The Option Investor Newsletter Wednesday 07-17-2002 Copyright 2002, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 07-17-2002 High Low Volume Advance/Decl DJIA 8542.48 + 69.37 8723.37 8452.76 2243 mln 1760/1364 NASDAQ 1397.25 + 21.99 1426.28 1370.21 1942 mln 1873/1467 S&P 100 453.68 + 4.87 463.50 447.46 totals 3633/2831 S&P 500 906.04 + 0.00 926.53 895.03 RUS 2000 406.69 + 2.42 415.26 402.06 DJ TRANS 5411.76 – 22.34 2491.33 2377.93 VIX 39.80 + 0.28 42.14 38.94 VIXN 63.23 - 2.01 66.04 63.16 Put/Call Ratio 0.82 ************************************************************ Pick A Number All eyes were on the IBM earnings announcement after the close today and Big Blue did not disappoint -- if you were looking to play a shell game of hide the real earnings number. While the official spin from IBM was that Q2 numbers beat by a penny, with 84 cents over estimates of 83 cents, GAAP numbers were only 3 cents a share. Wall Street had already been expecting a ton of "one time" charges from IBM but the range was from 2.0 to 3.0 billion. The current number they are quoting is a $2.1 billion in one time pre-tax charges due to job cuts, restructuring and the sale of its hard-disk business, which it hasn't sold yet. Company management tried to spin the numbers with earnings of $1.45B and said the real number investors should be looking at is 89 cents a share excluding "all" charges. Analysts had been looking for revenues to come in around $19.4B and IBM turned in almost $20B, but this is down 6% from the year before. It was interesting to note that IBM's CFO said, "We continue to improve our position in the industry for when demand picks up." Ah... for when demand picks up, so there isn't any pick up yet but when it happens they'll be ready. They didn't specify which industry they'd be ready for but sales in Big Blue's hardware division were down 16% from last year. Even their massive services division was down 1% from Q2 2001. Initial investor reaction was actually positive as IBM traded up over $2 in after hours. However, in today's OptionInvestor.com Market Monitor, Jim had some excellent insights into the usual IBM shenanigans that will likely come to light as analysts dissect the earnings report. Traditionally, IBM has been able to manage earnings with massive stock buyback programs. Simply put, if revenues aren't going to meet the earnings per share estimates, then reduce the number of shares outstanding to make them look better. According to notes in the earnings release, IBM bought back $1.8B in stock last quarter, which is about 25 million shares. This was enough that it could have given the company a 2 to 4 cent edge on the EPS outcome. In addition to the buybacks the write offs dropped the company into the next lower tax bracket from 28.9% to 25.3%. This alone was worth an extra $52 million in "profits", which comes awfully close to the $56 million IBM said their total operations churned out in net profits for the quarter (after charges). Whether Wall Street believes the 84 cents, 89 cents or 3 cents results, it looks like you can pick a number because they're all going to be judged with a callous eye. While the markets waited to hear from International Business Machinations, I mean Machines, it was another volatile session for traders. The futures were positive ahead of the opening bell due to stronger than expected earnings numbers from a few DJIA components. Unfortunately the rally failed just as it begun. The Dow popped up to 8723 or +250 points before immediately succumbing to a slow and steady drift downward. By 1:00PM, the index had reached its lows for the day at 8452 and merely bounced around the afternoon but ended positive by the close. This broke a seven-day losing streak for the Industrials but it wasn't a very convincing performance for anyone still wishing to invest new money. The Nasdaq Composite offered similar action for traders with a big gap up at the open to 1426 or +50 points before sliding into lunchtime. Traders must have been cautious with Greenspan speaking for a second day on Capital Hill. Alan came across as optimistic and voiced his opinion that the long- term outlook for the economy is the best he's ever seen it. Too bad investors we're willing to commit any cash on Alan's optimism. What seems like the first time in a long time, the market internals were positive. Advancing issues out paced decliners on both the NYSE (17 to 13) and the Nasdaq (18 to 14). 52-week highs versus 52-week lows were 26 to 109 on the NYSE and 52 to 111 on the Nasdaq. Volume was strong with 2.2B for the NYSE and 1.9B on the Naz. Chart of the Dow Jones Industrials Chart of the Nasdaq Yesterday evening, no one knew how Wall Street would eventually interpret Intel's earnings report. Considering the open this morning, it looks like everyone just turned their head and pretended not to notice. A similar reaction to IBM's numbers would help but if brokerage houses start coming out with negative remarks it could have the major indices aiming for Monday's low again. The 8900 to 9000 level, which currently coincides with the top of the Dow's descending channel, could be a tough hurdle to overcome. On the other hand, the Nasdaq is trying really hard to break through short-term resistance at 1400 (to 1450). As we mentioned last night and again this morning in the intraday updates, the Nasdaq 100 bullish percent has actually moved into bull confirmed status. This internal reading on the index is projecting a bullish posture and bears should become more conservative and act quicker to cover shorts if they move against them. Of course that is a "should" and not a "will" and they still have the S&P 500 in a bear confirmed status to give them moral support. Plus, there are still a lot of earnings reports yet to be seen and heard and odds are skyrocketing that Wall Street will have to revise their estimates for the second half of 2002 lower again. Looking again at the Nasdaq composite traders will notice that the top of the longer-term descending channel from January is currently near 1550. That would be a 16% rally from the bottom on Monday (7/15/02) and you can bet bears will be lining up to short anything with four-letter symbols should this occur. News of Note Contributing to the positive open this morning for the DJIA were a couple of Dow components announcing Q2 numbers. Boeing (BA) flew past estimates of 80 cents with earnings of 92 cents(a) but lower than the 95 cents from the prior year. The number one soft-drink manufacturer, Coca-Cola (KO), popped over the prior year numbers of 47 cents and met estimates of 52 cents a share. Financial behemoth, Citigroup Inc (C), cashed in with 78 cents a share versus estimates of 77 cents. Also beating estimates was conglomerate United Technologies (UTX). Earnings were $1.23, which beat estimates by three cents. Not contributing to the rally were JPM and HON. J.P. Morgan Chase missed Q2 estimates of 65 cents with results of $0.58 a share. Honeywell met estimates due to cost cutting but then revised their guidance lower and announced additional job cuts. Of note in the hardware sector was Apple Computer (AAPL). Shares gapped down this morning and ended the day -12.4% after announcing that quarterly profits had fallen by almost 50%. The company also lowered guidance going forward despite revealing new products at the Macworld trade show. Beating Lowered Estimates If you happened to catch Jim Jubak's spot on CNBC tonight, I thought he made an interesting point. It's no secret that analysts have lowered the earnings bar so low that even the slow down in the economy's comeback will not stop many companies from meeting or beating the consensus estimates. Jim pointed out that as of July 2001 analysts were projecting a 113% increase in earnings gains in Q2 2002 for technology stocks. As of April of this year, that estimate had dropped to a more modest 38% gain in earnings. According to his numbers that estimate had fallen to just +4% heading into this week. More importantly, Jubak felt that analysts' estimates for the third and fourth quarters of 2002 were still too high and he believes we'll see a rash of revisions after the Street digests the Q2 numbers. He might be right. The economy is expanding but it's not expanding as fast as projected last fall and Q1 of this year. In the last few months we have all but shot down a second half recovery for I.T. spending and we're seeing a slowdown in the growth across the rest of the economy as well. It's still growth and that's the good news but the current expansion is not going to fuel current earnings estimates. While Jubak didn't mention it in his report the mid-August deadline for the top 1000 companies to turn in revised or "CEO-approved" financials could prompt an even quicker move by Wall Street to realign their expectations with reality. Tomorrow It would be a strange twist indeed if Intel and IBM, two companies we expected to tank the markets with foul earnings news, fail to exact a response from investors and kick-start another shot at the much talked about capitulation event. But instead of Intel and IBM it turns out to be MSFT that does the dirty deed? The software giant announces earnings after the close on Thursday and the current expectation is that MSFT meets or beats estimates, especially with the possibility of increased sales as corporations rush to purchase software before MSFT moves to its leased-application revenue model. The challenge then becomes what does MSFT say in their conference call. It is tradition that MSFT downplays their numbers for the next quarter so we have to expect the same sort of rhetoric tomorrow. However, it may come down to just how badly do they down play the current quarter's and end of year projections? Short-term the markets are poised for a rebound and a bullish report by MSFT could be just the trick. However, traders need to be careful. If you're long, tighten stops as we approach resistance and if you're not, then start picking out what you'd like to short when we get there. While we wait for MSFT's earnings it looks like tomorrow could be another down day. IBM's after hours gains have fallen from +2.00 to just 30 cents and the futures are down. Maybe a nice double bottom at 8235 will be just the entry point bulls' need for a quick trade. James ******************** INDEX TRADER SUMMARY ******************** SOMETHING NEW, SOMETHING BLUE by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - The something new was that the substantial rally off the recent low in the tech laden Nasdaq, did not fall apart. And Nasdaq is even leading the S&P/NYSE market higher - wonder of wonders! The something blue is tonight's focus on "Big Blue" IBM. Trying to analyze their complex report with the restructuring charges and all the wrinkles - well, the nuts and bolts accounting types had a lot to figure out! It seemed that the company met or beat (ever so slightly) revenue and earnings projections. In after hours trading the stock was up substantially at one point - to around $73, after closing at 70.69. Stay tuned. Technically, IBM is looking like it might yet have another shot down toward the $60 area, to a "final" bottom - it will take a weekly close above 73.50 to "confirm" an upside reversal. After this flurry, the stock may just start drifting sideways to lower again. We'll see! It takes more than short-covering to KEEP them up. The media pundits are going to note that the Dow - always this "funny" little average - broke a 7-day losing streak with help from Intel, Boeing, United Tech, and Phillip Morris - Dow stocks that were all up 4% or more today. Since the Dow average came so close to its September intraday low and rebounded so strongly, we're seeing some decent follow through and a continued firm market tone. If you look at the market sectors, as I've been saying for some time in my Sector Trader commentary, its obvious that fund managers are selling off the former favorites that ran up in the first half and putting the money to work in the oversold sectors - what was most oversold? - the former tech fallen angels. The Dow could also but in a weekly "key reversal" - a substantial new low, followed by a close above the prior week - however this is speculation cause it ain't happened YET - the Dow has to manage to close this week above 8542 and we have options expiration, Microsoft (earnings) and two days to go! The Dow average, which was leading the market down on heavy volume - in a switch, Nasdaq held up the best! - rebounded on a positive pre-announcement by Kodak (EK - +11%). A climb in tech bellwether Intel (INTC) also helped considerably (+8.5%). There were rumors that the company would make a positive announcement, such as one raising their guidance on earnings - like many, if not most, of these floor rumors, it was unfounded at least as of this writing. My suggested stop at 449.50 was a good guess for the approximate low as it turned out. Those with long call positions, at 455 or under or at whatever price you are in at - a suggested exit point is at 455, just below some near-support. The Omarket should keep going or the rally gets a bit suspect. There is plenty of "room" on the upside in terms of the broad hourly channel as seen above. The move to a new low, followed by an upside reversal on good volume is suggesting that the rally will carry further. However, if the OEX gets up to resistance that starts around 480 up to 483, AND whenever the longer hourly stochastic gets up to an overbought reading again - take any call profits and RUN! S&P 100 (OEX) Index - Daily/Hourly charts: S&P 500 (SPX) Index - Hourly chart: There is a lot of technical resistance overhead in the 465-466 area in the OEX as suggested by the prior rally highs and implied by the top of the first downtrend channel. Next resistance is well above this area, at the pivotal 21-day moving average (484). Call purchases look attractive if the prior low is successfully retested and the hourly stochastics again both get oversold. Put plays look very attractive if OEX rallies 10-12 points from closing levels. A close above 470 is an exit point in case the market ever has a "buying panic" and changes its spots completely. 480-483 is my next area of active selling interest. S&P 5100 (SPXOEX) Index - Hourly chart: 931-934 looks like the area to sell SPX and 876-880, if reached again, an area to buy. In between, I don't envision doing anything as far as new trades - I don't like the risk to reward equation. I had my ONE lower hourly channel line, which is a line parallel to the upper trendline, drawn though the most number of lows rather than the absolute lowest low - WRONG! - sometimes this technique is what "works" EXCEPT when the market gets real extreme in a move. If so, you want the lower boundary line touching the LOWEST most extreme low, which offered the best outcome here. "Pulling" the lower parallel trendline down to the prior "extreme" low at 982 - the one that "stuck out" as a kind of "panic" low - then intersected the area of the lows today. Sometimes, for comparison, I will draw two trendlines (forming a buy/sell "zone") on one end or the other of my channels, which is again the case in the way I have the SPX chart above. I suggested the 916 area - stop at 912 - as the potential buy area for SPX in last night's commentary. However, it is often the case that an index gets somehow "pulled" to the even 100/1000 levels as if by a magnet - this concept worked well today as SPX got within a hair's breadth of 900! Dow Index (1/100: $DJX.X) - Daily/Hourly charts: I will be looking to sell DJX in the 87.2 to 88.9 area. It has immediate overhead resistance implied by the minor downtrend in the 86.7 area. A move above there and rally failure at today's 87.2 high would suggest a bearish play - or, above this high at the next one up. Stay tuned! 84 looks like possible near-term support, however, do not favor new positions on the long/call side unless DJX gets to an extreme again, such as by re-testing its low in the 82.5 area and again was registering an oversold extreme on both hourly stochastics. My strategy has been and continues to be to wait for the periodic extremes that occur when prices get to the top or bottom of the trend channels and the like. These points offer the high potential trades, especially given the high premiums stemming from high current volatility. KEY NASDAQ STOCKS INFLUENCING QQQ DIRECTION - What has kept me bullish or at least tempered my bearishness lately is by taking a "bottoms up" approach of always staying focused on "key" Nasdaq stocks, at least on a technical basis. MSFT (Microsoft) - got back to its 50-day moving average today at 52.92 - now MSFT needs a close above this level and then above 55.5 to get something going to the upside. Thing the stock is forming a bottom, so my best guess on upcoming earnings is that they will be perceived as at least "OK", if not bullishly. INTC (Intel) - Minor upside reversal today - needs follow through to above resistance in the 18.8 to 19.5 price zone. CSCO (Cisco systems) - Also had minor upside reversal today - key overhead resistance now looks like 14.3, then 14.9. QCOM (Qualcomm) - Marking time. Could be bottoming, but stock looks like to will "follow" the others, rather than lead. ORCL (Oracle) - Most bullish looking of the Nas 100 that I follow - move above $10 suggests a move to around 12. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: To suggest that QQQ was going to have a further near-term run up, I would have liked to see the stock clear its 21-day moving average by more than a hair's breadth. A decisive upside penetration above the 21-day moving average has often been the "signal" for another spurt higher. The Q's are right AT "pivotal" resistance in my estimation. Tomorrow could be a key day - if there is a feel-good spill over to the IBM earnings we could get a 1 to 1.5 point move higher. Or, not and Nasdaq drifts lower again, especially with Microsoft's report ahead of us Thursday after the close. It’s a guess as to which comes next - the Q's may pull back first to the low end of its emerging uptrend price channel, at 24.3- 24.5, then again launch a rally that makes a run to the substantial overhead stock "supply" or selling interest implied by all those prior swing highs clustering around 26.5-26.8. OR, QQQ may extend its rally first, then pull back into the end of the week or early next. The sideways trend is causing the hourly stochastic to fall - this is the way a strong market will tend to correct - by going sideways rather than down a whole lot. Trading the likely range is suggested. Given the resistance overhead, especially at the prior highs you can see on the hourly chart above and with the prior low from September (27.0) in QQQ possible "becoming" resistance, look to sell in the 26.5-27.00 area. A daily close above 27.00 or an intraday high above 28.00 would cause me to exit from the short side of QQQ. To play the low end of an anticipated near-term price range, buy in the 24.30-24.50 area with an stop/exit point at 23.50. ------------- Let the stock break out above this resistance without me. I would rather short the rally at some point or buy the next dip than surrender a profit, at least in this market climate. Or, if I want to stay long I'll buy ORCL or MSFT on a further breakout if I want to play the tech darlings. Support is anticipated in the 23.5-24.0 area; then down around 22 if there is another sharp break. Above 25.5, resistance levels are at the prior highs at 26.5-26.8. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** The End of The Bear? by Mark Phillips mphillips@OptionInvestor.com That seems to be the question that is on everyone's mind after the mind-numbing decline and rebound on Monday. For that matter, the volatility on Tuesday and Wednesday seems to indicate that a lot of people are trying to call a bottom here, but the bears are not going to give up easily. It seems that everyone that can fog a mirror is being asked whether this is the bottom, and whether we now have capitulation. Well I'm here to tell you that virtually everyone is either asking or answering the wrong question. The underlying question that seems to be bandied about is whether this is the end of the Bear market. Depending on your definition of "The End of the Bear", my answer would range from maybe getting close, to not for a long time. Before you click away to read a happier treatise on the rebirth of the bull market, let me tease you with this -- understanding what I have to say just may make the difference between early retirement and well, the alternative. For the most part, the talking heads on Stock TV seem to be focused on the 'fact' that bear markets last 18-24 months and by that definition, this bear has outstayed his welcome. I think this is an extremely myopic view, predominantly because it takes a dangerously narrow slice of history as its sample period. The real question that needs to be answered is "What TYPE of Bear Market Is This?". Most of the commentary I have seen seems to be based on the premise that we are in a normal cyclical bear market within the overall secular trend. In my less-than-humble opinion, the experts are wrong. Before proceeding, let's cover some basic definitions. A secular market refers to the primary trend in any given market. For instance the U.S. equity markets were in a secular bull market from 1982 until early 2000. At the same time, the Gold market was in a secular bear market from the early 1980s until late 2001. During these secular markets there have been several counter-trend markets or cyclical markets. Dealing with the equity markets, in that 18 year secular bull market, there were several periods that can be termed cyclical bear markets; Fall 1987, Summer 1990, Fall 1997, Fall 1998. But the point remains that the primary trend was bullish. Well now, the 'experts' are looking at this 20-year period and drawing conclusions as though we are still in a secular bull market. And that's where the huge error is taking place. Not only are we still in a bear market (as we have been for the past 2 years), but it appears to me like the bear market we are in is a secular one, not another cyclical one. I don't expect you to take my word for this, although I regret that I can't share any historical charts tonight to support my case. My charting service only goes back to the late 1980's and that isn't nearly far enough to show us the data that we need. But for those of you that are interested in validating the data, let me direct you to the following site: Dow Jones Indexes While it isn't one long 100-year chart of the DOW, the links on the left hand side give us 10-year snapshots of the DOW since 1895, annotated with important events throughout each decade. Students of history will find this information incredibly informative and interesting. By the way, if any of you can direct me to a single 100year chart of the DOW, I would be most grateful. Coming back on track, I was explaining why I believe we are now in a secular bear market. Looking at the past 100 years of DOW data, the market tends to run in 17-20 year secular trends, punctuated by secondary counter-trends. I already detailed the last 20 years, but that is what most of the so-called experts are using to make their predictions that the bear is on its last legs. Let's go back to the immediate post-WWII period for our first comparison. In 1949, the market entered a new era of prosperity by taking out the prior year's high and the succeeding 17 years saw a gradual bull market emerge through the early 1950s. Then in 1954 a strong rally commenced on the heels of the first mass-produced computer. Topping out in the middle of 1956, the bull market didn't re-commence until the latter part of 1958 on the heels of the creation of the first silicon chip. Are you noticing the theme here? The strong surges in the bull market 50 years ago were driven by technological innovation maybe there really isn't anything new? Late 1959 saw another near-term top, although it was bested in 1961, before the Cuban Missile Crisis sent the markets tumbling. But it was a short-lived tumble and the bulls came on with a vengeance in late 1962, propelling the market steadily higher right up to the beginning of 1966. The DOW just fell short of reaching the formidable 1000 level on this climax of this secular bull market. That little progression took 17 years and saw the DOW rise from about 170 in 1949 to just below 1000 in early 1966 for a rise of approximately 480%. That very frisky bull was followed by 18 years of a secular bear market. Sure there was a brief poke above the 1000 level in late 1972, but that was quickly snuffed out after the dual slam of Watergate and the Arab Oil Embargo. Between 1966 and early 1982, the DOW meandered between 1050 and 550. That's right, buy and hold investors that bought at the top in 1966 had to wait until early 1983 before they could realize a significant profit on their investment. Apparently, the trend really is our friend! We all know that the run to new highs in 1983 ushered in a bull market of historic proportions that resulted in new all-time highs just over 2 years ago for all the major indices. That brings us back to our current market. We had a 17-year secular bull market, followed by a 17-year secular bear and then another 17 year secular bull. Does it seem reasonable to expect that either the 1983-2000 bull market is getting ready to resume or that the 2000-2002 bear market is near an end? No! I fully expect the bear market we have been mired in for the past 2 years to obey the pattern of history, meaning that we are not likely to enter a new secular bull market until somewhere around 2017. While I hope that isn't the case, experience has taught me not to argue with the pattern of history. Instead, I'm assuming the historical pattern will repeat and preparing accordingly. If I'm wrong, there will be plenty of time to acknowledge the error of my ways and get back on the Bull Express. I don't think I need to be in any hurry though. The DOW is the strongest of the major indices and would have to break its all-time high of 11,722 before we would consider it the birth of a new primary bull market. I think I have time for nap while I wait. [GRIN] Now before you do something rash like label me a "Chicken Little" or worse yet, a perma-bear, hold on a minute. Here's the part that we all want to hear as individual traders. Each of these secular markets were punctuated by dramatic counter-trend rallies and selloffs, but the primary trends in each of those time periods remained dominant. One of the incontrovertible truths is that markets oscillate. As traders, we look to profit each time the market reverses from an extreme and reverts to the mean. In fact, with all of my recent commentary on MOCO lately, you should be able to divine that I am looking for the current market decline to come to a temporary end very soon. The reason I wrote this article is that I don't want any of you to be confused as to the big picture. The rally off the September lows was a bear market rally and amounted to a 31% DOW gain from trough to peak. When the current decline ends, we will get another bear market rally that will likely fall far short of vaulting the DOW higher by 31%. Bear market rallies tend to post a series of lower highs until the nasty bear just plain gets bored and goes away. That doesn't happen until stocks represent true values with historically low P/E ratios, and we aren't even close yet. Trade the next rally for all it is worth, but please don't fall for the illusion that it is the end of the bear and the birth of a new long-term bull. It will be a cyclical bull market and needs to be traded as such. This is not the time for blind buy-and-hold long-term investments. This is an environment in which traders will excel and investors will languish. My admonition to you is to put in the necessary effort to learn to trade well. That doesn't mean that you need to become a day-trader. But you need to learn how to read the mood and cycle of the market and time your entries and exits accordingly. Get a good book on Technical Analysis, or better yet 2 or 3. Learn how to read Point & Figure Charts, and especially the Bullish Percent charts. Jeff Bailey does a tremendous job of showing us how to use these charts on a daily basis. Learn the lessons he shares and you'll find that profitable longer-term swing trading becomes far less mysterious. And with that knowledge, navigating the markets won't be nearly so treacherous, even if the cranky bear does stick around for another 15 years. Best Wishes for a Profitable Future! Mark ************** TRADERS CORNER ************** Call = Put By Steven Price I often heard other traders use the phrase "Calls are puts, puts are calls," when I began trading. This made no sense to me. Calls make money when the stock goes up; puts make money when the stock goes down. Right? Well, not exactly. One of the most profitable option trading strategies involves buying calls and hoping the stock tanks. What am I talking about? Anyone who has used the strategy of covered calls in a declining market understands that while selling a call that winds up at zero on expiration can help soften the blow of losses on your stock, the stockholder still loses money as the stock goes down. The strategy I'm talking about is basically the opposite of the covered call. And this strategy can be very profitable in a declining market, while still protecting an investor if the market goes up. The first step, however, is the ability to short stock. Let's assume instead of buying stock and selling calls, you buy a call and short the stock. In our imaginary scenario, let's say stock PRI is trading at $50, and you purchase an August 50 call for $3.00. Now you sell 100 shares of the underlying stock PRI at $50. The position is now: Long (1) $50 Call $3.00 debit $ 300.00 -100 shares PRI $50.00 credit $5000.00 Now where do we want the stock to go? DOWN! If the stock goes up, we retain the right to purchase it for $50 by exercising our call, thus breaking even on our stock trade and in the meantime we earn a little bit of interest on our $4700.00 credit between the time of the trade and the time the option expires and we exercise it. In the end though, the interest we collect between now and the time the call expires probably will not add up to $300.00 and we'll wind up losing money on the transaction. But what if the stock goes down? Let's assume the stock drops to $46. Now let's look at our cash flow. Long (1) $50 Call $0 ($300.00 loss) -100 shares of PRI ($400.00 gain because we can buy 100 shares back $4.00 lower than where we sold it) At expiration we are ahead $100.00. But let's assume the stock drops and there is still time left before the call expires. We can buy back our shares for a $400 gain, but there will still be some value left in the calls that have not expired yet, maybe $1.00. Now, we can either sell the call for $1.00 and pocket the $200.00 total gain, or we can hold it, and hope the stock goes up. If the stock goes up we can do one of three things: 1) sell the call which may now be worth more with the stock higher; 2) do nothing, simply hold the call and hope the stock keeps going; or 3) sell the stock again. If we sell (or short) the stock again, we know that if it keeps going up we get to buy it at 50 when we exercise our call, but if it goes back down, we get to buy it again (cover) at a lower price. Because stocks tend to move up and down within a trend, we may have the opportunity to sell the stock and buy it back again several times, while saving the call as protection in case the stock keeps going up after we short it. If we simply hang on to the call we may be able to sell it higher as long as it doesn't expire before gaining in value. We've already pocketed the $400 from the original drop to $46, which has covered our cost of the call, so in essence we've gotten a free call (plus a $100 profit), which we may be lucky enough to make some money on. Now, I started this article with the comment that, "a call is a put, a put is a call." How does this relate to what I've just explained? Well let's say that instead of buying the call for $3.00 and shorting the stock, that instead you bought a 50 PRI put for $3.00 with the stock trading $50. Now your position is simply a long put for $3.00, or a debit of $300.00. The stock drops to $46.00, and your put is now worth $4.00. You can sell it for a $1.00 profit, or you can buy 100 shares of stock. If the stock goes down, you are protected by the put because you get to sell the stock at $50 for a $4.00 dollar winner on the stock, minus the $3.00 you paid for the put, and a profit of $100.00. If you hang on to the put rather than selling it, you now own both the put and the stock. If the stock goes up you can sell it for a profit. While the put will lose value as the stock goes up, the stock will make money, and you still get to keep your $100 winner, with the chance to sell the stock higher. And then wait for it to go back down and repeat the process all over again. At $46, it doesn't matter whether you had bought a put for $3.00, or a call for $3.00 and sold the stock short. The profit is the same. By trading the stock back and forth, buying it lower and selling it higher, and holding onto the option as protection if it keeps going in the opposite direction you'd like it to, you give yourself more than one opportunity for the option trade to make you money. You don't have to make enough to pay for the option on the first move. In fact the stock can keep moving back and forth $1.00 at a time, and as long as you buy the dip and sell it above, you will make money on every movement. In a volatile stock, this can be very profitable. Of course options are more expensive on volatile stocks because market makers are aware of this opportunity and are willing to pay more for the options. In my next installment I'll discuss trading less than 100 shares per option and how this can be profitable no matter which way the stock goes after the trade. Steven Price ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 7/17 by Leigh Stevens Best sector gain today was in the oversold Biotech group. Well, I tried playing the biotech HOLDR's and got throw out early in the upheavals before the final recent bottom - right idea - WRONG timing and you know what they say about timing. At least I got participation in the second best performing sector today, being long the Internet HOLDR's stock. I also am long the Semiconductor HOLDR's - with the sector index in the red column today - but with the Semi HOLDR's UP on the day - someone smells maybe a little more upside potential. UP on Wednesday - DOWN on Wednesday - SECTOR TRADE RECOMMENDATIONS & REVIEW - NEW/OPEN TRADE RECOMMENDATION(S) - NONE OPEN POSITIONS - Long HHH at 21.50 (Internet HOLDR's) STOP: 21.2 Long SMH at 28.30 (Semiconductor HOLDR's) STOP: 28.70 TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHT - Biotechnology Index ($BTK.X) STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; MYGN; PDLI; TARO; TEVA; VRTX; XOMA The BTK index has exceeded or broken out above resistance implied by a cluster of prior lows and the first down trendline, with a couple of more resistance levels looming - at 366 at the 50-day moving average and at 376, another key former low that could now act as resistance. Stay tuned. Judging just by the Biotech HOLDR's (BBH) there the potential to rebound toward the high end of the daily chart downtrend channel, before the stock would encounter more major technical resistance in the 90-93 area. However, this would first involve BBH piercing 89, which was the May low and that later "became" the June rally peak. Stay tuned! UPDATE: 7/17 Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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The Option Investor Newsletter Wednesday 07-17-2002 Copyright 2002, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** STOP-LOSS UPDATES ***************** BJ - put Adjust from $36.05 down to $35.60 CI - put Adjust from $91.50 down to $88.50 XL - put Adjust from $82 down to $78 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ AMGN $37.10 +4.23 (+2.80) The broad rally in the biotech sector continued to carry AMGN higher during today’s session. The stock broke above its short term descending trend and reached past the $37 level, closing near its high for the day. Our stop was triggered and, as such, we’re dropping coverage this evening. Look for a pullback in tomorrow’s session to exit plays. PHCC $21.37 +1.10 (+1.87) The short covering in PHCC continued into today’s session as the broader strength in health care issues pressured the stock higher. The stock broke out above its declining 10-dma and shot higher from there, reaching as high as $21.91 on an intraday basis. The stock triggered our stop along the way. Look for a pullback early tomorrow for an exit if the stop didn’t get you out. ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* MRK – Merck $44.50 +0.49 (-1.05 this week) Merck & Co., Inc. is a global, research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care, L.L.C. (Merck-Medco). The Company's operations are managed principally on a products and services basis and are comprised of two business segments: Merck Pharmaceutical, which includes products marketed either directly or through joint ventures; and Merck-Medco. Merck Pharmaceutical products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. Most Recent Update MRK’s trip up through its 10-dma during yesterday’s recovery in the broader market proved to be a short lived move on what was most likely short covering in the drug sector as others in the group moved higher as well. But MRK was unable to hold onto its gains for the day and gave back more during today’s session when it followed the Dow measurably lower. From here we’re looking for a retest of the recent lows down around the $42 level which could come in the next session or two if the selling continues in the drug space. Look for a breakdown below today’s intraday low at the $43.75 level for a possible entry point into further weakness. Additionally, future rollovers from the 10-dma should produce solid entry points into new put plays. The 10-dma finished the day’s session at the $46 level. Comments MRK is coiling tighter and tighter. The stock is ready to break in one direction or another, which could come tomorrow. The rollover from the 10-dma today proved that the sellers are still very much alive in this stock. Look for a breakdown below today’s low confirmed by a decline below the $42.87 level in tomorrow’s session. BUY PUT AUG-45 MRK-TI OI=2464 at $2.85 SL=1.50 BUY PUT AUG-40 MRK-TH OI=2354 at $1.05 SL=0.50 Average Daily Volume = 6.92 mln ************************************************ BIG-CAP COVERED CALLS, NAKED PUTS & COMBINATIONS ************************************************ Dow Downdraft Comes To An End! By Ray Cummins Stocks found some solid footing today as positive earnings news from a pair of blue-chip companies helped the Dow end a streak of seven straight losing sessions. Positive profit announcements from Citigroup (NYSE:C) and Boeing (NYSE:BA) sustained the recovery in the Dow industrials, helping the average climb 69 points to 8,542. The NASDAQ Composite ended up 21 points at 1,397 after upbeat revenue reports and forecasts from wireless phone maker Motorola (NYSE:MOT) and semiconductor giant Intel (NASDAQ:INTC) boosted optimism among the technology segment. The broader Standard & Poor's 500-stock Index climbed 5 points to 906 on strength in biotech issues. Chemical, drug, oil and paper shares also boosted the major market averages. Trading volume came in at 1.92 billion on the NYSE and at 2.32 billion on the technology exchange. Market breadth ended narrowly positive, with advancers pacing decliners 18 to 14 on the NYSE and 19 to 15 on the NASDAQ. Government bonds enjoyed modest gains in volatile action that opposed the activity in stocks. The 10-year Treasury note was up 3/32 to yield 4.68% while the 30-year government bond climbed 3/32 to yield 5.44%. *************** Summary of Current Open Positions *************** (As of 07-16-02) Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield CCMP JUL 35 34.25 39.58 $0.75 5.04% QLGC JUL 35 33.90 42.85 $1.10 7.38% EBAY JUL 50 49.20 60.74 $0.80 5.92% RYL JUL 47.5 46.70 42.50 ($1.70) 0.00% *** EBAY JUL 50 49.20 60.74 $0.80 7.34% ERTS JUL 55 54.40 63.54 $0.60 4.57% SNPS JUL 45 44.40 45.51 $0.60 5.85% CHBS AUG 35 34.30 34.51 $0.21 1.69% *** EBAY JUL 50 49.60 60.74 $0.40 8.95% EBAY AUG 45 44.15 60.74 $0.85 5.54% LEN AUG 50 49.05 54.16 $0.95 5.20% *** The bullish position in Ryland (NYSE:RYL) was closed Friday when the stock price fell below near-term technical support at $48. Christopher & Banks (NASDAQ:CHBS) has retreated in conjunction with the retail apparel segment and traders who do not want to own the stock should cover the sold (short) put or exit/adjust the position. Lennar (NYSE:LEN) is also in a new downtrend, along with other housing stocks, and a move below support at $51-$52 would be sufficient cause for an early exit of the position. Naked Calls Stock Strike Strike Break Current Gain Potential Symbol Month Price Even Price (Loss) Mo. Yield EXPE JUL 70 70.85 57.15 $0.85 7.65% LLL JUL 60 60.40 46.69 $0.40 4.30% ABC JUL 70 70.25 62.82 $0.25 4.59% ABC AUG 75 75.85 62.82 $0.85 4.99% BRL JUL 60 60.30 55.50 $0.30 6.89% BRL AUG 65 65.75 55.50 $0.75 5.51% DGX JUL 80 80.30 68.50 $0.30 4.78% DGX AUG 85 86.10 68.50 $1.10 5.35% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status ERTS 64.10 63.54 JUL 50 55 0.50 54.50 $0.50 Open NOC 121.80 108.50 JUL 105 110 0.40 109.60 ($0.85) Closed CTX 56.56 48.72 JUL 45 50 0.40 49.60 ($0.65) Closed ERTS 64.86 63.54 JUL 50 55 0.40 54.60 $0.40 Open KSWS 24.08 20.33 JUL 20 23 0.37 22.13 ($0.95) Closed LEN 59.18 54.16 JUL 50 55 0.80 54.20 ($0.04) Open? GD 103.06 97.77 JUL 90 95 0.60 94.40 $0.60 Open? INTU 47.15 46.59 JUL 35 40 0.35 39.65 $0.35 Open LEN 60.38 54.16 JUL 50 55 0.65 54.35 ($0.19) Open? SII 35.86 31.50 JUL 30 33 0.55 31.95 ($0.35) Closed The bullish spreads in Fidelity National (NYSE:FNF) and Expeditors (NASDAQ:EXPD) were closed last week (as previously suggested) for small losses. Thursday's drop below technical support forced an early exit in Northrop Grumman (NYSE:NOC) while the positions in K-Swiss (NASDAQ:KSWS), Smith International, and Centex (NYSE:CTX) were closed during Monday's broad market slump. Lennar (NYSE:LEN) and General Dynamics (NYSE:GD) are also candidates for early exit on any further downside movement. Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status BGEN 42.44 33.83 JUL 60 55 0.25 55.25 $0.25 Open CYMI 40.59 31.43 JUL 55 50 0.60 50.60 $0.60 Open C 42.34 36.20 JUL 50 48 0.30 47.80 $0.30 Open EDS 49.28 33.87 JUL 60 55 0.45 55.45 $0.45 Open VIA 46.59 37.17 JUL 55 50 0.70 50.70 $0.70 Open BWA 60.15 52.26 JUL 70 65 0.60 65.60 $0.60 Open CDWC 43.87 46.92 JUL 55 50 0.55 50.55 $0.55 Open COF 58.73 50.60 JUL 70 65 0.65 65.65 $0.65 Open KSS 69.82 65.24 JUL 80 75 0.65 75.65 $0.65 Open LEH 59.66 56.95 JUL 70 65 0.55 65.55 $0.55 Open MMM 122.42 115.90 JUL 135 130 0.60 130.60 $0.60 Open AGN 58.30 60.00 AUG 70 65 0.60 65.60 $0.60 Open CI 89.83 86.33 AUG 105 100 0.55 100.55 $0.55 Open COF 51.41 50.60 AUG 65 60 0.65 60.65 $0.65 Open UN 60.97 55.53 AUG 70 65 0.80 65.80 $0.80 Open Synthetic Positions: Stock Pick Last Position Credit C/B M/V Status CNF 36.55 36.22 SEP40C/32P 0.10 32.40 0.70 Closed FAST 40.37 38.84 AUG42C/37P 0.10 37.40 0.10 Open Synthetic positions in United Health (NYSE:UNH), General Dynamics (NYSE:GD) and Lockheed Martin (NYSE:LMT), all provided favorable profits prior to the recent broad-market slump. The position in Dollar Tree (NASDAQ:DLTR) also achieved profitability before the widespread decline in stock prices. *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations *************** EBAY - eBay Inc. $61.62 *** Internet Auction Giant! *** eBay (NASDAQ:EBAY) is a Web-based community in which buyers and sellers are brought together to browse, buy and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and other miscellaneous items. The eBay trading platform is an automated, topically arranged service that supports an auction format in which sellers list items for sale and buyers bid on items of interest, and a fixed-price format in which sellers and buyers trade items at a fixed price established by sellers. Through its wholly owned and partially owned subsidiaries and affiliates, the Company operated online trading platforms directed towards the United States, Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland and also the United Kingdom. The amazing resilience of eBay has been a popular topic among leading stock market analysts and the good news for the company continued this week when the online auction giant confirmed its second-quarter results would be better than previously forecast because of strong growth in both the U.S. and its international operations. The company also recently announced a deal to buy PayPal, the leading vendor of online payment services, for $1.5 billion in a move hailed by most analysts and eBay's addition to the S&P 500 is expected to attract both public and institutional investors to the issue in the coming weeks. Traders who agree with a favorable outlook for Ebay shares can speculate on its future activity with these positions. EBAY - eBay Inc. $61.62 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 45 QXB TI 1462 0.55 44.45 4.3% "TS" SELL PUT AUG 50 QXB TJ 4283 1.05 48.95 7.6% *** SELL PUT AUG 55 QXB TK 5474 1.95 53.05 9.9% SELL PUT AUG 60 QXB TL 4604 3.40 56.60 13.0% *************** FRX - Forest Laboratories $74.49 *** Solid Earnings! *** Forest Laboratories (NYSE:FRX) develops, manufactures and sells both branded and generic forms of ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. The company's most important U.S. products consist of branded ethical drug specialties marketed directly, or "detailed," to physicians by its Forest Pharmaceuticals, Therapeutics and Specialty sales forces. The company's many products include those developed by Forest and those acquired from other pharmaceutical companies and integrated into Forest's marketing and distribution systems. Principal products include Celexa, an SSRI for the treatment of depression; the respiratory products Aerobid and Aerochamber; Tiazac, a once-daily diltiazem for the treatment of hypertension and angina; and Infasurf, a lung surfactant for the treatment and prevention of respiratory distress syndrome in premature infants. Forest Laboratories was a popular issue today after the company said its quarterly profit rose 67%, much more than expected, on strong sales of its flagship antidepressant drug, Celexa. The drug-maker said net income in its fiscal first quarter jumped to $123 million, or $0.67 per share, from $74 million, or $0.40 per share, a year earlier. Forest also announced that it received a six-month extension for its U.S. monopoly over Celexa through a law designed to encourage testing of drugs in children that are already used in adults. The patent protection now lasts until early 2004 and the extension should provide ample time to get final marketing approval for its new antidepressant, Lexapro, which it claims is more effective than Celexa and has fewer side effects. The drug has already received conditional approval from the U.S. Food and Drug Administration and analysts expect final approval in the coming months. Analysts say the outlook for Forest Laboratories is excellent as it has an established market presence in Celexa and a healthy pipeline of experimental drugs. Traders who think that optimism will translate to higher share prices in the near-term can profit from that outcome with these positions. FRX - Forest Laboratories $74.49 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 60 FRX TL 627 0.80 59.20 5.0% *** SELL PUT AUG 65 FRX TM 850 1.40 63.60 6.5% SELL PUT AUG 70 FRX TN 3098 2.20 67.80 8.1% *************** IDPH - IDEC Pharmaceuticals $41.56 *** On The Rebound! *** IDEC Pharmaceuticals (NASDAQ:IDPH) is a biopharmaceutical company engaged primarily in the research, development, manufacture and commercialization of targeted therapies for the treatment of many cancer and autoimmune and inflammatory diseases. The company's two primary commercial products, Rituxan and Zevalin (ibritumomab tiuxetan), are for use in the treatment of B-cell non-Hodgkin's lymphomas. The company is also developing new products for the treatment of cancer and various other autoimmune diseases such as rheumatoid arthritis, psoriasis, allergic asthma and allergic rhinitis. Rituxan, the company's first product, and Zevalin, its second product approved for marketing in the United States, as well as its other primary products under development, address immune system disorders such as lymphomas, autoimmune and many inflammatory diseases. In addition, the company has discovered other product candidates through the application of its unique technology platform. Shares of IDEC Pharmaceuticals have rebounded in recent sessions on speculation the company's quarterly earnings reports would be favorable. Indeed, Wednesday's announcement was positive as the biotechnology company said that second-quarter net profit jumped 40% as sales of its non-Hodgkin's lymphoma drug Rituxan surged. IDEC's net income increased to $35 million, or $0.20 per diluted share, compared to $25 million, or $0.15 per share, for the same period in 2001. Revenue rose to $97 million from $64 million as as sales of Rituxan, which is co-promoted by Genentech, soared to $257 million with IDEC's share totaling $92 million in the latest quarter. The company's quarterly results also received a boost from sales of Zevalin, a drug that treats lymphoma by delivering radiation directly to cancer tumors. Analysts say the outlook for both drug products is excellent and investors must agree as they have pushed the price of the issue up over 25% in the last week. Traders who believe the bullish trend will continue in the near-term can profit from that outcome with these positions. IDPH - IDEC Pharmaceuticals $41.56 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 30 IDK TF 2459 0.60 29.40 6.8% *** SELL PUT AUG 35 IDK TG 746 1.30 33.70 11.6% SELL PUT AUG 40 IDK TH 281 2.80 37.20 15.9% *************** QLGC - QLogic Corporation $42.80 *** Reader's Request! *** QLogic Corporation (NASDAQ:QLGC) is a designer and supplier of Storage Area Networking infrastructure building blocks. Its SAN infrastructure building blocks, comprised of semiconductor chips, host board adapters and switches, are integrated into storage networking solutions of the world's leading system and storage manufacturers. Companies such as Sun Microsystems, IBM, Dell Computer, Compaq Computer Corporation, Fujitsu Microelectronics, and Hitachi all use some or all of its components in the storage and systems solutions they market to the world's information technology environments. In addition to its original equipment manufacturer relationships with these and other companies, the company provides selected Fibre Channel building blocks through leading distributors, systems integrators and resellers, further expanding its reach and visibility to the information technology community. One of our readers commented on the recent recovery in QLogic's share value and asked if this would be a good candidate for a bullish "premium selling" position. The company has a favorable fundamental outlook with a solid balance sheet and excellent cash flow. Also, analysts at Soundview have a positive outlook for the Storage Area Networking segment and their recent meeting with Hewlett Packard (NYSE:HPQ) suggests the pickup in SAN deployments will continue going forward. Based on the robust option prices, there is a relatively high probability play which will establish a cost basis below $30 while conservative traders can target an acceptable credit at the $25 strike. QLGC - QLogic Corporation $42.80 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 25 QLC TE 1091 0.40 24.60 4.5% "TS" SELL PUT AUG 30 QLC TF 1368 0.80 29.20 8.7% *** SELL PUT AUG 35 QLC TG 4161 1.70 33.30 15.6% *************** BULLISH PLAYS - Credit Spreads *************** TKTX - Transkaryotic Therapies $40.15 *** FDA Drug Review *** Transkaryotic Therapies (NASDAQ:TXTK) is a biopharmaceutical company that develops protein- and cell-based therapeutics for the treatment of a range of human diseases. TKT is building a broad and renewable product pipeline based on three proprietary development platforms: Niche Protein products, Gene-Activated proteins and Transkaryotic Therapy gene therapy. Replagal is the company's enzyme replacement therapy for the treatment of patients with Fabry disease, and it has been granted marketing authorization in the European Union. The company also has the approval to market Replagal in The Czech Republic, Israel, New Zealand, Iceland, Norway and Switzerland. Transkaryotic's quarterly earnings are due July 31. Shares of drug-maker Transkaryotic Therapies soared earlier this week after the U.S. FDA set a September review date for Replagal, the company's experimental drug for Fabry disease. An advisory committee will meet September 27 to discuss the new drug, and the date is important as Transkaryotic Therapies is competing against Genzyme General to bring to the U.S. market a treatment for the rare Fabry disease, a disorder in which fats build up in tissue surrounding the body's major organs causing pain and frequently death. Genzyme's drug, Fabryzyme, will be reviewed by the FDA committee on September 26 but the scheduled order of the panel meetings does not reflect the position of either product with respect to the race for Orphan Drug status in the United States. The news of a September FDA panel meeting to review Replagel has produced a favorable change of character in the issue and the options in this position expire long before the meeting takes place. Traders who believe the stock will remain in a trading range (near $40) until after the FDA review can profit from that outcome with this position. TKTX - Transkaryotic Therapies $40.15 PLAY (moderately aggressive - bullish/credit spread): BUY PUT AUG-30 UFT-TF OI=51 A=$0.65 SELL PUT AUG-35 UFT-TG OI=36 B=$1.40 INITIAL NET CREDIT TARGET=$0.75-$0.90 PROFIT(max)=18% *************** TRMS - Trimeris $43.25 *** Aids Drug Has Potential! *** Trimeris (NASDAQ:TRMS) is engaged in the discovery and development of fusion inhibitors, a new class of antiviral drug treatments. Fusion inhibitors impair viral fusion, a complex process by which viruses attach to and penetrate host cells. If a virus cannot enter a host cell, the virus cannot replicate. By inhibiting the fusion process of particular types of viruses, the company's drug candidates under development offer a novel mechanism of action with the potential to treat a variety of medically important viral diseases. Trimeris is a company in the development stages and has invested a significant portion of its time and financial resources in researching T-20, its lead drug candidate, thus is dependent on that product for its overall success. Shares of Trimeris rebounded this week after the company reported that its T-20 now has fast track designation from the U.S. FDA for for the treatment of HIV-infected individuals. Data released by drug-maker Roche Holding AG of Switzerland and Trimeris suggests that T-20 greatly reduces the amount of virus in the blood of many patients running out of treatment options. An article in The Wall Street Journal also noted that T-20, a new class of HIV treatment called a fusion inhibitor, will likely be approved in the U.S. and Europe early next year and may reach the U.S. market in the first quarter of 2003. Investors are obviously betting on a successful outcome for the company's extensive research program in T-20 and traders who share that optimism can speculate on the near-term share value of TRMS with this position. TRMS - Trimeris $43.25 PLAY (conservative - bullish/credit spread): BUY PUT AUG-30 RQM-TF OI=10 A=$0.50 SELL PUT AUG-35 RQM-TG OI=199 B=$1.00 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% *************** Neutral Plays - Straddles & Strangles *************** ERTS - Electronic Arts $63.00 *** Premium Selling! *** Electronic Arts (NYSE:ERTS) operates in two principal business segments globally: EA's Core business segment comprises the creation, marketing and distribution of entertainment software, while the EA.com business segment is composed of the creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and Website advertising. Electronic Arts is a great candidate for premium-selling, based on the underlying issue's technical background. ERTS exists in a relatively stable trading range near $60-65 and the short-term indications suggest the current trend will continue. Traders who enjoy neutral "premium-selling" strategies should consider this position and those who agree with a bullish bias for the issue should plan to cover or adjust the sold (call) options on any heavy-volume rally beyond $67. ERTS - Electronic Arts $63.00 PLAY (aggressive - neutral/credit strangle): SELL CALL AUG-70 EZQ-HN OI=3814 B=$1.60 SELL PUT AUG-50 EZQ-TJ OI=3355 B=$1.10 INITIAL NET CREDIT TARGET=$2.75-$2.90 PROFIT(max)=18% UPSIDE B/E=$72.75 DOWNSIDE B/E=$47.25 *************** BEARISH PLAYS - Naked Calls & Combinations With the July expiration period coming to an end, traders will be looking for new portfolio positions for the month of August. Here are some favorable candidates for bearish positions, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may also be higher than other plays in the same strategy based on disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about the future outcome of the position. *************** BZH - Beazer Homes $61.40 *** Misallocation News! *** Beazer Homes (NYSE:BZH) designs, builds and sells single family homes in various locations within the United States: Florida, Georgia, North Carolina, South Carolina, Tennessee, Arizona, California, Colorado, Nevada, Texas, Maryland, Pennsylvania, New Jersey and Virginia. The company designs its homes to appeal primarily to entry-level and first time move-up homebuyers. The company's objective is to provide its customers with homes that incorporate quality and value while seeking to maximize its gain on invested capital. The company's homebuilding and marketing activities are conducted under the name of Beazer Homes in each of its markets except in Colorado (Sanford Homes) and Tennessee (Phillips Builders). BZH - Beazer Homes $61.40 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL AUG 65 BZH HM 64 3.10 68.10 13.1% SELL CALL AUG 70 BZH HN 152 1.60 71.60 9.2% SELL CALL AUG 75 BZH HO 150 0.80 75.80 6.2% *** *************** EXPE - Expedia $58.70 *** Looking For A Bottom! *** Expedia (NASDAQ:EXPE) is a provider of travel-planning services. Expedia's global travel marketplace includes direct-to-consumer websites offering travel-planning services located at Expedia.com, Expedia.co.uk, Expedia.de, Expedia.ca, Expedia.nl and Expedia.it. Expedia also provides various travel-planning services through Voyages-sncf.com, as part of a joint venture with the state-owned railway group in France. In addition, the company offers travel planning services through its telephone call centers and through private label travel Websites through its WWTE business. WWTE is a division of Travelscape, one of the company's many wholly owned subsidiaries. In February 2002, a controlling stake in Expedia was acquired by USA Networks. EXPE - Expedia $58.70 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL AUG 65 UED HM 492 2.10 67.10 11.0% SELL CALL AUG 70 UED HN 398 1.00 71.00 7.7% *** SELL CALL AUG 75 UED HO 209 0.40 75.40 3.3% "TS" *************** SPW - SPX Corporation $98.75 *** Auto Industry Slump! *** SPX Corporation (NYSE:SPW) is a worldwide provider of technical products and systems, industrial products and services, flow technology and service solutions. SPX offers networking and switching products, fire detection and building life-safety products, television and radio broadcast antennas and towers, life science products and services, transformers, compaction equipment, high-integrity castings, dock products and systems, cooling towers, air filtration products, valves, back-flow protection and fluid handling devices, and metering and mixing solutions. The company's products and services also include specialty service tools, diagnostic systems, service equipment and technical information services. The company's products are used by a broad array of customers in many industries including chemical processing, pharmaceuticals, infrastructure, mineral processing, petrochemical, telecom, transportation, financial services and power generation. SPW - SPX Corporation $98.75 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL AUG 110 SPW HB 140 2.70 112.70 8.8% SELL CALL AUG 115 SPW HC 54 1.45 116.45 6.0% *** SELL CALL AUG 120 SPW HD 7 0.80 120.80 3.9% "TS" *************** ABC - AmerisourceBergen $64.50 *** Premium-Selling Play! *** AmerisourceBergen (NYSE:ABC) is a pharmaceutical services company dedicated solely to the pharmaceutical supply chain. The company markets its pharmaceutical products and services to hospital systems (hospitals and acute care facilities), alternate care customers (mail order facilities, physicians' offices, long-term care institutions and clinics), independent community pharmacies, and regional drugstore and food merchandising chains. The firm also provides outsourced pharmacies to long-term care and worker compensation programs. AmerisourceBergen operates in two primary market segments: Pharmaceutical Distribution and PharMerica. The Pharmaceutical Distribution is primarily the company's wholesale and specialty drug distribution business, and PharMerica is the company's institutional pharmacy business. The company's second quarter earnings are due July 31. ABC - AmerisourceBergen $64.50 PLAY (conservative - bearish/credit spread): BUY CALL AUG-80 ABC-HP OI=564 A=$0.50 SELL CALL AUG-75 ABC-HO OI=523 B=$0.95 INITIAL NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11% *************** BRL - Barr Laboratories $56.45 *** Generic Drug Slump! *** Barr Laboratories (NYSE:BRL) is a pharmaceutical company engaged in the development, manufacture and marketing of generic and proprietary prescription pharmaceuticals. The firm was formed in October 2001 as the result of a merger between a subsidiary of Barr Laboratories and Duramed, in which Duramed became a wholly owned subsidiary of Barr. Barr sells approximately 85 pharmaceutical products, representing various dosage strengths and product forms of approximately 35 chemical entities. Barr's product line focuses principally on the development and marketing of generic and proprietary products in the oncology and female healthcare categories, including hormone replacement and oral contraceptives. Duramed develops, manufactures and markets a line of prescription drug products in tablet, capsule and liquid forms. Duramed's products include those of its own manufacture and those it markets under arrangements with other manufacturers. BRL - Barr Laboratories $56.45 PLAY (conservative - bearish/credit spread): BUY CALL AUG-70 BRL-HN OI=331 A=$0.25 SELL CALL AUG-65 BRL-HM OI=120 B=$0.85 INITIAL NET CREDIT TARGET=$0.65-$0.70 PROFIT(max)=15% *************** SLM - SLM Corporation $86.05 *** Sell-Off In Progress! *** SLM Corporation (NYSE:SLM), formerly USA Education, is a private source of funding, delivery and servicing support for higher education loans for students and their parents in the United States. SLM provides a range of financial services, processing capabilities and information technology to meet the needs of educational institutions, lenders, students and other guarantee agencies. The company's managed portfolio of student loans, including loans owned and loans securitized, is approximately $70 billion, of which over 90% is federally insured. SLM also has commitments to purchase over $20 billion of additional student loans. Primarily a provider of education credit, the company serves a diverse range of clients, including over 6,000 educational and financial institutions and guarantee agencies. The company serves in excess of seven million borrowers through its ownership or management of student loans. SLM - SLM Corporation $86.05 PLAY (conservative - bearish/credit spread): BUY CALL AUG-100 SLM-HT OI=12 A=$0.35 SELL CALL AUG-95 SLM-HS OI=50 B=$0.90 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% *************** SEE DISCLAIMER ***************************** ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. 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