The Option Investor Newsletter Wednesday 06-05-2002 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 06-05-2002 High Low Volume Advance/Decline DJIA 9796.80 +109.00 9800.00 9688.30 1296 mln 1759/1388 NASDAQ 1595.26 + 17.14 1595.42 1563.55 1413 mln 1662/1734 S&P 100 520.87 + 4.84 521.05 514.84 totals 3421/3122 S&P 500 1049.90 + 9.21 1050.11 1038.84 RUS 2000 475.04 + 1.28 475.71 470.97 DJ TRANS 2680.63 + 17.13 2684.38 2656.49 VIX 24.71 - 1.44 26.28 24.71 VIXN 48.02 - 1.02 49.89 47.97 Put/Call Ratio 0.78 ******************************************************************* Oracle Says "We didn't Warn." Ah... the lazy days of summer right? You might think that with the constant day after day of lackluster volume. One might get the picture that the host of investors that brought the markets up off their September 2001 lows have all checked out. After a rough spring semester the final school bell has rung and the crowd has now left the building happy to be on summer vacation. It has indeed been a tough 2002 for the major indices and investors are seeing more and more reasons to sit back and wait before putting their money to work. High up on the list is the geo-political turmoil that has taken center stage in the media these last few weeks. The threat of nuclear war between India and Pakistan is a nightmare that could throw the entire global economy into a depression. Fortunately, there were hints and whispers today that the situation may indeed be cooling in contrast to the +100 degree heat citizens are feeling in India right now. The Indian Prime Minister offered a suggestion that both India and Pakistan jointly patrol the Line of Control in Kashmir but the Pakistani government countered that India's offer was a media ploy. Despite the rejection, some analysts are encouraged that India, the more powerful of the two countries, is at least considering negotiations. Countering any positive press was a new travel warning from the U.S. State Department strongly urging Americans in the region to leave the area. One hot spot that has been overshadowed by the nuclear silhouette between any Indian-Pakistani conflict is the Middle East. There was another suicide bombing today that claimed 17 Israeli lives and injured 36 more. The Islamic Jihad took credit for the attack as the perpetrator drove a car, lined with explosives, next to a bus and detonated the bomb in Megiddo, Israel. Ominously, reporters noted that Megiddo is Hebrew for Armageddon and the attack took place on the 35th anniversary of the 1967 Arab-Israeli war. Arafat condemned the attack but President Bush issued increasingly harsh language for Arafat's lack of leadership of the Palestinian people. The Israeli response was to send tanks into the town of Jenin, the reported base for the Islamic Jihad. I realize that if you wanted a news report on the Middle-East conflict or the ongoing concerns in central Asia you'd probably turn on CNN or your nightly news. The issue here is that a backdrop of political and military unrest does not induce investors to part with the money but quite the opposite. The markets turn defensive as they cautiously await any outcome that might hinder business locally or globally. Market internals expressed this hesitancy as volume did come in light with 1.2B on the NYSE and 1.4B on the Nasdaq. Bulls will point to the up volume out pacing down volume on the NYSE but the advance decline numbers were mixed. 1759 advancers sneaked past decliners of 1662 on the NYSE but decliners got their revenge on the Nasdaq beating advancers 1734 to 1338. The major indices may have ended the day in the green but it wasn't due to any change in investor sentiment. Economists and market commentators may have been encouraged by the ISM non-manufacturing numbers this morning but nobody else really seemed to notice. For May the index rose to 60.1% outpacing the estimates for 56.0% and April's 55.3% reading. This was the highest reading in almost two years for the indicator but the major indices merely yawned. Like clockwork, the regularly scheduled Wednesday stock-specific disaster was right on time. This morning the Federal Energy Regulatory Commission (FERC) threatened to revoke the trading licenses of Williams Co. (NYSE:WMB), El Paso Electric (NYSE:EE), Avista (NYSE:AVA) and Portland General Electric, which is owned by bankrupt energy trading company Enron (Nasdaq:ENRNQ). The FERC flexed its muscles as the agency alleges the group has failed to respond adequately to their investigation into possible energy market manipulation during the California crisis. Investor response was immediate and the fallout was painful. WMB lost 18%, EE lost 7.88%, AVA fell 13.3%, and ENRNQ slid another 4.76%. The commission has given the companies 10 days to "show why the commission should not revoke their market-based rate authority". It will be interesting to see how this develops but we hope any shareholders in these company owned protective puts on their positions. Additional stocks contributing to the general malaise of the markets were found across multiple sectors. eFunds (EFDS) lost over 29% to close at $9.32 after lowering Q2 earnings and revenue estimates. Not only did the software company claim a growing list of customers were pushing back purchases but the CFO would be stepping down as of June 30th. It didn't take long for someone to slap a "hold" on the stock from a previous "buy" recommendation. Tech company, Hewlett-Packard (NYSE:HPQ) got its earnings estimates trimmed by Credit Suisse Boston after HPQ's Tuesday conference call. Big surprise, the company lowered guidance for the current year and said revenues would fall. Another big cap that can't get any respect is AOL-Time Warner (NYSE:AOL). Shares continue to slip even after the company reiterated its 2002 America Online advertising revenue target of $1.8 to $2.2 billion. EBAY is another remnant from the Internet bubble that has been able to maintain a stock price not found in the single digits. The bad news is we may be seeing the first chink in the impenetrable armor of this auction-site behemoth. The company had earlier announced that 2002 earnings might come in below analysts expectations. EBAY confirmed that news with guidance of 73 to 75 cents a share versus the First Call consensus of 76 cents. Many have made the claim before but with a P/E close to 133 shares are priced for perfection and a couple of missteps could be painful for shareholders. Joining its fellow big cap brethren were shares of WCOM. News has it that the company is looking into a 20% cut in its workforce in an effort to shoulder its $30 billion in debt. That's almost 16,000 jobs over and above the 13,000 the company has already slashed in the last two years. Shares ended down 2.48%. Adding just one more log to the growing funeral pyre for the tech rebound in late 2002 was the CEO of Ericcson (Nasdaq:ERICY), Kurt Hellstrom. The Sweden-based telecom equipment giant is still struggling. The CEO believes the downturn may not end in 2002. As quoted by the Financial Times, Kurt said, "We don't think the market has become worse but the downturn has been prolonged. We have to face the possibility that next year doesn't turn upwards". Despite the negative comments shares of ERICY, QCOM and NOK all ended to the plus side. One company that seems to have a poisonous touch is Adelphia Communications. The company's investment banker, Salomon Smith Barney, maintained a "buy" rating on the stock despite the implosion in its share price and the SEC is now investigating Salomon's banking deals with Adelphia. Would you believe that gold finally hit some profit taking after touching the $330 level on Tuesday? The June contracts for gold (gc02m) hit $330.30 intraday in yesterday's session in what was the end of a non-stop three-week rally. We outlined the $330 level as potential resistance last week. Gold futures fell over $6.00 today in profit taking. The pull back started yesterday in the XAU.X as traders began to take profits in a number of gold- related stocks. After doing some research early this afternoon it's amazing the different perspectives you get from traders. Those bears who have been waiting to short the sector are drooling to grab their slice of any downdraft but there appears to be just as many bulls looking for the bounce to jump on the goldbug bullet train. Bears will correctly point to the weekly chart of gold and show you how the sector and the metal is very overbought and in need of a good bout of selling. However, bulls we tell you that neither the metal or the XAU index has violated its bullish trend and there is plenty of (trading) support still below it for an opportune entry point even if another day or two of declines were to be seen. I can see both sides of the argument but given its incredibly overbought state (bearish for gold) and the geo-political unrest and falling dollar (bullish for gold) I would avoid it. Only aggressive traders using 100% risk capital should approach gold at these levels (either direction). Bears who go short only to find India and Pakistan threatening the first nuclear exchange in 50 years next week could be in trouble and bulls who go long will be yelping in pain if the metal and the index see a 20% pull back. How about some good news? The drug sector is still hitting new lows but the FDA is sparking bullish interest in AstraZeneca (NYSE:AZN) and Millennium Pharmaceuticals (Nasdaq:MLNM). AZN said it had received an approval letter from the FDA for its cholesterol drug Crestor. The FDA also gave "fast-track" status to MLNM's drugs to fight leukemia and multiple myeloma. While both stocks gapped higher this morning they did fail to maintain the majority of their gains. Let's try again. If we're looking for good news who could you turn to for a few choice words to lift the markets. Why John Chambers of course! The CEO of Cisco Systems, one of the few men (besides Greenspan) who can change the course of the markets with a well-crafted utterance. Last time the markets received positive news from CSCO there was a sharp rally higher as shorts ran for cover in fear that a bull stampede was right behind them. Unfortunately, no such stampede occurred. This time John offered some soothing words for an oversold market but no one cared. It was if Chambers had become the boy who cried, "wolf" (or recovery) one too many times. The CEO stated that he believed the rebounding U.S. economy would revive the telecom industry. John was quoted as saying, "We believe the commercial marketplace will come back first. That will be followed by the enterprise, and that will be followed by the service providers. Unfortunately, service providers lagging two to six months behind the enterprise." The market's response was a 16-cent loss for shares of CSCO and a new all-time low for the NWX.X. So what's a bullish trader to do besides turn in his uniform and join the other team? Why look to the software sector for a little pep talk. I know. I know... you're thinking that any bull looking to the software sector for trades has probably got mad- cow disease. Believe it or not, the $GSO.X turned in another positive session making it two in a row. That's an uncommon site around here, especially considering that Manugistics (Nasdaq:MANU) and Tibco Software (Nasdsaq:TIBX) both warned today. Most of Wall Street has already written the software sector off as a lost cause. In the last few weeks Goldman, Salomon and Merrill have all downgraded the group due to the I.T. spending outlook. Imagine the market's surprise when ORCL says the made their numbers late afternoon. It looked like those bears that were still paying attention this afternoon decided to cover when Ellison announced, "We didn't warn." The expectation for ORCL to guide lower was pretty strong but Ellison said the company made its per-share profit estimates of 12 cents for the fourth quarter. This was the catalyst for the afternoon rally and the major indices all closed just below major resistance levels. While this sounds like good news for ORCL and the sector my concern is with the details. What are the odds that ORCL "made the numbers" due to massive cost cutting and expense controls? Recent successes due to resource management and not rising revenues have not been the seed of any prolonged market recovery. I said I was looking for good news and the markets may continue to rally/cover tomorrow but with Intel's analyst meeting after the close on Thursday I'm not expecting a lot of investors willing to place bets in tech land. That's right. Tomorrow night, the biggest semiconductor company in the market is holding its mid-quarter analyst meeting. In its Q1 results Intel forecasted Q2 revenues to come in between $6.4 and $7 billion. The last couple of weeks have shown a growing expectation that Intel will guide to the lower end of that range. Analysts believe that Intel may be cautious since this is typically a back-end loaded quarter. With the SOX.X attempting to bounce off the 450 level of support any positive news could light a big fire under the group and lead the Nasdaq higher as well. Any significant negative news could have the sector breaking to new relative lows and likewise become a lead weight around the Nasdaq's neck. Traders can also expect news to come out from the management team at EMC. The storage device leader will begin its own analyst meeting at 10:00 a.m. ET tomorrow but the CFO is expected to focus on the company's new products versus any guidance to the company's quarter. The Dow Jones Industrials has bounced strongly off the 9600 level but closed just shy of resistance at 9800. If investors can keep the upward momentum going I'd expect the battle to take place between the 200-dma (near 9880) and the 10K mark. Chart of the Dow Jones The Nasdaq Composite has also rallied off the 1550 support level but closed just under the 1600 level of resistance. If the ORCL news can keep the bears on the defensive then a rally back to the 1650 level might not be out of the question. However, before you day trading bulls start looking for plays, keep this in mind. The Intel report after the bell is likely to keep the tech-heavy Nasdaq in limbo as investors wait to hear the news. Chart of the Nasdaq Dancing in unison, the S&P 500 also closed just under resistance of 1050 but looks like it could bounce another day or two before running out of steam. Unfortunately, I would not be surprised to see it trade sideways as the markets wait for direction from either Intel or the Payroll report on Friday. My bigger concern is the bearish outlook from the weekly charts for all three of the major indices. Chart of the SPX Taking into account the bearish trends we see in so many sectors, the lack of strength in the Transports and Airlines even through oil has fallen significantly from its recent highs (down 12%), the political unrest overseas, the falling dollar, lack of any pick up in I.T. spending and negative guidance for the remainder of the year, and the onset of summer - a traditional time of year that bulls go into hibernation... I don't see a lot of reasons to buy stocks at this time. Weekly chart of the Dow Jones Weekly chart of the Nasdaq Weekly chart of the SPX I hate to sound bearish because history has shown too many times that when everything looks the worst it can usually mean the bottom is just around the corner. What should concern you and I is how do you define "the worst". James ******************** INDEX TRADER SUMMARY ******************** BEARS BEWILDERED by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - There is so much negative sentiment that the bears are bewildered whenever a rally lasts more than a day, especially if the rally has so-so Advances over Declines (NYSE) or has a negative A/D such as the Nasdaq today - COMP was still up over 1%. Of course the reason for this is that mostly the big cap tech stocks were advancing. It's not a numbers game like the Dow (an Arithmetic average), but it’s the weight of the stocks in a capitalization weighted index. If the market is bottoming, and I think it is - it takes a long time and the rallies don't look much unless it’s a rebound from a panic sell off - like Sept. As Barton Briggs, the fine Morgan Stanley chief market strategist said the other day, it's often the case that you have an ultimate low on a panic, then a secondary low on a "whimper". This fits with the weekly Head & Shoulders bottom pattern on SPX, with the 3rd. low (right shoulder) usually having less volume than the other 2 lows (left shoulder and head). And, we always seem to be doomed to trade the last big trend. We get habituated to the trend and don't "believe" that it is changing - well, the clues to trend change are not easy to see. They never are. Witness all the folks that were still chasing the Nasdaq rally as it went over 5,000 - so many thought 6000 was next. Shades of the Coyote running off the cliff as Road Runner deftly turns the corner, while the poor Coyote is still running in air. GENERAL MARKET INDICATORS - Something that will tend to tell you that the market is oversold on advance-decline basis is to look at the daily advances minus declines figure on a 10-day moving average basis. Such a plot for the NYSE is below - only the 10-day average is shown as also plotting the daily figure makes the chart too cluttered to really see the average which is the important think. On this basis the market is as oversold as in February, the last time we had a substantial rally. The turn up in the NYSE A/D line, from oversold, is key also: Of course, my A/D "indicator" is not as oversold as September, but that was the panic event and not one I expect to be repeated absent some catastrophe - this could happen again of course, but I am not taking that bet right now. The other thing to note is that you don't get "perfect" signals every time - a "false "overbought' was reached in Oct. This is why NOT to rely on any one indicator and to look for other "confirmations"; e.g., chart patterns, a "sentiment" extreme, etc. Strong bullish sentiment being what we did NOT get in October by the way - can you recall being real bullish a month after 9/11? My Nasdaq A/D indicator is below: The same pattern presents itself in the Nasdaq in terms of the oversold extreme and recent rebound in the advance-decline line in Nasdaq. S&P 500 ($SPX.X) Daily/Hourly charts: You will notice on the daily chart the tendency for the bottoms that have occurred near the lower envelope line to be more than a 1-day affair. On average, we see tradable bottoms developing over 4-7 trading days. Are we vulnerable to further downswings - yes, but I don't anticipate the lows to be taken out or penetrated, at least not by much. Further dips are an opportunity in my estimation to accumulate index calls - out beyond the June expiration also. I am not suggesting the play of the day here, especially in this daily commentary. 1030 is support. This is an area to accumulate, but not throw caution to the wind of course - I suggest a stop/exit point at 1014 to allow 5% "slippage" or for a reversal. A rally failure in the 1060 resistance area may well offer short- term downside potential. Quite tradable - but, I am staying somewhat more focused on a chance to get on board a bigger trend, with a rally at some point in the not distant future that could carry back up above 1100 again. With the premiums higher now, very short-term trading gets tougher as you have to have better and better intraday timing or you find that you were right on the market and somehow didn't profit from it, in the instances when you didn't make up a 5-6% premium on long index options, which expands on an upswing also. S&P 100 ($OEX.X) Daily/Hourly charts: Buy OEX in the 510 area on a further drop, with a stop/exit at 505. I anticipate a drop back to the area of the lows based on the "wedge" like hourly chart pattern - but in case this DOESN'T happen am already long part of a position. 527-530 is the breakout point current. The resistance areas are those prior highs, stair stepping up the hourly chart. Dow 1/100 Index ($DJX.X) Daily/Hourly charts: 96 appears to offer solid support, at the February lows. Buy dips back to the 96-96.30 area with stop protection at 95. 99 is key near resistance and also the "breakout" point should DJX penetrate it. As with the S&P there has been a bullish upside crossover in the 14-day stochastic. This can flip back and forth a couple of times such as the last time the market put in a decent bottom. Nasdaq Composite ($COMPX) Daily/Hourly charts: The COMP has made an apparent "double bottom" low, after filling in the upside chart gap from early-May. I don't hear this talked about much at all. All focus is the Dow. Good. Play tech too, especially since we are also seeing possible double bottom lows in the Software and Semiconductor sectors per my comments last night in the Sector Trader wrap. The hourly chart shows the rising bearish wedge pattern. This formation is not a reliable (in its outcome) as the bullish falling wedge, but is a pattern that suggests that a further drop could lie ahead - I like to see lows re-tested if I think it might be an important bottom. Resistance can be anticipated in the 1610-1614 area, at the top of the hourly downtrend channel. Ability to get above 1607 and STAY ABOVE this level on subsequent "reactions" (price dips) would be bullish for the COMP. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: I suggested long QQQ positions at 29.25 and day to day readers had an opportunity to buy this area again today or even a bit lower, at 29.0. I wouldn't want you to think that the only trading possibilities are intraday. There are numerous opportunities in a year for those who only catch up with the market at the end of the day. You just have to be patient and pick your occasional spots. Options trading is not like stocks, but its not all about day to day and very short term trading either. 30 will likely offer resistance and I would not be surprised to see another reversal from this area - and, another move down to the 29 area again. I am maintaining a 28.50 stop. Short-term traders will probably have a shorting opportunity ahead. However, I would use a 30.5 stop on shorts, if 30 is reached and you get short. I prefer to stay long. Especially given the double bottom low we've seen so far and the bullish upside crossover generated in the 14-day stochastic. It’s really all in INTC, MSFT, ORCL, CISCO and QCOM, which are the key Nasdaq big cap stocks - all of which are still trading under resistance at the top ends of their downtrend price channels - except for QCOM, which has had a minor break out above the top end of its downtrend channel, although the stock is still trading basically sideways still. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************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 ************************************************************** *********** OPTIONS 101 *********** Which Option Should I Buy? -- Part Deux By Mark Phillips mphillips@OptionInvestor.com Sometimes, I think the people that read my column are psychic. Last week we went through a graphic explanation of how to decide on which option to buy, whether ITM, ATM or OTM for a given option trade. As experienced traders know, that is only half of the question, as we also need to determine which expiration month to use. So after writing last week's piece, my intention was to cover the issue of expiration month this week. I guess I should have indicated that's where we were headed next, as I got several emails asking to cover the issue of which expiration month to utilize. I guess I better not disappoint. Last week, we used IBM as an example using June put contracts showing that the perceived advantage of utilizing OTM options (due to their lower cost) may often be an illusion. In the example that we highlighted, even with a more than $10 drop in the price of the underlying stock, investors would have gotten more bang for their buck (in terms of %Return) using an ATM option than the "cheaper" OTM option. The theoretical reason for this is that the higher Delta of the ATM option allows the trade to start working in our favor earlier and at a greater rate. In addition to picking the direction and severity of an expected move in the underlying stock, we also have to have an idea of the time period over which we expect that move to take place. If we are targeting a move over the next 2-5 days, then typically the front-month options will serve us well. But what happens if the move takes a bit longer, say 2-3 weeks? The depreciation due to time decay that occurs while we are waiting for the stock to reach our anticipated price target may exceed the appreciation resulting from the price movement in the stock. The net result would be that we are right in terms of the expected move in the stock but wrong on our timing, yielding a losing trade where a winner should have been. That's always a frustrating experience and I'm sure I'm not the only one that has gotten caught in that trap. I'm a big believer in teaching by example, so let's dive right into a recent winning trade of mine and see if I made the best choice in terms of timeframe. Jeff Bailey got my attention with his recent bearish comments on shares of Williams Companies (NYSE:WMB), as the energy trader was looking very top-heavy under the continuing scrutiny by investors and regulators. Here's what the chart looked like when it first caught my attention. Heavy selling had dropped the stock right down to the $15 level, which was just above major support at the $14 level. But with oscillators buried in oversold, I wasn't ready to take the trade. Looking at the PnF chart, I could see the double-bottom sell signal that occurred as the stock fell to the $15 level was forecasting an eventual decline to the $11.50 level. That gave me my target price and wanting to take advantage of both Delta and Gamma, I decided to select the $12.50 strike price, which would be ATM (maximum time value) if my price target was met. So what do we need next? How about an entry point? Sure enough, the market handed me one and I didn't have to wait very long. A nice little rebound to the $18 level was all the bulls could manage, but that was enough to lift the daily Stochastics out of oversold territory. When that bearish crossover occurred on May 29th, it was time to enter the play. Aaahh, but that brings us the central theme of our discussion here today. What month options should I buy? We were already well into the June expiration cycle, so the June contracts were too short-term for my liking. When would the stock collapse under its recent lows? Would it meander lower or crater? Inquiring minds (Me!) wanted to know. Just in case it ended up being a long, slow grind lower, I opted to utilize August contracts. They cost me more up front, but I knew I would be fairly well insulated against the effects of time decay. As you know from following the news recently, shares of WMB have absolutely collapsed in the past week, greatly exceeding my wildest expectations for the play. With one negative news event after another driving WMB to new multi-year lows, investors have been screaming "Get me Out!", which can be seen in the extraordinarily heavy selling volume on Monday and Wednesday of this week. As I mentioned above, I was targeting the $11.50 level, and when WMB fell to the $11 level and stabilized yesterday, that was enough for me. I closed out my entire position, but after today's drop I'm wishing I had held on a bit longer. Seller's remorse hits again. So let's look at the relative performance of the $12.50 Puts for June, July and August and see how they fared. I'll use the closing price of 5/29 as the entry point and then look at the price of each of the options at the close on Monday (6/3) and today (6/5). Expiration Price Price Price Month Symbol (5/29) (6/3) (6/5) June WMB-RV $0.25 $2.10 $3.00 July WMB-SV $0.75 $2.40 $3.30 August WMB-TV $0.95 $2.70 $4.00 Hmmmm. Looks like I could have done MUCH better with a more aggressive selection of June or July contracts, now doesn't it? Rather than the paltry 184% gain offered by the August contracts between 5/29 and 6/03, the June's would have been good for 740%!! But what would I have done with those June contracts if the stock had taken a couple more weeks to get moving? They would have likely expired worthless, keeping me from enjoying the profits of the play. July looks like the best selection from the data I've shown here, and I would have to say that I was a bit too conservative with the selection of August strikes. But given the chance, I think I would make the same selection, as buying plenty of time gave me the reassurance that I could be patient with the position while waiting for the forces of supply and demand to work in my favor. As you can see, there are no hard and fast rules for which expiration month to select, as it is predicated on factors such as our expectations (which are basically an estimate), and the current market environment. As option traders, we strive to balance risk against possible reward, entering a given trade for as little as possible, while still giving ourselves enough time to be right. As a side note, one of my early mentors in the option trading world advocated always buying 60-90 days of time when purchasing options due to the fact that it will keep you relatively insulated against the ravages of time decay while waiting for the trade to work in your favor. From my selection of expiration month, you can see that early advice is still exerting its influence in my trading decisions. And that may be the critical point to stress on the topic. Buy as much time as you need to feel comfortable in the trade. You may not make the killing that comes with buying front month options, but in my experience, sometimes a position trade with back-month options is the right choice to keep the account growing while we get our adrenaline rush day-trading front-month options on more volatile issues. Best Trading Wishes! Mark ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 6/5 by Leigh Stevens SECTOR HIGHLIGHT - The important and interesting events relating to market sectors in the past week, is that ones that just seemed to never stop going up - the ones that have been always appearing on the "green" list - like Forest and Paper Products ($FPP.X) reflecting strength in homebuilding, the Financial stocks, as seen in the NYSE Financial Index ($NF.X), Defense ($DFI.X), Gold and Silver ($XAU.X), Oil ($OIX.X) and Oil Services ($OSX.X), the size darlings - small and mid cap - as reflected in the Amex Composite Index ($XAX.X) and the Russell 2000 ($RUT.X), have been falling - the corrections in some cases taking the form of sharp breaks. The major exception to the rotation OUT of the sectors that have been in strong up trends is health care ($HMO.X) and the Health Providers to some extent ($RXH.X) which shot up today although these groups are down from their highs and could yet be building tops - time will tell - guess we're all going to get sick and die HMO has to penetrate 644.7 to clear its old high - it remains in a strong trend for now (today's close: 622.0). On the other hand, sectors that have been the bears whipping boys, especially the brokers ($XBD.X), and the key tech sectors of Software ($GSO.X) and Semis ($SOX.X) have recently made double bottoms - so far - time will tell. What is this telling us - a lot I think. There is a sea change going on in the market as all of a sudden there is a lot of money coming out of former winners and into -- what? Well, think of it as buying power for some rotation of money into areas of the market that have been out of favor. Of course, the big cap Dow stocks continue to reflect a theme of investing in "safe" stable "name" companies with stable earnings. HIGHER ON THE DAY ON Wednesday - DOWN ON THE DAY on Wednesday - 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) CHART AS OF 6/5 - Comments tomorrow 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 index may be forming a double bottom low in the 385-386 area, so the selected stocks in the group like Amgen (AMGN) may be setting up as a buy in terms of the stock or its call options. Suggested buy of Biotech Holdr's (BBH) at 101.50 on 5/24; If suggested stop point at 92.5 was adhered to, exit has been made. However, the HOLDR's are getting interesting again, if we are seeing a double bottom low setting up. Will be looking to re- enter this trade possibly. I don’t like the recent downside gap in terms of showing technical weakness, but it may be what is called an "exhaustion" gap that signals some "final" capitulation by the bulls and will set the stage for a rally ahead. Time will tell. Will give this one a little more time to see how the action is for the next couple or few days. The volume was not huge on the last break, which supports the double bottom possibility. LAST UPDATE: 6/5 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 CHART AS OF 6/5: Bottom may be setting up here. 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 CHART AS OF 6/5: Double top and bearish RSI divergence has manifested in a continued weakness and correction, as suggested previously. Think we have lower to go still, perhaps back to the 600 area. 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 ($NF.X) STOCKS: This index is composed of all the financial stocks on the NYSE; e.g., banks, insurance, etc. CHART AS OF 6/5: The financials have continued lower after the rally failure of mid-May. The question is whether NF's second down "leg" has run its course after the double top of March- April. This sector has completed a "measured move" objective and the 200-day moving average has "caught" the recent lows. Stay tuned! Forest & Paper Products Sector Index ($FPP.X) CHART AS OF 6/5: The further apart (in time) for a double top the more significant it tends to be in terms of a top. I anticipate further weakness. The key level to watch on the downside now is the prior (down) swing low in the 345 area - this was also the level of price peak in Dec. and the again in late-January. If 345 is penetrated, the next level of potential support become the 200-day moving average in the 338 area. Maybe the new home boom is moderating or they just did so much building in the warm weather months, that the demand has moderated. Gold & Silver Sector Index ($XAU.X) STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL CHART AS OF 6/5: In case you thought that they had repealed the laws of gravity for the metals and that they would forever be "precious" - stay tuned! If this break continues and the downside chart "gap" is a bearish sign, then the key levels to watch are the up trendline around 80; then, if exceeded, at the 50-day moving average in the 76 area. A close under the 50-day average says that the gold run may be done for a while. I have been surprised it went this long, but there was a LOT of political uncertainties - there still is but the "hot" spots may be cooling down some. ** MORE TOMORROW ** THURSDAY ** Health Providers Index; Morgan Stanley ($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 ($SOX.X) STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX ** SEE SECTOR HIGHLIGHT OF THE DAY ** Software Index; Goldman Sachs ($GSO.X) STOCKS: ERTS; INFA; INKT; INTU; ISSX; ITWO; IWOV; JDEC; MANU; MENT; MSFT; MUSE; NATI; NOVL; NTIQ; ORCL; PMTC; PRGN; PRSF; PSFT; RATL; RETK; REY; RHAT; RNWK; SEBL; SNPS; SY; SYMC; TIBX; VIGN; VRTS; WEBM; WIND; YHOO ** SEE SECTOR HIGHLIGHT OF THE DAY ** 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 ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Wednesday 06-05-2002 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ************************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 ************************************************************** ***************** STOP-LOSS UPDATES ***************** BRCD - call Adjust from $17.75 up to $18 INTU - call Adjust from $41 up to $41.50 BLL - put Adjust from $45 down to $44 WMB - put Adjust from $12 down to $11.35 DUK - put Adjust from $33 down to $32 COHU - put Adjust from $24 down to $22.50 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* DUK - Duke Energy $31.31 -0.39 (-0.70 this 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. Most Recent Update Energy traders were under attack again yesterday when fellow OI put play WMB was defending against allegations that it had played a role in the manipulation of energy prices in California. And of course the tragic news out of El Paso cast a cloud over the sector for most of the day. The sentiment caused another sharp drop in DUK which saw the stock take out its short term support at the $31 level. The stock and broader sector staged a minor relief rally today, which came on much lighter volume and was unable to take out even yesterday's relatively lower low at the $32 level. Today's short term relief rally could have possibly set up another entry point into this stock as the sentiment in the sector remains incredibly bearish. We'll look for short term resistance to start forming at the $32 level, and look to possible rollovers from that level as entry points through the rest of the week. Of course we'll take breakdowns below short term support as well, if the selling in the sector resumes on a news driven event. Comments DUK traced its second inside day today. The time for decision is approaching. Traders with open positions should lower stops to Monday's high at $32. While momentum traders can look for a breakdown below the low yesterday at $30.80, confirmed by a decline below Monday's low at the $30.61 level. Look for volume to increase on the way back down as a sign that the big sellers have returned. Confirm sector sentiment in the energy sector. BUY PUT JUN-32*DUK-RZ OI=7771 at $1.85 SL=1.00 BUY PUT JUL-30 DUK-SF OI=3859 at $1.55 SL=0.75 Average Daily Volume = 4.16 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** The Calm After The Storm! By Ray Cummins Blue-chip shares rebounded today after a bullish economic report bolstered investor optimism about the long-term outlook for the stock market. The Institute for Supply Management said its index of business activity in non-manufacturing sectors jumped to 60.1 in May from 55.3 a month earlier, smashing the estimate of 56 predicted by economists polled by Thomson Global Markets. The service sector accounts for about two-thirds of economic activity in the U.S. and it was the index's biggest increase since August 2000. The Dow Jones Industrials ascended 108 points to 9,796 on renewed strength in its retail and cyclical issues. Walmart (NYSE:WMT), Honeywell (NYSE:HON), Microsoft (NASDAQ:MSFT), American Express (NYSE:AXP) and United Technologies (NYSE:UTX) were the leading performers while Hewlett-Packard (NYSE:HPQ), J.P. Morgan Chase (NYSE:JPM), Citigroup (NYSE:C), AT&T (NYSE:T) and General Motors (NYSE:GM) limited the average's gains. The NASDAQ Composite also ended higher, but losses in the telecom and networking sectors continued to weigh on technology shares. The hi-tech index ended 17 points higher at 1,595. The Standard & Poors 500-stock index edged up 9 points to 1,049 on select buying in retail, brokerage, biotechnology, consumer and cyclical shares. On the downside, oil issues took a hit following bearish supply numbers released by the American Petroleum Institute and gold stocks plunged after weeks of extensive gains. On the Big Board, where 1.29 billion shares traded, advancers squeaked past decliners 18 to 14. Losers paced winners 17 to 16 on the NASDAQ, where 1.63 billion shares changed hands. Government bonds retreated as the strong economic data kept buyers cautious. The 10-year note fell 5/32 to yield 5.05% while the 30-year bond slid 1/2 to yield 5.66%. *************** Summary of Current Positions *************** (As of 06-03-02) Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield NVLS JUN 40 39.05 40.01 $0.95 5.90% ** As noted last Wednesday, Varian Semiconductor (NASDAQ:VSEA) moved below a recent support area and was closed to limit losses. Monday's bearish activity also prompted an early exit from our bullish position in Novellus (NASDAQ:NVLS). Naked Calls Stock Strike Strike Break Current Gain Potential Symbol Month Price Even Price (Loss) Mo. Yield CYMI JUN 55 55.60 40.20 $0.60 5.98% PHTN JUN 50 50.40 36.88 $0.40 5.20% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status RYL 56.50 51.60 JUN 45 48 0.27 47.23 $0.27 Closed SII 73.80 69.90 JUN 55 60 0.65 59.35 $0.65 Closed ADRX 46.06 41.51 JUN 30 35 0.65 34.35 $0.65 Closed BBOX 54.94 49.01 JUN 45 50 0.55 49.45 ($0.44) Closed FDC 82.18 78.20 JUN 70 75 0.50 74.50 $0.50 Closed HON 39.25 37.55 JUN 33 35 0.30 34.70 $0.30 Closed UOPX 34.00 29.20 JUN 26 30 0.35 29.65 ($0.45) Closed AVE 71.75 68.75 JUN 65 70 0.90 69.10 ($0.35) Closed SRCL 35.04 33.79 JUN 30 33 0.30 32.20 $0.30 Open UNH 88.39 90.37 JUN 75 80 0.45 79.55 $0.45 Open INTU 42.92 42.60 JUN 35 40 0.55 39.45 $0.55 Open Monday's precipitous declines negatively affected almost all of our bullish spreads and any issues that fell below recent support areas were closed in order to limit losses. Positions previously closed: DRS Technologies (NYSE:DRS). Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status BHI 35.96 35.29 JUN 43 40 0.35 40.35 $0.35 Open BGEN 42.44 48.80 JUL 60 55 0.25 55.25 $0.25 Open ROOM 55.30 49.05 JUN 70 65 0.55 65.55 $0.55 Open ADBE 35.85 35.30 JUN 45 40 0.55 45.55 $0.55 Open Synthetic Positions: Stock Pick Last Position Credit C/B M/V Status RTN 42.40 43.57 JUN47C/37P 0.00 37.50 0.75 Closed ATVI 33.95 32.28 JUN40C/30P 0.30 29.70 0.30 Closed CTAS 55.02 50.84 AUG60C/50P (0.10) 50.10 0.60 Closed JPM 36.91 34.66 JUN40C/32P 0.30 32.20 0.80 Closed HSIC 49.75 49.10 JUL55C/45P 0.10 44.90 0.10 Closed LLL 63.95 59.85 JUN70C/57P 0.20 57.30 0.20 Closed ABT 46.90 45.42 JUN42P/50C 0.20 50.20 0.85 Open All of the bullish synthetic positions were closed during the severe sell-off on Monday. The sole bearish play in Abbott Labs (NYSE:ABT) achieved a favorable "early-exit" credit and traders should consider locking-in profits in the position. Credit Strangles: Stock Pick Last Position Credit G/L Yield Status ERTS 63.21 62.93 JUN70C/55P 1.25 1.25 8.9% Open Debit Straddles: Stock Pick Last Position Debit M/V G/L Status DGX 85.72 87.40 AUG85C/85P 10.60 10.10 (0.50) Open FLIR 44.75 44.63 JUL45C/45P 7.25 7.00 (0.25) Open New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (I monitor the positions marked with ***). *************** BULLISH PLAYS - Naked Puts One of our readers requested some conservative "premium-selling" plays on leading technology stocks to profit from the potential recovery in that group. Investors with a bullish outlook on the underlying issues, who plan to use the recent share-value slump to initiate new positions, may find the risk-reward outlook in these plays attractive. All of these companies have favorable fundamentals but the stocks must also be evaluated for portfolio suitability and each position should be reviewed with regard to your personal investing criteria. *************** CCMP - Cabot Microelectronics $47.70 *** Bottom-Fishing! *** Cabot Microelectronics (NASDAQ:CCMP) is a global supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization (CMP). CMP is a polishing process used by IC device manufacturers to planarize, or flatten, many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. Planarization is a polishing process that levels and smooths, and removes the excess material from the surfaces of these layers. CMP slurries are liquid formulations that facilitate and enhance this polishing process and generally contain engineered abrasives and proprietary chemicals. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. CCMP - Cabot Microelectronics $47.70 PLAY (sell naked put): Action Month & Option Open Opt Bid Cost Target Req'd Strike Symbol Int. Premium Basis Mo. Yield SELL PUT JUN 40 UKR RH 850 0.45 40.45 7.2% SELL PUT JUL 35 UKR SG 134 0.70 35.70 4.7% *** SELL PUT JUL 40 UKR SH 241 1.55 41.55 8.3% *************** EMLX - Emulex $30.78 *** 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. EMLX - Emulex $30.78 PLAY (sell naked put): Action Month & Option Open Opt Bid Cost Target Req'd Strike Symbol Int. Premium Basis Mo. Yield SELL PUT JUN 27.5 UMQ RY 2,304 0.70 28.20 13.7% SELL PUT JUL 20 UML SD 1,000 0.40 20.40 4.2% "TS" SELL PUT JUL 22.5 UML SX 976 0.75 23.25 7.5% *** SELL PUT JUL 25 UMQ SE 7,942 1.25 26.25 11.1% *************** NVDA - Nvidia Corporation $32.60 *** Technical Base Forming? *** Nvidia Corporation (NASDAQ:NVDA) designs, develops and markets graphics processors and related software for personal computers and digital entertainment platforms. NVIDIA provides a unique "top-to-bottom" family of performance 3D graphics processors and graphics processing units that, in the company's opinion, has set the standard for performance, quality and features for a broad range of desktop PCs, from professional workstations to low-cost PCs, and mobile PCs, from performance laptops to thin-and-light notebooks. NVDA - Nvidia Corporation $32.60 PLAY (sell naked put): Action Month & Option Open Opt Bid Cost Target Req'd Strike Symbol Int. Premium Basis Mo. Yield SELL PUT JUN 27.5 UVA RY 1,485 0.45 27.95 10.2% SELL PUT JUN 30 RVU RF 8,084 0.95 30.95 15.9% SELL PUT JUL 22.5 UVA SX 139 0.45 22.95 4.5% "TS" SELL PUT JUL 25 UVA SE 2,032 0.85 25.85 8.0% *** *************** QLGC - QLogic $46.03 *** Trading Range! *** QLogic Corporation (NASDAQ:QLGC) is a designer and supplier of Storage Area Networking (SAN) infrastructure building blocks. Its SAN infrastructure building blocks, comprised of various semiconductor chips, host board adapters and switches, are integrated into storage networking solutions of the world's leading system and storage manufacturers. Companies such as Sun Microsystems, IBM, Dell, Compaq, Fujitsu Microelectronics, and Hitachi all use some of its components in the storage and systems solutions they sell to the world's largest information technology environments. In addition to its original equipment manufacturer relationships with these and other companies, the company now delivers selected Fibre Channel building blocks through leading distributors, systems integrators and resellers, thereby expanding its reach and visibility to the information technology community. QLGC - QLogic $46.03 PLAY (sell naked put): Action Month & Option Open Opt Bid Cost Target Req'd Strike Symbol Int. Premium Basis Mo. Yield SELL PUT JUN 40 QLC RH 6,254 0.65 40.65 9.5% SELL PUT JUL 40 QLC SH 4,095 2.20 42.20 10.4% SELL PUT JUL 30 QLC SF 3,343 0.50 30.50 3.6% "TS" SELL PUT JUL 35 QLC SG 1,281 1.10 36.10 7.4% *** *************** BULLISH PLAYS - Spreads & Combinations *************** ATH - Anthem $72.00 *** Hot Sector! *** Anthem (NYSE:ATH) is a health benefits company serving over seven million members, or customers, primarily in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado and Nevada. The company owns the exclusive right to market its products and services using the Blue Cross Blue Shield (BCBS) names and marks in these states under license agreements with the Blue Cross Blue Shield Association, an association of independent BCBS plans. Anthem's product portfolio includes a diversified mix of managed care products, including health maintenance organizations (HMOs), preferred provider organizations (PPOs) and point-of-service (POS) plans, as well as traditional indemnity products. The company's unique managed care plans and products are designed to encourage providers and members to select cost-effective healthcare by utilizing the full range of its medical management services, quality initiatives and financial incentives. Stocks in the Health Care Plans sector are "hot" and the bullish momentum helped shares of ATH finish today's session at a new, all-time high. With few groups performing as well as the health care segment, investors are likely to continue pouring money into that industry and traders who want to profit from the activity should consider this limited-risk position. ATH - Anthem $72.00 PLAY (conservative - bullish/credit spread): BUY PUT JUL-60 ATH-SL OI=401 A=$0.70 SELL PUT JUL-65 ATH-SM OI=71 B=$1.35 INITIAL NET CREDIT TARGET=$0.65-$0.75 PROFIT(max)=15% *************** ERTS - Electronic Arts $64.10 *** Low Risk - Low Reward! *** Electronic Arts (NYSE:ERTS) operates in two principal business segments globally: EA's Core business segment comprises the creation, marketing and distribution of entertainment software, while the EA.com business segment is composed of the creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and Website advertising. One of our readers asked that we occasionally offer some "very conservative" credit-spread candidates for traders who like to target a 5-7% monthly return in this strategy. Electronic Arts is a good nominee for this category of low-risk spread trading, based on the underlying issue's "neutral-to-bullish" technical background and its relatively low volatility. The short-term indications suggest the current trend will continue and traders who agree with that outlook can profit from upside activity in the issue with this position. ERTS - Electronic Arts $64.10 PLAY (conservative - bullish/credit spread): BUY PUT JUL-50 EZQ-SJ OI=31 A=$0.40 SELL PUT JUL-55 EZQ-SK OI=172 B=$0.85 INITIAL NET CREDIT TARGET=$0.50-$0.50 PROFIT(max)=11% *************** FNF - Fidelity National $30.52 *** Approaching New Highs! *** Fidelity National Financial (NYSE:FNF) is a title insurance and diversified real estate related services company. The company's title insurance underwriters are Fidelity National Title, Chicago Title, Ticor Title, Security Union Title and Alamo Title. The company provides title insurance in 49 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands, and in Canada and Mexico. In addition, the company provides an array of escrow and other title related services, as well as real estate related services, including collection and trust activities, trustee's sales guarantees, recordings, reconveyances, property appraisal services, credit reporting, exchange intermediary services in connection with real estate transactions, real estate tax services, home warranty insurance, foreclosure posting and publishing services, loan portfolio services, flood certification, field services, property records and multiple listing services. The housing market is performing well and companies who provide real-estate related services, such as Fidelity National, are enjoying the benefits of the activity. With interest rates at historic lows, the trend is expected to continue and traders who agree with that outlook can profit from future upside movement in one of the leading companies in the Surety and Title Insurance group with this position. FNF - Fidelity National $30.52 PLAY (conservative - bullish/credit spread): BUY PUT JUL-25.00 FNF-SE OI=0 A=$0.25 SELL PUT JUL-27.50 FNY-SY OI=2091 B=$0.55 INITIAL NET CREDIT TARGET=$0.30-$0.40 PROFIT(max)=14% *************** NUE - Nucor Corporation $68.85 *** Steel Industry Giant! *** Nucor Corporation (NYSE:NUE) manufactures and sells steel products. Principal steel products are hot-rolled steel, cold-rolled steel, cold-finished steel, steel joists and joist girders, steel deck and steel fasteners. Hot- and cold-rolled sheet steel are produced to customer orders and other hot-rolled steel, cold-rolled steel, cold-finished steel and fasteners are manufactured in a variety of sizes with inventories maintained. In 2001, approximately 90% of the company's hot- and cold-rolled steel production was sold to non-affiliated customers; the remainder was used in the manufacture of other steel products. Nucor's hot- and cold-rolled steel and cold-finished steel are sold primarily to steel service centers, fabricators and manufacturers throughout the United States; steel fasteners are sold to distributors and manufacturers, and steel joists, joist girders and steel deck are sold to contractors and fabricators throughout the United States. Nucor, the second-largest steel maker in the United States, has signed an agreement with Birmingham Steel to purchase most of the Alabama company's assets for $615 million in cash and analysts say the addition of their plants will strengthen Nucor's position as the leader of quality steel production. Nucor officials believe the acquisition of Birmingham Steel will boost its earnings per share within 12 months of closing the deal and investors appear to agree with the outlook as the company's share value has rallied to a multi-year high on heavy volume. Traders who favor the bullish technical indications can profit from future upside activity in the issue with this position. NUE - Nucor Corporation $68.85 PLAY (moderately aggressive - bullish/debit spread): BUY CALL JUL-60 NUE-GL OI=204 A=$9.40 SELL CALL JUL-65 NUE-GM OI=718 B=$5.10 INITIAL NET DEBIT TARGET=$4.15-$4.20 PROFIT(max)=19% B/E=$64.20 *************** BULLISH PLAYS - Synthetic Positions *************** DLTR - Dollar Tree $39.19 *** Retail Rally! *** Dollar Tree (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. Dollar Tree now operates almost 2000 in 37 states and the company's store growth has resulted from opening new stores and completing selective mergers and acquisitions from 1998 through 2000. Dollar Tree stores operate under the names of Dollar Tree, Dollar Express, Dollar Bills, Only One Dollar and Only $One. The company also operates 12 multi-price point stores under the name Spain's Cards and Gifts. The discount/variety segment of the retail sector has been performing well in recent weeks and today the group was one of the market leaders. Dollar Tree is one of the top companies in this unique industry and its share value recently received a boost with its addition to the NASDAQ-100 Index. This index is one of the most widely followed benchmarks in the world and changes to the index are generally followed by heavy trading in shares of the companies affected as fund holdings are adjusted to match the popular market gauge. Traders who think the rally will continue in the coming months can profit from that outcome with this speculative position. DLTR - Dollar Tree $39.19 PLAY (speculative - bullish/synthetic position): BUY CALL AUG-45 DQO-HI OI=201 A=$0.95 SELL PUT AUG-35 DQO-TG OI=164 B=$1.05 INITIAL NET CREDIT TARGET=$0.20-$0.25 TARGET PROFIT=$0.75-$1.25 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,250 per contract. *************** UNH - UnitedHealth Group $91.77 *** An Old Favorite! *** UnitedHealth Group (NYSE:UNH) forms and operates markets for the exchange of health and well being services. Through its family of businesses, the company helps people achieve optimal health and well being through all stages of life. The company's revenues are derived from premium revenues on insured (risk-based) products, fees from management, administrative and consulting services and investment and other income. It conducts its business primarily through operating divisions in the following business segments: Uniprise; Healthcare Services, which includes UnitedHealthcare and Ovations; Specialized Care Services, and Ingenix. James J. Cramer, a popular market analyst for the Street.com, recently talked about the "mini-rotation into health care" and indeed, the bullish activity in the group suggests that investors are plowing money back into the segment. UnitedHealth Group has long been one of our favorites in the sector and today's rally to a new, all-time high indicates that Wall Street also has an optimistic outlook for the company. Traders can attempt to profit from future upside movement in shares of UNH with this speculative position. UNH - UnitedHealth Group $91.77 PLAY (conservative - bullish/synthetic position): BUY CALL JUL-100 UNH-GT OI=70 A=$0.70 SELL PUT JUL-80 UNH-SP OI=86 B=$0.50 INITIAL NET DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$1.00-$1.50 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $2,500 per contract. *************** BEARISH PLAYS - Naked Calls & Combinations Based on analysis of historical option pricing and the underlying stock's technical background, these issues meet our fundamental criteria for profitable "bear-call" credit spreads. Each issue has robust option premiums, a well defined resistance area and a high probability of remaining below the sold strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. *************** CYMI - Cymer $40.59 *** Technicals Only! *** Cymer (NASDAQ:CYMI is a supplier of excimer laser illumination sources, the essential light source for deep ultraviolet (DUV) photolithography systems used in the building of semiconductors. DUV lithography is a key enabling technology, which has allowed the semiconductor industry to meet the exacting specifications and manufacturing requirements for volume production of today's most advanced semiconductor chips. Cymer's lasers are used in step-and-repeat and step-and-scan photolithography systems for the manufacture of semiconductors with critical feature sizes below 0.35 microns. Cymer believes its excimer lasers constitute a substantial majority of all excimer lasers incorporated in DUV photolithography tools. Cymer's various products consist of photolithography light sources, replacement parts and service. CYMI - Cymer $40.59 PLAY (conservative - bearish/credit spread): BUY CALL JUL-55 CQG-GK OI=108 A=$0.45 SELL CALL JUL-50 CQG-GJ OI=175 B=$1.00 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% *************** C - Citigroup $42.34 *** Technicals Only! *** Citigroup (NYSE:C) is a diversified global financial services holding company whose businesses provide a range of financial services to consumer and corporate customers. The company has over 192 million customer accounts in over 100 countries and territories. The company's activities are conducted through Global Consumer, which delivers a wide array of banking, lending, insurance and investment services; Global Corporate, which provides corporations, governments, institutions and investors with a broad range of financial products and services; Global Investment Management, which offers a broad range of life insurance, annuities and asset management products and services; Private Banking, which consists of customary banking activities, and Investment Activities, which are the company's venture capital activities. C - Citigroup $42.34 PLAY (conservative - bearish/credit spread): BUY CALL JUL-50.00 C-GJ OI=1891 A=$0.15 SELL CALL JUL-47.50 C-GW OI=5055 B=$0.40 INITIAL NET CREDIT TARGET=$0.30-$0.35 PROFIT(max)=14% *************** SUPPLEMENTAL CREDIT-SPREAD CANDIDATES *************** BULLISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain ABK 66.78 JUL 65P 1.35 JUL 60P 0.55 0.85 20% OHP 48.05 JUL 45P 0.90 JUL 42P 0.55 0.40 19% CI 103.85 JUL 95P 1.15 JUL 90P 0.60 0.60 14% UNH 91.77 JUL 85P 1.20 JUL 80P 0.65 0.60 14% WLP 76.50 JUL 70P 1.00 JUL 67P 0.75 0.30 14% MMM 125.73 JUL 115P 1.25 JUL 110P 0.75 0.55 12% NOC 120.50 JUL 110P 1.15 JUL 105P 0.65 0.55 12% MIK 44.05 JUN 40P 0.60 JUL 40P 0.20 0.50 11% BEARISH PLAYS: Stock Last Short Bid Long Ask Target Monthly Symbol Price Option Price Option Price Credit Gain ATN 34.43 JUL 40C 0.95 JUL 45C 0.40 0.60 14% AIG 65.07 JUL 70C 0.75 JUL 75C 0.20 0.60 14% KMG 56.38 JUL 60C 0.80 JUL 65C 0.25 0.60 14% NVLS 42.12 JUL 50C 1.00 JUL 55C 0.45 0.60 14% NBR 39.25 JUL 45C 0.65 JUL 47C 0.40 0.30 14% ETN 78.85 JUL 85C 1.00 JUL 90C 0.45 0.60 14% *************** SEE DISCLAIMER ***************************** ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. 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