The Option Investor Newsletter Sunday 06-23-2002 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 6-21 WE 6-14 WE 6-07 WE 5-31 DOW 9253.79 -220.42 9474.21 -115.46 9589.67 -335.58 -179.01 Nasdaq 1440.95 - 63.79 1504.74 - 30.74 1535.48 - 80.25 - 45.76 S&P-100 489.42 - 12.34 501.76 - 5.56 507.32 - 21.88 - 10.72 S&P-500 989.13 - 18.14 1007.27 - 20.26 1027.53 - 39.61 - 16.68 W5000 9389.98 -159.74 9549.72 -202.97 9752.69 -353.80 -144.15 RUT 461.07 + 2.00 459.07 - 11.44 470.51 - 16.96 - 6.17 TRAN 2755.64 + 82.50 2673.14 - 13.52 2686.66 - 62.60 + 5.59 VIX 31.28 + 1.35 29.93 + 3.28 26.65 + 3.75 + 1.64 VXN 59.30 + 3.63 55.67 + 3.43 52.24 + 6.29 + 3.09 TRIN 2.01 1.34 1.30 1.11 Put/Call 1.27 1.15 .79 .73 ****************************************************************** Retest Complete? by Jim Brown I guess that depends on what retest you are discussing. The markets closed at the lows of the year and that has to be a retest of sorts. The keyword missing from the title is "successful". Successful retests in the recent context (4 yrs) normally involved rocket rebounds when the prior levels were "tested". I think Friday's market action offers yet another clue to future direction. Chart of the Nasdaq Chart of the Dow Friday started with another flurry of downgrades. JP Morgan downgraded the enterprise software sector in view of the increasingly pessimistic IT spending outlook. MSFT, ORCL, SEBL, PSFT, etc, all suffered another drop. Remember the big after hours spike in ORCL to near $10? Well ORCL came really close to hitting $8 on Friday. I bet those shorts are really glad they covered. SEBL is about to hit a new post 9/11 low at $13. Same with PSFT at $16. Microsoft has been the best performer until Wednesday. The company began a slide from over $56 to near $52 at the close today. The worry it seems is that there are rumors beginning to float about an impending earnings warning. Considering the rumors last week were about an impending positive surprise we have come full circle. Microsoft's June low is $49.17. The networking sector was downgraded by Banc of America on concerns the spending freeze could drag out into 2003. JNPR, LU, CSCO, CIEN, etc, all took another hit. Cisco continued its drop towards $12 with a -.34 loss to $13.73. All the other stocks in the sector are already under $10. One fish swimming against the current was Salomon (pun) Smith Barney. SSB upgraded Dell to buy from neutral saying PC demand is not as bad as it seems. Interesting call but Dell still struggled to stay positive in the days trading closing up only a nickel at $23.97. SSB said they thought all the slowing component sales were due to excess inventory from the 1Q and not a slowing of demand. They felt demand was stable. Time will tell. Qualcomm said on Friday that results would meet or exceed the high end of its previous forecast. The sector spiked at the open but closed lower. Qualcomm said sales of phone chips were on track and it was experiencing strong order input for the fourth quarter due to increasing demand for CDMA technology. One of the continuing sector problems was a downgrade of the sector to negative from stable by Moody's on Friday. They warned they might downgrade some of the debt soon. Dow component Merck hit a four-year low today after it was revealed that they had counted as income money that was not received. It appears their Merck-Medco unit claimed as income the co-payments that people make when buying drugs on insurance. The drugstores keep all or part of the co-payment and the drug companies never see it. Merck-Medco reportedly claimed these payments as a way to boost income. MRK lost -2.22 to $49.99. Martha Stewarts broker may be making crafts soon and it won't be for recreation. After the close Friday Merrill Lynch announced that new information had come to light regarding trades in IMCL stock by Martha and IMCL CEO Samuel Waksal and the information had been turned over to authorities. The broker, Peter Bacanovic, and an associate, Douglas Faneuil had been placed on leave. Let's see, if it was good news I doubt they would have been sent home. According to Merrill the story just started to unravel in the last 48 hours. Oops! Wonder how good Martha is at teaching crafts in confined places? Nobody has admitted any wrongdoing but anyone can play connect the dots. According to news reports the mystery of the missing stop loss order has been solved. It never existed. Next week is going to be a challenge economically. Tuesday we get Consumer Confidence again and Existing Home Sales. Wednesday is Durable Goods orders and New Home Sales. Wrap those reports up in a two day FOMC meeting ending Wednesday and top with a GDP report on Thursday and you have a recipe for market worry. The desert on Friday is Personal Income and Spending, Consumer Sentiment and PMI. A very busy week! Just what the market needs. The market had a bad week to put it mildly. This was the fifth weekly loss in a row for the Dow and the lowest close of the year. The Dow took out last week's intraday low of 9261 with a drop to 9220 but rebounded slightly on minor short covering to close at 9253. The Dow is still well above the post 9/11 numbers of 8062 but appears destined to close that gap. The closest Dow support is in the 9075 area and the close on Friday was below the current down trend channel. The S&P also took out last weeks lows and closed under 1000 again. The Nasdaq took out last weeks lows and closed only 17 points away from the post 9/11 close of 1423. In a word, ugly. A new pattern has appeared. Sell in the morning and sell again in the afternoon. Simple and efficient. Get the bulls to buy the morning dip and then knock them down again in the afternoon. Monday could see more selling at the open with margin calls picking up (remember those) and total frustration being the order of the day. There was a huge imbalance of sell on close orders that will have to be reconciled at the open on Monday. Working in our favor is an expected post expiration bounce and extreme oversold conditions. With stocks not restrained by market makers trying to protect expiring positions they will be free to move unrestricted. Unfortunately with the current trend the initial move may not be up. The volume increased on Friday with the NYSE trading 1.725 billion shares. A huge day with 1.23 billion down volume. The Nasdaq volume was less than the NYSE at 1.785B but still the biggest day of the week. The capitulation topic continued to be discussed and while Friday was ugly, it was not capitulation. It is still coming to a market near you soon. Despite the bearish sentiment the conditions are not bad enough historically. Only 8% of the S&P are at 52 week lows despite the 4:1 down volume over up volume on the S&P. The Nasdaq, despite the carnage, only saw 6% of its stocks at new lows. There were still 81 new Nasdaq highs on Friday. As I mentioned in my Thursday night commentary I think the leading indicator for market direction is the NDX, the top 100 Nasdaq stocks. It is well below the 9/11 lows and still dropping fast. It is at Jan-1998 levels (1035) and after minor support at 1025 it could fall all the way to 950. Multiply that across all the indexes and you can see the possibilities. For next week there are two conflicting camps of speculators. One camp thinks Monday will be a blow off day and then a rebound on Tuesday/Wednesday. Since that is chock full of economic reports and a FOMC meeting that could say nasty things I am not leaning in that direction. The other camp thinks Monday will rebound after three triple digit down days on the Dow. Tuesday will be flat with the bear market returning for the balance of the week. There are multiple cycle theories that suggest a temporary bottom the end of next week. Of course everybody has a theory. One reader wrote me on Friday and said "If support holds next week the market will go up". No kidding. If it does not hold and goes down, he is right, if it holds and goes up he is right. Not much risk in that market call. My best guess is the latter of the two camps. A close higher on Monday with possibility of another intraday dip. The bounce will run out of steam on Tuesday and start drifting lower again to coincide with the FOMC announcement on Wednesday. All of this speculation will of course be dependent on the economic reports mentioned above. They could change the direction or accelerate it. Warning season is about to come to a close but we have one more big week left. The major fear is a warning from a big company like MSFT or IBM. While IBM is expected the severity of the warning would be key. Any warning from Microsoft would be like a lightning bolt on a sunny day and the results could be catastrophic. I don't expect a MSFT event and think it is pure speculation. Still there are hundreds of other companies that can warn and like we saw last week any 3-4 on the same day could push us over the brink. Despite what we like to think we are not on our own. The world markets are sinking with us as the events impact the global economy. On Friday for instance The Nikkei lost -258 points, the Hang Seng -162, Venezuela -280 and Brazil -511. Brazil is the festering sore that is impacting those other markets and it will eventually take us down another notch. Many older traders can remember several Brazil induced crashes in the last decade and the situation is not getting any better. Add in the terrorist threat for the July-4th weekend and you have numerous reasons to not be long stocks over the next couple of weeks. I don't want you to think we have turned into permabears as one reader said Friday. "All OIN wrote about this week was gloom and doom. Terrorists, earnings, scandals, falling markets, broken support levels and your negative outlook. Can't you write positive things about the market?" We would love to. How about this email I received on Friday: "Jim, Went heavily into IBM (100 puts) needless to say I was a little nervous when it went up on a downgrade. Just got out for a $50,000 profit-- Did the same with OMC (should be OMG for Oh my God). Think I'm going to Disney World (just kidding) Thank you Thank you Thank you." (Name withheld) Unfortunately we don't make the markets, we just report on them and suggest ways to profit from whatever trend is present. That trend is down until it changes and we will continue to report that as well. How you choose to react to the information is your business. Have a great weekend! Seminar update: Confirmed speakers now include: John Bollinger, Creator of the Bollinger bands Jon Najarian, Dr "J" from the CBOE, President Mercury Trading Robin Dayne, Profiled as "The Traders Coach" on 20/20 and CNBC Steven Price, Options Instructor, Market maker at CBOE Jeffery Verdon, Trading and Tax law specialist Leigh Stevens, Chief Market Strategist, Option Investor Jeff Bailey, Mr Point and Figure himself! Others will be posted as we get closer. Sign up now at the discounted price" http://www.OptionInvestor.com/seminar/fall2002/ Enter Very Passively, Exit Very Aggressively! Jim Brown Editor Editors note: Are You A Successful Trader and Frustrated Writer? One part of this job I really like is getting emails from fellow traders with tips, tricks and different insights into the markets. Everybody has a different view of the same market and how to profit from it. I have readers every week who send lengthy comments about particular trade setups or market forecasts. Quite a few are nothing short of amazing. We are going to start next week a "Guest Trader" column. If you have a particular trading technique, market view, trend analysis or just a hot stock tip, we invite you to submit it for publication. We will review it and publish the best ones in the newsletter. They don't need to be pretty or professional, just well thought out with enough documentation to prove your case. If you are a successful trader in this market then others want to know your secrets! Email jim@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** WATCH THE KEY STOCKS by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - I learned from my market/trading mentor to follow everything, overlook nothing, but especially keep your eye on key stocks to understand the direction of the indexes and the market. You can look at maybe 4 stocks to see when the market is capable of turning around: GE, CSCO, MSFT and INTC. All but Cisco is in the Dow 30. Microsoft, Intel and Cisco are HUGE in tech and the Nasdaq. They are "bellwethers" - as they go, so goes the market. It used to be IBM, but that was in a much simpler era. Anyway, back to my mentor - I talk about him enough in my book so I won't here, but he is one of the greatest index, stock and ptions traders on the planet. Which is why HE is in (the book) Market Wizards and I am not - at least as a featured market player. I would note in passing that you do not hear about any of the "wizard" traders - AT ALL. They don't write about the market, "sell" trading systems, go on Wall Street Week, or any of that "public" stuff generally. They are private traders and want to keep it that way. They are all about making MONEY trading the markets, not about TALKING about the markets. My take-me-under-his-wing trading giant happened to LOVE to talk, but only about the market and not in a public forum. One thing I remember is that he used to calculate very accurately where the Dow was going by analyzing all 30 stocks and projecting where each was headed then coming up with a projection for the average - an interesting "bottoms up" approach. So, today I took a look at 3 of the Nasdaq bellwethers cause I was wondering what the likelihood is that the Nasdaq 100 and QQQ have bottomed, or the Dow, or any segment of the market - except the small cap sectors, which are hanging in like a "rock" - after "only" a 50% correction of the Sept to June advance. See my Sector Trader wrap for more on this. 3 STOCKS THAT TELL THE STORY - Certainly at least tech is not going to turn around until Cisco oes. The key events here: "filling in" its big upside chart gap and still heading south, after a reversal at its down trendline and at its 200-day moving average and failure again at the 50-day average. CSCO is MAYBE getting to the low end of a possible trading range in the area of the late-Feb lows and most of the cluster of low in late-April. This will be an area to watch - the $13-14 area in CSCO. The key chart event was the double top and rally failure right at the May price peak. It then did not take a genius to see to short//buy puts on the stock. And to figure that, for example, QQQ was not going anywhere - this was the "leading" stock in the Q's in terms of the one being in a rally. Oracle is a "lightweight" compared to the monster of Seattle. The $50 area is now going to be the key area to watch for "breakage", or not. The key chart/technical "event" was the reversal just above the 2 key moving averages (50 & 200-day), followed by a downside penetration of them - it was all declining momentum after that. The second monster event was the huge downside chart gap followed by the total inability to rally back "into" the gap area, which acted as total resistance - why? - the gap is where sellers could NOT sell (at least during regular trading hours) on the "overnight" news - you can bet that the sellers welcomed the chance to do so on any return of prices into this price zone where they could not exit before. So, the gap tells us where prices are "capped" due to supply (willing sellers). If a stock has a strong lid on it, chances are it will still move but has only one direction to go in - the stock has to get cheaper as sellers continue to overwhelm potential buyers. S&P 100 Index ($OEX.X) - Daily/Hourly charts: It's not shown on the daily chart, but the OEX is nearing its 480 September low. I would say that it is not going to get this close to re-testing its fall "panic" low with going there. There are of course many ways to get there however. The OEX is completely oversold on its hourly chart - NOT on a daily chart basis - and is at the lower envelope lines ("bands") that usually marks the area of an EXTREME in price AND is back to last Friday's low in the 488 area - given all that, what is the likelihood that there will be at least a short-term short- covering type rebound. The odds would "normally" be good, especially considering the Friday expiration influence, which is in some sense an "artificial" one that is now removed. Do I want to bet on it by playing the long side, even for a bounce? - NO, unless I see it develop intraday and can catch it quick SO that I can stop out on a move to a new low. Overhead resistance (selling interest) can be expected on a move back up to those prior lows - the cluster of them in the 497-500 area; then, in the 509-510 area. As far as buying - it's easier to sell the rallies - just wait. And, for sure I think we do not have to "worry" about a BIG upside move developing until we get even more oversold and raders get even MORE bearish than they are - and they are getting PRETTY bearish or at least fearful, judging by the steady climb of the CBOE volatility index, VIX, which closed at 31.28. The Nas 100 volatility index, VXN is now almost to 60 (59.3) - readings above 60 have previously been associated with market bottoms. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: The downside target implied by the Dow Head & Shoulders Top (see my 6/18 or 6/20 Wrap) to 88.6 in DJX or Dow 8860 is a less distant target certainly. While I am encouraged for the economic recovery by the steady eddy Dow Transportation average, it not uncommon for one Dow average to move independently of the other for lengthily periods of time such as a few weeks to a few months. As with the S&P 100, the DJX is at most of the lower extremes (just NOT the Daily oversold stochastic reading) from which I would normally expect a rebound - where, the probabilities of these things would favor bullish plays - however, this is one BEAR of a bear market. If you have vivid memories of how "extreme" the market got at the top a couple of years ago, you will know that the pendulum is now (naturally) at the opposite "extreme" - its just that we LIKED that prior extreme MORE as most traders feel more "natural" trading stuff that keeps going UP. On balance, we have the possibility of setting up a double bottom if we open steady to higher on Monday. I can't suggest playing it - or I could, but figure this market is too unpredictable to make a projection in an end of day commentary. The key stocks I started off with DON'T have potential double bottoms. Of course, with the Dow there are some still strong bullish trends. Too close to Call! We can "call" resistance at that cluster of prior lows between 94.5/94.7 and the 96 area. Implied support by the low end of the hourly channel (off the bottom) intersects in the 90 area. If its more of the same fear & loathing of stocks next week and more free fall, this is my next target in DJX. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: NOTE: The "centered" moving average on the hourly charts that is not shown, unlike like on the daily chart - the average on which the moving average "envelopes" are based - is 21, meaning, on the hourly chart, that the lower band is a line that "floats" at 5% below the 21-hour moving average based on the average of the close of the last 21-hours. Don't worry, help is on the way, I going to write my THIS week's TRADER'S CORNER (Thursday) article on the "ins and outs" of moving average envelopes. This past Thursday's Trader's Corner column was on using the Arms Index (TRIN) to detect changes in trend direction. Which reminds me: use the TRIN as a barometer for Monday's trading direction - watch for low TRIN readings well under 1.00 (e.g., .50 - bullish - shows buying "pressure") or well above 1.00 (e.g., 1.50 or higher - bearish - selling pressure) as a clue to the buy/sell bias at that moment - and, then WATCH for when this Index starts to move AWAY from any such extreme, as a possible change in the immediate trend. I got the most recent prior hourly low (26.2) in Red for Resistance - it is now that. What was a prior low now has "become" resistance and a place to mark where we are in terms of suggesting a bullish or bearish near-term outlook. Bearish as long as we trade under this prior low, bullish (short-term) if the Q's start trading above it (26.2). Simple, yes! The dashed level line at 27.00 on the Daily chart is another such point, as this is the level of the important Sept. low. Notice how the QQQ trend moves down the lower curved envelope line (blue; "5%")- it acts as "curved trendline" so to speak. It is telling us that, at an oversold (downside) "extreme" the rate of downside momentum S-L-O-W-S down at least. 24.7, at the low end of the hourly downtrend channel, is implied support or a next downside target potentially. Again, watch 26.2 as the "pivotal" mid-point number for QQQ. MINI-TRADER'S CORNER - QUESTION: " Great article last night - relating to the premium of index futures to the Index, can you tell me what the PREM.X is on Q- Charts? I can see it is the futures over the cash, but are there any parameters Etc. and how we might interpret the info. Thanks..." RESPONSE: PREM.X is simply the nearest S&P futures (the "front month" - as of today, September) contract level minus the SPX "cash" value - so, it’s the premium of futures to cash. However, unless you are getting "real time" futures quotes, or at least the Chicago Mercantile Exchange (CME) where the S&P 500 futures trade, PREM.X will be a delayed quote on the futures side. It then has little ability to identify sudden sharp shifts in the premium of futures to cash - these changes happen quickly when there is a index futures-related arbitrage buy or sell "program" going on. But back to the significance of the PREM.X levels from day to day. Watching the levels from day to day will give you an ideas when the premium starts falling or rising, relative to the "norm", which tends to indicate rising bullish "sentiment" (rising premium level) or rising bearish sentiment (falling premium level). However, there is another missing comparison number, which is "Fair Value" of futures relative to cash; i.e., what "should" futures be trading at to be "fairly" valued to the actual basket of stocks. For example, you know that fair value is 250 (2.5) points (futures over cash) today and you see that PREM.X is running at 350 most of the day - this is usually a result of a bullish sentiment and willingness to pay a "premium" price in the index futures in the belief that the index will be rising. On the other hand, if PREM.X is running 100 or even -100 to nearby futures - and fair value is 250 - then bearish sentiment predominates. When PREM.X gets "rich' to cash, it invites buy programs - sell the futures, buy the basket of (S&P) stocks ("cash"). When the premium gets "undervalued, they unwind (liquidate) the previously done arbitrage programs by executing "sell programs" - buy the futures, sell the stocks. It's hard to INITIATE arbitrage that buys the futures and SHORTS the stocks, because of the "uptick rule" on shorting stocks. Arbitrage works on the rapid execution on each "side" of the trade - you cannot assume usually that you can short all the stocks you need to at the SAME time. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** Editor's Plays ************** Russell-3000 This is the week to capitalize on the Russell Shuffle. At the end of June each year the Russell kicks out the non performers and adds an entirely new crop of stocks. I am going to focus on that today. First however let's recap some of the expiration week plays from last Sunday. I am not going to list them all but we had some pretty decent gains. See the "weeks high = " IMNX $21.72 Jun-$22 call IUU-FX $.50 Weeks High = $1.10 ESST $17.03 Jun-$17 call SEQ-FW $.80 Weeks High = $2.50 HLIT $4.98 Jun-$5 put LOQ-RA $.40 Weeks High = $1.30 HPQ $17.35 Jun-$17 put HHY-RW $.55 Weeks High = $1.20 SEBL $14.86 Jun-$15 put SGQ-RC $.95 Weeks High = $1.80 Best of all was GENZ. The June $25 put at $.65 cents turned into a home run when GENZ warned on Wednesday. GENZ $26.75 Jun-$25 put GZQ-RE $.65 Weeks High = $5.70 Even a blind squirrel finds an acorn once in awhile! *********************** Russell-1000, 2000, 3000 rebalancing Each year the Russell indexes are rebalanced at the end of June. This rebalancing is based on the market capitalization of each of the stocks as well as their price. Stocks trading under $1 are dropped and new stocks are added. For instance JBLU and KFT are new stocks that were not around last June. Stocks are weighted by market cap, which means the higher cap stocks will require funds to buy more shares to match the index results. When stocks are delisted, acquired, or for some other reasons are dropped from the index during the year they are not replaced until the end of June. This means there are many more stocks added than dropped during the reshuffle. The stocks involved in the Russell rebalancing are announced in mid-June with the changes taking place on June-30th. Stocks that are going to be dropped will see selling as the month draws to a close. Stocks being added will see heavy buying as the thousands of funds add them to their holdings. Since the funds attempt to match the index values exactly the majority of trading is done very close to the end of the month. However arbitragers will attempt to position themselves in these stocks beforehand to capitalize on the buying. For your trading pleasure I have produced several lists of these new stocks. Just having the list of stocks is no real help without the market cap. This is the clue as to which will move the most. I have included that tidbit of information and sorted them by market cap. I created a separate Qcharts Quote file of the additions (in their entirety) and the deletions. I edited the deleted list to only show those stocks still trading near or over $5. Since stocks trading under $5 don't offer many shorting opportunities I dropped them. I also created two comma delimited files for those who don't use Qcharts. This allows you to import the lists into Excel or whatever quote system you use. Note: These are the additions to the Russell-3000. The top one third of the 3000 stocks then make the Russell-1000 and the bottom two thirds become the Russell-2000. Here are the links: Russell 3000 Deletions (Quote sheet) Http://www.OptionInvestor.com/downloads/R3K_deletions.quo Russell 3000 Additions (Quote sheet) Http://www.OptionInvestor.com/downloads/R3K_additions.quo Russell 3000 Deletions (text file) Http://www.OptionInvestor.com/downloads/R3K_deletions.csv Russell 3000 Additions (text file) Http://www.OptionInvestor.com/downloads/R3K_additions.csv Deletions: I reviewed the Russell deletions and these are some suggestions. The "O" means optionable. ENMD - O NOVT - O MXWL - O ZIXI - O EMIS - O VXGN - O HIFN - O TAXI - O KANA STRC SKP BCII ANST AMTR These stocks could react negatively to the drop as fund managers leave them. Remember, most of the drop will occur in the last week of the month and the first couple days of July. Additions: I just reviewed the Russell additions and these are my favorites. The "O" means optionable. A "**" means it has possibilities. KFT - O ** Higher cap means more buying PRU - O ** Higher cap means more buying PFG - O ** Higher cap means more buying ATH - O ** Higher cap means more buying ADS AAP - O AHS - O TSCO - ** IMH - ** JAS.A - ** UNTD HPLA - O MFA RAS INVN - O ** OVTI - O RGX - ** CCRD - O ** HGR - ** LABS DKWD - O ** MGAM - O HOLX - O DCO MVL - O RNDC I stopped scanning when the market cap fell under $200 million. Some of these stocks are already moving. They should continue up until the first week in July unless the arbitragers over buy and have to dump with insufficient fund buying. *********************** Remember, these are all high risk plays and should only be made with 100% risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Somebody Please Pass The Towel By Eric Utley This market is uglier than Tyson's last defeat versus Lewis. Will this fight end in a TKO too? The bulls are still standing, but it feels like they're using only one of the four available appendages. Meanwhile, it feels good to be a bear, doesn't? Having your way with the market, sticking and jabbing, every once in a while throwing down a roundhouse power punch. Let's take a look at how the judges are scoring this one. The Dow Jones Industrial Average ($INDU) is about 600 points away from its 200-dma -- an important moving average for gauging long term trends. The S&P 500 (SPX.X) is about 125 points away from its 200-dma, and the Nasdaq-100 (NDX.X) is about 400 points below its long term moving average. However many deviations away from the 200-dma we are now I'm not quite sure. But I do know this: It's at an extreme. Friday's best performing sector was the Utility Index (UTY.X) with a whopping 0.57 percent gain. This was once a grandma sector until the boys of Enron, Dynergy (NYSE:DYN), and Williams (NYSE:WMB) came along. Still, there may be some defensive appeal in the utilities names, explaining Friday's bid. At the other end of the spectrum, the Software Index (GSO.X) was the worst performing sector of the day with its 4.66 percent plunge below September's lows. Software is technology. Need we go further? For the first time in a long time the four put/call ratios tracked in this column all finished above 1.0, meaning that more puts traded than calls Friday. I really hate it when these interesting observations take place around expiration, particularly a triple witch expiration, because I have no way of telling how much the expiration played into these numbers. Sometimes it can artificially inflate one side of the market, which I think is what happened Friday. I'd like to see the same observation next Tuesday, which would tell us a lot more about the sentiment of the market. Surprisingly, the bullish percent numbers were not hit hard. Sure, the Dow Jones Bullish Percent ($BPINDU) reversed back into bear confirmed, but the NYSE, NDX, and SPX numbers held up pretty well. And I'd like to point out once again that the Nasdaq-100 Bullish Percent ($BPNDX) is still in a bull alert position even after Friday's decline. So there was a bit of a divergence there between the price of the NDX itself and the internals of the market. For the first time in more than a week, the ARMS numbers moved back towards extreme oversold readings. What's interesting about this particular time is that the longer term readings are getting up there in conjunction with a high reading in the short-term indicators. So while the 5 and 10-day numbers have been gyrating, the 21 and 55-day numbers have been moving steadily higher. The higher the longer term numbers, the closer we are to a very significant turning point in the market, or so the theory goes. At any rate, the shortest of them all in the 5-day popped up to 1.48 last Friday. The advance/decline line was not as negative as I had hoped for in last Friday's session. In fact, it wasn't bad at all with a 13/18 ratio on the NYSE, and a 16/17 reading for the Nasdaq. See, there are still some bulls out there. But they had better not look at the new high/new low numbers. Ugly! About 200 new lows were hit on the Nasdaq, and 145 on the NYSE. Then there's the goings on in the Commitment of Traders (COT) report. From a very anecdotal observation, it looks to me as if the commercial interest in the three big futures markets are buying into the weakness in the averages. That's to say, they're bringing in short positions and adding long positions along the way, reducing their net bearish positions, or increasing net bullish positions. This divergence is so indicative of a market turning point that it's silly. It can't be that obvious, can it? The thing that strikes me as disconcerting is that so many now are calling for capitulation. Even the folks over at CNBC are asking the floor traders when the market is going to wash out and rebound into an extended summer rally. I don't like that so many people are asking for the capitulation; nevertheless, the numbers here in this column certainly point to that end. We could see it next week. Stay tuned! ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9254 Moving Averages: (Simple) 10-dma: 9540 50-dma: 9936 200-dma: 9835 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 989 Moving Averages: (Simple) 10-dma: 1017 50-dma: 1068 200-dma: 1104 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1036 Moving Averages: (Simple) 10-dma: 1106 50-dma: 1234 200-dma: 1410 Utility ($UTY) Wow! The UTY was the best performing sector during Friday's market meltdown. Oh yea, the UTY gained 0.57 percent on the day. Wow! Leading to the upside included shares of Northeast Utility (NYSE:NU), Duke Energy (NYSE:DUK), Progress Energy (NYSE:PGN), DTE Energy (NYSE:DTE), and American Electric Power (NYSE:AEP). 52-week High: 376 52-week Low : 301 Current : 316 Moving Averages: (Simple) 10-dma: 316 50-dma: 332 200-dma: 327 Software ($GSO) The GSO was the worst performing sector during Friday's session. It lost 4.66 percent, on its way below September's lows. The Amdocs (NYSE:DOX) warning was the primary driver for the weakness in the group. Not by surprise, the stock was the worst performing component of the GSO with its 41 percent plunge. Other notable downside movers included Rational Software (NASDAQ:RATL), off by 9.40 percent, I2 Tech (NASDAQ:ITWO), down by 7.82 percent, and Intuit (NASDAQ:INTU), lower by 6.43 percent, and helping along the weakness with its own negative news item. 52-week High: 234 52-week Low : 106 Current : 106 Moving Averages: (Simple) 10-dma: 115 50-dma: 126 200-dma: 154 ----------------------------------------------------------------- Market Volatility I hope, I truly hope, that the VIX's weakness Friday was a product of the triple witch expiration, and not lower on its own merits. That would be something, wouldn't it? We'll know more next week, but like my buddy Mr. Phillips said, "I don't like the zag in the VIX." The VXN did what it was supposed to Friday. It's nice when it works that way. It kissed the 60 level, but fell a bit lower as the day wore on. Still, it's getting up there, which is a good thing. CBOE Market Volatility Index (VIX) - 31.56 -0.94 Nasdaq-100 Volatility Index (VXN) - 59.29 +1.36 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.27 652,242 828,451 Equity Only 1.16 463,867 539,982 OEX 1.43 57,085 81,421 QQQ 1.94 34,059 65,908 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 52 - 1 Bull Correction NASDAQ-100 20 - 1 Bull Alert DOW 43 - 3 Bear Confirmed S&P 500 45 - 1 Bear Confirmed S&P 100 47 - 2 Bear Confirmed 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 1.48 10-Day Arms Index 1.40 21-Day Arms Index 1.47 55-Day Arms Index 1.38 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 1378 1805 NASDAQ 1668 1749 New Highs New Lows NYSE 91 145 NASDAQ 61 199 Volume (in millions) NYSE 1,805 NASDAQ 1,962 ----------------------------------------------------------------- Commitments Of Traders Report: 06/18/02 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 Get this, S&P commercials grew less bearish by a wide margin last week. They brought in their net short position by about 18,000 contracts. Not by surprise, small traders grew less bullish by about 12,000 contracts. Commercials Long Short Net % Of OI 06/04/02 369,298 440,027 (70,729) (8.6%) 06/11/02 388,751 457,018 (68,267) (8.1%) 06/18/02 437,530 487,956 (50,426) (5.4%) 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 06/04/02 167,713 58,885 108,828 48.0% 06/11/02 174,357 69,464 104,893 43.0% 06/18/02 181,178 88,517 92,661 34.3% 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 eased off of their recent bullishness by adding back a few more shorts. Small traders went in the opposite direction by adding a few more longs than shorts. Commercials Long Short Net % of OI 06/04/02 47,875 39,100 8,775 9.3% 06/11/02 45,946 36,878 9,068 10.9% 06/18/02 54,816 49,169 5,647 5.4% Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: 9,068 - 06/11/01 Small Traders Long Short Net % of OI 06/04/02 12,162 21,420 (9,258) 27.2% 06/11/02 14,561 25,330 (10,769) 27.0% 06/18/02 20,883 29,153 (8,270) 16.5% Most bearish reading of the year: (10,769) - 06/11/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Dow commercials bought into the weakness last week to the tune of more than 3,000 contracts added to their net bullish position. Small traders made the money. They added to their net short position by more than 4,000 contracts. Commercials Long Short Net % of OI 06/04/02 20,564 16,169 4,395 11.0% 06/11/02 20,369 17,172 3,197 8.5% 06/18/02 25,995 19,115 6,880 15.1% 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 06/04/02 7,114 9,639 (2,525) (14.7%) 06/11/02 7,500 9,925 (2,425) (13.9%) 06/18/02 5,379 11,813 (6,434) (37.2%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** Half Way There By Eric Utley The second quarter ends next week. So does the first half of the year. And what first a half it has been. The S&P 500 (SPX) is down by about 14 percent year-to-date. And if something doesn't change quickly, the market looks to be heading for its third consecutive year of losses. Which brings up an interesting piece of history: The market has not finished lower in four consecutive years since 1941. Curiously enough, that was following one of the great asset bubbles in this country after the 1929 crash. The years that followed were slim indeed, with stocks pretty much going nowhere for 20 years. What's most disconcerting about this particular post-bubble slump is that the bubble itself was the most widely participated in, arguably the largest asset bubble ever. 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 ---------------------------- QLogic (NASDAQ:QLGC) I've been watching QLGC for a bearish entry. Don't you think the stock should be lower? What's your opinion? - Ken Thanks for the question, Ken, and I tend to agree with what you alluded to. QLogic is involved in the data storage business, which has obviously taken a hit due to the slowdown in information technology spending. With little rebound in sight for business spending, you have to think that the data storage business will remain a very tough one for at least another year, if not longer. But despite the woes of its peers and customers, QLGC has held up very well in this market environment. What I find interesting is to look at the charts of QLGC's big customers who include Sun Microsystems (NASDAQ:SUNW), IBM (NYSE:IBM), Dell Computer (NASDAQ:DELL), and Hewlett (NYSE:HPQ). Most of the stocks are trading at or below their September lows, while QLGC is well above its lows from last fall. QLGC bottomed right around $18 last fall. It closed at $42 and change last Friday. Given the overwhelming weakness in the others in the data storage business, including the software makers like Veritas (NASDAQ:VRTS) and other infrastructure plays like Brocade (NASDAQ:BRCD), I can't imagine that QGLC is doing well enough to justify its loft price and valuation. The stock is selling for about 58 times last year's earnings, and about 12 times last year's sales. Those are very expensive measures versus even the rest of the tech sector. The only thing that I really found that could be giving support to the stock is the relatively high short interest. There are about 13 million shares sold short in this stock, which is a fairly high number given its float of just over 90 million shares. The heavy short interest can oftentimes keep a stock from going down because of the emotion involved with shorting a stock with too many others. The fear of the upside can often overwhelm the weak shorts, who in turn cover prematurely and keep demand in the stock, keeping the price up even though it should by most measures be much lower. Technically, the stock appears to be stuck in between a long term neutral wedge, or perhaps a slightly descending wedge, which would be a little more bearish than a neutral pattern. I'd be willing to bet that the stock eventually breaks down below its wedge and goes on to much lower prices, but it may take a big short covering rally in the broader market before that happens, which would help to remove the weak shorts in the stock and clear the way for more supply and less demand in the stock. Given the oversold nature of the market right now, I wouldn't be as inclined to short QLGC at its current levels. But it's an interesting bearish play up near resistance, perhaps near its descending resistance line right around the $50 level. QLGC - Daily ---------------------------- Corinthian Colleges (NASDAQ:COCO) I was scanning the new high list and noticed a few stocks from the private education sector that look very strong. I was wondering what your charts show for these stocks. I'm particularly interested in COCO. - Thanks, Peter Thank you for the question, Peter. I don't know what it is about these private education stocks, but they've going like mad this year. I've heard the idea that the soft job market has caused a dramatic increase in demand for secondary education, and the professional type of education that many of these private educators provide. It seems that a lot of people are going back to school. From what I gather, that is the primary driver behind these stocks, but there could be more to the story that I may be unaware of. For its part, COCO offers post secondary education services. It runs about 50 schools in 20 different states. The company targets mainly the career oriented student with degree programs for healthcare, electronics and information tech studies. Earnings are expected to grow by 39 percent this year, and by about 26 percent next year. That's pretty much the reason that the stock has done so well: Earnings! Technically the stock is doing very well and looks very, very strong. Amazingly it broke out of its short term base last Friday on heavy volume. The stock has been trending higher above its supporting trend line which it has rebounded from about three times this year The stock was having some trouble getting above the $30 level over the last month and a half, but easily broke and closed above that level during last Friday's session. Again, the volume was very heavy, and judging by what the price has been doing, I'd guess that the stock remains under heavy institutional accumulation. But given the breakout above short term resistance already, I wouldn't be aggressively pursuing this stock. Instead, I think COCO is a good one to look for a pullback to support where it would offer a very smart buying opportunity. More often than not, after a stock breaks out from a short term base it will normally come back to retest what is known as the platform of the support, which is the previous resistance at the $30 level. That former resistance should now offer support for the stock, and an entry point into bullish positions. I'd place my stop somewhere just below the ascending trend line if I were to buy on a pullback to $30. COCO - 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 24th ================================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- SONC Sonic Corporation Mon, Jun 24 After the Bell 0.34 WAG Walgreen Mon, Jun 24 -----N/A----- 0.25 ------------------------- TUESDAY ------------------------------ COMS 3Com Tue, Jun 25 After the Bell -0.02 APOL Apollo Group Tue, Jun 25 Before the Bell 0.24 CHBS Christopher & Banks Tue, Jun 25 -----N/A----- 0.33 EMMS Emmis Communications Tue, Jun 25 Before the Bell -0.08 FDO Family Dollar Stores Tue, Jun 25 Before the Bell 0.35 FDX FedEx Corp Tue, Jun 25 Before the Bell 0.77 KBH KB Home Tue, Jun 25 Before the Bell 1.11 KR Kroger Tue, Jun 25 Before the Bell 0.44 MU Micron Technology Tue, Jun 25 After the Bell 0.07 PAYX Paychex Tue, Jun 25 Before the Bell 0.19 RAD Rite Aid Corporation Tue, Jun 25 -----N/A----- -0.07 SJR Shaw Communications Tue, Jun 25 After the Bell N/A UOPX Un. of Phoenix Online Tue, Jun 25 Before the Bell 0.13 ----------------------- WEDNESDAY ----------------------------- STZ Constellation Wed, Jun 26 After the Bell 0.37 GIS General Mills Wed, Jun 26 Before the Bell 0.25 ------------------------- THURSDAY ----------------------------- AM American Greetings Thu, Jun 27 Before the Bell 0.43 CAG ConAgra Foods, Inc. Thu, Jun 27 Before the Bell 0.33 NKE Nike Thu, Jun 27 After the Bell 0.75 TKS Tomkins Thu, Jun 27 Before the Bell N/A ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable KSWS K-Swiss Inc. 2:1 06/21 06/24 JNC John Nuveen Co 2:1 06/21 06/24 PNRA Panera Bread 2:1 06/24 06/25 PENN Penn National Gaming, Inc.2:1 06/24 06/25 THC Tenet Healthcare Corp. 3:2 06/27 06/28 GMRK GulfMark Offshore, Inc. 2:1 06/27 06/28 TRBS Texas Regional Bancshares 3:2 06/27 06/28 STJ St. Jude Medical, Inc. 2:1 06/28 07/01 JILL J. Jill Group 3:2 06/28 07/01 MMC Marsh McLennan Companies 2:1 06/28 07/01 CMC Commercial Metals 2:1 06/28 07/01 FPU Florida Public Utilities 4:3 06/28 07/01 BER W.R. Berkley 3:2 07/02 07/03 COH Coach Inc 2:1 07/03 07/05 SII Smith Inte 2:1 07/05 07/08 THO Thor Industries 2:1 07/05 07/08 MLAN The Midland Company 2:1 07/05 07/08 -------------------------- Economic Reports This Week -------------------------- Micron Technology and FedEx report earnings on Tuesday. But the big market movers this week--other than unforeseen global disasters, of course--are likely to be a pile of economic reports hitting the wires Tuesday through Friday: Housing numbers, Consumer Sentiment & Confidence, the Final GDP...pretty much everything but the kitchen sink! And of course don't forget that Doc Greenspan and his FOMC boys hold a two-day chitchat on Tuesday and Wednesday. ============================================================== -For- Monday, 06/24/02 ---------------- None Tuesday, 06/25/02 ----------------- Consumer Confidence (DM)Jun Forecast: 109.6 Previous: 109.8 Existing Home Sales (DM)May Forecast: 5.63M Previous: 5.79M FOMC Meeting (2-Day)(DM) Wednesday, 06/26/02 ------------------- Durable Orders (BB) May Forecast: 0.5% Previous: 0.8% New Home Sales (DM) May Forecast: 915K Previous: 915K FOMC Meeting (2-Day)(DM) Thursday, 06/27/02 ------------------ Initial Claims (BB) 06/22 Forecast: N/A Previous: 393K GDP-Final (BB) Q1 Forecast: 5.6% Previous: 5.6% Chain Deflator-Final (BB)Apr Forecast: 1.0% Previous: 1.0% Help Wanted Index (DM) May Forecast: N/A Previous: 47 FOMC Minutes 5/7 Friday, 06/28/02 ---------------- Personal Income (BB) May Forecast: 0.3% Previous: 0.3% Personal Spending (BB) May Forecast: 0.0% Previous: 0.5% Mich Sentiment-Rev. (DM)Jun Forecast: 90.8 Previous: 90.8 Chicago PMI (DM) Jun Forecast: 58.5 Previous: 60.8 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 06-23-2002 Sunday 2 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** INDEX TRADER GAMEPLANS ********************** THE SECTOR BEAT - 6/23 by Leigh Stevens The red ink was flowing again Friday, which was to be expected in with the market again under extreme selling - there was however, no sector that off by even 5% - mostly, the weak got weaker, especially tech sectors like software, disk drives, chip stocks, etc., along with the drug stocks. Portfolio managers may have felt that the drug makers were under assault due to the risks inherent to the moment when their hugely profitable prescription drugs loose their patent protection. This happened with Prilosec, make by U.K.-based AstraZeneca, when the FDA made a Friday decision to allow Procter & Gamble to sell an over the counter version - while P&G would have a licensing arrangement with the drug's maker, it would reduce the cost by 75%, dropping from $4 a capsule to $1 - still not cheap but its a one cap a day dosage. Having been a daily user of the product, who stopped when even my monthly "co-pay" was outrageously expensive - I say (to the FDA) WELL DONE! It's OUTRAGEOUS what we have to pay for some of these drugs, while the drug companies are spending TENS OF MILLIONS on advertising these medications, so they can get more "users". Even more interesting in such a free-fall market like this one, is what sectors were UP and bucking the trend. On Friday, the small cap Russell 2000 index was UP. The S&P SmallCap 600 Index was nearly UP ($SML.X -0.02%). So, too the Dow Transportation average - if anything bodes well for the future direction of our economy it is the transport stocks (trucking, rail, airfreight – not the airlines). The Defense stocks were UP again on Friday, rebounding during the week after their recent sell off. The home builder stocks were unchanged on Friday, after a mostly up week. Not so the Healthcare (HMO) stocks at week's end - with this sector, the technical internals have been "signaling" a reversal - I'll take a look at these sectors. HIGHER ON THE DAY ON Friday - DOWN ON THE DAY on Friday - SECTOR TRADE RECOMMENDATIONS & REVIEW - NEW TRADE RECOMMENDATION(S) - Buy IJS at 88.50 (S&P 600 Small Cap Value fund iShares) Stop at 87.60 COMMENT - I THOUGHT WE WOULD GET FILLED ON THE IJS LIMIT PRICE TODAY - WITH THE DOW DOWN 170 PTS, YOU WOULD THINK SO - WRONG!! Also suggested purchase of IWM around 91.00 (Russell 2000 iShares) 6/20 low was 91.32; Close: 91.80 COMMENT - LOW ON IWM WAS 91.20 AGAIN TODAY - REMINDS ME OF THE SAYING THAT "LIMIT" ORDERS LIMIT YOUR PROFITS - HOPE "AROUND" QUALIFIER WAS HELPFUL! Buy BBH at 79.10 (Biotech HOLDR's Trust stock) Stop at 76.00 OPEN POSITIONS - Long IJS at 91.25 (S&P 600 small cap value iShares) Stop: 87.60 TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHT(S) - Biotechnology Index ($BTK.X) STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; MYGN; PDLI; TARO; TEVA; VRTX; XOMA The Biotechnology sector is not following the rest of the market to new lows. BTK is falling back toward the low end of its downtrend channel. Another move to this area may offer a buying opportunity in this sector - at least they would offer a potential low risk entry, because an exiting stop can be placed just under the prior lows, which is close by - making for a "tight" stop/exit point. (The Biotech HOLDR's look like they may offer a buying opportunity and are featured in the trade recommendation section above.) A daily close above 376 in the BTK Index is needed to suggest an upside reversal and possible bottom. Closing move above 375-376 still is a key to a turnaround. Conversely, a close below 325 would suggest the possibility of another down "leg" developing. UPDATE: 6/23 Defense Index; Amex ($DFI.X) STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN; ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC SOME PRIOR COMMENTS: Thought that a "bear flag" was forming – NOT! Saw further downside, perhaps back to 600 area. NOW: Close above 655 and the 50-day moving average is a bullish plus, but the 660-661 level is the key "line" of technical resistance - a close above here, AND the ability to stay above it on subsequent pullbacks, is needed to suggest that the bullish trend might be back on track. However, there would still be the double top at 680 to overcome for DFI. More action is needed to say that this sector is not still building a top. UPDATE: 6/23 U.S. Home Construction Index ($DJUSHB) - Dow Jones STOCKS: BZH; CLPO; CPH; CAV; CTX; CHB; CMH; DHI; DHOM; FRTG; HOV; KBH; WLS; MDC; MHO; MTH; MODT; NHCH; NUR; OH; OHCA; OHCB; OHB; PHHM; PHM; RYL; SKY; SEHI; SPF; TOL; WLT; WCI; WTMK; WLFO Looks like the Home Builder stock sector could make a top if the Index stalls in the 397 area - stay tuned! Healthcare Index; Morgan Stanley ($HMO.X) STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; TGH; THC; UNH; WLP SOME PRIOR COMMENTS: Potential for a top, even with move to new high above 645 - possible downside reversal is suggested by the bearish price/RSI divergence. NOW: A close below the prior top at 645 provides initial evidence for a downside reversal, but "confirmation" would be on a close under 630 at the up trendline. What I found bearish in the chart (besides already noted higher highs on decline relative strength) is the rising bearish "wedge" pattern that is outlined (magenta converging lines) on the chart. Move below 630 support, then a close below the 50-day moving average would "confirm" a bearish reversal. There is not a HOLDR or iShares that represent this sector that I have found. Shorting/buying puts on individual stocks in the sector is a way to play this group however. UPDATE: 6/23 Transportation Average; Dow Jones ($TRAN) STOCKS: Airborne Inc. (ABF); Alexander & Balwin (ALEX); AMR Corp (AMR); Burlington Northern (BNI); CNE Transportation (CNF); CSX Corp (CSX); Delta (DAL); FedEx Corp. (FDX); GATX Corp (GMT); J.B.Hunt Transport Services (JBHT); Norfolk Southern (NSC); Northwest Airlines (NWAC); Roadway Express (ROAD); Ryder System (R); Southwest Airlines (LUV); UAL Corp. (UAL); Union Pacific (UNP); US Airways (U); USFreightways Corp. (USFC); Yellow Corp. (YELL) SOME PRIOR COMMENTS: The DJ Transportation average has been "basing" above its 200-day moving average, performing better than the Dow Industrials in this regard. TRAN closed above its March- May down trendline on recent rally. Chart picture continues to look bullish as long as 2620-2622 is not exceeded to the downside. NOW: Bullish breakout above its down trendline and to above the transports 50-day moving average is "confirming" bullish action, especially in the face of such a down market. There is no way to buy a sector type stock - no HOLDR or iShare, etc. – however, individual call and stocks purchases can be a way to play this group, especially if you can play 2-3 stocks. UPDATE: 6/23 Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week DGX 87.15 1.62 0.93 1.06 -0.55 -1.09 Dropped OHP 49.11 0.97 0.65 -0.47 -0.69 -0.22 Entry point?? BGEN 40.30 1.59 -1.11 -1.17 -0.79 -2.12 Dropped AET 50.38 0.96 1.03 0.89 -0.29 1.48 Still strong DUK 31.76 0.60 1.21 -0.09 -1.83 0.75 Nice rebound! KFT 41.93 0.50 0.39 -1.46 -0.11 -1.02 Inside day!!! ATH 72.50 2.11 0.25 -0.32 -0.89 1.11 Held up well MIK 43.15 0.31 -1.27 0.82 -0.26 0.50 New, wedged up DHI 26.74 0.54 0.71 0.50 0.79 3.03 New, housing! PUTS MIL 31.04 1.33 -0.39 -0.60 -3.31 -3.03 Ready to break HIG 60.92 2.24 -0.23 -0.13 -0.98 0.99 Dropped ENZN 23.34 1.44 -0.60 -0.78 -1.45 -2.20 Take out lows? IBM 68.75 0.97 -1.20 -2.59 -1.77 -7.42 Below $70!!! ZLC 38.40 0.87 -0.79 -0.20 -0.18 -0.73 200-dma at $38 TDS 62.00 2.50 -1.05 -1.45 0.02 -1.15 Telecom tanker NVLS 32.23 2.07 -0.85 -3.35 -1.88 -3.74 No bottom yet EMMS 22.53 0.71 -0.12 -0.33 -1.80 -3.16 Look out below TBH 20.60 0.90 -0.58 -0.45 -1.90 -3.83 New, Brazil!! KMI 40.20 1.64 -0.56 -1.85 -0.27 -0.56 New, low gas ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* DHI – D.R. Horton Inc. $26.74 (+3.03 last week) See details in play list Put Play of the Day: ******************** KMI - Kinder Morgan $40.20 (-0.56 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 ^^^^^ BGEN – Biogen, Inc. $40.30 (-2.12) The Biotech bounce appears to be dead, with the BTK index falling back to its closing lows from a couple weeks ago. The hint of strength that we were focusing on in BGEN has been completely squashed as well, with the stock falling back to just above the $40 level. While our stop has yet to be violated, the fact that it couldn't make any headway over the past week is reason enough for us to pull the plug. A rebound next week should be used to exit open plays at a more favorable point. DGX $87.15 (-1.09) The strength that shares of DGX had been exhibiting early last week vaporized on Friday, as the stock gave up more than 4.5% on strong volume. Although the bulls tried valiantly to defend the $88 support level in the middle of the day, the end of day slide was too much for them and they stepped aside. With our stop violated, it's time to push DGX off of the playlist this weekend. Use any sort of rebound on Monday to exit open positions. PUTS ^^^^ HIG $60.92 (+0.99) HIG just isn't acting right. Our suspicion grew last Friday as the stock actually managed to finish higher while the market was crushed into the close of trading. We didn't like that divergence. Instead of having the stock go against us next week, we're dropping coverage this weekend. Look to exit plays into weakness early next week, or set a very tight stop just above Friday's highs to protect against a short covering rally. *********** 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 06-23-2002 Sunday 3 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** NEW CALL PLAYS ************** MIK - Michaels Stores $43.15 (+0.50 last week) Michaels Stores, Inc. is a national specialty retailer providing materials, ideas and education for creative activities. As of March 22, 2002, the Company operated 708 Michaels retail stores in 48 states, as well as in Canada, averaging 18,100 square feet of selling space. Its stores offer products for the do-it-yourself home decorator and arts and crafts supplies. The Company also operated 142 Aaron Brothers stores, as of March 22, 2002, primarily on the West Coast, averaging 5,900 square feet of selling space. These offer photo frames, a full line of ready-made frames, custom framing services and a wide selection of art supplies. Is the consumer losing strength? Some retailers beg to differ. MIK is one such retailer, whose shares have been on a tear this year, up by about $10 year to date. That's a pretty solid move for a stock that began the year near the $33 mark! The company has been able to fend off any weakness seen in the other broad line retailers with its specialty product mix. The arts and crafts chain reported same store sales rose by 6 percent during the month of May, far outpacing the average retail sales report. The company reported that total sales for the month had risen to $175 million, above last year's $151 million during the same period. The stock has obviously responded to the strong fundamentals of the company, and it looks to continue higher over the short term judging by the pattern traced over the last two weeks. On an hourly chart, MIK has traced an ascending wedge with an aggressive support line now below current levels at or around the $42 level. We've seen four rebounds from that level in the last two weeks, which continues to support relatively higher lows. The upper end of the pattern is the resistance portion of the wedge, which is at the $44 level. A breakout above there could lead to a quick trip back up to the stock's relative highs up around the $46 level traced earlier this month, which was also the stock's yearly high. Traders looking to enter on the breakout need only look for a strong move above the $44 level on heavy intraday advancing volume in a rising market. Our stop is initially set at the $39.50 level. BUY CALL JUL-40*MIK-GH OI=529 at $4.00 SL=2.75 BUY CALL JUL-45 MIK-GI OI=371 at $1.25 SL=0.50 BUY CALL SEP-40 MIK-IH OI=627 at $5.20 SL=3.00 BUY CALL OCT-55 MIK-II OI=129 at $2.50 SL=1.25 Average Daily Volume = 549 K DHI – D.R. Horton Inc. $26.74 (+3.03 last week) D.R. Horton is a national builder that is engaged primarily in the construction and sale of single-family homes in 39 markets and 23 states in the U.S. The company designs, builds and sells its homes on lots developed by it and on finished lots that it purchases, ready for home construction. DHI also provides title agency and mortgage brokerage services to its homebuyers. It does not retain or service the mortgages that it originates, but sells the mortgages and related servicing rights to investors. Home is where the heart is, and lately it happens to be where the money is too! One of the best performing sectors since the September lows is the Dow Jones US Home Construction sector (DJUSHB), still up more than 100% from those lows. May and the first part of June saw some weakness in the sector as it consolidated down to the $345 level, but the recent housing data lit a fire in the bullish camp last week, resulting in a strong bullish run. DHI certainly can't be called a laggard in this area of the market, as it rallied more than 12% last week and ended right at resistance ($26.75). All this occurred while the broad market was once again taking a severe beating to the downside. Adding to the bullish tone in DHI, the stock saw heavy buying volume with Thursday and Friday seeing nearly double the averaged daily number of shares trade hands. It makes one wonder what the stock will do if the broad market ever manages to rally again. There is now support at the $26 level, although it is much stronger at $24.50-25.00. A dip and bounce from either of these levels would make for an attractive entry point into the play although we wouldn't turn our nose up at a breakout over intraday resistance at $27, so long as volume remains strong. The last vestige of resistance resides at $29, and we would expect some profit taking to commence once that level is reached again. Plan your trade accordingly. Ride the bullish trend as long as it lasts and monitor the DJUSHB for signs of continued strength. Our stop is initially set at $24. BUY CALL JUL-25*DHI-GE OI=506 at $2.50 SL=1.25 BUY CALL JUL-30 DHI-GF OI= 39 at $0.35 SL=0.00 BUY CALL AUG-25 DHI-HE OI=256 at $3.00 SL=1.50 BUY CALL AUG-30 DHI-HF OI=245 at $0.75 SL=0.25 Average Daily Volume = 1.56 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** AET - Aetna $50.38 (+1.48 last week) Aetna Inc., incorporated in December 1982, is a health benefits company whose business operations are conducted in the Health Care, Group Insurance and Large Case Pensions segments. On December 13, 2000, the Company was spun off, with the remaining entity merged into a subsidiary of ING Groep N.V. The Health Care segment consists of health and dental benefit products including health maintenance organization, point-of-service, preferred provider organization and indemnity products, and group insurance products including life, disability and long term care insurance products. The Group Life Insurance segment consists principally of renewable term coverage, the amounts of which may be fixed or linked to individual employee wage levels. Large Case Pensions manages a variety of retirement products, including pension and annuity products, offered to qualified defined benefit and contribution plans. It was an interesting week for the HMOs last week on the political front. The Supreme Court upheld state laws that require HMOs to accept opinions from review boards about medical procedures. The news was received poorly by the broader sector noting the drop in the HMO index in the two days following the court's decision. But AET remained virtually untouched by the weakness in the broader group, which was a sign of the stock's continued relative strength. Instead of the issues impacting the other HMOs in the sector, AET's weakness later in the week was mostly due to the broad market weakness that pressured virtually all stocks lower, save it for a few isolated cases such as the gold stocks. In fact AET traced another new yearly high last week, so clearly it's going to take more than a round of broader market weakness to pull this stock back to earth. Moving forward, we would ideally like to see some strength return to the broader market. At least some stabilization in stocks would help this play. But AET may be able to continue going it alone as it has done all year long. Early next week, traders might start looking for a rebound from current levels around the rising 10-dma, or slightly lower above the $48 level. A little pullback in here wouldn't be such a bad thing as it would help to remove some of the stock's short term overbought condition. Otherwise, a breakout to new highs above the $52 level on heavy volume can be used as an entry point into strength above current levels and onto new highs. BUY CALL JUL-45 AET-GI OI=1556 at $6.30 SL=4.75 BUY CALL JUL-50*AET-GJ OI= 739 at $2.75 SL=1.50 BUY CALL OCT-50 AET-JJ OI=2359 at $5.00 SL=3.00 BUY CALL OCT-55 AET-JK OI=1396 at $2.80 SL=1.75 Average Daily Volume = 1.16 mln ATH – Anthem, Inc. $72.50 (+1.11 last week) Anthem is a health benefits company serving over 7 million members, primarily in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado and Nevada. The company owns the exclusive right to market its products and services using the Blue Cross Blue Shield (BCBS) names in these states under license agreements with the Blue Cross Blue Shield Association. ATH'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 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. Despite the fact that it gave back a lot of ground over the past 2 days in the wake of the Supreme Court ruling, the Health Care Payor index (HMO.X) managed to end the week fractionally above where it went out the week before. That is pretty respectable when compared to the carnage that was doled out in the broad market last week. Shares of ATH actually held up fairly well as the week drew to a close, finding buying interest near the $71.50 level, aided by the 20-dma ($71.35). Part of the stock's strength is likely due to the company's statement that it expects to reaffirm its earnings estimates, while the other positive factor centers around the stock's pending addition into the Russell index at the end of the month. With strong support at $71 (also the site of the stock's 10-week ascending trendline), it looks like we are setting up for an attractive entry into the play. Take advantage of intraday dips near support to initiate new positions on the rebound, using strength in the HMO index as a confirming indicator. Traders that would prefer to enter on strength will need to see ATH clear the $74 level at a minimum, but will likely need to see strong volume propel the stock through its all-time highs at $75 before they'll be able to breathe easily about new positions. Our stop remains at $69, allowing aggressive traders to target new entries on a more extreme dip near the $70 level. BUY CALL JUL-70*ATH-GN OI=4942 at $4.70 SL=2.75 BUY CALL JUL-75 ATH-GO OI= 329 at $1.95 SL=1.00 BUY CALL SEP-75 ATH-IO OI= 165 at $4.50 SL=2.75 BUY CALL SEP-80 ATH-IP OI=2232 at $2.45 SL=1.25 Average Daily Volume = 1.33 mln DUK – Duke Energy Corporation $31.76 (+0.75 last week) Duke Energy offers physical delivery and management of both electricity and natural gas throughout the United States and abroad. The company is a leading domestic gatherer and processor of natural gas and develops, constructs an operates energy facilities worldwide. DUK offers 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. While the rest of the market was melting down (again) on Friday, the Utility sector (UTY.X) bucked the trend and actually bounced from minor support near $312 to stake claim to the enviable claim as one of only 4 sectors to show a gain on the day. DUK managed to follow suit, rebounding from the $31 level to close near the high of the day on strong volume (50% above the ADV). That's pretty encouraging in light of the recent spate of selling in the Utility sector and the all-consuming selling in the broad markets. So where do we go from here? DUK isn't out of the woods yet, as it still has to contend with the 2-month descending trendline ($32.25) following by significant resistance near $33. But if the Utility sector can extend its rebound next week, DUK stands a fighting chance of breaking through resistance. Continue using intraday dips near the $31 level to initiate new positions. We are leaving our stop in place at $29 to allow us to target new positions on a more severe intraday dip near the $30 level. Be careful not to catch a falling knife though. Wait for the bounce before initiating your trade. BUY CALL JUL-30 DUK-GF OI=3065 at $2.75 SL=1.25 BUY CALL JUL-32*DUK-GZ OI=3998 at $1.20 SL=0.50 BUY CALL OCT-32 DUK-JZ OI=1677 at $2.50 SL=1.25 BUY CALL OCT-35 DUK-JG OI=3667 at $1.45 SL=0.75 Average Daily Volume = 4.46 mln KFT – Kraft Foods, Inc. $41.93 (-1.02 last week) Kraft Foods, 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 has operations in 68 countries and sells 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. Here comes another Russell addition, and the fact that fund managers will need to be accumulating KFT ahead of the end-of-month Russell Shuffle, should give the stock a boost over the next week. Of course, it doesn't hurt that the stock has been in a solid upward trend for the past 5 months. The ascending channel that contains the price action over that time period defines support at $41 and resistance at $44. While the pattern won't last forever, it should continue to control the trading action in KFT through the end of the month. Note that the lows over the past 3 days have been in the vicinity of $42, so a rebound from that level next week might make for a decent entry into the play. But we would prefer to see a dip to that ascending trendline to allow us to better manage risk and reward. It is also interesting to note that the stock has been finding support at the 30-dma ($41.95) over the past month. With the added support of the Russell addition, KFT should continue to find support in the lower portion of that channel. Stops are currently set at $40.50 BUY CALL JUL-40 KFT-GH OI= 66 at $2.40 SL=1.25 BUY CALL JUL-42*KFT-GV OI= 474 at $0.90 SL=0.50 BUY CALL SEP-42 KFT-IV OI= 1764 at $1.85 SL=1.00 BUY CALL SEP-45 KFT-II OI=10033 at $0.80 SL=0.25 Average Daily Volume = 1.62 mln OHP – Oxford Health Plans, Inc. $49.11 (-0.22 last week) Oxford Health Plans is a healthcare company providing health benefit plans primarily in New York, New Jersey and Connecticut. The company's product line includes its point-of-service plans, the Freedom Plan and the Liberty Plan, health maintenance organizations, preferred provider organizations, Medicare+Choice and third-party administration of employer-funded benefit plans. Bullish investors want to know whether this is it for the Health Care Payor's index (HMO.X), or if it is just another pause before the sector charges to new highs. Unless you've been hiding under a rock, you remember the strong bullish run the HMO index had earlier this year, led in part by a strong breakout and rally from OHP. Since its breakout over the $32 level in early January, OHP has been riding a solid ascending trendline, which currently rests at $48.50. What we're focused on right now though is the intraday support near $49. If the bulls can manage to kick the HMO stocks back into rally mode next week, then a rebound from this level looks attractive for new entries. Otherwise, we'll want to look for a bounce off the trendline to provide access into the play. We want to continue riding the trend as long as it lasts, and expect that if the broad market stages a comeback next week, the HMO index should continue to outperform and OHP should be right there with the leaders. BUY CALL JUL-47 OHP-GT OI= 513 at $3.00 SL=1.50 BUY CALL JUL-50*OHP-GJ OI= 494 at $1.50 SL=0.75 BUY CALL AUG-47 OHP-HT OI= 70.at $3.70 SL=2.00 BUY CALL AUG-50 OHP-HJ OI=2082.at $2.40 SL=1.25 Average Daily Volume = 782 K ************* NEW PUT PLAYS ************* KMI - Kinder Morgan $40.20 (-0.56 last week) Kinder Morgan, Inc. is an energy storage and transportation company in the United States, operating, either for itself or on behalf of Kinder Morgan Energy Partners, L.P., more than 30,000 miles of natural gas and products pipelines. The Company owns and operates Natural Gas Pipeline Company of America, a major interstate natural gas pipeline system with approximately 10,000 miles of pipelines and associated storage facilities. The Company owns and operates a retail natural gas distribution business serving approximately 233,000 customers in Colorado, Nebraska and Wyoming. The Company constructs, operates and, in some cases, owns natural gas-fired electric generation facilities. Try as they might, the natural gas stocks can't get any respect. Managements of these companies are trying all that they can to restore confidence. For instance, KMI reaffirmed guidance in late May saying that they were comfortable with this year's numbers as they continued to realize strong gains in each of the businesses. Yet the market didn't take notice, which goes to show just how negative the sentiment in the energy sector has become surrounding the Enron debacle, and the events surrounding other so called energy merchants such as Williams and Dynergy. With the negativity growing by the day, and more skeletons to come out of the closet, KMI appears to be heading back down to its lows traced in late February down near the $37 level. The stock traced a small relief rally last week, which saw it trade as high as the $42 level before reversing lower and ultimately failing in Friday's session with the trade back down to the $40 level. As early as next week, the stock could retest its near term lows down around the $39 level, which is the mark that we're watching to act as potential support. Look for that level to fail and offer a momentum based entry point into weakness on further selling in the energy sector and the broader market. If the stock does by chance try to rebound again, look for another failed rally attempt near the 10-dma overhead just below the $41 level, or slightly higher just below the $42 area near term congestion. Our stop is just above that short term congestion at the $42.50 level. BUY PUT JUL-40*KMI-SH OI=1393 at $2.05 SL=1.25 BUY PUT AUG-40 KMI-TH OI=1556 at $2.90 SL=1.75 Average Daily Volume = 743 K TBH - Telecom Brasil Sa Te $20.60 (-3.83 last week) Telebras HOLDRS operated as a telecommunication company until May 1998, whereby it spun-off 12 new companies. The Company's controlling shareholders has announced their intention to liquidate and dissolve the Company. Fears are building over Brazil's economy. The negative sentiment reached panic level late last week. Foreign investors are growing cautious on Brazil's ability to meet its debt payments, which in turn sent the country's currency, the real, to all time lows in foreign exchange trading last week. The root of the problem stems from Brazi's ballooning $274 billion debt load, and its ability to meet those obligations. The growing turmoil in the currency market is trickling down to the rest of the capital markets food chain and into the stocks of the country. One of the once high flying issues of Brasil, TBH, is on the brink of a major break down that could see the stock fall sharply lower into the coming weeks. TBH is merely a shell company that once was a large telecommunications company that was spun off into a dozen separate companies. But the ticker TBH is still very much a tradable asset. What we're watching for is a big breakdown below its multi year low at the $20 level. The stock rebounded from that level last fall, but it looks like it's going to be breaking that support on this leg lower. Watch for a high volume trade to the $20 level as a sign that the selling is continuing and that the troubles in Brazil are mounting. Use such a decline to enter new put plays and target the mid teens to the downside. Our stop is initially in place at the $25 level. BUY PUT JUL-22*TBH-SX OI= 160 at $2.65 SL=1.25 BUY PUT OCT-20 TBH-VD OI= 100 at $2.45 SL=1.00 Average Daily Volume = 462 K ************************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 06-23-2002 Sunday 4 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** CURRENT PUT PLAYS ***************** MIL - Millipore $31.04 (-3.03 last week) Millipore Corporation is a multinational bioscience company that provides technologies, tools and services for the discovery, development and production of new therapeutic drugs. The Company's products serve the worldwide life science research, biotechnology and pharmaceutical industries. Millipore's products are based on a variety of enabling technologies, including the Company's membrane filtration and chromatography technologies. In life science research, Millipore offers products for genomics, proteomics, drug discovery and general laboratory applications. It was another stellar week for the bears in MIL as the stock lost another $3 during the week. Recall that during the prior week MIL shed about $3. Obviously the downside momentum in this stock shows no signs of letting up as the weakness in the broader market is only adding to the weakness that is already at work in MIL. Of course the weakness in the Biotechnology Sector Index (BTK.X) is certainly helping the cause of the bears in MIL. The further the BTK.X falls, the more downside we're likely to enjoy in MIL as the company is tied closely to the sentiment in the biotechnology industry. Traders looking for new put play entry points can consider entering into weakness below current levels, but only in a falling market environment and on weakness in the BTK.X. A better entry point will probably come in the next few days closer to a short term resistance level. The big decline last Friday which saw MIL trade from $34.41 down to $31.10 might need to be partially retraced in next week's trading. By that time, it's most likely that the downward sloping 10-dma will be a lot lower than where it closed last Friday at the $34.13 level because the moving average will take into account the much lower prices in the last two days. Another rollover from that 10-dma should offer a solid entry point into new put plays just like it did early last week. Wait for the stock to come up to that level if it shows signs of weakness, then look to pounce on new put plays once it rolls over from the 10-dma. BUY PUT JUL-35*MIL-SG OI= 24 at $4.50 SL=3.00 BUY PUT JUL-30 MIL-SF OI=196 at $1.25 SL=0.50 Average Daily Volume = 401 K ZLC - Zale $38.40 (-0.73 last week) Zale Corporation, and with its wholly owned subsidiaries, is a specialty retailer of fine jewelry. As of July 31, 2001, the Company operated 2,344 specialty retail jewelry stores and kiosks located primarily in shopping malls throughout the United States, Canada and Puerto Rico. The Company principally operates under six brand names including Zales Jewelers, Zales the Diamond Store Outlet, Gordon's Jewelers, Bailey Banks & Biddle Fine Jewelers, Peoples Jewelers and Piercing Pagoda. Zales Jewelers provides jewelry to a broad range of customers. It's getting closer, and closer. Can you feel it? ZLC is on the edge of a major breakdown and it feel one step closer during last Friday's session. The stock fell by about another 1 percent, or about 40 cents during the session. In doing so, ZLC crept ever closer to its 200-dma, which finished last Friday at the $37.70 level. The stock actually bounced from the $37.90 level, just a few ticks above the 200-dma, so obviously there were some bulls in there last Friday trying to prevent the stock from breaking down one more day. But we have the feeling that those bulls will be disappointed next week when ZLC finally breaks down below its short term support and the 200-dma. We expect some volatility to accompany any break below the 200-dma, so we need to set forth a specific level to spot and confirm a breakdown. That level is the $37 level, which is a little more than $1 away from the stock closed last Friday. The $37 level will not only confirm a breakdown below the 200-dma, but it will also confirm a breakdown below the short term support level at the $38 mark which has propped the stock up three times in the last three months. A break below the $37 level should come on heavy volume as the longs still in this stock see the obvious technical failure. So simply look for a breakdown below the $37 level on heavy volume in a weak market environment. From there, we'll target the $34 level to the downside. BUY PUT JUL-40*ZLC-SH OI=55 at $2.65 SL=1.50 BUY PUT JUL-35 ZLC-SG OI= 0 at $0.35 SL=0.00 Average Daily Volume = 253 K TDS - Telephone Data Systems $62.00 (-1.15 last week) Telephone and Data Systems, Inc. (TDS) is a diversified telecommunications service company with wireless telephone and wireline telephone operations. TDS conducts substantially all of its wireless operations through United States Cellular Corporation (U.S. Cellular) and substantially all of its wireline telephone operations through its wholly owned subsidiary, TDS Telecommunications Corporation. TDS, U.S. Cellular and TDS Telecom hold various investments in publicly traded companies, the majority of which were the result of sales or trades of non-strategic assets. Minority positions are held in Deutsche Telekom AG, Vodafone plc, Rural Cellular Corporation and VeriSign, Inc. There's no relief in sight for the telecom sector. In fact the news just keeps getting worse and worse. WCOM had its debt rating cut by Moody's late last week. SBC reported that it had reduced its stake in a Latin American telecom investment. Qwest Communications was downgraded by AG Edwards Friday morning. And the KPNQwest network was scheduled to be shut down in a matter of days. They say that it's always darkest before dawn, but unfortunately for telecom, it just keeps getting darker and darker, with no dawn in sight. That spells trouble for the high priced stocks in the telecom sector who have become favorite targets of the short sellers. And at $62, TDS is one of the highest priced stocks in the group seeing as most of the once telecom bellwethers sport single digits now. TDS' price action last week revealed the classic short selling pattern of a sharp two day short covering rally, followed by more selling the latter part of the week. The stock traded back down to near its relative lows during last Friday's session, which puts TDS at risk for a big breakdown going into next week's trading. Traders can look for a high volume decline below the $61 level next week on further deterioration in the telecom sector. And confirm weakness in the broader market before entering a momentum based put play. If the stock does go through another short covering rally, just step aside and let the nervous shorts carry the stock up to a more favorable entry point closer to the downward sloping 10-dma, which finished the week at the $65.24 level. BUY PUT JUL-65 TDS-SM OI=110 at $5.30 SL=3.25 BUY PUT JUL-60*TDS-SL OI=193 at $3.00 SL=1.50 Average Daily Volume = 244 K EMMS - Emmis Communications $22.53 (-3.16 last week) Emmis Communications Corp. is a diversified media company with radio broadcasting, television broadcasting and magazine publishing operations. The Company operates the sixth largest publicly traded radio portfolio in the United States based on total listeners. The 20 FM radio stations and three AM radio stations the Company operates in the United States serve the nation's three largest radio markets of New York City, Los Angeles and Chicago, as well as Denver, Phoenix, St. Louis, Indianapolis and Terre Haute, Indiana. The 15 television stations the Company operates serve geographically diverse mid-sized markets in the United States as well as the large markets of Portland and Orlando and have a variety of television network affiliations, including five with CBS, five with FOX, three with NBC, one with ABC and one with WB. Communications stocks took another hit late last week, specifically the radio communications stocks. Last week, Moody's cut the debt rating on industry heavyweight Cox Radio (NYSE:CXR) based on their belief of only a moderate rebound in the radio advertising market. Moody's speculated that radio advertising would likely remain weak into the next year. The negative sentiment surrounding the radio group pressured EMMS ever lower into Friday's session which saw the stock plummet below its 200-dma on a sharp increase in daily trading volume which reached nearly 1.5 million shares on the day. The stock's sharp fall below its 200-dma was surprising because a bounce was not even attempted. No, the stock just fell straight through that level and continued much lower to close decidedly below its 200-dma, which should have caught the attention of many institutional shareholders. Looking forward, the 200-dma should now serve as strong short term resistance. Keep an eye on that level for entry points during any intraday rally attempts followed by rollovers. The 200-dma finished the week at the $23.09 level. Looking to the downside, the stock has some potential short term support coming from the congestion developed in January around the $22 level. But once that support is worked through, the stock shouldn't find much help in terms of support until the $16 level. If the stock continues lower next week, look for a breakdown below the $21 level as a momentum based entry point upon a break of the short term support. BUY PUT JUL-25*QMJ-SE OI=38 at $3.40 SL=2.00 BUY PUT JUL-22 QMJ-SX OI=21 at $1.95 SL=0.75 Average Daily Volume = 711 K NVLS - Novellus Systems $32.23 (-3.74 last week) Novellus Systems, Inc. (Novellus) manufactures, markets and services semiconductor processing equipment. The Company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. It doesn't seem too long ago that the chip equipment companies were forecasting better times ahead. For NVLS, it was only about a month ago that the company said that sales and orders were increasing and that it actually guided higher for the year. But that guidance seems to have been forgotten rather quickly after the warning from Intel and the further bad news from Advanced Micro Devices. The chip equipment stocks had been the go to group in technology up through the end of April and into early May, but that trend has clearly reversed in an almost straight decline lower for NVLS, among other leading chip equipment stocks. And the downward trend does not appear to be coming to an end any time soon. It was the strong and almost straight higher rally last fall that left plenty of hot air underneath these stocks, which has NVLS at risk of retesting its September lows over the course of the next week or two, especially if its trend continues to accelerate to the downside. With the information technology spending rebound being pushed out further and further by the day, and more warnings from technology companies likely to come to surface next week, NVLS should keep working lower on heavy volume. Momentum traders can look for a break below current levels early next week if the selling in the SOX and the broader technology sector continues. If NVLS does put together a rebound, look for the stock to rollover once more near the upper end of its declining channel now at the $35.50 area. BUY PUT JUL-35*NLQ-SG OI=5144 at $4.70 SL=2.75 BUY PUT JUL-30 NLQ-SF OI=1549 at $2.05 SL=1.00 Average Daily Volume = 8.70 mln ENZN – Enzon, Inc. $23.34 (-2.20 last week) Enzon is a biopharmaceutical company that develops and commercializes enhanced therapeutics for life-threatening diseases through the application of its two proprietary platform technologies: polyethylene glycol (PEG) and single-chain antibodies. The company applies PEG technology to improve the delivery, safety and efficacy of proteins and small molecules with known therapeutic efficacy. ENZN applies its single-chain antibody technology to discover and produce antibody-like molecules that offer many of the therapeutic benefits of monoclonal antibodies while addressing some of their limitations. The Biotech beatings will continue until morale improves! Although the rate of decline appeared to be slowing as the Biotechnology index (BTK.X) approached its closing lows from a couple weeks ago, the daily Stochastics is in full bearish decline, and it looks like those lows will fall to the bearish assault early next week. Likewise, our ENZN play got beaten up again in the latter half of last week, ending on Friday right at major support near the $23 level. Let the market serve up one more bad-news story on a Biotech stock and it looks like the BTK will be knocking on the door of the $300 level and that would almost assuredly send ENZN down towards its next level of significant support in the $15-16 area. And that is still well above the current bearish price target ($7) from the PnF chart. So long as rallies continue to be sold by the bears, we can use each one that fails to initiate new positions. While a breakdown under $23 would certainly be welcome for initiating new positions, we're currently leaning toward an oversold rebound early in the week. Take advantage of any rally that fails below the $26.50 level (the site of our stop) to initiate new plays. The resistance level most likely to turn back the bullish advance is at $24.50-25.25, followed by $26.25. Until support fails, we're keeping our stop at $26.50. BUY PUT JUL-25*QYZ-SE OI=293 at $3.20 SL=1.50 BUY PUT JUL-22 QYZ-SX OI=373 at $1.75 SL=0.75 Average Daily Volume = 1.43 mln IBM - International Bus. Machines $68.75 (-7.42 last week) International Business Machines uses advanced information technology to provide customer solutions. The company provides value to its customers through a variety of solutions including technologies, systems, products, services, software and financing. IBM's three hardware product segments are comprised of Technology, Personal Systems and Enterprise Systems. Other major operations consist of a Global Services segment, a Software segment, a Global Financing segment and an Enterprise Investments segment. Investors have got to be wondering where support is for IBM. After piercing the $75 level a couple weeks ago, it seemed a foregone conclusion that the stock was heading lower...much lower. Sure enough, once the broad market bounce failed in the middle of the week, shares of Big Blue have seen heavy selling pressure, culminating with Friday's plunge under the $70 level. So how far can she go? Looking at the weekly chart shows the first meaningful support at $67, with major support coming in at $60. In addition to that being strong support from 1998, it is also the 62% retracement of the stock's rally from the 1993 lows to the 2000 highs. As if that weren't enough, the current sell signal on the PnF chart is pointing to an eventual price target of $61. That makes a potent case for continuing to sell all rallies in the stock and that's just what we intend to do. While highly unlikely, we'd we thrilled to get a rally up to the $74 resistance level for new entries. But short of a broad market rebound, that isn't likely to happen over the near term. So we'll have to set our sights a bit lower, looking for a failed rally first at $71 and then at $72.50. Of course if the selling continues, new positions can be considered on a break below the $68 level. Just keep a sharp lookout for a short-covering rally off the $67 level. Lower stops to $74.25. BUY PUT JUL-70*IBM-SN OI=29484 at $4.60 SL=2.75 BUY PUT JUL-65 IBM-SM OI= 7970 at $2.45 SL=1.25 Average Daily Volume = 8.70 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** How Many Bulls Can Dance on the Head of a Pin? By Mark Phillips mphillips@OptionInvestor.com Not many, when there is one angry bear perched up there, swinging powerful roundhouse blows at everything with horns or hooves! Don't ask me where this mental image came from, but Friday night I got this picture of the bulls scaling a near vertical rock face to reach this narrow peak. But once they got there (the head of the pin) this psychotic angry bear would kick them off one by one, resulting in a precipitous plunge back to earth. Does that sound anything like what we've been experiencing over the past several weeks? It does to me, as there hasn't been the slightest hint of a rally that could stick since the middle of May. As I mentioned last weekend, I didn't have any confidence that the rebound off the Friday lows had any hope of sticking. You may wonder why I've had such a cynical view of all these half-hearted rally attempts. While I could say that my variety of market indicators was telling me the markets were due for a sharp fall (which they were), that really hasn't been the source of my bearishness. No, the key factor for me has been the action of the VIX in relation to the broad market price action. For the past few weeks the VIX has shown a stubborn lack of willingness to price fear into the marketplace, with each hint of a recovery causing a sharp drop in the VIX. This was particularly disconcerting on days where a sharp plunge in the market would produce a sharp rise in the VIX, but the afternoon recovery off the lows would drive the VIX sharply lower, often times ending at its low of the day. That is not healthy action, as it tells us that every trader (and their brother) is looking for this dip to be the bottom that they can buy and hold. In short, there was no fear in the market. And what little there was during the day would disappear faster than rain in the desert. Look at a chart of the VIX, specifically focusing on the candles from 6/7 and 6/14. Did the dips and rebounds in the broad indices on those days amount to anything significant for the bulls? Of course not! I've been pounding this drum for awhile now, that there will not be another meaningful, tradable bottom in the market without the VIX running to a bearish extreme (at or above the 30 level). Well, we finally got above 30 and held there for the past 2 days and that is encouraging, as we're starting to see a bit of stick to the fear index. But we're not there yet. By the time this cycle has run its course, I expect to see the VIX moving above the 35 level and possibly into the low 40's. I'm not going to go into a lot of detail on the broad markets this weekend, as I'm sure Jim will do plenty of that, but here are some of the benchmarks I'm watching for that I think are necessary in addition to an extreme reading in the VIX. First off, the DOW needs to decline to the next solid level of support at 9000-9075, although I wouldn't rule out a dip into the 8800-8900 area (the 75% retracement of the rally off the September lows). With the S&P500 now below 1000, I expect to see a retest of its September lows near the $945 level. The weakest of all is the NASDAQ, with the NASDAQ-100 currently trading below the September lows. Using the QQQ as my proxy for this index, I've been looking for the PnF bearish price objective of $25 to be achieved for several months now and that could very well come next week. I wouldn't be at all surprised to see the QQQ decline down to the $23 level before that elusive bottom is in place. Simply put, fasten your seatbelts, as I expect the ride to be very bumpy from here on out. With that as preamble, let's peruse our list of plays and candidates. Portfolio: MSFT - Up until Friday, MSFT had been holding up rather well, a rare spot of strength in the severely whipped Technology sector. The more than 3% decline on Friday came on heavy volume and it looks like the next dip is underway. The critical issue this week will be whether the stock can managed to hold above the $50 level. A rebound from that area would likely set up another solid entry point, while a drop under our stop at $48 would be bad news indeed. If looking to play this one, wait for the bounce! XOM - While it may be boring, it certainly isn't getting taken apart with the rest of the market. I continue to think we are near a solid tradable bottom for XOM. That ascending trendline (now at $38.75) continues to provide support, helped along by the 62% retracement of the rally off the September lows ($38.66). Dips near this level are still buyable, although what we really need to see is a convincing rally through the 200-dma and a close over $40.50. PG - Relative strength continues to be the theme with PG, as it is once again holding up very well relative to the rest of the stocks in the DOW. Now in the middle of its ascending channel, we could see a pullback into the $89-90 support level over the next week or so, but I would then expect the bottom of that channel to provide support once again. Another rebound off the bottom of the channel can be used for initiating new positions, although we want to keep those stops in place. I'm leaving it at $86 so we don't get shaken out in the near-term market volatility. Note the large increase in the Return column in the Portfolio below. This is due to a large increase in the spread, which widened to $2.40 on the '04 LEAP as of Friday's close. If we use the bid price to calculate %Return, it falls to a return of only 20%. Can you say volatility?? Traders with a large gain in the position at this point might want to consider taking partial profits and look to re-enter on the expected dip or when volatility dissipates a bit. BBY - Bye Bye BBY. Yikes, that was painful. See what happens when trying to pick the bottom when the rest of the market isn't there yet? With a violated stop at $37, we've got to let this one go. Watch List: WMT - Sure enough, WMT rolled over with the rest of the market last week, but I'm starting to feel a lot better about this one. Let the current decline run its course and target new entries either on a rebound from the $53-54 level (the site of the last 2 lows, which could set up a H&S bottom) or on a sharp dip and rebound from the $51 level (the site of the 61% retracement of the rally off the September lows). BRCM - The further the SOX drops, the better I like the BRCM play. That $18-19 level is looking like it might be the right place to draw our line in the sand. Don't catch a falling knife if the stock falls through the $18 level, but right now our entry strategy is looking good. INTC - We're getting close now aren't we? INTC is now trading below its September lows and moved as low as $18.40 on Friday. Keep a sharp eye on this one, as a rebound could be coming soon. A dip into the $17-18 range should be a solid entry point as it is the site of the lows from 1997-1998, so I am lowering the entry target accordingly. Just make sure to wait for the rebound before initiating new positions. As a benchmark, keep an eye on the SOX index, which could be on its way to finding a meaningful bottom in the vicinity of $340. QQQ - If you haven't made the move over to PnF charting, you're really missing out and it looks like early next week could see the QQQ tagging that $25 target. There's nothing magic about that level though, so don't enter the play just because you see a print at $25. Wait for the rebound with some buying conviction. BBH - Alas, it looks like I was too late to this party as well. For some reason my timing has been off with the Biotechs lately and we never got enough of a bounce to consider it a solid entry point. Consider it a missed opportunity. The reason I'm leaving the play alive is that I think with all the bad news in the sector, we could see a series of solid entry points to the downside before it gets healthy again. I'm leaving the entry point unchanged this week as we need to see what kind of rebound materializes when we do put in a near-term bottom. Needless to say, it was another rough week for the bulls, but the good news is that we are that much closer to our next solid rally. I thought long and hard about adding new Watch List plays this weekend, but decided against it. Too many choices cloud the mind, so let's keep it simple. We have some solid candidates both on the Watch List and Portfolio that should perform quite well once the capitulation that we have been patiently waiting for occurs. Note that on all of our plays we're looking to catch an important bottom. While I know the urge is strong to pick the absolute bottom, please don't try to catch a falling knife. Wait for the rebound to show itself before entering. It is far better to miss a couple $$ on the upside than catch a knife that hasn't stopped falling yet. Our failed play on BBY is a perfect example of what can happen. I still like that stock, but because of jumping in too soon, I'm not in a position to benefit when that elusive bottom does occur. I know I have beaten incessantly on the topic of market volatility in this column, specifically focused on the VIX. A big part of my obsession is that it is such a powerful sentiment indicator especially at market bottoms. But the other part of my motivation is to try to show the fallacy of the silly statements from many that perhaps the nature of the indicator is changing. Hopefully this latest spike in the VIX and decline in the markets will put to rest (at least for a while) the wrong-headed notion that the markets can ever stage a meaningful rally at the same time that the VIX is rising. Hopefully my highlighting of this important indicator can help you stay out of hot water, preventing you from looking for rallies in all the wrong places. I think that listening to the story told by history provides much more fertile ground for cultivating long-term profits than trying to ask a leopard to change its spots. While I try to provide solid trade candidates on a weekly basis, my principal aim is to help educate my readers so that they won't need my commentary to navigate the ebbs and flows of the financial markets. My greatest pleasure comes from hearing from you and how you have learned from what I've attempted to teach. That is because I know that when you truly learn a few simple lessons that MUST BE learned, trading and financial success will follow. Thank you for allowing me to be your guide. Have a safe week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: MSFT 05/13/02 '03 $ 55 MSQ-AK $ 5.90 $ 6.10 + 3.39% $48 '04 $ 55 LMF-AK $10.20 $11.00 + 7.84% $48 XOM 05/22/02 '03 $ 40 XOM-AH $ 3.00 $ 2.60 -13.33% $38.50 '04 $ 40 LXO-AH $ 5.10 $ 4.70 - 9.80% $38.50 PG 05/30/02 '03 $ 95 PG -AS $ 3.70 $ 6.40 +72.97% $86 '04 $ 95 KBJ-AS $ 9.00 $13.20 +46.66% $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 $53-54 CC JAN-2003 $ 50 VWT-AJ JAN-2004 $ 55 LWT-AK CC JAN-2004 $ 50 LWT-AJ QQQ 06/09/02 $25, $23 JAN-2003 $ 28 OZC-AB CC JAN-2003 $ 25 OZC-AY JAN-2004 $ 28 LRI-AY CC JAN-2004 $ 25 LRI-AJ INTC 06/16/02 $17-18 JAN-2003 $ 20 NQ -AD CC JAN-2003 $ 15 NQ -AC JAN-2004 $ 20 LNL-AD CC JAN-2004 $ 15 LNL-AC PUTS: BBH 06/09/02 $96-98 JAN-2003 $90 GBZ-MR JAN-2004 $90 KOV-MR JAN-2005 $90 XBB-MR New Portfolio Plays None New Watchlist Plays None Drops BBY - Catch a falling knife, lose a finger! While I thought BBY might see a dip into the $38-39 area following our entry last weekend, I certainly didn't expect to see the stock fall apart like it did this week! Part of my decision to take a position at the $40 level was due to the fact that was the bearish price target from the PnF chart. As Jeff says frequently, bearish targets can be exceeded, and this one certainly was. Obviously, investors didn't like the slight downward guidance provided with the company's earnings report on Monday. With our stop at $37 violated, we have to drop the play this weekend. I still like the prospects for BBY longer-term, but I want to let a bottom form before adding it back onto the Watch List. ************************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 06-23-2002 Sunday 5 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Selling Covered-Calls: Some Guidelines For Using This Section By Mark Wnetrzak Each week we receive a number of similar questions from readers who are new to the Option Investor Newsletter. Some of the most frequent topics include portfolio diversity, position management and use of the "supplemental plays" list. New readers often ask how they should approach this section and the range of candidates. Should they attempt to participate in all of the selections or focus on one or two issues with a larger position? The first requirement, before initiating any new play, is comprehensive due diligence. There are a number of factors to consider with the most important being the overall condition of the market and the sector or industry in which the target issue resides. Traders should also clearly understand the risk-reward ratio of this particular strategy and use the technique only when it conforms to their portfolio outlook and personal trading style. As far as entering the positions, our prices are based on Friday's closing quotes, so they may not be the same on Monday, or later in the week. With that fact in mind, each individual investor must decide which candidates meet their criteria for acceptable profit potential and downside capital risk, and enter those positions at the appropriate cost basis. Most of our readers use a "buy-write" order to guarantee a fill only when the position is available at a specific price. After the position is initiated, money management becomes the key factor to success. Since this is a limited profit strategy, no one can afford to have many losers and that's why it is so important to monitor each issue on a daily basis and exit or adjust any plays that experience a significant change in character. Another popular question concerns the most difficult decision that all traders face: when to exit a position. The one outstanding principle that novice investors fail to adhere to is the need to outline a basic exit strategy before initiating any position to eliminate emotional decisions. This plan must be simple enough to recall and implement while monitoring a portfolio of plays in a volatile market. In addition, these early-exit rules should apply across a range of situations and be designed to compensate for one's weaknesses and inadequacies. To be effective in the long term, they must be formulated to help maintain discipline on a general basis and at the same time, offer a timely memory aid for the most difficult situations. Utilizing this type of system addresses a number of problems, but the most significant obstacle it eliminates is the need for judgment under pressure. A sound exit strategy will also help you avoid exposing your portfolio to excessive losses and this is important because the science of successful trading is far less dependent on making profits, but rather on avoiding undue outflows. In fact, the necessity to limit draw-downs and prevent failed trades from significantly eroding capital should be a dominant theme in any trader's approach to the market. Further, not only must losses be limited, but each individual position must be reviewed on a regular basis to ensure that overall portfolio risk is kept to a practical minimum. Finally, readers often ask about the "Supplemental" picks and why they are not included in the regular group of listed plays. With regard to these added positions, the disclaimer offers a general explanation: "The following group of issues is a list of additional candidates to supplement your search for profitable trading positions." For one reason or another, they simply did not make our final list, which is generally limited to 7 to 10 candidates. However, the process of choosing the "published" plays is highly subjective and quite often there are additional issues that warrant individual consideration. That is why we now include some of the stocks that just missed our final cut (for various reasons), so that our readers can decide if they meet their personal criteria for favorable plays. Our primary task is to provide a list of potentially profitable positions, greatly reducing the initial research for candidates in this strategy. At the same time, we expect our subscribers to decide which plays meet their risk-reward profile and hopefully, with examination and analysis far beyond that which we can provide in the few hours between Friday's market close and the publishing deadline, they will select only those positions that are winners. 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 7.97 JUN 7.50 1.10 *$ 0.55 8.9% CLHB 11.76 13.52 JUN 10.00 2.15 *$ 0.39 8.8% COB 5.29 5.00 JUN 5.00 0.55 $ 0.26 7.9% SRP 7.81 7.47 JUN 7.50 0.75 $ 0.41 6.5% UNTD 11.00 10.89 JUN 10.00 1.75 *$ 0.75 5.9% USU 9.34 7.97 JUN 7.50 2.30 *$ 0.46 5.7% PCLE 10.59 10.23 JUN 10.00 1.15 *$ 0.56 5.2% MEDC 14.00 12.99 JUN 12.50 2.00 *$ 0.50 4.7% SIE 18.50 21.40 JUN 17.50 2.00 *$ 1.00 4.4% NTIQ 22.10 19.45 JUN 20.00 3.50 $ 0.85 3.3% ACXM 17.78 17.08 JUN 17.50 0.85 $ 0.15 1.3% INET 7.95 6.92 JUN 7.50 0.90 $ -0.13 0.0% KROL 23.40 21.55 JUN 22.50 1.45 $ -0.40 0.0% DLTR 40.27 38.17 JUN 40.00 1.55 $ -0.55 0.0% VVTV 21.99 18.17 JUN 20.00 3.10 $ -0.72 0.0% VVTV 21.75 18.17 JUN 20.00 2.40 $ -1.18 0.0% VSNX 11.49 8.01 JUN 10.00 1.90 $ -1.58 0.0% IPXL 8.01 7.55 JUL 7.50 1.10 *$ 0.59 6.2% HPLA 13.95 14.77 JUL 12.50 2.40 *$ 0.95 6.0% COB 5.35 5.00 JUL 5.00 0.70 $ 0.35 5.5% CANI 11.26 11.10 JUL 10.00 1.85 *$ 0.59 4.5% MCDT 8.99 8.05 JUL 7.50 1.90 *$ 0.41 4.2% *$ = Stock price is above the sold striking price. Comments: The market environment continues to favor the "Bears" and the horrid move lower on heavy volume by the DOW could send the NASDAQ and S&P-500 well below their September lows. Money management remains the central theme for the covered-call portfolio. Monday's over-sold rally lost steam on Tuesday but it did offer a reasonable (though quick) opportunity to exit or adjust unfavorable positions. We closed our positions as each stock broke through near-term support, thus raising the probability of further downside movement. Remember, sitting on the sidelines isn't a bad thing as the ITM Covered-Call strategy requires a "neutral" to "bullish" outlook. Keep a close watch on any positions you retain as we move into the summer doldrums. Positions Closed: Northfield Labs (NASDAQ:NFLD), Endocare (NASDAQ:ENDO), AirGate PCS (NASDAQ:PCSA), MIPS Technologies (NASDAQ:MIPS), CheckFree NASDAQ: CKFR), Retek (NASDAQ:RETK), Med-Design (NASDAQ:MEDC) - $15 strike, Macromedia (NASDAQ:MACR), Extreme Networks (NASDAQ:EXTR), Given Imaging (NASDAQ:GIVN), Quest Software (NASDAQ:QSFT), Informatica (NASDAQ:INFA), and Urologix (NASDAQ:ULGX). 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 ABFS 25.48 JUL 25.00 FDQ GE 1.45 0 24.03 28 4.4% JBHT 31.05 JUL 30.00 JHQ GF 2.15 16 28.90 28 4.1% MCAF 14.26 JUL 12.50 CFU GV 2.25 122 12.01 28 4.4% MIR 8.70 JUL 7.50 MIR GU 1.60 504 7.10 28 6.1% NCEN 31.85 JUL 30.00 URE GF 3.40 537 28.45 28 5.9% PETM 17.50 JUL 17.50 QPT GW 0.80 1436 16.70 28 5.2% REV 4.96 JUL 5.00 REV GA 0.45 235 4.51 28 10.8% 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 REV 4.96 JUL 5.00 REV GA 0.45 235 4.51 28 10.8% MIR 8.70 JUL 7.50 MIR GU 1.60 504 7.10 28 6.1% NCEN 31.85 JUL 30.00 URE GF 3.40 537 28.45 28 5.9% PETM 17.50 JUL 17.50 QPT GW 0.80 1436 16.70 28 5.2% ABFS 25.48 JUL 25.00 FDQ GE 1.45 0 24.03 28 4.4% MCAF 14.26 JUL 12.50 CFU GV 2.25 122 12.01 28 4.4% JBHT 31.05 JUL 30.00 JHQ GF 2.15 16 28.90 28 4.1% 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). ***** ABFS - Arkansas Best $25.48 *** Trucking Sector Ignites! *** Arkansas Best (NASDAQ:ABFS) is a diversified holding company engaged through its subsidiaries primarily in motor carrier transportation operations and intermodal transportation opera- tions. Principal subsidiaries are ABF Freight System, Clipper Express and related companies. The company's less-than-truck- load (LTL) motor carrier operations are conducted through ABF Freight System, Inc., ABF Freight System (B.C.), Ltd., ABF Freight System Canada, Ltd., ABF Cartage, Inc., and Land-Marine Cargo, Inc. Clipper operates through Clipper Freight Management and Clipper LTL, and offers domestic intermodal freight services. ABF Freight System announced on Friday that it is revising its general rates and charges on August 1, 2002. Typically, the increase will be 5.8%, although the amount will vary by lane and shipment characteristic. This week the trucking sector has gained the favor of investors as the companies are beginning to see benefits from the recovering economy, saying shipping volumes are turning up from sustained declines. We simply favor the bullish move back above the 150-dma on increasing volume, which suggests further upside movement. With stocks in the trucking segment currently in favor, this position in ABFS is an excellent candidate for a broad market hedge. JUL 25.00 FDQ GE LB=1.45 OI=0 CB=24.03 DE=28 TY=4.4% ***** JBHT - J.B. Hunt $31.05 *** Trucking Sector - Part II *** J.B. Hunt Transport Services (NASDAQ:JBHT) along with its wholly owned subsidiaries, is a diversified transportation services company. Through its subsidiaries and associated companies, JBHT provides a wide range of logistics and transportation services to a diverse group of customers. These customers request targeted transportation services or they outsource their transportation function to JBHT, or one of its associated companies. J.B. Hunt also directly transports full-load "containerizable" freight in the continental United States and portions of Canada and Mexico. J.B. Hunt Transport Services recently completed the sale of 5.1 million shares of common stock at $26 per share. Standard & Poor's also affirmed its ratings on the company, saying the equity offering and debt reduction will modestly improve Hunt's capital structure. Traders who want to own a solid company in the trucking sector, which has gained bullish momentum, should also consider this position for their long-term portfolio. JUL 30.00 JHQ GF LB=2.15 OI=16 CB=28.90 DE=28 TY=4.1% ***** MCAF - McAfee.com $14.26 *** Earnings Speculation *** McAfee.com (NASDAQ:MCAF) provides personal computer security and management application services and products for consumers and small to medium-sized businesses over the Internet. Through the company's Website, consumers can subscribe to online services and purchase products to secure, repair, update and upgrade their PCs. As a managed services provider, McAfee.com generates revenue by encouraging PC users to subscribe to one or more of its services, which gives them online access to version-less PC security and management software applications that the company hosts on its servers. Under this managed services model, consumers "rent versus buy" McAfee.com's software applications. The company's software applications allow its subscribers to manage their PCs by checking for and eliminating viruses, protecting their PC systems from intrusion by hackers and other online threats, optimizing PC system performance and repairing problems. In May, J.P. Morgan raised the rating on McAfee.com to a "long-term buy" from "market performer," with a new six-month price target of $20. Analysts believe the company's quarter is tracking better than expected in terms of new subscriber growth, and new service offerings and the potential for a announcement with Microsoft. The stock has formed a Stage I base with technical support near our cost basis and this position offers investors a method of obtaining a relatively low-risk entry point in the issue. The company's earnings are due July 10. JUL 12.50 CFU GV LB=2.25 OI=122 CB=12.01 DE=28 TY=4.4% ***** MIR - Mirant $8.70 *** Bottom Fishing The Utilities *** Mirant (NYSE:MIR) is a global competitive energy company. Mirant delivers value by integrating an extensive portfolio of power and natural gas assets with risk management and marketing expertise. The company has facilities in North America, the Caribbean, Europe and Asia. As of December 31, 2001, Mirant owned or controlled more than 22,000 MW (megawatts) of electric generating capacity around the world, with approximately 6,800 MW under development. On January 19, 2001, the company announced, as part of its separa- tion from Southern Company, that it was changing it name and would begin doing business as Mirant. The company will likely beat the earnings guidance it provided investors for the 2nd-quarter, the company's Chief Executive Marce Fuller said on June 17. The suffering company is looking for a long-term deal to provide the company with increased liquidity for its trading operation. The company is in discussions with a third party to form a separate entity with an investment grade rating of at least "A-minus," giving Mirant access to additional capital to back its trading operation. We simply favor the technical support area near our cost basis as Mirant forges a Stage I base. Investors who remain bullish on Mirant's future can speculate on the future movement of the stock with this conservative position. JUL 7.50 MIR GU LB=1.60 OI=504 CB=7.10 DE=28 TY=6.1% ***** NCEN - New Century Financial $31.85 *** Bullish Outlook *** New Century Financial (NASDAQ:NCEN) is a specialty finance company that, through its subsidiaries, originates, purchases, sells and services sub-prime mortgage loans secured primarily by first mortgages on single-family residences. The company offers both fixed-rate and adjustable-rate loans (ARMs), as well as loans with an interest rate that is initially fixed for a period of time and subsequently converts to an adjustable rate. Most of the ARMs originated by the company are offered at a low initial interest rate, sometimes referred to as a "start rate." At each interest rate adjustment date, New Century adjusts the rate, subject to certain limitations on the amount of any single adjustment and a cap on the aggregate of all adjustments. New Century Financial recently raised its earnings estimate for fiscal 2002, partly due to strong loan production. The company increased its earnings estimate to a range of $5.25 to $5.45 per share, from an earlier range of $4.35 to $4.55 per share. Our outlook is also bullish, due to the recent technical strength and this position offers a low risk, short-term cost basis in the issue. JUL 30.00 URE GF LB=3.40 OI=537 CB=28.45 DE=28 TY=5.9% ***** PETM - PETsMART $17.50 *** Stage II Climber *** PETsMART (NASDAQ:PETM) is a provider of products, services and solutions for the lifetime needs of pets. As of Feb. 3, 2002, the company operated 560 retail stores in North America, an Internet pet e-commerce site and several major branded catalogs and affiliated Websites that market supplies for pets and horses. The majority of its stores feature pet styling salons that offer high-quality grooming services. In addition, its stores offer complete pet training services. Through its strategic relation- ship with Banfield, The Pet Hospital, the company facilitates full-service veterinary care in approximately half its stores. In early June, Petsmart posted sharply higher first quarter profits, helped by a growing pet services business, and the company raised its earnings forecast for the full fiscal year. Petsmart President and Chief Operating Officer Bob Moran told analysts that the company has the potential to boost pretax income from 5.6% of sales to 8%-9% in 2005. The recent price history of PETsMart reveals one of the better charts we've seen in the broader-market groups and investors who want to diversify their portfolio should consider this position. JUL 17.50 QPT GW LB=0.80 OI=1436 CB=16.70 DE=28 TY=5.2% ***** REV - Revlon $4.96 *** Stage I Speculation *** Revlon (NYSE:REV) manufactures, markets and sells an extensive array of cosmetics and skin care, fragrances and personal care products. The company's products are marketed under such brand names as Revlon Colorstay, Revlon Age Defying, and Skinlights, as well as Almay and Ultima II in cosmetics; Almay Kinetin, Vitamin C Absolutes, Eterna 27, Ultima II and Jeanne Gatineau in skin care; Charlie and Fire & Ice in fragrances, and High Dimension, Flex, Mitchum, Colorsilk, Jean Nate and Bozzano in personal care products. Revlon conducts its business exclusively through its direct subsidiary, Revlon Consumer Products Corp. and the company's products are sold in more than 100 countries across five continents. Revlon has been forming a Stage I base for over a year with a fairly strong technical support area around $5. Traders can speculate on the near-term performance of the issue with this conservative position. JUL 5.00 REV GA LB=0.45 OI=235 CB=4.51 DE=28 TY=10.8% ***** ***************** 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 ZIXI 5.05 JUL 5.00 HQU GA 0.50 855 4.55 28 10.7% WGRD 5.02 JUL 5.00 RUH GA 0.40 88 4.62 28 8.9% OATS 15.25 JUL 15.00 QOQ GC 1.00 103 14.25 28 5.7% CPKI 25.00 JUL 25.00 CUH GE 1.10 138 23.90 28 5.0% HPLA 14.77 JUL 12.50 QHP GV 2.80 2023 11.97 28 4.8% GG 11.05 JUL 10.00 GG GB 1.45 4736 9.60 28 4.5% AMZN 17.53 JUL 15.00 ZQN GC 3.10 7671 14.43 28 4.3% ***************** NAKED PUT SECTION ***************** Success Basics: Q&A With The Naked-Puts Editor By Ray Cummins One of our readers submitted some great questions about the differences between selling covered-calls and naked-puts and the way we approach those strategies in the newsletter. To: jim@OptionInvestor.com Subject: Covered-Calls and Naked-Puts Jim, I wonder if you could be the arbitrator for OI. In the weekend naked puts/covered call sections, OI listed Carreker (NASDAQ:CANI) as a candidate for both strategies. I am using this as an example, because I have seen several instances where OIN's target return makes no sense. In the covered call section, with the stock at $11.07 and writing the ITM $10 July call with a premium of $1.60 , leaves a target return of 4.9%. In the naked put section, writing a July $10 put with a premium of $.50 leaves gives a target return of 11.3%. Essentially, these are the same trade, as you can see from the cost basis of $9.47 on the covered write and $9.50 on the naked put. Why is the target return so different? I do agree that the brokerage requirement is a little less on the naked put, but the return is not double. Separately, why are both strategies here? Doesn't the naked put always outperform the covered write? The requirements would always be less due to one transaction, not two and the in-the-money amount reducing the naked put requirement. I am sure many accounts, such as IRA's cannot write naked puts. But, why isn't the candidate-list the same? I have followed your columns for over two years and actively watch the monitor. Keep up the good work. LE Hello LE, Jim forwarded your E-mail to me as I am the managing editor for the two sections mentioned. Your questions are valid and I hope I can answer them to your satisfaction. With regard to the return on investment (ROI) in the CANI position, the calculations are correct and they are based on the standard collateral formulas used by online brokers such as E-trade, Schwab and Ameritrade. The reason such a disparity exists is because the covered-call returns do not include the use of margin (buying the stock at 50% of its actual price), whereas the naked-put collateral requirements are often only 20% of the underlying issue's current value. Such is the case in the Carreker (NASDAQ:CANI) positions, where one play requires that you purchase the stock outright, at full price (as in an IRA), while another involves the commitment of portfolio cash or securities of a much smaller amount. You mentioned, "the naked-put always outperforms the covered write" and that fact is generally true, however our goal is to provide a range of candidates in both strategies as there are many novice investors who can not sell "naked" options (due to the requirement for a higher level of experience and account value) as well as those who are simply looking for ways to improve the performance of their individual retirement (IRA) accounts. Also, some investors aren't comfortable writing "naked" options and many have yet to learn (as you have) that buying and selling stock options outright can be more profitable than strategies which involve ownership in the underlying issue. Finally, the duplication of a stock as a "New Play" in both sections is rare and it is something we attempt to avoid (as we are trying to provide a large selection of potentially profitable plays), but it will happen occasionally when there is a shortage of good candidates or we believe the position offers uncommonly favorable technical or fundamental characteristics. In this case, CANI was listed only as a "Supplemental" position (explained in that segment of the newsletter) in the Covered-Calls section while it was a primary candidate in the Naked-Puts portfolio. I trust this explanation helps you understand the difficulty we have in producing these sections (for a variety of different traders) and hopefully, you will eventually profit from some of the positions we offer. Ray Reader's Response: Ray, Thanks for the explanation. It was as well written as your columns usually are. I presume you agree that a buy write and a naked put are essentially the same strategy. I can't think of a situation where the result shouldn't be the same, except the naked put usually has less commissions and burns up less resources. That said, is there any reason I should not look at the covered call candidates in the same vein as the naked put candidates? Is there any difference in the risk posture of the trades? On another note, do I remember that in the past you have suggested strikes in the 3-4% per month return category as being 2 standard deviations out of the action? When I see the return jumping up above this threshold, I reduce the number of shares. Do I remember this correctly? LE Hello Again, With regard to your generous comments, we try to answer all of the E-mail inquiries in a timely manner and with as much guidance as possible without encroaching on the area of personal financial advice. The SEC monitors the activity of companies like ours very closely and we have very strict rules concerning the information published in the newsletter and in individual correspondence (and the guidelines vary significantly). Your assessment regarding the similar risk/reward outlook in both Covered-Calls and Naked-Puts is correct. The are no fundamental differences in the two strategies other than the collateral requirements and commission costs, thus writing cash-secured puts is almost always the most (theoretically) favorable of the two techniques. In addition, the Covered-Calls section of the OIN can be used a Naked-Put candidate list as well, even though we try to post a variety of viable plays in both portfolios. The final question is a bit more complex and the answer is not as definitive as you might expect. I mentioned before that targeting a 3-4% per month return in "premium-selling" strategies (using options with historically average prices) will often require moves (in the underlying) of 2 standard deviations to become unprofitable. That fact also applies to writing "naked" puts, however I would not use it as the only qualifier in selecting stocks for this strategy. There are many occasions when the recent trend of the underlying dictates that you should avoid the issue even with the most robust option premiums. Reducing the number of contracts (shares) sold is one way to limit the percentage risk to your portfolio but it will not adequately address the requirement to avoid losses in technically or fundamentally unfavorable candidates. Remember, statistical probability is just one of the components you must evaluate when selecting potential plays; recent price/volume trends (charting) in both the issue and its industry group/sector and option premiums are important factors as well. I wish you much success! Ray *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule: Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a "buy-to-close" STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield EMLX 29.91 25.30 JUN 25.00 0.40 *$ 0.40 11.7% AMZN 19.47 17.53 JUN 17.50 0.65 *$ 0.65 11.3% ENDP 11.56 10.56 JUN 10.00 0.55 *$ 0.55 9.5% AMZN 19.16 17.53 JUN 15.00 0.40 *$ 0.40 8.2% QCOM 30.87 26.12 JUN 25.00 0.25 *$ 0.25 8.1% RMCI 27.46 24.60 JUN 22.50 0.70 *$ 0.70 7.5% GG 9.36 11.05 JUN 8.75 0.35 *$ 0.35 7.3% 2-1 split BJS 37.52 35.11 JUN 35.00 0.65 *$ 0.65 7.2% JBHT 26.95 31.05 JUN 25.00 0.30 *$ 0.30 7.1% PHSY 30.06 26.63 JUN 25.00 0.60 *$ 0.60 6.9% EMLX 30.11 25.30 JUN 22.50 0.30 *$ 0.30 6.9% JBL 22.96 19.96 JUN 20.00 0.35 $ 0.31 6.8% NOVN 24.37 24.72 JUN 22.50 0.50 *$ 0.50 6.7% SIE 19.88 21.40 JUN 17.50 0.65 *$ 0.65 6.5% PHSY 25.87 26.63 JUN 20.00 0.50 *$ 0.50 6.4% EBAY 56.67 59.75 JUN 50.00 0.45 *$ 0.45 5.9% AMZN 16.94 17.53 JUN 12.50 0.30 *$ 0.30 5.9% TDY 19.17 18.80 JUN 17.50 0.60 *$ 0.60 5.6% SRCL 35.00 38.57 JUN 32.50 0.30 *$ 0.30 5.5% INTU 44.03 44.20 JUN 40.00 0.35 *$ 0.35 5.5% RDC 26.12 22.25 JUN 22.50 0.50 $ 0.25 2.5% RMCI 31.23 24.60 JUN 25.00 0.55 $ 0.15 1.9% NOVN 26.61 24.72 JUN 25.00 0.40 $ 0.12 1.8% OSTE 8.30 7.29 JUN 7.50 0.20 $ -0.01 0.0% NTIQ 23.12 19.45 JUN 20.00 0.45 $ -0.10 0.0% PSFT 20.94 16.92 JUN 17.50 0.30 $ -0.28 0.0% TDY 21.24 18.80 JUN 20.00 0.50 $ -0.70 0.0% WIN 19.20 16.35 JUN 17.50 0.30 $ -0.85 0.0% WFR 8.30 5.84 JUN 7.50 0.60 $ -1.06 0.0% ADRX 45.22 31.36 JUN 35.00 0.70 $ -2.94 0.0% CANI 11.07 11.10 JUL 10.00 0.50 *$ 0.50 11.3% SIE 19.20 21.40 JUL 17.50 0.65 *$ 0.65 8.5% FBR 10.65 11.54 JUL 10.00 0.35 *$ 0.35 7.7% SWFT 21.50 22.65 JUL 20.00 0.55 *$ 0.55 6.2% TALX 18.42 18.87 JUL 15.00 0.30 *$ 0.30 6.1% SCIO 28.94 28.80 JUL 25.00 0.55 *$ 0.55 5.8% ATTC 31.25 31.07 JUL 30.00 0.80 *$ 0.80 5.8% SKX 22.10 21.70 JUL 17.50 0.30 *$ 0.30 5.5% YCC 26.74 26.98 JUL 25.00 0.55 *$ 0.55 5.0% *$ = Stock price is above the sold striking price. Comments: There was "no joy in Mudville" this week as stocks continued to plunge amid worries over earnings warnings, distrust of corporate balance sheets, political conflict, and economic uncertainty. As if that wasn't enough, the "triple witching" expiration of stock index futures, index options, and equity options created a spike in the trading volume during the volatile session. Investors who were hoping for a recovery rally were sorely disappointed as the major averages fell to lows not seen since the tragedy of 9/11. Our portfolio was drastically trimmed during last week's slump but unfortunately, we endured a few more losers as the expiration period came to an end. The only positive thing to be said is that all of our July positions are in relatively good shape and the downside appears to be somewhat limited from this point. Positions Closed: Endocare (NASDAQ:ENDO), Plexus (NASDAQ:PLXS), Headwaters (NASDAQ:HDWR), Dana (NYSE:DCN), Macromedia (NASDAQ:MACR), Take-Two Intera (NASDAQ:TTWO), Checkfree (NASDAQ:CKFR), Fleming (NYSE:FLM), Idexx Laboratories (NASDAQ:IDXX) and Valuevision Media (NASDAQ:VVTV). 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 APN 10.85 JUL 10.00 APN SB 0.25 0 9.75 28 7.3% CACI 36.51 JUL 32.50 KFQ SZ 0.80 137 31.70 28 7.6% CLHB 13.52 JUL 10.00 QPB SB 0.40 289 9.60 28 14.0% DG 18.50 JUL 17.50 DG SW 0.30 160 17.20 28 4.9% LNCR 30.71 JUL 27.50 LQN SY 0.70 1000 26.80 28 7.8% MOVI 20.18 JUL 17.50 QLV SW 0.35 45 17.15 28 6.6% SWFT 22.65 JUL 20.00 SDU SD 0.35 355 19.65 28 5.6% YHOO 15.49 JUL 12.50 YHZ SV 0.30 4847 12.20 28 9.3% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CLHB 13.52 JUL 10.00 QPB SB 0.40 289 9.60 28 14.0% YHOO 15.49 JUL 12.50 YHZ SV 0.30 4847 12.20 28 9.3% LNCR 30.71 JUL 27.50 LQN SY 0.70 1000 26.80 28 7.8% CACI 36.51 JUL 32.50 KFQ SZ 0.80 137 31.70 28 7.6% APN 10.85 JUL 10.00 APN SB 0.25 0 9.75 28 7.3% MOVI 20.18 JUL 17.50 QLV SW 0.35 45 17.15 28 6.6% SWFT 22.65 JUL 20.00 SDU SD 0.35 355 19.65 28 5.6% DG 18.50 JUL 17.50 DG SW 0.30 160 17.20 28 4.9% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** APN - Applica $10.85 *** Consumer Durables Sector *** Applica (NYSE:APN) is a manufacturer, marketer and distributor of a broad range of branded and private-label small electric consumer goods. In 1998, APN acquired Black & Decker's Household Products Group, a supplier of brand name small household appliances in the United States. The company also makes and distributes a range of professional personal care products, home environment products and pet care products, including the LitterMaid cat litter box. The company manufactures and markets products under various licensed brand names, its own brand names, and other private-label brand names. Applica's customers include mass merchandisers, specialty retailers and appliance distributors primarily in North America, Latin America and the Caribbean. Applica recently said its pro forma 2002 profit will be about 15% higher than expected due to lower costs and stronger sales. The company also reported it is enjoying improved operating conditions and an enhanced product mix. Investors who think those conditions will translate to higher share values should consider this position. JUL 10.00 APN SB LB=0.25 OI=0 CB=9.75 DE=28 TY=7.3% ***** CACI - CACI International $36.51 *** New Contract! *** CACI International (NASDAQ:CACI) is a holding company and its operations are conducted through wholly owned subsidiaries located in the United States and Europe. The company delivers information technology and communications solutions to clients through four major areas of expertise or lines of business: systems integration, managed network services, document technology and basic engineering services. The company's markets, both domestic and international, are agencies of national governments, major corporations and state and local governments. The demand for CACI's many services in large measure is created by the increasingly complex network, systems and information environment in which governments and businesses operate, and by the need to stay current with new technology while increasing productivity and performance. CACI recently announced that it has been awarded a $163.5 million contract to provide information and technology support to the Space and Naval Warfare Systems Command Systems Center in Norfolk, Virginia. CACI's primary role under the five-year contract, which has one base year and four option years, is to implement the Naval Tactical Command Support System software developed by SSC Norfolk, aboard Naval vessels and shore activities around the world. The award substantially increases the scope and value of CACI's software and systems integration support with the Navy and the news has helped CACI return to an old trading range near $35. JUL 32.50 KFQ SZ LB=0.80 OI=137 CB=31.70 DE=28 TY=7.6% ***** CLHB - Clean Harbors $13.52 *** Acquisition Approved! *** Clean Harbors (NASDAQ:CLHB) provides a range of environmental services to a diversified customer base in the U.S. and Puerto Rico through its subsidiaries. The services provided by Clean Harbors are classified in four primary categories: treatment and disposal of industrial wastes (Treatment and Disposal); site services provided at customer sites (Site Services); specialized repackaging, treatment and disposal services for laboratory chemicals and household hazardous wastes (CleanPack), and out- sourcing of customer's environmental management program (Onsite Services). Clean Harbors also provides transportation for all hazardous wastes, analytical testing, information management and training services. Clean Harbors shares moved higher last week after the company announced that the U.S. Bankruptcy Court in Delaware approved the sale of Safety-Kleen's Chemical Services Division to Clean Harbors. The transaction is expected to close in the third quarter of 2002 and based on the recent rally in CLHB's share value, investors are pleased with the news. JUL 10.00 QPB SB LB=0.40 OI=289 CB=9.60 DE=28 TY=14.0% ***** DG - Dollar General $18.50 *** Specialty Retail Sector *** Dollar General (NYSE:DG) is a discount retailer of quality general merchandise at everyday low prices. Through conveniently located stores, the company offers a varied assortment of consumable basic merchandise including health and beauty aids, packaged food, home cleaning supplies, house-wares, stationery, seasonal goods, basic clothing and domestics. Dollar General stores serve primarily low and middle income families with over 5,000 stores in 27 states. Morgan Stanley recently upgraded shares of Dollar General, based on improved fundamentals and lessening concerns about accounting issues at the discount chain. The company restated its earnings for 1998-2000 after incorrectly accounting for some leases and liabilities. Wachovia Securities backed the upbeat outlook and investors who agree with a bullish future for DG can profit from that outcome with this position. JUL 17.50 DG SW LB=0.30 OI=160 CB=17.20 DE=28 TY=4.9% ***** LNCR - Lincare Holdings $30.71 *** Safe-Haven Sector! *** Lincare Holdings (NYSE:LNCR) together with its subsidiaries, is a provider of oxygen and other respiratory therapy services to patients in the home. The company's customers typically suffer from chronic obstructive pulmonary disease, such as emphysema, chronic bronchitis or asthma, and require supplemental oxygen or other respiratory therapy services in order to alleviate the many symptoms and discomfort of respiratory dysfunction. In addition to providing oxygen and other respiratory therapy services to its patients in the home, Lincare also provides a variety of infusion therapies in certain geographic markets. Lincare supplies home medical equipment, such as hospital beds, wheelchairs and other supplies that may be required by patients. Stocks in the health care segment have performed well in recent weeks and the group's future looks bright with the baby-boomer generation approaching retirement age. Investors who want a long-term portfolio issue in the industry can establish a low risk cost basis in LNCR with this position. JUL 27.50 LQN SY LB=0.70 OI=1000 CB=26.80 DE=28 TY=7.8% ***** MOVI - Movie Gallery $20.18 *** Improved Outlook! *** Movie Gallery (NASDAQ:MOVI) is a home video specialty retailer in rural and secondary markets. The company owns and operates over 1,400 retail stores in the United States and Canada, which rent and sell videocassettes, DVD and video games. Movie Gallery's target markets are small towns and suburban areas of cities with populations generally between 3,000 and 20,000, where its primary competitors are independently owned stores and regional chains. The company is also a low-cost operator of national home video specialty retail chains. They have developed and implemented a flexible and disciplined business strategy that centers on driving revenue growth, maximizing store productivity and profitability and minimizing operating costs. Movie Gallery recently said it expects second-quarter results to be above the consensus estimate, and the company raised its earnings per share guidance for the rest of the year. The CEO said the company's results continue to benefit from stronger profit margins related to the ongoing transition to DVD and he is pleased with the performance of new stores added through acquisitions and internal developments. Investors who want to establish a discounted cost basis in the issue should consider this position. JUL 17.50 QLV SW LB=0.35 OI=45 CB=17.15 DE=28 TY=6.6% ***** SWFT - Swift Transportation $22.65 *** Hot Sector! *** Swift Transportation (NASDAQ:SWFT) is a truckload carrier in North America. The company operates primarily throughout the continental United States, combining regional operations with transcontinental van operations. The company transports retail and department store merchandise, manufactured goods, paper products, non-perishable food, beverages and beverage containers and building materials for such companies as Kmart, Target, Costco, Sears and Wal-Mart. The company owns M.S. Carriers, a truckload carrier that operates in the continental United States and the Canadian provinces of Quebec and Ontario, and Mexico. M.S. Carriers also transports truckload shipments of general commodities, such as packages, retail goods, non-perishable food, paper and paper products, household appliances, furniture and packaged petroleum products. Its customers include Sears, Federal Express, Family Dollar and Home Depot. Stocks in the Freight Transport segment have been "hot" recently and investors who want to diversify their portfolios with one of the leading companies in the industry should consider this position. JUL 20.00 SDU SD LB=0.35 OI=355 CB=19.65 DE=28 TY=5.6% ***** YHOO - Yahoo! 15.49 *** Entry Point! *** Yahoo! (NASDAQ:YHOO) is a worldwide Internet business and consumer services company that offers a comprehensive, branded network of properties and services to more than 219 million individuals around the globe. The company offers an online navigational guide to the Internet via its www.yahoo.com Website, which is a guide in terms of traffic, advertising and household and business user reach. Through Yahoo! Enterprise Solutions, the company provides business services designed to enhance the productivity and Web presence of its clients. Yahoo! has offices in the United States, Europe, Asia, Latin America, Australia and Canada. Yahoo! is the most widely used web portal in the world and the company has value in a range of Internet segments. Investors who wouldn't mind owning the issue at a discounted basis can speculate conservatively on the future movement of YHOO's share value with this position. JUL 12.50 YHZ SV LB=0.30 OI=4847 CB=12.20 DE=28 TY=9.3% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield GMST 8.20 JUL 5.00 QLF SA 0.30 597 4.70 28 16.8% APOG 15.11 JUL 15.00 QJA SC 0.70 0 14.30 28 11.5% SIE 21.40 JUL 20.00 SIE SD 0.75 35 19.25 28 10.3% YELL 31.08 JUL 30.00 YUX SF 1.15 504 28.85 28 10.0% PHSY 26.63 JUL 22.50 HYQ SX 0.65 34 21.85 28 9.8% CENT 17.82 JUL 17.50 EQH SW 0.65 0 16.85 28 9.5% CPB 27.53 JUL 27.50 CPB SY 0.80 0 26.70 28 7.4% EDMC 41.49 JUL 40.00 UKN SH 1.00 0 39.00 28 6.7% ROAD 36.85 JUL 35.00 EJQ SG 0.65 25 34.35 28 5.2% RBK 28.96 JUL 27.50 RBK SY 0.50 55 27.00 28 5.1% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ No Bottom In Sight! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, June 21 The bearish activity in stocks continued Friday as concerns over weakness in the dollar, corrupt corporate accounting practices and the potential for terrorism conspired to keep investors out of the market. The Dow Jones Industrial Average plunged 177 points to 9,253 with Merck (NYSE:MRK), United Technologies (NYSE:UTX), International Business Machines (NYSE:IBM), Eastman Kodak (NYSE:EK), Johnson & Johnson (NYSE:JNJ) and Microsoft (NASDAQ:MSFT) among the biggest losers. Only four components finished in the plus column and the blue-chip gauge was dealt its fifth straight weekly loss for the first time in over a year. There was no relief for beleaguered technology issues, with software and semiconductor stocks enduring the worst selling pressure while wireless and networking shares suffered from additional brokerage downgrades. The NASDAQ index did well to finish only 23 points lower at 1,440. In the broader market, the drug sector was spurned by traders as questions over Merck's accounting methods emerged and stocks in the oil service, financial, consumer and cyclical sectors generally retreated. The Standard & Poor's 500-stock index slid 17 points to 989. Trading volume reached 1.8 billion on the NYSE and almost 2 billion on the NASDAQ. Market breadth was negative, with decliners outnumbering advancers 18 to 14 on the Big Board and 18 to 17 on the technology exchange. In the treasury market, bonds headed higher with the 10-year note up 6/32 to yield 4.70% while the 30-year bond gained 12/32 to yield 5.40%. On the fund flow front, Trim Tabs reported that all equity funds had outflows of $300 million during the week ending June 19 compared with outflows of $5.2 billion in the prior week. Bond funds saw outflows of nearly $400 million compared to inflows of $200 million in the prior week. Last week's new plays (positions/opening prices/strategy): Clear Chan. (NYSE:CCU) JUL55C/JUL50C $0.70 credit bear-call Gen. Motors (NYSE:GM) JUL60C/JUL55C $0.70 credit bear-call eBay (NSDQ:EBAY) JUL45P/JUL50P $0.50 credit bull-put Oracle (NSDQ:ORCL) J0310P/SEP07P $2.00 credit put-combo GoldCorp (NYSE:GG) OCT12C/JUL12C $0.70 debit calendar Pharm. Res. (NYSE:PRX) AUG35C/AUG25P $0.30 credit synthetic Sei Invest. (NSDQ:SEIC) SEP30C/SEP30P $4.85 debit straddle Despite the recent volatility in the market, we were unable to achieve the target prices in all of our new positions. However, the extreme activity in the financial services segment provided a favorable entry opportunity in the SEI debit straddle and the neutral-outlook position is already trading at a small profit. Portfolio Activity: After a brief surge during Monday's session, the selling pressure in stocks continued almost unabated this week as investors became more concerned about the lack of recovery in corporate earnings and the slumping value of the dollar. The outlook for equities has changed from "cautious optimism" to an attitude of gloom and trepidation in a very short period. Fortunately, that may be the first step to a capitulation sell-off; an event that many traders believe must occur before the market can change direction for the long term. Some analysts thought the recent precipitous decline in share values would instill a surge of bargain-hunting but that did not occur and the results can be seen in many of the bullish positions in our portfolio. At the same time, we enjoyed success in a number of bearish plays and the current trend bodes well for issues in that category. One element of the market that has been very prevalent in recent weeks is volatility and many readers are learning just how difficult that component can be in managing an options portfolio. A new reader asked some great questions about the ways he might use spread and combination trading to offset the adverse effects of an unpredictable market environment and I have decided to share that discussion in today's narrative. Questions & comments on spreads/combos to Contact Support ****************************************************************** - READER'S WRITE E-MAIL REPLIES - ****************************************************************** Attn: Spreads/Combos Editor Subject: Strategy Selection Dear Ray, I am a new reader and I have enjoyed my trial membership to the Option Investor Newsletter. Although I am familiar with basic option trading strategies, I have yet to try any spreads or combination plays. Since the market conditions seem to favor this approach, I was hoping you could give me some suggestions for becoming successful with these methods. Also, do you use some kind of system to take profits and limit losses with these positions? Thanks for a great product! HG Hello HG, The options market is unique because it offers a variety of ways to profit. At the same time, the risk in some positions can be substantial and as a trader, your primary goal must always be to maximize returns and preserve capital. The easiest way to achieve this objective is to become familiar with reliable strategies and acquire the knowledge to implement and manage them correctly. The principal requirement for profitable trading is the ability to achieve acceptable returns and control risk effectively. A thorough and deliberate approach to strategy selection is the first step in the process. After the principal techniques have been identified, it is crucial to execute them with discipline and consistency. Discipline in option trading is the ability to maintain self-control and implement a pre-determined plan. The most difficult skill that traders must learn is the ability to overcome human (emotional) impulses. When real money is at stake, the influences of greed and fear (of loss) will attempt to sway your judgment, hindering a rational thought process. If you can not overcome these effects, the chances of success are slim. In fact, that is the primary reason it is so important to utilize strategies that promote a mechanical approach to trading. These types of techniques offer little opportunity for indecision and generally provide more consistent returns as they are exposed to less risk than those with a high level of maintenance. Strategy Selection Profitable trading strategies have a number of common traits: precisely defined principles, ease of execution and flexibility. However, the most important characteristic for the majority of investors is asset preservation. In the options market, the most successful systems are those which employ effective defensive measures. The ability to protect and conserve portfolio capital, while achieving consistent returns is a fundamental quality of any profitable technique. Fortunately, numerous option trading strategies satisfy this criteria and our goal at the OIN is to help novice investors discover the most appropriate combination of trading techniques and provide them with the tools necessary to profit on a regular basis. The majority of option traders use derivatives to speculate on the directional movement of stocks. The appealing feature of option ownership is leverage with limited risk. If a trader correctly predicts the market direction and takes the appropriate position, he can expect to make a profit. Unfortunately, that technique has a relatively low probability of success. As all option traders quickly discover, owning the correct position (CALL or PUT) when the market moves in the predicted direction will not necessarily be profitable. The reason is, over short periods of time (while the trader is waiting for the option to rise in value), the position is at risk from a variety of changes in the market. One method that experienced traders use to overcome this problem involves simple combination positions or spreads. Spread trading is one way to take advantage of mis-priced options and premium disparities, while at the same time reducing the effects of short-term changes in market conditions so that a position can be held to maturity. The wonderful thing about option trading is its diversity. There are an incredible number of strategies available, one for every type of market trend, character and outlook. Positions involving combinations of calls and puts, with different strike prices and expiration months, along with index and futures options offer the astute trader a variety of ways to participate in the market. This assortment provides even the most conservative investor the ability to construct positions with an acceptable level of risk and reward in almost any situation. In addition, students of option pricing theory can identify combinations with potentially superior returns when the relationships between the options are theoretically skewed. While there is no “perfect” position, successful traders learn to maximize profits and hedge their risk in as many different ways as possible, limiting the effects of short-term volatility and market gyrations. Obviously, there is no way to completely eliminate risk but you can reduce it much more than that of a inexperienced trader who does not utilize all of the available strategies. Develop A System Using a proven trading system is one of the best ways to become successful in the market. A plan of attack helps novice traders learn proper money management and the correct use of technical analysis in identifying precise entry and exit points. Trading in a systematic manner is far more likely to produce consistent profits than a scheme based on intuition, emotion or the trend of the day. The benefits to this approach are many but most importantly, you can eliminate the guesswork that comes from trying to manage an active position without realistic goals or loss limits. The targets and exit strategies are predefined, leaving no doubt as to when and how to get out of a position if the market moves against you. Potential risk is identified prior to beginning the trade, with a fixed limit on maximum losses and a formula for taking profits. There are no positions initiated without a complete assessment of the capitalization necessary to carry out the entire strategy, even in the worst case scenario. A thorough study of the underlying issue’s historical data is used to provide objective goals for future movement, based on expected volatility and technical indications. With all of these elements properly evaluated and arranged, you can develop an effective plan that contains a suitable risk-reward outlook based on appropriate strategies that are compatible with your personal trading style. A major stage in developing a practical method for participating in the market is to determine your comfort threshold and stress level. Think about the unique emotional effects of your trading activities and managing a complex portfolio. Are you ordinarily a cautious person or do you feel comfortable traveling at warp speed? How will a specific type of trading affect you mentally? Can you handle the volatility of day-trading options or are you happier with conservative, longer-term plays. After you identify the appropriate trading attitude, it is important to decide what type of market activity is most favorable to your personal style. Some traders prefer strategies that profit from trending markets such as those characterized by a sustained advance or decline. Techniques that benefit from this type of movement include Put or Call buying and high-potential spreads or combinations. Another tactic might be to focus on changes in volatility. Traders using this approach buy or sell premium in an attempt to profit from transitions in market character. Some utilize neutral positions such as calendar or ratio spreads when the technical outlook for the underlying issue is range-bound or static. Regardless of the method you prefer, each category of price action demands a unique type of trading system. The key to success is to specialize in a specific kind of market activity and utilize trading strategies that perform well in that particular environment. One of the most important steps in developing a profitable system is identifying the appropriate level of complexity when selecting trading techniques. The simplest approach is most often the best but every strategy has risk and it is impossible to classify any particular technique as the absolute perfect method. In most cases, there is more than one favorable technique and even though each strategy has different attributes, they can all be useful in a trader's arsenal at the proper time. The easiest way to become successful is to become completely knowledgeable of the mechanics of any technique that you are using and then construct a group of diverse candidates based on the correct market outlook. Of course, you must remember that the individual investment objectives are far more important than the merits of the technique itself. If a specific strategy is not suitable for you or your trading style then it should not be used, no matter how attractive it appears. In addition to selecting the proper trading techniques, you must also identify the appropriate time frame in which to participate in the market. Most investors are suited to longer-term plays as they require less attention and are easy to manage for those who have full-time commitments to work or family. Traders who have the temperament and resources to follow the markets at all hours should consider short term techniques based on intra-day data and momentum-based trends. Using the appropriate strategy when the markets dictates action is the fundamental step in developing the ability to trade in a disciplined manner. After you have identified the characteristics of the market and selected the correct technique to profit from future trends, the next task is to determine specific entry and exit points for the underlying instrument. In most cases, technical analysis should be used to ascertain the correct parameters for risk and reward. With this approach, a simple mechanism for money management is built into the initial position. Entry timing can be based on a number of different indicators and the criteria used to identify a trading opportunity is a personal choice. The great thing is, you don't have to open any position until you are satisfied with the probability of a profitable outcome. You can search through charts for the perfect pattern, perform extensive due-diligence, and wait for the best combination of technical indicators and favorable market conditions. In short, you can forego any trade until the number of reasons to participate becomes overwhelming. Remember, the market does not care whether you play along or sit on the sidelines. In addition, when you trade without a system, it's amazing how confusing the situation can become. Once you are committed, you are playing by the market’s rules, not your own. Good Luck! ****************************************************************** - NEW PLAYS - ****************************************************************** Traders sometimes ask why we don't offer more bearish "synthetic" positions. The answer is simple: most subscribers do not have approval to write "naked" calls in their option trading accounts. However, the current market internals suggest we may be in for another big sell-off, so here are some speculative positions that will profit from declining share values. All of these positions are based on the price of the underlying issue and its technical trend or pattern. Although these plays offer great risk-reward potential, they must also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** GS - Goldman Sachs $70.55 *** Flagging Financial Sector! *** The Goldman Sachs Group (NYSE:GS) is a global investment banking and securities business that provides a wide range of services worldwide to a substantial and diversified client base. Goldman Sachs operates offices in over 20 countries with its activities divided into two segments: Global Capital Markets, and the Asset Management and Securities Services division. The Global Capital Markets segment, which represented 64% of the company's 2001 net revenues, consists of Investment Banking, and Market Trading and Principal Investments. Goldman Sachs' Asset Management segment offers investment strategies and advice across all major asset classes: global equity; fixed income, including money markets; currency, and alternative investment products. The company's principal Securities Services activities include prime brokerage, financing services and securities lending. PLAY (speculative - bearish/synthetic position): BUY PUT JUL-60 GS-SL OI=1475 A=$0.50 SELL CALL JUL-80 GS-GP OI=5900 B=$0.40 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.75-$1.00 Note: Using options, the position is similar to being short the stock. The collateral requirement for the sold (short) call is approximately $1,900 per contract. ****************************************************************** KLAC - KLA-Tencor $44.04 *** Elevator Going Down! *** KLA-Tencor Corporation (NASDAQ:KLAC) is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's comprehensive portfolio of products, software, analysis, services and expertise is designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. KLAC offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. Their many customers turn to KLA-Tencor for in-line wafer defect monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer overlay; film and surface measurement; and overall yield and fab wide data analysis. PLAY (speculative - bearish/synthetic position): BUY PUT SEP-30 KCQ-UF OI=1041 A=$1.15 SELL CALL SEP-60 KCQ-IL OI=2508 B=$0.85 INITIAL NET DEBIT TARGET=$0.00-$0.15 TARGET PROFIT=$1.25-$1.50 Note: Using options, the position is similar to being short the stock. The collateral requirement for the sold (short) call is approximately $1,000 per contract. ****************************************************************** QLGC - QLogic Corporation $42.49 *** Key Moment! *** QLogic Corporation (NASDAQ:QLGC) is a designer and supplier of Storage Area Networking infrastructure building blocks. Its SAN infrastructure building blocks, comprised of semiconductor chips, host board adapters and switches, are integrated into storage networking solutions of the world's leading system and storage manufacturers. Companies such as Sun Microsystems, IBM, Dell, Fujitsu Microelectronics, and Hitachi all use some or all 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 delivers selected Fibre Channel building blocks through leading distributors, systems integrators and resellers, thereby expanding its reach and visibility to the information technology community. PLAY (speculative - bearish/synthetic position): BUY PUT JUL-35 QLC-SG OI=2097 A=$1.35 SELL CALL JUL-50 QLC-GJ OI=3134 B=$1.00 INITIAL NET DEBIT TARGET=$0.10-$0.20 TARGET PROFIT=$0.70-0.95 Note: Using options, the position is similar to being short the stock. The collateral requirement for the sold (short) call is approximately $1,075 per contract. ****************************************************************** - CREDIT SPREADS - These plays are based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may also be higher than other plays in the same strategy based on disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about the future outcome of the position. ****************************************************************** CEPH - Cephalon $47.57 *** Drug Sector Decline! *** Cephalon (NASDAQ:CEPH) is an international biopharmaceutical firm dedicated to 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 are Provigil for the treatment of excessive daytime sleepiness associated with narcolepsy, Actiq for pain management in cancer, and Gabitril for the treatment of partial seizures associated with epilepsy. PLAY (conservative - bearish/credit spread): BUY CALL JUL-60 CQE-GL OI=2258 A=$0.30 SELL CALL JUL-55 CQE-GK OI=4203 B=$0.85 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% ****************************************************************** HCA - HCA Incorporated $50.40 *** Hot Sector! *** HCA (NYSE:HCA) is a healthcare services company that operates almost 200 hospitals which are comprised of general, acute care and psychiatric hospitals as well as some joint ventures. In addition, the company operates approximately 80 freestanding surgery centers. The company's facilities are located in 23 states, England and Switzerland. HCA's general, acute care hospitals provide a range of services to accommodate such medical specialties as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. Outpatient and ancillary healthcare services are provided by HCA's general, acute care hospitals and through the company's freestanding outpatient surgery and diagnostic centers, and rehabilitation facilities. HCA's psychiatric hospitals provide a full range of mental healthcare services through inpatient, partial hospitalization and outpatient settings. PLAY (conservative - bullish/credit spread): BUY PUT JUL-45.00 HCA-SI OI=353 A=$0.20 SELL PUT JUL-47.50 HCA-SW OI=191 B=$0.45 INITIAL NET CREDIT TARGET=$0.30-$0.35 PROFIT(max)=14% ****************************************************************** MO - Philip Morris $52.65 *** More Lawsuits! *** Philip Morris Companies (NYSE:MO) is a holding company whose principal wholly owned subsidiaries, Philip Morris Incorporated, Philip Morris International, Kraft Foods, and Miller Brewing, are engaged in the manufacture and sale of various consumer products. A wholly owned subsidiary of the parent company, Philip Morris Capital, engages in a wide range of leasing and investment activities. The company's significant industry segments are domestic tobacco, international tobacco, North American food, international food, beer and financial services. PLAY (conservative - bearish/credit spread): BUY CALL JUL-60 MO-GL OI=7178 A=$0.10 SELL CALL JUL-55 MO-GK OI=14449 B=$0.55 INITIAL NET CREDIT TARGET=$0.50-$0.60 PROFIT(max)=11% ****************************************************************** UTX - United Technologies $65.75 *** Merrill Downgrade! *** United Technologies (NYSE:UTX) provides a broad range of high technology products and support services to the building systems and aerospace industries. The company conducts its business through four principal segments: Otis (elevators, escalators, automated people movers and service); Carrier (commercial and residential heating, ventilating and air conditioning systems and equipment, commercial and transport refrigeration equipment, and aftermarket service and parts); Pratt & Whitney (commercial, general aviation and military aircraft engines, parts, service, industrial gas Whitney turbines and space propulsion); and also Flight Systems (commercial and military helicopters, parts and service, and aerospace products and aftermarket services). The company's quarterly earnings are due July 17. PLAY (conservative - bearish/credit spread): BUY CALL JUL-75 UTX-GO OI=948 A=$0.20 SELL CALL JUL-70 UTX-GN OI=1272 B=$0.80 INITIAL NET CREDIT TARGET=$0.65-$0.70 PROFIT(max)=15% ****************************************************************** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ Will the bulls take control next week? Or will the bears have their way again? To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/062302.asp ************** MARKET POSTURE ************** More breakdowns below short term support for the market. Sectors were a little more quiet than normal. To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/062302.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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