy trading is plaguing just about every company involved in this relatively new enterprise and if you follow business news, it seems that hardly a day goes by without another energy trader's accounting practices being called into question. Just in the past week, negative stories broke on EP, WMB, DYN, MIR and XEL and the flood of accusations have continued to pressure the group lower. Whether in fact any of these firms engaged in this questionable practice, the very question has created a black cloud over the sector and is pressuring many of the stocks to multi-year lows. WMB's assertion last week that the company did not engage in round-trip trading was enough to give the stock a pop up to the $18 level (the first positive action since mid-April), it didn't last and the stock had an ugly week last week. After falling through the $15 support level, WMB traded all the way down to the $13.70 level on Thursday, its lowest level since late 1995. Friday's rebound was lacking in enthusiasm and it looks like WMB could be setting up for another leg down. Ideally we could see a rebound to the $15 resistance level (prior support) to provide us with fresh entries before the stock rolls over again, but judging by the lethargic advance (?) on Friday, it looks like we may have to settle for taking on new positions near current levels. Our first target to the downside is found near the $11 level, historical support dating back to 1994. Our stop is set at $16.50. BUY PUT JUN-15*WMB-RC OI=4265 at $1.55 SL=0.75 BUY PUT JUN-12 WMB-RV OI=7317 at $0.50 SL=0.25 Average Daily Volume = 3.69 mln PLAB - Photronics $22.87 (-1.09 last week) Photronics, Inc. and its subsidiaries manufacture photomasks, which are high precision photographic quartz plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of semiconductors, and are used as masters to transfer circuit patterns onto semiconductor wafers during the fabrication of integrated circuits and, to a lesser extent, other types of electrical components. The Company operates principally from 11 facilities, five of which are located in the United States, three in Europe and one each in Korea, Singapore and Taiwan. Just as we had planned, PLAB followed through to the upside in last Friday's session following its rebound from the $22 level in Thursday's session on another round of short covering in the broader technology space, which appeared to come to an end in last Friday's session. The stock never even approached its overhead and falling 10-dma which now stands at the $24.66 level. We would actually like to see some more upside in this stock which would provide a gift for an entry point and help to remove a lot of upside risk from the pent up demand in short covering. Going into next week, we hope to get the stock up around the $24 to $24.50 area. We will start to look for aggressive put entry points upon such a set up. If the stock continues lower we will look at taking momentum based entry points upon a breakdown below the short term support that was established during last Thursday's rebound. However, we want to see the broader Semiconductor Sector Index (SOX.X) give up some ground before entering puts into weakness in PLAB. Ideally we would also like to see confirmation in the broader technology sector with further weakness in the Nasdaq. Momentum based entry points below the $22 level can target the $20 level to the downside. BUY PUT JUN-25*PQF-RE OI=1440 at $2.90 SL=1.50 BUY PUT JUL-25 PQF-SE OI= 350 at $3.50 SL=2.25 Average Daily Volume = 699 K COHU - Cohu Inc. $24.50 (+0.50 last week) Cohu, Inc. is the owner and operator of businesses in the semiconductor equipment segment, and the television camera segment. The Company's wholly owned subsidiary Delta Design, Inc., designs, manufactures and sells semiconductor test handling equipment to semiconductor manufacturers and semiconductor test subcontractors throughout the world. The Company's Electronics Division designs, manufactures and sells closed circuit television cameras and systems to original equipment manufacturers, contractors and government agencies. The short covering that we saw taking place in COHU last Thursday continued into Friday's session when the stock bucked the trend of weakness in the broader market as well as its sector, the Semiconductor Sector Index (SOX.X). For its part, the SOX.X finished lower by about 1 percent for the day, while COHU managed to put together a 3 percent gain for the day. But we are not too upset with the stock's out performance to the upside because what it did was help to remove a lot of the short covering potential that had been built up during the last three weeks. Secondly, the stock's rally into Friday's session set up another favorable put entry point near resistance upon a rollover in next week's trading. The stock closed last Friday just under its descending 10-dma overhead at the $24.87 level. A continuation up to that level early next week followed by a rollover would offer a favorable entry point, and could be played with a tight stop just above the 10-dma at the $25 or $25.50 levels. Without a strong day or two in the SOX.X, the rally in COHU is unlikely to have legs with it, and the stock will eventually roll back down under the weight of the weakness in its sector. So make sure to look for continued weakness in the broader chip sector next week before gaming a rollover from the 10-dma. BUY PUT JUN-25*QCH-RE OI=71 at $1.55 SL=1.00 BUY PUT JUL-25 QCH-SE OI=20 at $2.10 SL=1.75 Average Daily Volume = 160 K WHR - Whirlpool $71.40 (-2.51 last week) Whirlpool Corporation is a worldwide manufacturer and marketer of major home appliances. The Company manufactures in 13 countries under 11 major brand names and markets products to distributors and retailers in more than 170 countries. The Company manufactures and markets a full line of major appliances and related products, primarily for home use. The Company's principal products are home laundry appliances, home refrigerators and freezers, home cooking appliances, home dishwashers, room air-conditioning equipment, and mixers and other small household appliances. The Company also produces hermetic compressors and plastic components, primarily for the home appliance and electronics industries. The worsening in old favorite blue chips is disconcerting for the bulls who believe in the economic recovery. We spotted such a breakdown in WHR last week when the stock declined from its three month consolidation below the $72 level. The stock attempted to rally in last Friday's session following its short covering bounce from Thursday's rebound. But that rally attempt failed miserably when WHR turned lower into the close of trading to finish with only a fractional gain on the day. The stock is setting up to test its 200-dma below at the $68.73 level possibly as early as next week's trading. Short term traders should keep in mind the 200-dma as a short term reference of support or even as a potential downside target over the next week or two. For entry points, using future rollovers should be the best way to get into new put positions. Another rollover like the one we witnessed last Friday would serve that purpose well. Of course a failed rally up to the declining 10-dma at $73.24 would serve up a nice entry point as well. When tracking this stock for entry and exit points, make sure to keep a close watch on the Dow Jones Industrial Average ($INDU). WHR seems to track the index quite closely, so using the two together should help to increase odds of success. BUY PUT JUN-70*WHR-RN OI=315 at $1.45 SL=0.75 BUY PUT JUL-70 WHR-SN OI= 4 at $2.70 SL=1.75 Average Daily Volume = 555 K DUK - Duke Energy $32.01 (-2.69 last week) Duke Energy Corporation offers physical delivery and management of both electricity and natural gas throughout the United States and abroad. Duke Energy provides these and other services through seven business segments: Franchised Electric, Natural Gas Transmission, Field Services, North American Wholesale Energy (NAWE), International Energy, Other Energy Services and Duke Ventures. DUK tried to appease Federal Regulators last Friday by telling them that the company hadn't engaged in any questionable trading transactions, such as wash trades in an attempt to boost sales and trading volume. The company said that it had conducted an internal review of its trading division in the Western U.S. and concluded that it hadn't used any round trip trading techniques. DUK's press release was in response to a Federal inquiry on May 21. The company is expected to file another report on June 5, which is a date to keep on the calendar as it could turn up some negative news for the company and adversely impact the stock. As for Friday's action, the stock rebounded on the press release on what appeared to be a day of relief for the broader energy sector. But the stock still fell to a new relative low in the recent trend earlier in the session when it bounced from the $31.33 level. Volume remained very active as the buyers and sellers remained at odds. Looking out into next week's trading, we're looking for either a short term bounce up to resistance, or a breakdown below support for entry points. A rollover from the $33 level would offer good entries into new positions, while a breakdown below the $31 level should pave the way for more selling to come into the stock. BUY PUT JUN-32*DUK-RZ OI=2591 at $1.45 SL=0.75 BUY PUT JUL-30 DUK-SF OI=6849 at $1.25 SL=0.75 Average Daily Volume = 4.16 mln ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***** LEAPS ***** Summer Doldrums or Summer Rally? By Mark Phillips mphillips@OptionInvestor.com Who's to say? Certainly not me! I've been expecting some bullish action over the past couple weeks, but clearly I've been wrong as the broad markets have continued to drift lower. Is there a rally in our future, or have we already seen it? Welcome to the fun of trading in the summer months in a market that has little reason to go up. A big part of the current problems in the market is the war fear surrounding the Kashmir region. Whether a conventional war in that part of the world would have a significant market effect is not the issue. The possibility of that occurrence along with the remote possibility of a nuclear exchange, is creating uncertainty. The markets hate uncertainty, and as a result they have continued their persistent downward slide. Add in the fact that the volatility measures (VIX and VXN) are trolling along at the lower end of their respective historical ranges, and the approach of typically slow summer trading and you can see that there just isn't any compelling reason for investors to buy. With no fear, (note that uncertainty is not the equivalent of fear) there is not the proverbial wall of worry for the bulls to climb. Light summer trading volume appears to be here and that isn't going to be helpful to the bullish case. Even with a full list of positive economic news on Friday, the markets couldn't sustain altitude. While there has been a lot of volatile chop both up and down, the S&P has done little more than drift a few points lower over the past month. Over the same period of time, the DOW is up by a mere 15 points, while the NASDAQ-100 is off by 42. Can you say rangebound? Sure, I knew you could. I continue to look for the broad indices to put in a significant bottom near current levels, but without strong buying interest (tough to come by with low volatility and summer upon us), I don't see how the bulls can push this market significantly higher over the near term. Short term traders can profit handsomely in this environment, selling resistance and buying support, but long-term position traders better hit those entry points just right and take profits when they are offered. Eventually there will be enough conviction to lift the markets from their current malaise, but this weekend I cannot see from whence the catalyst will come. If good economic news can't do the trick, then our next hope will come from the July earnings cycle and we've got some time to wait before that rolls around. You'll notice that there are currently no put plays on the Watch List, and that is largely due to the fact that I don't see a significant downside risk right now. The markets want to put in a bottom and rally, but lack the conviction to do so. I still think the bullish side is where the action is over the near term, but will continue to view any rally as just the latest bear-market rally, not the beginning of a new bull market. But in the midst of that environment, there are always opportunities for profit. So let's see how our current list of candidates is faring. Portfolio: JNJ - It was another nip and tuck week for JNJ, but despite the pronounced weakness in the DOW, the stock is continuing to ride its ascending trendline higher. Entries near this level still look attractive, but we need to keep a tight stop on the play. We're ratcheting ours up to $60 this weekend to protect against the possibility of a breakdown. MDT - Consolidation was the name of the game last week, and the result is that MDT appears to be working on building a new base near the $46 level. We could see a bit more weakness, before the bulls take another shot at the $47 resistance level, but it should be fairly minor. We've raising our stop to $44 to minimize the potential for loss while awaiting the push through resistance. MSFT - It was either a sucker's entry, or else we'll eventually be proven right on our bottom-fishing play on the king of Software stocks. The GSO index is trying to put in a bottom and MSFT is doing the same. For now, it is just a wait-and-see process. XOM - This play has a similar feel to it as our JNJ play, as the stock keeps bouncing right there on the ascending trendline. These bounces still look attractive for fresh entries as we await the next bullish catalyst. Crude Oil prices have been weak for the past couple weeks, but we're looking for that trend to change as summer driving season kicks into high gear. Ratchet stops up to $38.50. PG - It has been a long wait, but the stock finally graduated onto the Portfolio after giving us precisely the entry point we were looking for. Use the ascending channel for your guide to the play. Rebounds from the lower channel line are buyable, while a breakdown below the $86 level will tell us clearly that the bullish run is over. So set tight stops at that level. Watch List: WMT - Another week, another test of major support. WMT fell below our hoped-for entry point and now appears like it needs a more meaningful support level to stimulate significant buying. With the RTH (Retail HOLDR) on a sell signal, we're going to look lower for our entry into the play. The $50-51 level looks strong as support and should correspond with major support in the RTH. BRCM - Interesting how little movement is taking place in BRCM with the SOX breaking support levels on a regular basis. Believe it or not, I think we are getting very close to a solid entry into the play, and it's about time. Keep focused on the entry target and be patient. AMAT - Inching lower, AMAT is in a critical situation here. The PnF chart is sitting right on strong support at $22 (also the site of the 200-dma), but if the stock prints $21 it could be lights out. The good news from AMAT's earnings report has been wiped out by a lack of positive guidance from NVLS' update last week. A rebound from the $22 area looks good for long term entries, but if filled, we want to play with a tight stop just below $20, the next level of strong support. BBH - So much for holding the ascending trendline! Biotech stocks failed to hold their relative strength last week and we are forced to look for an entry at a lower level as the NASDAQ struggles to find support. Lower the entry target to $92-93 (the site of the early May gap), but wait for the bounce before playing. Note that we have begun listing the 2005 LEAP symbols (where available) in the Watch List as these strikes have begun to appear. If you are looking for maximum time in your LEAPS purchases, they are definitely worth considering, as time decay won't be a factor for quite some time. As I have said repeatedly, I believe we are currently in a primary bear market and profits to the long side will come only from carefully picking both the right stocks and the right entry points. The markets continue to look to me like they want to put in a bottom and get on with the next bear-market rally. But the geopolitical fears (India and Pakistan right now) appear to be keeping the buyers on the sidelines. The one disconcerting factor is that the VIX and VXN volatility indicators are showing a distinct lack of fear. Until there is a spike upwards in these indicators, there will be no wall of worry for the bulls to scale, and that will keep any subsequent rally rather muted. At the same time, I don't see the catalyst that will generate a substantial selloff as I think the nuclear war fears have been substantially overblown, making the upside the high odds bet over the near term. When the next rally runs its course, we'll start to populate the Put side of the Watch List with new plays in an attempt to profit as the persistent bear rears its head again later this year. My advice is to play the long side with caution, keeping position sizes small. The time to enthusiastically trade from the long side of the market will come again, but it isn't here right now. Remember the number 1 rule of successful investing, which is capital preservation. If there isn't a trade that looks good to you, that often means the right trade is to make no trade at all. 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 $ 2.80 -15.15% $60 '04 $ 65 LJN-AM $ 6.40 $ 6.40 + 0.00% $60 MDT 05/15/02 '03 $ 45 VKD-AI $ 4.00 $ 4.90 +22.50% $44 '04 $ 45 LKD-AI $ 7.30 $ 8.20 +12.33% $44 MSFT 05/13/02 '03 $ 55 MSQ-AK $ 5.90 $ 4.80 -18.64% $48 '04 $ 55 LMF-AK $10.20 $ 9.60 - 5.88% $48 XOM 05/22/02 '03 $ 40 XOM-AH $ 3.00 $ 2.95 - 1.67% $38.50 '04 $ 40 LXO-AH $ 5.10 $ 5.00 - 1.96% $38.50 PG 05/30/02 '03 $ 95 PG -AS $ 3.70 $ 4.40 +18.92% $86 '04 $ 95 LPR-AS $ 9.00 $ 9.80 + 8.89% $86 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BRCM 10/28/01 $18-20 JAN-2003 $ 25 OGJ-AE CC JAN-2003 $ 20 ORD-AD JAN-2004 $ 25 LGJ-AE CC JAN-2004 $ 20 LGJ-AD WMT 03/31/02 $50-51 JAN-2003 $ 55 VWT-AK CC JAN-2003 $ 50 VWT-AJ JAN-2004 $ 55 LWT-AK CC JAN-2004 $ 50 LWT-AJ AMAT 05/12/02 $22 JAN-2003 $ 25 ANQ-AE CC JAN-2003 $ 22 ANQ-AX JAN-2004 $ 25 LPJ-AE CC JAN-2004 $ 22 LPJ-AX JAN-2005 $ 25 ZPJ-AE CC JAN-2005 $ 20 SPJ-AD BBH 05/26/02 $92-93 JAN-2003 $100 GBZ-AT CC JAN-2003 $ 95 GBZ-AS JAN-2004 $100 KBB-AT CC JAN-2004 $ 95 KOV-AS JAN-2005 $100 XBB-AT CC JAN-2005 $ 90 XBB-AR BBY 06/02/02 $40 JAN-2003 $ 50 VBY-AJ CC JAN-2003 $ 45 VBY-AI JAN-2004 $ 50 LBS-AJ CC JAN-2004 $ 45 LBS-AI PUTS: None New Portfolio Plays PG - Proctor & Gamble $88.75 ** Call Play ** Finally! It seems like we've been waiting forever for PG to drop back to the bottom of its year-long ascending channel, but the persistent broad-market weakness managed to get the job done last week. PG rebounded strongly from a low of $87 on Thursday and managed to extend those gains on Friday. Recall that we don't expect PG to scream up the charts, but we can play the range in the current channel as long as it lasts. The stock has continued to perform well in the weak economic environment due to the fact that the company provides all those consumer staples that we all need to purchase regardless of the state of the economy. With a consistent pattern of meeting or exceeding earnings estimates, it is no wonder investors continue to step up and buy the dips when they occur. We took our position here following Thursday's bullish day, even though the Weekly Stochastics are currently pointing south. Note that they haven't made it into oversold for over a year now, and if this trend is going to continue, then we would expect to see a short-cycle bullish reversal in the very near future. After the recent test of very strong resistance at the $94 level, it is no surprise to see some concerted profit taking, and we would advocate using repeated bounces near the lower channel line to initiate new or add to existing positions. Given the fact that a dominant portion of our technical justification for the play is the price channel, any significant violation of the lower channel line will be reason to close it out. For now, we are setting the stop at $86. BUY LEAP JAN-2003 $95 PG -AS $4.40 BUY LEAP JAN-2004 $95 LPR-AS $5.10 New Watchlist Plays BBY - Best Buy $46.20 **Call Play** Up until the middle of May, we had a convenient gauge of the Retail sector through the CBOE Retail Index (RLX.X). But with the cessation of that index leaves us with no convenient measure of the strength of the Retail sector, except for the Retail HOLDR (AMEX:RTH). While this measure shows that Retail stocks are currently under distribution, I think we are near an important bottom for the group. Last week's drop to the 200-dma near $93 created a fresh sell signal on the PnF chart, which leaves the RTH vulnerable to the $85 level according to the current vertical count. So the time to think about new long positions is not here yet, but could materialize in the fairly near future. One of the strongest Retail stocks since the September lows is BBY, which had nearly doubled at its March highs, relative to the lows. Since then, the stock has been drifting lower and understandably bounced off its own 200-dma last week near the $45 level, helped somewhat by the positive earnings report from Electronics Boutique (NASDAQ:ELBO) on Thursday night. While aggressive traders might consider new positions near the 200-dma, I think we'll get another opportunity at a lower price. The PnF chart currently has BBY on a sell signal as well, with the vertical count pointing to the $40 level as a likely bottom. Note that this was a level of solid support prior to the selloff last September, and I'm looking for it to provide us with a solid entry point as the economy recovers. One of the factors that has me leaning bullish on the stock is the news reports recently pointing to increasing sales of both Xbox and Playstation 2 game units and game software (due in part to the recent price cuts). Apparently consumers are still gobbling up items that can be used for entertainment in their own homes. The optimum entry into the play will come with the RTH dropping to find support in the $85 area and BBY falling to major support in the $40 area. Then we can follow it up with a tight stop at the $37.50 level. As has been our theme here for awhile now, wait for the entry point to come to you rather than chasing it. Chasing entries just doesn't work in the current market environment, and your account balance will thank you later for exercising patience now. BUY LEAP JAN-2003 $50 VBY-AJ BUY LEAP JAN-2003 $45 VBY-AI For Covered Call BUY LEAP JAN-2004 $50 LBS-AJ BUY LEAP JAN-2004 $45 LBS-AI For Covered Call Drops None ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. 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The Option Investor Newsletter Sunday 06-02-2002 Sunday 5 of 5 ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************* COVERED CALLS ************* Option Trading Basics: Market-Makers And Floor Brokers By Mark Wnetrzak One of our readers had some excellent questions about the methods used by floor brokers and other option specialists at the major exchanges. To: questions@OptionInvestor.com Subject: Floor-trading techniques Hello OIN, I have always been interested in the tasks of a floor trader and would love to develop the skills they have in capturing a profit from their trades. Since many of you deal directly with these folks, I thought you might be able to answer some questions about their jobs. As I understand it, when an order to trade an option is given to a floor broker, he announces the order to the trading crowd. Then the traders in the crowd respond with their bids and offers. If the broker/market-maker has an order to buy at the current offer price, or sell at the current bid price, the order will trade. I know that one way a market-maker tries to profit is to buy at prices below the theoretical value and then sell at higher prices. But I'm sure that isn't always possible, so how else do floor traders make money trading options? TG Regarding option trading and floor brokers: The majority of methods employed by floor specialists to profit from trading in options and their associated stocks are based on pricing theory and statistical probability. There are also a number of scalping techniques; the most common of which occurs when heavily traded options are bought at the bid and sold at the ask, generating a spread credit for the market-maker. Specialists who participate in risk-free transactions also utilize various arbitrage techniques. A large number of specialists favor box-spreads and conversions or reversals (reverse conversions). A box spread consists of two call options with different strike prices and two put options with strike prices equivalent to the calls. Box spreads are initiated when the options are miss-priced on a relative basis. The price risk of the call spread is offset by the opposite position in the put spread thus guaranteeing a risk-free profit. In addition, the specialist does not need to purchase the underlying issue to participate in the technique. Unfortunately, opportunities for this type of position are available primarily to floor traders who can instantly exploit the disparities among the options, and the ongoing execution of orders in a liquid market eventually returns the prices to their relative fair values. Conversions involve calls, puts, and the underlying stock. For example, the conversion is used when a retail trader is interested in buying a call option. To offer the position, a specialist will buy an under-priced put and sell an overpriced or fairly priced synthetic put (a short call and long stock position). The initial profit is achieved when the transaction yields a credit. If the value of the (sold) call option goes up, the (long) stock position will offset the change. If the value of the (long) stock falls, the put is exercised to cover the loss. In this manner, the floor broker trades risk-free and profits from the initial transaction. Of course, funds must be borrowed to finance the purchase of the stock and the current interest rate is always figured into the overall position. The technique for a reversal (reverse-conversion) is simply the opposite. When a retail trader desires to sell a call option, a floor broker will attempt to buy the call at a discount and sell an overpriced or fairly priced synthetic call (a short put and short stock). The initial credit received is risk-free profit. In the case of a reversal, the funds received from the (shorted) stock are placed in a risk-free, short-term investment. At expiration, the call will be exercised to purchase the underlying or the stock is received via assignment, replacing that which was borrowed in the initial transaction. There are no up-front funds needed for this technique but because of the rules (sales on the up-tick only) and difficulty in short selling, specialists generally do not receive all of the funds from the short sale. All of these techniques are risk-free transactions since the price change on the option purchased is offset with the sale of synthetic positions. The knowledge of option pricing is the primary manner in which the specialist profits from these transactions. Simple box spreads and conversions are the most common forms of option arbitrage and once you understand the basics of each method, your relationship with the market-maker will be a much happier one. 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 USU 8.05 7.49 JUN 7.50 1.10 $ 0.54 8.8% MACR 20.32 22.20 JUN 20.00 2.25 *$ 1.93 7.7% INFA 8.16 8.97 JUN 7.50 1.30 *$ 0.64 6.8% UNTD 11.00 10.92 JUN 10.00 1.75 *$ 0.75 5.9% USU 9.34 7.49 JUN 7.50 2.30 $ 0.45 5.6% INET 7.95 7.53 JUN 7.50 0.90 *$ 0.45 5.5% NTIQ 22.10 23.12 JUN 20.00 3.50 *$ 1.40 5.5% PCLE 10.59 10.96 JUN 10.00 1.15 *$ 0.56 5.2% VVTV 21.99 21.74 JUN 20.00 3.10 *$ 1.11 5.1% VSNX 11.49 10.44 JUN 10.00 1.90 *$ 0.41 4.8% MEDC 14.00 16.30 JUN 12.50 2.00 *$ 0.50 4.7% GIVN 13.99 13.90 JUN 12.50 2.25 *$ 0.76 4.7% SIE 18.50 18.75 JUN 17.50 2.00 *$ 1.00 4.4% QSFT 15.06 14.00 JUN 15.00 1.70 $ 0.64 4.2% VVTV 21.75 21.74 JUN 20.00 2.40 *$ 0.65 3.8% RETK 27.45 24.39 JUN 25.00 3.90 $ 0.84 3.1% MIPS 7.61 7.10 JUN 7.50 0.65 $ 0.14 2.3% SRP 7.81 6.97 JUN 7.50 0.75 $ -0.09 0.0% CKFR 23.76 21.22 JUN 22.50 2.25 $ -0.29 0.0% *$ = Stock price is above the sold striking price. Comments: The major averages held up fairly well considering the daily terrorist warnings and the threat of a nuclear war in India. Well, at least they didn't break through support (the early May lows). As for the Covered-Call portfolio, the majority of positions are holding up relatively well even in this most troublesome environment. We did close AirGate PCS (NASDAQ: PCSA) as it continues to move lower and is threatening to test the February low. Quest Software (NASDAQ:QSFT) is still in a precarious position and it is worrisome that it can not move above its 50-dma. QSFT will remain on the "early exit" watch-list. The following stocks are also candidates for an early exit, depending on your outlook: Retek Inc. (NASDAQ: RETK), Sierra Pacific Resources (NYSE:SRP) and CheckFree (NASDAQ:CKFR). MIPS Technologies (NASDAQ:MIPS) should also be monitored closely as the stock tests support near $7.00. Positions Closed: Northfield Labs (NASDAQ:NFLD), Endocare (NASDAQ:ENDO) and AirGate PCS (NASDAQ:PCSA). 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 ACXM 17.78 JUN 17.50 UQA FW 0.85 200 16.93 21 4.9% COB 5.29 JUN 5.00 COB FA 0.55 1805 4.74 21 7.9% DLTR 40.27 JUN 40.00 DQO FH 1.55 653 38.72 21 4.8% EXTR 11.28 JUN 10.00 EXJ FB 1.70 2335 9.58 21 6.4% KROL 23.40 JUN 22.50 KRQ FX 1.45 158 21.95 21 3.6% MEDC 16.30 JUN 15.00 MQH FC 1.80 531 14.50 21 5.0% ULGX 15.63 JUN 15.00 OZU FC 1.15 78 14.48 21 5.2% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield COB 5.29 JUN 5.00 COB FA 0.55 1805 4.74 21 7.9% EXTR 11.28 JUN 10.00 EXJ FB 1.70 2335 9.58 21 6.4% ULGX 15.63 JUN 15.00 OZU FC 1.15 78 14.48 21 5.2% MEDC 16.30 JUN 15.00 MQH FC 1.80 531 14.50 21 5.0% ACXM 17.78 JUN 17.50 UQA FW 0.85 200 16.93 21 4.9% DLTR 40.27 JUN 40.00 DQO FH 1.55 653 38.72 21 4.8% KROL 23.40 JUN 22.50 KRQ FX 1.45 158 21.95 21 3.6% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ACXM - Acxiom $17.78 *** On The Rebound! *** Acxiom (NASDAQ:ACXM) involved in the business of customer data integration and customer recognition infrastructure, enables businesses to develop and deepen customer relationships by creating a single, accurate view of their customers across the enterprise. Acxiom achieves this by providing customer data integration software, database management services, and premier customer data content through its AbiliTec, Solvitur and Info- Base products, while also offering a broad range of information technology outsourcing services. The company's products and services enable its clients to use information to improve their business decision-making processes and to effectively manage existing and prospective customer relationships. Acxiom has three business segments: Services; Data and Software Products; and Information Technology Management. Acxiom received some good news when Standard & Poor's affirmed its ratings and revised its outlook on Acxiom to stable from negative. This reflects Acxiom's sequential improvement in profitability over the past three quarters as well as expectations for continued improvement. CIBC World Markets recently initiated coverage on Acxiom with a "Strong Buy" rating. We simply favor the break-out this week on increasing volume as the stock moves to a test of the January high. A reasonable cost basis near technical support on a rebounding issue. JUN 17.50 UQA FW LB=0.85 OI=200 CB=16.93 DE=21 TY=4.9% ***** COB - Columbia Labs $5.29 *** Stage I Speculation *** Columbia Laboratories (AMEX:COB) develops women's healthcare and endocrinology products, including those intended to treat infertility, endometriosis and hormonal deficiencies. Columbia is also developing hormonal products for men and a buccal delivery system for peptides. The company's products primarily utilize its patented Bioadhesive Delivery System technology. Products include Crinone, a vaginally delivered, natural pro- gesterone product; Advantage-S, a female contraceptive gel; Replens, a vaginal moisturizer, and other products, as well as a testosterone-progressive hydration buccal tablet, a testost- eroned progressive hydration vaginal tablet, and a peptide delivery system. In early May, Columbia announced favorable results in the company's analyses of clinical pharmacokinetic trials. On May 14, the company announced that it had sold 454,545 shares of its common stock to Acqua Wellington North American Equities Fund, Ltd, raising $2.0 million. This week, Columbia announced a supply agreement with Mipharm S.p.A. for the manufacture and supply of commercial forms of Columbia's testosterone buccal tablet. We simply favor the move above the October-November 2001 resistance area and the current bullish momentum. Try target shooting a lower net-debit to allow for a short-term consolidation in the stock price and produce a higher potential yield. JUN 5.00 COB FA LB=0.55 OI=1805 CB=4.74 DE=21 TY=7.9% ***** DLTR - Dollar Tree Stores $40.27 *** Joining The NASDAQ 100 *** Dollar Tree Stores (NASDAQ:DLTR) is an operator of discount variety stores offering merchandise at the fixed price of $1.00. Since 1986, Dollar Tree has evolved from opening primarily mall- based stores to opening primarily strip-shopping-center-based stores. Since 1997, the company gradually increased the size of stores that it opened each year as it improved its merchandise offerings and service to its customers. The company's store growth has resulted from opening new stores and completing selective mergers and acquisitions from 1998 through 2000. As of December 31, 2001, Dollar Tree operated 1,963 single-price- point stores that operate under the names of Dollar Tree, Dollar Express, Dollar Bills, Only One Dollar and Only $One. They also operate 12 multi-price point stores under the name Spain's Cards and Gifts. In April, Dollar Tree reported a record 1st-quarter with earnings per share of $0.20 compared to $0.10 last year. On June 3, Dollar Tree will replace Adelphia Communications (NASDAQ:ADLAE) in the Nasdaq-100 index. The stock rallied strongly on the news, moving above the May high on extremely heavy volume. We favor the technical support near the cost basis in this position and investors who are interested in a long-term portfolio holding in the retail sector should consider this issue. JUN 40.00 DQO FH LB=1.55 OI=653 CB=38.72 DE=21 TY=4.8% ***** EXTR - Extreme Networks $11.28 *** Breaking The Downtrend? *** Extreme Networks (NASDAQ:EXTR) is a provider of network infra- structure equipment for business applications and services. The company delivers high-performance application and services infra- structure for enterprise, service provider and metropolitan area networks (MANs)-based on technology that combines high performance, intelligence and a low cost of ownership. Extreme's family of Summit stackable, BlackDiamond and Alpine chassis switches share the same consistent hardware, software and management architecture, enabling businesses to build a network infrastructure that is simple, easy to manage and scalable to meet the demands of growing businesses. Extreme Networks has received several upgrades over the last couple weeks on expectations of market-share gains from Cisco Systems (NASDAQ:CSCO), signs of businesses' increased spend- ing on network gear, and potential earnings growth over the next six to twelve months. We simply favor the recent rally through the down-trend line that started from the October high in 2000. Investors who retain a bullish outlook on Extreme can obtain a reasonable entry point with this position -- one that is near technical support as the stock exits a Stage IV downtrend and enters a Stage I base. JUN 10.00 EXJ FB LB=1.70 OI=2335 CB=9.58 DE=21 TY=6.4% ***** KROL - Kroll $23.40 *** Hot Sector! *** Kroll (NASDAC:KROL) is a global risk consulting company special- izing in investigative, intelligence and security services. Head- quartered in New York with more than 55 offices on six continents, Kroll serves a multinational clientele of individuals, law firms, corporations, non-profit institutions, and government agencies. Kroll offers a broad portfolio services to help clients reduce risks, solve problems, and capitalize on opportunities. The company operates through three core business groups: 1) Consulting Services, which offers business investigations and intelligence services, and financial services such as forensic accounting, business valuation and corporate recovery; 2) Security Services which offers crisis management, and architectural, institutional, personal and information security services; and (3) Employee Screening, which offers employee and vendor screening, substance abuse testing, and video surveillance services. On May 1, Kroll reported that 1st-quarter profits rose almost five times, citing a corporate restructuring and surging demand for its security services after the Sept. 11 attacks. This week, Kroll received antitrust clearance from the FTC for its proposed acquisition of Ontrack Data (NASDAQ:ONDI), which provides data recovery and electronic discovery services. Kroll is in a strong Stage II rally and this short-term position offers a conservative entry point with a cost basis near technical support. Target a lower net-debit to improve the profit potential in the position. JUN 22.50 KRQ FX LB=1.45 OI=158 CB=21.95 DE=21 TY=3.6% ***** MEDC - Med-Design $16.30 *** New Needle = New Royalties *** Med-Design (NASDAQ:MEDC) principally is engaged in the design, development and licensing of safety medical devices intended to reduce the incidence of accidental needle-sticks. Each safety medical device the company designs and develops incorporates its proprietary needle retraction technology. Med-Design’s technology enables health care professionals to retract a needle into the body of the medical device for safe disposal without any substantial change in operating technique. The company's products generally can be categorized into four groups: hypo- dermic syringes used to inject drugs and other fluids into the body; fluid collection devices used to draw blood or other fluids from the body; venous and arterial access devices used to provide access to patients' veins and arteries; and specialty safety devices for other needle based applications. A new contract with Sultan Chemists will help Med-Design market the Safety Dental Injector directly to dentists. This week, Becton Dickinson (NYSE:BDX) announced that it is launching the Integra safety syringe, a new needle it licensed from Med-Design. This new product launch will help Med-Design's revenues as they will receive royalties from the sales of the needle. Traders can speculate on the near-term performance of the issue with this conservative position. JUN 15.00 MQH FC LB=1.80 OI=531 CB=14.50 DE=21 TY=5.0% ***** ULGX - Urologix $15.63 *** What's Up? Urologix! *** Urologix (NASDAQ:ULGX) has developed and offers non-surgical, catheter-based therapies that use a proprietary cooled micro- wave technology for the treatment of benign prostatic hyper- plasia (BPH), a disease that affects more than 23 million men worldwide by causing adverse changes in urinary voiding patterns. The company markets its products under the Targis and Prostatron names. Both systems utilize Cooled ThermoTherapy, a targeted microwave energy combined with a cooling mechanism that protects healthy tissue and enhances patient comfort while providing safe, effective, lasting relief from the symptoms of BPH. Back in April, the FDA removed contraindications for the Urologix's TargisŪ System for BPH patients with co-existing prostate or bladder cancer, after reviewing additional data and research demonstrating that the procedure presented no known side effects. But there is no recent news to explain this week's rally on heavy volume. Does somebody know something? A reasonable entry point from which to speculate on Urologix' future. JUN 15.00 OZU FC LB=1.15 OI=78 CB=14.48 DE=21 TY=5.2% ***** ************************************ SUPPLEMENTAL COVERED CALL CANDIDATES ************************************ The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ODSY 35.25 JUN 35.00 UPE FG 2.15 46 33.10 21 8.3% ORB 7.70 JUN 7.50 ORB FU 0.60 784 7.10 21 8.2% DDS 30.03 JUN 30.00 DDS FF 1.25 1708 28.78 21 6.1% ICST 20.84 JUN 20.00 IUY FD 1.65 259 19.19 21 6.1% CTEC 18.30 JUN 17.50 UBC FW 1.40 154 16.90 21 5.1% IPXL 8.38 JUL 7.50 UPR GU 1.45 11 6.93 49 5.1% CAMP 6.05 JUL 5.00 UMP GA 1.40 43 4.65 49 4.7% TREE 14.10 JUN 12.50 QQP FV 1.95 115 12.15 21 4.2% ***************** NAKED PUT SECTION ***************** Investing 101: Achieving Goals Requires Careful Planning By Ray Cummins The recent decline in equity prices has significantly reduced the value of many stock portfolios, however investors who follow a sensible and prudent wealth-building strategy can achieve their goals in any market environment. Most people invest for a reason: they want to achieve specific goals such as a higher standard of living, early retirement, or providing a college education for their children. But, investing is just one part of the financial planning process and in many cases, the fundamental steps in building a profitable portfolio are ignored due to an overwhelming desire to "get rich quick" in the stock market. Rather than focus on picking the next "winner" in the "hot" sector, today we are going to discuss some concepts that can help you achieve success with any financial instruments. The first step to long-term capital appreciation is to establish tangible goals based on specific dollar amounts and time frames. Vague and imprecise targets are difficult to achieve because they require no distinct commitment with regard to attaining necessary returns and adhering to loss limits. Goals that are well defined in monetary terms and include target completion dates create an obligation to identify and implement strategies for realizing the objectives. At the same time, all goals must be realistic and achievable, and the strategy selection process should strive for a balance between acceptable capital risk and potential reward. If a suitable balance cannot be achieved, the investor should consider whether the potential gain is worth the risk, or if the primary portfolio goals need to be altered or adjusted. The second step is to examine your current portfolio holdings and cash reserves, to determine how they can best be used to achieve the established objectives. You should consider existing assets as well as future inflows when making this assessment but do not include financial resources that have been allocated for other purposes such as short-term saving accounts and emergency funds, or money from previously established retirement investments such as company stock-options, pensions and cash-value life insurance. After you have calculated the total available capital and income for investing, a critical determination will have to be made: Do the existing resources provide an adequate asset base to achieve your long-term goals? If the answer is yes, no further action is necessary. If not, your assets may require repositioning before the plan is initiated or you may need to adjust the time frame or portfolio risk tolerance to attain the portfolio goals. After the monetary resources are established and the objectives are clearly defined, the next step is to consider the possible strategies and financial products for achieving your goals. The vast array of investing vehicles offers ample tools for tailoring the plan to the purpose, thus the most important task is to find a combination of methods and instruments that will accomplish the desired results. The basic differences among investments are the required time period, the risk-reward outlook, and the capital and liquidity requirements. All of these components should be carefully evaluated when selecting a particular strategy and in addition, any method used to help achieve portfolio goals must be clearly understood (including loss-limiting techniques) before new positions are initiated. The final phase of the investing process includes implementing the plan and monitoring the results so that future adjustments can be made in a timely manner. Because circumstances change, the portfolio must be reviewed on a regular basis to determine if its performance is on pace to achieve the original goals. A periodic evaluation of each individual position is necessary to determine if the issue or instrument is yielding the estimated earnings. If the investment is not performing as expected, an adjustment can be made to remedy the situation before it has a substantial (negative) effect on the overall portfolio value. There are a number of proven investing strategies than can be used to achieve your personal financial goals and in the next segment, we will discuss some of the most popular techniques among stock and option traders. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield WFR 8.30 7.70 JUN 7.50 0.60 *$ 0.60 13.9% AMZN 19.47 18.23 JUN 17.50 0.65 *$ 0.65 11.3% ENDP 11.56 10.90 JUN 10.00 0.55 *$ 0.55 9.5% MACR 23.89 22.20 JUN 20.00 0.60 *$ 0.60 8.3% AMZN 19.16 18.23 JUN 15.00 0.40 *$ 0.40 8.2% ADRX 45.22 43.27 JUN 35.00 0.70 *$ 0.70 8.1% RMCI 27.46 27.58 JUN 22.50 0.70 *$ 0.70 7.5% CKFR 23.89 21.22 JUN 20.00 0.65 *$ 0.65 7.4% GG 9.36 11.75 JUN 8.75 0.35 *$ 0.35 7.3% 2-1 split TDY 21.24 20.15 JUN 20.00 0.50 *$ 0.50 7.3% RMCI 31.23 27.58 JUN 25.00 0.55 *$ 0.55 7.0% PHSY 30.06 27.74 JUN 25.00 0.60 *$ 0.60 6.9% NOVN 24.37 26.61 JUN 22.50 0.50 *$ 0.50 6.7% SIE 19.88 18.75 JUN 17.50 0.65 *$ 0.65 6.5% PHSY 25.87 27.74 JUN 20.00 0.50 *$ 0.50 6.4% TTWO 25.60 25.67 JUN 20.00 0.40 *$ 0.40 6.3% TTWO 25.50 25.67 JUN 20.00 0.30 *$ 0.30 6.3% MACR 22.00 22.20 JUN 17.50 0.25 *$ 0.25 6.1% AMZN 16.94 18.23 JUN 12.50 0.30 *$ 0.30 5.9% DCN 22.67 21.32 JUN 20.00 0.45 *$ 0.45 5.7% TDY 19.17 20.15 JUN 17.50 0.60 *$ 0.60 5.6% WIN 19.20 19.41 JUN 17.50 0.30 *$ 0.30 5.4% IDXX 31.10 31.60 JUN 30.00 0.55 *$ 0.55 5.2% RDC 26.12 25.70 JUN 22.50 0.50 *$ 0.50 4.9% HDWR 18.42 17.23 JUN 17.50 0.70 $ 0.43 4.4% FLM 25.35 22.14 JUN 22.50 0.80 $ 0.44 3.9% PLXS 28.00 22.61 JUN 25.00 0.75 $ -1.64 0.0% *$ = Stock price is above the sold striking price. Comments: The big surprise in the portfolio this week occurred when shares of contract manufacturer Plexus (NASDAQ:PLXS) fell sharply on Wednesday after brokerage firm Raymond James & Associates cut its rating on the stock amid concerns about the company's customer base. Although the bearish activity offered plenty of time for adjustment (and the issue was on the "early exit" watch-list), there was no reason to think the downgrade would have such a significant effect on the stock's price. That type of activity clearly reflects the fear and apprehension among investors in the current market environment and reinforces the need for effective position management and timely transactions when limiting portfolio losses. With the recent decline in equity values, a number of positions remain on the watch-list including: Fleming Companies (NYSE:FLM), Headwaters Inc. (NASDAQ:HDWR), Right Management Consultants (NASDAQ:RMCI), Pacific Healthcare Systems (NASDAQ:PHSY), and Memc Electronic (NYSE:WFR). Positions Closed: Endocare (NASDAQ:ENDO), Plexus (NASDAQ:PLXS) 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 BJS 37.52 JUN 35.00 BJS RG 0.65 802 34.35 21 7.2% EMLX 30.11 JUN 22.50 UML RX 0.30 901 22.20 21 6.9% JBL 22.96 JUN 20.00 JBL RD 0.35 1951 19.65 21 7.7% NOVN 26.61 JUN 25.00 NPQ RE 0.40 0 24.60 21 6.1% NTIQ 23.12 JUN 20.00 CDJ RD 0.45 60 19.55 21 9.9% OSTE 8.30 JUN 7.50 OQQ RU 0.20 0 7.30 21 10.7% TTWO 25.67 JUN 22.50 TUO RX 0.40 320 22.10 21 7.7% VVTV 21.74 JUN 20.00 UVR RD 0.25 505 19.75 21 5.0% 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 OSTE 8.30 JUN 7.50 OQQ RU 0.20 0 7.30 21 10.7% NTIQ 23.12 JUN 20.00 CDJ RD 0.45 60 19.55 21 9.9% JBL 22.96 JUN 20.00 JBL RD 0.35 1951 19.65 21 7.7% TTWO 25.67 JUN 22.50 TUO RX 0.40 320 22.10 21 7.7% BJS 37.52 JUN 35.00 BJS RG 0.65 802 34.35 21 7.2% EMLX 30.11 JUN 22.50 UML RX 0.30 901 22.20 21 6.9% NOVN 26.61 JUN 25.00 NPQ RE 0.40 0 24.60 21 6.1% VVTV 21.74 JUN 20.00 UVR RD 0.25 505 19.75 21 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). ***** BJS - BJ Services $37.52 *** Oil Service Sector! *** BJ Services Company (NYSE:BJS) is a provider of pressure pumping and oilfield services serving the petroleum industry worldwide. The company's pressure pumping services consist of cementing and stimulation services used in the completion of new oil and gas wells and in remedial work on existing wells, both onshore and offshore. Other oilfield services include product and equipment sales for pressure pumping services, tubular services provided to the oil and natural gas exploration and production industry, commissioning and inspection services, provided to refineries, pipelines, offshore platforms and specialty chemical services. Despite the recent consolidation in the sector, BJS is trading near 52-week highs and traders who favor the outlook for stocks in the oil service group should consider this position. JUN 35.00 BJS RG LB=0.65 OI=802 CB=34.35 DE=21 TY=7.2% ***** EMLX - Emulex $30.11 *** Entry Point! *** Emulex (NASDAQ:EMLX) is a designer, developer and supplier of a broad line of storage networking host bus adapters, application specific computer chips and other software products that provide connectivity solutions for storage area networks (SANs), network attached storage and redundant array of independent disks storage. The company's products are based on internally developed ASIC, firmware and software technology, and offer support for a variety of SAN protocols, configurations, system interfaces and operating systems. The company's architecture offers customers a stable applications program interface that has been preserved across multiple generations of adapters, and to which many OEMs have customized software for mission-critical server and storage system applications. One of our readers said he would like to see some "target-shooting" plays on leading technology stocks, in order to establish discounted positions in these companies for his long-term portfolio. Emulex is a great candidate for any stock portfolio and $22 seems like a fair price at which to own the issue. JUN 22.50 UML RX LB=0.30 OI=901 CB=22.20 DE=21 TY=6.9% ***** JBL - Jabil Circuit $22.96 *** Another Entry Point! *** Jabil Circuit (NYSE:JBL) is a worldwide independent provider of electronic manufacturing services. Jabil designs and manufactures electronic circuit board assemblies and systems for major original equipment manufacturers in the communications, personal computer, peripherals, automotive and consumer products industries. Jabil serves its OEM customers with dedicated work cell business units that combine high volume, automated continuous flow manufacturing with advanced electronic design and design for manufacturability technologies. The company's customers include Cisco Systems, Dell Computer Corporation, Hewlett-Packard Company, Johnson Controls, Lucent Technologies and Marconi PLC. Jabil is another technology issue that would be a great addition to any long-term portfolio and investors who believe the recent decline for NASDAQ stocks is coming to an end can attempt to profit from that outcome with this position. JUN 20.00 JBL RD LB=0.35 OI=1951 CB=19.65 DE=21 TY=7.7% ***** NOVN - Noven Pharmaceuticals $26.61 *** FDA Approval! *** Noven Pharmaceuticals (NASDAQ:NOVN) is engaged in the development and manufacture of advanced transdermal drug delivery products and technologies and prescription transdermal products. Noven's principal commercialized products are transdermal drug delivery systems for use in hormone replacement therapy. The company's first major product was an estrogen patch for the treatment of menopausal symptoms marketed under the brand name Vivelle in the United States and Canada, and under the brand name Menorest in Europe and other markets. Noven's second-generation estrogen patch was launched in the United States under the brand name Vivelle-Dot. This product is expected to be launched in 2002 in several foreign countries under the brand name Estradot. Noven also developed a combination estrogen/progestin transdermal patch for the treatment of menopausal symptoms, which is marketed under the brand name CombiPatch in the U.S. and under the brand name Estalis in Europe and certain other markets. On May 20, Noven received Food and Drug Administration approval for the expanded use of their Vivelle-Dot in the prevention of postmenopausal osteoporosis. The shares rallied on the news and the move to a new trading range suggests continued upside activity in the near future. JUN 25.00 NPQ RE LB=0.40 OI=0 CB=24.60 DE=21 TY=6.1% ***** NTIQ - NetIQ $23.12 *** Bottom-Fishing! *** NetIQ (NASDAQ:NTIQ) is a provider of e-business infrastructure management and intelligence solutions for the components of an organization's e-business infrastructure from back-end servers, networks and directories, to front-end Web servers and other applications. NetIQ's product family is designed to reduce the cost of its customers' operations and increase the security, performance and overall availability of Windows-based e-business applications, directories, servers and networks. The company's solutions also address the key e-business management needs and the wide variety of Internet-based systems including Web servers, firewalls, proxy servers, media and e-mail servers and database systems. NetIQ's product family consists of three broad product groups: systems test, migration and administration; operations and security management; and e-business intelligence. A review of the technical outlook for NTIQ suggests that a base of support has been established near $20 and traders who think the neutral trend will continue in the near term can speculate on the that outcome with this position. JUN 20.00 CDJ RD LB=0.45 OI=60 CB=19.55 DE=21 TY=9.9% ***** OSTE - Osteotech $8.30 *** Health Services Sector *** Osteotech (NASDAQ:OSTE) provides services and products primarily focused in the repair and healing of the musculoskeletal system. These products and services are marketed mainly to the orthopedic, spinal, neurological, oral and maxillofacial, dental and general surgery markets in the United States and Europe. The company is a processor and developer of human bone and bone connective tissue, or allograft bone tissue, forms. The allograft bone tissue the company processes is procured by independent tissue banks or other Tissue Recovery Organizations, primarily through the donation of tissue from deceased human donors, and is used for transplantation. The company has two operating segments, the Grafton Demineralized Bone Matrix Segment and the Base Allograft Bone Tissue Segment. OSTE came up in a search of bullish issues in favorable sectors and the buying support just below the cost basis makes this play reasonable speculation for traders who like the outlook for the company. Target-shoot a higher premium in the issue initially, to allow for a short-term consolidation in the stock price. JUN 7.50 OQQ RU LB=0.20 OI=0 CB=7.30 DE=21 TY=10.7% ***** TTWO - Take-Two Int. Software $25.67 *** 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. This is the last week that traders who think the announcement will be favorable can profit from that outcome. JUN 22.50 TUO RX LB=0.40 OI=320 CB=22.10 DE=21 TY=7.7% ***** VVTV - ValueVision $21.74 *** A Record First Quarter! *** 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 major operating strategy incorporates television home shopping, web e-commerce, vendor programming sales and fulfillment services. The company's principal electronic media activity is its home shopping business, which uses recognized on-air television home shopping personalities to market brand name and proprietary and private label consumer products at competitive prices. In mid- May, ValueVision announced that it had replaced Arthur Andersen with Deloitte & Touche as their independent auditors. Last week ValueVision reported a small quarterly profit as it wrote down fewer investments and booked more revenue from its ShopNBC.com site. More importantly, the company is expecting future sales of $128 million to $133 million, up 22% to 27% from a year ago. The recent break-out above the MAR - APR resistance area, which is now technical support, suggests higher prices in the near future and this position offers a conservative method to profit from further upside activity in the company's share value. JUN 20.00 UVR RD LB=0.25 OI=505 CB=19.75 DE=21 TY=5.0% ***** ***************** 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 TNL 25.85 JUN 25.00 TNL RE 0.70 20 24.30 21 9.9% NEM 31.21 JUN 30.00 NEM RF 0.80 6939 29.20 21 9.6% TRI 45.19 JUN 45.00 TRI RI 1.15 51 43.85 21 8.8% USPI 31.07 JUN 30.00 QPJ RF 0.70 27 29.30 21 8.4% F 17.65 JUN 17.50 F RW 0.40 3150 17.10 21 7.9% CACI 33.68 JUN 30.00 KFQ RF 0.45 268 29.55 21 6.4% CEN 22.86 JUN 22.50 CEN RX 0.35 0 22.15 21 5.6% X 20.54 JUN 20.00 X RD 0.30 81 19.70 21 5.4% REY 30.45 JUN 30.00 REY RF 0.45 0 29.55 21 5.4% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ The Summer Doldrums Arrive... By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, May 31 Stocks opened strong today, but the gains dwindled late in the session as traders exited long positions prior to the closing bell. The Dow Jones Industrial Average ended only 13 points higher at 9,925 after rising 131 points in early trading. The strongest blue-chip issues were Home Depot (NYSE:HD), Honeywell (NYSE:HON), Coca-Cola (NYSE:KO), Exxon-Mobil (NYSE:XOM), and Merck (NYSE:MRK). The NASDAQ was less fortunate, finishing down 16 points at 1,615 as buyers retreated from software, semiconductor and networking shares. The broad-market S&P 500 index ended almost unchanged as retail, oil, oil service, consumer and gold issues edged higher while biotechnology, utility, drug and defense issues generally moved lower. Trading volume totaled 1.23 billion shares on the Big Board and 1.55 billion shares on the NASDAQ. Market breadth was positive, with advancers surpassing decliners 19 to 12 on the NYSE and 18 to 17 on the technology exchange. In the treasury market, government bonds retreated as the new economic data ended the recent advance. The 10-year note slumped 5/32 to yield 5.04% while the 30-year "long" bond retreated 9/32 to yield 5.61%. On the fund flow front, Trim Tabs said that all equity funds had outflows of $700 million in the past week, compared with outflows of $3.8 billion in the prior week. Equity funds that invest in U.S. stocks had outflows of $1.1 billion for the second straight week. Portfolio Activity: The second quarter ended with a week of relatively uneventful sessions as trading volumes dwindled while investors continued to show their disinterest in the stock market. The dearth of activity was very evident in the Spreads/Combos portfolio and only a few issues had movement of any significance. Among the new straddle candidates, Williams Companies (NYSE:WMB) was the big winner, offering a closing credit of up to $1.00 on $2.80 invested as the stock sank to multi-year year lows on Friday. Cognos (NASDAQ:COGN) was also very active, however the opening gap on Tuesday prevented any entry in the position. Cablevision Systems (NYSE:CVC), Juniper Networks (NASDAQ:JNPR), and Westwood One (NYSE:WON) were volatile from a percentage standpoint, but they have yet to achieve profitability. In the credit-spreads group, all of the current positions are profitable, including the adjusted plays (Clear Channel and Qlogic) from last month. We are monitoring Schlumberger and Nabors Industries for further downside activity and plan to exit or adjust those positions if that occurs. In the synthetic positions section, Patterson-UTI Energy (NASDAQ:PTEN) made another downward move this week and the bullish play is now a strong candidate for early-exit. The neutral, premium-selling position in Adobe Systems (NASDAQ:ADBE) is performing well and the calendar spread in American Express (NYSE:AXP) has achieved profitability in less than two months. ****************************************************************** - READER'S WRITE E-MAIL REPLIES - ****************************************************************** One of our subscribers submitted a good question about a recent neutral-outlook play on the S&P 100 Index (OEX) and it is worth reprinting for the benefit of all the OIN's readers. To: Contact Support Subject: OEX Credit-Spread Strangles Ray, The most recent OEX Credit-Spread Positions (5/18 Spreads/Combos) have the S&P 100 index at 553. It is now at 542 (on the close of business 5/22). Questions: 1) Do you adjust the strike prices (of the spreads) accordingly? 2) What are the abbreviations for the amounts: A=$2.05/$4.10 and B=$2.50/$4.50 that are listed with the bearish and bullish credit spreads? Thanks for your help, BF Hello BF, Here is the original play (5/18/02 Spreads/Combos): 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% Abbreviation examples: A=$2.05 is an abbreviation for ASK=$2.05 B=$2.50 is an abbreviation for BID=$2.50 Other Abbreviations: B/E = Break-even price OI = Open Interest ROI = Return on investment ITM = In-the-money ATM = At-the-money OTM = Out-of-the-money I also list a suggested "net-credit" or "net-debit" target to help traders open the play. This is simply a recommended entry point, just my opinion of what a trader might use as an initial "limit" for the spread-opening order, and it should be a reasonable price to initiate the play even with small changes in the stock and option quotes. The target is always less than the quoted BID/ASK numbers (we don't pay "market" for spread orders) and generally, you can expect to shave a minimum of $0.10-$0.20 off the BID/ASK price when opening or closing even the smallest spread order. The margin can be more or less, depending on the price of the options, whether they are ITM or OTM, the time-value premium, the volatility of the stock, etc. I generally try to give the beginning trader an idea of the value of the position because the option prices are always different the next day. Of course, you may need to adjust this target based on the activity of the underlying issue, the trading volume of its options and the implied volatility of the series being traded. As far as the range of the OEX and the play publishing date: The the outlook for this type of position is "neutral" and indeed, the volatile market movement near the beginning of this week prevented an entry at the suggested prices. So, as you observed, traders who still believe the OEX will be range-bound should move their strikes downward (and give thanks for the volatility prior to the position entry -- which increases the option premiums slightly, providing a small theoretical edge in the position). The strike prices in our adjusted position (based on the bearish open) were both $5 lower than the target spread. Hope that helps! Ray P.S. Remember, the Option Investor Newsletter is really just a selection of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the issues meet your criteria for potential plays. Only you can know what trading strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** IPXL - Impax Laboratories $8.38 *** Reader's Request! *** Impax Laboratories (NASDAQ:IPXL), which was formerly known as Global Pharmaceutical Corporation, is a unique technology-based, specialty pharmaceutical company focused on the development and commercialization of generic and brand name pharmaceuticals. In the generic pharmaceuticals market, the company is primarily focusing its efforts on selected controlled-release generic versions of popular brand name pharmaceuticals. In the brand name pharmaceuticals market, the company is developing products for the treatment of central nervous system disorders. Impax's initial brand name product portfolio consists of a number of development-stage projects to which it is applying its unique formulation and development expertise to develop differentiated, modified or controlled-release versions of marketed substances. The company intends to expand its brand name products portfolio primarily through internal development, and in addition, through licensing and acquisition. One of our new subscribers submitted this stock for a potential "bottom-fishing" position and based on the option premiums and recent technical outlook, there is a favorable opportunity for low-cost speculation with the issue. The bullish activity in the issue is due to a recent announcement that Impax received tentative approval from the Food and Drug Administration for a generic version of Claritin-D 12-Hour extended-release tablets. Final approval may be some months away however, due to pending patent-infringement litigation with Schering-Plough (NYSE:SGP) and the expiration of the 30-month stay under the Hatch-Waxman Amendments. Investors appear optimistic about the future of the company and traders who agree with that outlook can profit from additional upside movement in the issue with this position. PLAY (speculative - bullish/synthetic position): BUY CALL AUG-10.00 UPR-HB OI=772 A=$0.80 SELL PUT AUG-7.50 UPR-TU OI=50 B=$0.80 INITIAL NET CREDIT TARGET=$0.10-$0.25 TARGET PROFIT=$0.50-$0.75 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $320 per contract. ****************************************************************** - CONSERVATIVE SYNTHETIC POSITIONS - Readers who are interested in a more conservative outlook with this strategy should consider these next two candidates. Aflac recently reaffirmed its 2002 and 2003 earnings-per-share growth target of 15%-17% and Kraft is one of the most popular issues in the Food and Beverage group; a segment that generally performs very well when the broader-market sectors are in a bearish trend. As always, traders should review the issues thoroughly and make their own decision about the future outcome of each position. ****************************************************************** AFL - Aflac $32.16 *** Solid Fundamental Outlook! *** AFLAC (NYSE:AFL) is the holding company of subsidiaries engaged primarily in the supplemental health and life insurance business, and in printing. The supplemental health and life insurance business is administered primarily through American Family Life Assurance Company of Columbus (AFLAC). The company's operations in Japan (AFLAC Japan) and the United States (AFLAC U.S.) service the two markets for the company's insurance business. Aflac is authorized to conduct insurance business in all 50 states, the District of Columbia, several U.S. territories and many foreign countries. Currently, the company's only significant foreign operation is AFLAC Japan, which accounted for 77% of their total revenues in 2001. Total assets attributable to AFLAC Japan were 84% as of December 31, 2001. PLAY (conservative - bullish/synthetic position): BUY CALL AUG-35 AFL-HG OI=405 A=$0.50 SELL PUT AUG-30 AFL-TF OI=260 B=$0.60 INITIAL NET CREDIT TARGET=$0.10-$0.25 TARGET PROFIT=$0.80-$1.00 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,225 per contract. ****************************************************************** KFT - Kraft Foods $43.01 *** New "All-Time" High! *** Kraft Foods (NYSE:KFT) together with its subsidiaries, is engaged in the manufacture and sale of branded foods and beverages in the United States, Canada, Europe, Latin America and Asia Pacific. The company conducts its global business through its subsidiaries, Kraft Foods North America, and Kraft Foods International. Kraft has operations in 68 countries, and markets its products in more than 145 countries. Kraft Foods North America operates in the United States, Canada and Mexico, and manages its operations by product category, while Kraft Foods International manages its operations by geographic region. Kraft Foods North America's reportable segments are Cheese, Meals and Enhancers; Biscuits, Snacks and Confectionery; Beverages, Desserts and Cereals, and Oscar Mayer and Pizza. Kraft Foods International's reportable segments are Europe, Middle East and Africa; and Latin America and Asia Pacific. Traders should target a smaller debit (or even a credit) in the position initially, to allow for a brief consolidation in the underlying issue. PLAY (conservative - bullish/synthetic position): BUY CALL SEP-45 KFT-II OI=360 A=$1.15 SELL PUT SEP-40 KFT-UH OI=473 B=$0.80 INITIAL NET DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$1.00-$1.25 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,425 per contract. ****************************************************************** - CREDIT SPREADS - ****************************************************************** CI - Cigna $106.05 *** Technicals Only! *** Cigna Corporation (NYSE:CI) and its subsidiaries are investor owned employee benefits organizations in the United States. Its subsidiaries are major providers of employee benefits offered through the workplace, including health care products and other services, life, accident and disability insurance, retirement products and services and investment management. CIGNA's main perating divisions include Employee Health Care, Disability and Life Benefits, CIGNA Group Insurance, Employee Retirement, and Investment Services, and International Life, Health and Employee Benefits. The company's Other Operations include the recognition of deferred gains on the sales of individual life insurance and annuity business and reinsurance business, and the results of CIGNA's retained reinsurance business, corporate life insurance business, settlement annuity business, and other non-insurance operations. This play is based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from this position may be higher than other plays in the same strategy based on disparities in option pricing. Although the position offers favorable risk/reward potential, it must also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - bullish/credit spread): BUY PUT JUN-95 CI-RS OI=256 A=$0.30 SELL PUT JUN-100 CI-RT OI=980 B=$0.80 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% ****************************************************************** SII - Smith International $73.38 *** Technicals Only! *** Smith International (NYSE:SII) is a worldwide supplier of premium products and services to the oil/gas exploration and production industry, the petrochemical industry and other related industrial markets. Smith International provides a comprehensive line of technologically-advanced products and engineering services such as drilling and completion fluid systems, solids-control equipment, waste-management services, three-cone and diamond drill bits, fishing services, drilling tools, underreamers, casing exit and multilateral systems, packers and liner hangers. The company also offers supply-chain management solutions through an extensive branch network providing pipe, valve, tool, safety and other maintenance products. The company's operations are aggregated into two business segments: Oilfield Products and Services, and Distribution. The Oilfield Products and Services segment consists of M-I SWACO, Smith Bits and Smith Services. The Distribution segment consists of Wilson. Smith International is comfortably established in a bullish trend but the long-term resistance near the sold strike price (at $80) and the recent consolidation in oil industry stocks suggests that this play offers reasonable speculation for conservative option traders. PLAY (conservative - bearish/credit spread): BUY CALL JUN-85 SII-FQ OI=677 A=$0.30 SELL CALL JUN-80 SII-FP OI=2140 B=$0.75 INITIAL NET CREDIT TARGET=$0.50-$0.60 PROFIT(max)=11% ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** MNX - CBOE Mini NDX Index $120.84 *** Speculation Only! *** The CBOE Mini-NDX Index (CBOE:MNX) is based on 1/10th the value of the Nasdaq-100 Index (NDX). The Nasdaq-100 Index is a modified, capitalization-weighted index composed of 100 of the largest non financial securities listed on the NASDAQ Stock Market. The index was created in 1985 with a base value set to 250 on February 1 of that year. After reaching a level of nearly 800 on December 31, 1993, the index level was halved on January 3, 1994. For more information on the MNX, visit the CBOE online at www.cboe.com. The MNX is a very popular index among professional traders and the premiums and liquidity are perfect for traders who want to speculate on the movement of technology stocks. In this case, the index meets our criteria for a favorable straddle; cheap option premiums, a history of adequate price movement and the potential for volatility in the stock or its industry. This selection process provides the foremost combination of low risk and potentially high reward but, as with any position, it must be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (very speculative - neutral/debit straddle): BUY CALL JUL-120 MQX-GD OI=205 A=$7.70 BUY PUT JUL-120 MQX-SD OI=5266 A=$6.60 INITIAL NET DEBIT TARGET=$14.25-$14.50 TARGET PROFIT=15-40% ****************************************************************** CEPH - Cephalon $53.58 *** Premium-Selling! *** Cephalon (NASDAQ:CEPH) is a worldwide biopharmaceutical company engaged in the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting a very active research and development program, the company markets three products in the United States and a number of products in various countries throughout Europe. Cephalon's United States products comprise Provigil, for the treatment of excessive daytime sleepiness associated with narcolepsy; Actiq, for cancer pain management; and Gabitril, for the treatment of partial seizures associated with epilepsy. Here is a good candidate for a premium-selling position, based on the underlying issue's technical background. CEPH has a fairly stable trading range from $45 to $65 and the chart indications suggest the current (long-term) trend will continue. At the same time, CEPH is not a passive issue, having tested the boundaries of its recent range ($54-$60) on a regular basis. Traders who employ "premium-selling" strategies can use that volatility to initiate a neutral-outlook position with an acceptable credit. The probability of the share value reaching the sold strikes is rather low, but there is always the possibility of a break-out from the current trading range, so monitor the position daily for changes in technical or fundamental character. PLAY (aggressive - neutral/credit strangle): SELL CALL JUL-65 CQE-GM OI=261 B=$1.00 SELL PUT JUL-40 CQE-SH OI=87 B=$1.25 INITIAL NET CREDIT TARGET=$2.25-$2.40 PROFIT(max)=17% UPSIDE B/E=$67.25 DOWNSIDE B/E=$37.75 ****************************************************************** ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************ MARKET WATCH ************ We expect a return of volatility next week. Watch for these watch list candidates to begin triggering action points. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/060202.asp ************** MARKET POSTURE ************** More volatility is likely next week. Look to tighten your support and resistance levels with this weekend’s Posture. To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/060202_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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