The Option Investor Newsletter Wednesday 07-24-2002 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) ******************************************************************* 07-24-2002 High Low Volume Advance/Decl DJIA 8191.29 +488.95 8202.02 7532.66 3218 mln 1949/1269 NASDAQ 1290.23 + 61.18 1290.40 1192.42 2207 mln 2003/1443 S&P 100 419.98 + 23.23 420.48 384.96 totals 3952/2712 S&P 500 843.43 + 45.73 844.32 775.68 RUS 2000 378.56 + 14.57 378.56 354.11 DJ TRANS 2183.92 + 23.57 2190.48 2090.32 VIX 45.29 – 5.19 56.74 44.92 VIXN 65.59 – 0.80 69.73 64.55 Put/Call Ratio 0.87 ******************************************************************* To The Moon Alice Today started off looking like a continuation of the recent plunge. Support at 7400 on the Dow looked sure to be tested. We traded as low as 7532.66, before rallying back more than 650 points, all the way to 8191.29. The Dow closed up 488.95 points, for the second largest point gain ever. A rumor that the Federal Board of Governors might hold an emergency meeting to lower interest rates may have been the catalyst. One other theory advanced by our Senior Market Technician, Jeff Bailey, is that the bearish count on the 5-year Treasury YIELD of 3.30% had been achieved, possibly triggering an institutional buy program on stocks that were rotating cash out of bonds and into stocks. The thinking goes that some institutions moved their cash, generated from selling equities, into treasuries, earlier this year when the YIELD was higher. When the YIELD reached its bearish vertical count this morning it may have triggered some models away from the 5-year YIELD to lock in gains on the price, and shift the cash back to stocks. There are plenty of theories as to what caused this rally, but I suspect it is a result of the coil being wound a little too tightly the last couple of weeks. Remember the Dow had given up more than 1800 points since July 5th, including this morning’s low. A bear market rally, retracing half of that move, would amount to a 900-point bounce. Chart of the Dow Retracement The bounce from the 7500 range wasn’t that far off from predictions of 7400, which had permeated the market. These predictions looked back to support in January and August of 1998, as well as October of 1997. The rallies following these support levels in 1998 both reached the 9000 mark. Monthly Chart of Dow The S&P 500, which had lost more than 100 points over the last four days, rallied back 45.69 points, making back almost half its losses since last Thursday, to close at 843.43. The S&P had fallen through support at both the 900 and 800 levels in a very short time and looked ready to test the 700 mark soon. But certainly not today. The Nasdaq Composite ($COMPX) also looked ready to set new lows, breaking support at 1200 as it traded down to 1192.42 to start the day. The index followed the rest of the market and finished the day up 61.18, more than 5%, to close at 1290.23. The Market Volatility Index ($VIX) soared this morning, reaching a new relative high of 56.74, within 0.54 of last September’s high, before falling to 45.29 on the rally. Only three times previously has the volatility index reached over 50: October 1997, October 1998, and September 2001. In the past, extreme reading from the VIX, which reflect the volatility level of the options on the S&P 100, have foreshadowed a rally in the market. Chart of The Market Volatility Index The Gold and Silver index ($XAU.X) even got a reprieve, after being beaten up badly this week. The index had fallen from a 71.29 close on Friday, all the way to this morning’s low of 56.05, before staging a convincing rally to close at 62.96, up 3.72 on the day. The day started out with images of the Rigas family being led off in handcuffs, after looting Adelphia Communications for hundreds of millions of dollars. Company founder John Rigas, his two sons Timothy and Michael, and two other executives are accused of schemes which provided them funds to purchase stock , cover margin calls, and even begin construction on a golf course, all at the expense of company investors. This was followed by news that the House of Representatives and the Senate have agreed on a corporate reform bill. This bill will establish a new independent oversight board, overseen by the SEC, which has the power to investigate and punish accounting firms that audit publicly traded companies. The new laws also focus on separation of stock analysts from investment banking services within the same firm. Tougher criminal penalties, as well as extending the timeframe investors have to file lawsuits are also part of the reforms, along with additional protection for corporate whistleblowers. In a provision aimed at executives who sell stock before a company bottoms out, there are also provisions that prevent company insiders from selling stock during a blackout period during which workers cannot make changes to their pension plans. Amazon.com, which released earnings after the bell yesterday, posted a narrower than expected loss. The stock, however, was hammered early, opening down more $2.18, before riding the rally up to close within $0.45 of yesterday’s close. More interesting, however, is their announcement that they will begin expensing employee stock options as part of their accounting. Many companies used stock options as an alternative to higher salaries during the boom-boom late 90s, which were not counted against the bottom line. This practice, which has received much attention the last few months in the wake of exposure of "creative accounting" procedures at many companies, is surely to take a chunk out of the bottom line. TIAA-CREF, pension fund administrator and one of the nation’s largest institutional investors, came out with the announcement that they are sending requests to 1754 companies, asking that they now expense these options when reporting earnings. This practice could significantly reduce earnings numbers in the future for many companies, depending on how many are currently excluding this cost. Merrill Lynch announced that they will now include GAAP (generally accepted accounting principles) numbers in their research reports on companies. This could significantly alter the financial appearance for many corporations, who have been reporting pro-forma numbers. GAAP includes one-time charges, while pro-forma does not. If a company is forced to write down the value of a purchase, settle a lawsuit, or restructure, these expenses are not currently reported under pro-forma guidelines. The flip side to this is that one-time profits, such as selling off a unit, are also included. The Nasdaq announced today that they are awaiting approval of a new exchange, which will list futures on individual stocks. It has been rumored for some time, and now appears to be close to reality, with Nasdaq/LIFFE rep Tom Ascher stating that if approved, the new exchange would open sometime this fall. What does this mean to the options business? Calls and puts are currently priced in relation to one another according to a finite formula, which takes into account the interest cost of carrying a long stock position, and the dividends that the stock pays. The ability to hedge option positions with futures, which have none of these characteristics, could drastically alter option pricing on equities. It will also provide a third leg in the option- stock arbitrage formula, as stock futures will fluctuate around the current value of a stock based on what the belief is about the direction the stock is headed. This can be seen currently in the way the S&P futures operate independently of the 500 stocks on which they are based, although they must eventually come into line as arbitrageurs take advantage of discrepancies. These futures will also carry a 20% margin requirement, as opposed to the current 50% margin requirement for equities, which will allow more investors to trade them. Another important aspect of these futures is the ability to sell short. The uptick rule, which prevents short sellers from selling on downticks, was put in place to prevent markets from getting hammered by those already short an issue. These single-stock futures will allow this type of activity. This will also allow certain types of option positions, which require the shorting of stock by market makers as a risk hedge, to be initiated more safely. Liquidity may improve in equity option markets, as orders for these types of trades now remain unfilled until there is a stock uptick. After the bell, the big news was AOL/Time Warner, which released earnings and a little bit of news as well. The company reported earnings of 24 cents a share, which beat analyst’s expectations of 22 cents. Revenue was also higher that expected. CEO Richard Parsons said, however, that while subscriber revenue was up 20%, on-line advertising revenue was down 42%. Parsons also said that he sees no evidence of an on-line advertising rebound . The big news, however, is that AOL is the target of a federal accounting probe, looking into unusual accounting practices, originally revealed by the Washington Post. CFO Wayne Pace stated that the company’s results were audited and signed off on by Ernst and Young. Ernst can’t be too happy about the probe after seeing what happened to Arthur Andersen. AOL, which closed at $11.40, was trading down at $10.65 after hours. Tomorrow should be quite a test to see whether the rally holds. Some pull back can be expected, however if it is small, the bulls may be back in business. As we warned in last night’s market sentiment, a continued rally does not necessarily mean the end of the bear market. It could however, provide some terrific trading opportunities. Steve Price ******************** INDEX TRADER SUMMARY ******************** "FEAR INDEX" REPEAT by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - Everyone has taken to calling the CBOE Volatility Index (symbol: $VIX.X) the index of market-related "fear" - with the idea that when fear gets really extreme, it forecasts a market bottom. How about today versus the post 9/11 low on Sept. 21. The VIX today almost exactly repeated the pattern of a sharp "spike" up to a peak followed by a sharply lower close from this peak - and an associated sharp turnaround in the S&P from its daily low. 9/21/01 - VIX: High: 57.3, up from low of 45 the day before; CLOSE: 49, down 14% from the intraday peak OEX low: 480 - close: 491 7/24/02 - VIX: High: 56.7, up from low of 47 the day before; CLOSE: 45.3, off 20% from its intraday top OEX low: 385 - close: 419 REASONS - A lot, from the factual, including a rebounding dollar of late, a rebounding bank/financial sector led by a very oversold JP Morgan (JPM - up 16%) and Citigroup (C - up 9.6%) and likely Senate/House agreement on STRONG accounting reforms, to the whimsical - such as a rumor (from the Futures floor - where else!) about an "emergency" Fed meeting to lower interest rates. The "defining" moment of the day for me - especially for it's "psychological" boost, was the picture of senior executives of Adelphia being led off in handcuffs. I had the feeling that this was the "emotional" turn in sentiment to a more optimistic bullish one just as it was in the post-1987 crash years when the same handcuff scene was seen of corporate raider, Leon Boesky, busted for profiting from "inside information". Another telling event was the House/Senate compromise on the tougher Senate bill on accounting reforms, that included an independent audit oversight board with broad powers to both investigate and punish accounting firms that audit public companies - admin will be by the S.E.C. Added criminal penalties seemed to be another aspect well cheered by investors! Art Cashin, the old seasoned floor pro, that is one of the more listened to floor "guest" commentators for CNBC, had it exactly right today when he said that the "reason he said yesterday that there was an increasing chance for a big turn in the market" basically reiterated a point I made last night and notated on the Wednesday OEX chart below. There is a striking change in a market going down in an orderly fashion which we've had for weeks - one, with falling prices following a downtrend channel for a prolonged period and that is a more gradual decline - when you draw the line it has a moderate "slope" to it. Then comes a sea change - the selling picks up such that prices fall "through" the floor of this channel and go into "free fall" so to speak. Such a move results in a chart pattern that goes from tracing out a downward sloping "arc" to one that falls over the (right hand) "edge" of a more "circular" pattern. The resulting downtrend now starts to come closer to following a vertical line down. This is a "free fall" stage of "panic" - the accelerating down move is a last dramatic "capitulation" or "throwing in the towel" on stocks. When the pain of seeing the falling value of your investment accounts says "GET ME OUT!" My OEX charts from YESTERDAY (Tuesday) - with chart notation about the "straight vertical fall" of the past week: You'll notice how OEX "fell out" of the broader LESS STEEP hourly downtrend channel (between the dashed magenta lines) which the S&P 100 Index had been in many weeks and instead started the VERY steep decline defined by the steep solid green lines. A sure tip off that a major "turning point" is near is from the type pattern I've described of vertical "crash" type drop - as seen on the chart above BEFORE the turn. Going from BEFORE to AFTER, is the UPDATE of the OEX chart through today (Wed.) - S&P 100 (OEX) Index - Daily/Hourly charts: Assuming that the OEX can get above near resistance around 420, I see upside potential back up to the 440 area of the gap. Downside support should be found on pullbacks to the 400-405 area. The market may well have put in a "tradable" bottom for a longer time frame than past recent rallies - where 2-3 days was a maximum duration. Perhaps we'll now see an upward bias for 2-3 weeks rather than days this time. Certainly a DROP in volatility will make long calls and puts a lot cheaper to play versus the recent high price of entry into long index options positions "carrying" so much premium. S&P 500 (SPX) Index - Hourly chart: Well, ONLY a slide of another 20 points (under prior Tues's low at 796) and a re-drawn lower trendline as you see above, before there is a final "3rd." point at 776 for the line defining the downtrend channel. Meanwhile, the 5-hour stochastic model merely bottomed at a higher high at that point, a divergent buy "signal". 876 is next chart resistance, at the prior swing low (see the SPX hourly chart) and there is a tendency for prior lows to "become" resistance on a rebound. This is because this is first point where people who bought that bottom can get out at "break even" and some will do so. More major resistance is apparent in the 900 area - the fall through 900 preceded the recent sharp free fall - so, 900 was the recent "breakdown" point. Expect substantial resistance in this area. A lot more market players bought this area, as it was the low end of an trading range for a 3-day period. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: A 75 target, to the low end of its broad channel, presented itself clearly on the Weekly chart. I wish I had taken better note of this channel line ahead of today as the Dow gave the best set up for finding the low for this move. Hourly chart resistance comes in at 84-84.5, then 86; finally, at 88, back up at the top of the broader hourly downtrend channel for DJX. I think we could be about midway in a move and this would suggest a 88 target and then some. Support is 77-78 - buy the DJX index calls on a move back into this range; between 7700 and 7800 on the Dow. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: Ha, the 22 area turned out to be a support turn around point in the QQQ Nas 100 tracking stock. Today's turnaround was from the area of the "narrower" steep set of (dashed lines) trendlines "bracketing" the recent steep downswing in the Q's. So what next - a fair amount of technical resistance is not far over head, starting around 24 and extending to 24.5. It’s a touch "slog" from there to 26.5, which was the last rally high. The Nasdaq rally today seemed noteworthy to me for the nervousness of its buyers/potential buyers. Tomorrow ought to tell us if the old time enthusiasm for the tech "beauties" will come back with so much of the bloom off those "roses". Ah, an old flame still can rock! With the Q's I'm mildly bullish but a lot depends on some upside follow through from MSFT, CISCO and INTC. ORCL and QCOM seem rally-ready, but there is still this tentative feeling to a rally and spill over buying owing as much to the S&P rally as to a real tech BASH. Institutions are more focused on the S&P right now and individual still feel tentative - when this market, so much more driven by the online set, catches a wave of enthusiasm, we will see it in the key stocks just noted. AND, a THREE day rally is probably going to be needed to pull in more traders. We have had 2-day affairs but not longer - if the market went out firm on Friday and DIDN'T fall apart on Monday, we could even have a brief spot of "panic buying" - it happens on the upside too - the panic is "oh NO, I'm going to miss this rally!". MINI "TRADER'S CORNER" - PROGRAM TRADING A "shoot the messenger" take on Program Trading has been made by investors and traders that have been seeing the recent volatility in the market as owing all to a lot of big "buy and sell programs". There is greater and greater volatility, so funds that have to reduce their holdings or perhaps "re-weight" their portfolios, turn increasing to simultaneous selling/buying the stocks involved so that the prices they get are in line with the S&P Index. Small traders note the greater number of program style trades and the "wake" involved from these big block trades - and, they tend to complain about it as making it impossible to trade the market. I say, "Fuggetabotit! Yes, "program trades" have accounted for as much as 40% of total daily NYSE volume just lately - up from a more "typical" (for this stage of a bear market) 30%. But this is more a function of individual investors staying away and reducing the volume. Who is left? - the funds that you and I invest in, and they have to respond to the market changes. An efficient (less costly) way for them to do that is by executing "blocks" of stock at the same time. By the way, we're not talking about that variety of program trading that is involved in stock index futures arbitrage with a basket of the stocks underlying the index involved. And, an article by the Wall Street Journal today quotes a Big Board (NYSE) "spokesperson" as stating that "Arbitrage" accounts for maybe 10% of the total. This is consistent of my knowledge of it in terms of volume levels - Index Arbitrage opportunities are far more limited in the ABSENSE of the bullish "sentiment" that frequently bids up the S&P futures premiums to well over "fair value". The definition noted for what is a "program trade" - the NYSE defines as: "any trade valued at a minimum of 1 million dollars and where more than 15 different stocks are bought or sold at once". A million actually is only small potatoes, as individual program trades can easily have a value of $100 million and more - such as a major rebalancing of a major pension fund - such resulting program trading could involve 2-3 Billion, with a "b". The funds believe or theorize that Program trading block transactions can help "steady" the market as it falls, spreading losses around a variety of stocks that might be in firm's portfolio. Well, that's one side of it! Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *********** OPTIONS 101 *********** So Many Requests, So Little Time by Mark Phillips mphillips@OptionInvestor.com It seems that at least once a week lately, I'm forced to change ships midstream because the pace of this market's decline is surpassing even my most pessimistic assumptions from just a few weeks ago. Myriad factors are arrayed against the markets and the scandal in the Financials (thanks to C and JPM being shown to have really been in bed with Enron) that surfaced yesterday is just the latest iceberg to hit the Titanic. Needless to say, that Chinese proverb/curse about living in interesting times has been ratcheted up a few notches. I had a completely different article all ready to go for today, which I think many of you will find quite interesting, but it will have to wait until next week. It centers on the issue of who stands behind the options/LEAPS that we buy if we really have a substantial market decline (as if we aren't in the middle of one already!). Somebody sold those options that we bought, and the question (How do we know there will be a market for that LEAP when we want to sell it for a profit?) is one we should all ask at some point in our option trading careers. Suffice to say, the answer is rather interesting, especially as it pertains to index LEAPS, but as I said above, we have bigger fish to fry here tonight. Over the past few days, I've had several readers who have requested some detailed information on index LEAPS and where we might look for longer-term trades with the major indices having fallen so far, so fast. We've talked about it numerous times in the LEAPS column, that the ideal time to purchase LEAP Calls is when the VIX is at an extreme high. Well, with the VIX closing at an all-time high of 50.48 yesterday, it certainly seems like there could be some truly attractive LEAP Call trades to take when this crazy market stops falling. Like all of you, I'd give my eye teeth to know at what level on any major index this selling would come to an end, even if that end is just temporary. Unfortunately, my crystal ball is currently non-functional, but the last reading I got said that a DOW in the 7300-7400 area and the S&P 500 in the vicinity of 730-740 looked like a high-odds bet. Unfortunately we seem to have a ways to go before reaching those extreme levels. But trying to pick what those support levels that hold will be is an exercise in futility so long as there are no sustained signs of strength. Rather than spend our time here trying to put together a LEAPS play on the indices that may or may not set up for us, I thought it would be instructive to review which indices have LEAPS available, what their advantages and disadvantages are and how we might best use them to our financial advantage. S&P 500 - The granddaddy of the indices, the S&P 500 or SPX is the index of choice for the professionals and as such is only for those with deep financial pockets when considering a viable LEAPS trade. When buying a LEAP call, we want to purchase the LEAP out of the money, but not so far that we have to have a huge move before seeing our LEAP begin to appreciate. I'm writing this on Tuesday night, and the SPX closed just south of 800 for the first time in over 5 years. But lets assume for the sake of argument that this is the bottom and we want to buy a LEAP call at current levels. What strike would we pick and how far out in time? Even that question is a bit convoluted, as the expiration months on index LEAPS are different than for individual equities. While equity LEAPS all have an expiration in January of the specified year (2003, 2004 or 2005), index LEAPS adhere to the following schedule: March 2003 June 2003 December 2003 June 2004 Obviously, the expiration month you choose will depend on the timeframe over which you expect the rebound to take place. Given the fact that most pundits are now admitting the 2002 recovery is DOA and some are calling into question the probability of a 2003 recovery, I would personally opt for as much time as possible and go for the June 2004 LEAPS. Another part of my rationale is that I know from my experience with equity LEAPS, that the further out in time I go, the less effect volatility has on the option premium. With volatility as measured by the VIX currently sky-high, going as far out in time as possible helps to insulate us from the volatility factor. If we are looking for a shorter-term trade (say on the order of 2-5 months), then we'll want to pick a strike that is closer to the money, perhaps the 900 strike. On the other hand, if we're expecting that this bottom will be THE bottom and want to hold for the duration, then we might feel comfortable with a strike further out of the money, maybe even the 1050 strike. So let's look at some prices to see what the price of admission is. The JUN-04 900 Call is currently trading for a cool $6740, while the JUN-04 1050 Call is being offered at a mere $2930. While that latter option may seem like a downright bargain, note that it would require a 125 point move in the SPX (ignoring the effects of volatility and time decay) to give us a double on the trade. [I'm making this estimate based on the fact that the 925 strike is currently trading for $5930, roughly double the current value of the 1050 strike.] Making a similar assessment of the 900 LEAP Call shows that the same 125 point move in the index would yield closer to a 90% return. So if holding for the big move over a long period of time (9 months or more), we might do better by selecting the strike further out of the money. However, if we are looking for a smaller move in the index, we would do well to select the strike closer to the money, so we don't have to wait for an extreme move before seeing our LEAP begin to appreciate. Those strikes that are FAR out of the money will actually start to see a fair amount of premium decay as volatility decays back nearer to its normal range, and this can offset a large portion of the expected premium increase as the index moves in our favor. Here's an exercise that you can all do at home to evaluate the risks and rewards of picking different strikes. Go to the CBOE site and pull up a complete option chain (including LEAPS) for the SPX and look at the different prices for different strikes. Then you can make assumptions for how far you expect the index to move and then come up with a reasonable future estimate of the price of that option after the move has occurred. For instance, if the JUN-04 800 Call currently costs $11,300, and the JUN-04 700 call currently costs $16,750, I can conclude that an at the money JUN-04 LEAP will increase in value by roughly $5400 with a 100-point upward move in the SPX. By going through the option chain, you can quickly zero in on which combination of expiration month and strike price best fits into your trading plan. I hadn't intended to spend this whole article talking about the SPX, but here I am, already running out of room. Let's see if I can cover the other majors in a more abbreviated manner. Dow Jones 30 - As most of you are probably aware, you can't buy options on the DOW, but the DJX.X index is a capable proxy, as it is 1/100 the size of the actual DOW. When the DOW is at 9000 (I can dream, can't I?), then the DJX is at 90. Expiration months here are the same as for the SPX, with the notable exception that the series currently ends with DEC-2003 since the JUN-04 strikes have not been released. I actually prefer trading the LEAPS on the DJX to the SPX due to the fact that the contracts are more reasonably priced. A DEC-03 $80 strike is currently priced at $840, which is notable since that is practically an at the money option. It isn't the absolute cost that I care about, but the ease with which you can tailor your trade size. Large traders with mid-6 figure accounts can quite easily pick up a dozen of the SPX LEAPS without exceeding a prudent threshold of having no more than 15% of their account at risk in a single trade. For the little guy, with a $50,000 account, one JUN-04 $925 Call is all that can be purchased without exceeding that 15% threshold. Playing in the SPX arena is too rich for this smaller trader, in my opinion, as it denies him the flexibility of entering the trade in stages, or taking partial profits as the trade works in his favor. On the other hand, this smaller trader could pick up 5 contracts for $3000, then another 5 for $4000 after the trade begins to work in his favor, for a total account allocation of $7000 (or 14%) in the trade. Then as the trade becomes profitable, you can sell 2 contracts here or 3 contracts there to lock in profits on the way up. I love that flexibility! NASDAQ-100 - LEAPS aren't really available on the NDX, but as capable option traders, you all know that it isn't necessary, when we have the NASDAQ-100 Trust (the first of the Merrill Lynch HOLDRs), otherwise known as the QQQ. Strikes are nice and close together and we have strikes (that conform to the expiration month pattern of normal equities) out to JAN-04 currently with JAN-05 scheduled to arrive soon. For those that like to trade the QQQ and have a feel for the way it moves (and of course have a bullish outlook on Technology), this can be a great way to go. As a single data point, the JAN-04 $25 Call on the QQQ is currently trading for just $350. Going through the estimation exercise I outlined in the SPX section above shows that a move of about 6 points or 240 NDX points would yield a double on that LEAP. If you prefer to focus your trading in the Technology realm, the QQQ LEAPS provide the same advantage as the DJX does, that of flexible position sizing. Other HOLDRs - While I don't have space to go into any details here, there are LEAPS available on a few of the other Merrill Lynch HOLDRs, namely the SMH (Semiconductor HOLDR), BBH (Biotech HOLDR) and HHH (Internet HOLDR). If you're looking for a way to use LEAPS to trade the longer-term trend in any of these sectors, then these instruments definitely merit a closer look. While our discussion here tonight has been necessarily brief, hopefully it has at least given you some food for thought and some ideas where to look for LEAP trades on the major indices, as well as enough knowledge to weigh the pros and cons of which index to focus on. I know there are likely many gaping holes in this article, which will generate plenty of questions. Send them my way and we'll explore them together in this forum as time permits on a week-by-week basis. In the meantime, I'll see if there isn't a way to squeeze a couple more of these indices or HOLDRs into our weekend visits in the LEAPS column. Have a great week! Mark ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 7/24 by Leigh Stevens "What a difference a day makes, 24-little hours" - I might have thought that I dreaming, not singing, when I looked at every one of the sectors I follow showing ONLY "green" - my Q-charts background when an item is up on the day. UP on Wednesday - DOWN on Wednesday - Only the Goldman Sachs precious metals index ($GPX.X) was down and it is more tied to the physical metal prices than the stocks. The Gold & Silver sector index (XAU) was up some 6% even. UPSIDE REVERSAL PATTERNS - The criteria for an upside reversal is a move to new low, or under prior support, followed by a sharp rebound to above the prior close or, an even stronger "signal", to above the previous day's high. This pattern seen especially in: The Bank Index (BTK), the Amex Composite (small cap), Biotech, the PC "Boxmakers" (BMX), the Cyclical sector (CYC), the (NYSE) Financial Index (NF), Defense (DFI), Forest & Paper Products (FPP), Healthcare (HMO), Oils (OIX), Drugs (DRG), Retail (RLX), the Russell 2000; small caps (RUT), Software (GSO), Broker- Dealers (XBD), and the Dow Transports (TRAN). SECTOR TRADE RECOMMENDATIONS & REVIEW - NEW/OPEN TRADE RECOMMENDATIONS - WAITING TO SEE UPSIDE FOLLOW THROUGH TO THIS RALLY - I HAVE BEEN DOWN THIS ROAD BEFORE! - AND WHY I AM STOPPED OUT OF RECENT LONG POSITIONS. MOREOVER, THE SECTORS ARE TOO LOW TO CONSIDER BEARISH PLAYS JUST YET. OPEN POSITIONS - NONE TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHT - One of the more dramatic turnarounds today was the very oversold Bank sector - and a key sector it is, as it tends to be a bellwether for our economic health. The sector was lead by a rebounding JP Morgan (up 16%) and an embattled Citigroup (+10%). Bank Index ($BKX.X) STOCKS: BAC; BBT; BK; C; CMA; FBF; FITB; GDW; JPM; KEY; KRB; MEL; NCC; NTRS; ONE; PNC; SOTR; STI; STT; USB; WB; WFC; WM; ZION PRIOR COMMENTS: Noted the significant double top in place in 916- 918 area - such a significant top would typically lead to a very substantial decline. 692 was the prior low made back in Sept - this is a key level for BKX to surpass if a rally is going to gain traction and lead to a substantial longer-term rally. Odds favor another sell off later, as it seems doubtful that the Banks will not "build" a base and establish a series of lows over this year. That said, BKX could nevertheless rebound further, to resistance apparent in the 750 area, which is the current "best" upside I see currently, before another downswing. LAST UPDATE: 7/24 Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* 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 07-24-2002 Copyright 2002, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** STOP-LOSS UPDATES ***************** JNJ - call Adjust from $40 up to 46.50 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ AZO $67.19 +5.46 (-2.31) AZO followed the market rally up over $5 today. The OI stop loss of $64.00 was crossed and we have closed this position. AZO’s candlestick chart now shows a bullish engulfing pattern, encompassing the movement of the last two days, and within 0.05 of a third. Be careful about turning too bullish, AZO could still see significant resistance at the 200- dma and the $70 level. CTX $47.64 +2.13 (+1.89) Centex rallied on a big day for the market. It crossed resistance at $45, and continued through our stop loss of $47.00, just above Monday’s high of $46.80. This rally may have have been the result of fellow homebuilder Ryland (RYL) reporting higher second quarter earnings than expected and raising its full year earnings estimate. Homebuilder Pulte (PHM) was also upgraded today by JMP Securities. We have closed this position. Bears might be waiting at overhead resistance of $49.00 and again at $50.00. GS $70.85 +3.12 (-6.15) Goldman Sachs rallied today, following other financials Citigroup and J.P. Morgan, crossing our stop loss of $70.00. In spite of this issue’s triple bottom point and figure breakdown at $69.00, we have closed this position, as GS was able to cross back through resistance at $70.00. OI feels a move back below $69.00 could provide an a new entry point, and we will reassess this issue in the future. LEH $53.20 +2.59 (-1.27) Lehman Bros. rode the market rally up through our stop loss of $52.25. LEH followed the financial sector higher, led by Citigroup and J.P. Morgan, which rebounded from huge losses this week. LEH also announced the indefinite postponement of the IPO of Cinemark Inc., one of the country’s largest movie theater chains, for which Lehman was lead underwriter. OMC $50.96 +4.24 (+0.98) Omnicom rallied with the broader markets today, just crossing the OI stop loss of $50.00. This stock has rolled over since its recent move from $36.50 took it to $54.20 and back down again. Although we closed this position, a move back down will lead to a reassessment and possible re-entry for bearish trades. ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************* PLAY OF THE DAY - PUT ********************* MHK - Mohawk Industries Inc. $43.50 -1.48 (-2.40for the week) Company Summary: Mohawk is a leading supplier of flooring for both residential and commercial applications and a producer of woven and tufted broadloom carpet, rugs, ceramic tile, laminate, wood and an array of home product including pillows, throws, bedspreads and other textiles. The Company designs, manufactures and markets premier brand names, which include "Mohawk," "Mohawk ColorCenter," "Floorscapes," "Aladdin," "Bigelow," "Custom Weave," "Durkan," "Galaxy," "Helios," "Horizon," "Mohawk Commercial," "World," and "Wunda Weve," "Goodwin Weavers," "Karastan," "Mohawk Home," "Newmark" Dal-Tile, and American Olean Why we like it: Mohawk took quite a fall last week after warning that 3rd and 4th quarter earnings would be well below previous estimates. The stock gapped and closed down $7.70 on July 16th. It made a weak effort to close the gap, but was unsuccessful. They had previously said they expected earnings growth in the 10-15 percent range, and then guided lower to 2-5 percent. That may be optimistic given that the company said that the uncertainty of economic conditions has never been greater. Makers of furniture, home fixtures and appliances have all been hard hit as consumer demand and confidence has waned. MHK fell sharply below its 200-dma, and after its failed attempt to rally, appears ready to break below its open on the gap day. On that day it opened at $43.50 and in the next three days managed a dead-cat bounce back to the $50 resistance level. Those gains have all been given back the next support level is the psychological round number of $40. However, we expect this to break and see MHK trade toward its next nearest support below that level, which appears between $37 and $38. This is our initial target on this play. Below that level, it could be a quick drop to support at $30. As the homebuilders have taken a beating due concerns over a potential housing bubble, this maker of home products will surely see demand for its products continue to fall as consumer sentiment decreases. A downgrade by Raymond James the day following its earnings release did nothing to help investor confidence in this issue. OI will use a trigger point below $42.75 as an entry point, just below its intraday low on its gap down. Until MHK trades under $42.75, we'll stand on the sidelines. Once triggered, we will place our stop loss at $46.65 above Monday's high. Why This is our Play of The Day Although the homebuilders got a lift today, and the Dow was up almost 500 points, this stock was still unable to get past Tuesday’s high. Our stop loss of $46.50 remains safe and we see a re-entry point on a pullback below $45.00. BUY PUT AUG-45*MHK-TI OI= 107 at $2.80 SL=1.80 BUY PUT SEP-45 MHK_UI OI= n/a at $3.70 SL=2.50, wait for volume Average Daily Volume = 848K ************************************************ BIG-CAP COVERED CALLS, NAKED PUTS & COMBINATIONS ************************************************ Relief Rally In Progress! By Ray Cummins U.S. stocks soared Wednesday after a week of precipitous declines as traders shopped for bargains in the downtrodden equity markets. The Dow Jones Industrial Average surged almost 500 points to post its second largest point gain ever amid strength in its financial components. The blue-chip index enjoyed gains in all but one of its member issues; only McDonald's closed lower. The tech-laden NASDAQ Composite Index climbed 60 points to 1,290 with computer hardware and software shares leading the recovery. The broader Standard & Poor's 500-stock index posted its biggest percentage gain since October 1987, up 45 points to 843. Among the leading broad-market sectors were utility, oil service and biotechnology issues. Trading volume was extreme at 2.81 billion on the NYSE and 2.47 billion on the NASDAQ. Market breadth was positive with winners outpacing losers 3 to 2 on the Big Board and 4 to 3 on the technology exchange. Treasury issues finished with huge losses in the wake of the equity advance. The 10-year Treasury note tumbled 13/32 to yield 4.46% while the 30-year government bond declined 1 point to yield 5.34%. *************** Summary of Current Open Positions *************** (As of 07-23-02) Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield CHBS AUG 35 34.30 34.51 $0.21 1.69% *** EBAY AUG 45 44.15 53.16 $0.85 5.54% LEN AUG 50 49.05 48.21 ($0.84) 0.00% *** EBAY AUG 50 48.95 53.16 $1.05 7.56% FRX AUG 60 59.20 67.59 $0.80 5.03% IDPH AUG 30 29.40 37.59 $0.60 6.83% QLGC AUG 30 29.20 38.02 $0.80 8.67% Christopher & Banks (NASDAQ:CHBS) has retreated in sympathy with the broader market and traders who do not want to own the stock should cover the sold (short) put or exit/adjust the position. As mentioned last week, Lennar's (NYSE:LEN) move below support at $51-$52 may 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 ABC AUG 75 75.85 59.10 $0.85 4.99% BRL AUG 65 65.75 50.50 $0.75 5.51% DGX AUG 85 86.10 55.00 $1.10 5.35% BZH AUG 75 75.80 57.85 $0.80 6.20% EXPE AUG 70 71.00 48.41 $1.00 7.69% SPW AUG 115 116.45 92.83 $1.45 5.95% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status TKTX 40.15 38.08 AUG 30 35 0.75 34.25 $0.75 Open TRMS 43.25 39.50 AUG 30 35 0.55 34.45 $0.55 Open Transkaryotic Therapies (NASDAQ:TKTX) has retreated to a "key" moment and should be monitored closely for further downside activity. A move below the recent trading-range top near $36 would be a potentially bearish signal, possibly warranting an early exit in the position. Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status AGN 58.30 51.72 AUG 70 65 0.60 65.60 $0.60 Open CI 89.83 77.44 AUG 105 100 0.55 100.55 $0.55 Open COF 51.41 30.99 AUG 65 60 0.65 60.65 $0.65 Open UN 60.97 50.10 AUG 70 65 0.80 65.80 $0.80 Open ABC 64.50 59.10 AUG 80 75 0.50 75.50 $0.50 Open BRL 56.45 50.50 AUG 70 65 0.65 65.65 $0.65 Open SLM 86.05 81.25 AUG 100 95 0.60 95.60 $0.60 Open Credit Strangles: Stock Pick Last Position Credit G/L Yield Status ERTS 63.00 54.00 AUG70C/50P 2.75 2.75 18% Open Synthetic Positions: Stock Pick Last Position Credit C/B M/V Status FAST 40.37 33.15 AUG42C/37P 0.10 37.40 0.10 Closed The bullish position in Fastenal (NASDAQ:FAST) was closed Friday when the issue moved through recent technical support near $38. *************** BULLISH PLAYS - Naked Puts One of our readers requested some new "premium-selling" plays on leading technology stocks to profit from the potential recovery in that group. Traders with a bullish outlook on the underlying issues, who plan to use the recent share-value slump to initiate new positions, may find the risk-reward outlook in these plays attractive. All of these companies have relatively favorable fundamentals but each stock must also be evaluated for portfolio suitability and the recommended position should be reviewed with regard to your personal investing criteria. *************** CTSH - Cognizant Technology $55.90 *** New High!! *** Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life cycle solutions to complex software development and maintenance problems that companies face as they transition to e-business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. The company's customers include ACNielsen Corporation, ADP, Incorporated, Brinker International, Incorporated, Computer Sciences Corporation, The Dun & Bradstreet Corporation, First Data Corporation, IMS Health Incorporated, Metropolitan Life Insurance Company, Nielsen Media Research, Incorporated, PNC Bank and Royal & SunAlliance USA. CTSH - Cognizant Technology $55.90 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 40 UPU TH 10 0.40 39.60 4.6% "TS" SELL PUT AUG 45 UPU TI 111 1.00 44.00 10.6% *** SELL PUT AUG 50 UPU TJ 370 2.05 47.95 14.6% *************** EBAY - eBay Inc. $55.75 *** Still The Web-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. EBAY - eBay Inc. $55.75 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 40 QXB TH 1,516 0.40 40.40 4.6% "TS" SELL PUT AUG 45 QXB TI 3,074 0.80 45.80 8.7% *** SELL PUT AUG 50 QXB TJ 9,234 1.65 51.65 12.8% *************** ERTS - Electronic Arts $57.18 *** Volatility = Premium! *** 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. ERTS - Electronic Arts $57.18 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 45 EZQ TI 610 1.10 43.90 11.6% *** SELL PUT AUG 50 EZQ TJ 3,959 2.00 48.00 14.9% SELL PUT AUG 55 EZQ TK 3,188 3.50 51.50 19.1% *************** IDPH - IDEC Pharmaceuticals $39.99 *** 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. IDPH - IDEC Pharmaceuticals $39.99 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 2,465 0.65 29.35 9.9% *** SELL PUT AUG 35 IDK TG 2,095 1.50 33.50 15.9% SELL PUT AUG 40 IDK TH 1,966 3.20 36.80 22.0% *************** QLGC - QLogic $41.26 *** Bullish Industry Outlook! *** QLogic Corporation (NASDAQ:QLGC) is a designer and supplier of Storage Area Networking (SAN) infrastructure building blocks. Its SAN infrastructure building blocks, comprised of various semiconductor chips, host board adapters and switches, are integrated into storage networking solutions of the world's leading system and storage manufacturers. Companies such as Sun Microsystems, IBM, Dell, Compaq, Fujitsu Microelectronics, and Hitachi all use some of its components in the storage and systems solutions they sell to the world's largest information technology environments. In addition to its original equipment manufacturer relationships with these and other companies, the company now delivers selected Fibre Channel building blocks through leading distributors, systems integrators and resellers, thereby expanding its reach and visibility to the information technology community. QLGC - QLogic $41.26 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 1,479 0.35 24.65 5.4% *** SELL PUT AUG 30 QLC TF 2,114 0.80 29.20 11.7% SELL PUT AUG 35 QLC TG 4,369 1.55 33.45 17.4% *************** SLAB - Silicon Laboratories $28.64 *** New Trading Range? *** 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. SLAB - Silicon Laboratories $28.64 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 20 QFJ TD 85 0.20 20.20 4.5% "TS" SELL PUT AUG 22.5 QFJ TX 75 0.70 21.80 14.4% *** SELL PUT AUG 25 QFJ TE 137 1.20 23.80 17.6% *************** UNH - UnitedHealth $88.75 *** Technology Sector Alternative! *** UnitedHealth Group (NYSE:UNH) forms and operates markets for the exchange of health and well being services. Through its family of businesses, the company helps people achieve optimal health and well being through all stages of life. The company's revenues are derived from premium revenues on insured (risk-based) products, fees from management, administrative and consulting services and investment and other income. It conducts its business primarily through operating divisions in the following business segments: Uniprise; Healthcare Services, which includes UnitedHealthcare and Ovations; Specialized Care Services, and Ingenix. UNH - UnitedHealth $88.75 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 70 UHB TN 235 0.45 69.55 3.3% "TS" SELL PUT AUG 75 UHB TO 120 0.85 74.15 5.0% *** SELL PUT AUG 80 UHB TP 2,770 1.55 78.45 7.2% *************** WLP - WellPoint Health Networks $75.76 *** Solid Earnings! *** WellPoint Health Networks (NYSE:WLP) is a managed healthcare company. As a result of the recent completion of its merger with RightCHOICE Managed Care, the company has over 12 million members. The company offers a broad spectrum of network-based managed care plans, including preferred provider organizations, and health maintenance organizations, as well as point-of-service and other hybrid plans and traditional indemnity plans. In addition, the company offers managed care services, including underwriting, actuarial services, network access, medical cost management and claims processing. The company also provides a broad array of specialty and other products, including pharmacy, dental, workers' compensation managed care services, utilization management, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration. WLP - WellPoint Health Networks $75.76 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 60 WLP TL 330 0.45 59.55 3.8% "TS" SELL PUT AUG 65 WLP TM 1,337 1.05 63.95 6.7% *** SELL PUT AUG 70 WLP TN 1,933 1.95 68.05 9.7% *************** BEARISH PLAYS - Naked Calls & Combinations If the market enjoys a technical rebound in the coming sessions, investors are unlikely to look to "safe-haven" sectors such as aerospace stocks to find new positions for their portfolios. At the same time, the volatile activity in the market has driven option prices to historical highs, providing a great opportunity for traders who use "premium-selling" strategies. Here are some candidates for bearish positions, based on the underlying stock's technical history and its recent trend. In addition, each issue has robust option premiums, a well defined resistance area above the current price and a high probability of a remaining below the sold strike in the suggested position. News and market sentiment will have an effect on these stocks so please review each play individually and make your own decision about its future outcome. *************** GD - General Dynamics $85.60 *** Back In A Comfort Zone! *** General Dynamics (NYSE:GD) operates businesses that produce information and communications technology, land and amphibious combat systems, and also engage in naval, as well as commercial shipbuilding, and business aviation. These are high technology firms that use design, manufacturing and program management expertise together with advanced technology and the integration of complex systems as part of their everyday operations. The company operates in four primary business groups: Information Systems and Technology, Combat Systems, Marine Systems, and Aerospace. The company also owns other commercial operations. GD - General Dynamics $85.60 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL AUG 100 GD HT 3,245 0.50 100.50 3.3% "TS" SELL CALL AUG 95 GD HS 1,786 1.25 96.25 6.3% *** SELL CALL AUG 90 GD HR 2,033 2.65 92.65 10.8% *************** LMT - Lockheed Martin $58.00 *** Rally At An End? *** Lockheed Martin (NYSE:LMT) is a customer-focused, worldwide enterprise principally engaged in the research, development, manufacture and integration of advanced technology systems, products and services for government and commercial customers. The corporation's core business areas are systems integration, aeronautics, space and technology services. Lockheed's Systems Integration segment engages in the development, integration and production of electronic systems for undersea, shipboard, land and airborne applications. Space Systems is engaged in the design, development, engineering and production of commercial and military space systems. Aeronautics designs, researches and develops, produces, and supports combat and air mobility aircraft, surveillance and command, reconnaissance, platform systems integration and advanced development programs. The Technology Services division provides information management, engineering, scientific and logistic services. LMT - Lockheed Martin $58.00 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL AUG 70 LMT HN 1,190 0.35 70.35 3.9% "TS" SELL CALL AUG 65 LMT HM 6,608 1.05 66.05 8.0% *** SELL CALL AUG 60 LMT HL 1,993 2.60 62.60 14.4% *************** NOC - Northrop Grumman $105.63 *** Low Risk = Low Reward! *** Northrop Grumman (NYSE:NOC) is a worldwide defense company that provides unique, technologically advanced products, services and solutions in defense and commercial electronics, information technology, systems integration, and nuclear and non-nuclear shipbuilding and systems. Northrop Grumman has operations in 44 states and 25 countries, serving U.S. and international military, government and commercial customers. Northrop Grumman is divided into six major business sectors: Electronic Systems, Information Technology, Integrated Systems, Ship Systems, Newport News and Component Technologies. NOC - Northrop Grumman $105.63 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL AUG 120 NOC HD 1,962 1.10 121.10 5.0% *** SELL CALL AUG 115 NOC HC 1,340 2.15 117.15 8.1% SELL CALL AUG 110 NOC HB 4,936 4.30 114.30 13.5% *************** BA - The Boeing Company $41.19 *** Trading Range? *** The Boeing Company (NYSE:BA) together with its subsidiaries, is an aerospace firm. The company operates in principal areas that include commercial airplanes, military aircraft, missile systems, space and communications and customer and commercial financing. The Commercial Airplanes segment is involved in development, production and marketing of commercial jet aircraft; the Military Aircraft and Missile Systems segment is involved in the research, development, production, modification and support of military aircraft; the Space and Communications segment is involved in the research, development, production, modification and support of space systems, missile defense systems, satellites and satellite launching vehicles, rocket engines and information and battle management systems, and the Customer and Commercial Financing segment is primarily engaged in the financing of commercial and private aircraft and commercial equipment. The Boeing Company $41.19 PLAY (conservative - bearish/credit spread): BUY CALL AUG-47.50 BA-HW OI=2761 A=$0.30 SELL CALL AUG-45.00 BA-HI OI=3952 B=$0.55 INITIAL NET CREDIT TARGET=$0.30-$0.40 PROFIT(max)=14% *************** EASI - Engineered Support Systems $42.90 *** Big Down Day! *** Engineered Support Systems (NASDAQ:EASI) along with its various subsidiaries, designs and manufactures military support equipment and electronics for the United States armed forces. The company also engineers and manufactures air handling and heat transfer equipment, material handling equipment and custom molded plastic products for commercial and industrial users. Engineered Support Systems' six wholly owned subsidiaries are Systems & Electronics (SEI), Engineered Air Systems (Engineered Air), Keco Industries, (Keco), Engineered Coil Company (d/b/a Marlo Coil), Engineered Electric Company (d/b/a Fermont ) and Engineered Specialty Plastics. EASI - Engineered Support Systems $42.90 PLAY (very conservative - bearish/credit spread): BUY CALL AUG-55 UFE=HK OI=195 A=$0.25 SELL CALL AUG-50 UFE-HJ OI=278 B=$0.65 INITIAL NET CREDIT TARGET=$0.45-$0.50 PROFIT(max)=9% *************** SEE DISCLAIMER ***************************** ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** MARKET POSTURE ************** Support - for real this time! 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