The Option Investor Newsletter Sunday 07-07-2002 Copyright 2002, 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 7-05 WE 6-28 WE 6-21 WE 6-14 DOW 9379.50 +136.24 9243.26 - 10.53 9253.79 -220.42 -115.46 Nasdaq 1448.36 - 16.58 1464.96 + 24.01 1440.95 - 63.79 - 30.74 S&P-100 492.66 + 2.54 490.12 + .70 489.42 - 12.34 - 5.56 S&P-500 989.03 - .79 989.82 + .69 989.13 - 18.14 - 20.26 W5000 9313.40 - 70.63 9384.03 - 5.95 9389.98 -159.74 -202.97 RUT 440.92 - 21.74 462.66 + 1.59 461.07 + 2.00 - 11.44 TRAN 2652.64 - 77.68 2730.32 - 25.32 2755.64 + 82.50 - 13.52 VIX 30.21 + 1.08 29.13 - 2.15 31.28 + 1.35 + 3.28 VXN 56.28 - 1.67 57.95 - 1.35 59.30 + 3.63 + 3.43 TRIN 0.28 1.18 2.01 1.34 Put/Call .77 .66 1.27 1.15 ****************************************************************** Let's Get Shorty! by Jim Brown With MOPO and MOCO being discussed by Buzz and Mark maybe the market setup for Monday morning should be called the MOSS. (mother of all short squeezes) Of course after Friday there may not be many shorts left to squeeze. The +324 Dow gain was the largest one day gain since last September and helped the Dow break its six week losing streak. Unfortunately the Nasdaq and the S&P-500 still posted losses for the week. Chart of the Dow Chart of the Nasdaq There was no economic reason for the bounce Friday. The Jobs Report should have struck fear into traders but their minds were already made up. The Jobs Report showed that there were only 36,000 new jobs created in June when 104,000 had been expected. Unemployment rose to 5.9% and the new jobs created were mainly in health services not business services and therefore did not signal any upturn in business activity. Manufacturing actually lost -23,000 jobs in June. While this may not be exciting we will continue to take these small gains instead of losses as bullish. What was not bullish was the revision downward of the prior three months numbers. May dropped from +41K to only +24K. April fell from positive to negative -21k and March dropped from positive to -5K. Suddenly the economic recovery is recovering much slower than expected. Bulls roared? Traders came back from the holiday, saw no negative terrorist headlines and rushed to buy stocks. Sorry, that is not the way it happened. With the volume very light it was not a new bullish sentiment taking control but simply short covering in light of no attacks. This brings up several interesting points. We all know the bears have been shorting rallies for months very successfully. They are shorting based on general market fundamentals, accounting concerns, falling profits, etc. Only one short covering rally in recent history has brought anything close to this rebound and that was the Cisco comments on May-7th. The following day the Dow gained +305 points to 10141 and that was on a Wednesday with three full days of trading before the weekend. The +324 point gain on Friday in only a half day of trading would suggest that many more traders were short than in May. Were they short simply because the economic conditions were worse? I doubt it since they are actually improved from early May. Were they short because the market was setting new lows on Wednesday? I doubt that also. After seeing the market action on Friday I now suspect that the flurry of terrorist warnings leading up to the holiday had prompted a broader range of traders to short stocks. Remember the rise in the markets on Wednesday afternoon? I said at the time that I thought it was short covering by smart traders taking profits in advance of the holiday unknowns. I believe the action on Friday was simply the shorts expecting an event closing those positions. This is really scary since it shows how many traders really expected another attack. I also believe it points out another problem. The economic fundamentals did not change but the number of people wanting to go long on Friday was amazing. I received over a dozen emails from traders wanting to go long even after a +200 point gain in the Dow. This makes me believe that there is still not enough fear in the markets. It is surprising when you consider the levels we hit last week. Some analysts have suggested we are undergoing a capitulation by breadth instead of depth. With the horrible internals the beginning of the week it appeared we were nearing a bottom. With the knee jerk rebound on Friday I am now not so sure. Monday is shaping up to be volatile to say the least. The TRIN closed at .25, a level only seen four times earlier this year. On May-8th and April-16th the following day posted a sharp drop. On March-8th and 15th the markets trended sideways for a couple days before dropping. The VIX closed below 30 again and back at the same level it was just before the last drop. Obviously these are both overbought/oversold indicators and they are pointing to overbought. Extreme overbought in the case of the TRIN. The gains on Friday were extreme because of the oversold and heavily shorted market conditions. The spring was completely compressed and when the rebound occurred in only a half day's trading the results were dramatic. This brings up the problem of what may happen on Monday. Have all the shorts covered? Did the stop losses get triggered on the ones who were not at their PC on Friday? Will institutions come back to work on Monday and decide that now is a good time to buy? I doubt it. Earnings warnings are still with us and new accounting scandals are likely to continue to erupt. Fundamentals did not change despite the positive comments about the chip sector. For instance, to illustrate the absurdness of the buying on Friday, AMD gained nearly +7% to levels near its last warning. After two warnings in the last two weeks for AMD did business suddenly explode? I don't think so. This is simple short covering with a compressed timeline. Investors are not flocking into the market. The TrimTabs.com weekly survey showed that another $10.8 billion in cash flowed out of equity funds for the week ended Wednesday. This was on top of -$9.2 billion the week before. I looked at several hundred individual stock charts and almost without exclusion the buying propelled them to just under recent resistance or right at it. The bulls would make the case that an opening bounce on Monday could propel these stocks over that resistance and trigger an entirely new round of short covering. This is entirely possible and would simply mean we roll over at a higher level. The bears would hope that the buying was over after Friday and sell into any weak bounce on Monday. You can bet that the absence of hedge fund trading on Friday means they will be back in force on Monday. Since they are normally contrarian in direction it means they will be shorting heavily on any weakness. Obviously you can see from my comments I am directionally biased. Since IBM and Intel have not warned (yet) the possibility of lowered guidance with their earnings is very strong. The economic outlook since their last guidance has slowed considerably. IBM announces on the 17th, Intel on the 16th. That is only seven trading days away for Intel. With warnings still flying I expect a flurry on Monday and Tuesday now that the holidays are over. Want more bad news? IBM warned before the bell on Monday April 8th with scheduled earnings on the 17th. Monday is July 8th with earnings on the 17th. A surprising coincidence! Don't be surprised if history repeats itself. Technically speaking the resistance for the Dow is 9412, only 38 points away and then 9725. I would suspect the 9725 is the one that will hold. Resistance for the broader S&P is 1007, 19 points away and 1040, 52 points above Friday's close. The Nasdaq has strong resistance at 1475-1485 an as long as the opening bounce does not take it over those levels they should hold on a gradually rising market. All this resistance bashing means that if this IS ONLY a short covering rally it will fail quickly and not much higher than our present position. There is room for one more good day and then the market will have to go back to trading on fundamentals in order to break out. Without some positive earnings surprises and positive guidance this will not happen. Bottom line, if you are long calls keep those stops tight after any opening bounce. We have a new writer this Sunday that I really think you will like. Check out his Options 101 article entitled "The Trading Wars" in this weekends newsletter. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor Editors note: If you feel you have a specific trading style, technique, indicator, market view or anything that would benefit our readers, please email me and lets give everyone the benefit of your experience. Everybody has a different view of the same market and how to profit from it. 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 ************************************************ 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/ ************************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 ************** Target Shooting The Market With the incredible gains on Friday there exists the strong possibility of a pull back when the short covering runs its course. You could buy puts on the OEX or individual stocks but the OEX is expensive and individual stocks react differently. To solve this problem we can target shoot the DJX, which represents the Dow and the QQQ which represents the Nasdaq 100. I say target shoot because we do not know where these stocks will top out. It makes more sense to pick a level where we are comfortable entering a put and let the markets decide if we get executed. Using the QQQ, which closed on Friday at $26.35 the target level I would suggest is $27.00. The last two recent highs have been $26.79 and $26.75. The last intraday high before that was $27.05. We will assume the resistance still exists at $26.75 but with the possibility of a strong open on Monday we will opt for the $27 level instead. I would suggest buying the July-$26 put option (QAV-ZW) if the QQQ touches $27.00. If you have a broker like Preferred that takes contingent orders based on the underlying stock price then enter it as "buy QAV-ZW at market when QQQ = $27.00. If your broker does not support this type of order then my best guess on the option price with the QQQ at $27 is $1.00. Enter a limit order for the desired number of contracts at $1.00. Since it is also possible that the markets could explode through current resistance we need to set a stop loss for the trade that will only be triggered on a solid break through $27. I suggest that stop loss to be $27.55. (The .55 gets us away from the round number price magnet at $27.50) Should we get stopped out I would reopen the play with an entry point of $28.75 and a stop loss of $29.55. I would raise the strike price to July-$28. Note: Be sure to enter the orders in advance since any "touch" of the desired levels could only be momentary. Chart of the QQQ *********************** The DJX is going to be a little wider than the QQQ since the Dow tends to move in larger point jumps. Resistance at Dow 9412 is too close to pick as an entry point but there is strong resistance at 9712. I suggest buying the DJX July-95 put (DJV-SQ) if the DJX hits 96.95. The estimated option price is $1.50 if this happens. I picked $96.95 when resistance is 9712 because everybody tends to butt in line when anticipating entry points based on prior levels. Everybody wants to get in ahead of the crowd. We want to get in ahead of the 9700 century mark and the crowd. The stop loss for this trade will be 98.05, just slightly above the June 5th high. Chart of the DJX *********************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Summer of the Bull? By Eric Utley Not quite yet. But Friday’s rally did do some constructive things towards further upside this summer. Just about everything went the right way for the bulls. The dollar was higher against the majors; Treasuries were lower despite a weak jobs report; gold was down; stocks were higher. Just what sparked Friday’s rally is open for debate. Clearly there was a large shift out of one asset class and into another, stocks being the other. Perhaps the holiday set the tone for Friday’s rally. We could say that the bulls enjoyed a day of Independence from the bears, a day long in the coming. We can only wait to see if the good feelings spread around Friday carry over the weekend and into next week’s trading. In the meantime, let us take a look at the numbers. Fear was crushed Friday. The CBOE Market Volatility Index (INDEX:VIX.X) fell back to the 30 level, which some consider a key psychological level. The VIX shed more than 3 points on the day, which was a big move indeed! The Nasdaq-100 Volatility Index (INDEX:VXN.X) dropped by nearly 4 points. The theme with these to indicators has been the same all year. When stocks rise, fear falls. There’s no doubt in any rally, which means that there’s no wall of worry to climb. That’s not to say stocks can’t or won’t go higher in the face of a falling VIX, but traditionally, we’ve seen pessimism in the face of a rally when at a meaningful turning point in the market. There was no pessimism Friday. Options traders reflected as much in the put/call numbers. All four of the markets that we track the numbers for finished below 1.0 last Friday, which means more calls traded than puts. The equity only put/call ratio fell to 0.51, meaning that twice as many calls traded as puts. The basic thinking here is that if everyone already bought into Friday’s rally who was going to, then who’s left to carry stocks higher? That’s why skepticism is so important over the intermediate to longer term. Elsewhere, the bullish percent numbers showed some improvement Friday, but did not by any means confirm the action in the broader market. The Nasdaq-100 Bullish Percent (BPNDX) was by far the most active and benefited the most from Friday’s rally by adding five stocks to finish at 13 percent. The bigger picture in the Nasdaq is that it’s still oversold, but not in a bullish position. What Friday’s rally did do is set forth the groundwork for confirmation in the bullish percent numbers going into next week’s trading. We’ll track these developments closely. All four of the ARMS Index numbers that we track are now below the extreme oversold reading of 1.50, though only by small amounts in each case. It will be interesting to see if these numbers continue to creep higher. Of special interest to me is the longer term 55-day number, which finished last Friday at the 1.38 level. The market internals were nothing short of super strong last Friday with advancers far out pacing decliners. The new high/new low list was not nearly as bullish, as new lows still beat new highs on both the NYSE and NASDAQ. Volume, as expected, was awfully light, which takes away from the credibility of Friday’s rally, in my mind anyway. The sector scorecard was decidedly green Friday, quite the difference from what has been the routine as of late, when most sectors have finished lower. The Gold and Silver Index (XAU.X) was the only sector on my list that finished lower on the day, and being that gold equities are a defensive bunch, it should come as no surprise that the XAU was the leader to the downside. And on a day when the Dow gained more than 300 points, you just know who the bulls are going to go to. That’s right, the semis, which earned the day’s best performing sector spot. I hate to put a damper on what we observed Friday, but from what the numbers say, we’ve seen this same type of action this year, and last year. It smells an awful lot like a short covering rally that lacks the necessary attributes to morph into anything meaningful. But like the other head fakes in the recent past, this rally has set the groundwork for something bigger. All we can do is continue to observe. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 11350 52-week Low : 8062 Current : 9380 Moving Averages: (Simple) 10-dma: 9185 50-dma: 9758 200-dma: 9814 S&P 500 ($SPX) 52-week High: 1316 52-week Low : 945 Current : 989 Moving Averages: (Simple) 10-dma: 977 50-dma: 1044 200-dma: 1099 Nasdaq-100 ($NDX) 52-week High: 2071 52-week Low : 1089 Current : 1061 Moving Averages: (Simple) 10-dma: 1026 50-dma: 1173 200-dma: 1395 Semiconductors ($SOX) The semis led the charge in the technology sector Friday. The SOX was the best performing sector for the day. It gained 8.27 percent for the day. Leading SOX components included Novellus Systems (NASDAQ:NVLS), LSI Logic (NYSE:LSI), Teradyne (NYSE:TER), Applied Materials (NASDAQ:AMAT), and Broadcom (NASDAQ:BRCM). 52-week High: 657 52-week Low : 343 Current : 393 Moving Averages: (Simple) 10-dma: 379 50-dma: 463 200-dma: 510 Gold ($XAU) As stocks shot higher Friday, investors fled gold equities. But that’s been the pattern over the last few weeks, a pattern of inverse relationship. The XAU was the worst performing sector Friday with its 1.03 percent drop. Only half of the XAU components finished lower Friday, but they were enough to weigh down the index. They were Newmont Mining (NYSE:NEM), Meridian Gold (NYSE:MDG), Agnico Eagle Mines (NYSE:AEM), Barrick (NYSE:ABX), and Anglogold (NYSE:AU). 52-week High: 89 52-week Low : 49 Current : 70 Moving Averages: (Simple) 10-dma: 74 50-dma: 79 200-dma: 64 ----------------------------------------------------------------- Market Volatility Triple digits in the Dow. No stick in the VIX. Same pattern again and again. It’s not so much the absolute level of the VIX that I’ve become concerned with, but rather its action in relation to the rest of the market. The VIX’s implosion bodes poorly for stocks over the intermediate term, but it has room to come down in the short term, which means stocks could have room to run. CBOE Market Volatility Index (VIX) - 30.21 -3.10 Nasdaq-100 Volatility Index (VXN) - 56.28 –3.78 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.77 301,374 231,944 Equity Only 0.51 235,288 121,204 OEX 0.92 26,260 24,188 QQQ 0.66 20,876 13,890 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 46 + 0 Bull Correction NASDAQ-100 13 + 5 Bear Confirmed DOW 30 + 3 Bull Alert S&P 500 34 + 1 Bear Confirmed S&P 100 31 + 1 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 1.41 10-Day Arms Index 1.45 21-Day Arms Index 1.43 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 2169 782 NASDAQ 2313 808 New Highs New Lows NYSE 32 35 NASDAQ 22 55 Volume (in millions) NYSE 793 NASDAQ 1,119 ----------------------------------------------------------------- Commitments Of Traders Report: 06/25/02 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 Commercial interests added back about 10,000 contracts to their net bearish position. Small traders dropped a number of longs and a smaller number of shorts for a reduction in their net bullish position by more than 20,000 contracts. Commercials Long Short Net % Of OI 06/11/02 388,751 457,018 (68,267) (8.1%) 06/18/02 437,530 487,956 (50,426) (5.4%) 06/25/02 378,214 438,775 (60,561) (7.4%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 06/11/02 174,357 69,464 104,893 43.0% 06/18/02 181,178 88,517 92,661 34.3% 06/25/02 134,380 62,792 71,588 36.3% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 The roles reversed. Commercials went decidedly short, while Small Traders went decidedly long. Commercials Long Short Net % of OI 06/11/02 45,946 36,878 9,068 10.9% 06/18/02 54,816 49,169 5,647 5.4% 06/25/02 27,238 35,926 (8,688) (13.8%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 06/11/02 14,561 25,330 (10,769) (27.0%) 06/18/02 20,883 29,153 (8,270) (16.5%) 06/25/02 14,749 7,570 7,179 32.2% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Dow commercials dropped about 2,000 of their net long position. Small traders eased into a bullish position. Commercials Long Short Net % of OI 06/11/02 20,369 17,172 3,197 8.5% 06/18/02 25,995 19,115 6,880 15.1% 06/25/02 18,016 13,255 4,761 15.2% 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 06/11/02 7,500 9,925 (2,425) (13.9%) 06/18/02 5,379 11,813 (6,434) (37.2%) 06/25/02 6,414 6,597 183 1.40% 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 *************** Summer Rally At Last? By Eric Utley I don’t think many expected what we saw take place in the market last week. Then again, the market has the propensity to do that which is least expected by the majority of its participants. Going into last week’s session, the talking heads were once again calling for a washout event. Corporate scandal and the threat of further terrorist attacks kept the buyers at bay in the earlier part of the week. But the sellers just plain ran out of selling in the last two sessions of the week. When no one is left to sell, stocks can only go higher. Or, maybe there was something more at play. We were, after all, celebrating the birth of the greatest nation. So maybe there was something a little more sentimental at work. No matter the root cause, Friday’s ramp was welcome from where I sit. 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 ---------------------------- Oracle (NASDAQ:ORCL) What are you thoughts on ORCL. I’ve been avoiding buying tech stocks for the last two months, but have noticed the chart in ORCL that looks like it could be breaking out. Where do you see support and resistance? – Thanks, Ken Thanks for the question, Ken. And well done on avoiding the mess that became technology over the last two months. ORCL, however, has indeed shown some signs of improvement over the last two months. Option Investor added the stock to the call list this weekend, so we would have to agree with your observations. But before we get to the technicals of the stock, I’d like to make an interesting observation that has nothing to do with objective analysis. I find it very interesting that the buyers have supported and lifted ORCL in the last few months give what I consider was a great loss of credibility. Don’t forget that it was ORCL who on more than one occasion issued profit warnings on quiet Friday afternoons earlier this year. The company has twice tried to slip a warning under the cover of the market by issuing its releases late in the week, after the market closes no less. Moreover, it was Siebel who said not too long ago that it had experienced its worst quarter ever. Siebel Systems, mind you, is one of ORCL’s chief competitors. Tom Siebel, the chief of the firm that carries his name, was an Oracle executive once upon a time. Anyway, the market knows more than I do, and it does not seem to mind that ORCL doesn’t have any credibility. Just something to think about, now back to the objective. ORCL is back on a buy signal, its first in over six months. The stock did so last week by trading to the $10 level, breaking out above its short term double top resistance at the previous high of $9.50. The buy signal has put ORCL back into a bullish short term position, with resistance now coming into play at the $10 level. That resistance will be broken if ORCL can trade above the $10.50 level during this run higher. As for support, the stock now has short term help at the $8 level, which is about 20 percent away from where the stock is currently trading. A bit lower, the stock has a strong double-bottom in place at the $7.50 level. While the short term technical position has taken a turn for the better in ORCL over the last few months, the longer term picture isn’t as bullish. The stock is still trading well below its bearish resistance line, which is now overhead at the $12.50 level. I’d grow much more bullish on ORCL if it were to breakout above its bearish resistance trend line, which itself would signal a longer term shift in the stock’s position. I think that ORCL can certainly be traded from the bullish side over the short term, but you have to define where you’re going to take an exit, which I think comes at the bearish resistance line. ---------------------------- Home Depot (NYSE:HD) Home Depot has been in the dumps lately. I’ve been holding since $44 and haven ridden HD down all the way. Do you see the stock turning around, or at least done going down? – Jay Thanks for the question, Jay. HD maybe has gotten too big for its own good. The company’s growth strategy over the years has been to add one new location after another. The company has entered nearly every major suburban market where home building, restoration, and remodeling has been booming. At current count, the company has a little over 1,300 stores. But the company is facing a couple of problems that may prevent it from staging the type of growth that has driven the stock substantially higher over the last decade. For starters, the company is running out of markets to enter, to build new stores. Sure it can go overseas, but the U.S. market is becoming harder and harder to expand within, which is partly due to the tough competition that Home Depot is facing from Lowes. These, of course, are issues that are specific to Home Depot. There are macro issues at work as well, such as the strength of the U.S. consumer. The retail sector as a whole has been hit pretty hard in the last few months over those concerns. The selling hasn’t been contained to HD. Other heavyweights such as WMT have been hit hard as well. In the case of HD, I think it’s been a culmination of events and fears that have pressured the stock down by so much, so quickly. I can’t say whether now would be a good time to buy the stock, but I can make some technical observations. The stock’s steep fall from above $45 down to its recent relative lows at $34 caused what I would consider some longer term damage. Prior to the slide in May and June, HD had been consolidating its fall rally in a fairly tight range, which was a positive. But the steep breakdown from that consolidation caused quite a bit of damage. Over the very short term, however, HD is trying to put in some basing work. It has short term resistance at $38, which if broken would put the stock back on a buy signal and in a short term bullish position. But like ORCL above, HD is trading well below its bearish resistance. The thing that I’d be looking for over the next several months is some sideways trading in HD. A stop below the recent relative low at $34 could help to protect against further downside. If the stock does stage a good sized short term rally, I’d be looking to exit from bullish positions some where near the bearish resistance line if HD reaches that far. ---------------------------- 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 July 8th ================================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- AA ALCOA Mon, Jul 08 -----N/A----- 0.28 AMB AMB Property Mon, Jul 08 After the Close 0.62 FVB First Virginia Banks Mon, Jul 08 -----N/A----- 0.88 SWY Safeway Mon, Jul 08 -----N/A----- 0.72 ------------------------- TUESDAY ------------------------------ CEFT Concord EFS Tue, Jul 09 -----N/A----- 0.18 PBG Pepsi Bottling Group Tue, Jul 09 Before the Bell 0.47 ----------------------- WEDNESDAY ----------------------------- BRO Brown & Brown Wed, Jul 10 After the Close 0.28 CBSH Commerce Bancshares Wed, Jul 10 Before the Bell 0.72 FAST Fastenal Wed, Jul 10 Before the Bell 0.27 DNA Genentech Wed, Jul 10 After the Close 0.22 ISCA International Speedway Wed, Jul 10 -----N/A----- 0.27 MTG MGIC Investment Corp. Wed, Jul 10 Before the Bell 1.55 MCAF McAfee.com Wed, Jul 10 After the Close 0.07 RBAK Redback Networks Wed, Jul 10 After the Close -0.17 BPOP Popular, Inc. Wed, Jul 10 -----N/A----- 0.62 SDX Sodexho Alliance S.A. Wed, Jul 10 Before the Bell N/A STI SunTrust Wed, Jul 10 Before the Bell 1.20 YHOO Yahoo! Wed, Jul 10 After the Close 0.02 ------------------------- THURSDAY ----------------------------- ABT Abbott Laboratories Thu, Jul 11 -----N/A----- 0.49 ADX Adams Express Thu, Jul 11 -----N/A----- N/A BBT BB&T Thu, Jul 11 Before the Bell 0.68 CTAS Cintas Thu, Jul 11 -----N/A----- 0.36 DCLK DoubleClick Thu, Jul 11 After the Close 0.00 SSP E.W. Scripps Thu, Jul 11 Before the Bell 0.75 DJ Dow Jones Thu, Jul 11 -----N/A----- 0.22 SSP E.W. Scripps Thu, Jul 11 Before the Bell 0.75 IFIN Investors Fin. Srvcs Thu, Jul 11 06:00 am ET 0.25 JNPR Juniper Networks Thu, Jul 11 After the Bell -0.01 MAR Marriott International Thu, Jul 11 -----N/A----- 0.42 NET Network Associates Thu, Jul 11 Before the Bell 0.12 NXY Nexen Thu, Jul 11 -----N/A----- 0.60 PWAV Powerwave Techn. Thu, Jul 11 After the Close 0.05 SONS Sonus Networks Thu, Jul 11 After the Close -0.07 THC Tenet Healthcare Thu, Jul 11 -----N/A----- 0.92 SGR The Shaw Group Thu, Jul 11 Before the Bell 0.59 EYE VISX Thu, Jul 11 After the Close 0.12 ------------------------- FRIDAY ------------------------------- ACN Accenture Fri, Jul 12 Before the Bell 0.26 B Barnes Group Fri, Jul 12 Before the Bell 0.37 BLK BlackRock Fri, Jul 12 Before the Bell 0.49 MI Marshall & Ilsley Fri, Jul 12 -----N/A----- 0.53 PSB PS Business Parks Fri, Jul 12 After the Close 0.87 SPOT PanAmSat Fri, Jul 12 Before the Bell 0.09 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable SII Smith International 2:1 07/08 07/09 THO Thor Industries, Inc. 2:1 07/08 07/09 PROV Provident Financial Hldngs 3:2 07/12 07/13 KRB MBNA Corporation 3:2 07/15 07/16 SBCF Seacoast Banking Corp. 3:1 07/12 07/15 ERES eResearchTechnology 3:2 07/16 07/17 MLAN Midland Co 2:1 07/16 07/17 ANFI American National Fncl 5:4 07/18 07/19 REXL Rexhall Industries 2:1 07/18 07/19 ANFI American National Fin Inc. 5:4 07/18 07/21 -------------------------- Economic Reports This Week -------------------------- Once again earnings season will dwarf any major economic reports in the eyes and hearts of investors. Earnings for the second quarter begin to trickle in on Monday but start to pick up mid- week. There are a couple of reports this week that will still have the attention of analysts and these will be the PPI on Thursday and the Retail Sales and Sentiment numbers on Friday. ============================================================== Monday, 07/08/02 -For- ---------------- Consumer Credit (AB) May Forecast: $6.0B Previous: $8.8B Tuesday, 07/09/02 ----------------- None Wednesday, 07/10/02 ------------------- Export Prices ex-ag.(BB)Jun Forecast: N/A Previous: 0.0% Import Prices ex-oil(BB)Jun Forecast: N/A Previous: -0.1% Wholesale Invntories(DM)May Forecast: -0.4% Previous: -0.7% Thursday, 07/11/02 ------------------ Initial Claims (BB) 07/06 Forecast: N/A Previous: N/A PPI (BB) Jun Forecast: 0.0% Previous: -0.4% Core PPI (BB) Jun Forecast: 0.1% Previous: 0.0% Friday, 07/12/02 ---------------- Retail Sales (BB) Jun Forecast: 0.6% Previous: -0.9% Retail Sales ex-auto (BB)Jun Forecast: 0.4% Previous: -0.4% Mich Sentiment-Prel (DM) Jul Forecast: 93.3 Previous: 92.4 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 07-07-2002 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 ************************************************************** *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Fri Week BA 45.00 -0.40 -0.06 -0.77 1.23 0.00 Ready to run ESST 17.97 -0.93 -0.60 0.92 1.04 0.43 Now’s the time SNPS 54.48 -1.76 -0.82 0.89 1.24 -0.33 Dropped MSFT 54.90 -2.02 -1.22 1.01 2.43 -0.20 Leading tech MO 46.21 1.28 0.74 -0.43 0.94 2.53 New, rebound? INTU 50.09 -2.09 -1.66 2.14 2.02 0.27 New, strength NVDA 18.90 -1.12 -0.56 1.15 1.45 1.72 New, cover??? ORCL 10.05 -0.48 -0.31 0.87 0.50 0.58 New, based! PUTS TDS 59.00 -0.65 -1.37 0.47 0.00 -1.55 Weakness Fri EMMS 20.48 -1.61 -0.67 0.73 0.84 -0.81 Ready to roll KMI 38.19 0.28 -0.70 0.32 0.27 0.17 Losing steam EXPE 57.49 -1.88 -5.41 1.83 3.56 -1.80 Dropped LXK 52.00 -3.50 -0.53 0.23 1.40 -2.40 Back to 10-dma QLGC 39.80 -2.21 -1.46 3.09 2.28 1.70 Short covering XL 82.00 -1.67 -1.42 -0.31 0.70 -2.70 Off from high ACS 46.74 -1.83 -2.17 1.87 1.39 1.87 Dropped LLY 50.62 -2.64 -1.64 -1.63 0.13 -5.78 No life at all CAM 49.99 1.15 -1.87 1.45 0.84 1.57 Ready to enter GS 71.50 -2.21 -0.44 -0.50 1.30 -1.85 New, rollover LLL 50.70 -1.82 -0.78 -2.08 1.38 -3.30 New, trending CAH 58.50 -4.11 -2.89 2.74 1.35 -2.91 New, trouble ************************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: ********************* INTU – Intuit $50.09 +2.02 (+0.27 last week) See details in play list Put Play of the Day: ******************** GS – Goldman Sachs Group $73.95 (+0.60 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 ^^^^^ SNPS $54.48 (-0.33) Throughout the long slide in the Semiconductor sector, SNPS has held up remarkably well, and it was our expectation that when the market rebounded, SNPS would benefit substantially. Well, the rally on Friday was pretty impressive, with the Semiconductor sector (SOX.X) leading the charge with a 9% gain. Needless to say, it was disappointing to see that SNPS couldn't manage more than a 2.3% gain on the day, once again turned back at the $55 resistance level. Due to its lack of follow-through on Friday, we're pulling the plug on the play this weekend. PUTS ^^^^ EXPE $57.49 (-1.80) The first test of the 200-dma for EXPE proved to be painful for the bears as the stock has rebounded from that level in the last two days of trading. The bulls might be regaining their confidence in EXPE and might try to carry the stock higher next week. Instead of waiting around for that to happen, we’d rather salvage what gains we might have left in this position. Set a tight stop above the close of Friday’s session, or look to exit plays into weakness early next week. ACS $49.35 (+1.87) The last two days have seen ACS rebound from the pits. The stock clawed its way back during Wednesday’s session, and in the process created an inside day from which it broke out during Friday’s session. The break could lead to a run higher over the near term, which we want no part of. Look to exit on a pullback from the 200-dma overhead at the $49.75 level in the coming sessions. *********** 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 07-07-2002 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 ************** MO – Phillip Morris $46.21 (+2.53 last week) Philip Morris Companies Inc. is a holding company whose principal wholly owned subsidiaries, Philip Morris Incorporated, Philip Morris International Inc., Kraft Foods Inc. and Miller Brewing Company, are engaged in the manufacture and sale of various consumer products. A wholly owned subsidiary of the Company, Philip Morris Capital Corporation, engages in various leasing and investment activities. The company's significant industry segments are domestic tobacco, international tobacco, North American food, international food, beer and financial services. Tobacco stocks have been hit very hard in the last several weeks. The market grew nervous a few weeks back after a jury award. Phillip Morris and RJR suffered a major setback when a jury in Miami gave more than $5 million in damages to a flight attendant who claimed that she had acquired chronic sinusitis through second hand smoke. Separately, a federal court ordered RJR to pay some $15 million in damages to a smoker. The market was frightened at the prospects of higher than previously expected awards. But much of the downside appears to have been unwarranted as the fundamentals of the broader industry remain very healthy. Indeed, the tobacco stocks of the market were among some of the stronger stocks this year before the recent jury awards. Rational action seems to be returning to the tobacco stocks as the leaders such as RJR and MO have since stabilized and begun to rebound higher. MO appears to have the most upside because of its strength in financial position. Its dividend yield and earnings growth are once again coming back into focus as the buyers remerge. Traders looking to game the rebound in MO can watch for a breakout above the 10-dma, which closed Friday right at the $46.17 level, just a few ticks below where the stock closed. A breakout above the 10-dma by about $0.50 could signal that the bounce has legs and could eventually carry MO back up to its 200-dma all the way up to the $50 level. Make sure to confirm volume on a breakout above the 10-dma. If you’re more comfortable with a pullback to support, watch for MO to retreat down to the $45 level for another entry opportunity. Our stop is initially in place at $44. BUY CALL JUL-45*MO-GI OI=3695 at $2.00 SL=1.00 BUY CALL JUL-47 MO-GW OI=4154 at $0.80 SL=0.25 BUY CALL AUG-47 MO-HW OI=2657 at $1.90 SL=1.00 BUY CALL AUG-50 MO-HJ OI=9353 at $0.95 SL=0.25 Average Daily Volume = 7.67 mln INTU – Intuit $50.09 +2.02 (+0.27 last week) Intuit, Inc. is a provider of small business, tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers, small businesses and accounting professionals. The Company's principal products and services include Quicken, QuickBooks, Quicken TurboTax, ProSeries, Lacerte and Quicken Loans. Intuit offers products and services in five principal business divisions, which include Small Business, Tax, Personal Finance, Quicken Loans and Global Business. Very few technology stocks are trading at yearly highs. Let alone a big cap technology stock. Yet INTU is trading at a fresh 52-week high after last Friday’s rebound back up above the $50 level. The company has been on an acquisition spree over the last several weeks, the most recent of which was a small business software outfit that went for $85 million. The acquisitions have added to INTU’s already strong sales outlook for this year and into the next, which the market is rewarding with a premium and new yearly highs. Technically, INTU’s charts are things of beauty, both its longer term and short term charts. The weekly view reveals that INTU has been forming a solid two year base from which it is just beginning to emerge from. On very high levels of volume no less. Given the breakout on the weekly chart in the last two days, the stock doesn’t have a point of reference for resistance until the $56 level. The daily chart shows a steady trend of accumulation since early May, which has seen the stock rally from the $36 level to where it’s currently trading around the $50 mark. The stock has room to run to the upside, if only the market remains stable to positive going into next week’s trading. Look for a break above the $50 level on relatively high volume to use as a possible entry point. If you’d rather wait for a pullback, watch for market related weakness to drag INTU back down to short term support, which is between the $46 and $48 levels. Our stop is initially set at the $43 mark. BUY CALL JUL-45 IQU-GI OI=3777 at $4.40 SL=2.75 BUY CALL JUL-50*IQU-GJ OI=5571 at $1.35 SL=0.75 BUY CALL AUG-50 IQU-HJ OI= 581 at $3.20 SL=1.50 BUY CALL AUG-55 IQU-HK OI= 266 at $1.45 SL=0.75 Average Daily Volume = 3.21 mln NVDA – NVIDIA $18.90 (+1.72 last week) NVIDIA Corporation designs, develops and markets graphics and media communication processors and related software for personal computers (PCs), workstations and digital entertainment platforms. The Company provides an architecturally compatible top-to-bottom family of performance 3-D graphics processors and graphics processing units (GPUs) that set the standard for performance, quality and features for a broad range of desktop PCs. They range from professional workstations to low-cost PCs and mobile PCs, and from performance laptops to thin-and-light notebooks. NVIDIA's 3-D graphics processors are used for a wide variety of applications, including games, digital image editing, business productivity, the Internet and industrial design. The semiconductor sector is one of the most beaten up segments of the market. That much could partially explain the SOX’s 9 percent rally last Friday. The bounce was longer over due in the chip space, which means that this rebound could have room to run to the upside. For its part, the SOX has short term resistance at the 400 level. If cleared, the SOX could easily move back up to the 450 mark. Of the chip stocks, NVDA is one of the most beaten up this year considering that shares have fallen from above the $70 level since the beginning of the year to where they closed last Friday below the $20 level. If the SOX is going to run higher, NVDA should be one of the stocks in the group to lead the charge higher. The stock finished last week just below its downward sloping 10-dma which hasn’t been tested in over four weeks. A breakout above that level could confirm the rebound in the stock, and eventually lead it back up into the mid $20s. The 10-dma for NVDA finished last Friday at the $19.73 mark, which will be an important level to watch going into next week’s trading. The stock does have a gap after last Friday’s move higher, which is down to the $17.45 level. It’s possible that that gap gets filled before the stock runs higher. If NVDA begins to pullback early next week, watch for an entry if and when the gap gets filled. Our stop is initially set at the $16 level. BUY CALL JUL-17*UVA-GW OI=2354 at $2.45 SL=1.25 BUY CALL JUL-20 UVA-GD OI=4145 at $1.15 SL=0.50 BUY CALL AUG-17 UVA-HW OI= 925 at $3.50 SL=1.50 BUY CALL AUG-20 UVA-HD OI=1156 at $2.30 SL=1.75 Average Daily Volume = 11.2 mln ORCL – Oracle $10.05 (+0.58 last week) Oracle Corporation is a supplier of software for information management. The Company develops, manufactures, markets and distributes computer software that helps corporations manage and grow their businesses. The Company's software products can be categorized into two broad areas: systems software and business applications software. Systems software is a complete Internet platform for developing and deploying applications on the Internet and on corporate intranets. Systems software products include database management software, application server software and development tools that allow users to create, retrieve and modify the various types of data stored in a computer system. The former lead dogs of technology have been among the hardest hit in this market environment. The risks of overvaluation and slowing earnings growth have caused for a dramatic sell off so far this year. But one of the former leaders of the new economy is showing significant signs of stabilization, and perhaps foreshadowing a strong rally into the remainder of the summer. The stock we speak of is ORCL, which has completed more than two months of solid base work while at the time the rest of technology continued to fall through the floor. Last Friday’s strong rally in the tech sector put ORCL into a position of a possible breakout from its base, which we will be watching for carefully going into next week. The stock has some minor resistance at the $10 level that was created during its last rally attempt in the first half of May. After some more consolidation following that breakout attempt, the stock may now be ready to finally emerge from its lengthy base with conviction. Look for a breakout rally above the $10.50 level on strong buying volume. Ideally we’ll see a strong follow through in the Nasdaq that would help ORCL to emerge from its base. As well, we’d like to see further signs of strength in the Software Sector Index (GSO.X) to confirm ORCL’s strength. If the breakout above $10.50 comes, the stock could have room to run up to the $12 area in short order given the lack of meaningful resistance immediately above current levels. But the 200-dma above near the $13 level should present some short-term congestion if ORCL reaches that high in short order. If you favor entries on pullbacks, wait a couple of days for the stock to move back down into its base, and watch for a bounce from the $9 level. Our stop is initially set at the $8.50 level. BUY CALL JUL- 7 ORQ-GU OI=11067 at $2.45 SL=1.75 BUY CALL JUL-10*ORQ-GB OI=53059 at $0.50 SL=0.00 BUY CALL AUG-10 ORQ-HB OI= 8197 at $0.95 SL=0.25 BUY CALL AUG-12 ORQ-HV OI= 1772 at $0.20 SL=0.00 Average Daily Volume = 49.2 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 ****************** ESST - ESS Technology $17.97 (+0.43 last week) ESS Technology, Inc. is a designer, developer and marketer of highly integrated digital system processor chips. The Company offers a broad array of DVD chips, video CD chips, communication chips and personal computer (PC) audio chips. These chips are the primary processors driving digital video and audio players, including DVD, video CD and MP3 players. The Company's chips use multiple processors and a programmable architecture that enable it to offer a broad array of features and functionality. The Company is also a supplier of chips for use in modems and similar communication products, and a supplier of PC audio chips. The Company sells its chips to distributors and original equipment manufacturers of DVD, video CD, MP3, modem and PC products. We had been waiting for a turn in the market to carry ESST higher, and that’s exactly what we got in last week’s holiday shortened trading session. What a holiday! ESST has been trading with a great deal of relative strength in the last few weeks, and the stock should shine in a market environment that is at least favorable to stocks in general. And the last two days have been most favorable. Given the recent market related pullback in the stock, ESST may now be ready to punch higher as long as the market stays positive. We hope that you were able to target a good entry point on the weakness in this stock early last week, because if you did, you should be sitting very pretty right now. Those who took entries closer to $16 might consider booking partial profits upon further follow through to the upside early next week. In terms of new entry points, we’d like to see ESST take out some of its short-term resistance before getting aggressively bullish. The stock has near term congestion at immediate overhead levels up to the $18.50 level, which it needs to clear next week if it’s going to start trending higher over the short term. Traders looking for new entry points can wait for a breakout above the $18.50 level in a market that is rallying. Confirm strength in the tech sector before entering, though, and make sure that volume comes into the stock to confirm that the rally has legs. BUY CALL JUL-17*SEQ-GW OI=2679 at $1.40 SL=0.75 BUY CALL JUL-20 SEQ-GD OI=2349 at $0.50 SL=0.25 BUY CALL AUG-17 SEQ-HW OI= 146 at $2.40 SL=1.50 BUY CALL AUG-20 SEQ-HD OI= 154 at $1.25 SL=0.75 Average Daily Volume = 2.85 mln BA – Boeing $45.00 (+0.00 last week) One of the world's major aerospace firms, BA operates in three principal segments: commercial airplanes, military aircraft and missiles, and space and communications. Commercial airplanes operations involves the development, production and marketing of commercial jet aircraft, principally to the commercial airline industry. The Military Aircraft and Missiles division is involved in the research, development, production, modification and support of military aircraft, including transport and attack aircraft. The Space and Communications segment is involved in the research, development, production, modification and support of space systems, rocket engines and battle management systems. Being in the right place at the right time cure feels good. When we stepped forward and began coverage on BA, it looked like both the stock was ready to stage a bullish move, despite the poor action of the DOW Transports ($TRAN). Well, since then the $TRAN has continued lower, but BA is looking better by the day. Just as we expected, the $42 support level provided a springboard for the stock to run as high as $45.25 early last week before the bulls ran out of steam. Following its surge above the $45 level last Monday, BA pulled back, rebounded from the $43.00-43.50 support zone and ended the week right back at the $45 level. While ending the week unchanged may not seem impressive on the surface, it is encouraging in light of the volatile week in the broad markets that BA found support at a higher low and looks ready to take a run at the $46 resistance level. Perhaps the approach of earnings on July 17th will be enough to motivate the bulls. Sure, we could see another pullback before that happens and another bounce from the $43 area looks good for fresh entries. Traders looking for confirmation before playing will want to wait for the bulls to push through the $46 resistance level before opening new positions. Keep stops set at $41.50. BUY CALL JUL-42 BA-GV OI= 931 at $3.00 SL=1.50 BUY CALL JUL-45*BA-GI OI=4737 at $1.30 SL=0.75 BUY CALL JUL-47 BA-GW OI=2327 at $0.40 SL=0.00 BUY CALL AUG-45 BA-HI OI=3460 at $2.15 SL=1.00 BUY CALL AUG-47 BA-HW OI=2982 at $1.10 SL=0.50 Average Daily Volume = 3.37 mln MSFT – Microsoft $54.90 (+0.20 last week) Although best known for its ubiquitous Windows PC operating system, MSFT develops, manufactures, licenses and supports a wide range of software products for a multitude of computing devices. The company's software products include scalable operating systems for servers, PCs and intelligent devices, server applications for client/server environments and software development tools. The MSFT's online efforts include the MSN network of Internet products and services and alliances with companies involved with broadband access and various forms of digital interactivity. Relative strength is an important aspect of every investment decision, but that importance is made even more profound when trying to game bullish trades in a clearly unhealthy market. A quick look at the NASDAQ shows an unhealthy downward trend, with the Composite having clearly broken the September lows. The Software sector (GSO.X) looks even worse, as it has spent the last 10 sessions below its September lows. And even the oversold rebound on Friday only lifted the GSO index to the level of the September intraday lows. So it is rather impressive to see that MSFT has not only avoided testing its September lows, but has been building a new pattern of higher lows since early May, when MSFT trading a double bottom just above the $48 level. The rebound this week from just above $50 came right at the ascending trendline and Friday's rally brought the stock right back to the $55 resistance level. The real test of the bulls' resolve will occur at the $56 level, which has acted as resistance since late April. So how do we play it? Ideal entries will materialize on a dip and rebound from the $52 support level, although a bounce from the $53 level (the top of Friday's gap) would be a bullish sign and provide good entries as well. Those looking for confirmation that this rally isn't going to disappear as quickly as it arrived will want to wait for MSFT to clear the $56 level on strong volume before playing. Raise stops to $50.50, as that level provided strong support on last week's dip. BUY CALL JUL-50 MSQ-GJ OI=27183 at $5.80 SL=3.75 BUY CALL JUL-55*MSQ-GK OI=49773 at $2.25 SL=1.00 BUY CALL AUG-55 MSQ-HK OI=10818 at $3.40 SL=1.75 BUY CALL AUG-60 MSQ-HL OI= 8101 at $1.30 SL=0.75 Average Daily Volume = 36.2 mln ************* NEW PUT PLAYS ************* CAH – Cardinal Health $59.15 (-2.26 last week) Cardinal Health is the second largest US wholesaler of pharmaceuticals, surgical and hospital supplies. The healthcare service provider offers these products and services to independent and chain drugstores, hospitals, alternate care centers, and the pharmacy departments of supermarkets throughout the United States. The company also offers support services including computerized order entry and confirmation systems. Through its subsidiary, Pyxis Corporation, CAH develops, manufactures, leases, sells and services systems that automate the distribution, management, and control of medications and supplies in healthcare facilities. It is amazing how quickly the tides of fortune reverse in this market. It wasn't so long ago that the majority of the call plays were picked from the Health Care sector of the market, but judging from the carnage experienced in that arena in recent weeks, those stocks look better for puts than for calls. Just witness what has happened in the Health Care Payor index (HMO.X). After one last push to the north side of $650, the HMO index has been crashing over the past 3 weeks, trading as low as $560 on Wednesday in response to legislation changes and litigation concerns. Witness shares of CAH, which plunged from $63 to as low as $46.80 (a 25% loss) before rebounding back to the $60 resistance level on Friday. It is interesting to note, that after gapping up on Friday morning, the stock was completely unable to make any further progress, actually closing 50-cents below its opening tick. Responding to the precipitous plunge in its stock price, the company stated on Tuesday that the weakness was due to an erroneous rumor in the marketplace about its relationship with Arthur Anderson over the past few years. Company officials were quick to point out that there are no accounting improprieties. Whether there is any truth to the rumors is a secondary issue at this point, as the technical damage has been done and the stock is still buried under its descending trendline. A rollover near the $60-61 area would make for an ideal entry, as would a drop back under the $57 level. We are initiating coverage with our stop set at $63.25. BUY PUT JUL-60*CAH-SL OI=1073 at $2.80 SL=1.50 BUY PUT JUL-55 CAH-SK OI=1860 at $1.00 SL=0.50 Average Daily Volume = 2.15 mln GS – Goldman Sachs Group $73.95 (+0.60 last week) The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net-worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Investors thinking that Friday's sharp rally will spell the end of the persistent bearish decline in the Brokerage sector (XBD.X) need only look at the price action in this index over the past month to cool their heels. After breaking below the $435 support level (also the 50% retracement of the fall rally), the XBD has been tracing a series of lower lows and lower highs for the past month. Breaking the 62% retracement at $408 on Tuesday, the XBD continued down to an intraday low of $392 on Wednesday before the oversold rebound began. It is entirely possible that this bounce could continue back to the $435 area, but short of economic prosperity breaking out all over, a continuation above that level seems unlikely. GS is the brokerage stock we most like to beat up on, primarily because of its consistent trading pattern over the past few months; namely DOWN. Connecting the intraday highs from late March to present yields a descending trendline that currently rests at $74, near the close of trading on Friday. A rollover near this level could be used for fresh entries, but we'd prefer to see a rally up to heavy resistance near $76 before taking a position. Then GS should fall of its own weight, as the plight of the market is revealed day by day with the commencement of July earnings season. Initial stops are set at $77. Traders looking to enter on a breakdown will need to wait for GS to fall through its recent lows (near $69) on heavy volume before entering a new position. BUY PUT JUL-75*GS-SO OI=5306 at $2.70 SL=1.25 BUY PUT JUL-70 GS-SN OI=8039 at $0.85 SL=0.25 Average Daily Volume = 3.43 mln LLL - L-3 Communications Holdings $51.02 (-2.98 last week) As a leading supplier of sophisticated secure communication systems and specialized communication products, LLL provides critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The company's high data rate communication, avionics, telemetry and instrumentation systems and components are used to connect a variety of airborne, space, ground-based and sea-based communication systems. Remember when Defense stocks could do nothing but head up, as investors were sure that fat profits would follow the defense buildup that went along with the war against terrorism? Judging by the recent action in the Defense index (DFI.X), that enthusiasm has cooled somewhat, as it has been falling pretty consistently since the middle of May. Last week's action was particularly grim with a nearly 10% slide between Monday's open and Wednesday's intraday low. So while there was a significant rebound on Friday, the DFI index is still well below heavy resistance at the $625 level. Shares of LLL went on a tear last fall, launching from a pre-attack level near $31 to an all time high near $66.50 in May, but it has all been downhill since then. In the intervening 8 weeks, LLL has been posting a series of lower highs and lower lows. Especially since early June, LLL has built itself a descending channel and the current lower boundary is near $48 and the upper boundary is at $56, also the site of significant overhead resistance. Channels have been a fairly reliable trading tool of late, so let's take advantage of the formation. A rollover near the $52 level (center of the channel) may be a decent entry point, but patient traders will want to wait for the bulls to push to either the $54 resistance level or ideally the $55.50-56.00 area before entering on the eventual rollover. Likewise, we'll want to harvest our gains as LLL reaches the lower edge of the channel, preparing to re-enter the play on the next rollover from resistance. Set stops initially at $56. BUY PUT JUL-52 LLL-SX OI=1187 at $3.20 SL=2.25 BUY PUT JUL-50*LLL-SJ OI=3647 at $2.00 SL=1.00 BUY PUT JUL-47 LLL-SW OI=1892 at $2.25 SL=1.00 Average Daily Volume = 1.50 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. 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The Option Investor Newsletter Sunday 07-07-2002 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 ***************** LLY - Eli Lilly $52.25 (-4.15 last week) LLY discovers, develops, manufactures and sells Pharmaceutical products targeted at the diagnosis, prevention and treatment of human diseases. The company's best known commercial product is the anti-depressant Prozac, although there are numerous other lesser-known drugs that treat conditions such as Parkinson's disease, diabetes, osteoporosis along with a broad range of antibiotics. The company also conducts research to find products to treat diseases in animals and to increase the efficiency of animal food production. There's no question that Pharmaceutical stocks have lost their enviable status as havens of safety in times of economic uncertainty, now that the DRG index has fallen to levels not seen since early 1998. Sure there has been a bit of a rebound over the past couple days, but that bounce is more of a short-covering rally in response to relief that there was no terrorist act over the holiday. The long term picture is decidedly down, with the $315-320 area now acting as formidable resistance. As bad as the picture is for the DRG index, LLY is even weaker. After breaking down yet again at the $46 level, the stock tumbled all the way to $50 on Wednesday. As testament to the stock's weakness, it only managed a gain of about $1.60 on Friday, a day where the DRG index posted a 3.7% advance. LLY is likely still reeling from the Lehman downgrade amid concerns of manufacturing and FDA nonapproval having a detrimental effect on financial results throughout the remainder of this year and into the next. Coming to rest near the $52 resistance level, LLY could very well roll over next week, especially since the DRG index came to rest just below the $300 level. But an even better entry point will come with the stock rolling over near the $54 level at the same time that the DRG index runs out of steam near the $305 level. Alternatively, look to open new positions on the downside as LLY breaks below the $50 level. Lower stops to $54.50, in case of a continuation of Friday's short-covering. BUY PUT JUL-55 LLY-SK OI=3361 at $3.70 SL=2.25 BUY PUT AUG-55 LLY-TK OI= 329 at $4.50 SL=2.75 BUY PUT AUG-50*LLY-TJ OI= 453 at $1.90 SL=1.00 Average Daily Volume = 3.66 mln LXK – Lexmark International $52.30 (-2.10 last week) Wrapping its arms around the entire life-cycle of printers, LXK develops and manufactures a broad range of laser, inkjet and dot matrix printers for the office and home markets. The company is also the exclusive source for new print cartridges for the laser and inkjet printers it manufactures. Additionally, LXK provides supplies for IBM printers and offers after-market laser cartridges for the large installed base of a range of laser printers sold by other manufacturers. The decline continued throughout last week's action, with another lower high and more importantly, a new lower low for this cycle. On Wednesday, LXK fell below $49 before rebounding with the remainder of the market into the close and then continuing upwards on Friday. Despite the all-day nature of Friday's rally, we remain unconvinced that the action in LXK is anything other than short-term short-covering. The bulls haven't even been able to challenge the month-long descending trendline (now at $54) since the middle of June and with earnings season upon us, there are unlikely to be any bullish revelations to break this trend anytime soon. LXK is set to announce its results on July 18th and investors are likely to be nervous leading up to that event, with concerns about a pending price war gaining a foothold in the market. Despite the strong upward move at the open on Friday, it is interesting to note that LXK had a hard time building on the early gains and came to rest below the $52.50-53.00 resistance area. Add in the formidable resistance at the $53.50-54.00 area, and it looks like things are still stacked very much in favor of the bears. Use a failed rally below the 200-dma ($54.16) to initiate new positions with a favorable risk-reward ratio. Keep stops in place at $54.50. BUY PUT JUL-55 LXK-SK OI=1670 at $4.10 SL=2.50 BUY PUT JUL-50*LXK-SJ OI=1875 at $1.60 SL=0.75 Average Daily Volume = 1.36 mln QLGC – QLogic Corporation $39.80 (+1.70 last week) Somebody has to make the equipment that lets your computer talk to all its peripheral equipment, and QLGC does it well. A leading designer and supplier of semiconductor and board-level input/output (I/O) management products, QLGC has been providing SCSI-based connectivity solutions to this market sector for over 12 years. QLGC's I/O products provide a high performance interface between computer systems and their attached data storage peripherals, such as hard disk and tape drives, removable disk drives and RAID (redundant array of independent disks) subsystems. The company is also the market share leader in Fibre Channel host bus adapters, a market segment that is receiving tremendous attention from investors. Short-covering was the name of the game on Friday as those investors that hadn't already left for the weekend went on a buying spree in response to the fact that there was no terrorist attack over the 4th of July. The NASDAQ-100 shot higher by more than 6.5% on the day, so any idea of this being the beginning of a strong summer rally need to be tempered with the fact that it came on rather light volume. But that doesn't change the fact that QLGC vaulted higher by 6% itself, bringing it within 20-cents of our $40 stop at the close. We debated about dropping the play this weekend, but after reflecting how quickly short-covering rallies have failed lately, we decided to give it one more day before pulling the plug. If our stop is broken on a closing basis, we'll take our lumps, but until a major resistance level is broken, the charts are still telling us to short all rallies. The only valid entry strategy for the play right now is to enter on a rollover from current levels. That entry would look even better if it occurred in the midst of a renewed broad-based Technology retreat next week. BUY PUT JUL-40*QLC-SH OI=5993 at $2.90 SL=1.50 BUY PUT JUL-35 QLC-SG OI=5659 at $1.25 SL=0.50 Average Daily Volume = 10.8 mln 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. The broader telecom sector, as measured by the North American Telecommunications Index (XTC.X), finished more than 5 percent higher during Friday’s massive rally in the broader market. For its part, TDS finished unchanged. That’s right, the stock didn’t go anywhere for the day, other than rolling over from its 10-dma once again. We very much liked the way that the stock under performed both its sector and the broader market during Friday’s session, and we hope that it means that TDS is going to continue lower over the coming weeks. But we do need to be careful about getting to aggressively bearish on this stock with the way that the broader market acted last week. While TDS is still in a favorable position for put plays, the broader market may trump any weakness in this stock over the near term. With that said, watching the action in the broader market as it relates to this play, along with watching sector action, will become all the more important. If the market starts to weaken again early next week, then we will feel more comfortable with taking new put entries into TDS. After all, the stock looks like it may breakdown once again from its short term consolidation. Continue to watch for rollovers from the 10-dma as that level has kept any rally in TDS in check over the last several months. Otherwise, watch for a breakdown below the $57 level on heavy volume as a sign that the stock is going to resume its trend lower. But only take new entries on a break below support in a negative market environment. BUY PUT JUL-65 TDS-SM OI= 84 at $6.80 SL=4.25 BUY PUT JUL-60*TDS-SL OI=207 at $3.30 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. EMMS showed signs of stabilization in the last two sessions thanks to the rebound in the broader market. But for as beaten up as this stock has been in the last several weeks, quite frankly we expected more short covering to come into this stock and in the process carry it higher. But that just didn’t happen last week. After all, the stock finished the session higher by a little more than 4 percent, while the comparative Nasdaq-100 finished closer to 7 percent higher. The under performance on the part of EMMS is a testament to the inherent weakness in the stock and the broadcasting sector. We expect the stock to rollover again on the first signs of weakness in the broader market. If, however, the market does continue higher next week, then EMMS will most likely be dragged along for the ride higher. The best defense against that scenario in which the market continues to rally is setting a tight stop above a significant short term resistance level to protect profits against further upside erosion. The stock is having trouble clearing the $22 level, which may be a good site to think about setting a protective upside stop for open positions. Of course a rollover from that level would offer a solid entry point into new put positions. If the stock does reverse early next week and slip back into its declining trend, then we’ll watch for a breakdown below short term support at the $18.50 mark for a momentum entry into weakness. BUY PUT JUL-25*QMJ-SE OI=13 at $4.80 SL=2.75 BUY PUT JUL-22 QMJ-SX OI=34 at $2.60 SL=1.25 Average Daily Volume = 711 K 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. The Natural Gas Index (XNG.X) finished higher last Friday by 2.11 percent, well below the final gains in the broader market of 3.67 percent as measured by the rally in the S&P 500. The natural gas index as a whole has been an under performer since its yearly peak in late April up around the 200 level. The index broke down from support last week, which is a major longer term level of support. Last Friday’s rally may prove to be no more than a brief short covering rally in the longer term downward trend at work in the XNG.X. And as goes the XNG, so too goes KMI. The stock itself lagged the broader market as well, although it was slightly better than the XNG. KMI came within a very close distance to its relative low that we were targeting since the inception of this play during last week’s trading. Last Friday’s rally put the stock back at its descending 10-dma which closed at the $38.89 level. If the trend is going to continue in the XNG, we expect KMI to rollover back down below its 10-dma in next week’s trading. Consider using such a rollover as an entry point if the XNG confirms. As a precaution, traders with open positions might consider sliding down a tight stop to protect profits. BUY PUT JUL-40*KMI-SH OI=1421 at $2.80 SL=1.25 BUY PUT AUG-40 KMI-TH OI=2889 at $3.80 SL=1.75 Average Daily Volume = 743 K XL - XL Capital $82.00 (-2.70 last week) XL Capital Ltd., formerly EXEL Merger Company, is a provider of insurance and reinsurance coverages and financial products and services to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. The Company provides property and casualty insurance on a global basis. XL Capital generally writes specialty coverages for commercial customers. Specific lines of business written include third-party general liability insurance, environmental liability insurance, directors and officers liability insurance, professional liability insurance, aviation and satellite insurance, employment practices liability insurance, surety, marine insurance, property insurance and other insurance covers, including program business and political risk insurance. XL broke down to another new relative low in its declining trend during last Wednesday’s session. The stock traded down to as low as the $80 level before rebounding along with the broader market on short covering into the holiday. Friday’s session saw thee stock continue higher, reaching as high as the $83 level during intraday trading, but from there it promptly rolled over to finish well off of its earlier daily peak. When it was all said and done, the stock under performed the broader market by a great deal, having only managed a fractional gain of the day. That much combined with the rollover from the daily high gives us reason to believe that XL is still heading lower, and that the last two days of strength were primarily short covering induced. If the broader market does continue to drag XL higher into the coming few sessions, then we would expect the 10-dma to come into play as resistance. The 10-dma finished last Friday at the $84.34 level, and would be a good site to target shoot a rollover entry point into new put plays early next week. If the stock reverses lower out of the gates early Monday morning, then traders might look for the stock to breakdown below where it closed last Wednesday, which was at the $81 level. BUY PUT JUL-85*XL-SQ OI=215 at $4.50 SL=2.50 BUY PUT JUL-80 XL-SP OI=454 at $1.80 SL=1.00 Average Daily Volume = 871 K CAM – Cooper Cameron $49.99 (+1.57 last week) Cooper Cameron Corporation is an international manufacturer of oil and gas pressure control equipment, including valves, wellheads, controls, chokes, blowout preventers and assembled systems for oil and gas drilling, production and transmission used in onshore, offshore and subsea applications. Cooper Cameron is also a manufacturer of centrifugal air compressors, integral and separable gas compressors and turbochargers. The Company's operations are organized into four separate business segments, Cameron, Cooper Cameron Valves, Cooper Energy Services and Cooper Turbocompressor, each of which conducts business as a division of the Company. The breakdown in the Oil Service Sector Index (OSX.X) that we detected last week has been followed by two strong days to the upside. But that much may not be such a surprise considering the oversold nature of the group over the very short term. In fact, we don’t dislike the last two days of strength in the group as it has set up CAM for another rollover opportunity into new put plays closer to resistance. For its part, the stock closed above its 10-dma last week, but below its short term resistance just beneath the $52 level. Rollovers anywhere from current levels to the $52 mark can be used to take entries into new put plays, provided that the oil service sector doesn’t power higher in early next week’s trading. The broader market might also play into the future short term direction of the energy sector as well as CAM, although the two haven’t tracked one another real closely this year. It’s been only recently that the OSX.X has given up its strength versus the rest of the market, so further strength in the broader market might not impact this play very much. If you’re looking for more confirmation of a reversal back down into short term trend and for weakness in CAM, then watch for the stock to take out Friday’s intraday low at the $49.39 level, and use volume as an indicator of how heavy the selling is. High volume and a break below Friday’s low should tell us that CAM is heading back down. BUY PUT JUL-50*CAM-SJ OI= 24 at $1.65 SL=0.75 BUY PUT AUG-50 CAM-TJ OI=199 at $2.90 SL=1.50 Average Daily Volume = 843 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** Beginning of the Summer Rally? By Mark Phillips mphillips@OptionInvestor.com Perhaps, but I'm not holding my breath. Let's look at the competing arguments. Bulls - Markets are oversold and VIX spent close to a week above the pivotal 30 level and is now relaxing. Economy improving and the September lows have now been successfully tested. Bear markets tend to last 18-24 months, so we are overdue for a return of the bull. Bears - Markets continue to be weak, as they are forecasting more problems in the economy (double-dip recession). No capitulation yet. We need to see a blowoff in the VIX (above 40 and preferably 50) along with heavy selling (90% of all volume on the downside for at least one and preferably more days) so that we know that stock is moving out of the weak hands and into stronger ones. Fund outflows still running heavy and foreign investors deciding that the US markets are not the place to be. Stock valuations still sky-high and likely to become even more ridiculous if the SEC forces companies to expense stock options. Those of you that have been with me for awhile know which side of the argument I come down on, but $2 and my opinion will only get you a cup of coffee. I am a voracious reader and try to absorb as much information from a wide variety of sources about what is going on in our markets without forming an opinion. But once I assimilate enough information (like the Borg) and develop a strong opinion, I tend not to waver from it until presented with enough evidence to shake my convictions My opinion is that the rally that brought last week's volatile trade to an end was just a load of short-covering in the wake of not having any sort of terrorist activities surface over the 4th of July. Whether it continues on Monday is anybody's guess. But that's a part of what I get paid for, so here's how I think it shakes out. All the markets just managed to come back from the brink of disaster on Wednesday and the relief that they didn't succumb looks like it could give us another multi-day rebound, possibly as high as 9800 on the DOW. We probably won't get there, but if we do I'll be lining up to buy puts with both hands, especially in light of the fact that the 50-dma crossed back under the 200-dma last week. I've written recently about my hopes for a MOCO trade, and twice the market has tempted me with a VIX in the neighborhood of 36. For those that are keeping score at home, I haven't even gotten close to pulling the trigger on the action plan that I laid out in those articles, as my initial trigger doesn't even get tripped until the VIX tops 40. This is another example of why a written action plan is so critical to successful trading. Haven written out at what points (specifically documented) I will take action, there is no guesswork or trying to second guess my feelings after the market opens. It takes a lot of patience, but if the conditions I described come to pass, then the action plan will practically execute itself. In the meantime, let's deal with the current market as it currently exists. And the best way to do that is by examining the progress of each of our current plays. Portfolio: MSFT - Back from the brink...again. Just when it looked like MSFT might tip over, the stock rebounded from another higher low, leading the rest of the market back from the edge of the abyss. Friday's action was particularly encouraging, with the bulls rallying MSFT right to the $55 level at the close. Hopefully some of you were able to take advantage of the dip back down to the $50 level to initiate new positions ahead of the expected breakout above the $56 resistance level. We're keeping our stop where it is until the bulls show us the conviction necessary to scale that resistance level. XOM - Things appear to be improving for XOM, as it held up rather well in a very unpleasant market environment last week. Note that the stock found support in the $39.50 area before rebounding again on Friday. The lows are getting higher, as the bulls continue to knock on the $41 resistance level. Once this level is broken, we can turn our gaze on the $42 level and consider raising our stop. PG - Losing strength rapidly, PG is not looking nearly as healthy as it was just a few short weeks ago. After 2 tests of the descending trendline with an intervening rally that only went to the middle of the ascending channel, shares of PG finally broke below the bottom of the channel on Tuesday. This one is starting to look a lot like WMT just before it finally broke down at the end of March, so if you're in the play, keep those stops tight at $86. Even with the sharp rebound on Friday, the stock is right at the level of the lower channel line, and unless the bulls can get it back inside the channel on a closing basis, I would not be interested in opening new positions here. If this is going to be the point from which the stock rebounds sharply, it won't hurt us to wait for the proof before risking our investment capital. QQQ - To say I was having buyer's remorse last week would be an understatement, as the QQQ traded all the way down to $22.73 on Wednesday. I hope some of you took advantage of that dip to enter the play at an extreme discount. The rebound off of those lows was truly impressive, but my concern is obviously that it is nothing more than short-covering. The next obstacle will be the $27 resistance, with real formidable resistance showing itself in the $28.50-29.00 area. For now, we want to continue taking advantage of dips into the $23-25 area to initiate new positions, as the weekly Stochastics attempt to reverse out of oversold territory. A strong rally is going to be a tough accomplishment with earnings season just getting underway. There are likely a lot of land mines out there, still to be uncovered. Watch List: WMT - I don't know about you, but when looking through the charts this weekend, I once again had a hard time getting excited about what I see on WMT. Sure we got a rebound from the $53-54 area, but the stock is still effectively trapped under the $58 resistance level. Since breaking down a few months ago, WMT has been posting a series of lower highs and I'm not convinced that it isn't going to break down again. For now, I'm going to keep the play on HOLD. BRCM - Is that an entry point? Not with my money, it isn't! As I mentioned above, the action on Friday looked like nothing more than short-covering and I think that particularly applies to stocks in the Telecom and Networking arenas. With earnings season getting underway and nary a sign of a pickup in demand, my bet is that we'll see both a lower price and an easier entry point to take advantage of than a 10% short-covering rally. Lower the entry target to $15 this weekend, but only play on a volume-backed rally (not a gap) from that level. INTC - In a more positive market environment, I might have been inclined to take an entry as INTC bounced from just above the $16 level on Wednesday. Simply put, I wasn't sufficiently convinced by the action in the broad market to press the entry. With earnings season approaching rapidly, I'm betting that we'll get another opportunity to snatch some LEAPS on the cheap without having to try to position in the vicinity of a gap. BA - With the weakness in the first part of the week, I was sure we were going to get a tasty entry into our BA play last week, but the funny business surrounding the 4th of July holiday seemed to muddle the picture somewhat. Rather than force an entry on Wednesday, I decided to wait for a clearer signal next week. That clarity should emerge with the daily Stochastics once again bottoming in oversold with BA confirming support at one of our listed entry targets. BBH - Short-covering appeared with a vengeance on Friday and gave the beaten-down BBH more than a 5% shot in the arm. Of course that was only enough to raise the stock to the $76-77 area and we don't even get near significant resistance until the $80-81 area. Aggressive traders could try a position near there, but I'm personally holding out for a more substantial rally before entering new long-term positions. If the broad market will cooperate, I think it is entirely feasible to get the BBH up near the $90 level before the bulls lose their conviction. For such a volatile week, I must again say that I didn't much like the action. Just like last week, an ideal setup for washing out the weak hands and giving us a solid tradable bottom was foiled by another round of short-covering. Eventually we'll reach a level that prompts real buying, but I just don't think we're there yet. Perhaps the pending earnings season will help to provide some illumination into the future. I'd settle for either solid earnings and forward guidance (although I won't hold my breath on that one), or more disappointments that finally cause enough investors to throw in the towel so that we can have at least an intermediate-term capitulation. The VIX continues to be my guide as to when that actually occurs, and you can bet I'm still waiting for MOCO. If you missed my recent articles on the subject, here are the links for your convenience: Getting Ready to Change Gears Gearing Up For MOCO From last week: "Should the high-VIX scenario fail to pan out over the next few weeks, then I fear we will muddle our way lower throughout the summer, posting a series of lower highs and lower lows as we continue to ride down the descending channels in each of the major indices. I don't think I have to tell you that scenario is not one that I relish." That continues to be my thinking relative to the markets and I suspect now that we won't have the clarity that we so greatly desire until we see how this earnings season (especially the forward guidance) pans out. Note that I didn't pull the trigger on any new Portfolio plays this week, and a big part of my hesitation is my suspicion about the rebound off the Wednesday lows. I don't expect it to last. I debated long and hard about new Watch List plays this weekend too. In the end, I felt it made more sense to watch the trading action next week before placing additional plays on the list. Better safe, than sorry. Don't worry, we'll have a fresh batch of possibles for your consideration next weekend. Whatever trades you take, keep them on a short leash. It's a safe bet that there are plenty of surprises in store over the next few weeks. See you next 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 $ 6.20 + 5.08% $48 '04 $ 55 LMF-AK $10.20 $11.20 + 9.80% $48 XOM 05/22/02 '03 $ 40 XOM-AH $ 3.00 $ 2.80 - 6.67% $38.50 '04 $ 40 LXO-AH $ 5.10 $ 5.00 - 2.00% $38.50 PG 05/30/02 '03 $ 95 PG -AS $ 3.70 $ 3.90 + 5.41% $86 '04 $ 95 KBJ-AS $ 9.00 $ 9.70 + 7.78% $86 QQQ 06/26/02 '03 $ 28 OZC-AB $ 2.45 $ 2.45 + 0.00% $22.50 '04 $ 28 LRI-AJ $ 4.50 $ 4.50 + 0.00% $22.50 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BRCM 10/28/01 $15 JAN-2003 $ 20 RCQ-AD CC JAN-2003 $ 15 RCQ-AC JAN-2004 $ 20 LGJ-AD CC JAN-2004 $ 15 LGJ-AC WMT 03/31/02 HOLD JAN-2003 $ 55 VWT-AK CC JAN-2003 $ 50 VWT-AJ JAN-2004 $ 55 LWT-AK CC JAN-2004 $ 50 LWT-AJ INTC 06/16/02 $16-17 JAN-2003 $ 20 NQ -AD CC JAN-2003 $ 15 NQ -AC JAN-2004 $ 20 LNL-AD CC JAN-2004 $ 15 LNL-AC BA 06/30/02 $43, $42 JAN-2003 $ 45 BA -AI CC JAN-2003 $ 40 BA -AH JAN-2004 $ 45 LBO-AI CC JAN-2004 $ 40 LBO-AH PUTS: BBH 06/09/02 $80-81 JAN-2003 $85 GBZ-MQ $90 JAN-2004 $80 KOV-MP JAN-2005 $85 XBB-MP New Portfolio Plays None New Watchlist Plays None Drops None *********** OPTIONS 101 *********** The Trading Wars – By Mike Parnos – Trading With Attitude Investing is a war. It’s a war that is fought every day – and every day there are winners and losers. If you’re like most investors over the past two years, you probably feel like Davy Crockett at the Alamo – fighting off two thousand Mexicans with only Old Betsy and a Bowie Knife? Walt Disney brought Davy Crockett back to life and painted him a hero, but that didn’t make him any less dead. Why did he die? Because he fought the odds – and lost. All that’s left of Davy Crockett is a coonskin hat and a tall tale. When it comes to the stock market, I’d rather be a live coward, than a financially dead hero. History provides many valuable lessons. There are many military events that accurately portray the right and wrong ways to approach the combat zone we know as the stock market. For example, how did a seemingly disorganized band of patriots defeat the legions of highly trained troops of England’s King George to ultimately win America’s independence? Appearances can be deceptive. The patriots weren’t disorganized at all – just bad dressers. Their generals used unconventional tactics. They used the element of surprise. They hid until they had an advantage – then attacked, causing as much damage as possible, then retreating until the situation was right to mount another attack. They were passionate, nimble, focused and had a strategy – aggressive when the situation called for it, but also patient. Waiting as long as necessary. Patience is the greatest asset in the investment wars. If you don’t have an advantage, you shouldn’t be in the market. The retail investor is the enemy. You don’t have to destroy him – he’ll ultimately destroy himself. He’s emotional. He doesn’t use money management skills. Never fear, there is a bottomless pit of retail investors who continue to take uncalculated risks or trust their money to King George type management firms with the belief that the sheer numbers of troops will ultimately win the war. It doesn’t work that way. Not anymore. The bull market has left only a mass of cow chips. Now you have to be very careful where you step. What happens when you pick a direction? You can only make money ONE WAY -- if the stock goes in that specific direction. Why not position yourself to make a little if the stock goes up, goes down or goes nowhere? If the market is going nowhere, you can still make money by taking advantage of the traders who are betting on a particular market direction. Remember, the retail investor is WRONG most of the time! Professional traders sit back, take the bets, and are RIGHT most of the time? There are trading tactics that allow you to benefit from this very scenario. Does your arsenal include these strategies? Keep in mind, you don’t have to bring home a whole scalp after every battle. If you can be satisfied with taking a “little off the top,” you will be able to take fewer risks, keep your powder dry, and live to fight another day. The war is ongoing – and so must be your focus. You may win a series of battles, but you can’t afford to become overconfident. Great tacticians will define, and accept, their risk before any battle. The same is true for the best money managers. There will always be casualties. You’ll lose some battles. That’s a given. A few sacrifices will have to be made. They will often take the form of insurance – money you spend on options to hedge your positions. How many troops will you send into battle? How much money will you take to war? Until you have a plan, the safest place for your money is in the bank or a money market fund. You can have the most sophisticated equipment (or weapons), but if you don’t have a battle plan, you’re going to lose the war. The British troops are home recruiting more soldiers (investors) for the next war. They won’t admit they lost the last war – or that their tactics were wrong. If they do, they won’t get new recruits to sacrifice. Will they change their tactics? Unlikely. Will the results be different? Not if they’re up against the same foe. The investment battlefield is littered with millions of sacrificed investors who are lying there wounded, their financial lives slipping away, still hoping to be rescued by the British troops. They shouldn’t hold their breath. Have you won any battles lately? Or have you been one of the casualties? It’s not too late. You can still join the patriots and the fight to declare your financial independence. Guerilla money managers are recruiting. There’s no dress code. Why did the U.S. lose the Viet Nam war? Because guerilla tactics are almost impossible to defeat. Remember, it was the shrewd Sitting Bull that lured General Custer to the massacre at Little Big Horn. They call them “history lessons” because you’re supposed to learn from them. You can’t teach an old bull new tricks. Unfortunately, there are a lot of bulls still out there – and ill prepared for battle. You don’t have to fight your war standing in a field of cow chips. Strategy Du Jour From the Couch Potato Trading Institute, here is a variation of a popular option strategy that will allow you to watch all 35 Law & Order reruns every week and make very respectable money at the same time. The bulk of your effort will be expended finding a volatile stock that is vacillating in a nice wide trading range. That’s what commercials are for. Let's take a favorite of mine, QLGC. It closed at $39.80. This stock has been all over the map and, let's be realistic, who the heck knows where it's going to go? Not me. However, I'd feel pretty sure that, come August option expiration, it will be somewhere between $30 and $50. We're going to construct what is known as an "Iron Condor." It may sound like a rejected special effect from a Star Wars movie, but it can be quite useful. An Iron Condor is really pretty simple. It consists of establishing a bull put spread and a bear call spread on the same stock about a month out. In this case, they will be well out of the money. For this example we'll use a 10 contract position. In establishing the bull put spread we'll buy the August $25.00 put at $.85 and selling the August $30 put for $1.65. We have just put $.80 ($800) in our pocket and have an exposure of $5.00 less the $.80 we took in. Now we'll put on the bear call spread. Based on some significant resistance, it seems highly unlikely that QLGC will finish over $50. So we will buy the August $55 call for $.65 and sell the August $50 call for $1.20. We've just put another $.55 ($550) in our pocket and we have an exposure of $5.00 less the $.55 we took in. We've taken in a total of $1,350 ($800 + $550). Our exposure is $3,650 ($5,000 less $1,350). QLGC can bounce around to its heart's content in the established 20-point range between $30 and $50 while we watch TV and get a peaceful night's sleep. The beauty of the Iron Condor is that, no matter how poor your stock selection may be, you can't be wrong in both directions. In our example, your broker will require you to keep in your account as maintenance the $5000 for the bull put spread and the $5,000 for the bear call spread. Despite the fact that you can't be wrong in both directions, most brokerages don’t have software that will recognize the position as a whole. Thus, in their eyes, each spread is dealt with independently. Hopefully, some programmer will have a vision and come up with a solution. But until then . . . The return on your risk is 36.98% ($1,350 divided by $3,650) for about six weeks, which should leave you more than satisfied -- and you don't have to pick a direction. Ideally, all positions will expire worthless and the strategy will not require any closing commissions. If the stock is acquired at some ridiculously high price or if the CEO gets caught with his hand in the till or his secretary, there is still a comfortable cushion. If the stock violates one of the short strikes, you simply buy the stock to cover the short call or short the stock to cover the short put. That's probably an over simplification, but it is a viable solution to a worse case scenario. The whole point of the Iron Condor is to make a healthy return while you munch on Doritos and watch Jerry Orbach and Sam Waterson put the bad guys in jail. Now, what did I do with that damn remote control . . . . .? ************************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 07-07-2002 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 ************* Options 101: Q&A On Institutional Trading Strategies By Mark Wnetrzak This week's question concerns the use of the covered-call strategy by professional traders and fund managers. Attn: Covered-Calls Editor Subject: Mutual Funds Using Covered-Calls? Mark, I just read an article about fund managers moving back into stocks and it mentioned that some were using call options to protect against further drops in share value. I gather this means they were selling covered-calls to hedge their stock holdings. I have heard of companies selling puts on their own stocks but I did not know that mutual funds sold calls on portfolio holdings. Is this a common strategy or is it being used now because of the current "bearish" market conditions? Also, do they use the same approach as you guys (front-month ITM options) or do they have a different method for this strategy? Thanks! TR Regarding Institutional Investing Strategies: Buying stock and writing covered-calls is a well-known hedge strategy among institutional traders and mutual fund managers because the risk/reward characteristics of that approach are often better than owning the stock or speculating in options. There are a number or reasons why professional investors use the technique to achieve above-average returns in their stock portfolios but the most common is the downside protection it offers for long-term holdings. Another motivation to write "covered" calls against portfolio stocks comes from the fact that in the past, options have historically been overpriced. Whether due to supply and demand factors or simple speculation, it has been common in recent years for traders to pay more for call options than they are (theoretically) worth. When options are expensive, option writers benefit by receiving larger time value premiums, and even a relatively small difference in an option's premium can result in a significant increase in the annual returns from this strategy. A final reason that fund managers favor covered-write positions is that the owner keeps any stock dividends until the stock is assigned (via exercise). Profits from regular dividends can increase the annual return of the underlying stock position by as much as 5-8%. For this reason, hedge-fund managers try to sell options on stocks with moderate to large cash dividends. In some instances, the early exercise of options (dividend-capturing strategy) will prevent an investor from receiving this added premium, but the effect can generally be offset by reinvesting the funds in another profitable position. The basic techniques that fund managers use when implementing this strategy can be beneficial to retail investors as well. One of the most common traits is selling short-term options to obtain higher relative time values. In most cases, longer-term series have much less premium (proportionally) in the option's price due to a smaller demand from traders. Fund and pension plan buyers usually select high quality "value" stocks and sell in-the-money options for increased probability of assignment. When compared to outright ownership, this method is similar to "pre-selling" the issue at a profit. Surprisingly, professional investors also use the popular "buy-write" technique when placing orders. Designating the net cost of the combined position when the order is placed eliminates price risk and affords the fund manager with an opportunity to negotiate a favorable basis. A large (block) trader will often agree to these terms in order to unload sizeable amounts of the stock with only a small premium concession from the current market price. We all know that institutional investors utilize only the most successful long-term strategies to guarantee a consistent rate of return. Any method that produces less than favorable results will inevitably lower their supply of funds, thus it is generally avoided. The covered-write strategy is commonly used because it yields moderate (compounded) returns over a complete market cycle while avoiding the potential of large portfolio losses. Indeed, it appears this technique may be the safest way to outperform all but the most aggressive investing strategies, in the majority of market conditions. 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 EXTR 10.09 10.01 JUL 10.00 1.00 *$ 0.91 14.5% REV 4.96 5.10 JUL 5.00 0.45 *$ 0.49 11.8% MCDT 8.90 9.24 JUL 7.50 1.75 *$ 0.35 7.1% HPLA 13.95 13.24 JUL 12.50 2.40 *$ 0.95 6.0% NCEN 31.85 31.93 JUL 30.00 3.40 *$ 1.55 5.9% COB 5.35 5.04 JUL 5.00 0.70 *$ 0.35 5.5% CANI 11.26 10.20 JUL 10.00 1.85 *$ 0.59 4.5% MCAF 14.26 15.16 JUL 12.50 2.25 *$ 0.49 4.4% QSFT 14.53 13.50 JUL 12.50 2.40 *$ 0.37 4.4% MCDT 8.99 9.24 JUL 7.50 1.90 *$ 0.41 4.2% MANH 32.16 29.04 JUL 30.00 3.20 $ 0.08 0.4% JBHT 31.05 28.76 JUL 30.00 2.15 $ -0.14 0.0% IPXL 8.01 6.60 JUL 7.50 1.10 $ -0.31 0.0% ABFS 25.48 23.58 JUL 25.00 1.45 $ -0.45 0.0% FBR 12.73 11.00 JUL 12.50 0.75 $ -0.98 0.0% ZIXI 5.48 5.01 AUG 5.00 1.20 *$ 0.72 10.4% DRIV 9.19 8.87 AUG 7.50 2.25 *$ 0.56 5.0% *$ = Stock price is above the sold striking price. Comments: Ah, an over-sold, short-covering, terror-free July 4th, relief rally! An excellent opportunity to re-evaluate the strength of any positions you are holding. As a defensive measure, we closed a few positions this week and are still watching Revlon (NYSE:REV) and J.B. Hunt Transport Services (NASDAQ:JBHT) as they both test support areas. We will also add these stocks to our early exit watch-list: Carreker (NASDAQ:CANI) - testing support at $10; Manhattan Associates (NASDAQ:MANH) - at a key moment; Impax Laboratories (NASDAQ:IPXL) - no lower; Arkansas' Best (NASDAQ: ABFS) - stay above those May and June lows; Friedman, Billings, Ramsey (NYSE:FBR) - we got the expected pullback, will the rally resume? Investors with a long-term bullish outlook on these issues may consider rolling-forward and/or down to lower the overall cost basis in the underlying position. Positions Closed: PETsMART (NASDAQ:PETM) and Mirant (NYSE:MIR). 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 EMC 7.59 JUL 7.50 EMC GU 0.50 79081 7.09 14 12.6% EXTR 10.01 JUL 10.00 EXJ GB 0.85 2663 9.16 14 19.9% IVGN 31.30 JUL 27.50 IUV GY 4.60 39 26.70 14 6.5% JDEC 12.65 JUL 12.50 QJD GV 0.85 429 11.80 14 12.9% QSFT 13.50 JUL 12.50 QUD GV 1.50 343 12.00 14 9.1% RIMM 13.35 JUL 10.00 RUL GB 3.80 172 9.55 14 10.2% STAR 22.70 JUL 22.50 OUE GX 0.65 237 22.05 14 4.4% 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 EXTR 10.01 JUL 10.00 EXJ GB 0.85 2663 9.16 14 19.9% JDEC 12.65 JUL 12.50 QJD GV 0.85 429 11.80 14 12.9% EMC 7.59 JUL 7.50 EMC GU 0.50 79081 7.09 14 12.6% RIMM 13.35 JUL 10.00 RUL GB 3.80 172 9.55 14 10.2% QSFT 13.50 JUL 12.50 QUD GV 1.50 343 12.00 14 9.1% IVGN 31.30 JUL 27.50 IUV GY 4.60 39 26.70 14 6.5% STAR 22.70 JUL 22.50 OUE GX 0.65 237 22.05 14 4.4% 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). ***** EMC - EMC Corporation $7.59 *** Reader's Request *** EMC (NYSE:EMC) designs, manufactures, markets and supports a wide range of hardware and software products and provides services for the storage, management, protection and sharing of electronic information. These integrated solutions enable organizations to create an enterprise information infrastructure (E-Infostructure). Information storage products consist of information storage systems and information storage software sold to customers that use a variety of computing platforms for key applications, including electronic commerce, data warehousing and transaction processing, and information storage systems provides consulting, assessments, implementations, integration, operations management, day-to-day support and maintenance to customers. In September 2001, the company acquired Luminate Software Corporation, a privately held software company based in Redwood City, California. In early June, EMC reaffirmed its second quarter guidance and said it agrees with analysts' expectations of a loss of 2 cents a share. The company also said it still expects single-digit revenue growth. We simply favor the recent move back above the 30-dma which increases the probability of a favorable outcome in this short-term speculative play. Investors who like the fundamental outlook for EMC can use this play to establish a reduced cost basis in the issue. JUL 7.50 EMC GU LB=0.50 OI=79081 CB=7.09 DE=14 TY=12.6% ***** EXTR - Extreme Networks $10.01 *** Change Of Character? *** Extreme Networks (NASDAQ:EXTR) is a provider of network infra- structure equipment for business applications and services. The company delivers high-performance application and services infra- structure for enterprise, service provider and metropolitan area networks (MANs)-based on technology that combines high performance, intelligence and a low cost of ownership. The company's family of Summit stackable, BlackDiamond and Alpine chassis switches share the same consistent hardware, software and management architecture, enabling businesses to build a network infrastructure that is simple, easy to manage and scalable to meet the demands of growing businesses. Investors appear to be relieved that Extreme will not issue a warning prior to the company's earnings report due on July 17. We favor the strong technical support area at $10 and the move through the long-term downtrend line (two-year chart), which suggests a positive change of character. JUL 10.00 EXJ GB LB=0.85 OI=2663 CB=9.16 DE=14 TY=19.9% ***** IVGN - Invitrogen $31.30 *** Positive Guidance *** Invitrogen (NASDAQ:IVGN) develops, manufactures and markets more than 10,000 products for the life sciences markets. The company's products are principally research tools in reagent and kit form, biochemicals, sera, media, and other products and services, which Invitrogen sells to corporate, academic and government entities. The company focuses its business on two principal segments, Cell Culture Products and Molecular Biology Products. Invitrogen rallied on Wednesday after the company reaffirmed its earnings outlook for the second quarter in line with analyst expectations. The company said it expects to report second-quarter results at or above the upper end of its range, which was $160 million to $163 million in revenue and $0.44 to $0.46 per share, before the cost related to the closing of a plant and other merger-related charges. Reasonable short-term speculation for those who agree with a bullish, long-term outlook on the company. JUL 27.50 IUV GY LB=4.60 OI=39 CB=26.70 DE=14 TY=6.5% ***** JDEC - J.D. Edwards $12.65 *** Bracing For A Rally? *** J.D. Edwards (NASDAQ:JDEC) is a provider of agile, collaborative solutions for the connected economy. The company delivers inte- grated, collaborative software for supply chain management (planning and execution) procurement and customer relationship management, in addition to workforce management and other func- tional support. Customers can choose to operate its software on a variety of computing environments, and the company supports several different databases. J.D. Edwards distributes, implements and supports its software worldwide through 55 offices and more than 350 third-party business partners. J.D. Edwards has rallied off the May low after a bullish earnings report. With several new contracts and partnerships, as well as new products, investors are anticipating the company's next earnings report due on July 24. This position offers a conservative way to profit from the current bullish momentum in the issue. JUL 12.50 QJD GV LB=0.85 OI=429 CB=11.80 DE=14 TY=12.9% ***** QSFT - Quest Software $13.50 *** Bottom-Fishing Again! *** Quest Software (NASDAQ:QSFT) is a developer and vendor of applic- ation and database management software products. The company also provides support and maintenance services for its products, as well as post-sale consulting services. Quest's products improve the quality of service provided by its customers' key software applications. The company's application management products support the packaged applications from many of vendors, including SAP (NYSE:SAP), Siebel (NASDAQ:SEBL), PeopleSoft (NASDAQ:PSFT) and Oracle (NASDAQ:ORCL). Quest Software appears to have made a successful test of the September low as the company forges a Stage I base. This position offers reasonable short-term speculation on a stock that is demonstrating increasing technical strength. JUL 12.50 QUD GV LB=1.50 OI=343 CB=12.00 DE=14 TY=9.1% ***** RIMM - Research In Motion $13.35 *** Earnings Rally! *** Research In Motion (NASDAQ:RIMM) is a designer, manufacturer and marketer of wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, RIM provides solutions for seamless access to time- sensitive information including e-mail, messaging, Internet and intranet-based applications. RIMM technology also enables a broad array of third party developers and manufacturers in North America and around the world to enhance their products and services with wireless connectivity. RIMM's portfolio of products includes the RIM Wireless Handheld product line, the BlackBerry wireless e-mail solution, embedded radio modems and software development tools. RIMM rallied with heavy volume after the company reported smaller- than-expected losses and higher-than-expected revenue. The company did cut its revenue targets for the year but still maintained their earnings forecast ($0.30 to $0.45 loss). Traders can speculate on the near-term performance of RIMM with this conservative position. JUL 10.00 RUL GB LB=3.80 OI=172 CB=9.55 DE=14 TY=10.2% ***** STAR - Lone Star $22.70 * ** The Trend Is Your Friend! *** Lone Star Steakhouse & Saloon (NASDAQ:STAR) owns and operates 249 mid-priced, full service, casual dining restaurants located in the U.S., which operate under the trade name Lone Star Steakhouse & Saloon or Lone Star Cafe, and 20 upscale steakhouse restaurants, five operating as Del Frisco's Double Eagle Steak House restaurants and 15 operating as Sullivan's Steakhouse restaurants. In addition, a licensee operates three Lone Star restaurants in California and a licensee operates a Del Frisco's restaurant in Orlando, Florida. Internationally, the company operates 25 Lone Star Steakhouse & Saloon restaurants in Australia. In addition, a licensee operates a Lone Star Steakhouse & Saloon restaurant in Guam. Lone Star beat estimates when it reported earnings in June and the company recently said it plans to resume expanding its restaurant chains. Lone Star's price history reveals one of the better charts we've seen in the broader-market groups and traders who want to diversify their portfolio should consider this stock-option position. JUL 22.50 OUE GX LB=0.65 OI=237 CB=22.05 DE=14 TY=4.4% ***** ***************** 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 CREE 12.75 AUG 12.50 CVO HV 1.60 59 11.15 42 8.8% MCAF 15.16 AUG 15.00 CFU HC 1.65 107 13.51 42 8.0% AMLN 10.24 AUG 10.00 AQM HB 1.05 26 9.19 42 6.4% NOK 14.90 AUG 15.00 NOK HC 1.20 2799 13.70 42 6.3% QLGC 39.88 JUL 35.00 QLC GG 5.80 3424 34.08 14 5.9% MERQ 25.72 JUL 22.50 RQB GX 3.70 1133 22.02 14 4.7% ***************** NAKED PUT SECTION ***************** Option Trading Basics: Exercise and Assignment - Part II By Ray Cummins Last week's narrative on option exercise and assignment produced some very interesting E-mail replies and one of them is perfect for today's discussion. Attn: OIN Naked-Puts Editor Re: Assignment Strategies Hello Ray, I am a little new to options so I read with interest your article on assignment when selling puts. I know that in most cases, there is a small chance of early exercise when selling out-of-the-money puts but I do become more concerned when the price of the stock gets close to the option's strike price. Another area I'm worried about is what to do when an assignment occurs. I know I can just buy the stock with the money in my brokerage account but at that point, I may not want to keep it. What are some alternatives to owning the stock after the sold option has been assigned? Looking forward to your reply, GS Hello GS, The first thing you should understand is that the probability of early assignment in positions where the share value is relatively close to the sold options' strike price is almost nil. In those extreme cases where the stock falls substantially below the sold option's strike price, early assignment occurs but only on rare occasions. In addition, the likelihood that it would be your options (through random assignment) is very low and if there is any time value (extrinsic premium) remaining in the position, the probability is even lower because it is better (for the owner) to sell the option rather than exercise it. In those few instances when you are assigned, it's very important to be notified by your broker in a timely manner so that you can use the flexibility of options to eliminate or offset the obligation without undue losses. For most participants, early assignment is an acceptable risk in derivatives trading. Although it happens infrequently, there are some potentially unpleasant outcomes -- just as with any trade that does not go as planned. The best solution to this problem is to have a pre-determined exit strategy for every position in your portfolio so when things do not progress as expected, the trades involved in any adjustments will be much easier to execute. Many traders use spreads or combinations to offset specific risks (or potential obligations) when a trade fails to perform as expected. However, once an option has been assigned to an option writer (even though he may not yet have been notified of the assignment), he can no longer initiate a closing transaction in that option but must instead buy or sell the underlying interest for the exercise price. When your broker informs you of a Put option assignment, there are a number of alternatives available. The method you select will depend on several factors including the current outlook for the underlying issue and the amount of uncommitted funds you have available to apply to future transactions. The easiest course of action is to buy the stock that has been assigned and retain it as a portfolio holding. The brokerage firm looks upon assignment in the same manner as a pending stock purchase. You have three days before funds are required for the actual settlement, thus there is ample time to study the situation and determine the appropriate course of action. If you choose to make an offsetting trade on the day of assignment, there may be no need to allot additional funds to purchase of the issue. If you have to purchase the stock, you may be able to sell it during a future rally or write covered-calls on the issue until a break-even basis has been obtained. There are also recovery strategies such as using a covered write and a debit spread, where the premium from the sold position is used to offset the cost of the long call. If you own the stock at a sizable loss to the initial cost basis, another popular method is to "average" down. This technique involves adding new shares to your current position at a lower price. While averaging is an excellent way to lower the break-even price in the issue, it also increases the amount of money at risk in the position. Another popular strategy is to simply sell the stock and write a new option at the same strike price that you were originally short, with a future expiration date. This method is appropriate when a trader believes the underlying stock will eventually rebound and assuming there is additional extrinsic value in new position, the transaction should produce a small profit. If the value of the underlying has dropped significantly below the strike price of the assigned option, the writer may have to choose a position with a distant expiration to recover the lost potential. In this case, the new options are often written at the next lower strike price, and occasionally in greater quantity so as to generate a credit. Using this recovery method, no debits are incurred but a realized loss is taken in the short term. If the stock price continues to decline, the process is repeated. Eventually, the issue should stop falling and the last set of sold (short) options will expire worthless. At that time, the traders' overall profit will consist of the sum of all the previous credits. Obviously, the problem with this technique is that the trader must have enough portfolio collateral to stay with the strategy even if the issue continues to decline. A large portfolio is best for this type of recovery because the collateral required for naked option writing may be in the form of cash or securities and these holdings are not affected unless there is a need for additional funds to close the position prematurely. Good Luck! *** WARNING! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule: Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a "buy-to-close" STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield CANI 11.50 10.20 JUL 10.00 0.35 *$ 0.35 14.7% CLHB 13.52 11.12 JUL 10.00 0.40 *$ 0.40 14.0% CANI 11.07 10.20 JUL 10.00 0.50 *$ 0.50 11.3% YHOO 15.49 13.62 JUL 12.50 0.30 *$ 0.30 9.3% ASYT 20.35 19.26 JUL 17.50 0.35 *$ 0.35 9.0% SIE 19.20 20.31 JUL 17.50 0.65 *$ 0.65 8.5% COCO 33.89 33.00 JUL 30.00 0.60 *$ 0.60 8.5% LNCR 30.71 31.86 JUL 27.50 0.70 *$ 0.70 7.8% FBR 10.65 11.00 JUL 10.00 0.35 *$ 0.35 7.7% CACI 36.51 38.01 JUL 32.50 0.80 *$ 0.80 7.6% SIE 22.35 20.31 JUL 20.00 0.35 *$ 0.35 7.3% APN 10.85 11.60 JUL 10.00 0.25 *$ 0.25 7.3% YELL 32.40 30.00 JUL 30.00 0.55 $ 0.55 7.2% MOVI 20.18 19.40 JUL 17.50 0.35 *$ 0.35 6.6% IBC 28.88 28.89 JUL 25.00 0.35 *$ 0.35 6.3% SWFT 21.50 21.95 JUL 20.00 0.55 *$ 0.55 6.2% SCIO 28.94 30.01 JUL 25.00 0.55 *$ 0.55 5.8% ATTC 31.25 31.65 JUL 30.00 0.80 *$ 0.80 5.8% SWFT 22.65 21.95 JUL 20.00 0.35 *$ 0.35 5.6% SKX 22.10 20.40 JUL 17.50 0.30 *$ 0.30 5.5% YCC 26.74 25.95 JUL 25.00 0.55 *$ 0.55 5.0% DG 18.50 19.39 JUL 17.50 0.30 *$ 0.30 4.9% JDAS 28.26 15.00 JUL 22.50 0.50 $ -3.00+ 0.0% *$ = Stock price is above the sold striking price. Comments: Friday's bullish activity helped the majority of our positions recover from the recent selling pressure and almost all of the issues in the portfolio have returned to favorable valuations. However, we experienced an unexpected surprise in JDA Software (NASDAQ:JDAS); one that demonstrates the requirement to write puts only on stocks you wouldn't mind owning. JDA shares fell 44% to $15.10 Friday after the company said that second quarter earnings would come in between $0.17 and $0.18 cents, versus a forecast of $0.22. The company cited "timing of several large contracts" for the shortfall and expects second-quarter revenue of $57 million, up 13%, but investors didn't like the news. An exit near the day's high ($19.40) would have limited the loss to approximately $3, but that is no consolation to someone will own the stock after the July expiration (or sooner). The new position in Talx (NASDAQ:TALX) was not opened as the company said Monday morning that it is now under investigation by the U.S. Securities and Exchange Commission. Current issues on the "early-exit" watch-list include Yankee Candle (NYSE:YCC), Yellow Corporation (NASDAQ:YELL), Carreker (NASDAQ:CANI), Sierra Health Services (NYSE:SIE), and Clean Harbors (NASDAQ:CLHB). 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 BCE 18.22 JUL 17.50 BCE SW 0.25 220 17.25 14 8.0% CHBS 41.19 JUL 35.00 URH SG 0.35 32 34.65 14 7.1% COCO 33.00 JUL 27.50 UCS SY 0.30 21 27.20 14 8.1% CUM 31.86 JUL 30.00 CUM SF 0.45 2 29.55 14 8.6% EXPD 32.17 JUL 30.00 URP SF 0.35 418 29.65 14 6.9% FCN 33.30 JUL 30.00 FCN SF 0.35 222 29.65 14 7.3% LNCR 31.86 JUL 30.00 LQN SF 0.55 853 29.45 14 10.5% SLAB 26.80 JUL 22.50 QFJ SX 0.60 247 21.90 14 18.6% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield SLAB 26.80 JUL 22.50 QFJ SX 0.60 247 21.90 14 18.6% LNCR 31.86 JUL 30.00 LQN SF 0.55 853 29.45 14 10.5% CUM 31.86 JUL 30.00 CUM SF 0.45 2 29.55 14 8.6% COCO 33.00 JUL 27.50 UCS SY 0.30 21 27.20 14 8.1% BCE 18.22 JUL 17.50 BCE SW 0.25 220 17.25 14 8.0% FCN 33.30 JUL 30.00 FCN SF 0.35 222 29.65 14 7.3% CHBS 41.19 JUL 35.00 URH SG 0.35 32 34.65 14 7.1% EXPD 32.17 JUL 30.00 URP SF 0.35 418 29.65 14 6.9% 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). ***** BCE - BCE Inc. $18.22 *** Bell Canada Deal! *** BCE Incorporated (NYSE:BCE) is a Canadian communications company, with more than 22 million customer connections through wireline, wireless, data/Internet and satellite services it provides under the Bell brand. The company's activities are conducted through Bell Canada (Canadian connectivity), Bell Globemedia (content), Teleglobe (global connectivity), BCE Emergis (commerce) and BCE Ventures (other BCE investments). BCE has decided to exercise its call options to boost its stake in a Bell Canada subsidiary to 100% by buying SBC Communications' (NYSE:SBC) 20% stake. The move alleviates an overhang on the stock that investors wanted removed and places BCE in a position to access to all of Bell Canada's cash flow and earnings. Apparently, most people are happy with the news as the stock is a new upward trend and the momentum should carry the issue back to a recent trading range near $22-$23. JUL 17.50 BCE SW LB=0.25 OI=220 CB=17.25 DE=14 TY=8.0% ***** CHBS - Christopher & Banks $41.19 *** Retail Sector *** Christopher & Banks Corporation (NASDAQ:CHBS), formerly Braun's Fashions Corporation, is a retailer of women's specialty apparel, which operates through its wholly owned subsidiary, Christopher & Banks, Inc. The company operates 310 stores in 29 states under the names Christopher & Banks, Brauns and C.J. Banks, primarily in the northern half of the United States. The company's stores offer coordinated assortments of exclusively designed sportswear, sweaters and dresses. Christopher & Banks said early last week that sales at its stores open at least a year rose 13% in June, helped by strong sales of pants and skirts. Total sales for the four weeks ended on June 29 rose 36% to $23.5 million from $17.3 million a year earlier and sales were robust in all categories. The specialty retail sector generally performs well during the summer months and a cost basis near $35 is not a bad price for this issue. JUL 35.00 URH SG LB=0.35 OI=32 CB=34.65 DE=14 TY=7.1% ***** COCO - Corinthian Colleges $33.00 *** New High Coming? *** Corinthian Colleges (NASDAQ:COCO) is a private, for-profit, post- secondary education company, with thousands of students enrolled in its programs. The company currently operates 56 colleges in 20 states, including 17 in California and nine in Florida, and serves the segment of the population seeking to acquire career-oriented education. The company offers a variety of master's, bachelor's and associate's degrees and diploma programs through two operating divisions. The company's Corinthian Schools division operates 35 diploma-granting schools with programs primarily in the healthcare, electronics and information technology fields, and seeks to provide its students a solid base of training for a variety of entry-level positions. The company's Rhodes Colleges subsidiary operates 21 degree-granting colleges, and offers curricula principally in the business, healthcare, information technology and criminal justice areas. COCO shares recently traded at an all-time high and despite the slump in equity values, the bullish trend in the issue appears likely to continue in the near term. JUL 27.50 UCS SY LB=0.30 OI=21 CB=27.20 DE=14 TY=8.1% ***** CUM - Cummins $31.86 *** Bottom-Fishing For Blue-Chips! *** Cummins (NYSE:CUM) manufactures, distributes and services electric power generation systems, engines and related products, including fuel systems, controls, air handling, filtration, and emissions solutions. Cummins sells its many products to original equipment manufacturers distributors and other customers worldwide. Cummins has manufacturing facilities worldwide, including major operations in Europe, India, Mexico, China and Brazil. The company has parts distribution centers in Brazil, Mexico, Australia, Singapore, China, India and Belgium are strategically located to supply service parts to Cummins extensive customer base. Cummins supports its customer base with a significant global distribution system of more than 500 independent distributors and nearly 5,000 dealers in 131 countries. The historical support level for this stock is at $30 and investors who wouldn't mind owning shares of a blue-chip industrial company should consider this "bottom-fishing" position. JUL 30.00 CUM SF LB=0.45 OI=2 CB=29.55 DE=14 TY=8.6% ***** EXPD - Expeditors International $32.17 *** Transport Sector *** Expeditors International of Washington (NASDAQ:EXPD) is engaged in the business of providing global logistics services. The company offers its customers a seamless international network supporting the movement and strategic positioning of goods. The company's services include the consolidation or forwarding of air and ocean freight. In each U.S. office, and in many overseas offices, the company acts as a customs broker. The company also provides additional services including distribution management, vendor consolidation, cargo insurance, purchase order management and customized logistics information. The outlook for EXPID is favorable due to expectations that its net revenue growth rate will accelerate in the second quarter and for the year based on stronger international freight flows. Investors who agree that the freight segment is one of the stronger groups in the market can establish a conservative cost basis in the issue with this position. JUL 30.00 URP SF LB=0.35 OI=418 CB=29.65 DE=14 TY=6.9% ***** FCN - FTI Consulting $33.30 *** Information Provider! *** FTI Consulting (NYSE:FCN) Inc. is a multi-disciplined consulting firm with legal practices in the areas of financial restructuring, litigation consulting and engineering and scientific investigation. The company serves businesses, lenders, investors, insurers and their legal counsel in adverse circumstances, such as class action lawsuits, financial restructurings and bankruptcy proceedings and accident investigations. The company has organized its business into three divisions. The Financial Consulting division provides expert testimony, cost benefit analysis, damage assessment, market competition analysis and business valuations. The Applied Sciences division offers forensic engineering and scientific investigation services. The Litigation Consulting division advises clients in all the phases of litigation, including discovery, jury selection, trial preparation and the actual trial. FTI Consulting is in a unique "niche" industry and their services are a very necessary requirement for big business in today's economy. The long-term bullish trend in its share value reflects that demand and traders can speculate on its future performance in a conservative manner with this position. JUL 30.00 FCN SF LB=0.35 OI=222 CB=29.65 DE=14 TY=7.3% ***** LNCR - Lincare Holdings $31.86 *** Healthcare Sector *** Lincare Holdings (NASDAQ:LNCR), together with its subsidiaries, is a provider of oxygen and various 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 dysfunctions. Besides being a provider of oxygen and respiratory therapy services to patients in the home, Lincare also provides a variety of infusion therapies in certain geographic markets. Lincare also supplies home medical equipment, such as hospital beds, wheelchairs and other supplies that may be required by patients. CFSB and Legg Mason recently upgraded Lincare and we think this company offers one of the best opportunities in the healthcare sector. The buying pressure near $30 also suggests a relatively strong support area at our cost basis. JUL 30.00 LQN SF LB=0.55 OI=853 CB=29.45 DE=14 TY=10.5% ***** SLAB - Silicon Laboratories $26.80 *** More Bottom-Fishing! *** Silicon Laboratories (NASDAQ:SLAB) designs, manufactures and sells proprietary high-performance mixed-signal integrated circuits (ICs) for the wireless, wireline and optical communications industries. Mixed-signal ICs are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. The company's mixed-signal design engineers use normal complementary metal oxide semiconductor (CMOS) technology to create ICs that can reduce the cost, size and system power requirements of devices that the company's customers sell to their end user customers. SLAB's expertise in analog CMOS and mixed-signal IC design allows the company to develop products rapidly, which enables the company's customers to improve their time-to-market with end products that respond to consumer demand in the communications industry. We favor the recent trading range bottom, which is slightly above our cost basis in this speculative position. JUL 22.50 QFJ SX LB=0.60 OI=247 CB=21.90 DE=14 TY=18.6% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CHL 15.04 JUL 15.00 CHL SC 0.60 20 14.40 14 19.8% CREE 12.75 AUG 10.00 CVO TB 0.70 281 9.30 42 15.6% MCAF 15.16 AUG 12.50 CFU TV 0.65 10 11.85 42 11.6% JPM 31.25 JUL 27.50 JPM SY 0.45 4966 27.05 14 10.6% INTU 50.09 JUL 45.00 IQU SI 0.70 2707 44.30 14 9.7% BBBY 37.70 JUL 35.00 BHQ SG 0.55 1724 34.45 14 9.2% ENTG 15.05 AUG 12.50 UFN TV 0.50 2 12.00 42 9.1% DG 18.90 AUG 17.50 DG TW 0.45 2207 17.05 42 4.9% ************************ SPREADS/STRADDLES/COMBOS ************************ July 5, 2002 Stocks soared Friday in an abbreviated, post-holiday session as investors shopped for bargains in the downtrodden technology segment. The Dow Jones Industrial Average enjoyed its largest point gain of the year, rocketing 324 points to 9,379 on strength in its hi-tech heavyweights. The NASDAQ Composite jumped 68 points to 1,448 on gains in bellwethers like Sun Microsystems (NASDAQ:SUNW) Oracle (NASDAQ:ORCL) and Intel (NASDAQ:INTC). In the broader markets, almost every major sector moved higher with only gold, utilities and some safe-haven groups enduring a downward bias. The S&P 500-stock index closed up 35 points at 989. Advancers outpaced gainers on the NYSE by 4 to 1 on modest volume of 701 million shares. The technology exchange enjoyed similar bullish breadth as winners outpaced losers 3 to 1 on trading volume of 1.1 billion shares. The bond market was week in the wake of the recovery in equities. The benchmark 10-year note dropped 10/32 to 100 18/32, with its yield at 4.80%, up 4 basis points from a seven-month low. Last week's new plays (positions/opening prices/strategy): Aventis (NYSE:AVE) JUL60P/JUL65P $0.65 credit bull-put eBay (NSDQ:EBAY) JUL50P/JUL55P $0.70 credit bull-put J.Jill (NSDQ:JILL) JUL20P/JUL23P $0.30 credit bull-put Temple (NYSE:TIN) JUL50P/JUL55P $0.45 credit bull-put XL Cptl. (NYSE:XL) JUL95C/JUL90C $0.40 credit bear-call Caci Int. (NSDQ:CACI) AUG42C/JUL42C $0.75 debit calendar Alliant (NYSE:ATK) AUG50P/AUG75C $0.10 debit synthetic Cognizant (NSDQ:CTSH) JUL60C/JUL47P $0.10 debit synthetic The bearish market movement early in the week made it easy to achieve the target entry prices in most of the new combination plays. However, the continued decline in equity values placed those same positions in jeopardy near Wednesday's closing bell and there was some concern as to whether we would ever get the recovery rally that analysts had been predicting over the past few sessions. Luckily, Friday's surprise buying spree provided the much-anticipated upward momentum and it appears that most of our bullish plays are "out of the woods" for the moment. Of course, that also means the synthetic short position in Alliant Tech Systems (NYSE:ATK) has likely achieved its maximum profit ($0.40) in the near term and should be monitored for early exit. Portfolio Activity The beautiful arctic wilderness combined with some unusually warm weather to produce an excellent Fourth of July holiday in my home state of Alaska. With the wonderful conditions outdoors it was difficult to focus on the financial markets and I must admit, I did very little stock-watching this week. Fortunately, Friday's rally brought the majority of bullish positions in our portfolio back into positive territory and much of the evidence suggests the bullish trend will continue in the near-term. Among the most productive positions in the portfolio were the synthetic plays in Qlogic (NASDAQ:QLGC) and KLA-Tencor (NASDAQ:KLAC), both of which provided outstanding short-term profits for speculative traders. Another laudable position in that category was the covered-put combination on Oracle (NASDAQ:ORCL) as the "bottom-fishing" play has already yielded a favorable early-exit gain. In the straddle section, Sei Investments Company (NASDAQ:SEIC) easily reached the downside break-even point (the value of the SEP-$30 Put paid for the entire play) and also provided a small profit in the overall position. Among the bearish spreads, two issues warranted early exits (or adjustments): United Technologies (NYSE:UTX) and 3M Company (NYSE:MMM). In both cases, we chose to roll forward and up to August options. With UTX, we were able to maintain a $0.55 credit in the new spread (AUG80C/75C) but the sharp rally in MMM forced us to transition to the AUG145C/140C spread, where only a break-even adjustment ($0.00 credit in the new position) could be achieved. Of the remaining (July expiration) spreads, Autozone (NYSE:AZO), Ambac Financial (NYSE:ABK), HCA Inc. (NYSE:HCA), and Oxford Health Plans (NYSE:OHP) appear to be recovering but all of these stocks should be thoroughly evaluated and their respective positions adjusted (or closed), based on your near-term outlook for the underlying issue. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** CTX - Centex $56.88 *** Reader's Request! *** Centex Corporation (NYSE:CTX) is a multi-industry company with operations in six primary business segments. Conventional Homes operations involve the construction and sale of single-family homes, town homes and low-rise condominiums, and the purchase and development of land. Investment Real Estate operations involve the acquisition, development and sale of land, and the development of industrial, office, retail and mixed-use projects. Financial Services operations involve the financing of homes, home equity and sub-prime lending, and the sale of insurance coverages. Construction Products involves cement production and distribution, and the production, distribution and sale of gypsum wallboard, ready-mix concrete, aggregates and recycled paperboard. Contracting and Construction Services involves the construction of buildings. Centex HomeTeam Services is involved in pest and termite control, lawn and landscape care, electronic security, alarm monitoring and home wiring services. One of our readers noted that we have offered very few "premium selling" positions in our portfolio during the past month, so we decided to scan the market for issues that favor the credit strangle. Centex emerged on a list of relatively stable stocks with robust option premiums and based on the current technical outlook, the issue qualifies as a potential candidate for that technique. The company's quarterly earnings are due on July 17 and the profit results are expected to be in-line with current estimates. However, news and market sentiment will certainly have an effect on the company's share value so review the issue thoroughly and make your own decision about the future outcome of the position. PLAY (speculative - neutral/credit strangle): SELL CALL AUG-65 CTX-HM OI=164 B=$0.70 SELL PUT AUG-45 CTX-TI OI=50 B=$0.60 INITIAL NET CREDIT TARGET=$1.35-$1.50 PROFIT(max)=10% UPSIDE B/E=$66.35 DOWNSIDE B/E=$43.65 ****************************************************************** SYMC - Symantec $34.48 *** Premium Selling! *** Symantec (NASDAQ:SYMC) provides a broad range of content and network security solutions to individuals and enterprises. The company is a provider of virus protection, firewall, virtual private network, vulnerability management, intrusion detection, remote management technologies and security services to various consumer groups and enterprises around the world. The company currently views its business in five primary operating segments: Consumer Products, Enterprise Security, Administration, Services and Other. Symantec's quarterly earnings are due on July 17. Symantec is another issue that surfaced on the list of potential short-strangle candidates and traders who employ premium-selling strategies can use the recent volatility and the robust option premiums to initiate a neutral-outlook position with a favorable credit. The probability of the share value reaching our sold strikes is rather low, but there is always the possibility of a break-out from the recent trading range, so monitor the issue daily for changes in technical or fundamental character. PLAY (speculative - neutral/credit strangle): SELL CALL AUG-45 SYQ-HI OI=12 B=$0.75 SELL PUT AUG-25 SYQ-TE OI=361 B=$0.40 INITIAL NET CREDIT TARGET=$1.20-$1.25 PROFIT(max)=14% UPSIDE B/E=$46.20 DOWNSIDE B/E=$23.80 ****************************************************************** - SYNTHETIC POSITIONS - ****************************************************************** HOV - Hovnanian Enterprises $35.00 *** Strong Sector! *** Hovnanian Enterprises (NYSE:HOV) designs, constructs and markets single-family detached homes and attached condominium apartments and townhouses in residential developments in the Northeast U.S., North Carolina, Metropolitan Washington D.C., southern California, Texas and the Mid South. The company markets its unique homes to first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. Hovnanian Enterprises offers a variety of homestyles in the United States at prices ranging from $43,000 to $950,000 with an average sales price of $255,000, based on fiscal 2001 prices. The company has homes for sale in over 170 communities and since the opening of its predecessor company in 1959, the company has delivered over 100,000 homes. The company also provides a number of financial services such as mortgages and title insurance to its customers. The residential construction sector has performed very well in recent months and the share value of Hovnanian Enterprises is a testimony to that trend. The price of the issue has more than tripled since December of 2001 and there are no signs of an end to the upside activity in the near-term. Traders who agree with a bullish outlook for the stock and its industry group can attempt to profit from further upward movement in HOV's share value with this speculative position. PLAY (speculative - bullish/synthetic position): BUY CALL AUG-40 HOV-HH OI=93 A=$0.80 SELL PUT AUG-30 HOV-TF OI=232 B=$0.85 INITIAL NET CREDIT TARGET=$0.15-$0.25 TARGET PROFIT=$0.75-$0.90 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $985 per contract. ****************************************************************** TOT - TOTAL Fina Elf $81.50 *** New All-Time High! *** TOTAL Fina Elf (NYSE:TOT) is engaged in all aspects of petroleum industry, including upstream operations (oil and gas exploration, development and production); downstream operations (refining and marketing); and the trading and shipping of crude and petroleum products. TOTAL also produces Petrochemicals and plastics, as well as intermediates and performances polymers and specialties for industrial and consumer use. In addition, the company has interests in coal mining and in the nuclear power, cogeneration and electricity sectors. Shares of TOTAL Fina Elf soared Friday on news of the Norwegian government's approval for the company develop the Skirne and Byggve natural gas and condensate fields in the southern central region of the North Sea. TFE plans to start production in that area by the end of 2003, yielding 34,000 barrels of oil a day in 2004. The news comes on the heels of a favorable announcement concerning a large natural gas field in Russia 's Barents Sea, which is in the early stages or development by a new consortium involving TFE. Studies suggest the Shtokmanov field could hold up to 100 trillion cubic feet of natural gas and TOTAL Fina Elf hopes to have a 25% interest in the group formed to develop the field. Investors are optimistic about the company's future and on Friday, they helped TOT's share value rally to an all-time high near $82. With any luck, there will be a brief consolidation in the issue allowing traders to initiate a speculative (bullish) position at an acceptable price. Target a small debit (or even a credit) in the play initially, to allow for a pullback in the price of the underlying stock. PLAY (very speculative - bullish/synthetic position): BUY CALL AUG-85 TOT-HQ OI=0 A=$1.40 SELL PUT AUG-75 TOT-TO OI=1081 B=$0.90 INITIAL NET DEBIT TARGET=$0.10-$0.25 TARGET PROFIT=$1.25-$1.50 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $2,700 per contract. ****************************************************************** - CREDIT SPREADS - ****************************************************************** BBBY - Bed Bath & Beyond $37.70 *** Positive Outlook! *** Bed Bath & Beyond (NASDAQ:BBBY) is a nationwide operator of retail "superstores" selling primarily high quality domestics merchandise and home furnishings. The company offers a large assortment of merchandise at everyday low prices that are substantially below regular department store prices and generally comparable to or below department store sale prices. The company's merchandise in the domestics category includes items such as bed linens, bath accessories and kitchen textiles, and its home furnishings line includes items such as cookware, dinnerware, glassware and basic house-wares. The company currently operates over 300 stores in 43 states. Last week, Standard & Poor's said it had revised its outlook on Bed Bath & Beyond to "positive" from "stable" due to the company's consistent operating performance, continuing profitability, and moderate debt leverage. The rating company also affirmed its triple-'B'-minus corporate credit rating on BBBY, reflecting its leadership position in the highly competitive home furnishings industry, successful merchandising strategy, and strong financial profile. Despite a backdrop of slowing consumer spending, BBBY continued to report strong sales and earnings growth throughout 2001 and the first quarter of 2002. The company has historically achieved high sales and earnings increases through the organic growth of its store base and consistently outperformed its retail sector competition. Its successful merchandising strategy and decentralized management structure have enabled BBBY to generate above-average operating margins of close to 20% and strong return on capital measures of above 20% during the last three years. Bed Bath & Beyond's fundamental outlook is solid and the recent technical indications suggest the issue is poised for future gains. Traders can profit from that outcome with this position. PLAY (less conservative - bullish/credit spread): BUY PUT JUL-32.50 BHQ-SZ OI=1135 A=$0.20 SELL PUT JUL-35.00 BHQ-SG OI=1724 B=$0.55 INITIAL NET CREDIT TARGET=$0.40-$0.45 PROFIT(max)=19% ****************************************************************** INTU - Intuit $50.09 *** The Rally Continues! *** Intuit (NASDAQ:INTU) is a leading provider of small business, tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers, small businesses and accounting professionals. The company's principal products and services include Quicken, QuickBooks, Quicken TurboTax, ProSeries, Lacerte and Quicken Loans. Intuit offers products and services in five principal business divisions, which include Small Business, Tax, Personal Finance, Quicken Loans and Global Business. Shares on Intuit have been on a roller-coaster ride in recent sessions after Morgan Stanley analysts lowered the company's earnings estimates while Jeffries & Co. upgraded the issue on strong potential growth. To make the outlook clearer, Intuit raised future earnings guidance on its own after announcing the acquisition of Eclipse, a provider of business management software for wholesale durable goods distributors. Intuit says Eclipse will contribute between $40 million and $50 million in revenue in fiscal year 2003 and as a result of the acquisition, Intuit raised the upper end of its revenue guidance for fiscal year 2003 to $1.75 billion. Intuit also noted that pro forma operating income could reach as high as $410 million, compared to prior guidance of $405 million. Apparently, investors were happy with the new deal because on Friday, they drove the stock to an 18-month high on heavy-volume. Traders who believe the up-trend will continue can profit from that outcome with this conservative combination position. PLAY (conservative - bullish/credit spread): BUY PUT JUL-40 IQU-SH OI=3428 A=$0.25 SELL PUT JUL-45 IQU-SI OI=2707 B=$0.70 INITIAL NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11% ****************************************************************** WFT - Weatherford $43.87 *** Technicals Only! *** Weatherford International (NYSE:WFT) is a provider of equipment and services used for the drilling, completion and production of oil and natural gas wells. The company conducts operations in approximately 100 countries and has approximately 485 service and sales locations, which are located in nearly all of the oil and natural gas producing regions in the world. The company's oil equipment business is divided into three principal operating divisions. The Drilling and Intervention Services Division provides drilling systems, well installation services, cementing products and under-balanced drilling. The Completion Systems Division provides a full range of completion products and oil transport services. The Artificial Lift Systems Division is the only organization in the world that is able to provide all forms of artificial lift used primarily for the production of oil. It also provides production optimization services and automation and monitoring of well head production. The company's quarterly earnings are due July 22. From a technical viewpoint, Weatherford has once again made a futile attempt to move above $52 and the recent slump below its long-term moving average (150-dma) suggests further downside movement in the near-term. From a historic perspective, moving below September-May trend-line was a negative indication and the decline below the April and June lows creates a formidable resistance area near $45. A nearly complete "head-n-shoulder" formation is also looming in the distance. PLAY (very conservative - bearish/credit spread): BUY CALL AUG-55 WFT-HK OI=447 A=$0.20 SELL CALL AUG-50 WFT-HJ OI=1781 B=$0.70 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ The shorts are still working with two more triggered Friday. We’re trying it again with this Nasdaq favorite. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/070702.asp ************** MARKET POSTURE ************** More movement to report from Friday’s session. Unfortunately, most of it was to the downside. To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/070702.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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